Attached files
file | filename |
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EX-31.1 - EX-31.1 - FS KKR Capital Corp. II | d581501dex311.htm |
EX-31.2 - EX-31.2 - FS KKR Capital Corp. II | d581501dex312.htm |
EX-32.1 - EX-32.1 - FS KKR Capital Corp. II | d581501dex321.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-00926
FS Investment Corporation II
(Exact name of registrant as specified in its charter)
Maryland | 80-0741103 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Cira Centre
2929 Arch Street, Suite 675
Philadelphia, Pennsylvania 19104
(Address of principal executive office)
(215) 495-1150
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | þ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
The issuer had 163,595,673 shares of common stock outstanding as of August 13, 2013.
Table of Contents
Page | ||||||
PART IFINANCIAL INFORMATION |
| |||||
ITEM 1. |
FINANCIAL STATEMENTS | 1 | ||||
Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012 | 1 | |||||
2 | ||||||
3 | ||||||
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 |
4 | |||||
Consolidated Schedules of Investments as of June 30, 2013 (Unaudited) and December 31, 2012 |
5 | |||||
Notes to Unaudited Consolidated Financial Statements | 16 | |||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 40 | ||||
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 70 | ||||
ITEM 4. |
CONTROLS AND PROCEDURES | 71 | ||||
PART IIOTHER INFORMATION |
||||||
ITEM 1. |
LEGAL PROCEEDINGS | 72 | ||||
ITEM 1A. |
RISK FACTORS | 72 | ||||
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 72 | ||||
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES | 72 | ||||
ITEM 4. |
MINE SAFETY DISCLOSURES | 72 | ||||
ITEM 5. |
OTHER INFORMATION | 72 | ||||
ITEM 6. |
EXHIBITS | 73 | ||||
SIGNATURES | 76 |
Table of Contents
PART IFINANCIAL INFORMATION
Item 1. | Financial Statements. |
FS Investment Corporation II
(in thousands, except share and per share amounts)
June 30, 2013 (Unaudited) |
December 31, 2012 |
|||||||
Assets |
||||||||
Investments, at fair value (amortized cost$1,390,161 and $480,606, respectively) |
$ | 1,396,939 | $ | 488,642 | ||||
Cash |
321,084 | 107,157 | ||||||
Due from counterparty |
| 97,441 | ||||||
Receivable for investments sold and repaid |
11,498 | 3,538 | ||||||
Interest receivable |
22,508 | 4,131 | ||||||
Receivable for common stock purchased |
85 | 482 | ||||||
Deferred financing costs |
1,554 | 162 | ||||||
Reimbursement due from sponsor(1) |
| 1,635 | ||||||
Receivable due on total return swap(2) |
| 396 | ||||||
Unrealized appreciation on total return swap(2) |
| 5,641 | ||||||
Prepaid expenses and other assets |
51 | 100 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,753,719 | $ | 709,325 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Payable for investments purchased |
$ | 157,310 | $ | 53,636 | ||||
Repurchase agreement payable(3) |
194,000 | 117,500 | ||||||
Credit facility payable(4) |
100,194 | | ||||||
Stockholder distributions payable |
8,470 | 3,344 | ||||||
Management fees payable |
7,595 | 2,467 | ||||||
Accrued capital gains incentive fees(5) |
4,090 | 3,548 | ||||||
Administrative services expense payable |
568 | 181 | ||||||
Interest payable |
981 | 274 | ||||||
Directors fees payable |
177 | | ||||||
Other accrued expenses and liabilities |
805 | 648 | ||||||
|
|
|
|
|||||
Total liabilities |
474,190 | 181,598 | ||||||
|
|
|
|
|||||
Stockholders equity |
||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $0.001 par value, 450,000,000 shares authorized, 138,202,241 and 57,612,806 shares issued and outstanding, respectively |
138 | 58 | ||||||
Capital in excess of par value |
1,269,647 | 517,604 | ||||||
Accumulated undistributed net realized gains on investments and total return swap and gain/loss on foreign currency(6) |
10,423 | | ||||||
Accumulated distributions in excess of net investment income(6) |
(7,477 | ) | (3,482 | ) | ||||
Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
6,798 | 13,547 | ||||||
|
|
|
|
|||||
Total stockholders equity |
1,279,529 | 527,727 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 1,753,719 | $ | 709,325 | ||||
|
|
|
|
|||||
Net asset value per share of common stock at period end |
$ | 9.26 | $ | 9.16 |
(1) | See Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates. |
(2) | See Note 8 for a discussion of the Companys total return swap agreement, which was terminated on June 13, 2013. |
(3) | See Note 8 for a discussion of the Companys repurchase transaction. |
(4) | See Note 8 for a discussion of the Companys credit facility. |
(5) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees. |
(6) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to unaudited consolidated financial statements.
1
Table of Contents
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Investment income |
||||||||||||||||
Interest income |
$ | 26,896 | $ | 18 | $ | 42,276 | $ | 18 | ||||||||
Fee income |
1,330 | | 2,923 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total investment income |
28,226 | 18 | 45,199 | 18 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating expenses |
||||||||||||||||
Management fees |
7,595 | 22 | 12,580 | 22 | ||||||||||||
Capital gains incentive fees(1) |
(2,839 | ) | 65 | 1,020 | 65 | |||||||||||
Administrative services expenses |
644 | 20 | 1,105 | 20 | ||||||||||||
Stock transfer agent fees |
612 | 14 | 1,047 | 14 | ||||||||||||
Accounting and administrative fees |
131 | 1 | 220 | 1 | ||||||||||||
Interest expense |
1,967 | | 3,111 | | ||||||||||||
Organization costs |
| 12 | | 205 | ||||||||||||
Directors fees |
157 | | 303 | | ||||||||||||
Other general and administrative expenses |
677 | 23 | 1,154 | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
8,944 | 157 | 20,540 | 350 | ||||||||||||
Less: Expense reimbursement from sponsor(2) |
| (135 | ) | | (135 | ) | ||||||||||
Add: Expense recoupment to sponsor(2) |
| | 2,041 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
8,944 | 22 | 22,581 | 215 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income (loss) |
19,282 | (4 | ) | 22,618 | (197 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Realized and unrealized gain/loss |
||||||||||||||||
Net realized gain (loss) on investments |
811 | 4 | 1,659 | 4 | ||||||||||||
Net realized gain (loss) on total return swap(3) |
12,426 | | 19,689 | | ||||||||||||
Net realized gain (loss) on foreign currency |
(41 | ) | | (100 | ) | | ||||||||||
Net change in unrealized appreciation (depreciation) on investments |
(13,734 | ) | 322 | (1,258 | ) | 322 | ||||||||||
Net change in unrealized appreciation (depreciation) on total return swap(3) |
(9,612 | ) | | (5,641 | ) | | ||||||||||
Net change in unrealized gain (loss) on foreign currency |
30 | | 150 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total net realized and unrealized gain (loss) on investments |
(10,120 | ) | 326 | 14,499 | 326 | |||||||||||
|
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|
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|
|
|
|||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 9,162 | $ | 322 | $ | 37,117 | $ | 129 | ||||||||
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|
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Per share informationbasic and diluted(4) |
||||||||||||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) |
$ | 0.08 | $ | 1.40 | $ | 0.39 | $ | 1.02 | ||||||||
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Weighted average shares outstanding |
116,647,055 | 229,647 | 96,371,312 | 125,934 | ||||||||||||
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|
|
|
|
|
|
(1) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees. |
(2) | See Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates. |
(3) | See Note 8 for a discussion of the Companys total return swap agreement, which was terminated on June 13, 2013. |
(4) | The weighted average shares used in the per share computation of the net increase (decrease) in net assets resulting from operations is based on the weighted average shares outstanding during three and six months ended June 30, 2013 and 2012, respectively. |
See notes to unaudited consolidated financial statements.
2
Table of Contents
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
Six Months Ended June 30, |
||||||||
2013 | 2012 | |||||||
Operations |
||||||||
Net investment income (loss) |
$ | 22,618 | $ | (197 | ) | |||
Net realized gain (loss) on investments, total return swap and foreign currency(1) |
21,248 | 4 | ||||||
Net change in unrealized appreciation (depreciation) on investments |
(1,258 | ) | 322 | |||||
Net change in unrealized appreciation (depreciation) on total return swap(1) |
(5,641 | ) | | |||||
Net change in unrealized gain (loss) on foreign currency |
150 | | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
37,117 | 129 | ||||||
|
|
|
|
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Stockholder distributions(2) |
||||||||
Distributions from net investment income |
(26,613 | ) | (73 | ) | ||||
Distributions from net realized gain on investments |
(10,825 | ) | (4 | ) | ||||
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|
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|
|||||
Net decrease in net assets resulting from stockholder distributions |
(37,438 | ) | (77 | ) | ||||
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|
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Capital share transactions |
||||||||
Issuance of common stock |
739,199 | 22,627 | ||||||
Reinvestment of stockholder distributions |
16,436 | | ||||||
Repurchases of common stock |
(712 | ) | | |||||
Offering costs |
(2,800 | ) | (1,207 | ) | ||||
Reimbursement of investment adviser(3) |
| (346 | ) | |||||
Capital contributions of investment adviser |
| 1,412 | ||||||
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|
|
|
|||||
Net increase in net assets resulting from capital share transactions |
752,123 | 22,486 | ||||||
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|
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Total increase in net assets |
751,802 | 22,538 | ||||||
Net assets at beginning of period |
527,727 | 200 | ||||||
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|
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Net assets at end of period |
$ | 1,279,529 | $ | 22,738 | ||||
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|
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Accumulated distributions in excess of net investment income(2) |
$ | (7,477 | ) | $ | (290 | ) | ||
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|
|
|
(1) | See Note 8 for a discussion of the Companys total return swap agreement, which was terminated on June 13, 2013. |
(2) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
(3) | See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates. |
See notes to unaudited consolidated financial statements.
3
Table of Contents
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30, |
||||||||
2013 | 2012 | |||||||
Cash flows from operating activities |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 37,117 | $ | 129 | ||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
||||||||
Purchases of investments |
(1,100,342 | ) | (32,438 | ) | ||||
Paid-in-kind interest |
(51 | ) | | |||||
Proceeds from sales and repayments of investments |
195,909 | 442 | ||||||
Net realized (gain) loss on investments |
(1,659 | ) | (4 | ) | ||||
Net change in unrealized (appreciation) depreciation on investments |
1,258 | (322 | ) | |||||
Net change in unrealized (appreciation) depreciation on total return swap(1) |
5,641 | | ||||||
Accretion of discount |
(3,412 | ) | (2 | ) | ||||
Amortization of deferred financing costs |
165 | | ||||||
(Increase) decrease in due from counterparty |
97,441 | | ||||||
(Increase) decrease in receivable for investments sold and repaid |
(7,960 | ) | (442 | ) | ||||
(Increase) decrease in expense reimbursement due from sponsor(2) |
1,635 | (135 | ) | |||||
(Increase) decrease in interest receivable |
(18,377 | ) | (57 | ) | ||||
(Increase) decrease in receivable due on total return swap(1) |
396 | | ||||||
(Increase) decrease in prepaid expenses and other assets |
49 | | ||||||
Increase (decrease) in payable for investments purchased |
103,674 | 30,516 | ||||||
Increase (decrease) in management fees payable |
5,128 | 22 | ||||||
Increase (decrease) in accrued capital gains incentive fees |
542 | 65 | ||||||
Increase (decrease) in administrative services expense payable |
387 | 20 | ||||||
Increase (decrease) in interest payable |
707 | | ||||||
Increase (decrease) in directors fees payable |
177 | | ||||||
Increase (decrease) in other accrued expenses and liabilities |
157 | 38 | ||||||
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|
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Net cash used in operating activities |
(681,418 | ) | (2,168 | ) | ||||
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Cash flows from financing activities |
||||||||
Issuance of common stock |
739,596 | 22,627 | ||||||
Reinvestment of stockholder distributions |
16,436 | | ||||||
Repurchases of common stock |
(712 | ) | | |||||
Offering costs |
(2,800 | ) | (1,207 | ) | ||||
Capital contributions of investment adviser |
| 1,412 | ||||||
Reimbursement of investment adviser(2) |
| (346 | ) | |||||
Stockholder distributions |
(32,312 | ) | | |||||
Borrowings under credit facility(3) |
100,194 | | ||||||
Borrowings under repurchase agreement(4) |
76,500 | | ||||||
Deferred financing costs paid |
(1,557 | ) | | |||||
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|
|
|
|||||
Net cash provided by financing activities |
895,345 | 22,486 | ||||||
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|
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Total increase (decrease) in cash |
213,927 | 20,318 | ||||||
Cash at beginning of period |
107,157 | 200 | ||||||
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Cash at end of period |
$ | 321,084 | $ | 20,518 | ||||
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|
(1) | See Note 8 for a discussion of the Companys total return swap agreement, which was terminated on June 13, 2013. |
(2) | See Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates. |
(3) | See Note 8 for a discussion of the Companys credit facility. During the six months ended June 30, 2013, the Company paid $0 in interest expense on the credit facility. |
(4) | See Note 8 for a discussion of the Companys repurchase transaction. During the six months ended June 30, 2013, the Company paid $2,239 in interest expense pursuant to the repurchase agreement. |
See notes to unaudited consolidated financial statements.
4
Table of Contents
Unaudited Consolidated Schedule of Investments
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Senior Secured LoansFirst Lien43.8% |
||||||||||||||||||||||
Air Medical Group Holdings, Inc. |
(f) | Health Care Equipment & Services | L+525 | 1.3% | 6/30/18 | $ | 4,450 | $ | 4,558 | $ | 4,525 | |||||||||||
Alcatel-Lucent USA Inc. |
(h) | Technology Hardware & Equipment | L+525 | 1.0% | 7/31/16 | 769 | 766 | 778 | ||||||||||||||
Alcatel-Lucent USA Inc. |
(d)(f)(g)(h) | Technology Hardware & Equipment | L+625 | 1.0% | 1/30/19 | 8,179 | 8,304 | 8,273 | ||||||||||||||
Alon USA Partners, L.P. |
(d)(h) | Energy | L+800 | 1.3% | 11/26/18 | 4,146 | 3,950 | 4,314 | ||||||||||||||
Alvogen Pharma US Inc. |
(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+575 | 1.3% | 5/23/18 | 8,333 | 8,251 | 8,292 | ||||||||||||||
Amaya Holdings Corp. |
(f)(g)(h) | Consumer Services | L+775 | 1.3% | 11/5/15 | 7,899 | 7,874 | 7,938 | ||||||||||||||
Apex Tool Group |
Capital Goods | L+325 | 1.3% | 1/31/20 | 5,326 | 5,301 | 5,337 | |||||||||||||||
Ascension Insurance, Inc. |
(d)(e) | Insurance | L+825 | 1.3% | 3/5/19 | 79,808 | 78,351 | 79,808 | ||||||||||||||
Attachmate Corp. |
(f) | Software & Services | L+575 | 1.5% | 11/22/17 | 2,775 | 2,811 | 2,784 | ||||||||||||||
Audio Visual Services Group, Inc. |
(d)(f) | Technology Hardware & Equipment | L+550 | 1.3% | 11/9/18 | 10,160 | 10,163 | 10,261 | ||||||||||||||
Audio Visual Services Group, Inc. |
(g) | Technology Hardware & Equipment | L+550 | 1.3% | 11/9/17 | 7,500 | 7,500 | 7,488 | ||||||||||||||
Avaya Inc. |
(d) | Technology Hardware & Equipment | L+450 | 10/26/17 | 3,371 | 3,052 | 2,963 | |||||||||||||||
Avaya Inc. |
(d)(f)(g) | Technology Hardware & Equipment | L+675 | 1.3% | 3/31/18 | 11,965 | 11,326 | 11,251 | ||||||||||||||
BlackBrush TexStar L.P. |
(d)(f) | Energy | L+650 | 1.3% | 6/4/19 | 14,250 | 14,109 | 14,197 | ||||||||||||||
Blue Coat Systems, Inc. |
(d) | Software & Services | L+350 | 1.0% | 5/31/19 | 2,127 | 2,127 | 2,121 | ||||||||||||||
Boomerang Tube, LLC |
(d) | Energy | L+950 | 1.5% | 10/11/17 | 4,813 | 4,683 | 4,764 | ||||||||||||||
Brasa (Holdings) Inc. |
(f)(g) | Consumer Services | L+625 | 1.3% | 7/19/19 | 993 | 997 | 1,005 | ||||||||||||||
Bright Horizons Family Solutions LLC |
Health Care Equipment & Services | L+300 | 1.0% | 1/30/20 | 1,008 | 998 | 1,013 | |||||||||||||||
Cenveo Corp. |
(f) | Commercial & Professional Services | L+500 | 1.3% | 2/13/17 | 4,419 | 4,398 | 4,432 | ||||||||||||||
Clear Channel Communications, Inc. |
(d) | Media | L+365 | 1/29/16 | 6,156 | 5,088 | 5,637 | |||||||||||||||
Clover Technologies Group, LLC |
(f) | Commercial & Professional Services | L+550 | 1.3% | 5/7/18 | 5,997 | 5,997 | 5,997 | ||||||||||||||
Collective Brands, Inc. |
(d)(f) | Consumer Durables & Apparel | L+600 | 1.3% | 10/9/19 | 18,863 | 18,914 | 19,145 | ||||||||||||||
The Container Store, Inc. |
(e) | Consumer Durables & Apparel | L+425 | 1.3% | 4/6/19 | 988 | 988 | 991 | ||||||||||||||
Corner Investment PropCo, LLC |
(d)(f)(g)(h) | Consumer Services | L+975 | 1.3% | 11/2/19 | 36,000 | 36,537 | 37,080 | ||||||||||||||
Crestwood Holdings LLC |
(f)(g) | Energy | L+600 | 1.0% | 6/19/19 | 5,882 | 5,853 | 5,941 | ||||||||||||||
DAE Aviation Holdings, Inc. |
(g) | Capital Goods | L+500 | 1.3% | 11/2/18 | 3,951 | 3,990 | 3,971 | ||||||||||||||
DigitalGlobe, Inc. |
(d)(h)(g) | Software & Services | L+275 | 1.0% | 1/31/20 | 2,540 | 2,558 | 2,537 | ||||||||||||||
Drumm Investors LLC |
Health Care Equipment & Services | L+375 | 1.3% | 5/4/18 | 1,501 | 1,446 | 1,446 | |||||||||||||||
Eastman Kodak Co. |
Consumer Durables & Apparel | L+1050 | 1.0% | 9/30/13 | 633 | 606 | 638 | |||||||||||||||
Eastman Kodak Co. |
Consumer Durables & Apparel | 10.6% | 9/30/13 | 508 | 508 | 513 | ||||||||||||||||
Education Management LLC |
(f)(h) | Consumer Services | L+400 | 6/1/16 | 3,989 | 3,525 | 3,478 | |||||||||||||||
Edwards (Cayman Island II) Ltd. |
(f)(h) | Capital Goods | L+350 | 1.3% | 3/26/20 | 3,864 | 3,826 | 3,874 | ||||||||||||||
EquiPower Resources Holdings, LLC |
(f)(g) | Utilities | L+325 | 1.0% | 12/21/18 | 1,469 | 1,501 | 1,463 | ||||||||||||||
ERC Ireland Holdings Ltd. |
(g)(h) | Telecommunication Services | EURIBOR+300, 1.0% PIK | 9/30/17 | | 11,223 | 10,990 | 13,009 | ||||||||||||||
FairPoint Communications, Inc. |
(d) | Telecommunication Services | L+625 | 1.3% | 2/14/19 | $ | 13,092 | 12,967 | 12,849 | |||||||||||||
Fram Group Holdings Inc. |
(f) | Automobiles & Components | L+500 | 1.5% | 7/29/17 | 2,915 | 2,958 | 2,895 |
See notes to unaudited consolidated financial statements.
