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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                     

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.)

 

201 Rouse Boulevard  
Philadelphia, Pennsylvania   19112
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (215) 495-1150

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  x    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 such 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   x  (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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

The issuer had 324,259,557 shares of common stock outstanding as of August 2, 2016.


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

  

ITEM 1.

   FINANCIAL STATEMENTS   
  

Consolidated Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015

     1   
  

Unaudited Consolidated Statements of Operations for the three and six months ended June  30, 2016 and 2015

     2   
  

Unaudited Consolidated Statements of Changes in Net Assets for the six months ended June  30, 2016 and 2015

     3   
  

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015

     4   
  

Consolidated Schedules of Investments as of June 30, 2016 (Unaudited) and December 31, 2015

     5   
  

Notes to Unaudited Consolidated Financial Statements

     28   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     64   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     89   

ITEM 4.

  

CONTROLS AND PROCEDURES

     90   

PART II—OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

     91   

ITEM 1A.

  

RISK FACTORS

     91   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     91   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     91   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     91   

ITEM 5.

  

OTHER INFORMATION

     91   

ITEM 6.

  

EXHIBITS

     92   
  

SIGNATURES

     97   


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

FS Investment Corporation II

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

 

 

     June 30, 2016
(Unaudited)
    December 31, 2015  

Assets

    

Investments, at fair value

    

Non-controlled/unaffiliated investments (amortized cost—$4,553,008 and $4,752,111, respectively)

   $ 4,274,029      $ 4,391,357   

Non-controlled/affiliated investments (amortized cost—$162,907 and $125,274, respectively)

     183,585        141,518   
  

 

 

   

 

 

 

Total investments, at fair value (amortized cost—$4,715,915 and $4,877,385, respectively)

     4,457,614        4,532,875   

Cash

     375,396        228,781   

Receivable for investments sold and repaid

     48,177        1,925   

Interest receivable

     58,448        37,879   

Deferred financing costs

     5,534        6,267   

Prepaid expenses and other assets

     110        224   
  

 

 

   

 

 

 

Total assets

   $ 4,945,279      $ 4,807,951   
  

 

 

   

 

 

 

Liabilities

    

Payable for investments purchased

   $ 5,173      $ —     

Repurchase agreements payable (net of deferred financing costs of $1,355 and $1,647, respectively)(1)

     948,645        948,353   

Credit facilities payable (net of deferred financing costs of $240 and $274, respectively)

     1,159,639        1,095,566   

Stockholder distributions payable

     9,901        20,273   

Management fees payable

     21,303        21,529   

Subordinated income incentive fees payable(2)

     15,744        16,254   

Administrative services expense payable

     1,191        1,392   

Interest payable

     10,929        9,980   

Directors’ fees payable

     274        278   

Other accrued expenses and liabilities

     1,238        3,914   
  

 

 

   

 

 

 

Total liabilities

     2,174,037        2,117,539   
  

 

 

   

 

 

 

Commitments and contingencies(3)

    

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, 325,888,111 and 321,507,876 shares issued and outstanding, respectively

     326        322   

Capital in excess of par value

     3,024,612        2,987,791   

Accumulated undistributed net realized gains (losses) on investments and credit default swaps and gain/loss on foreign currency(4)

     (35,033     11,785   

Accumulated undistributed net investment income(4)

     39,638        35,024   

Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency

     (258,301     (344,510
  

 

 

   

 

 

 

Total stockholders’ equity

     2,771,242        2,690,412   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,945,279      $ 4,807,951   
  

 

 

   

 

 

 

Net asset value per share of common stock at period end

   $ 8.50      $ 8.37   

 

(1) See Note 8 for a discussion of the Company’s repurchase transactions.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.

 

(3) See Note 10 for a discussion of the Company’s commitments and contingencies.

 

(4) 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

FS Investment Corporation II

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

 

 

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2016     2015     2016     2015  

Investment income

        

From non-controlled/unaffiliated investments:

        

Interest income

   $ 109,906      $ 128,187      $ 224,495      $ 235,851   

Fee income

     7,972        31,532        10,863        39,238   

Dividend income

     —          5,434        —          5,804   

From non-controlled/affiliated investments:

        

Interest income

     2,632        1,195        5,143        1,195   

Fee income

     700        1,482        700        1,482   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     121,210        167,830        241,201        283,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Management fees(1)

     24,346        25,214        48,354        49,440   

Subordinated income incentive fees(2)

     15,744        25,095        31,584        40,308   

Administrative services expenses

     1,029        1,140        2,057        2,216   

Stock transfer agent fees

     506        677        1,043        1,018   

Accounting and administrative fees

     351        429        701        856   

Interest expense

     17,625        16,486        34,159        29,705   

Directors’ fees

     273        224        545        412   

Other general and administrative expenses

     1,403        1,342        2,468        2,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

     61,277        70,607        120,911        126,348   

Management fee waiver(1)

     (3,043     (3,151     (6,044     (4,002
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     58,234        67,456        114,867        122,346   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     62,976        100,374        126,334        161,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and unrealized gain/loss

        

Net realized gain (loss) on investments:

        

Non-controlled/unaffiliated investments

     (32,219     (14,081     (46,821     (11,696

Net realized gain (loss) on credit default swaps

     —          —          —          (19,588

Net realized gain (loss) on foreign currency

     —          (269     3        (294

Net change in unrealized appreciation (depreciation) on investments:

        

Non-controlled/unaffiliated investments

     144,584        (31,626     81,775        (32,837

Non-controlled/affiliated investments

     1,809        1,873        4,434        1,873   

Net change in unrealized appreciation (depreciation) on credit default swaps

     —          —          —          19,426   

Net change in unrealized gain (loss) on foreign currency

     —          191        —          120   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net realized and unrealized gain (loss) on investments

     114,174        (43,912     39,391        (42,996
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 177,150      $ 56,462      $ 165,725      $ 118,228   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information—basic and diluted(3)

        

Net increase in net assets resulting from operations (Earnings per Share)

   $ 0.55      $ 0.18      $ 0.51      $ 0.38   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

     323,535,582        316,126,500        322,955,111        314,885,356   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See Note 4 for a discussion of the waiver by FSIC II Advisor, LLC, the Company’s investment adviser, of certain management fees to which it was otherwise entitled during the applicable period.

 

(2) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.

 

(3) 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 the applicable period.

See notes to unaudited consolidated financial statements.

 

2


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

 

 

 

     Six Months Ended
June 30,
 
     2016     2015  

Operations

    

Net investment income

   $ 126,334      $ 161,224   

Net realized gain (loss) on investments, credit default swaps and foreign currency

     (46,818     (31,578

Net change in unrealized appreciation (depreciation) on investments

     86,209        (30,964

Net change in unrealized appreciation (depreciation) on credit default swaps

     —          19,426   

Net change in unrealized gain (loss) on foreign currency

     —          120   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     165,725        118,228   
  

 

 

   

 

 

 

Stockholder distributions(1)

    

Distributions from net investment income

     (121,720     (118,744
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (121,720     (118,744
  

 

 

   

 

 

 

Capital share transactions(2)

    

Reinvestment of stockholder distributions

     74,576        52,801   

Repurchases of common stock

     (37,751     (13,864
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     36,825        38,937   
  

 

 

   

 

 

 

Total increase in net assets

     80,830        38,421   

Net assets at beginning of period

     2,690,412        2,911,790   
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,771,242      $ 2,950,211   
  

 

 

   

 

 

 

Accumulated undistributed net investment income(1)

   $ 39,638      $ 64,623   
  

 

 

   

 

 

 

 

(1) See Note 5 for a discussion of the sources of distributions paid by the Company.

 

(2) See Note 3 for a discussion of transactions with respect to shares of the Company’s common stock during the six months ended June 30, 2016 and 2015.

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ 165,725      $ 118,228   

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Purchases of investments

     (377,800     (1,116,563

Paid-in-kind interest

     (9,900     (6,035

Proceeds from sales and repayments of investments

     510,081        831,697   

Net realized (gain) loss on investments

     46,821        11,696   

Net change in unrealized (appreciation) depreciation on investments

     (86,209     30,964   

Net change in unrealized (appreciation) depreciation on credit default swap

     —          (19,426

Accretion of discount

     (7,732     (23,919

Amortization of deferred financing costs

     1,687        2,073   

(Increase) decrease in collateral held at broker for open swap contracts

     —          37,951   

(Increase) decrease in receivable for investments sold and repaid

     (46,252     (10,026

(Increase) decrease in interest receivable

     (20,569     12,753   

(Increase) decrease in receivable for credit default swaps

     —          62   

(Increase) decrease in prepaid expenses and other assets

     114        (164

Increase (decrease) in payable for investments purchased

     5,173        (59,599

Increase (decrease) in management fees payable

     (226     (1,006

Increase (decrease) in subordinated income incentive fees payable

     (510     9,761   

Increase (decrease) in administrative services expense payable

     (201     54   

Increase (decrease) in interest payable

     949        2,929   

Increase (decrease) in directors’ fees payable

     (4     (41

Increase (decrease) in unamortized swap premiums received

     —          (10,622

Increase (decrease) in other accrued expenses and liabilities

     (2,676     (644
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     178,471        (189,877
  

 

 

   

 

 

 

Cash flows from financing activities

    

Reinvestment of stockholder distributions

     74,576        52,801   

Repurchases of common stock

     (37,751     (13,864

Stockholder distributions

     (132,092     (107,831

Borrowings under credit facilities(1)

     80,000        126,000   

Borrowings under repurchase agreements(2)

     —          299,106   

Repayments of credit facilities(1)

     (15,961     —     

Deferred financing costs paid

     (628     (4,038
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (31,856     352,174   
  

 

 

   

 

 

 

Total increase in cash

     146,615        162,297   

Cash at beginning of period

     228,781        224,583   
  

 

 

   

 

 

 

Cash at end of period

   $ 375,396      $ 386,880   
  

 

 

   

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 2,069      $ 986   
  

 

 

   

 

 

 

 

(1) See Note 8 for a discussion of the Company’s credit facilities. During the six months ended June 30, 2016 and 2015, the Company paid $16,444 and $11,756, respectively, in interest expense on the credit facilities.

 

(2) See Note 8 for a discussion of the Company’s repurchase transactions. During the six months ended June 30, 2016 and 2015, the Company paid $15,079 and $12,947, respectively, in interest expense pursuant to its repurchase agreements.

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments

As of June 30, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor   Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Senior Secured Loans—First Lien—97.0%

               

5 Arch Income Fund 2, LLC

    (p)(t)      Diversified Financials     10.5%          11/18/21      $ 4,295      $ 4,321      $ 4,295   

5 Arch Income Fund 2, LLC

    (p)(q)(t)      Diversified Financials     10.5%          11/18/21        14,705        14,705        14,705   

A.T. Cross Co.

    (e)(g)      Retailing     L+875          9/6/19        39,208        39,208        33,032   

Abaco Energy Technologies LLC

    (g)(k)      Energy    
 
L+700, 2.5% PIK
(2.5% Max PIK)
  
  
  1.0%     11/20/20        26,614        25,398        17,299   

Acision Finance LLC

    (k)(l)      Software & Services     L+975      1.0%     12/17/18        30,368        29,532        30,064   

Aeneas Buyer Corp.

    (h)      Health Care Equipment & Services     L+500      1.0%     12/18/21        8,944        8,944        8,930   

Aeneas Buyer Corp.

    (q)      Health Care Equipment & Services     L+500      1.0%     12/18/21        9,000        9,000        8,986   

Aeneas Buyer Corp.

    Health Care Equipment & Services     L+813      1.0%     12/18/21        500        500        507   

Aeneas Buyer Corp.

    (q)      Health Care Equipment & Services     L+750      1.0%     12/18/21        100        100        102   

Allen Systems Group, Inc.

    (e)(g)(h)(i)(w)      Software & Services    
 
L+788, 1.2% PIK
(1.2% Max PIK)
  
  
  1.0%     4/30/20        78,599        78,414        80,171   

Altus Power America, Inc.

    (l)      Energy     L+750      1.5%     10/10/21        2,474        2,474        2,499   

Altus Power America, Inc.

    (q)      Energy     L+750      1.5%     10/10/21        651        651        657   

AP Exhaust Acquisition, LLC

    (e)(h)(i)(k)      Automobiles & Components     L+775      1.5%     1/16/21        163,378        163,378        143,977   

Ascension Insurance, Inc.

    (e)(g)(h)(i)      Insurance     L+825      1.3%     3/5/19        77,180        76,490        77,566   

Aspect Software, Inc.

    (q)      Software & Services     L+950      1.0%     5/25/18        1,194        1,194        1,203   

Aspect Software, Inc.

    Software & Services     L+950      1.0%     5/25/20        3,761        3,761        3,790   

Atlas Aerospace LLC

    (g)(l)      Capital Goods     L+806      1.0%     5/8/19        57,000        57,000        57,285   

Atlas Aerospace LLC

    (q)      Capital Goods     L+750      1.0%     5/8/19        21,714        21,714        21,823   

ATX Networks Corp.

    (g)(h)(p)      Technology Hardware & Equipment     L+600      1.0%     6/11/21        1,960        1,935        1,936   

BenefitMall Holdings, Inc.

    (e)(h)(i)(k)(l)      Commercial & Professional Services     L+725      1.0%     11/24/20        113,275        113,275        113,275   

BenefitMall Holdings, Inc.

    (q)      Commercial & Professional Services     L+725      1.0%     11/24/20        41,818        41,818        41,818   

Blue Coat Holdings, Inc.

    (q)      Technology Hardware & Equipment     L+350      1.0%     5/22/20        2,045        2,045        2,029   

Blueprint Sub, Inc.

    (e)      Software & Services     L+450      1.0%     5/7/21        2,456        2,456        2,456   

Blueprint Sub, Inc.

    (q)      Software & Services     L+450      1.0%     5/7/21        2,456        2,456        2,456   

Blueprint Sub, Inc.