5
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Hamilton Lane Advisors, LLC |
(f) | Diversified Financials | L+400 | 1.3% | 2/23/18 | $ | 1,773 | $ | 1,788 | $ | 1,769 | |||||||||||
Harlan Sprague Dawley, Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+350 | 7/11/14 | 7,041 | 6,559 | 6,258 | |||||||||||||||
Hoyts Group |
(h) | Consumer Services | L+300 | 1.0% | 5/22/20 | 7,000 | 6,965 | 7,000 | ||||||||||||||
Ikaria Acquisition Inc. |
(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+650 | 1.3% | 9/18/17 | 5,271 | 5,321 | 5,307 | ||||||||||||||
ILC Industries, LLC |
(f) | Capital Goods | L+600 | 1.5% | 7/11/18 | 4,950 | 4,934 | 4,925 | ||||||||||||||
Inmar, Inc. |
(f) | Software & Services | L+525 | 1.3% | 8/4/17 | 4,877 | 4,909 | 4,883 | ||||||||||||||
Kanders C3 Holdings, LLC |
(d)(e) | Capital Goods | L+900 | 1.3% | 12/19/18 | 35,369 | 35,140 | 35,369 | ||||||||||||||
Lantiq Deutschland GmbH |
(d)(h) | Software & Services | L+900 | 2.0% | 11/16/15 | 1,521 | 1,429 | 1,391 | ||||||||||||||
MMI International Ltd. |
(f)(h) | Technology Hardware & Equipment | L+600 | 1.3% | 11/2/18 | 11,170 | 10,836 | 10,947 | ||||||||||||||
MMM Holdings, Inc. |
(f) | Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 3,951 | 3,977 | 3,991 | ||||||||||||||
MModal Inc. |
(d)(f) | Health Care Equipment & Services | L+625 | 1.3% | 8/15/19 | 16,801 | 16,446 | 16,413 | ||||||||||||||
MSO of Puerto Rico, Inc. |
(f) | Health Care Equipment & Services | L+825 | 1.5% | 12/12/17 | 2,874 | 2,893 | 2,902 | ||||||||||||||
National Mentor Holdings, Inc. |
(f) | Health Care Equipment & Services | L+525 | 1.3% | 2/9/17 | 7,939 | 8,061 | 8,007 | ||||||||||||||
National Vision, Inc. |
(f)(g) | Health Care Equipment & Services | L+575 | 1.3% | 8/2/18 | 2,370 | 2,400 | 2,382 | ||||||||||||||
Navistar, Inc. |
(d)(h) | Capital Goods | L+450 | 1.3% | 8/17/17 | 852 | 845 | 855 | ||||||||||||||
New HB Acquisition, LLC |
Food, Beverage & Tobacco | L+550 | 1.3% | 4/9/20 | 3,896 | 3,858 | 3,977 | |||||||||||||||
Nexeo Solutions, LLC |
(d)(g) | Capital Goods | L+350 | 1.5% | 9/8/17 | 6,938 | 6,848 | 6,862 | ||||||||||||||
NSH Merger Sub, Inc. |
(f) | Health Care Equipment & Services | L+650 | 1.8% | 2/2/17 | 2,000 | 1,995 | 2,000 | ||||||||||||||
Pact Group |
(h) | Commercial & Professional Services | L+275 | 1.0% | 5/29/20 | 2,655 | 2,642 | 2,645 | ||||||||||||||
Panda Sherman Power, LLC |
(d) | Energy | L+750 | 1.5% | 9/14/18 | 3,818 | 3,816 | 3,904 | ||||||||||||||
Panda Temple Power, LLC (TLA) |
(d) | Energy | L+700 | 1.5% | 7/17/18 | 2,000 | 2,018 | 2,040 | ||||||||||||||
Patheon Inc. |
(d)(h) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3% | 12/6/18 | 10,207 | 9,921 | 10,309 | ||||||||||||||
Pharmaceutical Research Associates, Inc. |
(f) | Health Care Equipment & Services | L+525 | 1.3% | 12/10/17 | 6,291 | 6,400 | 6,350 | ||||||||||||||
PRV Aerospace, LLC |
(f) | Capital Goods | L+525 | 1.3% | 5/9/18 | 3,055 | 3,080 | 3,068 | ||||||||||||||
Reddy Ice Holdings, Inc. |
(f)(g) | Retailing | L+550 | 1.3% | 5/1/19 | 1,190 | 1,179 | 1,197 | ||||||||||||||
Sirius Computer Solutions, Inc. |
(d) | Software & Services | L+575 | 1.3% | 11/30/18 | 8,750 | 8,669 | 8,739 | ||||||||||||||
Smile Brands Group Inc. |
(f)(e) | Health Care Equipment & Services | L+525 | 1.8% | 12/21/17 | 32,241 | 30,876 | 31,676 | ||||||||||||||
Sorenson Communication, Inc. |
(d)(f) | Telecommunication Services | L+825 | 1.3% | 10/31/14 | 29,904 | 30,012 | 29,960 | ||||||||||||||
Sports Authority, Inc. |
(f) | Consumer Durables & Apparel | L+600 | 1.5% | 11/16/17 | 8,264 | 8,343 | 8,295 | ||||||||||||||
Sprint Industrial Holdings LLC |
(f) | Energy | L+575 | 1.3% | 5/14/19 | 6,429 | 6,365 | 6,477 | ||||||||||||||
Stallion Oilfield Holdings, Inc. |
(d)(f)(g) | Energy | L+675 | 1.3% | 6/18/18 | 10,000 | 9,900 | 10,063 | ||||||||||||||
Technicolor SA |
(f)(h) | Media | L+475 | 2.0% | 5/26/16 | 418 | 423 | 422 | ||||||||||||||
Technicolor SA |
(f)(h) | Media | L+575 | 2.0% | 5/26/17 | 1,256 | 1,270 | 1,268 | ||||||||||||||
Texas Competitive Electric Holdings Co. LLC |
(d)(e) | Utilities | L+350 | 10/10/14 | 13,000 | 10,195 | 9,352 | |||||||||||||||
Therakos, Inc. |
(d)(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+625 | 1.3% | 12/27/17 | 6,638 | 6,524 | 6,655 | ||||||||||||||
Totes Isotoner Corp. |
(e) | Consumer Durables & Apparel | L+575 | 1.5% | 7/7/17 | 915 | 914 | 918 | ||||||||||||||
TravelCLICK, Inc. |
(f) | Consumer Services | L+450 | 1.5% | 3/16/16 | 1,979 | 1,981 | 2,006 |
See notes to unaudited consolidated financial statements.
6
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
UTEX Industries, Inc. |
(f) | Energy | L+350 | 1.3% | 4/10/20 | $ | 2,703 | $ | 2,690 | $ | 2,695 | |||||||||||
Willbros United States Holdings, Inc. |
(d)(h) | Energy | L+750 | 2.0% | 6/30/14 | 2,000 | 1,970 | 2,006 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansFirst Lien |
572,163 | 578,291 | ||||||||||||||||||||
Unfunded Loan Commitments |
(17,704 | ) | (17,704 | ) | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Net Senior Secured LoansFirst Lien |
554,459 | 560,587 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured LoansSecond Lien29.2% |
||||||||||||||||||||||
Advantage Sales & Marketing Inc. |
(e) | Commercial & Professional Services | L+725 | 1.0% | 6/12/18 | 471 | 471 | 475 | ||||||||||||||
Alliance Laundry Systems LLC |
(d) | Capital Goods | L+825 | 1.3% | 12/10/19 | 3,450 | 3,417 | 3,513 | ||||||||||||||
Attachmate Corp. |
(d) | Software & Services | L+950 | 1.5% | 11/22/18 | 17,700 | 17,716 | 17,739 | ||||||||||||||
Audio Visual Services Group, Inc. |
(d)(g) | Technology Hardware & Equipment | L+950 | 1.3% | 5/9/18 | 15,320 | 15,188 | 15,320 | ||||||||||||||
Berlin Packaging LLC |
(g) | Commercial & Professional Services | L+750 | 1.3% | 3/28/19 | 3,571 | 3,643 | 3,607 | ||||||||||||||
BJs Wholesale Club, Inc. |
(d) | Food & Staples Retailing | L+850 | 1.3% | 3/26/20 | 2,766 | 2,740 | 2,839 | ||||||||||||||
Blackboard Inc. |
(e) | Software & Services | L+1000 | 1.5% | 4/4/19 | 1,000 | 931 | 1,020 | ||||||||||||||
Brasa (Holdings) Inc. |
(d) | Consumer Services | L+950 | 1.5% | 1/20/20 | 1,739 | 1,675 | 1,774 | ||||||||||||||
Camp International Holding Co. |
(e) | Capital Goods | L+875 | 1.3% | 11/29/19 | 1,000 | 1,016 | 1,027 | ||||||||||||||
Capital Automotive L.P. |
(f) | Real Estate | L+500 | 1.0% | 4/30/20 | 7,895 | 7,856 | 7,974 | ||||||||||||||
Centaur Acqusition, LLC |
Consumer Services | L+750 | 1.3% | 2/20/20 | 3,000 | 2,971 | 3,041 | |||||||||||||||
Cervalis LLC |
(d)(e) | Commercial & Professional Services | L+875 | 1.3% | 2/8/18 | 30,000 | 29,578 | 30,000 | ||||||||||||||
CHG Buyer Corp. |
(d)(g) | Health Care Equipment & Services | L+775 | 1.3% | 11/19/20 | 6,448 | 6,336 | 6,555 | ||||||||||||||
Deltek Systems Inc. |
(g) | Software & Services | L+875 | 1.3% | 10/1/19 | 3,000 | 2,970 | 3,038 | ||||||||||||||
EquiPower Resources Holdings, LLC |
(e) | Utilities | L+850 | 1.5% | 6/21/19 | 1,000 | 982 | 1,028 | ||||||||||||||
FR Brand Acquisition Corp. |
(e) | Energy | L+975 | 1.3% | 10/11/19 | 6,000 | 5,782 | 6,163 | ||||||||||||||
Hoyts Group |
(h) | Consumer Services | L+725 | 1.0% | 11/22/20 | 3,000 | 2,970 | 3,008 | ||||||||||||||
ILC Industries, LLC |
(e) | Capital Goods | L+1000 | 1.5% | 6/14/19 | 4,000 | 3,782 | 3,780 | ||||||||||||||
John Henry Holdings, Inc. |
(d)(e) | Commercial & Professional Services | L+900 | 1.3% | 5/6/19 | 23,250 | 22,923 | 23,686 | ||||||||||||||
Kronos Inc. |
Software & Services | L+850 | 1.3% | 4/30/20 | 6,154 | 6,096 | 6,369 | |||||||||||||||
LM U.S. Member LLC |
(d) | Transportation | L+825 | 1.3% | 10/19/20 | 6,114 | 6,036 | 6,198 | ||||||||||||||
NEP Broadcasting, Inc. |
(d) | Software & Services | L+825 | 1.3% | 7/22/20 | 4,000 | 3,962 | 4,115 | ||||||||||||||
Onex Carestream Finance L.P. |
(d)(e) | Health Care Equipment & Services | L+850 | 1.0% | 12/5/19 | 50,000 | 49,008 | 49,250 | ||||||||||||||
Paw Luxco II Sarl |
(g)(h) | Consumer Durables & Apparel | EURIBOR+950 | 1/29/19 | | 7,000 | 8,469 | 8,196 | ||||||||||||||
Pharmaceutical Research Associates, Inc. |
(d)(e) | Health Care Equipment & Services | L+925 | 1.3% | 6/10/19 | $ | 29,988 | 29,757 | 30,457 | |||||||||||||
Sabine Oil & Gas LLC |
Energy | L+750 | 1.3% | 12/31/18 | 7,021 | 6,956 | 7,021 | |||||||||||||||
Securus Technologies Holdings, Inc. |
Telecommunication Services | L+775 | 1.3% | 4/30/21 | 4,000 | 3,960 | 4,019 | |||||||||||||||
Sensus USA Inc. |
(e) | Capital Goods | L+725 | 1.3% | 5/9/18 | 2,050 | 2,057 | 2,045 | ||||||||||||||
SESAC Holdings Inc. |
(d) | Media | L+875 | 1.3% | 7/12/19 | 2,000 | 1,972 | 2,063 | ||||||||||||||
Sheridan Holdings, Inc. |
(e) | Health Care Equipment & Services | L+775 | 1.3% | 7/1/19 | 273 | 270 | 276 |
See notes to unaudited consolidated financial statements.
7
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Smart & Final Inc. |
(d)(e) | Food & Staples Retailing | L+925 | 1.3% | 11/16/20 | $ | 6,892 | $ | 6,698 | $ | 6,987 | |||||||||||
StoneRiver Group, L.P. |
(e) | Software & Services | L+725 | 1.3% | 5/30/20 | 11,009 | 10,954 | 10,968 | ||||||||||||||
Teine Energy Ltd. |
(e)(h) | Energy | L+625 | 1.3% | 5/17/19 | 5,486 | 5,405 | 5,445 | ||||||||||||||
Therakos, Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+1000 | 1.3% | 6/27/18 | 28,000 | 27,225 | 28,840 | ||||||||||||||
TNS, Inc. |
(e) | Telecommunication Services | L+800 | 1.0% | 8/14/20 | 30,469 | 30,025 | 30,786 | ||||||||||||||
Travelport LLC |
(e)(g) | Consumer Services | L+800 | 1.5% | 1/31/16 | 5,119 | 5,238 | 5,260 | ||||||||||||||
TriZetto Group, Inc. |
(d) | Software & Services | L+725 | 1.3% | 3/28/19 | 4,186 | 4,129 | 4,165 | ||||||||||||||
UTEX Industries, Inc. |
Energy | L+750 | 1.3% | 4/10/21 | 3,243 | 3,227 | 3,257 | |||||||||||||||
Vertafore, Inc. |
(e) | Software & Services | L+825 | 1.5% | 10/27/17 | 830 | 831 | 853 | ||||||||||||||
Waddington Group |
(g) | Materials | L+725 | 1.3% | 11/24/20 | 5,000 | 4,975 | 5,050 | ||||||||||||||
WP CPP Holdings, LLC |
(d) | Capital Goods | L+925 | 1.3% | 6/28/20 | 15,000 | 14,855 | 15,750 | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured LoansSecond Lien |
365,052 | 372,957 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Senior Secured Bonds11.9% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(d)(e) | Materials | 10.5% | 6/1/19 | 10,000 | 9,896 | 9,000 | |||||||||||||||
Allen Systems Group, Inc. |
(e) | Software & Services | 10.5% | 11/15/16 | 14,225 | 9,319 | 9,389 | |||||||||||||||
Avaya Inc. |
(d)(e) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 16,000 | 14,915 | 14,520 | |||||||||||||||
Avaya Inc. |
(d)(e) | Technology Hardware & Equipment | 9.0% | 4/1/19 | 8,000 | 7,952 | 7,640 | |||||||||||||||
Caesars Entertainment Operating Co. |
(g)(h) | Consumer Services | 9.0% | 2/15/20 | 10,000 | 9,570 | 9,603 | |||||||||||||||
Cenveo Corp. |
(d) | Commercial & Professional Services | 8.9% | 2/1/18 | 915 | 836 | 897 | |||||||||||||||
Clear Channel Communications, Inc. |
(d) | Media | 9.0% | 12/15/19 | 1,844 | 1,704 | 1,796 | |||||||||||||||
Eastman Kodak Co. |
Consumer Durables & Apparel | 10.6% | 3/15/19 | 492 | 168 | 536 | ||||||||||||||||
Edgen Murray Corp. |
(d)(h) | Capital Goods | 8.8% | 11/1/20 | 2,000 | 1,986 | 2,010 | |||||||||||||||
Erickson Air-Crane, Inc. |
(d) | Capital Goods | 8.3% | 5/1/20 | 15,000 | 14,726 | 14,723 | |||||||||||||||
Global A&T Electronics Ltd. |
(e)(h) | Technology Hardware & Equipment | 10.0% | 2/1/19 | 9,000 | 9,000 | 9,113 | |||||||||||||||
JW Aluminum Co. |
(e) | Materials | 11.5% | 11/15/17 | 5,000 | 4,915 | 5,013 | |||||||||||||||
Logans Roadhouse Inc. |
(e) | Consumer Services | 10.8% | 10/15/17 | 18,564 | 17,624 | 17,301 | |||||||||||||||
Neff Rental LLC |
(e) | Capital Goods | 9.6% | 5/15/16 | 3,750 | 3,791 | 3,924 | |||||||||||||||
PH Holding LLC |
(d) | Consumer Durables & Apparel | 9.8% | 12/31/17 | 5,000 | 4,922 | 5,250 | |||||||||||||||
Prince Mineral Holdings Corp. |
(d) | Materials | 11.5% | 12/15/19 | 2,750 | 2,720 | 2,956 | |||||||||||||||
Sorenson Communication, Inc. |
(d)(e) | Telecommunication Services | 10.5% | 2/1/15 | 37,000 | 33,222 | 29,355 | |||||||||||||||
Technicolor SA |
(h) | Media | 9.4% | 5/26/17 | 888 | 821 | 1,020 | |||||||||||||||
Travelport LLC |
(d) | Consumer Services | 4.0%, 4.4% PIK | 12/1/16 | 8,051 | 7,005 | 8,023 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
155,092 | 152,069 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Subordinated Debt15.8% |
||||||||||||||||||||||
Alliant Holdings I, Inc. |
(d) | Insurance | 7.9% | 12/15/20 | 4,000 | 4,000 | 4,061 | |||||||||||||||
Amkor Technologies, Inc. |
(d)(h) | Semiconductors & Semiconductor Equipment | 6.4% | 10/1/22 | 1,250 | 1,250 | 1,224 |
See notes to unaudited consolidated financial statements.