    (g)(h)(i)(k)(l)      Software & Services     L+750      1.0%     5/7/21        93,677        93,677        93,457   

Blueprint Sub, Inc.

    (q)      Software & Services     L+750      1.0%     5/7/21        12,281        12,281        12,252   

Cactus Wellhead, LLC

    (g)(h)      Energy     L+600      1.0%     7/31/20        16,463        15,577        11,195   

Cadence Aerospace Finance, Inc.

    (g)      Capital Goods     L+525      1.3%     5/9/18        2,730        2,740        2,546   

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Caesars Entertainment Operating Co., Inc.

  (k)(o)(p)   Consumer Services   5.6%     3/1/17   $ 15,620      $ 15,334      $ 14,747   

Caesars Entertainment Operating Co., Inc.

  (k)(o)(p)   Consumer Services   6.5%     3/1/17     10,707        10,528        9,971   

Caesars Entertainment Operating Co., Inc.

  (e)(g)(j)(o)(p)   Consumer Services   8.7%     3/1/17     66,665        66,511        61,546   

Caesars Entertainment Resort Properties, LLC

  (e)(k)   Consumer Services   L+600   1.0%   10/11/20     33,958        32,552        32,583   

CEVA Group Plc

  (p)(q)   Transportation   L+500     3/19/19     20,000        20,000        16,100   

Cimarron Energy Inc.

  (l)   Energy   L+775, 3.8% PIK
(3.8% Max PIK)
  1.0%   12/15/19     23,958        23,958        23,958   

Corner Investment PropCo, LLC

  (e)(g)(k)   Consumer Services   L+975   1.3%   11/2/19     38,758        39,144        37,983   

Crestwood Holdings LLC

  (g)   Energy   L+800   1.0%   6/19/19     5,065        5,053        4,483   

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     7,055        6,979        6,872   

Emerging Markets Communications, LLC

  (g)(h)   Telecommunication Services   L+575   1.0%   7/1/21     12,870        11,973        12,452   

Fairway Group Acquisition Co.

  (g)(n)(o)   Food & Staples Retailing   L+400   1.0%   8/17/18     9,355        8,438        5,379   

Fairway Group Acquisition Co.

    Food & Staples Retailing   L+800   1.0%   7/29/16     2,492        2,429        2,479   

Fox Head, Inc.

  (h)(k)(l)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     13,219        13,219        13,246   

FR Dixie Acquisition Corp.

  (g)   Energy   L+475   1.0%   12/18/20     4,105        4,091        1,293   

Greystone Equity Member Corp.

  (f)(p)   Diversified Financials   L+1050     3/31/21     36,635        36,787        36,177   

Greystone Equity Member Corp.

  (f)(p)(q)   Diversified Financials   L+1100     3/31/21     3,365        3,365        3,323   

H.M. Dunn Co., Inc.

  (k)(l)   Capital Goods   L+957   1.0%   3/26/21     60,000        60,000        60,000   

H.M. Dunn Co., Inc.

  (q)   Capital Goods   L+725   1.0%   3/26/21     21,429        21,429        21,429   

Harvey Industries, Inc.

  (h)   Capital Goods   L+800   1.0%   10/1/21     9,333        9,333        9,543   

Hybrid Promotions, LLC

  (h)(k)(l)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     48,471        48,471        48,568   

Industrial Group Intermediate Holdings, LLC

  (g)(h)(i)(k)(l)   Materials   L+800   1.3%   5/31/20     126,277        126,277        127,539   

Industry City TI Lessor, L.P.

  (k)   Consumer Services   10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     13,378        13,378        13,646   

Intralinks, Inc.

  (g)(h)(k)(p)   Software & Services   L+525   2.0%   2/24/19     24,438        24,298        24,223   

JMC Acquisition Merger Corp.

  (g)(h)(i)   Capital Goods   L+857   1.0%   11/6/21     17,038        17,038        16,868   

JSS Holdings, Inc.

  (g)   Capital Goods   L+650   1.0%   8/31/21     7,700        7,231        7,315   

Kronos Acquisition Holdings Inc.

  (g)(h)(p)   Household & Personal Products   L+750   1.0%   8/26/22     12,872        12,872        13,097   

Latham Pool Products, Inc.

  (g)(h)(k)   Commercial & Professional Services   L+775   1.0%   6/29/21     35,000        35,000        35,000   

MB Precision Holdings LLC

  (e)(h)(i)(k)   Capital Goods   L+725   1.3%   1/23/20     59,675        59,675        53,633   

MMM Holdings, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     2,439        2,445        1,866   

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Moxie Liberty LLC

  (g)(i)   Energy   L+650   1.0%   8/21/20   $ 11,853      $ 11,883      $ 11,586   

Moxie Patriot LLC

  (i)   Energy   L+575   1.0%   12/19/20     5,556        5,519        5,354   

MSO of Puerto Rico, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     1,773        1,778        1,356   

New Star Metals Inc.

  (e)(f)(g)(h)(i)(k)   Capital Goods   L+800   1.3%   3/20/20     110,130        110,130        113,434   

Nobel Learning Communities, Inc.

    Consumer Services   L+450   1.0%   4/27/20     5,730        5,730        5,730   

Nobel Learning Communities, Inc.

  (q)   Consumer Services   L+450   1.0%   4/27/20     5,450        5,450        5,450   

Nobel Learning Communities, Inc.

  (g)(k)(l)   Consumer Services   L+843   1.0%   4/27/21     84,472        84,472        85,739   

Nova Wildcat Amerock, LLC

  (e)(g)(h)   Consumer Durables & Apparel   L+865   1.3%   9/10/19     70,077        70,077        59,916   

PHRC License, LLC

  (f)(h)(i)   Consumer Services   L+900   1.5%   8/14/20     59,082        59,082        58,491   

Polymer Additives, Inc.

  (h)(i)(l)   Materials   L+888   1.0%   12/20/21     63,068        63,068        63,384   

Polymer Additives, Inc.

  (l)   Materials   L+978   1.0%   12/20/21     1,941        1,941        2,029   

Production Resource Group, LLC

  (g)(h)(i)(l)   Media   L+850   1.0%   7/23/19     47,500        47,500        47,975   

Production Resource Group, LLC

  (g)(k)(l)   Media   L+850   1.0%   7/23/19     48,099        48,099        48,579   

Professional Plumbing Group, Inc.

  (e)(g)   Capital Goods   L+875   0.8%   7/31/19     25,200        25,200        25,326   

Propulsion Acquisition, LLC

  (e)(g)(h)   Commercial & Professional Services   L+600   1.0%   7/13/21     37,595        34,970        36,655   

PSKW, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+841   1.0%   11/25/21     26,000        26,000        25,604   

Roadrunner Intermediate Acquisition Co., LLC

  (g)   Health Care Equipment & Services   L+800   1.0%   9/22/21     7,850        7,850        7,900   

Rogue Wave Software, Inc.

  (e)   Software & Services   L+803   1.0%   9/25/21     18,788        18,788        18,506   

Sequential Brands Group, Inc.

  (e)(i)(k)(l)(p)   Consumer Durables & Apparel   L+825     12/4/21     158,000        158,000        158,000   

Smile Brands Group Inc.

  (e)(g)(h)(i)(j)   Health Care Equipment & Services   L+625, 1.5% PIK
(1.5% Max PIK)
  1.3%   8/16/19     43,385        43,031        37,998   

Sorenson Communications, Inc.

  (e)(g)(h)(i)(k)   Telecommunication Services   L+575   2.3%   4/30/20     99,970        99,629        98,845   

Sports Authority, Inc.

  (g)(n)(o)   Retailing   L+600   1.5%   11/16/17     7,818        7,851        2,111   

Stonewall Gas Gathering LLC

  (g)(i)   Capital Goods   L+775   1.0%   1/28/22     7,428        7,127        7,576   

SunGard Availability Services Capital, Inc.

  (g)(j)   Software & Services   L+500   1.0%   3/29/19     10,749        10,075        9,661   

Sunnova Asset Portfolio 5 Holdings, LLC

    Energy   12.0% PIK
(12.0% Max PIK)
    11/14/21     9,366        9,213        9,459   

Swift Worldwide Resources US Holdings Corp.

  (g)(i)   Energy   L+1100   1.0%   7/20/21     19,637        19,637        19,440   

ThermaSys Corp.

  (g)   Capital Goods   L+400   1.3%   5/3/19     4,713        4,715        3,895   

TierPoint, LLC

  (g)   Software & Services   L+450   1.0%   12/2/21     4,549        4,461        4,465   

Transplace Texas, LP

  (e)   Transportation   L+746   1.0%   9/16/21     18,000        18,000        18,473   

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

U.S. Xpress Enterprises, Inc.

  (e)(h)(i)(k)   Transportation   L+950, 0.0% PIK
(1.3% Max PIK)
  1.5%   5/30/19   $ 82,776      $ 82,776      $ 86,915   

UTEX Industries, Inc.

  (l)   Energy   L+400   1.0%   5/21/21     1,131        1,127        786   

Vertellus Performance Chemicals LLC

  (k)(l)   Materials   L+950   1.0%   1/30/20     65,000        65,000        61,285   

Warren Resources, Inc.

  (e)(f)(k)(n)   Energy   L+850   1.0%   5/22/20     70,443        70,443        48,958   

Waste Pro USA, Inc.

  (e)(h)(i)(k)(l)   Commercial & Professional Services   L+750   1.0%   10/15/20     115,634        115,634        118,236   

Waste Pro USA, Inc.

  (q)   Commercial & Professional Services   L+750   1.0%   10/15/20     7,333        7,333        7,498   

Zeta Interactive Holdings Corp.

  (e)(g)(h)   Software & Services   L+750   1.0%   7/9/21     29,719        29,719        29,886   

Zeta Interactive Holdings Corp.

  (q)   Software & Services   L+750   1.0%   7/9/21     6,424        6,424        6,460   
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                2,950,584        2,858,591   

Unfunded Loan Commitments

                (169,965     (169,965
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,780,619        2,688,626   
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—31.5%

               

Alison US LLC

  (j)(p)   Capital Goods   L+850   1.0%   8/29/22     4,444        4,295        3,931   

Allen Systems Group, Inc.

  (e)(f)(w)   Software & Services   L+1100, 0.0% PIK
(6.0% Max PIK)
  1.0%   6/27/22     23,333        16,111        16,100   

AP Exhaust Acquisition, LLC

  (e)   Automobiles & Components   12.0% PIK
(12.0% Max PIK)
    9/28/21     36,657        36,657        30,745   

Arena Energy, LP

  (e)   Energy   L+1100   1.0%   1/24/21     15,000        15,000        13,845   

Ascent Resources—Marcellus, LLC

  (g)   Energy   L+750   1.0%   8/4/21     3,333        3,291        522   

Ascent Resources—Utica, LLC

  (e)(f)(i)(l)   Energy   L+950, 2.0% PIK
(2.0% Max PIK)
  1.5%   9/30/18     246,600        245,768        240,435   

Atlas Resource Partners, L.P.

  (e)(h)(k)   Energy   L+900   1.0%   2/23/20     67,000        65,479        51,912   

BlackBrush Oil & Gas, L.P.

  (j)(l)   Energy   L+650   1.0%   7/30/21     11,182        10,484        11,168   

BPA Laboratories Inc.

  (e)   Pharmaceuticals, Biotechnology & Life Sciences   L+250     7/3/17     3,272        2,996        2,372   

Byrider Finance, LLC

  (f)   Automobiles & Components   L+1000, 0.5% PIK
(0.5% Max PIK)
  1.3%   8/22/20     16,702        16,702        16,535   

Checkout Holding Corp.

  (l)   Media   L+675   1.0%   4/11/22     10,000        9,941        6,287   

Chief Exploration & Development LLC

  (g)   Energy   L+650   1.0%   5/16/21     1,174        1,165        1,065   

Compuware Corp.

  (e)   Software & Services   L+825   1.0%   12/15/22     10,000        8,855        8,308   

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor     Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Consolidated Precision Products Corp.

  (e)   Capital Goods   L+775     1.0%      4/30/21   $ 6,932      $ 6,907      $ 6,273   

Crossmark Holdings, Inc.

  (l)   Media   L+750     1.3%      12/21/20     7,778        7,792        3,306   

Eastman Kodak Co.

  (l)   Consumer Durables & Apparel   L+950     1.3%      9/3/20     25,000        24,603        23,125   

Fieldwood Energy LLC

  (f)   Energy   L+713     1.3%      9/30/20     2,667        1,977        756   

Gruden Acquisition, Inc.

  (e)   Transportation   L+850     1.0%      8/18/23     15,000        14,327        11,300   

Inmar, Inc.

  (l)   Software & Services   L+700     1.0%      1/27/22     2,830        2,808        2,618   

Jazz Acquisition, Inc.

  (g)   Capital Goods   L+675     1.0%      6/19/22     3,700        3,745        2,849   

Jonah Energy LLC

  (f)   Energy   L+650     1.0%      5/12/21     1,250        1,083        1,109   

JW Aluminum Co.

  (e)(f)(l)(m)(w)   Materials   9.3% PIK
(9.3% Max PIK)
    11/17/20     31,986        31,975        31,986   

Leedsworld Inc.

  (e)(f)(h)   Retailing   L+875     1.3%      6/28/20     62,500        62,500        62,500   

MD America Energy, LLC

  (l)   Energy   L+850     1.0%      8/4/19     249        240        234   

Mitchell International, Inc.

  (k)   Software & Services   L+750     1.0%      10/11/21     8,843        9,009        8,231   

National Surgical Hospitals, Inc.

  (e)   Health Care Equipment & Services   L+900     1.0%      6/1/23     17,500        17,500        17,215   

Neff Rental LLC

  (l)   Capital Goods   L+625     1.0%      6/9/21     8,899        8,865        8,521   

Nielsen & Bainbridge, LLC

  (f)(h)   Consumer Durables & Apparel   L+925     1.0%      8/15/21     16,675        16,471        16,175   

P2 Upstream Acquisition Co.