8
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Antero Resources Finance Corp. |
Energy | 6.0% | 12/1/20 | $ | 4,000 | $ | 4,000 | $ | 3,935 | |||||||||||||
Atlas Energy Holdings |
(h) | Energy | 7.8% | 1/15/21 | 5,000 | 5,000 | 4,687 | |||||||||||||||
Aurora Diagnostics, LLC |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 7,000 | 7,042 | 4,690 | |||||||||||||||
Beazer Homes USA, Inc. |
(h) | Capital Goods | 7.3% | 2/1/23 | 2,750 | 2,750 | 2,736 | |||||||||||||||
BOE Intermediate Holding Corp. |
Materials | 9.8% PIK | 11/1/17 | 5,750 | 5,693 | 5,545 | ||||||||||||||||
Brocade Communications Systems, Inc. |
(h) | Telecommunication Services | 4.6% | 1/15/23 | 2,750 | 2,750 | 2,598 | |||||||||||||||
Cablevision Systems Corp. |
(d)(h) | Media | 5.9% | 9/15/22 | 2,780 | 2,780 | 2,704 | |||||||||||||||
CrownRock, L.P. |
(d)(e) | Energy | 7.1% | 4/15/21 | 30,000 | 30,000 | 29,548 | |||||||||||||||
DigitalGlobe, Inc. |
(h) | Software & Services | 5.3% | 2/1/21 | 1,100 | 1,100 | 1,060 | |||||||||||||||
EPE Holdings LLC |
(d) | Energy | 8.1%, 0.8% PIK | 12/15/17 | 4,000 | 3,982 | 4,136 | |||||||||||||||
EPL Oil & Gas, Inc. |
(e)(h) | Energy | 8.3% | 2/15/18 | 2,150 | 2,131 | 2,207 | |||||||||||||||
ERA Group, Inc. |
(h) | Energy | 7.8% | 12/15/22 | 7,250 | 7,132 | 7,323 | |||||||||||||||
Halcon Resources Corp. |
(d)(h) | Energy | 8.9% | 5/15/21 | 2,250 | 2,358 | 2,204 | |||||||||||||||
HD Supply, Inc. |
(d) | Commercial & Professional Services | 10.5% | 1/15/21 | 1,250 | 1,250 | 1,296 | |||||||||||||||
iStar Financial, Inc. |
(h) | Real Estate | 7.1% | 2/15/18 | 5,000 | 5,000 | 5,183 | |||||||||||||||
Jefferies Finance LLC |
(h) | Diversified Financials | 7.4% | 4/1/20 | 1,500 | 1,500 | 1,474 | |||||||||||||||
Kenan Advantage Group, Inc. |
(d) | Transportation | 8.4% | 12/15/18 | 2,500 | 2,500 | 2,600 | |||||||||||||||
Kinetic Concepts, Inc. |
(e) | Health Care Equipment & Services | 12.5% | 11/1/19 | 2,800 | 2,718 | 2,898 | |||||||||||||||
LBC Tank Terminals Holding Netherlands BV |
(e)(h) | Materials | 6.9% | 5/15/23 | 1,000 | 1,000 | 989 | |||||||||||||||
Legacy Reserves, L.P. |
(d)(h) | Energy | 8.0% | 12/1/20 | 8,250 | 8,081 | 8,494 | |||||||||||||||
Legacy Reserves, L.P. |
(d)(h) | Energy | 6.6% | 12/1/21 | 4,900 | 4,822 | 4,716 | |||||||||||||||
Memorial Production Partners, L.P. |
(d)(h) | Energy | 7.6% | 5/1/21 | 2,600 | 2,562 | 2,596 | |||||||||||||||
Mood Media Corp. |
(d)(e)(h) | Media | 9.3% | 10/15/20 | 38,457 | 38,094 | 35,512 | |||||||||||||||
Neustar, Inc. |
(h) | Software & Services | 4.5% | 1/15/23 | 2,750 | 2,750 | 2,599 | |||||||||||||||
Nuveen Investments, Inc. |
(d)(e) | Diversified Financials | 9.1% | 10/15/17 | 15,000 | 15,000 | 15,122 | |||||||||||||||
Resolute Energy Corp. |
(h) | Energy | 8.5% | 5/1/20 | 5,800 | 5,868 | 5,932 | |||||||||||||||
Revlon Consumer Products Corp. |
(h) | Household & Personal Products | 5.8% | 2/15/21 | 5,050 | 5,050 | 4,936 | |||||||||||||||
Rex Energy Corp. |
(d)(h) | Energy | 8.9% | 12/1/20 | 15,000 | 14,899 | 15,444 | |||||||||||||||
Rockies Express Pipeline LLC |
Energy | 6.0% | 1/15/19 | 3,250 | 3,250 | 2,981 | ||||||||||||||||
Seven Generations Energy, Ltd. |
(h) | Energy | 8.3% | 5/15/20 | 1,000 | 1,000 | 1,014 | |||||||||||||||
SGS International, Inc. |
(d) | Media | 8.4% | 10/15/20 | 1,000 | 1,000 | 1,023 | |||||||||||||||
Sidewinder Drilling Inc. |
(d) | Capital Goods | 9.8% | 11/15/19 | 2,000 | 2,000 | 1,977 | |||||||||||||||
Six Flags Theme Parks, Inc. |
(h) | Consumer Services | 5.3% | 1/15/21 | 2,500 | 2,500 | 2,432 | |||||||||||||||
U.S. Coatings Acquisition Inc. |
Capital Goods | 7.4% | 5/1/21 | 2,000 | 2,000 | 2,046 | ||||||||||||||||
Windstream Corp. |
(h) | Telecommunication Services | 6.4% | 8/1/23 | 2,600 | 2,600 | 2,451 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
207,412 | 202,373 | ||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
9
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Collateralized Securities7.9% |
||||||||||||||||||||||
AMMC 2012 CDO 11A Class Subord. |
(h) | Diversified Financials | 13.7% | 10/15/23 | $ | 6,000 | $ | 4,917 | $ | 5,179 | ||||||||||||
APID 2013-14A Class E |
(g)(h) | Diversified Financials | L+440 | 4/15/25 | 6,000 | 5,309 | 5,309 | |||||||||||||||
Ares 2012 CLO 2A Class Subord. |
(h) | Diversified Financials | 6.2% | 10/12/23 | 8,500 | 7,914 | 7,178 | |||||||||||||||
CGMS CLO 2013 3A Class E |
(g)(h) | Diversified Financials | L+525 | 7/1/25 | 5,000 | 4,437 | 4,437 | |||||||||||||||
CGMS CLO 2013 3A Class Subord. |
(g)(h) | Diversified Financials | 12.8% | 7/1/25 | 22,000 | 20,607 | 20,607 | |||||||||||||||
Halcyon Loan Advisors Funding 2013-2 Class Subord. |
(g)(h) | Diversified Financials | 13.1% | 7/20/25 | 15,000 | 14,100 | 14,100 | |||||||||||||||
Octagon CLO 2012 1A Class Income |
(h) | Diversified Financials | 11.2% | 1/15/24 | 4,650 | 4,219 | 4,375 | |||||||||||||||
Wind River CLO Ltd. 2013 1A Class Sub B |
(h) | Diversified Financials | 15.0% | 4/20/25 | 40,720 | 38,643 | 40,457 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
100,146 | 101,642 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Number of Shares |
Cost | Fair Value(c) |
||||||||||||||||||||
Equity/Other0.6% |
||||||||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(h)(i) | Telecommunication Services | 4,943 | | | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(h)(i) | Telecommunication Services | 21,099 | | | |||||||||||||||||
Kanders C3 Holdings, LLC, Common Equity |
(e)(i) | Capital Goods | 60,872 | 5,000 | 4,127 | |||||||||||||||||
Therakos, Inc., Common Equity |
(i) | Pharmaceuticals, Biotechnology & Life Sciences | 14,366 | 3,000 | 3,184 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
8,000 | 7,311 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS109.2% |
$ | 1,390,161 | 1,396,939 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(9.2%) |
(117,410 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 1,279,529 | ||||||||||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(e) | Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
See notes to unaudited consolidated financial statements.
10
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2013
(in thousands, except share amounts)
(f) | Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the obligations of Cooper River LLC under the revolving credit facility with Citibank, N.A. (see Note 8). |
(g) | Position or portion thereof unsettled as of June 30, 2013. |
(h) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of June 30, 2013, 78.5% of the Companys total assets represented qualifying assets. |
(i) | Security is non-income producing. |
See notes to unaudited consolidated financial statements.
11
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Senior Secured LoansFirst Lien30.3% |
||||||||||||||||||||||||
ADS Waste Holdings, Inc. |
(d) | Commercial & Professional Services | L+400 | 1.3% | 9/11/19 | $ | 1,317 | $ | 1,304 | $ | 1,335 | |||||||||||||
Airvana Network Solutions Inc. |
Telecommunication Services | L+800 | 2.0% | 3/25/15 | 1,304 | 1,306 | 1,310 | |||||||||||||||||
AlixPartners, LLP |
(d) | Diversified Financials | L+525 | 1.3% | 6/28/19 | 995 | 988 | 1,009 | ||||||||||||||||
Alon USA Energy, Inc. |
(d)(f)(g) | Energy | L+800 | 1.3% | 11/13/18 | 4,167 | 3,958 | 4,201 | ||||||||||||||||
Avaya Inc. |
(d) | Technology Hardware & Equipment | L+450 | 10/26/17 | 3,391 | 3,041 | 3,001 | |||||||||||||||||
Boomerang Tube, LLC |
(d) | Energy | L+950 | 1.5% | 10/11/17 | 4,938 | 4,794 | 4,876 | ||||||||||||||||
Clear Channel Communications, Inc. |
(d)(f) | Media | L+365 | 1/29/16 | 6,156 | 4,916 | 5,103 | |||||||||||||||||
Collective Brands, Inc. |
(d)(g) | Consumer Durables & Apparel | L+600 | 1.3% | 10/9/19 | 5,410 | 5,331 | 5,484 | ||||||||||||||||
Corner Investment PropCo, LLC |
(d)(g) | Consumer Services | L+975 | 1.3% | 11/1/19 | 9,000 | 8,827 | 8,899 | ||||||||||||||||
Crestwood Holdings LLC |
(d) | Energy | L+825 | 1.5% | 3/26/18 | 1,917 | 1,945 | 1,959 | ||||||||||||||||
Eastman Kodak Co. |
(e) | Media | L+750 | 1.0% | 7/19/13 | 2,488 | 2,483 | 2,495 | ||||||||||||||||
ERC Ireland Holdings Ltd. |
(f)(g) | Telecommunication Services | EURIBOR+300, 1.0% PIK | 9/29/17 | | 11,173 | 10,727 | 11,886 | ||||||||||||||||
Fairway Group Acquisition Co. |
(d) | Food & Staples Retailing | L+675 | 1.5% | 8/17/18 | $ | 3,722 | 3,669 | 3,759 | |||||||||||||||
Kanders C3 Holdings |
(d)(e) | Capital Goods | L+900 | 1.3% | 12/19/18 | 35,969 | 35,713 | 35,969 | ||||||||||||||||
Lantiq Deutschland GmbH |
(d)(g) | Software & Services | L+900 | 2.0% | 11/16/15 | 1,521 | 1,414 | 1,391 | ||||||||||||||||
MModal Inc. |
(d)(g) | Health Care Equipment & Services | L+550 | 1.3% | 8/15/19 | 4,534 | 4,469 | 4,376 | ||||||||||||||||
Navistar, Inc. |
(d)(g) | Capital Goods | L+550 | 1.5% | 8/17/17 | 1,222 | 1,211 | 1,230 | ||||||||||||||||
Nexeo Solutions, LLC |
(d) | Capital Goods | L+350 | 1.5% | 9/17/17 | 4,489 | 4,402 | 4,416 | ||||||||||||||||
Panda Sherman Power, LLC |
(d) | Energy | L+750 | 1.5% | 9/14/18 | 3,818 | 3,816 | 3,885 | ||||||||||||||||
Panda Temple Power (TLA), LLC |
(d) | Energy | L+700 | 1.5% | 7/17/18 | 2,000 | 2,019 | 2,030 | ||||||||||||||||
Patheon Inc. |
(d)(f)(g) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3% | 12/6/18 | 10,259 | 9,951 | 10,259 | ||||||||||||||||
Sirius Computer Solutions, Inc. |
(d)(f) | Software & Services | L+575 | 1.3% | 11/30/18 | 9,808 | 9,710 | 9,900 | ||||||||||||||||
Smile Brands Group Inc. |
(e) | Health Care Equipment & Services | L+525 | 1.8% | 12/21/17 | 12,705 | 12,031 | 12,006 | ||||||||||||||||
Sorenson Communication, Inc. |
(d) | Telecommunication Services | L+400 | 2.0% | 8/16/13 | 8,511 | 8,373 | 8,376 | ||||||||||||||||
SRA International, Inc. |
(d) | Software & Services | L+525 | 1.3% | 7/20/18 | 1,618 | 1,615 | 1,533 | ||||||||||||||||
Star West Generation LLC |
(d) | Energy | L+450 | 1.5% | 5/17/18 | 2,000 | 2,000 | 2,009 | ||||||||||||||||
Texas Competitive Electric Holdings Co. LLC |
(d)(e)(f) | Utilities | L+350 | 10/10/14 | 13,000 | 9,466 | 9,843 | |||||||||||||||||
The Container Store, Inc. |
(e) | Consumer Durables & Apparel | L+500 | 1.3% | 4/5/19 | 993 | 993 | 1,002 | ||||||||||||||||
TL Acquisitions, Inc. |
(d)(f) | Consumer Durables & Apparel | L+250 | 7/3/14 | 1,870 | 1,571 | 1,483 | |||||||||||||||||
Totes Isotoner Corp. |
(e) | Consumer Durables & Apparel | L+575 | 1.5% | 7/7/17 | 953 | 952 | 955 | ||||||||||||||||
Travelport LLC |
(d) | Consumer Services | L+475 | 1.5% | 8/23/13 | 2,000 | 2,028 | 2,043 | ||||||||||||||||
Willbros United States Holdings, Inc. |
(f)(g) | Energy | L+750 | 2.0% | 6/30/14 | 2,000 | 1,960 | 2,005 | ||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansFirst Lien |
166,983 | 170,028 | ||||||||||||||||||||||
Unfunded Loan Commitments |
(10,204 | ) | (10,204 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Senior Secured LoansFirst Lien |
156,779 | 159,824 | ||||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
12
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Senior Secured LoansSecond Lien28.3% |
||||||||||||||||||||||||
Advantage Sales & Marketing Inc. |
(e) | Commercial & Professional Services | L+775 | 1.5% | 6/18/18 | $ | 500 | $ | 501 | $ | 504 | |||||||||||||
Alliance Laundry Systems LLC |
(d) | Consumer Durables & Apparel | L+825 | 1.3% | 12/10/19 | 4,216 | 4,174 | 4,274 | ||||||||||||||||
Attachmate Corp. |
(d) | Software & Services | L+950 | 1.5% | 11/22/18 | 5,500 | 5,398 | 5,426 | ||||||||||||||||
Audio Visual Services Group, Inc. |
(d) | Technology Hardware & Equipment | L+900 | 1.3% | 4/30/19 | 9,615 | 9,425 | 9,495 | ||||||||||||||||
BJs Wholesale Club, Inc. |
(d) | Food & Staples Retailing | L+850 | 1.3% | 3/26/20 | 2,766 | 2,739 | 2,849 | ||||||||||||||||
Blackboard Inc. |
(e) | Software & Services | L+1000 | 1.5% | 4/4/19 | 1,000 | 927 | 964 | ||||||||||||||||
Brand Energy & Infrastructure Services, Inc. |
(e) | Energy | L+975 | 1.3% | 10/23/19 | 6,000 | 5,766 | 5,930 | ||||||||||||||||
Brasa (Holdings) Inc. |
(d) | Consumer Services | L+950 | 1.5% | 1/20/20 | 1,739 | 1,672 | 1,765 | ||||||||||||||||
Camp International Holding Co. |
(e) | Capital Goods | L+875 | 1.3% | 11/29/19 | 1,000 | 1,017 | 1,022 | ||||||||||||||||
Cannery Casino Resorts, LLC |
Consumer Services | L+875 | 1.3% | 10/2/19 | 4,000 | 3,922 | 3,823 | |||||||||||||||||
CHG Healthcare Inc. |
Health Care Equipment & Services | L+775 | 1.3% | 11/20/20 | 5,787 | 5,672 | 5,827 | |||||||||||||||||
Equipower Resources Holdings, LLC |
(e) | Utilities | L+850 | 1.5% | 6/21/19 | 1,000 | 981 | 1,029 | ||||||||||||||||
ILC Industries, LLC |
(e) | Capital Goods | L+1000 | 1.5% | 6/14/19 | 4,000 | 3,770 | 3,960 | ||||||||||||||||
John Henry Holdings, Inc. |
(d)(e) | Commercial Services & Supplies | L+900 | 1.3% | 5/6/19 | 23,250 | 22,903 | 22,785 | ||||||||||||||||
Kronos Inc. |
Software & Services | L+850 | 1.3% | 4/30/20 | 6,154 | 6,093 | 6,169 | |||||||||||||||||
LM U.S. Member LLC |
(d)(f) | Transportation | L+825 | 1.3% | 10/15/20 | 6,114 | 6,032 | 6,168 | ||||||||||||||||
NES Rentals Holdings, Inc. |
(d) | Capital Goods | L+1150 | 1.8% | 10/14/14 | 1,000 | 1,004 | 1,000 | ||||||||||||||||
Pharmaceutical Research Associates, Inc. |
(d)(e) | Health Care Equipment & Services | L+925 | 1.3% | 11/27/19 | 25,000 | 24,751 | 25,266 | ||||||||||||||||
Smart & Final Inc. |
(e) | Food & Staples Retailing | L+925 | 1.3% | 11/16/20 | 9,600 | 9,314 | 9,696 | ||||||||||||||||
Sensus U.S.A. Inc. |
(e) | Capital Goods | L+725 | 1.3% | 5/9/18 | 2,050 | 2,057 | 2,060 | ||||||||||||||||
Sheridan Holdings, Inc. |
(e) | Health Care Equipment & Services | L+775 | 1.3% | 7/1/19 | 273 | 270 | 277 | ||||||||||||||||
Southern Pacific Resource Corp. |
(d)(g) | Energy | Prime+750 | 1/7/16 | 4,975 | 5,034 | 5,042 | |||||||||||||||||
TriZetto Group, Inc. |
(d) | Software & Services | L+725 | 1.3% | 3/27/18 | 4,186 | 4,125 | 4,169 | ||||||||||||||||
Venoco, Inc. |
(d) | Energy | L+700 | 1.5% | 6/30/17 | 3,929 | 3,852 | 4,012 | ||||||||||||||||
Vertafore, Inc. |
(e) | Software & Services | L+825 | 1.5% | 10/27/17 | 830 | 831 | 835 | ||||||||||||||||
WP CPP Holdings, LLC |
(d)(f) | Capital Goods | L+925 | 1.3% | 6/28/20 | 15,000 | 14,850 | 15,150 | ||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansSecond Lien |
147,080 | 149,497 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Senior Secured Bonds9.2% |
||||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(d)(e) | Capital Goods | 10.5% | 6/1/19 | 10,000 | 9,890 | 9,938 | |||||||||||||||||
Avaya Inc. |
(d) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 2,000 | 1,853 | 1,873 | |||||||||||||||||
Avaya Inc. |
Technology Hardware & Equipment | 9.0% | 4/1/19 | 5,000 | 5,000 | 5,075 | ||||||||||||||||||
Cenveo Corp. |
(d) | Commercial & Professional Services | 8.9% | 2/1/18 | 4,188 | 3,756 | 3,998 | |||||||||||||||||
Clear Channel Communications, Inc. |
(d)(f) | Media | 9.0% | 12/15/19 | 1,844 | 1,697 | 1,699 | |||||||||||||||||
Eastman Kodak Co. |
Media | 10.6% | 3/15/19 | 1,000 | 665 | 823 | ||||||||||||||||||
Edgen Murray Corp. |
(d)(g) | Capital Goods | 8.8% | 11/1/20 | 2,000 | 1,986 | 2,020 |
See notes to unaudited consolidated financial statements.