  (l)   Energy   L+800     1.0%      4/30/21     14,500        14,705        12,543   

Paw Luxco II Sarl

  (p)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   5,727        7,199        4,204   

Payless Inc.

  (l)   Retailing   L+750     1.0%      3/11/22   $ 10,841        10,756        1,861   

Peak 10, Inc.

  (h)   Software & Services   L+725     1.0%      6/17/22     5,500        5,457        4,854   

Penton Media, Inc.

  (j)   Media   L+775     1.3%      10/2/20     5,511        5,455        5,387   

Printpack Holdings, Inc.

  (e)(i)(l)   Materials   L+875     1.0%      5/28/21     60,000        59,070        59,100   

PSAV Acquisition Corp.

  (e)(k)   Technology Hardware & Equipment   L+825     1.0%      1/24/22     80,000        79,085        80,000   

Renaissance Learning, Inc.

  (k)   Software & Services   L+700     1.0%      4/11/22     3,736        3,707        3,462   

Spencer Gifts LLC

  (l)   Retailing   L+825     1.0%      6/29/22     20,000        20,097        16,500   

Stardust Finance Holdings, Inc.

  (l)(p)   Materials   L+950     1.0%      3/13/23     2,000        1,985        1,940   

Templar Energy LLC

  (f)(n)(o)   Energy   L+750     1.0%      11/25/20     29,582        28,727        7,913   

TNS, Inc.

  (h)(j)(l)   Software & Services   L+800     1.0%      8/14/20     43,475        43,191        42,470   

Vantage Energy, LLC

  (f)(i)   Energy   L+750     1.0%      12/20/18     18,000        17,905        16,650   

Vantage Energy II, LLC

  (i)   Energy   L+750     1.0%      5/8/17     13,000        13,000        13,000   

Winebow Holdings, Inc.

    Retailing   L+750     1.0%      1/2/22     2,775        2,758        2,469   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                959,643        871,776   
             

 

 

   

 

 

 

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Senior Secured Bonds—5.5%

               

Advanced Lighting Technologies, Inc.

    (e)(f)      Materials     10.5%          6/1/19      $ 35,500      $ 32,795      $ 11,537   

AK Steel Corp.

    (j)(p)      Materials     7.5%          7/15/23        2,420        2,420        2,463   

Caesars Entertainment Resort Properties, LLC

    (e)(j)      Consumer Services     11.0%          10/1/21        37,350        37,948        36,790   

CEVA Group Plc

    (j)(m)(p)      Transportation     7.0%          3/1/21        5,000        4,337        4,331   

CEVA Group Plc

    (j)(p)      Transportation     9.0%          9/1/21        2,000        2,000        1,632   

FourPoint Energy, LLC

    (e)(f)      Energy     9.0%          12/31/21        46,313        44,763        44,923   

Global A&T Electronics Ltd.

    (f)(l)(p)      Semiconductors & Semiconductor Equipment     10.0%          2/1/19        19,490        18,880        13,789   

JW Aluminum Co.

    (w)      Materials     8.0%          12/29/16        4,466        4,422        4,422   

Lightstream Resources Ltd.

    (f)(p)      Energy     9.9%          6/15/19        5,313        5,313        4,834   

Logan’s Roadhouse, Inc.

    (f)      Consumer Services    
 
4.0%, 10.5% PIK
(10.5% Max PIK)
  
  
      10/15/17        39,799        32,697        11,609   

Modular Space Corp.

    (f)      Capital Goods     10.3%          1/31/19        9,020        9,205        4,341   

Rex Energy Corp.

    (f)      Energy     1.0%          10/1/20        3,980        620        876   

SandRidge Energy, Inc.

    (n)(o)      Energy     8.8%          6/1/20        11,700        11,675        4,724   

Sorenson Communications, Inc.

    (e)      Telecommunication Services    
 
9.0%, 0.0% PIK
(9.0% Max PIK)
  
  
      10/31/20        7,057        6,841        6,298   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                213,916        152,569   
             

 

 

   

 

 

 

Subordinated Debt—13.1%

               

Alta Mesa Holdings, LP

    (f)      Energy     9.6%          10/15/18        1,350        1,050        1,139   

Aspect Software, Inc.

    Software & Services    
 
3.0% PIK
(3.0% Max PIK)
  
  
      5/25/23        2,770        2,770        2,770   

Atlas Energy Holdings Operating Co., LLC

    (f)      Energy     7.8%          1/15/21        7,535        6,680        942   

Atlas Energy Holdings Operating Co., LLC

    (f)      Energy     9.3%          8/15/21        2,264        1,748        286   

Aurora Diagnostics, LLC

    (e)      Health Care Equipment & Services     10.8%          1/15/18        6,130        6,146        5,272   

Bellatrix Exploration Ltd.

    (p)      Energy     8.5%          5/15/20        5,000        4,919        3,319   

BMC Software Finance, Inc.

    (l)      Software & Services     7.3%          6/1/18        3,820        3,597        3,610   

Brooklyn Basketball Holdings, LLC

    (f)(i)      Consumer Services     L+725          10/25/19        39,746        39,746        38,951   

CEC Entertainment, Inc.

    (j)      Consumer Services     8.0%          2/15/22        18,715        18,532        18,189   

Ceridian HCM Holding, Inc.

    (j)(l)      Commercial & Professional Services     11.0%          3/15/21        43,750        43,230        43,640   

 

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, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor     Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Eclipse Resources Corp.

  (p)   Energy   8.9%     7/15/23   $ 9,175      $ 8,999      $ 8,682   

EV Energy Partners, L.P.

  (f)   Energy   8.0%     4/15/19     259        235        156   

Global Jet Capital Inc.

    Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/30/25     679        679        674   

Global Jet Capital Inc.

    Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    4/30/25     4,312        4,312        4,285   

Global Jet Capital Inc.

    Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/3/25     891        891        886   

Global Jet Capital Inc.

    Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    9/29/25     839        839        834   

Global Jet Capital Inc.

  (f)(p)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/4/25     6,192        6,192        6,154   

Global Jet Capital Inc.

  (f)(p)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    12/9/25     1,013        1,013        1,006   

Global Jet Capital Inc.

  (f)(p)   Commercial & Professional Services   15.0% PIK
(15.0% Max PIK)
    1/29/26     530        530        527   

Jupiter Resources Inc.

  (i)(p)   Energy   8.5%     10/1/22     28,800        26,649        20,772   

Mood Media Corp.

  (e)(f)(p)   Media   9.3%     10/15/20     46,207        45,719        31,709   

Navistar International Corp.

  (l)(p)   Capital Goods   8.3%     11/1/21     5,770        5,616        4,092   

NewStar Financial, Inc.

  (e)(i)(k)(l)(p)   Diversified Financials   8.3%, 0.0% PIK
(8.8% Max PIK)
    12/4/24     150,000        122,338        109,500   

P.F. Chang’s China Bistro, Inc.

  (e)(j)   Consumer Services   10.3%     6/30/20     28,853        28,904        26,663   

Scientific Games Corp.

  (j)(p)   Consumer Services   8.1%     9/15/18     3,800        3,720        3,741   

Sorenson Communications, Inc.

  (e)(f)   Telecommunication Services   13.0%, 0.0% PIK
(13.0% Max PIK)
    10/31/21     5,363        5,054        5,028   

SunGard Availability Services Capital, Inc.

  (j)   Software & Services   8.8%     4/1/22     5,900        4,349        3,237   

Talos Production LLC

  (f)   Energy   9.8%     2/15/18     4,500        4,207        1,659   

TI Group Automotive Systems, LLC

  (j)(p)   Automobiles & Components   8.8%     7/15/23     10,275        10,275        10,082   

York Risk Services Holding Corp.

  (e)(j)   Insurance   8.5%     10/1/22     8,350        7,550        6,054   
             

 

 

   

 

 

 

Total Subordinated Debt

                416,489        363,859   
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Collateralized Securities—3.5%

               

CGMS CLO 2013-3A Class Subord.

  (p)   Diversified Financials     16.6%          7/15/25        $  17,000      $   8,727      $ 9,721   

JPMorgan Chase Bank, N.A. Credit-Linked Notes

  (p)   Diversified Financials     11.1%          12/20/21        76,260        75,709        73,972   

NewStar Clarendon 2014-1A Class D

  (p)   Diversified Financials     L+435          1/25/27        1,060        1,001        944   

NewStar Clarendon 2014-1A Class Subord. B

  (p)   Diversified Financials     15.5%          1/25/27        12,140        10,306        10,025   

Octagon CLO 2012-1A Class Income

  (p)   Diversified Financials     6.8%          1/15/24        4,650        1,953        1,704   
             

 

 

   

 

 

 

Total Collateralized Securities

                97,696        96,366   
             

 

 

   

 

 

 
                              Number
of Shares
    Cost     Fair
Value(d)
 

Equity/Other—10.3%

               

5 Arches, LLC, Common Equity

  (o)(p)(s)   Diversified Financials           4,738        125        125   

A.T. Cross Co., Common Equity, Class A Units

  (f)(o)   Retailing           1,000,000        1,000        —     

A.T. Cross Co., Preferred Equity, Class A-1 Units

  (f)(o)   Retailing           243,478        243        37   

Abaco Energy Technologies LLC, Common Equity

  (o)   Energy           3,055,556        3,056        153   

Abaco Energy Technologies LLC, Preferred Equity

  (o)   Energy           12,734,481        637        637   

ACP FH Holdings GP, LLC, Common Equity

  (f)(o)   Consumer Durables & Apparel           88,571        89        89   

ACP FH Holdings, LP, Common Equity

  (f)(o)   Consumer Durables & Apparel           8,768,572        8,769        8,785   

Allen Systems Group, Inc., Common Equity

  (o)(w)   Software & Services           625,178        13,475        31,415   

Allen Systems Group, Inc., Warrants, 6/27/2022

  (o)(w)   Software & Services           253,704        7,231        7,231   

Altus Power America Holdings, LLC, Preferred Equity

    Energy           824,758        785        1,320   

Altus Power America Management, LLC, Class B Units

  (o)(u)   Energy           83        —          —     

Amaya Inc., Warrants, 5/15/2024

  (o)(p)   Consumer Services           2,000,000        16,832        18,160   

AP Exhaust Holdings, LLC, Common Equity

  (o)(s)   Automobiles & Components           8,378        8,378        251   

Ascent Resources Utica Holdings, LLC, Common Equity

  (o)(r)   Energy           128,734,129        38,700        32,184   

Aspect Software, Inc., Common Equity

  (o)   Software & Services           293,761        14,512        15,408   

BPA Laboratories, Inc., Series A Warrants, 4/29/2024

  (e)(o)   Pharmaceuticals, Biotechnology & Life Sciences           10,924        —          —     

BPA Laboratories, Inc., Series B Warrants, 4/29/2024

  (e)(o)   Pharmaceuticals, Biotechnology & Life Sciences           17,515        —          —     

Burleigh Point, Ltd., Warrants, 7/16/2020

  (o)(p)   Retailing           3,451,216        1,898        276   

Cimarron Energy Holdco Inc., Common Equity

  (o)   Energy           3,201,631        2,991        2,081   

DHS Technologies LLC, Common Equity

  (f)(o)   Capital Goods           60,872        5,000        644   

Eastman Kodak Co., Common Equity

  (o)   Consumer Durables & Apparel           1,846        36        30   

FourPoint Energy, LLC, Common Equity, Class C-II-A Units

  (o)(s)   Energy           13,000        13,000        5,168   

FourPoint Energy, LLC, Common Equity, Class D Units

  (o)(s)   Energy           2,437        1,610        975   

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

    Number
of Shares
    Cost     Fair
Value(d)
 

FourPoint Energy, LLC, Common Equity, Class E-II Units

    (o)(s)      Energy           54,104      $ 13,526      $ 20,695   

FourPoint Energy, LLC, Common Equity, Class E-III Units

    (f)(o)(s)      Energy           43,875        10,969        17,440   

Global Jet Capital Holdings, LP, Preferred Equity

    (f)(o)(p)      Commercial & Professional Services           5,496,503        5,497        5,497   

Harvey Holdings, LLC, Common Equity

    (o)      Capital Goods           666,667        667        1,300   

Industrial Group Intermediate Holdings, LLC, Common Equity

    (o)(s)      Materials           2,678,947        2,679        4,420   

JMC Acquisition Holdings, LLC, Common Equity

    (o)      Capital Goods           1,449        1,449        1,449   

JW Aluminum Co., Common Equity

    (e)(f)(l)(m)(o)(w)      Materials           256        —          416   

JW Aluminum Co., Preferred Equity

    (e)(f)(l)(m)(o)(w)      Materials           1,184        11,279        11,844   

MB Precision Investment Holdings LLC, Class A-2 Units

    (o)(s)      Capital Goods           2,287,659        2,288        343   

New Star Metals Inc., Common Equity

    (f)(o)      Capital Goods           2,223,246        2,250        7,114   

NewStar Financial, Inc., Warrants, 11/4/2024

    (f)(o)(p)      Diversified Financials           6,000,000        30,115        13,560   

Professional Plumbing Group, Inc., Common Equity

    (f)(o)      Capital Goods           3,000,000        3,000        5,100   

PSAV Holdings LLC, Common Equity

    Technology Hardware & Equipment           10,000        10,000        27,000   

Sequential Brands Group, Inc., Common Equity

    (f)(o)(p)      Consumer Durables & Apparel           408,685        5,517        3,261   

Sorenson Communications, Inc., Common Equity

    (e)(f)(o)      Telecommunication Services           43,796        —          30,057   

Sunnova Energy Corp., Common Equity

    (o)      Energy           384,746        1,444        2,432   

Sunnova Energy Corp., Preferred Equity

    (o)      Energy           36,363        194        193   

Swift Worldwide Resources Holdco Limited, Common Equity

    (o)(p)(v)      Energy           1,250,000        2,010        625   

White Star Petroleum Holdings, LLC, Common Equity

    (f)(o)      Energy           1,613,753        1,372        1,372   

Zeta Interactive Holdings Corp., Preferred Equity

    (o)      Software & Services           620,025        4,929        5,331   
             

 

 

   

 

 

 

Total Equity/Other

                247,552        284,418   
             

 

 

   

 

 

 

TOTAL INVESTMENTS—160.9%

              $ 4,715,915        4,457,614   
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(60.9%)

                  (1,686,372
               

 

 

 

NET ASSETS—100.0%

                $ 2,771,242   
               

 

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of June 30, 2016, the three-month London Interbank Offered Rate, or LIBOR, was 0.65%, the Euro Interbank Offered Rate, or EURIBOR, was (0.29)% and the U.S. Prime Lending Rate, or Prime, was 3.50%.

 

(c) Denominated in U.S. dollars unless otherwise noted.

 

(d) Fair value determined by the Company’s board of directors (see Note 7).

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2016

(in thousands, except share amounts)

 

 

 

(e) Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Floating Rate Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(f) 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).

 

(g) Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).

 

(h) Security or portion thereof held within Wissahickon Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8).

 

(i) Security or portion thereof held within Darby Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(j) Security or portion thereof held within Dunning Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(k) Security or portion thereof held within Juniata River LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, N.A. (see Note 8).

 

(l) Security or portion thereof held within Green Creek LLC and is pledged as collateral supporting the amounts outstanding under the Notes issued to Schuylkill River LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(m) Position or portion thereof unsettled as of June 30, 2016.

 

(n) Security was on non-accrual status as of June 30, 2016.

 

(o) Security is non-income producing.

 

(p) 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 company’s total assets. As of June 30, 2016, 85.9% of the Company’s total assets represented qualifying assets.

 

(q) Security is an unfunded commitment. The stated rate reflects the spread disclosed at the time of commitment and may not indicate the actual rate received upon funding.

 

(r) Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

 

(s) Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company.

 

(t) Security held within IC II Arches Investments, LLC, a wholly-owned subsidiary of the Company.

 

(u) Security held within IC II Altus Investments, LLC, a wholly-owned subsidiary of the Company.

 

(v) Investment denominated in British pounds. Cost and fair value are converted into U.S. dollars as of June 30, 2016.

 

See notes to unaudited consolidated financial statements.

 

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FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2016

(in thousands, except share amounts)

 

 

 

(w) Under the 1940 Act, the Company generally is deemed to be an “affiliated person” of a portfolio company if it owns 5% or more of the portfolio company’s voting securities and generally is deemed to “control” a portfolio company if it owns more than 25% of the portfolio company’s voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of June 30, 2016, the Company held investments in two portfolio companies of which it is deemed to be an “affiliated person” but is not be deemed to “control”. The following table presents certain financial information with respect to such portfolio companies for the six months ended June 30, 2016:

 

Portfolio Company

   Purchases      Paid-in-kind
Interest
     Sales and
Repayments
     Interest
Income
     Fee
Income
     Dividend
Income
     Net
Realized
Gain
(Loss)
     Net
Change in
Unrealized
Appreciation
(Depreciation)
 

Senior Secured Loans—First Lien

                       

Allen Systems Group, Inc.

   $ 7,282       $ 450         —         $ 3,657         —           —           —         $ 1,050   

Senior Secured Loans—Second Lien

                       

Allen Systems Group, Inc.

   $ 16,103         —           —         $ 31       $ 700         —           —         $ (11

JW Aluminum Co.

   $ 492       $ 1,422         —         $ 1,451         —           —           —         $ 11   

Senior Secured Bonds

                       

JW Aluminum Co.

   $ 4,422         —           —         $ 4         —           —           —           —     

Equity/Other

                       

Allen Systems Group, Inc. Common Equity

     —           —           —           —           —           —           —         $ 2,594   

Allen Systems Group, Inc., Warrants, 6/27/2022

   $ 7,231         —           —           —           —           —           —           —     

JW Aluminum Co., Common Equity

     —           —           —           —           —           —           —         $ 416   

JW Aluminum Co., Preferred Equity

   $ 223         —           —           —           —           —           —         $ 374   

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Senior Secured Loans—First Lien—104.2%

               

5 Arch Income Fund 2, LLC

    (o)(s)      Diversified Financials     10.5%          11/18/21      $ 1,192      $ 1,219      $ 1,192   

5 Arch Income Fund 2, LLC

    (o)(p)(s)      Diversified Financials     10.5%          11/18/21        17,808        17,808        17,808   

A.T. Cross Co.

    (e)(g)      Retailing     L+875          9/6/19        39,208        39,207        38,816   

A.T. Cross Co.

    (p)      Retailing     L+875          9/6/19        20,000        20,000        19,800   

Abaco Energy Technologies LLC

    (g)(k)      Energy     L+700        1.0%        11/20/20        26,813        25,447        13,808   

Acision Finance LLC

    (k)(l)      Software & Services     L+975        1.0%        12/15/18        31,616        30,600        31,300   

Aeneas Buyer Corp.

    (h)      Health Care Equipment & Services     L+500        1.0%        12/18/21        9,000        9,000        9,000   

Aeneas Buyer Corp.

    (p)      Health Care Equipment & Services     L+500        1.0%        12/18/21        9,000        9,000        9,000   

Aeneas Buyer Corp.

    Health Care Equipment & Services     L+813        1.0%        12/18/21        500        500        500   

Aeneas Buyer Corp.

    (p)      Health Care Equipment & Services     L+750        1.0%        12/18/21        100        100        100   

Allen Systems Group, Inc.

    (e)(g)(h)(x)      Software & Services    
 
L+789, 1.2% PIK
(1.2% Max PIK)
  
  
    1.0%        4/30/20        70,682        70,682        71,389   

Altus Power America, Inc.

    (l)      Energy     L+750        1.5%        10/10/21        1,724        1,724        1,707   

Altus Power America, Inc.

    (p)      Energy     L+750        1.5%        10/10/21        1,401        1,401        1,387   

AP Exhaust Acquisition, LLC

    (e)(g)(h)(i)(k)      Automobiles & Components     L+775        1.5%        1/16/21        163,378        163,378        153,371   

Ascension Insurance, Inc.

    (e)(g)(h)(i)      Insurance     L+825        1.3%        3/5/19        77,769        76,954        76,797   

Aspect Software, Inc.

    (h)(i)      Software & Services    
 
L+550, 0.3% PIK
(0.3% Max PIK)
  
  
    1.8%        5/7/16        7,375        7,381        6,828   

Atlas Aerospace LLC

    (g)(l)      Capital Goods     L+807        1.0%        5/8/19        57,000        57,000        56,715   

Atlas Aerospace LLC

    (p)      Capital Goods     L+750        1.0%        5/8/19        21,714        21,714        21,606   

ATX Networks Corp.

    (g)(h)(o)      Technology Hardware & Equipment     L+600        1.0%        6/11/21        1,970        1,943        1,940   

Avaya Inc.

    (i)      Technology Hardware & Equipment     L+525        1.0%        5/29/20        3,895        3,895        2,733   

BenefitMall Holdings, Inc.

    (e)(h)(i)(k)(l)      Commercial & Professional Services     L+725        1.0%        11/24/20        113,850        113,850        112,712   

BenefitMall Holdings, Inc.

    (p)      Commercial & Professional Services     L+725        1.0%        11/24/20        41,818        41,818        41,400   

Blue Coat Holdings, Inc.

    (p)      Technology Hardware & Equipment     L+350        1.0%        5/22/20        2,045        2,045        1,918   

Blueprint Sub, Inc.

    (g)(h)(i)(k)(l)      Software & Services     L+750        1.0%        5/7/21        94,119        94,119        93,819   

Blueprint Sub, Inc.

    (p)      Software & Services     L+750        1.0%        5/7/21        12,281        12,281        12,241   

Blueprint Sub, Inc.

    (e)      Software & Services     L+450        1.0%        5/7/21        2,456        2,456        2,456   

Blueprint Sub, Inc.

    (p)      Software & Services     L+450        1.0%        5/7/21        2,456        2,456        2,456   

Cactus Wellhead, LLC

    (g)(h)      Energy     L+600        1.0%        7/31/20        16,572        15,603        11,973   

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Cadence Aerospace Finance, Inc.

  (g)   Capital Goods   L+525   1.3%   5/9/18   $ 2,737      $ 2,750      $ 2,689   

Caesars Entertainment Operating Co., Inc.

  (k)(n)(o)   Consumer Services   5.2%     3/1/17     15,620        15,158        13,380   

Caesars Entertainment Operating Co., Inc.

  (k)(n)(o)   Consumer Services   6.0%     3/1/17     15,707        15,288        13,495   

Caesars Entertainment Operating Co., Inc.

  (e)(g)(i)(j)(n)(o)   Consumer Services   8.1%     3/1/17     68,576        68,321        53,635   

Caesars Entertainment Operating Co., Inc.

  (n)(o)   Consumer Services   8.8%     10/31/16     2,671        2,685        2,267   

Caesars Entertainment Resort Properties, LLC

  (e)(k)   Consumer Services   L+600   1.0%   10/11/20     34,132        32,591        31,167   

CEVA Group Plc

  (o)(p)   Transportation   L+500     3/19/19     20,000        20,000        17,300   

Cimarron Energy Inc.

  (k)(l)   Energy   L+775, 3.8% PIK
(3.8% Max PIK)
  1.0%   12/15/19     24,250        24,250        24,129   

CITGO Holding, Inc.

  (j)   Energy   L+850   1.0%   5/12/18     2,186        2,078        2,177   

Corner Investment PropCo, LLC

  (e)(g)(k)   Consumer Services   L+975   1.3%   11/2/19     38,788        39,224        37,964   

CoSentry.Net, LLC

  (e)(i)(k)   Software & Services   L+800   1.3%   12/31/19     62,331        62,331        63,578   

Crestwood Holdings LLC

  (g)   Energy   L+600   1.0%   6/19/19     5,166        5,151        3,350   

Eastman Kodak Co.

  (g)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     7,091        7,003        6,146   

Emerging Markets Communications, LLC

  (g)(h)   Telecommunication Services   L+575   1.0%   7/1/21     12,935        11,962        12,191   

Fairway Group Acquisition Co.

  (g)   Food & Staples Retailing   L+400   1.0%   8/17/18     9,379        8,374        7,566   

Fox Head, Inc.

  (h)(k)(l)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     13,286        13,286        13,346   

FR Dixie Acquisition Corp.

  (g)   Energy   L+475   1.0%   12/18/20     4,126        4,111        2,744   

Greystone Bridge Manager LLC

  (f)(o)   Diversified Financials   L+1050     5/1/20     33,672        33,842        32,998   

Greystone Bridge Manager LLC

  (o)(p)   Diversified Financials   L+1050     5/1/20     4,033        4,033        3,953   

H.M. Dunn Co., Inc.

  (k)(l)   Capital Goods   L+809   1.0%   3/26/21     60,000        60,000        59,400   

H.M. Dunn Co., Inc.

  (p)   Capital Goods   L+725   1.0%   3/26/21     21,429        21,429        21,214   

Harvey Industries, Inc.

  (h)   Capital Goods   L+800   1.0%   10/1/21     9,333        9,333        9,333   

Hybrid Promotions, LLC

  (h)(k)(l)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     48,714        48,714        48,935   

Industrial Group Intermediate Holdings, LLC

  (g)(h)(i)(k)(l)   Materials   L+800   1.3%   5/31/20     84,721        84,721        83,873   

Industry City TI Lessor, L.P.

  (k)   Consumer Services   10.3%, 0.0% PIK
(5.3% Max PIK)
    6/30/26     10,151        10,151        10,607   

Intralinks, Inc.

  (g)(h)(k)(o)   Software & Services   L+525   2.0%   2/24/19     24,563        24,399        24,378   

JMC Acquisition Merger Corp.

  (g)(h)(i)   Capital Goods   L+858   1.0%   11/6/21     15,000        15,000        15,000   

JMC Acquisition Merger Corp.

  (p)   Capital Goods   L+750   1.0%   11/6/21     2,717        2,717        2,717   

JSS Holdings, Inc.

  (g)   Capital Goods   L+650   1.0%   8/31/21     7,900        7,374        7,466   

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Latham Pool Products, Inc.

  (g)(h)(k)   Commercial & Professional Services   L+775   1.0%   6/29/21   $ 35,000      $ 35,000      $ 34,300   

MB Precision Holdings LLC

  (e)(h)(i)(k)   Capital Goods   L+725   1.3%   1/23/20     59,990        59,990        59,390   

MMM Holdings, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     2,524        2,532        1,186   

Mood Media Corp.

  (g)(o)   Media   L+600   1.0%   5/1/19     1,789        1,776        1,704   

Moxie Liberty LLC

  (g)(i)   Energy   L+650   1.0%   8/21/20     11,853        11,887        11,023   

Moxie Patriot LLC

  (i)   Energy   L+575   1.0%   12/19/20     5,556        5,515        5,139   

MSO of Puerto Rico, Inc.

  (g)   Health Care Equipment & Services   L+825   1.5%   12/12/17     1,835        1,841        863   

New Star Metals Inc.

  (e)(f)(g)(h)(i)(k)   Capital Goods   L+800   1.3%   3/20/20     120,750        120,750        120,750   

Nobel Learning Communities, Inc.

  (g)(k)(l)   Consumer Services   L+845   1.0%   4/27/21     84,472        84,472        84,173   

Nobel Learning Communities, Inc.

    Consumer Services   L+450   1.0%   4/27/20     3,634        3,634        3,634   

Nobel Learning Communities, Inc.

  (p)   Consumer Services   L+450   1.0%   4/27/20     7,547        7,547        7,547   

Nova Wildcat Amerock, LLC

  (e)(g)(h)   Consumer Durables & Apparel   L+330, 5.4% PIK
(5.4% Max PIK)
  1.3%   9/10/19     70,563        70,563        61,037   

Panda Sherman Power, LLC

  (e)   Energy   L+750   1.5%   9/14/18     2,287        2,298        2,069   

PHRC License, LLC

  (f)(h)(i)   Consumer Services   L+900   1.5%   8/14/20     59,425        59,425        58,831   

Pittsburgh Glass Works, LLC

  (e)(g)(l)   Automobiles & Components   L+916   1.0%   11/25/21     20,983        20,983        20,983   

Polymer Additives, Inc.