13
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor |
Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
JW Aluminum Co. |
(e) | Materials | 11.5% | 11/15/17 | $ | 5,000 | $ | 4,908 | $ | 4,850 | ||||||||||||
Neff Rental LLC |
(e) | Capital Goods | 9.6% | 5/15/16 | 3,750 | 3,798 | 3,888 | |||||||||||||||
PH Holding LLC |
(d) | Consumer Durables & Apparel | 9.8% | 12/31/17 | 5,000 | 4,909 | 5,050 | |||||||||||||||
Prince Mineral Holdings Corp. |
Materials | 11.5% | 12/15/19 | 2,750 | 2,718 | 2,870 | ||||||||||||||||
Sorenson Communication, Inc. |
Telecommunication Services | 10.5% | 2/1/15 | 2,000 | 1,691 | 1,668 | ||||||||||||||||
Technicolor SA |
(g) | Technology Hardware & Equipment | 9.4% | 5/26/17 | 888 | 812 | 917 | |||||||||||||||
Travelport LLC |
(d) | Consumer Services | L+600 PIK | 12/1/16 | 4,907 | 3,856 | 3,939 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
47,539 | 48,608 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Subordinated Debt20.4% |
||||||||||||||||||||||
Alliant Holdings I, Inc. |
Insurance | 7.9% | 12/15/20 | 4,000 | 4,000 | 4,020 | ||||||||||||||||
Amkor Technologies Inc. |
(d)(g) | Semiconductors & Semiconductor Equipment | 6.4% | 10/1/22 | 1,250 | 1,250 | 1,227 | |||||||||||||||
Antero Resources Finance Corp. |
Energy | 6.0% | 12/1/20 | 7,250 | 7,250 | 7,350 | ||||||||||||||||
Aurora Diagnostics, LLC |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 7,000 | 7,045 | 6,546 | |||||||||||||||
Cablevision Systems Corp. |
(d)(g) | Media | 5.9% | 9/15/22 | 2,780 | 2,780 | 2,794 | |||||||||||||||
EPE Holdings LLC |
Energy | 8.1% | 12/15/17 | 4,000 | 3,980 | 3,965 | ||||||||||||||||
EPL Oil & Gas Inc. |
(e)(g) | Energy | 8.3% | 2/15/18 | 2,150 | 2,129 | 2,217 | |||||||||||||||
Era Group Inc. |
(g) | Energy | 7.8% | 12/15/22 | 7,250 | 7,128 | 7,159 | |||||||||||||||
GulfMark Offshore, Inc. |
(g) | Energy | 6.4% | 3/15/22 | 4,425 | 4,447 | 4,569 | |||||||||||||||
iStar Financial Inc. |
(g) | Real Estate | 7.1% | 2/15/18 | 5,000 | 5,000 | 5,108 | |||||||||||||||
Kenan Advantage Group, Inc. |
Transportation | 8.4% | 12/15/18 | 2,500 | 2,500 | 2,586 | ||||||||||||||||
Kinetic Concepts, Inc. |
(e) | Health Care Equipment & Services | 12.5% | 11/1/19 | 2,800 | 2,714 | 2,681 | |||||||||||||||
Legacy Reserves, L.P. |
(g) | Energy | 8.0% | 12/1/20 | 8,250 | 8,073 | 8,457 | |||||||||||||||
NES Rentals Holdings, Inc. |
(d) | Capital Goods | 12.3% | 4/15/15 | 7,129 | 7,150 | 7,352 | |||||||||||||||
Nuveen Investments, Inc. |
(d)(e) | Diversified Financials | 9.1% | 10/15/17 | 15,000 | 15,000 | 14,813 | |||||||||||||||
Resolute Energy Corp. |
(g) | Energy | 8.5% | 5/1/20 | 5,800 | 5,872 | 5,894 | |||||||||||||||
Rex Energy Corp. |
(d)(g) | Energy | 8.9% | 12/1/20 | 15,000 | 14,895 | 15,113 | |||||||||||||||
SGS International Inc. |
(d) | Media | 8.4% | 10/15/20 | 1,000 | 1,000 | 1,035 | |||||||||||||||
Sidewinder Drilling Inc. |
Capital Goods | 9.8% | 11/15/19 | 2,000 | 2,000 | 2,008 | ||||||||||||||||
Six Flags Theme Parks Inc. |
(g) | Consumer Services | 5.3% | 1/15/21 | 2,500 | 2,500 | 2,513 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
106,713 | 107,407 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Collateralized Securities3.5% |
||||||||||||||||||||||
AMMC 2012 CDO 11A Class Subord. |
(g) | Diversified Financials | 17.9% | 10/15/23 | 6,000 | 5,032 | 5,983 | |||||||||||||||
Ares 2012 CLO 2A Class Subord. |
(g) | Diversified Financials | 19.0% | 10/12/23 | 8,500 | 8,231 | 8,004 | |||||||||||||||
Octagon CLO 2012 1A Class Income |
(g) | Diversified Financials | 17.1% | 1/15/24 | 4,650 | 4,232 | 4,321 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
17,495 | 18,308 | ||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
14
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Number of Shares |
Cost | Fair Value(c) |
|||||||||||||||||
Equity/Other0.9% |
||||||||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(g)(h) | Telecommunication Services | 21,825 | $ | | $ | | |||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(g)(h) | Telecommunication Services | 4,228 | | | |||||||||||||||||
Kanders C3 Holdings, LLC, Common Equity |
(e)(h) | Capital Goods | 60,872 | 5,000 | 4,998 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
5,000 | 4,998 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS92.6% |
$ | 480,606 | 488,642 | |||||||||||||||||||
|
|
|||||||||||||||||||||
OTHER ASSETS IN EXCESS OF LIABILITIES7.4% |
39,085 | |||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 527,727 | ||||||||||||||||||||
|
|
|||||||||||||||||||||
Total Return Swap |
Notional Amount |
Unrealized Appreciation |
||||||||||||||||||||
Citibank TRS Facility (Note 8) |
(g) | $ | 383,742 | $ | 5,641 | |||||||||||||||||
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(e) | Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(f) | Position or portion thereof unsettled as of December 31, 2012. |
(g) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the companys total assets. As of December 31, 2012, 80.7% of the Companys total assets represented qualifying assets. In addition, the Company also calculated its compliance with the qualifying asset test on a look through basis by disregarding the value of the Companys total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor was an eligible portfolio company. On this basis, 79.6% of the Companys total assets represented qualifying assets as of December 31, 2012. |
(h) | Security is non-income producing. |
See notes to unaudited consolidated financial statements.
15
Table of Contents
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation II, or the Company, was incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and commenced operations on June 18, 2012 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of shares of its common stock in its continuous public offering to persons who were not affiliated with the Company or the Companys investment adviser, FSIC II Advisor, LLC, or FSIC II Advisor, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering requirement, the Company had no operations except for matters relating to its organization and registration as a non-diversified, closed-end management investment company.
The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that intends to elect to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of June 30, 2013, the Company had four wholly-owned financing subsidiaries, Del River LLC, or Del River, Cobbs Creek LLC, or Cobbs Creek, Lehigh River LLC, or Lehigh River, and Cooper River LLC, or Cooper River. The unaudited consolidated financial statements include both the Companys accounts and the accounts of its wholly-owned financing subsidiaries as of June 30, 2013. All significant intercompany transactions have been eliminated in consolidation.
The Companys investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from its target companies as primary market investments.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Companys interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2012 included in the Companys annual report on Form 10-K. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The December 31, 2012 consolidated balance sheet and consolidated schedule of investments are derived from the Companys audited consolidated financial statements for the year ended December 31, 2012. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded and all amounts are in thousands, except share and per share amounts.
Capital Gains Incentive Fee: The Company has entered into an investment advisory and administrative services agreement with FSIC II Advisor, dated as of February 8, 2012, or the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 20.0% of the Companys incentive fee capital gains (i.e., the Companys realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if the Companys entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
In addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which is described more fully in Note 8), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their interpretation of the applicable language in the Advisers Act that the Company should look through the TRS in calculating its capital gains incentive fee. Under this look through methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a look through basis under which the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on income
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a look through basis.
The amount of capital gains incentive fees accrued by the Company as of December 31, 2012 exceeded by $441 the amount of incentive fees which would have been payable to FSIC II Advisor as of such date in accordance with the look through methodology. In accordance with FSIC II Advisors voluntary agreement to waive any such excess, the Company reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. The Company made a corresponding reduction to the amount of expense reimbursement due from sponsor as of March 31, 2013, which also reduced by $441 the amount of expense recoupment payable to sponsor as of March 31, 2013. As of June 30, 2013, the aggregate capital gains incentive fees paid to FSIC II Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP do not exceed the fees which would have been payable in accordance with the look through methodology. On June 13, 2013, the Company terminated the TRS.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Companys common stock during the six months ended June 30, 2013 and 2012:
Six Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Gross Proceeds from Offering |
78,912,060 | $ | 815,652 | 2,516,752 | $ | 23,052 | ||||||||||
Reinvestment of Distributions |
1,753,461 | 16,436 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Gross Proceeds |
80,665,521 | 832,088 | 2,516,752 | 23,052 | ||||||||||||
Commissions and Dealer Manager Fees |
| (76,453 | ) | | (425 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Proceeds to Company |
80,665,521 | 755,635 | 2,516,752 | 22,627 | ||||||||||||
Share Repurchase Program |
(76,086 | ) | (712 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Proceeds from Share Transactions |
80,589,435 | $ | 754,923 | 2,516,752 | $ | 22,627 | ||||||||||
|
|
|
|
|
|
|
|
Status of Continuous Public Offering
Since commencing its continuous public offering and through August 13, 2013, the Company has sold 161,675,895 shares of common stock for gross proceeds of $1,652,320. As of August 13, 2013, the Company had raised total gross proceeds of $1,670,915, including $200 of seed capital contributed by the principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of the Companys board of directors and certain individuals and entities affiliated with GSO / Blackstone Debt Funds Management LLC, or GDFM, the sub-adviser to FSIC II Advisor, in a private placement completed in June 2012. During the six months ended June 30, 2013 and 2012, the Company sold 80,665,521 and 2,516,752 shares of common stock for gross proceeds of $832,088 and $23,052 at an average price per share of $10.32 and $9.16, respectively. The gross proceeds received during the six months ended June 30, 2013 and 2012 include reinvested stockholder distributions of $16,436 and $0, respectively,
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
for which the Company issued 1,753,461 and 0 shares of common stock, respectively. During the period from July 1, 2013 to August 13, 2013, the Company sold 25,438,846 shares of common stock for gross proceeds of $264,284 at an average price per share of $10.39.
The proceeds from the issuance of common stock as presented on the Companys unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $76,453 and $425 for the six months ended June 30, 2013 and 2012, respectively.
Share Repurchase Program
The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Companys board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:
| the effect of such repurchases on the Companys qualification as a RIC (including the consequences of any necessary asset sales); |
| the liquidity of its assets (including fees and costs associated with disposing of assets); |
| the Companys investment plans and working capital requirements; |
| the relative economies of scale with respect to the Companys size; |
| the Companys history in repurchasing shares of common stock or portions thereof; and |
| the condition of the securities markets. |
The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Companys board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such shares of common stock on each date of repurchase at a price equal to 90% of the offering price in effect on each date of repurchase. The Companys board of directors may amend, suspend or terminate the share repurchase program at any time, upon 30 days notice. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Companys October 1, 2012 semi-monthly closing.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program during the six months ended June 30, 2013:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares | |||||
December 31, 2012(1) |
January 2, 2013 | | | $9.225 | | |||||
March 31, 2013 |
April 1, 2013 | 76,086 | 100% | $9.360 | $712 |
(1) | No shares were tendered for repurchase in connection with the quarterly tender offer. |
On July 1, 2013, the Company repurchased 45,414 shares (representing 100% of shares of common stock tendered for repurchase) at $9.45 per share for aggregate consideration totaling $429.
Note 4. Related Party Transactions
Compensation of the Dealer Manager and Investment Adviser
Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of the Companys gross assets and an incentive fee based on the Companys performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of the Companys operations. Management fees are paid on a quarterly basis in arrears.
The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until the Companys pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Companys pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a catch-up fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Companys pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. This catch-up feature allows FSIC II Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FSIC II Advisor will receive 20.0% of pre-incentive fee net investment income.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Companys incentive fee capital gains, which equal the Companys realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Note 2 for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.
The Company reimburses FSIC II Advisor for expenses necessary to perform services related to the Companys administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisors actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Companys board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Companys board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Companys board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of the Companys net assets to the same ratio as reported by other comparable BDCs.
Franklin Square Holdings, L.P., or Franklin Square Holdings, the Companys sponsor and an affiliate of FSIC II Advisor, has funded certain of the Companys offering costs and organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in the Companys continuous public offering until all offering costs and organization costs funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On June 18, 2012, the Company satisfied the minimum offering requirement. Since inception, Franklin Square Holdings has funded $3,202 in offering costs and organization costs, all of which were reimbursed during the year ended December 31, 2012. The reimbursements were recorded as a reduction of capital. As of June 30, 2013, no amounts remain reimbursable to FSIC II Advisor and its affiliates under this arrangement.
The dealer manager for the Companys continuous public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Companys affiliates. Under the dealer manager agreement among the Company, FSIC II Advisor and FS2, FS2 is entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in the Companys continuous public offering, all or a portion of which may be re-allowed to selected broker-dealers.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six months ended June 30, 2013 and 2012:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||
Related Party |
Source Agreement |
Description |
2013 | 2012 | 2013 | 2012 | ||||||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) | $ | 7,595 | $ | 22 | $ | 12,580 | $ | 22 | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) | $ | (2,839 | ) | $ | 65 | $ | 1,020 | $ | 65 | |||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(3) | $ | 644 | $ | 20 | $ | 1,105 | $ | 20 | ||||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(4) | $ | 7,863 | $ | 82 | $ | 14,680 | $ | 82 |
(1) | During the six months ended June 30, 2013 and 2012, $7,452 and $0, respectively, in base management fees were paid to FSIC II Advisor. Of the $7,595 in base management fees accrued and payable as of June 30, 2013, it is intended that the entire amount will be paid to FSIC II Advisor. |
(2) | During the three months ended June 30, 2013, the Company reversed $2,839 of capital gains incentive fees previously accrued based on the performance of its portfolio. During the six months ended June 30, 2013 and 2012, the Company accrued capital gains incentive fees of $1,020 and $65, respectively, based on the performance of its portfolio, all of which was based on unrealized gains. No such fees are actually payable by the Company with respect to such unrealized gains unless and until those gains are actually realized. See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee. As of December 31, 2012, the Company had accrued capital gains incentive fees of $3,548 based on the performance of its portfolio, of which $3,070 was based on unrealized gains and $478 was based on realized gains. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the look through methodology described more fully in Note 2. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, the Company reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. As a result of the foregoing, the Company has accrued capital gains incentive fees as of June 30, 2013 of $4,090, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor. The Company paid FSIC II Advisor $37 in capital gains incentive fees during the six months ended June 30, 2013. |
(3) | During the six months ended June 30, 2013 and 2012, $932 and $15, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC II Advisor and the remainder related to other reimbursable expenses. The Company paid $718 and $0 in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2013 and 2012, respectively. |
(4) | Represents aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
Capital Contribution by FSIC II Advisor and GDFM
In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Companys investment adviser.
In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Companys investment adviser. In connection with the same private placement, certain members of the Companys board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, the Company issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of August 13, 2013, the Company has sold an aggregate of 2,562,690 shares of common stock for aggregate gross proceeds of $23,198 to members of the Companys board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold in the private placement completed in June 2012.
Potential Conflicts of Interest
FSIC II Advisors senior management team is comprised of the same personnel as the senior management teams of FB Income Advisor, LLC and FS Investment Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs, FS Investment Corporation and FS Energy and Power Fund, respectively. As a result, such personnel provide investment advisory services to each of the Company, FS Investment Corporation and FS Energy and Power Fund. While none of FSIC II Advisor, FB Income Advisor, LLC or FS Investment Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation or FS Energy and Power Fund, respectively, any, or all, may do so in the future. In the event that FSIC II Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Companys investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FSIC II Advisor or its management team.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FSIC II Advisor, including FS Investment Corporation and FS Energy and Power Fund and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers. Because the Company did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, the Company will be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement
Pursuant to an expense support and conditional reimbursement agreement, dated as of May 10, 2012 and amended as of May 16, 2013, or, as amended, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Companys distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Companys distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse the
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Companys cumulative distributions paid to its stockholders in each quarter, less the sum of its net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Companys net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense reimbursement payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Companys average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Companys average net assets attributable to its shares of common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means the Companys total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that the Company bears a reasonable level of expenses in relation to its income.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings,
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Companys conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
Franklin Square Holdings is controlled by the Companys chairman, president and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Companys expenses in future quarters. As of June 30, 2013, there were no unreimbursed expense support payments subject to future reimbursement by the Company.
During the year ended December 31, 2012, the Company accrued $2,482 for reimbursements due from Franklin Square Holdings under this arrangement, of which $847 was funded by Franklin Square Holdings during such period. As of December 31, 2012, the Company had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the six month period ending June 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, the Company accrued an expense recoupment payable to sponsor of $2,041, which the Company offset against the reimbursements due on the Companys consolidated balance sheets as of December 31, 2012. During the six months ended June 30, 2013, the Company made expense recoupment payments of $847 to Franklin Square Holdings. As of June 30, 2013, no further amounts remain subject to repayment by the Company to Franklin Square Holdings in the future.
FS Benefit Trust
On May 30, 2013, FS Benefit Trust, or FS Trust, was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of Franklin Square Holdings and its affiliates. In connection with the Companys semi-monthly closing occurring on June 17, 2013, FS Trust purchased approximately $34 of the Companys shares at a purchase price equal to 90% of the offering price on effect on such date, or $9.45 per share.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared and paid on its common stock during the six months ended June 30, 2013 and 2012:
Distribution | ||||||||
For the Three Months Ended |
Per Share | Amount | ||||||
Fiscal 2012 |
||||||||
June 30, 2012 |
$ | 0.0302 | $ | 77 | ||||
Fiscal 2013 |
||||||||
March 31, 2013 |
$ | 0.1871 | $ | 14,791 | ||||
June 30, 2013 |
$ | 0.1883 | $ | 22,647 |
25
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
On July 1, 2013, the Companys board of directors declared two regular semi-monthly cash distributions of $0.031416 per share each, which were paid on July 31, 2013 to stockholders of record on July 15, 2013 and July 30, 2013, respectively. On August 6, 2013, the Companys board of directors declared two regular semi-monthly cash distributions of $0.031416 per share each, which will be paid on August 30, 2013 to stockholders of record on August 15, 2013 and August 30, 2013, respectively. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Companys board of directors.
The Company has adopted an opt in distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically opt in to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Companys common stock.
The Company may fund its cash distributions to stockholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions.
The Company expects that for a period of time following commencement of its continuous public offering, which time period may be significant, substantial portions of the Companys distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that are subject to repayment by the Company within three years. The purpose of this arrangement is to ensure that no portion of the Companys distributions to stockholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on the Companys investment performance and can only be sustained if the Company achieves positive investment performance in future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. The Companys future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that stockholders would otherwise receive in the future. There can be no assurance that the Company will achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the six months ended June 30, 2013, no portion of the distributions paid during such period were funded through the reimbursement of operating expenses by Franklin Square Holdings.