  (h)(i)(l)   Materials   L+838   1.0%   12/20/21     63,068        63,068        64,330   

Production Resource Group, LLC

  (g)(h)(i)(l)   Media   L+750   1.0%   7/23/19     47,500        47,500        47,975   

Professional Plumbing Group, Inc.

  (e)(g)   Capital Goods   L+875   0.8%   7/31/19     25,200        25,200        25,326   

Propulsion Acquisition, LLC

  (e)(g)(h)   Commercial & Professional Services   L+600   1.0%   7/13/21     37,784        34,941        36,840   

PSKW, LLC

  (e)(g)(h)   Health Care Equipment & Services   L+842   1.0%   11/25/21     26,000        26,000        26,018   

Reddy Ice Corp.

  (j)   Food, Beverage & Tobacco   L+550   1.3%   5/1/19     1,898        1,710        1,566   

Roadrunner Intermediate Acquisition Co., LLC

  (g)   Health Care Equipment & Services   L+800   1.0%   9/22/21     7,950        7,950        7,925   

Rogue Wave Software, Inc.

  (e)(g)   Software & Services   L+804   1.0%   9/25/21     18,788        18,788        18,553   

Sequential Brands Group, Inc.

  (e)(i)(k)(l)(o)   Consumer Durables & Apparel   L+825     12/4/21     158,000        158,000        156,420   

Serena Software, Inc.

  (g)(h)   Software & Services   L+650   1.0%   4/14/20     13,281        13,075        12,683   

Smile Brands Group Inc.

  (e)(g)(h)(i)(j)   Health Care Equipment & Services   L+650, 1.3% PIK
(1.5% Max PIK)
  1.3%   8/16/19     43,247        42,836        31,408   

Sorenson Communications, Inc.

  (e)(g)(h)(i)(k)   Telecommunication Services   L+575   2.3%   4/30/20     100,480        100,100        100,731   

Sports Authority, Inc.

  (g)   Retailing   L+600   1.5%   11/16/17     7,818        7,854        2,560   

Stallion Oilfield Holdings, Inc.

  (e)(g)(h)   Energy   L+675   1.3%   6/19/18     16,430        16,146        8,905   

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor   Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Stonewall Gas Gathering LLC

    (g)(i)      Capital Goods     L+775      1.0%     1/28/22      $ 9,925      $ 9,489      $ 9,900   

SunGard Availability Services Capital, Inc.

    (g)(j)      Software & Services     L+500      1.0%     3/29/19        10,855        10,070        9,471   

Sunnova Asset Portfolio 5 Holdings, LLC

    Energy    
 
12.0% PIK
(12.0% Max PIK)
  
  
      11/14/21        14,435        14,160        14,110   

Sunnova Asset Portfolio 5 Holdings, LLC

    (p)      Energy    
 
12.0% PIK
(12.0% Max PIK)
  
  
      11/14/21        414        414        404   

Swift Worldwide Resources US Holdings Corp.

    (g)(i)      Energy     L+800      1.3%     4/30/19        19,686        19,686        19,686   

ThermaSys Corp.

    (g)      Capital Goods     L+400      1.3%     5/3/19        4,777        4,779        4,216   

Transplace Texas, LP

    (e)(g)      Transportation     L+747      1.0%     9/16/21        18,000        18,000        17,843   

U.S. Xpress Enterprises, Inc.

    (e)(h)(i)(k)      Transportation    
 
L+1000, 0.0% PIK
(1.5% Max PIK)
  
  
  1.5%     5/30/19        84,292        84,292        84,292   

UTEX Industries, Inc.

    (l)      Energy     L+400      1.0%     5/21/21        1,137        1,132        783   

Vertellus Performance Chemicals LLC

    (k)(l)      Materials     L+950      1.0%     1/30/20        65,000        65,000        61,477   

Warren Resources, Inc.

    (e)(f)(k)(l)      Energy     L+850      1.0%     5/22/20        70,443        70,443        57,411   

Waste Pro USA, Inc.

    (e)(h)(i)(k)(l)      Commercial & Professional Services     L+750      1.0%     10/15/20        111,320        111,320        112,990   

Waste Pro USA, Inc.

    (p)      Commercial & Professional Services     L+750      1.0%     10/15/20        12,222        12,222        12,406   

Winchester Electronics Corp.

    (i)(l)      Technology Hardware & Equipment     L+800      1.0%     11/17/20        12,929        12,929        12,670   

Winchester Electronics Corp.

    (e)(k)(l)      Technology Hardware & Equipment     L+850      1.0%     11/17/20        98,182        98,182        96,218   

Zeta Interactive Holdings Corp.

    (e)(g)(h)      Software & Services     L+750      1.0%     7/9/21        29,719        29,719        29,684   

Zeta Interactive Holdings Corp.

    (p)      Software & Services     L+750      1.0%     7/9/21        6,424        6,424        6,416   
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                3,119,499        3,005,616   

Unfunded Loan Commitments

                (203,409     (203,409
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,916,090        2,802,207   
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—33.5%

               

Alison US LLC

    (g)(o)      Capital Goods     L+850      1.0%     8/29/22        4,444        4,286        3,611   

American Energy—Marcellus, LLC

    (g)      Energy     L+750      1.0%     8/4/21        3,333        3,291        78   

AP Exhaust Acquisition, LLC

    (e)      Automobiles & Components    
 
12.0%, 0.0% PIK
(12.0% Max PIK)
  
  
      9/28/21        33,514        33,514        30,581   

Arena Energy, LP

    (e)      Energy     L+1000      1.0%     1/24/21        15,000        15,000        13,812   

Ascent Resources—Utica, LLC

    (e)(f)(i)(l)      Energy    
 
L+950, 2.0% PIK
(2.0% Max PIK)
  
  
  1.5%     9/30/18        244,118        243,105        218,485   

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Rate(b)   Floor   Maturity   Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Altas Resource Partners, L.P.

  (e)(h)(k)   Energy   L+900   1.0%   2/23/20   $ 67,000      $ 65,296      $ 53,590   

BlackBrush Oil & Gas, L.P.

  (j)(l)   Energy   L+650   1.0%   7/30/21     11,182        10,419        8,964   

BPA Laboratories Inc.

  (e)   Pharmaceuticals, Biotechnology & Life Sciences   L+250     7/3/17     3,272        2,870        2,659   

BRG Sports, Inc.

  (l)   Consumer Durables & Apparel   L+925   1.0%   4/15/22     12,500        12,232        11,500   

Byrider Finance, LLC

  (f)   Automobiles & Components   L+1000   1.3%   8/22/20     16,667        16,667        16,333   

Checkout Holding Corp.

  (l)   Media   L+675   1.0%   4/11/22     10,000        9,937        5,725   

Chief Exploration & Development LLC

  (g)   Energy   L+650   1.0%   5/16/21     1,174        1,165        788   

Compuware Corp.

  (e)   Software & Services   L+825   1.0%   12/15/22     10,000        8,798        9,050   

Consolidated Precision Products Corp.

  (e)   Capital Goods   L+775   1.0%   4/30/21     6,932        6,905        6,308   

Crossmark Holdings, Inc.

  (l)   Media   L+750   1.3%   12/21/20     7,778        7,793        4,394   

Del Monte Foods, Inc.

  (l)(o)   Food, Beverage & Tobacco   L+725   1.0%   8/18/21     3,333        3,306        2,744   

Eastman Kodak Co.

  (j)   Consumer Durables & Apparel   L+950   1.3%   9/3/20     25,000        24,563        21,625   

Extreme Reach, Inc.

  (l)   Media   L+950   1.0%   1/22/21     8,000        7,875        7,640   

Fieldwood Energy LLC

  (f)   Energy   L+713   1.3%   9/30/20     2,667        1,919        425   

Flexera Software LLC

  (l)   Software & Services   L+700   1.0%   4/2/21     1,979        1,971        1,869   

Gruden Acquisition, Inc.

  (e)   Transportation   L+850   1.0%   8/18/23     15,000        14,281        14,288   

Inmar, Inc.

  (l)   Software & Services   L+700   1.0%   1/27/22     2,830        2,807        2,675   

Jazz Acquisition, Inc.

  (g)   Capital Goods   L+675   1.0%   6/19/22     3,700        3,748        3,330   

Jonah Energy LLC

  (f)   Energy   L+650   1.0%   5/12/21     1,250        1,070        794   

JW Aluminum Co.

  (e)(f)(l)(x)   Materials   L+850   0.8%   11/17/20     30,061        30,061        30,061   

Leedsworld Inc.

  (e)(f)(g)(h)   Retailing   L+875   1.3%   6/28/20     62,500        62,500        61,875   

MD America Energy, LLC

  (l)   Energy   L+850   1.0%   8/4/19     8,298        7,977        6,942   

Mitchell International, Inc.

  (k)   Software & Services   L+750   1.0%   10/11/21     8,843        9,021        8,482   

National Surgical Hospitals, Inc.

  (e)   Health Care Equipment & Services   L+900   1.0%   6/1/23     17,500        17,500        16,971   

Neff Rental LLC

  (l)   Capital Goods   L+625   1.0%   6/9/21     8,961        8,925        7,438   

Nielsen & Bainbridge, LLC

  (f)(h)   Consumer Durables & Apparel   L+925   1.0%   8/15/21     16,675        16,452        16,425   

P2 Upstream Acquisition Co.

  (l)   Energy   L+800   1.0%   4/30/21     14,500        14,721        12,144   

Paw Luxco II Sarl

  (o)   Consumer Durables & Apparel   EURIBOR+950     1/29/19   5,727        7,157        4,361   

Payless Inc.

  (l)   Retailing   L+750   1.0%   3/11/22   $ 10,841        10,751        4,911   

Peak 10, Inc.

  (h)   Software & Services   L+725   1.0%   6/17/22     5,500        5,453        5,088   

Penton Media, Inc.

  (j)   Media   L+775   1.3%   10/2/20     5,942        5,876        5,838   

Printpack Holdings, Inc.

  (e)(i)(l)   Materials   L+875   1.0%   5/28/21     60,000        59,001        58,500   

PSAV Acquisition Corp.

  (e)(k)   Technology Hardware & Equipment   L+825   1.0%   1/24/22     80,000        79,020        79,600   

Renaissance Learning, Inc.

  (k)   Software & Services   L+700   1.0%   4/11/22     3,736        3,705        3,531   

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Road Infrastructure Investment, LLC

    (l)      Materials     L+675        1.0%        9/30/21      $ 7,759      $ 7,728      $ 7,216   

Templar Energy LLC

    (f)(h)      Energy     L+750        1.0%        11/25/20        29,231        28,697        3,544   

TNS, Inc.

    (h)(j)(l)      Software & Services     L+800        1.0%        8/14/20        45,296        44,965        44,361   

Ultima US Holdings LLC

    (l)(o)      Capital Goods     L+850        1.0%        12/31/20        57,000        56,160        56,715   

Vantage Energy, LLC

    (f)(i)      Energy     L+750        1.0%        12/20/18        18,092        17,979        11,624   

Vantage Energy II, LLC

    (i)      Energy     L+750        1.0%        5/8/17        13,000        13,000        12,610   

Winebow Holdings, Inc.

    (g)      Retailing     L+750        1.0%        1/2/22        2,775        2,757        2,608   
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                1,012,224        902,113   
             

 

 

   

 

 

 

Senior Secured Bonds—6.7%

               

Advanced Lighting Technologies, Inc.

    (e)(f)      Materials     10.5%          6/1/19        35,500        32,439        17,484   

American Energy—Woodford, LLC

    (f)(m)(n)      Energy    
 
12.0% PIK
(12.0% Max PIK)
  
  
      12/30/20        2,588        2,006        369   

Aspect Software, Inc.

    (f)      Software & Services     10.6%          5/15/17        8,005        8,159        6,574   

Avaya Inc.

    (j)      Technology Hardware & Equipment     7.0%          4/1/19        5,500        5,478        4,102   

Avaya Inc.

    (f)      Technology Hardware & Equipment     10.5%          3/1/21        18,550        16,416        6,353   

Caesars Entertainment Resort Properties, LLC

    (e)(j)      Consumer Services     11.0%          10/1/21        37,350        37,991        33,802   

CEVA Group Plc

    (f)(o)      Transportation     9.0%          9/1/21        2,000        2,000        1,579   

FourPoint Energy, LLC

    (e)(f)      Energy     8.0%          12/31/20        57,281        55,556        44,536   

FourPoint Energy, LLC

    (f)(p)      Energy     8.0%          12/31/20        3,656        3,638        2,843   

Global A&T Electronics Ltd.

    (f)(l)(o)      Semiconductors & Semiconductor Equipment     10.0%          2/1/19        19,490        18,784        15,397   

Lightstream Resources Ltd.

    (f)(o)      Energy     9.9%          6/15/19        5,313        5,313        4,436   

Logan’s Roadhouse, Inc.

    (f)      Consumer Services    
 
4.0%, 10.5% PIK
(10.5% Max PIK)
  
  
      10/15/17        39,799        31,751        33,205   

Modular Space Corp.

    (f)      Capital Goods     10.3%          1/31/19        9,950        10,168        3,992   

SandRidge Energy, Inc.

    (j)      Energy     8.8%          6/1/20        11,700        11,675        3,572   

Sorenson Communications, Inc.