26
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common stock during the six months ended June 30, 2013 and 2012:
Six Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||
Offering proceeds |
$ | | | $ | | | ||||||||||
Borrowings |
| | | | ||||||||||||
Net investment income(1) |
26,613 | 71 | % | | | |||||||||||
Capital gains proceeds from the sale of assets |
10,825 | 29 | % | 4 | 5 | % | ||||||||||
Non-capital gains proceeds from the sale of assets |
| | | | ||||||||||||
Distributions on account of preferred and common equity |
| | | | ||||||||||||
Expense reimbursement from sponsor |
| | 73 | 95 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 37,438 | 100 | % | $ | 77 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | During the six months ended June 30, 2013, 92% of the Companys gross investment income was attributable to cash interest earned and 8% was attributable to non-cash accretion of discount and paid-in-kind, or PIK, interest. During the six months ended June 30, 2012, 89% of the Companys gross investment income was attributable to cash interest earned and 11% was attributable to non-cash accretion of discount. |
The Companys net investment income on a tax basis for the six months ended June 30, 2013 and 2012 was $33,900 and $73, respectively. As of June 30, 2013 and December 31, 2012, the Company had $7,287 and $0, respectively, of undistributed net investment income on a tax basis.
The difference between the Companys GAAP-basis net investment income and its tax-basis net investment income is due to the tax-basis deferral and amortization of organization costs incurred prior to the commencement of the Companys operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the inclusion of a portion of the periodic net settlement payments due on the total return swap in tax-basis net investment income and the accretion of discount on the total return swap.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the six months ended June 30, 2013 and 2012:
Six Months Ended June 30, |
||||||||
2013 | 2012 | |||||||
GAAP-basis net investment income (loss) |
$ | 22,618 | $ | (197 | ) | |||
Tax-basis deferral and amortization of organization costs |
(7 | ) | 205 | |||||
Reversal of incentive fee accrual on unrealized gains |
1,020 | 65 | ||||||
Tax-basis net investment income portion of total return swap payments |
10,269 | | ||||||
Accretion of discount on total return swap |
| | ||||||
|
|
|
|
|||||
Tax-basis net investment income |
$ | 33,900 | $ | 73 | ||||
|
|
|
|
27
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The determination of the tax attributes of the Companys distributions is made annually as of the end of the Companys fiscal year based upon the Companys taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Companys distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
As of June 30, 2013 and December 31, 2012, the components of accumulated earnings on a tax-basis were as follows:
June 30,
2013 (Unaudited) |
December 31, 2012 | |||||||
Distributable ordinary income |
$ | 7,287 | $ | | ||||
Incentive fee accrual on unrealized gains |
(4,090 | ) | (3,070 | ) | ||||
Unamortized organization costs |
(210 | ) | (217 | ) | ||||
Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency(1) |
6,757 | 13,352 | ||||||
|
|
|
|
|||||
$ | 9,744 | $ | 10,065 | |||||
|
|
|
|
(1) | As of June 30, 2013, the gross unrealized appreciation on the Companys investments and gain on foreign currency was $23,876. As of December 31, 2012, the gross unrealized appreciation on the Companys investments and TRS was $15,142. As of June 30, 2013 and December 31, 2012, the gross unrealized depreciation on the Companys investments and loss on foreign currency was $17,119 and $1,790, respectively. |
The aggregate cost of the Companys investments for federal income tax purposes totaled $1,390,202 and $480,606 as of June 30, 2013 and December 31, 2012, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $6,757 as of June 30, 2013. The aggregate net unrealized appreciation (depreciation) on a tax basis, including the Companys TRS with Citibank N.A., or Citibank, was $13,352 as of December 31, 2012.
Note 6. Investment Portfolio
The following table summarizes the composition of the Companys investment portfolio at cost and fair value as of June 30, 2013 and December 31, 2012:
June 30,
2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 554,459 | $ | 560,587 | 40 | % | $ | 156,779 | $ | 159,824 | 33 | % | ||||||||||||
Senior Secured LoansSecond Lien |
365,052 | 372,957 | 27 | % | 147,080 | 149,497 | 30 | % | ||||||||||||||||
Senior Secured Bonds |
155,092 | 152,069 | 11 | % | 47,539 | 48,608 | 10 | % | ||||||||||||||||
Subordinated Debt |
207,412 | 202,373 | 14 | % | 106,713 | 107,407 | 22 | % | ||||||||||||||||
Collateralized Securities |
100,146 | 101,642 | 7 | % | 17,495 | 18,308 | 4 | % | ||||||||||||||||
Equity/Other |
8,000 | 7,311 | 1 | % | 5,000 | 4,998 | 1 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 1,390,161 | $ | 1,396,939 | 100 | % | $ | 480,606 | $ | 488,642 | 100 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
28
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The Company does not control and is not an affiliate of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to control a portfolio company if it owned 25% or more of its voting securities and would be an affiliate of a portfolio company if it owned 5% or more of its voting securities.
The Companys investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2013, the Company had two such investments with unfunded commitments of $17,704. As of December 31, 2012, the Company had one such investment with an unfunded commitment of $10,204. The Company maintains sufficient cash on hand to fund such unfunded loan commitments should the need arise.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2013 and December 31, 2012:
June 30,
2013 (Unaudited) |
December 31, 2012 | |||||||||||||||
Industry Classification |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 2,895 | 0 | % | $ | | | |||||||||
Capital Goods |
111,715 | 8 | % | 84,807 | 17 | % | ||||||||||
Commercial & Professional Services |
73,035 | 5 | % | 5,837 | 1 | % | ||||||||||
Commercial Services & Supplies |
| | 22,785 | 5 | % | |||||||||||
Consumer Durables & Apparel |
44,482 | 3 | % | 18,248 | 4 | % | ||||||||||
Consumer Services |
108,949 | 8 | % | 22,982 | 5 | % | ||||||||||
Diversified Financials |
120,007 | 9 | % | 34,130 | 7 | % | ||||||||||
Energy |
173,504 | 12 | % | 90,673 | 19 | % | ||||||||||
Food & Staples Retailing |
9,826 | 1 | % | 16,304 | 3 | % | ||||||||||
Food, Beverage & Tobacco |
3,977 | 0 | % | | | |||||||||||
Health Care Equipment & Services |
170,141 | 12 | % | 50,433 | 10 | % | ||||||||||
Household & Personal Products |
4,936 | 0 | % | | | |||||||||||
Insurance |
83,869 | 6 | % | 4,020 | 1 | % | ||||||||||
Materials |
28,553 | 2 | % | 7,720 | 2 | % | ||||||||||
Media |
51,445 | 4 | % | 13,949 | 3 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
73,535 | 5 | % | 16,805 | 3 | % | ||||||||||
Real Estate |
13,157 | 1 | % | 5,108 | 1 | % | ||||||||||
Retailing |
1,197 | 0 | % | | | |||||||||||
Semiconductors & Semiconductor Equipment |
1,224 | 0 | % | 1,227 | 0 | % | ||||||||||
Software & Services |
83,770 | 6 | % | 30,387 | 6 | % | ||||||||||
Technology Hardware & Equipment |
91,054 | 7 | % | 20,361 | 4 | % | ||||||||||
Telecommunication Services |
125,027 | 9 | % | 23,240 | 5 | % | ||||||||||
Transportation |
8,798 | 1 | % | 8,754 | 2 | % | ||||||||||
Utilities |
11,843 | 1 | % | 10,872 | 2 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,396,939 | 100 | % | $ | 488,642 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
29
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of June 30, 2013 and December 31, 2012, the Companys investments were categorized as follows in the fair value hierarchy:
June 30, 2013 (Unaudited) |
December 31, 2012 | |||||||||||
Valuation Inputs |
Investments | Investments | Total Return Swap |
|||||||||
Level 1Price quotations in active markets |
$ | | $ | | $ | | ||||||
Level 2Significant other observable inputs |
| | | |||||||||
Level 3Significant unobservable inputs |
1,396,939 | 488,642 | 5,641 | |||||||||
|
|
|
|
|
|
|||||||
$ | 1,396,939 | $ | 488,642 | $ | 5,641 | |||||||
|
|
|
|
|
|
The Companys investments as of June 30, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Four senior secured loan investments and one senior secured bond investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Companys equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Four collateralized securities, which were newly-issued and purchased near June 30, 2013, were valued at cost, as the Companys board of directors determined that the cost of such investments was the best indication of their fair value.
30
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The Companys investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. One senior secured loan investment and one senior secured bond investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Companys equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. The Company valued the TRS in accordance with the agreements between Del River and Citibank which collectively established the TRS and are collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS was based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS were valued by Citibank. Citibank based its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations were sent to the Company for review and testing. The Companys valuation committee and board of directors reviewed and approved the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent the Companys valuation committee or board of directors had any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation was discussed or challenged pursuant to the terms of the TRS. For additional information on the Companys TRS, see Note 8.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Companys management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company will periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Companys valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Companys valuation process.
31
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The following is a reconciliation for the six months ended June 30, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||||
Senior Secured LoansFirst Lien |
Senior Secured LoansSecond Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/ Other |
Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 159,824 | $ | 149,497 | $ | 48,608 | $ | 107,407 | $ | 18,308 | $ | 4,998 | $ | 488,642 | ||||||||||||||
Accretion of discount (amortization of premium) |
1,843 | 542 | 950 | 77 | | | 3,412 | |||||||||||||||||||||
Net realized gain (loss) |
303 | 52 | 453 | 851 | | | 1,659 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
3,083 | 5,488 | (4,092 | ) | (5,733 | ) | 683 | (687 | ) | (1,258 | ) | |||||||||||||||||
Purchases |
483,284 | 258,092 | 116,615 | 155,288 | 84,063 | 3,000 | 1,100,342 | |||||||||||||||||||||
Paid-in-kind interest |
51 | | | | | | 51 | |||||||||||||||||||||
Sales and redemptions |
(87,801 | ) | (40,714 | ) | (10,465 | ) | (55,517 | ) | (1,412 | ) | | (195,909 | ) | |||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Fair value at end of period |
$ | 560,587 | $ | 372,957 | $ | 152,069 | $ | 202,373 | $ | 101,642 | $ | 7,311 | $ | 1,396,939 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 4,033 | $ | 6,159 | $ | (3,588 | ) | $ | (5,360 | ) | $ | 683 | $ | (687 | ) | $ | 1,240 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2012 | ||||||||||||||||||||||||||||
Senior Secured LoansFirst Lien |
Senior Secured LoansSecond Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/ Other |
Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Accretion of discount (amortization of premium) |
| | 2 | | | | 2 | |||||||||||||||||||||
Net realized gain (loss) |
4 | | | | | | 4 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
97 | 200 | | 25 | | | 322 | |||||||||||||||||||||
Purchases |
15,227 | 10,414 | 2,341 | 4,456 | | | 32,438 | |||||||||||||||||||||
Paid-in-kind interest |
| | | | | | | |||||||||||||||||||||
Sales and redemptions |
(442 | ) | | | | | | (442 | ) | |||||||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Fair value at end of period |
$ | 14,886 | $ | 10,614 | $ | 2,343 | $ | 4,481 | $ | | $ | | $ | 32,324 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 97 | $ | 200 | $ | | $ | 25 | $ | | $ | | $ | 322 | ||||||||||||||
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32
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an independent valuation firm as of June 30, 2013 and December 31, 2012 were as follows:
Type of Investment |
Fair Value at June 30, 2013(1) (Unaudited) |
Valuation Technique(2) |
Unobservable Input | Range | Weighted Average |
|||||||||
Senior Secured LoansFirst Lien |
$ | 112,911 | Market Comparables | Market Yield (%) | 9.3% - 10.5% | 9.6 | % | |||||||
Senior Secured LoansSecond Lien |
$ | 30,000 | Market Comparables | Market Yield (%) | 9.8% - 10.3% | 10.0 | % | |||||||
Senior Secured Bonds |
$ | 5,250 | Market Comparables | Market Yield (%) | 8.8% - 9.3% | 9.0 | % | |||||||
Equity/Other |
$ | 7,311 | Market Comparables | EBITDA Multiples (x) | 5.3x - 9.0x | 6.9 | x |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Four collateralized securities ($44,453), which were newly-issued and purchased near June 30, 2013, were valued at cost, as the Companys board of directors determined that the cost of such investments was the best indication of their fair value. As of June 30, 2013, $10,204 of the senior secured loans-first lien investments consisted of an unfunded loan commitment. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. |
Type of Investment |
Fair Value at December 31, 2012(1) |
Valuation Technique(2) |
Unobservable Input | Range | Weighted Average | |||||||
Senior Secured LoansFirst Lien |
$ | 35,969 | Market Comparables | Market Yield (%) | 10.0% - 10.5% | 10.3% | ||||||
Senior Secured Bonds |
$ | 5,050 | Market Comparables | Market Yield (%) | 9.3% - 9.8% | 9.5% | ||||||
Equity/Other |
$ | 4,998 | Market Comparables | EBITDA Multiples (x) | 3.3x - 4.5x | 4.3x |
(1) | Except as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. The TRS was valued in accordance with the TRS Agreement as discussed above. As of December 31, 2012, $10,204 of the senior secured loans-first lien investments consisted of an unfunded loan commitment. |
(2) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. |
Note 8. Financing Arrangements
The following table presents summary information with respect to the Companys outstanding financing arrangements as of June 30, 2013. For additional information regarding these financing facilities, please see the notes to the Companys audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2012 and the additional disclosure set forth in this Note 8.
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
JPM Facility |
Repurchase | 3.25% | $ | 194,000 | $ | 356,000 | May 20, 2017 | |||||||
Cooper River Credit Facility |
Revolving | L + 1.75% | $ | 100,194 | $ | 99,806 | March 27, 2016 |
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
Total Return Swap
On June 13, 2013, the Companys wholly-owned, special-purpose financing subsidiary, Del River, and Citibank entered into a Termination Acknowledgement (TRS), or the termination acknowledgment, pursuant to which Del River and Citibank agreed to immediately terminate the TRS Agreement and all transactions thereunder.
The TRS was for a portfolio of senior secured floating rate loans and other debt securities with a maximum notional amount of $425,000. Del River received from Citibank all interest and fees payable in respect of the assets underlying the TRS. Del River paid to Citibank interest at a rate equal to the one-month London Interbank Offered Rate, or LIBOR, plus 1.25% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, Del River either received from Citibank the appreciation in the value of such asset or paid to Citibank any depreciation in the value of such asset.
Del River was permitted to terminate the TRS upon prior written notice to Citibank and no termination fee was payable in connection with the termination of the TRS.
Upon the termination of the TRS, the Company recognized $5,437 of gains, $1,836 of which represented periodic net settlement payments due on the TRS.
JPM Financing
On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Lehigh River and Cobbs Creek, the Company entered into an amendment, or the April 2013 amendment, to its conventional debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which was originally entered into on October 26, 2012 and first amended on February 6, 2013. The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $300,000 to $550,000; and (ii) extended the final repurchase date under the financing arrangement from February 20, 2017 to May 20, 2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
In connection with the increase in the amount available under the debt financing arrangement, the aggregate market value of loans expected to be held by Lehigh River when the financing arrangement, as amended, is fully-ramped was increased from approximately $640,000 to $1,174,000.
The loans held by Lehigh River secure the obligations of Lehigh River under certain Class A Floating Rate Notes, or, together with the notes issued prior to April 23, 2013, the Class A Notes, to be issued from time to time by Lehigh River to Cobbs Creek pursuant to the Amended and Restated Indenture, dated as of February 6, 2013 and as supplemented by Supplemental Indenture No. 1, dated April 23, 2013, with Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Lehigh River from time to time was increased from $360,000 to $660,000 and the stated maturity date of the Class A Notes was changed from February 20, 2024 to May 20, 2024. All principal and interest on the Class A Notes will be due and payable on the stated maturity date. Cobbs Creek will purchase the Class A Notes to be issued by Lehigh River from time to time at a purchase price equal to their par value.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
In connection with the increase in the amount available under the debt financing arrangement, Cobbs Creek entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, or, collectively, the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Cobbs Creek for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility was increased from $360,000 to $660,000. Accordingly, the maximum amount payable at any time to Cobbs Creek under the JPM Facility was increased from $300,000 to $550,000.
Under the JPM Facility, Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than May 20, 2017. The repurchase price paid by Cobbs Creek to JPM for each repurchase of the Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing May 20, 2015, Cobbs Creek is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.
In connection with the increase in the amount available under the debt financing arrangement, the aggregate market value of loans expected to be held by Cobbs Creek when the financing arrangement, as amended, is fully-ramped was increased from $180,000 to $330,000. The loans held by Cobbs Creek secure the obligations of Cobbs Creek under the JPM Facility.
As of June 30, 2013 and December 31, 2012, Class A Notes in the aggregate principal amount of $232,800 and $141,000, respectively, had been purchased by Cobbs Creek from Lehigh River and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $194,000 and $117,500, respectively. The Company funded each purchase of Class A Notes by Cobbs Creek through a capital contribution to Cobbs Creek. As of June 30, 2013 and December 31, 2012, Cobbs Creeks liability under the JPM Facility was $194,000 and $117,500, plus $736 and $274, respectively, of accrued interest expense. The Class A Notes issued by Lehigh River and purchased by Cobbs Creek eliminate in consolidation on the Companys financial statements.
As of June 30, 2013 and December 31, 2012, the fair value of loans held by Lehigh River was $559,254 and $270,119, respectively, which included loans purchased by Lehigh River with proceeds from the issuance of Class A Notes. As of June 30, 2013 and December 31, 2012, the fair value of loans held by Cobbs Creek was $282,237 and $88,351, respectively.
As of June 30, 2013, the Company had incurred costs of $159 in connection with obtaining and amending the JPM Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM Facility. As of June 30, 2013, $132 of such deferred financing costs had yet to be amortized to interest expense.
The effective interest rate on the borrowings under the JPM Facility was 3.25% as of June 30, 2013. Interest is payable quarterly in arrears and commenced in May 2013. The Company recorded interest expense of $1,593
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
and $2,721 for the three and six months ended June 30, 2013, respectively, of which $10 and $20, respectively, related to the amortization of deferred financing costs. The Company paid $2,239 in interest expense during the six months ended June 30, 2013. The average borrowings under the JPM Facility for the six months ended June 30, 2013 were $165,287, with a weighted average interest rate of 3.25%.
Cooper River Credit Facility
On March 27, 2013, Cooper River entered into a revolving credit facility, or the credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The credit facility provides for borrowings in an aggregate principal amount up to $200,000 on a committed basis.
The Company may contribute cash or debt securities to Cooper River from time to time, subject to certain restrictions set forth in the credit facility, and will retain a residual interest in any assets contributed through its ownership of Cooper River or will receive fair market value for any debt securities sold to Cooper River. Cooper River may purchase additional debt securities from various sources. Cooper River has appointed the Company to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Cooper Rivers obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Cooper River, including its portfolio of debt securities. The obligations of Cooper River under the credit facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of the Companys investment in Cooper River.
Borrowings under the credit facility accrue interest at a rate equal to three-month LIBOR plus 1.75% per annum during the first two years of the facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the credit facility are subject to compliance with an equity coverage ratio with respect to the current value of Cooper Rivers portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Cooper Rivers portfolio.
Beginning June 24, 2013, Cooper River is required to pay a non-usage fee to the extent the aggregate principal amount available under the credit facility has not been borrowed. Outstanding borrowings under the credit facility are amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016.