    (e)      Telecommunication Services    
 
9.0%, 0.0% PIK
(9.0% Max PIK)
  
  
      10/31/20        7,057        6,822        6,594   
             

 

 

   

 

 

 

Total Senior Secured Bonds

                248,196        184,838   

Unfunded Bond Commitments

                (3,638     (3,638
             

 

 

   

 

 

 

Net Senior Secured Bonds

                244,558        181,200   
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Subordinated Debt—11.9%

               

Algeco Scotsman Global Finance Plc

    (f)(o)      Commercial & Professional Services     10.8%          10/15/19      $ 3,400      $ 2,745      $ 1,331   

Alta Mesa Holdings, LP

    (f)      Energy     9.6%          10/15/18        1,350        1,002        474   

Atlas Energy Holdings Operating Co., LLC

    (f)      Energy     7.8%          1/15/21        7,535        6,617        1,505   

Atlas Energy Holdings Operating Co., LLC

    (f)      Energy     9.3%          8/15/21        2,264        1,717        465   

Aurora Diagnostics, LLC

    (e)      Health Care Equipment & Services     10.8%          1/15/18        7,000        7,021        4,554   

Bellatrix Exploration Ltd.

    (j)(o)      Energy     8.5%          5/15/20        5,000        4,911        3,369   

BMC Software Finance, Inc.

    (l)      Software & Services     7.3%          6/1/18        3,820        3,546        3,162   

Brooklyn Basketball Holdings, LLC

    (f)(i)      Consumer Services     L+725          10/25/19        39,746        39,746        39,547   

CEC Entertainment, Inc.

    (j)      Consumer Services     8.0%          2/15/22        18,715        18,520        17,803   

Ceridian HCM Holding Inc.

    (j)      Commercial & Professional Services     11.0%          3/15/21        6,500        6,266        5,135   

Communications Sales & Leasing, Inc.

    (j)(o)      Real Estate     8.3%          10/15/23        2,000        1,944        1,707   

Eclipse Resources Corp.

    (j)(o)      Energy     8.9%          7/15/23        9,175        8,990        4,416   

EV Energy Partners, L.P.

    (f)      Energy     8.0%          4/15/19        259        232        129   

Global Jet Capital Inc.

    Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      1/30/25        635        635        636   

Global Jet Capital Inc.

    Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      4/30/25        4,030        4,030        4,030   

Global Jet Capital Inc.

    Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      9/3/25        828        828        828   

Global Jet Capital Inc.

    Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      9/29/25        779        779        779   

Global Jet Capital Inc.

    (f)(o)      Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      12/4/25        5,746        5,746        5,746   

Global Jet Capital Inc.

    (f)(o)      Commercial & Professional Services    
 
15.0% PIK
(15.0% Max PIK)
  
  
      12/9/25        940        940        940   

Jupiter Resources Inc.

    (i)(j)(o)      Energy     8.5%          10/1/22        28,800        26,535        11,556   

Legacy Reserves LP

    (j)      Energy     6.6%          12/1/21        5,000        3,988        1,081   

Legacy Reserves LP

    (e)      Energy     8.0%          12/1/20        8,250        8,126        1,660   

Mood Media Corp.

    (e)(f)(o)      Media     9.3%          10/15/20        46,207        45,676        29,630   

Navistar International Corp.

    (j)(l)(o)      Capital Goods     8.3%          11/1/21        15,240        14,155        10,311   

NewStar Financial, Inc.

    (e)(i)(k)(l)(o)      Diversified Financials    
 
8.3%, 0.0% PIK
(8.8% Max PIK)
  
  
      12/4/24        137,500        109,003        100,375   

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

  Rate(b)     Floor     Maturity     Principal 
Amount(c)
    Amortized
Cost
    Fair 
Value(d)
 

Ocean Rig UDW Inc.

    (f)(o)      Energy     7.3%          4/1/19        $    4,700      $ 4,700      $ 2,003   

Opal Acquisition, Inc.

    (j)      Commercial & Professional Services     8.9%          12/15/21        17,157        17,157        13,940   

P.F. Chang’s China Bistro, Inc.

    (e)(j)      Consumer Services     10.3%          6/30/20        25,853        26,150        21,539   

Rex Energy Corp.

    (f)      Energy     6.3%          8/1/22        3,950        3,950        558   

Sorenson Communications, Inc.

    (e)(f)      Telecommunication Services    
 
13.0%, 0.0% PIK
(13.0% Max PIK)
  
  
      10/31/21        5,363        5,036        5,579   

SunGard Availability Services Capital, Inc.

    (j)      Software & Services     8.8%          4/1/22        5,900        4,268        3,592   

Talos Production LLC

    (f)      Energy     9.8%          2/15/18        4,500        4,131        1,856   

TI Group Automotive Systems, LLC

    (j)(o)      Automobiles & Components     8.8%          7/15/23        10,275        10,275        9,466   

Triangle USA Petroleum Corp.

    (f)      Energy     6.8%          7/15/22        2,350        2,350        731   

Windstream Corp.

    (j)(o)      Telecommunication Services     6.4%          8/1/23        2,600        2,600        1,895   

York Risk Services Holding Corp.

    (e)(j)      Insurance     8.5%          10/1/22        8,350        7,509        6,691   
             

 

 

   

 

 

 

Total Subordinated Debt

                411,824        319,019   
             

 

 

   

 

 

 

Collateralized Securities—4.2%

               

CGMS CLO 2013-3A Class Subord.

    (o)      Diversified Financials     17.0%          7/15/25        17,000        9,833        10,798   

JPMorgan Chase Bank, N.A. Credit—Linked Notes

    (o)      Diversified Financials     14.2%          12/20/21        76,260        76,187        72,828   

NewStar Clarendon 2014—1A Class D

    (o)      Diversified Financials     L+435          1/25/27        1,060        993        965   

NewStar Clarendon 2014—1A Class Subord. B

    (o)      Diversified Financials     13.6%          1/25/27        12,140        10,953        10,142   

Octagon CLO 2012—1A Class Income

    (o)      Diversified Financials     7.9%          1/15/24        4,650        2,279        1,761   

Wind River CLO Ltd. 2013—1A Class Subord. B

    (o)      Diversified Financials     11.2%          4/20/25        26,720        18,345        16,889   
             

 

 

   

 

 

 

Total Collateralized Securities

                118,590        113,383   
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

23


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

    Number
of Shares
    Cost     Fair
Value(d)
 

Equity/Other—8.0%

               

5 Arches, LLC, Common Equity

    (n)(o)(r)      Diversified Financials           4,738      $ 125      $ 125   

A.T. Cross Co., Common Equity, Class A Units

    (f)(n)      Retailing           1,000,000        1,000        550   

A.T. Cross Co., Preferred Equity, Class A-1 Units

    (f)(n)      Retailing           243,478        243        256   

Abaco Energy Technologies LLC, Common Equity

    (n)      Energy           3,055,556        3,056        459   

ACP FH Holdings GP, LLC, Common Equity

    (f)(n)      Consumer Durables & Apparel           88,571        89        88   

ACP FH Holdings, LP, Common Equity

    (f)(n)      Consumer Durables & Apparel           8,768,572        8,769        8,734   

Allen Systems Group, Inc., Common Equity

    (n)(x)      Software & Services           625,178        13,475        28,821   

Altus Power America Holdings, LLC, Preferred Equity

    Energy           574,758        573        1,063   

Altus Power America Management, LLC, Class B Units

    (n)(t)      Energy           83        —          —     

Amaya Inc., Warrants, 5/15/2024

    (n)(o)      Consumer Services           2,000,000        16,832        15,260   

AP Exhaust Holdings, LLC, Common Equity

    (n)(r)      Automobiles & Components           8,378        8,378        4,189   

Ascent Resources Utica Holdings, LLC, Common Equity

    (n)(q)      Energy           13,555,557        12,900        2,711   

BPA Laboratories, Inc., Series A Warrants, 4/29/2024

    (e)(n)      Pharmaceuticals, Biotechnology & Life Sciences           10,924        —          —     

BPA Laboratories, Inc., Series B Warrants, 4/29/2024

    (e)(n)      Pharmaceuticals, Biotechnology & Life Sciences           17,515        —          —     

Burleigh Point, Ltd., Warrants, 7/16/2020

    (n)(o)      Retailing           3,451,216        1,898        2,278   

Cimarron Energy Holdco Inc., Common Equity

    (n)      Energy           2,500,000        2,500        1,750   

CoSentry.Net, LLC, Preferred Equity

    (f)(n)      Software & Services           2,632        2,500        4,385   

DHS Technologies LLC, Common Equity

    (f)      Capital Goods           60,872        5,000        1,218   

Eastman Kodak Co., Common Equity

    (n)      Consumer Durables & Apparel           1,846        36        23   

FourPoint Energy, LLC, Common Equity, Class C Units

    (n)(r)      Energy           13,000        13,000        9,100   

FourPoint Energy, LLC, Common Equity, Class D Units

    (n)(r)      Energy           2,437        1,610        1,718   

Global Jet Capital Holdings, LP, Preferred Equity

    (f)(n)(o)      Commercial & Professional Services           5,283,114        5,283        5,283   

Harvey Holdings, LLC, Common Equity

    (n)      Capital Goods           666,667        667        633   

Industrial Group Intermediate Holdings, LLC, Common Equity

    (n)(r)      Materials           2,107,438        2,107        3,477   

JMC Acquisition Holdings, LLC, Common Equity

    (n)      Capital Goods           1,449        1,449        1,449   

JW Aluminum Co., Common Equity

    (e)(f)(l)(n)(x)      Materials           244        —          —     

JW Aluminum Co., Preferred Equity

    (e)(f)(l)(n)(x)      Materials           1,128        11,056        11,247   

MB Precision Investment Holdings LLC, Class A-2 Units

    (n)(r)      Capital Goods           2,287,659        2,288        2,173   

New Star Metals Inc., Common Equity

    (f)      Capital Goods           2,223,246        2,250        2,001   

 

See notes to unaudited consolidated financial statements.

 

24


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

    Number
of Shares
    Cost     Fair
Value(d)
 

NewStar Financial, Inc., Warrants, 11/4/2024

    (f)(n)(o)(v)      Diversified Financials           6,000,000      $ 30,115      $ 29,520   

Professional Plumbing Group, Inc., Common Equity

    (f)(n)      Capital Goods           3,000,000        3,000        5,100   

PSAV Holdings LLC, Common Equity

    Technology Hardware & Equipment           10,000        10,000        31,500   

Sequential Brands Group, Inc., Common Equity

    (f)(n)(o)      Consumer Durables & Apparel           408,685        5,517        2,791   

Sorenson Communications, Inc., Common Equity

    (e)(f)(n)      Telecommunication Services           43,796        —          31,393   

Sunnova Holdings, LLC, Common Equity

    (n)      Energy           62,031        1,444        1,706   

Swift Worldwide Resources Holdco Limited, Common Equity

    (n)(o)(u)      Energy           1,250,000        2,010        1,290   

Zeta Interactive Holdings Corp., Preferred Equity

    (n)      Software & Services           620,025        4,929        5,122   
             

 

 

   

 

 

 

Total Equity/Other

                174,099        217,413   
             

 

 

   

Unfunded Contingent Warrant Commitment

    (w)                    (2,460
               

 

 

 

Net Equity/Other

                  214,953   
               

 

 

 

TOTAL INVESTMENTS—168.5%

              $ 4,877,385        4,532,875   
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(68.5%)

                  (1,842,463
               

 

 

 

NET ASSETS—100.0%

                $ 2,690,412   
               

 

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2015, the three-month London Interbank Offered Rate, or LIBOR, was 0.61%, the Euro Interbank Offered Rate, or EURIBOR, was (0.13)% and the U.S. Prime Lending Rate, or Prime, was 3.50%.

 

(c) Denominated in U.S. dollars unless otherwise noted.

 

(d) Fair value determined by the Company’s board of directors (see Note 7).

 

(e) Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Floating Rate Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(f) 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).

 

(g) Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).

 

See notes to unaudited consolidated financial statements.

 

25


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

(h) Security or portion thereof held within Wissahickon Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8).

 

(i) Security or portion thereof held within Darby Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(j) Security or portion thereof held within Dunning Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

 

(k) Security or portion thereof held within Juniata River LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, N.A. (see Note 8).

 

(l) Security or portion thereof held within Green Creek LLC and is pledged as collateral supporting the amounts outstanding under the Notes issued to Schuylkill River LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

 

(m) Security was on non-accrual status as of December 31, 2015.

 

(n) Security is non-income producing.

 

(o) 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 company’s total assets. As of December 31, 2015, 84.7% of the Company’s total assets represented qualifying assets.

 

(p) Security is an unfunded commitment. The stated rate reflects the spread disclosed at the time of commitment and may not indicate the actual rate received upon funding.

 

(q) Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

 

(r) Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company.

 

(s) Security held within IC II Arches Investments, LLC, a wholly-owned subsidiary of the Company.

 

(t) Security held within IC II Altus Investments, LLC, a wholly-owned subsidiary of the Company.

 

(u) Investment denominated in British pounds. Cost and fair value are converted into U.S. dollars as of December 31, 2015.

 

(v) Includes 500,000 NewStar Financial, Inc., or NewStar, warrants, which is the maximum number of warrants that the Company will forfeit in the event that the Company declines to fund additional subordinated debt investments in NewStar in an amount not to exceed $12,500 upon the request of NewStar.

 

(w) Represents the maximum number of NewStar warrants that the Company will forfeit in the event that the Company declines to fund additional subordinated debt investments in NewStar in an amount not to exceed $12,500 upon the request of NewStar.

 

See notes to unaudited consolidated financial statements.

 

26


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2015

(in thousands, except share amounts)

 

 

 

(x) Under the 1940 Act, the Company generally is deemed to be an “affiliated person” of a portfolio company if it owns 5% or more of the portfolio company’s voting securities and generally is deemed to “control” a portfolio company if it owns more than 25% of the portfolio company’s voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of December 31, 2015, the Company held investments in two portfolio companies of which it is deemed to be an “affiliated person” but is not be deemed to “control”. The following table presents certain financial information with respect to such portfolio companies for the year ended December 31, 2015:

 

Portfolio Company

   Purchases      Paid-in-kind
Interest
     Sales
and
Repayments
     Interest
Income
     Fee
Income
     Dividend
Income
     Net
Realized
Gain
(Loss)
     Net
Change in
Unrealized
Appreciation
(Depreciation)
 

Senior Secured Loans—First Lien

                       

Allen Systems Group, Inc.