In connection with the closing of the credit facility, the Company contributed approximately $52,472 in cash to Cooper River. Cooper River used approximately $14,194 of borrowings under the credit facility, together with cash contributed by the Company, to fund its acquisition of approximately $65,108 in debt securities held by an affiliate of Citibank and to pay certain fees and expenses in connection with the establishment of the credit facility.
As of June 30, 2013, $100,194 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. The Company incurred costs of $1,557 in connection with obtaining the credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the credit facility. As of June 30, 2013, $1,422 of such deferred financing costs had yet to be amortized to interest expense.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The effective interest rate on the borrowings under the credit facility was 2.48% per annum as of June 30, 2013. Interest is payable quarterly in arrears and commenced March 27, 2013. The Company recorded interest expense of $369 and $380 for the three and six months ended June 30, 2013, respectively, of which $128 and $135, respectively, related to the amortization of deferred financing costs and $8 and $8, respectively, related to fees on the unused portion of the credit facility. The Company paid no interest expense during the six months ended June 30, 2013. The average borrowings under the credit facility for the period from March 27, 2013 to June 30, 2013 were $44,059, with a weighted average interest rate of 2.08%.
Under the credit facility, Cooper River has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within five business days of when due; (b) the insolvency or bankruptcy of Cooper River or the Company; (c) the failure of Cooper River to be beneficially owned and controlled by the Company; (d) the resignation or removal of the Company as Cooper Rivers investment manager; and (e) GDFM (or any affiliate thereof or any replacement thereof approved in writing by Citibank) no longer serving as the investment sub-adviser to the Company. Upon the occurrence of an event of default, Citibank may declare the outstanding principal and interest and all other amounts owing under the credit facility immediately due and payable. During the continuation of an event of default, Cooper River must pay interest at a default rate.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights
The following is a schedule of financial highlights of the Company for the six months ended June 30, 2013 and the year ended December 31, 2012:
Six Months Ended June 30, 2013 (Unaudited) |
Year
Ended December 31, 2012 |
|||||||
Per Share Data: |
||||||||
Net asset value, beginning of period |
$ | 9.16 | $ | 9.00 | ||||
Results of operations(1) |
||||||||
Net investment income (loss) |
0.24 | 0.12 | ||||||
Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
0.15 | 0.73 | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
0.39 | 0.85 | ||||||
|
|
|
|
|||||
Stockholder distributions(2) |
||||||||
Distributions from net investment income |
(0.27 | ) | (0.28 | ) | ||||
Distributions from net realized gain on investments |
(0.11 | ) | (0.11 | ) | ||||
|
|
|
|
|||||
Net decrease in net assets resulting from stockholder distributions |
(0.38 | ) | (0.39 | ) | ||||
|
|
|
|
|||||
Capital share transactions |
||||||||
Issuance of common stock(3) |
0.12 | 0.07 | ||||||
Repurchases of common stock(4) |
| | ||||||
Offering costs(1) |
(0.03 | ) | (0.28 | ) | ||||
Reimbursement to investment adviser |
| (0.33 | ) | |||||
Capital contributions of investment adviser |
| 0.24 | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from capital share transactions |
0.09 | (0.30 | ) | |||||
|
|
|
|
|||||
Net asset value, end of period |
$ | 9.26 | $ | 9.16 | ||||
|
|
|
|
|||||
Shares outstanding, end of period |
138,202,241 | 57,612,806 | ||||||
|
|
|
|
|||||
Total return(5) |
5.24 | % | 6.11 | % | ||||
|
|
|
|
|||||
Ratio/Supplemental Data: |
||||||||
Net assets, end of period |
$ | 1,279,529 | $ | 527,727 | ||||
|
|
|
|
|||||
Ratio of net investment income to average net assets(6) |
2.51 | % | 1.29 | % | ||||
|
|
|
|
|||||
Ratio of accrued capital gains incentive fees to average net assets(6) |
0.11 | % | 1.63 | % | ||||
|
|
|
|
|||||
Ratio of interest expense to average net assets(6) |
0.35 | % | 0.13 | % | ||||
|
|
|
|
|||||
Ratio of operating expenses to average net assets(6) |
2.28 | % | 4.20 | % | ||||
Ratio of expenses reimbursed by sponsor to average net assets(6) |
| (1.14 | )% | |||||
Ratio of expense recoupment payable to sponsor to average net assets(6) |
0.23 | % | | |||||
|
|
|
|
|||||
Ratio of total operating expenses to average net assets(6) |
2.51 | % | 3.06 | % | ||||
|
|
|
|
|||||
Portfolio turnover(7) |
20.32 | % | 111.30 | % | ||||
|
|
|
|
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights (continued)
(1) | The per share data was derived by using the weighted average shares outstanding during the six months ended June 30, 2013 and the period from June 18, 2012 (commencement of operations) through December 31, 2012. |
(2) | The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period. |
(3) | The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Companys continuous public offering and pursuant to the Companys distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share. |
(4) | The per share impact of the Companys repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the period. |
(5) | The total return for the six months ended June 30, 2013 was calculated by taking the net asset value per share as of June 30, 2013, adding the cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2012. The 2012 total return was calculated by taking the net asset value per share as of December 31, 2012, adding the cash distributions per share which were declared during the calendar year and dividing the total by the net asset value per share at the beginning of the period. The total return does not consider the effect of the sales load from the sale of the Companys common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Companys future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Companys ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities the Company acquires, the level of the Companys expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return as calculated above represents the total return on the Companys investment portfolio during such period and is calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders. |
(6) | Weighted average net assets during the six months ended June 30, 2013 and the period from June 18, 2012 (commencement of operations) through December 31, 2012 are used for this calculation. Ratios are not annualized. |
(7) | Portfolio turnover is not annualized. |
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts) |
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, we, us, and our refer to FS Investment Corporation II.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| the impact of the investments that we expect to make; |
| the ability of our portfolio companies to achieve their objectives; |
| our current and expected financings and investments; |
| the adequacy of our cash resources, financing sources and working capital; |
| the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies; |
| our contractual arrangements and relationships with third parties; |
| actual and potential conflicts of interest with FSIC II Advisor, FB Income Advisor, LLC, FS Investment Corporation, FS Investment Advisor, LLC, FS Energy and Power Fund, GDFM or any of their affiliates; |
| the dependence of our future success on the general economy and its effect on the industries in which we may invest; |
| our use of financial leverage; |
| the ability of FSIC II Advisor to locate suitable investments for us and to monitor and administer our investments; |
| the ability of FSIC II Advisor or its affiliates to attract and retain highly talented professionals; |
| our ability to qualify and maintain our qualification as a RIC and as a BDC; |
| the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; |
| the effect of changes to tax legislation and our tax position; and |
| the tax status of the enterprises in which we invest. |
In addition, words such as anticipate, believe, expect and intend indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:
| changes in the economy; |
| risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and |
| future changes in laws or regulations and conditions in our operating areas. |
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We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Overview
We were incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced operations on June 18, 2012 upon raising gross proceeds in excess of $2,500 from sales of shares of our common stock in our continuous public offering to persons who were not affiliated with us or FSIC II Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and intends to elect to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified, closed-end management investment company.
Our investment activities are managed by FSIC II Advisor and supervised by our board of directors, a majority of whom are independent. Under our investment advisory and administrative services agreement, we have agreed to pay FSIC II Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FSIC II Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FSIC II Advisor in identifying investment opportunities and makes investment recommendations for approval by FSIC II Advisor according to guidelines set by FSIC II Advisor.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following six investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.
Originated/Proprietary Transactions: We intend to leverage our relationship with GDFM and their global sourcing and origination platform to identify proprietary investment opportunities. We define proprietary investments as any investment originated or structured specifically for us or made by us that was not generally available to the broader market. Proprietary investments may include both debt and equity components, although we do not expect to make equity investments independent of having an existing credit relationship. We believe proprietary transactions may offer attractive investment opportunities as they typically offer higher returns than broadly syndicated transactions.
Anchor Orders: In addition to proprietary transactions, we will invest in certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the average syndicate participant. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FSIC II Advisor and GDFM. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment.
Event Driven: We intend to take advantage of dislocations that arise in the markets due to an impending event and where the markets apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or
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impair a companys financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.
Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment.
Collateralized Securities: Collateralized loan obligations, or CLOs, are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities. Our relationship with GSO Capital Partners LP, one of the largest CLO managers in the world, allows us to invest in these securities with confidence and to capitalize on opportunities in the secondary CLO market.
Broadly Syndicated/Other: Although our primary focus is to invest in proprietary transactions, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our proprietary investments and provide a complement to our more illiquid proprietary strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or directly from our target companies. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities. We expect that our investments will generally range between $5,000 and $50,000 each, although investments may vary as the size of our capital base changes and will ultimately be at the discretion of FSIC II Advisor, subject to oversight by our board of directors.
The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans in which we invest are often rated by a nationally recognized statistical ratings organization and generally will carry a rating below investment grade (rated lower than Baa3 by Moodys Investors Service, Inc., or Moodys, or lower than BBB- by Standard & Poors Corporation). However, we also invest in non-rated debt securities.
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Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain on investments, net realized gain on total return swap, net unrealized appreciation and depreciation on investments, net unrealized appreciation and depreciation on total return swap and net unrealized gain and loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net realized gain on total return swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation and depreciation on total return swap is the net change in fair value of the TRS. Net unrealized gain and loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. In future quarters, we do not expect our revenues to include net realized gain on total return swap or net unrealized appreciation and depreciation on total return swap as a result of the termination of our TRS on June 13, 2013.
We principally generate revenues in the form of interest income on the debt investments we hold. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.
Expenses
Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fees compensate FSIC II Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FSIC II Advisor is responsible for compensating our investment sub-adviser.
We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FSIC II Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records which we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FSIC II Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See Related Party Transactions for additional information regarding the reimbursements payable to FSIC II Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2012.
In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FSIC II Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
Expense Reimbursement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid
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from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense reimbursement payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means our total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
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Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters. As of June 30, 2013, there were no unreimbursed expense support payments subject to future reimbursement by us.
During the year ended December 31, 2012, we accrued $2,482 for reimbursements due from Franklin Square Holdings under this arrangement, of which $847 was funded by Franklin Square Holdings during such period. As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the six month period ending June 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. During the six months ended June 30, 2013, we made expense recoupment payments of $847 to Franklin Square Holdings. As of June 30, 2013, no further amounts remain subject to repayment by us to Franklin Square Holdings in the future.
Portfolio Investment Activity for the Three and Six Months Ended June 30, 2013 and for the Year Ended December 31, 2012
The following table presents certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2013.
Total Portfolio Activity |
||||||||
Net Investment Activity |
Three Months Ended June 30, 2013 |
Six Months Ended June 30, 2013 |
||||||
Purchases |
$ | 473,266 | $ | 1,100,342 | ||||
Sales and Redemptions |
(104,330 | ) | (195,909 | ) | ||||
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Net Portfolio Activity |
$ | 368,936 | $ | 904,433 | ||||
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For the Three Months Ended June 30, 2013 |
For the Six Months
Ended June 30, 2013 |
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New Investment Activity by Asset Class |
Purchases | Percentage | Purchases | Percentage | ||||||||||||
Senior Secured LoansFirst Lien |
$ | 133,480 | 28 | % | $ | 483,284 | 44 | % | ||||||||
Senior Secured LoansSecond Lien |
118,608 | 25 | % | 258,092 | 23 | % | ||||||||||
Senior Secured Bonds |
72,498 | 15 | % | 116,615 | 11 | % | ||||||||||
Subordinated Debt |
104,203 | 22 | % | 155,288 | 14 | % | ||||||||||
Collateralized Securities |
44,477 | 10 | % | 84,063 | 8 | % | ||||||||||
Equity/Other |
| | 3,000 | 0 | % | |||||||||||
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Total |
$ | 473,266 | 100 | % | $ | 1,100,342 | 100 | % | ||||||||
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June 30, 2013 | ||||||||
Total Portfolio Characteristics |
Fair Value | Percentage
of Portfolio |
||||||
Senior Secured LoansFirst Lien |
$ | 560,587 | 40 | % | ||||
Senior Secured LoansSecond Lien |
372,957 | 27 | % | |||||
Senior Secured Bonds |
152,069 | 11 | % | |||||
Subordinated Debt |
202,373 | 14 | % | |||||
Collateralized Securities |
101,642 | 7 | % | |||||
Equity/Other |
7,311 | 1 | % | |||||
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|
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Total |
$ | 1,396,939 | 100 | % | ||||
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|
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Number of Portfolio Companies |
155 | |||||||
% Variable Rate (based on fair value) |
67.5% | |||||||
% Fixed Rate (based on fair value) |
32.0% | |||||||
% Income Producing Preferred Equity (based on fair value) |
| |||||||
% Non-Income Producing Equity or Other Investments (based on fair value) |
0.5% | |||||||
Average Annual EBITDA of Portfolio Companies |
$285,200 | |||||||
Weighted Average Credit Rating of Investments that were Rated |
B3 | |||||||
% of Investments on Non-Accrual |
| |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) |
9.8% | |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost)Excluding Non-Income Producing Assets |
9.9% |
New Proprietary Activity |
||||
Three Months Ended June 30, 2013 |
||||
Total Commitments (including Unfunded Commitments) |
$ | 7,975 | ||
Exited Investments (including partial paydowns) |
(3,894 | ) | ||
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Net Proprietary Activity |
$ | 4,081 | ||
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For the Three Months Ended June 30, 2013 |
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New Proprietary Commitments by Asset Class |
Originations | Percentage | ||||||
Senior Secured LoansFirst Lien |
$ | 7,975 | 100 | % | ||||
Senior Secured LoansSecond Lien |
| | ||||||
Senior Secured Bonds |
| | ||||||
Subordinated Debt |
| | ||||||
Collateralized Securities |
| | ||||||
Equity/Other |
| | ||||||
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Total |
$ | 7,975 | 100 | % | ||||
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Average New Proprietary Commitment Amount |
$7,975 | |||||||
Weighted Average Maturity for Newly Funded Proprietary Commitments |
11/5/15 | |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Newly Funded Investments during Period |
9.2% | |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Investments Exited during Period |
| |||||||
Total Proprietary Portfolio Characteristics |
||||||||
Number of Funded Proprietary Portfolio Companies |
4 | |||||||
% of Funded Proprietary Investments on Non-Accrual |
| |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary Investments |
9.8% | |||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary InvestmentsExcluding Non-Income Producing Assets |
10.1% |
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During the six months ended June 30, 2013, we made investments in portfolio companies totaling $1,100,342. During the same period, we sold investments for proceeds of $120,101 and received principal repayments of $75,808. As of June 30, 2013, our investment portfolio, with a total fair value of $1,396,939, consisted of interests in 155 portfolio companies (40% in first lien senior secured loans, 27% in second lien senior secured loans, 11% in senior secured bonds, 14% in subordinated debt, 7% in collateralized securities and 1% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $285.2 million. As of June 30, 2013, the investments in our portfolio were purchased at a weighted average price of 97.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 75.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 9.8% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of June 30, 2013. The portfolio yield does not represent an actual investment return to stockholders.
Based on our regular semi-monthly cash distribution rate of $0.031416 per share as of June 30, 2013 and our public offering price of $10.50 per share as of such date, the annualized distribution rate to stockholders as of June 30, 2013 was 7.18%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
During the period from June 18, 2012 through December 31, 2012, we made investments in portfolio companies totaling $681,503. During the same period, we sold investments for proceeds of $182,908 and received principal repayments of $21,340. As of December 31, 2012, our investment portfolio, with a total fair value of $488,642, consisted of interests in 88 portfolio companies (33% in first lien senior secured loans, 30% in second lien senior secured loans, 10% in senior secured bonds, 22% in subordinated debt, 4% in collateralized securities and 1% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $303.0 million. As of December 31, 2012, the investments in our portfolio were purchased at a weighted average price of 95.9% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 78.4% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 10.3% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2012. The portfolio yield does not represent an actual investment return to stockholders.
Based on our regular semi-monthly cash distribution rate of $0.030813 per share as of December 31, 2012 and our public offering price of $10.20 per share as of such date, the annualized distribution rate to stockholders as of December 31, 2012 was 7.25%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
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The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2013 and December 31, 2012:
June 30,
2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
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Senior Secured LoansFirst Lien |
$ | 554,459 | $ | 560,587 | 40 | % | $ | 156,779 | $ | 159,824 | 33 | % | ||||||||||||
Senior Secured LoansSecond Lien |
365,052 | 372,957 | 27 | % | 147,080 | 149,497 | 30 | % | ||||||||||||||||
Senior Secured Bonds |
155,092 | 152,069 | 11 | % | 47,539 | 48,608 | 10 | % | ||||||||||||||||
Subordinated Debt |
207,412 | 202,373 | 14 | % | 106,713 | 107,407 | 22 | % | ||||||||||||||||
Collateralized Securities |
100,146 | 101,642 | 7 | % | 17,495 | 18,308 | 4 | % | ||||||||||||||||
Equity/Other |
8,000 | 7,311 | 1 | % | 5,000 | 4,998 | 1 | % | ||||||||||||||||
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$ | 1,390,161 | $ | 1,396,939 | 100 | % | $ | 480,606 | $ | 488,642 | 100 | % | |||||||||||||
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(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
We do not control and are not an affiliate of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities and would be an affiliate of a portfolio company if we owned 5% or more of its voting securities.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2013, we had two such investments with unfunded commitments of $17,704. As of December 31, 2012, we had one such investment with an unfunded commitment of $10,204. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.
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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2013 and December 31, 2012:
June 30,
2013 (Unaudited) |
December 31, 2012 | |||||||||||||||
Industry Classification |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
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Automobiles & Components |
$ | 2,895 | 0 | % | $ | | | |||||||||
Capital Goods |
111,715 | 8 | % | 84,807 | 17 | % | ||||||||||
Commercial & Professional Services |
73,035 | 5 | % | 5,837 | 1 | % | ||||||||||
Commercial Services & Supplies |
| | 22,785 | 5 | % | |||||||||||
Consumer Durables & Apparel |
44,482 | 3 | % | 18,248 | 4 | % | ||||||||||
Consumer Services |
108,949 | 8 | % | 22,982 | 5 | % | ||||||||||
Diversified Financials |
120,007 | 9 | % | 34,130 | 7 | % | ||||||||||
Energy |
173,504 | 12 | % | 90,673 | 19 | % | ||||||||||
Food & Staples Retailing |
9,826 | 1 | % | 16,304 | 3 | % | ||||||||||
Food, Beverage & Tobacco |
3,977 | 0 | % | | | |||||||||||
Health Care Equipment & Services |
170,141 | 12 | % | 50,433 | 10 | % | ||||||||||
Household & Personal Products |
4,936 | 0 | % | | | |||||||||||
Insurance |
83,869 | 6 | % | 4,020 | 1 | % | ||||||||||
Materials |
28,553 | 2 | % | 7,720 | 2 | % | ||||||||||
Media |
51,445 | 4 | % | 13,949 | 3 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
73,535 | 5 | % | 16,805 | 3 | % | ||||||||||
Real Estate |
13,157 | 1 | % | 5,108 | 1 | % | ||||||||||
Retailing |
1,197 | 0 | % | | | |||||||||||
Semiconductors & Semiconductor Equipment |
1,224 | 0 | % | 1,227 | 0 | % | ||||||||||
Software & Services |
83,770 | 6 | % | 30,387 | 6 | % | ||||||||||
Technology Hardware & Equipment |
91,054 | 7 | % | 20,361 | 4 | % | ||||||||||
Telecommunication Services |
125,027 | 9 | % | 23,240 | 5 | % | ||||||||||
Transportation |
8,798 | 1 | % | 8,754 | 2 | % | ||||||||||
Utilities |
11,843 | 1 | % | 10,872 | 2 | % | ||||||||||
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Total |
$ | 1,396,939 | 100 | % | $ | 488,642 | 100 | % | ||||||||
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As of June 30, 2013 and December 31, 2012, approximately 51% and 50%, respectively, of our portfolio based on fair value constituted non-broadly syndicated investments. We define non-broadly syndicated investments as any investment that is considered proprietary, an anchor order, an opportunistic or event driven investment, or a collateralized security. The table below enumerates the percentage, by fair value, of the types of investments in our portfolio as of June 30, 2013 and December 31, 2012:
June 30, 2013 | December 31, 2012 | |||||||||||||||
Deal Composition |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
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Originated/Proprietary |
$ | 147,038 | 11 | % | $ | 30,763 | 6 | % | ||||||||
Anchor Order |
345,943 | 25 | % | 141,687 | 29 | % | ||||||||||
Event Driven |
47,020 | 3 | % | 26,633 | 5 | % | ||||||||||
Opportunistic |
66,912 | 5 | % | 26,644 | 6 | % | ||||||||||
Collateralized Securities |
101,642 | 7 | % | 18,308 | 4 | % | ||||||||||
Broadly Syndicated/Other |
688,384 | 49 | % | 244,607 | 50 | % | ||||||||||
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Total |
$ | 1,396,939 | 100 | % | $ | 488,642 | 100 | % | ||||||||
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Portfolio Asset Quality
In addition to various risk management and monitoring tools, FSIC II Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FSIC II Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment Rating |
Summary Description | |
1 |
Investment exceeding expectations and/or capital gain expected. | |
2 |
Performing investment generally executing in accordance with the portfolio companys business planfull return of principal and interest expected. | |
3 |
Performing investment requiring closer monitoring. | |
4 |
Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment. | |
5 |
Underperforming investment with expected loss of interest and some principal. |
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2013 and December 31, 2012:
June 30, 2013 | December 31, 2012 | |||||||||||||||
Investment Rating |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
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1 |
$ | | | $ | | | ||||||||||
2 |
1,289,146 | 92 | % | 442,090 | 90 | % | ||||||||||
3 |
84,363 | 6 | % | 29,340 | 6 | % | ||||||||||
4 |
23,430 | 2 | % | 17,212 | 4 | % | ||||||||||
5 |
| | | | ||||||||||||
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$ | 1,396,939 | 100 | % | $ | 488,642 | 100 | % | |||||||||
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The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
We commenced operations on June 18, 2012, when we raised in excess of $2,500 from persons who were not affiliated with us or FSIC II Advisor. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified, closed-end management investment company. As a result, comparisons of the three months ended June 30, 2013 to the period from June 18, 2012 (commencement of operations) through June 30, 2012 have been included, but no comparison of the six months ended June 30, 2013 to the six months ended June 30, 2012 have been included. During the six months ended June 30, 2012, we incurred organization costs of $205 and offering costs of $1,207, which were funded by Franklin Square Holdings and recorded as a contribution to capital.
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Comparison of the Three Months Ended June 30, 2013 and the Period from June 18, 2012 (Commencement of Operations) through June 30, 2012
Revenues
We generated investment income of $28,226 and $18 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio. Such revenues represent $26,186 and $16 of cash income earned as well as $2,040 and $2 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The level of income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.
Expenses
Our total operating expenses were $8,944 and $157 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $7,595 and $22 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively. Our operating expenses also include administrative services expenses attributed to FSIC II Advisor of $644 and $20 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively.
FSIC II Advisor is eligible to receive incentive fees based on performance. During the three months ended June 30, 2013 we reversed $2,839 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the period from June 18, 2012 through June 30, 2012, we accrued capital gains incentive fees of $65, all of which was based on unrealized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $1,967 and $0 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively, relating to the JPM Facility and our revolving credit facility and the amortization of deferred financing costs incurred in connection with the establishment of those facilities and our TRS. For the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $131 and $1, respectively, and fees and expenses incurred with our stock transfer agent totaled $612 and $14, respectively. Fees for our board of directors were $157 and $0, respectively, for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012.
Our other general and administrative expenses totaled $677 and $23 for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively, and consisted of the following:
Three Months Ended June 30, 2013 |
Period from June 18,
2012 to June 30, 2012 |
|||||||
Expenses associated with our independent audit and related fees |
$ | 85 | $ | 10 | ||||
Compensation of our chief compliance officer |
11 | 2 | ||||||
Legal fees |
199 | 2 | ||||||
Printing fees |
109 | 5 | ||||||
Other |
273 | 4 | ||||||
|
|
|
|
|||||
Total |
$ | 677 | $ | 23 | ||||
|
|
|
|
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We generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, the ratio of our operating expenses to our average net assets was 0.82% and 1.26%, respectively, and the ratio of our total operating expenses to our average net assets, which includes $0 and $135, respectively, of expense reimbursements from Franklin Square Holdings, was 0.82% and 0.09%, respectively. During three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, our ratio of total operating expenses to average net assets included $1,967 and $0, respectively, related to interest expense and $(2,839) and $65, respectively, related to accruals for (reversals of) incentive fees. Without such expenses, our ratio of total operating expenses to average net assets would have been 0.90% and 0.70% for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively. Incentive fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors.
Net Investment Income
Our net investment income (loss) totaled $19,282 ($0.17 per share) and $8 ($0.04 per share) for the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, respectively.
Net Realized Gains or Losses
We sold investments and received principal repayments of $72,845 and $31,485, respectively, during the three months ended June 30, 2013, from which we realized a net gain of $811. During the three months ended June 30, 2013, we earned $12,426 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net loss of $41 from settlements on foreign currency. We sold investments of $442 during the period from June 18, 2012 through June 30, 2012, from which we realized net gains of $4.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the three months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(13,734); net change in unrealized appreciation (depreciation) on our TRS was $(9,612); and the net change in unrealized gain (loss) on foreign currency was $30. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended June 30, 2013 was primarily driven by a general widening of credit spreads and the termination of our TRS which converted unrealized gains as of March 31, 2013 into realized gains. For the period from June 18, 2012 through June 30, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $322. The change in unrealized appreciation (depreciation) on our investments during the period from June 18, 2012 through June 30, 2012 was primarily driven by demand for certain loans in the secondary market, subsequent to our purchase of such loans.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, the net increase (decrease) in net assets resulting from operations was $9,162 ($0.08 per share) and $322 ($1.40 per share), respectively.
Results of Operations for the Six Months Ended June 30, 2013
Revenues
We generated investment income of $45,199 for the six months ended June 30, 2013 in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in
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our portfolio. Such revenues represent $41,736 of cash income earned as well as $3,463 in non-cash portions relating to accretion of discount and PIK interest for the six months ended June 30, 2013. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The level of income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.
Expenses
Our total operating expenses were $20,540 for the six months ended June 30, 2013. Our operating expenses include base management fees attributed to FSIC II Advisor of $12,580 and administrative services expenses attributed to FSIC II Advisor of $1,105 for the six months ended June 30, 2013.
FSIC II Advisor is eligible to receive incentive fees based on performance. During the six months ended June 30, 2013, we accrued capital gains incentive fees of $1,020 based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $3,111 for the six months ended June 30, 2013 relating to the JPM Facility and our revolving credit facility and the amortization of deferred financing costs incurred in connection with the establishment of those facilities and our TRS. For the six months ended June 30, 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $220 and fees and expenses incurred with our stock transfer agent totaled $1,047. Fees for our board of directors were $303 for the six months ended June 30, 2013.
Our other general and administrative expenses totaled $1,154 for the six months ended June 30, 2013 and consisted of the following:
Six Months Ended June 30, 2013 |
||||
Expenses associated with our independent audit and related fees |
$ | 163 | ||
Compensation of our chief compliance officer |
22 | |||
Legal fees |
399 | |||
Printing fees |
216 | |||
Other |
354 | |||
|
|
|||
Total |
$ | 1,154 | ||
|
|
We generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the six months ended June 30, 2013, the ratio of our operating expenses to our average net assets was 2.28% and the ratio of our total operating expenses to our average net assets, which includes $2,041 of expense recoupments paid to Franklin Square Holdings, was 2.51%. During the six months ended June 30, 2013, our ratio of total operating expenses to average net assets included $3,111 related to interest expense and $1,020 related to accruals for incentive fees. Without such expenses, our ratio of total operating expenses to average net assets would have been 2.05% for the six months ended June 30, 2013. Incentive fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors.
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Expense Reimbursement
During the year ended December 31, 2012, we accrued $2,482 for reimbursements due from Franklin Square Holdings under the expense reimbursement agreement, of which $847 was funded by Franklin Square Holdings during such period. As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the six months ended June 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. During the six months ended June 30, 2013, we made expense recoupment payments of $847 to Franklin Square Holdings. As of June 30, 2013, no further amounts remain subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see OverviewExpense Reimbursement.
Net Investment Income
Our net investment income totaled $22,618 ($0.23 per share) for the six months ended June 30, 2013.
Net Realized Gains or Losses
We sold investments and received principal repayments of $120,101 and $75,808 during the six months ended June 30, 2013, from which we realized a net gain of $1,659. During the six months ended June 30, 2013, we earned $19,689 from periodic net settlement payments on our TRS and the termination our TRS, which are reflected as realized gains, and realized a net loss of $100 from settlements on foreign currency.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the six months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(1,258); the net change in unrealized appreciation (depreciation) on our TRS was $(5,641); and the net change in unrealized gain (loss) on foreign currency was $150. The net change in unrealized appreciation (depreciation) on our investments and TRS during the six months ended June 30, 2013 was primarily driven by a general widening of credit spreads and the termination of our TRS which converted unrealized gains as of December 31, 2012 into realized gains.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the six months ended June 30, 2013, the net increase (decrease) in net assets resulting from operations was $37,117 ($0.39 per share).
Financial Condition, Liquidity and Capital Resources
Overview
As of June 30, 2013, we had $321,084 in cash, which we held in a custodial account, and $455,806 in borrowings available under our debt facilities. Below is a summary of our outstanding financing facilities as of June 30, 2013:
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||
JPM Facility |
Repurchase | 3.25% | $194,000 | $356,000 | May 20, 2017 | |||||
Cooper River Credit Facility |
Revolving | L + 1.75% | $100,194 | $99,806 | March 27, 2016 |
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During the six months ended June 30, 2013, we sold 80,665,521 shares of our common stock for gross proceeds of $832,088 at an average price per share of $10.32. The gross proceeds received during the six months ended June 30, 2013 include reinvested stockholder distributions of $16,436 for which we issued 1,753,461 shares of common stock. During the six months ended June 30, 2013, we also incurred offering costs of $2,800 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $76,453 for the six months ended June 30, 2013. These sales commissions and fees include $14,680 retained by the dealer manager, FS2, which is one of our affiliates.
Since commencing our continuous public offering and through August 13, 2013, we have sold 161,675,895 shares of common stock for gross proceeds of $1,652,320. As of August 13, 2013, we had raised total gross proceeds of $1,670,915, including $200 of seed capital contributed by principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of our board of directors and certain individuals and entities affiliated with GDFM in a private placement completed in June 2012. As of August 13, 2013, we have sold an aggregate of 2,562,690 shares of common stock for aggregate gross proceeds of $23,198 to members of our board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold in the private placement.
We generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of shares of our common stock. We accept subscriptions on a continuous basis and issue shares at semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.
Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our intent to be taxed as a RIC.
To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.
The following table provides information concerning our repurchases of shares of common stock pursuant to our share repurchase program during the six months ended June 30, 2013:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares | |||||
December 31, 2012(1) |
January 2, 2013 | | | $9.225 | | |||||
March 31, 2013 |
April 1, 2013 | 76,086 | 100% | $9.360 | $712 |
(1) | No shares were tendered for repurchase in connection with the quarterly tender offer. |
On July 1, 2013, we repurchased 45,414 shares (representing 100% of shares of common stock tendered for repurchase) at $9.45 per share for aggregate consideration totaling $429.
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Total Return Swap
On June 13, 2013, our wholly-owned, special-purpose financing subsidiary, Del River, and Citibank entered into the termination acknowledgment, pursuant to which Del River and Citibank agreed to immediately terminate the TRS Agreement and all transactions thereunder.
The TRS was for a portfolio of senior secured floating rate loans and other debt securities with a maximum notional amount of $425,000. Del River received from Citibank all interest and fees payable in respect of the assets underlying the TRS. Del River paid to Citibank interest at a rate equal to one-month LIBOR plus 1.25% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, Del River either received from Citibank the appreciation in the value of such asset, or paid to Citibank any depreciation in the value of such asset.
Del River was permitted to terminate the TRS upon prior written notice to Citibank and no termination fee was payable in connection with the termination of the TRS.
Upon the termination of the TRS, we recognized $5,437 of gains, $1,836 of which represented periodic net settlement payments due on the TRS.
JPM Financing
On April 23, 2013, through our two wholly-owned, special-purpose financing subsidiaries, Lehigh River and Cobbs Creek, we entered into the April 2013 amendment to our conventional debt financing arrangement with JPM, which we originally entered into on October 26, 2012 and first amended on February 6, 2013. The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $300,000 to $550,000; and (ii) extended the final repurchase date under the financing arrangement from February 20, 2017 to May 20, 2017. We elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
In connection with the increase in the amount available under the debt financing arrangement, the aggregate market value of loans expected to be held by Lehigh River when the financing arrangement, as amended, is fully-ramped was increased from approximately $640,000 to $1,174,000.
The loans held by Lehigh River secure the obligations of Lehigh River under the Class A Notes to be issued from time to time by Lehigh River to Cobbs Creek pursuant to the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Lehigh River from time to time was increased from $360,000 to $660,000 and the stated maturity date of the Class A Notes was changed from February 20, 2024 to May 20, 2024. All principal and interest on the Class A Notes will be due and payable on the stated maturity date. Cobbs Creek will purchase the Class A Notes to be issued by Lehigh River from time to time at a purchase price equal to their par value.
In connection with the increase in the amount available under the debt financing arrangement, Cobbs Creek entered into an amendment to the JPM Facility. Pursuant to the JPM Facility, JPM has agreed to purchase from time to time Class A Notes held by Cobbs Creek for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM Facility was increased from $360,000 to $660,000 in connection with the April 2013 amendment. Accordingly, the maximum amount payable at any time to Cobbs Creek under the JPM Facility was increased from $300,000 to $550,000.
Under the JPM Facility, Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must
occur no later than May 20, 2017. The repurchase price paid by Cobbs Creek to JPM for each repurchase of the
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Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing May 20, 2015, Cobbs Creek is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM Facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM Facility applied to the amount of such reduction.
In connection with the increase in the amount available under the debt financing arrangement, the aggregate market value of loans expected to be held by Cobbs Creek when the financing arrangement, as amended, is fully-ramped was increased from $180,000 to $330,000. The loans held by Cobbs Creek secure the obligations of Cobbs Creek under the JPM Facility.
As of June 30, 2013 and December 31, 2012, Class A Notes in the aggregate principal amount of $232,800 and $141,000, respectively, had been purchased by Cobbs Creek from Lehigh River and subsequently sold to JPM under the JPM Facility for aggregate proceeds of $194,000 and $117,500, respectively. We funded each purchase of Class A Notes by Cobbs Creek through a capital contribution to Cobbs Creek. As of June 30, 2013 and December 31, 2012, Cobbs Creeks liability under the JPM Facility was $194,000 and $117,500, plus $736 and $274, respectively, of accrued interest expense. The Class A Notes issued by Lehigh River and purchased by Cobbs Creek eliminate in consolidation on our financial statements.
As of June 30, 2013 and December 31, 2012, the fair value of loans held by Lehigh River was $559,254 and $270,119, respectively, which included loans purchased by Lehigh River with proceeds from the issuance of Class A Notes. As of June 30, 2013 and December 31, 2012, the fair value of loans held by Cobbs Creek was $282,237 and $88,351, respectively.
As of June 30, 2013, we had incurred costs of $159 in connection with obtaining and amending the JPM Facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the JPM Facility. As of June 30, 2013, $132 of such deferred financing costs had yet to be amortized to interest expense.
The effective interest rate on the borrowings under the JPM Facility was 3.25% as of June 30, 2013. Interest is payable quarterly in arrears commencing in May 2013. We recorded interest expense of $1,593 and $2,721 for the three and six months ended June 30, 2013, respectively, of which $10 and $20, respectively, related to the amortization of deferred financing costs. We paid $2,239 in interest expense during the six months ended June 30, 2013. The average borrowings under the JPM Facility for the six months ended June 30, 2013 were $165,287, with a weighted average interest rate of 3.25%.
Cooper River Credit Facility
On March 27, 2013, Cooper River entered into the credit facility with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The credit facility provides for borrowings in an aggregate principal amount up to $200,000 on a committed basis.
We may contribute cash or debt securities to Cooper River from time to time, subject to certain restrictions set forth in the credit facility, and will retain a residual interest in any assets contributed through our ownership of Cooper River or will receive fair market value for any debt securities sold to Cooper River. Cooper River may purchase additional debt securities from various sources. Cooper River has appointed us to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Cooper Rivers obligations to the lenders under the credit facility are secured by a first priority security interest in substantially all of the assets of Cooper River, including its portfolio of debt securities. The obligations of Cooper River under the credit facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Cooper River.
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Borrowings under the credit facility accrue interest at a rate equal to three-month LIBOR plus 1.75% per annum during the first two years of the facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the credit facility are subject to compliance with an equity coverage ratio with respect to the current value of Cooper Rivers portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Cooper Rivers portfolio.
Beginning June 24, 2013, Cooper River will be required to pay a non-usage fee to the extent the aggregate principal amount available under the credit facility has not been borrowed. Outstanding borrowings under the credit facility will be amortized beginning nine months prior to the scheduled maturity date. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016.
In connection with the closing of the credit facility, we contributed approximately $52,472 in cash to Cooper River. Cooper River used approximately $14,194 of borrowings under the credit facility, together with cash contributed by us, to fund its acquisition of approximately $65,108 in debt securities held by an affiliate of Citibank and to pay certain fees and expenses in connection with the establishment of the credit facility.
As of June 30, 2013, $100,194 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. We incurred costs of $1,557 in connection with obtaining the credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the credit facility. As of June 30, 2013, $1,422 of such deferred financing costs had yet to be amortized to interest expense.
The effective interest rate on the borrowings under the credit facility was 2.48% per annum as of June 30, 2013. Interest is payable quarterly in arrears and commenced March 27, 2013. We recorded interest expense of $369 and $380 for the three and six months ended June 30, 2013, respectively, of which $128 and $135, respectively, related to the amortization of deferred financing costs and $8 and $8, respectively, related to fees on the unused portion of the credit facility. We paid no interest expense for the six months ended June 30, 2013. The average borrowings under the credit facility for the period from March 27, 2013 to June 30, 2013 were $44,059, with a weighted average interest rate of 2.08%.