   $ 70,109       $ 573         —         $ 4,849       $ 1,482         —           —         $ 707   

Senior Secured Loans—Second Lien

                       

JW Aluminum Co.

   $ 30,061         —           —         $ 348         —           —           —           —     

Equity/Other

                       

Allen Systems Group, Inc. Common Equity

   $ 13,475         —           —           —           —           —           —         $ 15,346   

JW Aluminum Co., Common Equity

     —           —           —           —           —           —           —           —     

JW Aluminum Co., Preferred Equity

   $ 11,056         —           —           —           —           —           —         $ 191   

 

See notes to unaudited consolidated financial statements.

 

27


Table of Contents

FS Investment Corporation II

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 formally commenced investment operations on June 18, 2012. The Company is an externally managed, non-diversified, closed-end management investment company that 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. In addition, the Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, 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, 2016, the Company had nine wholly-owned financing subsidiaries and four wholly-owned subsidiaries through which it holds interests in certain non-controlled and non-affiliated portfolio companies. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of June 30, 2016. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes.

The Company’s 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 or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from the Company’s target companies as primary market or directly originated investments. In connection with the Company’s debt investments, the Company may on occasion receive equity interests such as warrants or options as additional consideration. The Company may also purchase or otherwise acquire minority interests in target companies, in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity. Any such minority interests are generally acquired in conjunction with one of the Company’s 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 the Company’s portfolio may be comprised of corporate bonds, collateralized loan obligations, or CLOs, other debt securities and derivatives, including total return swaps and credit default swaps.

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 Company’s 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, 2015 included in the Company’s annual report on Form 10-K for the year ended December 31, 2015. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. The December 31, 2015 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements

 

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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)

 

as of and for the fiscal year ended December 31, 2015. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the U.S. Securities and Exchange Commission, or the SEC.

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 entered into an investment advisory and administrative services agreement with the Company’s investment adviser, FSIC II Advisor, LLC, or 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 such agreement). Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., the Company’s 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 Company’s 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.

Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “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 equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of the Company’s common stock (including proceeds from its distribution reinvestment plan) reduced for distributions paid to stockholders from proceeds of non-liquidating dispositions of the Company’s investments and amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, FSIC II Advisor will not earn this part of the incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s 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

 

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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)

 

Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

Credit Default Swaps: When the Company is the buyer of a credit default swap contract, the Company is entitled to receive the par (or other agreed-upon) value of a referenced debt obligation (or basket of debt obligations) from the counterparty to the contract if a specified credit event with respect to the issuer of the debt obligation, such as a U.S. or foreign corporate issuer or sovereign issuer, occurs. In return, the Company pays the counterparty a periodic stream of payments over the term of the contract provided that no credit event has occurred. If no specified credit event occurs, the Company would have paid the stream of payments and received no proceeds from the contract. When the Company is the seller of a credit default swap contract, it receives the stream of payments, but is obligated to pay to the buyer of the protection an amount up to the notional amount of the swap and, in certain instances, take delivery of securities of the reference entity upon the occurrence of a credit event, as defined under the terms of that particular swap agreement. Credit events are contract specific but may include bankruptcy, failure to pay principal or interest, restructuring, obligation acceleration and repudiation or moratorium. If the Company is a seller of protection and a credit event occurs, the maximum potential amount of future payments that the Company could be required to make would be an amount equal to the notional amount of the agreement. This potential amount would be partially offset by any recovery value of the respective referenced obligation, or net amount received from the settlement of a buy protection credit default swap agreement entered into by the Company for the same referenced obligation. As the seller of a credit default swap contract, the Company may create economic leverage because, in addition to its total net assets, the Company is subject to investment exposure on the notional amount of the swap. The interest fee paid or received on the swap contract, which is based on a specified interest rate on a fixed notional amount, is accrued daily and is recorded as realized loss or gain. The Company records an increase or decrease to unrealized appreciation (depreciation) on credit default swaps in an amount equal to the change in daily valuation. Upfront payments or receipts, if any, are recorded as unamortized swap premiums paid or received, respectively, and are amortized over the life of the swap contract as realized losses or gains. For financial reporting purposes, unamortized upfront payments, if any, are netted with unrealized appreciation (depreciation) on credit default swaps to determine the market value of swaps as presented in Note 7 and Note 9. The Company will segregate assets in the form of cash and/or liquid securities in an amount equal to any unrealized depreciation on the credit default swaps of which it is the buyer, marked-to-market on a daily basis. The Company will segregate assets in the form of cash and/or liquid securities in an amount equal to the notional amount of the credit default swaps of which it is the seller. These transactions involve certain risks, including the risk that the seller may be unable to fulfill the transaction. As of June 30, 2016, the Company had no outstanding credit default swap contracts.

Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three and six months ended June 30, 2015 and the audited consolidated financial statements for the year ended December 31, 2015 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and six months ended June 30, 2016. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

In April 2015, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2015-03, Interest-Imputation of Interest, or ASU 2015-03, to simplify the presentation of debt issuance costs in financial statements. Under pre-existing guidance, debt issuance costs were recognized as a

 

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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)

 

deferred charge and presented as an asset on the balance sheet. ASU 2015-03 requires that debt issuance costs related to a recognized liability for indebtedness be presented in the balance sheet as a direct deduction from the carrying amount of that liability, consistent with debt discounts. In August 2015, the FASB issued Accounting Standards Update No. 2015-15, Interest-Imputation of Interest, or ASU 2015-15, to update the guidance to include SEC staff views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC indicated that it would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.

Commencing January 1, 2016, the Company adopted ASU 2015-03 and changed its method of disclosing debt issuance costs for its repurchase agreements and term loan credit facility. ASU 2015-03 affects the presentation and disclosure of such costs in the Company’s financial statements. There is no change to the Company’s recognition and measurement of debt issuance costs. In accordance with ASU 2015-15, the Company elected to continue to present debt issuance costs associated with line-of-credit arrangements as an asset, unchanged from its prior method of disclosure.

Comparative financial statements of prior interim and annual periods have been adjusted to apply the new method retrospectively. The adoption and retrospective adjustment of ASU 2015-03 had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the six months ended June 30, 2016 and 2015:

 

     Six Months Ended June 30,  
     2016     2015  
     Shares     Amount     Shares     Amount  

Reinvestment of Distributions

     8,874,917      $ 74,576        5,588,381      $ 52,801   

Share Repurchase Program

     (4,494,682     (37,751     (1,464,078     (13,864
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Proceeds from Share Transactions

     4,380,235      $ 36,825        4,124,303      $ 38,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distribution Reinvestment Plan

During the six months ended June 30, 2016 and 2015, the Company issued 8,874,917 and 5,588,381 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $74,576 and $52,801 at an average price per share of $8.40 and $9.45, respectively. During the period from July 1, 2016 to August 2, 2016, the Company issued 1,245,597 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $10,645 at an average price per share of $8.55.

 

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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)

 

Share Repurchase Program

The Company intends to continue to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s 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 Company’s qualification as a RIC (including the consequences of any necessary asset sales);

 

   

the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);

 

   

the Company’s investment plans and working capital requirements;

 

   

the relative economies of scale with respect to the Company’s size;

 

   

the Company’s 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 issuance of shares of common stock under its distribution reinvestment plan. At the discretion of the Company’s 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 calendar 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’s board of directors may amend, suspend or terminate the share repurchase program at any time upon 30 days’ notice.

Under the Company’s share repurchase program, the Company intends to offer to repurchase shares of common stock at a price equal to the price at which shares of common stock are issued pursuant to the Company’s distribution reinvestment plan on the distribution date coinciding with the applicable share repurchase date. The price at which shares of common stock are issued under the Company’s distribution reinvestment plan is determined by the Company’s board of directors or a committee thereof, in its sole discretion, and will be (i) not less than the net asset value per share of the Company’s common stock as determined in good faith by the Company’s board of directors or a committee thereof, in its sole discretion, immediately prior to the payment date of the distribution and (ii) not more than 2.5% greater than the net asset value per share as of such date.

 

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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 provides information concerning the Company’s repurchases of shares of common stock pursuant to its share repurchase program during the six months ended June 30, 2016 and 2015:

 

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
 

Fiscal 2015

             

December 31, 2014

     January 2, 2015         578,569         100   $ 9.500       $ 5,496   

March 31, 2015

     April 1, 2015         885,509         100   $ 9.450       $ 8,368   

Fiscal 2016

             

December 31, 2015

     January 4, 2016         1,779,357         100   $ 8.550       $ 15,214   

March 31, 2016

     April 1, 2016         2,715,325         100   $ 8.300       $ 22,537   

On July 1, 2016, the Company repurchased 2,874,151 shares of common stock (representing 100% of the shares of common stock tendered for repurchase) at $8.55 per share for aggregate consideration totaling $24,574.

Note 4. Related Party Transactions

Compensation of the 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 Company’s gross assets and an incentive fee based on the Company’s performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of the Company’s investment operations. Base management fees are paid on a quarterly basis in arrears. Effective March 5, 2015, FSIC II Advisor agreed to permanently waive a portion of its base management fee to which it is entitled under the investment advisory and administrative services agreement, so that the fee received equals 1.75% of the average value of the Company’s gross assets.

The incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “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 equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of the Company’s common stock (including proceeds from its distribution reinvestment plan) reduced for distributions from non-liquidating dispositions of the Company’s investments paid to stockholders and amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, FSIC II Advisor will not earn this part of the incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s 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 Company’s 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 be entitled to receive 20.0% of the Company’s pre-incentive fee net investment 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 4. Related Party Transactions (continued)

 

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 Company’s incentive fee capital gains, which equals the Company’s 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 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.

Pursuant to an investment sub-advisory agreement, or the investment sub-advisory agreement, between FSIC II Advisor and GSO / Blackstone Debt Funds Management LLC, or GDFM, GDFM will receive 50% of all management and incentive fees payable to FSIC II Advisor under the investment advisory and administrative services agreement with respect to each year.

The Company reimburses FSIC II Advisor for expenses necessary to perform services related to the Company’s administration and operations, including FSIC II Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company’s sponsor and an affiliate of FSIC II Advisor, providing administrative services to the Company on behalf of FSIC II Advisor. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisor’s 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 factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors reviews the methodology employed in determining how the expenses are allocated to the Company and the proposed allocation of the administrative expenses among the Company and certain affiliates of FSIC II Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to the Company 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 service providers known to be available. In addition, the Company’s 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 Company’s board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs. The Company does not reimburse FSIC II Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FSIC II Advisor.

 

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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 the Company accrued under the investment advisory and administrative services agreement during the three and six months ended June 30, 2016 and 2015:

 

            Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Related Party

 

Source Agreement

 

Description

      2016             2015             2016             2015      

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Base Management
Fee
(1)
  $ 21,303      $ 22,063      $ 42,310      $ 45,438   

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Subordinated Incentive Fee on Income(2)   $ 15,744      $ 25,095      $ 31,584      $ 40,308   

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Administrative Services Expenses(3)   $ 1,029      $ 1,140      $ 2,057      $ 2,216   

 

(1) FSIC II Advisor agreed, effective March 5, 2015, to permanently waive a portion of its base management fee to which it is entitled under the investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of the Company’s gross assets. As a result, the amounts shown for the three and six months ended June 30, 2016 are net of waivers of $3,043 and $6,044, respectively, and the amounts shown for the three and six months ended June 30, 2015 are net of waivers of $3,151 and $4,002, respectively. During the six months ended June 30, 2016 and 2015, $42,536 and $46,444, respectively, in base management fees were paid to FSIC II Advisor. As of June 30, 2016, $21,303 in base management fees were payable to FSIC II Advisor.

 

(2) During the six months ended June 30, 2016 and 2015, $32,094 and $30,547, respectively, of subordinated incentive fees on income were paid to FSIC II Advisor. As of June 30, 2016, a subordinated incentive fee on income of $15,744 was payable to FSIC II Advisor.

 

(3) During the six months ended June 30, 2016 and 2015, $1,965 and $2,125, respectively, of 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 $2,258 and $2,162 in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2016 and 2015, respectively.

Potential Conflicts of Interest

FSIC II Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC and FS Global Advisor, LLC, the investment advisers to certain other BDCs and a closed-end management investment company affiliated with Franklin Square Holdings. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III, FS Investment Corporation IV and FS Global Credit Opportunities Fund. While none of FSIC II Advisor, FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III, FS Investment Corporation IV or FS Global Credit Opportunities 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 Company’s 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. In addition, even in the absence of FSIC II Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III, FS Investment Corporation IV and/or FS Global Credit Opportunities Fund rather than to the Company.

 

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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)

 

Exemptive Relief

As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. 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 certain affiliates of FSIC II Advisor, including FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III, FS Investment Corporation IV and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers, or collectively the Company’s co-investment affiliates. The Company believes this relief has and may continue to enhance its ability to further its investment objectives and strategies. The Company believes this relief may also increase favorable investment opportunities for it, in part, by allowing the Company to participate in larger investments, together with its co-investment affiliates, than would be available to the Company if such relief had not been obtained. Because the Company did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, the Company is permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance (e.g., where price is the only negotiated term).

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, dated as of May 10, 2012 and amended and restated as of May 16, 2013, or, as amended and restated, 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 Company’s 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 Company’s distributions to stockholders may also be deemed to constitute a return of capital 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 Company for the portion of such distributions to stockholders that represent a return of capital, as the purpose of the expense reimbursement agreement 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 Company’s cumulative distributions paid to its stockholders in each quarter, less the sum of its net investment company taxable income, 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 company taxable income or net capital gains) in each quarter.