Under the credit facility, Cooper River has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within five business days of when due; (b) the insolvency or bankruptcy of Cooper River or us; (c) the failure of Cooper River to be beneficially owned and controlled by us; (d) our resignation or removal as Cooper Rivers investment manager; and (e) GDFM (or any affiliate thereof or any replacement thereof approved in writing by Citibank) no longer serving as our investment sub-adviser. Upon the occurrence of an event of default, Citibank may declare the outstanding principal and interest and all other amounts owing under the credit facility immediately due and payable. During the continuation of an event of default, Cooper River must pay interest at a default rate.
Capital Contribution by FSIC II Advisor and GDFM
In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser.
In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment
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adviser. In connection with the same private placement, certain members of our board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, we issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of August 13, 2013, we have sold an aggregate of 2,562,690 shares of common stock for aggregate gross proceeds of $23,198 to members of our board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold in the private placement completed in June 2012.
RIC Status and Distributions
We intend to elect to be treated for federal income tax purposes, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our investment company taxable income, as defined by the Code, each year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes.
We declared our first distribution on June 20, 2012. Subject to our board of directors discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on either a semi-monthly or monthly basis and pay such distributions on a monthly basis. We will calculate each stockholders specific distribution amount for the period using record and declaration dates and each stockholders distributions will begin to accrue on the date we accept each stockholders subscription for shares of our common stock. From time to time, we may also pay special interim distributions in the form of cash or common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of our common stock. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FSIC II Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the six months ended June 30, 2013 represented a return of capital for tax purposes.
We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.
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The following table reflects the cash distributions per share that we have declared and paid on our common stock during the six months ended June 30, 2013 and 2012:
Distribution | ||||||||
For the Three Months Ended |
Per Share | Amount | ||||||
Fiscal 2012 |
||||||||
June 30, 2012 |
$ | 0.0302 | $ | 77 | ||||
Fiscal 2013 |
||||||||
March 31, 2013 |
$ | 0.1871 | $ | 14,791 | ||||
June 30, 2013 |
$ | 0.1883 | $ | 22,647 |
On July 1, 2013, our board of directors declared two regular semi-monthly cash distributions of $0.031416 per share each, which were paid on July 31, 2013 to stockholders of record on July 15, 2013 and July 30, 2013, respectively. On August 6, 2013, our board of directors declared two regular semi-monthly cash distributions of $0.031416 per share each, which will be paid on August 30, 2013 to stockholders of record on August 15, 2013 and August 30, 2013, respectively. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
We may fund our cash distributions to stockholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
We expect that for a period of time following commencement of our continuous public offering, which time period may be significant, substantial portions of our distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that are subject to repayment by us within three years. The purpose of this arrangement is to ensure that no portion of our distributions to stockholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. Our future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that stockholders would otherwise receive in the future. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the six months ended June 30, 2013, no portion of the distributions paid during such period was funded through the reimbursement of operating expenses by Franklin Square Holdings.
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The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the six months ended June 30, 2013 and 2012:
Six Months Ended June 30, | ||||||||||||||||
2013 | 2012 | |||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||
Offering proceeds |
$ | | | $ | | | ||||||||||
Borrowings |
| | | | ||||||||||||
Net investment income(1) |
26,613 | 71 | % | | | |||||||||||
Capital gains proceeds from the sale of assets |
10,825 | 29 | % | 4 | 5 | % | ||||||||||
Non-capital gains proceeds from the sale of assets |
| | | | ||||||||||||
Distributions on account of preferred and common equity |
| | | | ||||||||||||
Expense reimbursement from sponsor |
| | 73 | 95 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 37,438 | 100 | % | $ | 77 | 100 | % | ||||||||
|
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(1) | During the six months ended June 30, 2013, 92% of our gross investment income was attributable to cash interest earned and 8% was attributable to non-cash accretion of discount and PIK interest. During the six months ended June 30, 2012, 89% of our gross investment income was attributable to cash interest earned and 11% was attributable to non-cash accretion of discount. |
See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the six months ended June 30, 2013.
Critical Accounting Policies
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of managements most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FSIC II Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires
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companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
| our quarterly valuation process begins with FSIC II Advisors management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from our sub-adviser or an independent valuation firm, if applicable; |
| preliminary valuation conclusions are then documented and discussed with our valuation committee; |
| our valuation committee reviews the preliminary valuation and FSIC II Advisors management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and |
| our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FSIC II Advisor, the valuation committee and any third-party valuation firm, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrowers ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
For convertible debt securities, fair value will generally approximate the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and
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scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
If we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, our board of directors will allocate the cost basis in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors will subsequently value these warrants or other equity securities received at fair value.
The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.
Our investments as of June 30, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Four senior secured loan investments and one senior secured bond investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Four collateralized securities, which were newly-issued and purchased near June 30, 2013, were valued at cost, as our board of directors determined that the cost of such investments was the best indication of their fair value.
Our investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. One senior secured loan investment and one senior secured bond investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. We valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS was based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS were valued by Citibank. Citibank based its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations were sent to us for review and testing. Our valuation committee and board of directors reviewed and approved the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our valuation committee or board of directors had any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation was discussed or challenged pursuant to the terms of the TRS.
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We periodically benchmark the bid and ask prices we receive from the third-party pricing services against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing services or independent dealers, including the use of an independent valuation firm. We will periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.
Revenue Recognition
Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon prepayment of a loan or security, any unamortized loan origination fees and original issuance discount are recorded as fee income. Upfront structuring fees are recorded as income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.
Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency
Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Capital Gains Incentive Fee
Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FSIC II Advisor, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
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In addition, we historically treated all net settlement payments received by us pursuant to our TRS (which is described more fully in Financial Condition, Liquidity and Capital ResourcesTotal Return Swap), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the Staff informed us that it is their interpretation of the applicable language in the Advisers Act that we should look through the TRS in calculating our capital gains incentive fee. Under this look through methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a look through basis under which we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a look through basis.
The amount of capital gains incentive fees accrued by us as of December 31, 2012 exceeded by $441 the amount of incentive fees which would have been payable to FSIC II Advisor as of such date in accordance with the look through methodology. In accordance with FSIC II Advisors voluntary agreement to waive any such excess, we reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. We made a corresponding reduction to the amount of expense reimbursement due from sponsor as of March 31, 2013, which also reduced by $441 the amount of expense recoupment payable to sponsor as of March 31, 2013. As of June 30, 2013, the aggregate capital gains incentive fees paid to FSIC II Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP do not exceed the fees which would have been payable in accordance with the look through methodology. On June 13, 2013, we terminated the TRS.
Uncertainty in Income Taxes
We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is more likely than not to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended June 30, 2013, we did not incur any interest or penalties.
Contractual Obligations
We have entered into an agreement with FSIC II Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FSIC II Advisor and, to the extent it is required to provide such services, our sub-adviser are reimbursed for administrative expenses incurred on our behalf. For the three months ended June 30, 2013 and the period from June 18, 2012 through June 30, 2012, we incurred $7,595 and $22, respectively, in base management fees and $644 and $20, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the
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six months ended June 30, 2013, we incurred $12,580 in base management fees and $1,105 in administrative services expenses under the investment advisory and administrative services agreement. In addition, FSIC II Advisor is eligible to receive incentive fees based on the performance of our portfolio. As of December 31, 2012, we had accrued capital gains incentive fees payable to FSIC II Advisor of $3,548 based on the performance of our portfolio, of which $3,070 was based on unrealized gains and $478 was based on realized gains. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the look through methodology described more fully under Critical Accounting PoliciesCapital Gains Incentive Fee. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, we reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. During the six months ended June 30, 2013, we accrued capital gains incentive fees of $1,020 based on the performance of our portfolio, all of which was based on unrealized gains. As a result of the foregoing, we have accrued capital gains incentive fees as of June 30, 2013 of $4,090, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor. We paid FSIC II Advisor $37 in capital gains incentive fees during the six months ended June 30, 2013.
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the JPM Facility between Cobbs Creek and JPM and the revolving credit facility between Cooper River and Citibank at June 30, 2013 is as follows:
Payments Due By Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Borrowings of Cobbs Creek(1) |
$ | 194,000 | $ | 194,000 | | | | |||||||||||||
Borrowings of Cooper River(2) |
$ | 100,194 | | $ | 100,194 | | |
(1) | At June 30, 2013, $356,000 remained unused under the JPM Facility. Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM Facility and subsequently resell such Class A Notes to JPM. As of June 30, 2013, the final repurchase transaction was scheduled to occur no later than May 20, 2017. |
(2) | At June 30, 2013, $99,806 remained unused under the credit facility. All amounts under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016. |
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Recently Issued Accounting Standards
None.
Related Party Transactions
Compensation of the Dealer Manager and Investment Adviser
Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of our operations. Management fees are paid on a quarterly basis in arrears.
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The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0% of pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.
We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisors actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to us based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.
Franklin Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On June 18, 2012, we satisfied the minimum offering requirement. Since inception, Franklin Square Holdings has funded $3,202 in offering costs and organization costs, all of which were reimbursed during the year ended December 31, 2012. The reimbursements were recorded as a reduction of capital. As of June 30, 2013, no amounts remain reimbursable to FSIC II Advisor and its affiliates under this arrangement.
The dealer manager for our continuous public offering is FS2, which is one of our affiliates. Under the dealer manager agreement among us, FSIC II Advisor and FS2, FS2 is entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which may be re-allowed to selected broker-dealers.
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The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six months ended June 30, 2013 and 2012:
Three Months Ended June 30, |
Six Months Ended June 30, |
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Related Party |
Source Agreement |
Description |
2013 | 2012 | 2013 | 2012 | ||||||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) | $ | 7,595 | $ | 22 | $ | 12,580 | $ | 22 | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) | $ | (2,839 | ) | $ | 65 | $ | 1,020 | $ | 65 | |||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(3) | $ | 644 | $ | 20 | $ | 1,105 | $ | 20 | ||||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(4) | $ | 7,863 | $ | 82 | $ | 14,680 | $ | 82 |
(1) | During the six months ended June 30, 2013 and 2012, $7,452 and $0, respectively, in base management fees were paid to FSIC II Advisor. Of the $7,595 in base management fees accrued and payable as of June 30, 2013, it is intended that the entire amount will be paid to FSIC II Advisor. |
(2) | During the three months ended June 30, 2013, we reversed $2,839 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the six months ended June 30, 2013 and 2012, we accrued capital gains incentive fees of $1,020 and $65, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee for a discussion of the methodology employed by us in calculating the capital gains incentive fee. As of December 31, 2012, we had accrued capital gains incentive fees of $3,548 based on the performance of our portfolio, of which $3,070 was based on unrealized gains and $478 was based on realized gains. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the look through methodology described more fully in Critical Accounting PoliciesCapital Gains Incentive Fee. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, we reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. As a result of the foregoing, we have accrued capital gains incentive fees as of June 30, 2013 of $4,090, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor. We paid FSIC II Advisor $37 in capital gains incentive fees during the six months ended June 30, 2013. |
(3) | During the six months ended June 30, 2013 and 2012, $932 and $15, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FSIC II Advisor and the remainder related to other reimbursable expenses. We paid $718 and $0 in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2013 and 2012, respectively. |
(4) | Represents aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
Capital Contribution by FSIC II Advisor and GDFM
In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser.
In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser. In connection with the same private placement, certain members of our board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, we issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering
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requirement on June 18, 2012. As of August 13, 2013, we have sold an aggregate of 2,562,690 shares of common stock for aggregate gross proceeds of $23,198 to members of our board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold in the private placement completed in June 2012.
Potential Conflicts of Interest
FSIC II Advisors senior management team is comprised of the same personnel as the senior management teams of FB Income Advisor, LLC and FS Investment Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs, FS Investment Corporation and FS Energy and Power Fund, respectively. As a result, such personnel provide investment advisory services to each of us, FS Investment Corporation and FS Energy and Power Fund. While none of FSIC II Advisor, FB Income Advisor, LLC or FS Investment Advisor, LLC is currently making private corporate debt investments for clients other than us, FS Investment Corporation or FS Energy and Power Fund, respectively, any, or all, may do so in the future. In the event that FSIC II Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FSIC II Advisor or its management team.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FSIC II Advisor, including FS Investment Corporation and FS Energy and Power Fund and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers. Because we did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, we will be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement Agreement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from our offering proceeds or borrowings. See OverviewExpense Reimbursement for a detailed description of the expense reimbursement agreement.
During the year ended December 31, 2012, we accrued $2,482 for reimbursements due from Franklin Square Holdings under this arrangement, of which $847 was funded by Franklin Square Holdings during such period. As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the six month period ending June 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. During the six months ended June 30, 2013, we made expense recoupment payments of $847 to Franklin Square Holdings. As of June 30, 2013, no further amounts remain subject to repayment by us to Franklin Square Holdings in the future.
FS Benefit Trust
On May 30, 2013, FS Trust was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of Franklin Square Holdings and its affiliates. In connection with our semi-monthly closing occurring on June 17, 2013, FS Trust purchased approximately $34 of our shares at a purchase price equal to 90% of the offering price in effect on such date, or $9.45 per share.
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Recent Developments
During the period from July 1, 2013 to August 13, 2013, we sold 25,438,846 shares of common stock for gross proceeds of $264,284 at an average price per share of $10.39.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We are subject to financial market risks, including changes in interest rates. As of June 30, 2013, 67.5% of our portfolio investments (based on fair value) paid variable interest rates, 0.5% were non-income producing investments and the remainder (32.0%) paid fixed interest rates. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed our incentive fee hurdle rate, as described in the investment advisory and administrative services agreement we have entered into with FSIC II Advisor, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FSIC II Advisor with respect to our increased pre-incentive fee net investment income.
Pursuant to the terms of the $200 million credit facility which Cooper River maintains with Citibank, Cooper River borrows at a floating rate based on LIBOR. Under the terms of the JPM Facility, Cobbs Creek pays interest to JPM at a fixed rate. To the extent that any present or future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding or financing arrangements in effect, our interest rate expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of June 30, 2013 (dollar amounts are presented in thousands):
LIBOR Basis Point Change |
Increase (Decrease) in Interest Income(1) |
Increase (Decrease) in Interest Expense |
Increase (Decrease) in Net Interest Income |
Percentage Change in Net Interest Income |
||||||||||||
Down 30 basis points |
$ | (134 | ) | $ | (431 | ) | $ | 297 | 0.2 | % | ||||||
Current LIBOR |
| | | | ||||||||||||
Up 100 basis points |
1,137 | 1,437 | (300 | ) | (0.2 | )% | ||||||||||
Up 300 basis points |
19,295 | 4,312 | 14,983 | 11.7 | % | |||||||||||
Up 500 basis points |
37,799 | 7,186 | 30,613 | 23.9 | % |
(1) | Assumes no change in defaults or prepayments by portfolio companies over the next twelve months. |
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the six months ended June 30, 2013, we did not engage in interest rate hedging activities.
In addition, we may have risk regarding portfolio valuation. See Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting PoliciesValuation of Portfolio Investments.
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Item 4. | Controls and Procedures. |
As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2013. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1. | Legal Proceedings. |
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
Item 1A. | Risk Factors. |
There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2012.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The table below provides information concerning our repurchases of shares of our common stock during the quarter ended June 30, 2013 pursuant to our share repurchase program.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
April 1 to April 30, 2013 |
76,086 | $ | 9.36 | 76,086 | (1) | |||||||||||
May 1 to May 31, 2013 |
| | | | ||||||||||||
June 1 to June 30, 2013 |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
76,086 | $ | 9.36 | 76,086 | (1) | |||||||||||
|
|
|
|
|
|
|
|
(1) | A description of the maximum number of shares that may be purchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q. |
See Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more detailed discussion of the terms of our share repurchase program.
Item 3. | Defaults upon Senior Securities. |
Not applicable.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
Not applicable.
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Item 6. | Exhibits. |
3.1 | Articles of Amendment and Restatement of the Company. (Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on June 14, 2012.) | |
3.2 | Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (b) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
4.1 | Form of Subscription Agreement. (Incorporated by reference to Appendix A filed with the Companys final prospectus on Form 497 (File No. 333-175654) filed on May 14, 2013.) | |
4.2 | Distribution Reinvestment Plan of the Company. (Incorporated by reference to Exhibit (e) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
4.3 | Amended and Restated Distribution Reinvestment Plan of the Company. (Incorporated by reference to Exhibit 4.3 filed with the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed on November 14, 2012.) | |
10.1 | Investment Advisory and Administrative Services Agreement, dated as of February 8, 2012, by and between the Company and FSIC II Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.2 | Investment Sub-Advisory Agreement, dated as of February 8, 2012, by and between FSIC II Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.3 | Dealer Manager Agreement, dated as of February 8, 2012, by and among the Company, FSIC II Advisor, LLC and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.4 | Form of Follow-On Dealer Manager Agreement. (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.) | |
10.5 | Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.6 | Form of Follow-On Selected Dealer Agreement (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.) | |
10.7 | Custodian Agreement, dated as of February 8, 2012, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit (j) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.8 | Escrow Agreement, dated as of January 23, 2012, by and among the Company, UMB Bank, N.A. and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (k) filed with Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.9 | ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 3, 2012.) |
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10.10 | Confirmation Letter Agreement, dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 3, 2012.) | |
10.11 | Amended and Restated Confirmation Letter Agreement, dated as of September 12, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 12, 2012.) | |
10.12 | Amended and Restated Confirmation Letter Agreement, dated as of September 27, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on October 1, 2012.) | |
10.13 | Amended and Restated Confirmation Letter Agreement, dated as of November 15, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on November 15, 2012.) | |
10.14 | Amended and Restated Confirmation Letter Agreement, dated as of December 13, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 17, 2012.) | |
10.15 | Termination Acknowledgment (TRS), dated as of June 13, 2013, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 17, 2013.) | |
10.16 | Investment Management Agreement, dated as of July 2, 2012, by and between the Company and Del River LLC (formerly known as IC-II Investments LLC). (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on July 3, 2012.) | |
10.17 | Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Lehigh River LLC. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.18 | Indenture, dated as of October 26, 2012, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.19 | Amended and Restated Indenture, dated as of February 6, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 7, 2013.) | |
10.20 | Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.21 | Lehigh River LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.22 | Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on February 7, 2013.) | |
10.23 | Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.24 | TBMA/ISMA 2000 Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Cobbs Creek LLC, together with the related Annex and Confirmation thereto, each dated as of October 26, 2012. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.25 | TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of February 6, 2013. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on February 7, 2013.) |
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10.26 | TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.27 | Revolving Credit Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.28 | Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.29 | Collateral Management Agreement, dated as of October 26, 2012, by and between Lehigh River LLC and the Company. (Incorporated by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.30 | Collateral Administration Agreement, dated as of October 26, 2012, by and among Lehigh River LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.31 | Collateral Management Agreement, dated as of October 26, 2012, by and between Cobbs Creek LLC and the Company. (Incorporated by reference to Exhibit 10.9 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.32 | Loan Agreement, dated as of March 27, 2013, by and between Cooper River LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.33 | Account Control Agreement, dated as of March 27, 2013, by and between Cooper River LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.34 | Security Agreement, dated as of March 27, 2013, by and between Cooper River LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.35 | Agreement and Plan of Merger, dated as of March 27, 2013, by and among Cooper River LLC, Cooper River CBNA Loan Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.36 | Investment Management Agreement, dated as of March 27, 2013, by and between the Company and Cooper River LLC. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |
32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2013.
FS INVESTMENT CORPORATION II
By: | /s/ MICHAEL C. FORMAN | |
Michael C. Forman Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ WILLIAM GOEBEL | |
William Goebel Chief Financial Officer (Principal Financial and Accounting Officer) |
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