Pursuant to the expense reimbursement agreement, the Company has 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 Company’s net investment company taxable income, 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

 

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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 taxable income or net capital gains) exceeds the regular cash distributions paid by the Company to its 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 support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company’s average net assets attributable to its shares of its common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company’s average net assets attributable to shares of its 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 Company’s 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. 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, the Company’s 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 Company’s 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 Company’s expenses in future quarters. As of June 30, 2016, there were no unreimbursed expense support payments subject to future reimbursement by the Company.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 5. Distributions

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the six months ended June 30, 2016 and 2015:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2015

     

March 31, 2015

   $ 0.1885       $ 59,177   

June 30, 2015

   $ 0.1885       $ 59,567   

Fiscal 2016

     

March 31, 2016

   $ 0.1885       $ 60,744   

June 30, 2016

   $ 0.1885       $ 60,976   

The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On May 5, 2016 and August 3, 2016, the Company’s board of directors declared regular monthly cash distributions for July 2016 through September 2016 and October 2016 through December 2016, respectively, each in the amount of $0.06283 per share. These distributions have been or will be paid monthly to stockholders of record as of monthly record dates previously determined by the Company’s board of directors. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s 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 the distribution 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 Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

Under the Company’s distribution reinvestment plan, cash distributions to participating stockholders will be reinvested in additional shares of the Company’s common stock at a purchase price determined by the Company’s board of directors, or a committee thereof, in its sole discretion, that is (i) not less than the net asset value per share of the Company’s common stock as determined in good faith by the Company’s board of directors or a committee thereof, in its sole discretion, immediately prior to the payment of the distribution and (ii) not more than 2.5% greater than the net asset value per share of the Company’s common stock as of such date. Although distributions paid in the form of additional shares of common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders who elect to participate in the Company’s distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes. Stockholders receiving distributions in the form of additional shares of common stock will be treated as receiving a distribution in the amount of the fair market value of the Company’s shares of common stock.

The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of the Company’s common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, gains from credit default swaps, non-capital gains proceeds from the sale of assets, and 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

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 5. Distributions (continued)

 

sources to make distributions. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, which is a nontaxable distribution) will be mailed to the Company’s stockholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the six months ended June 30, 2016 and 2015:

 

     Six Months Ended June 30,  
     2016     2015  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     121,720         100     118,744         100

Short-term capital gains proceeds from the sale of assets

     —           —          —           —     

Long-term capital gains proceeds from the sale of assets

     —           —          —           —     

Gains from credit default swaps (ordinary income for tax)

     —           —          —           —     

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 121,720         100   $ 118,744         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the six months ended June 30, 2016 and 2015, 93.4% and 95.5%, respectively, of the Company’s gross investment income was attributable to cash income earned, 2.5% and 2.4%, respectively, was attributable to non-cash accretion of discount and 4.1% and 2.1%, respectively, was attributable to paid-in-kind, or PIK, interest.

The Company’s net investment income on a tax basis for the six months ended June 30, 2016 and 2015 was $121,990 and $128,465, respectively. As of June 30, 2016, the Company had $45,272 of undistributed net investment income, $13,825 of distributable realized gains and $38,671 of capital loss carryover on a tax basis. As of December 31, 2015, the Company had $58,827 of undistributed net investment income and realized capital gains on a tax basis.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income during the six months ended June 30, 2016 is primarily due to the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes.

 

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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 sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the six months ended June 30, 2016 and 2015:

 

     Six Months Ended
June 30,
 
     2016     2015  

GAAP-basis net investment income

   $ 126,334      $ 161,224   

Reclassification of unamortized original issue discount and prepayment fees

     (8,150     (33,893

Reclassification of realized gains on credit default swap

     —          (19,588

Reversal of mark-to-market on outstanding credit default swaps

     —          19,426   

Other miscellaneous differences

     3,806        1,296   
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 121,990      $ 128,465   
  

 

 

   

 

 

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s 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 Company’s 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, 2016 and December 31, 2015, the components of accumulated earnings on a tax basis were as follows:

 

     June 30, 2016
(Unaudited)
    December 31, 2015  

Distributable ordinary income

   $ 45,272      $ 45,002   

Distributable realized gains

     13,825        13,825   

Capital loss carryover(1)

     (38,671     —     

Unamortized organization costs

     (168     (175

Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(2)

     (270,144     (356,353
  

 

 

   

 

 

 

Total

   $ (249,886   $ (297,701
  

 

 

   

 

 

 

 

(1) Under the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010, may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of June 30, 2016, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $5,730 and $32,941, respectively.

 

(2) As of June 30, 2016 and December 31, 2015, the gross unrealized appreciation on the Company’s investments and unrealized gain on foreign currency was $108,213 and $78,871, respectively. As of June 30, 2016 and December 31, 2015, the gross unrealized depreciation on the Company’s investments and unrealized loss on foreign currency was $378,357 and $435,224, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $4,727,758 and $4,889,228 as of June 30, 2016 and December 31, 2015, respectively. The aggregate net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency on a tax basis was $(270,144) and $(356,353) as of June 30, 2016 and December 31, 2015, 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 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of June 30, 2016 and December 31, 2015:

 

    June 30, 2016
(Unaudited)
    December 31, 2015  
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 2,780,619      $ 2,688,626        60   $ 2,916,090      $ 2,802,207        62

Senior Secured Loans—Second Lien

    959,643        871,776        20     1,012,224        902,113        20

Senior Secured Bonds

    213,916        152,569        4     244,558        181,200        4

Subordinated Debt

    416,489        363,859        8     411,824        319,019        7

Collateralized Securities

    97,696        96,366        2     118,590        113,383        2

Equity/Other

    247,552        284,418        6     174,099        214,953        5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,715,915      $ 4,457,614        100   $ 4,877,385      $ 4,532,875        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

As of June 30, 2016, except for Allen Systems Group, Inc., in which the Company held two senior secured loans and two equity/other investments, and JW Aluminum Co., in which the Company held a senior secured loan, a senior secured bond and two equity/other investments, the Company was not an “affiliated person” of any of its portfolio companies, as defined in the 1940 Act. As of June 30, 2016, the Company did not “control” any of its portfolio companies, as defined in the 1940 Act.

As of December 31, 2015, except for Allen Systems Group, Inc., in which the Company held a senior secured loan and an equity/other investment, and JW Aluminum Co., in which the Company held a senior secured loan and two equity/other investments, the Company was not an “affiliated person” of any of its portfolio companies, as defined in the 1940 Act. As of December 31, 2015, the Company did not “control” any of its portfolio companies, 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 more than 25% of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities.

The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, pursuant to which the Company may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of June 30, 2016, the Company had sixteen senior secured loan investments with aggregate unfunded commitments of $169,965 and one unfunded commitment to purchase up to $217 in shares of preferred stock of Altus Power America Holdings, LLC. As of December 31, 2015, the Company had eighteen senior secured loan investments with aggregate unfunded commitments of $203,409, one senior secured bond investment with an unfunded commitment of $3,638 and two unfunded commitments to purchase up to $467 and $246 in shares of preferred stock of Altus Power America Holdings, LLC and common equity of Sunnova Holdings, LLC, respectively. The Company maintains sufficient cash on hand, available

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 6. Investment Portfolio (continued)

 

borrowings and liquid securities to fund such unfunded commitments should the need arise. For additional details regarding the Company’s unfunded debt investments, see the Company’s unaudited consolidated schedule of investments as of June 30, 2016 and audited consolidated schedule of investments as of December 31, 2015.

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, 2016 and December 31, 2015:

 

     June 30, 2016
(Unaudited)
    December 31, 2015  

Industry Classification

   Fair Value      Percentage
of  Portfolio
    Fair Value      Percentage
of  Portfolio
 

Automobiles & Components

   $ 201,590         5   $ 234,923         5

Capital Goods

     403,487         9     474,141         11

Commercial & Professional Services

     366,834         8     335,256         7

Consumer Durables & Apparel

     342,271         8     351,431         8

Consumer Services

     474,539         11     470,309         10

Diversified Financials

     259,981         6     275,053         6

Energy

     705,055         16     624,508         14

Food & Staples Retailing

     7,858         0     7,566         0

Food, Beverage & Tobacco

     —           —          4,310         0

Health Care Equipment & Services

     106,636         2     98,425         2

Household & Personal Products

     13,097         0     —           —     

Insurance

     83,620         2     83,488         2

Materials

     382,365         9     337,665         7

Media

     143,243         3     102,906         2

Pharmaceuticals, Biotechnology & Life Sciences

     2,372         0     2,659         0

Real Estate

     —           —          1,707         0

Retailing

     118,786         3     113,654         3

Semiconductors & Semiconductor Equipment

     13,789         0     15,397         0

Software & Services

     451,740         10     490,803         11

Technology Hardware & Equipment

     108,920         2     234,989         5

Telecommunication Services

     152,680         3     158,383         4

Transportation

     118,751         3     115,302         3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,457,614         100   $ 4,532,875         100
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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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)

 

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 instrument’s 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, 2016 and December 31, 2015, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   June 30, 2016
(Unaudited)
     December 31, 2015  

Level 1—Price quotations in active markets

   $ 3,291       $ 23   

Level 2—Significant other observable inputs

     —           —     

Level 3—Significant unobservable inputs

     4,454,323         4,532,852   
  

 

 

    

 

 

 

Total

   $ 4,457,614       $ 4,532,875   
  

 

 

    

 

 

 

The Company’s investments as of June 30, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-eight senior secured loan investments, three senior secured bond investments, ten subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the investments. Except as described below, all of the Company’s equity/other investments were also valued by independent valuation firms, 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. Two equity/other investments, which were traded on an active public market, were valued at their respective closing price as of June 30, 2016. One senior secured bond investment, which was newly issued and purchased near June 30, 2016, was valued at cost, as the Company’s board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, the Company valued its other 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.

The Company’s investments as of December 31, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-five senior secured loan investments, three senior secured bond investments, eight subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates

 

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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)

 

for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the investments. Except as described below, all of the Company’s equity/other investments were also valued by independent valuation firms, 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. One equity/other investment, which was traded on an active public market, was valued at its closing price as of December 31, 2015. Two senior secured loan investments, which were newly-issued and purchased near December 31, 2015, were valued at cost, as the Company’s board of directors determined that the cost of such investments was the best indication of its fair value. Except as described above, the Company valued its other 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.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, 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 Company’s 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, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which it purchases and sells its investments. The valuation committee of the Company’s board of directors, or the valuation committee, and the board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.

 

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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, 2016 and 2015 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Six Months Ended June 30, 2016  
    Senior  Secured
Loans—First
Lien
    Senior Secured
Loans—Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/
Other
    Total  

Fair value at beginning of period

  $ 2,802,207      $ 902,113      $ 181,200      $ 319,019      $ 113,383      $ 214,930      $ 4,532,852   

Accretion of discount (amortization of premium)

    2,218        2,229        1,633        1,555        97        —          7,732   

Net realized gain (loss)

    2,225        (1,691     (22,044     (25,344     (1,224     1,257        (46,821

Net change in unrealized appreciation (depreciation)

    21,890        22,244        2,011        40,175        3,877        (4,465     85,732   

Purchases

    186,277        38,702        14,914        59,205        —          78,702        377,800   

Paid-in-kind interest

    1,583        7,083        155        1,079        —          —          9,900   

Sales and redemptions

    (327,774     (98,904     (25,300     (31,830     (19,767     (6,506     (510,081

Net transfers in or out of Level 3(1)

    —          —          —          —          —          (2,791     (2,791
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,688,626      $ 871,776      $ 152,569      $ 363,859      $ 96,366      $ 281,127      $ 4,454,323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 16,611      $ 19,581      $ (15,358   $ 15,098      $ 2,419      $ (1,906   $ 36,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) There was one transfer of an investment from Level 3 to Level 1 during the six months ended June 30, 2016. It is the Company’s policy to recognize transfers between levels, if any, at the beginning of the reporting period.

 

    For the Six Months Ended June 30, 2015  
    Senior  Secured
Loans—First
Lien
    Senior Secured
Loans—Second
Lien
    Senior
Secured
Bonds
    Subordinated
Debt
    Collateralized
Securities
    Equity/
Other
    Total  

Fair value at beginning of period

  $ 2,346,905      $ 1,001,313      $ 248,911      $ 421,683      $ 184,590      $ 189,388      $ 4,392,790   

Accretion of discount (amortization of premium)

    4,639        1,028        1,127        17,115        10        —          23,919   

Net realized gain (loss)

    (2,859     271        (8,438     (7,446     (907     3,601        (15,778

Net change in unrealized appreciation (depreciation)

    (30,507     2,916        5,011        (2,899     (9,174     675        (33,978

Purchases

    713,419        197,949        44,249        144,331        239        16,376        1,116,563   

Paid-in-kind interest

    2,443        2,501        176        915        —          —          6,035   

Sales and redemptions

    (462,442     (89,825     (47,949     (165,090     (48,813     (7,075     (821,194

Net transfers in or out of Level 3

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,571,598      $ 1,116,153      $ 243,087      $ 408,609      $ 125,945      $ 202,965      $ 4,668,357   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (15,341   $ (4,340   $ (6,521   $ 834      $ (7,237   $ 235      $ (32,370
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

45


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, 2015 of credit default swaps for which significant unobservable inputs (Level 3) were used in determining market value:

 

     Six Months Ended
June  30, 2015
 

Market value at beginning of period

   $ (30,048

Net realized gain (loss)

     (19,662

Net change in unrealized appreciation (depreciation)

     19,426   

Swap premiums received

     —     

Coupon payments received

     74   

Premiums paid on exit

     30,210   

Net transfers in or out of Level 3

     —     
  

 

 

 

Market value at end of period

   $ —     
  

 

 

 

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 credit default swaps still held at the reporting date

   $ —     
  

 

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of June 30, 2016 and December 31, 2015 were as follows:

 

Type of Investment

  Fair Value at
June  30, 2016
(Unaudited)
   

Valuation
Technique(1)

  Unobservable Input   Range   Weighted
Average

Senior Secured Loans—First Lien

    $1,884,443      Market Comparables   Market Yield (%)   5.3% – 19.3%   10.1%
      EBITDA Multiples (x)   8.1x – 8.6x   8.3x
    550,581      Market Quotes   Indicative Dealer Quotes   23.5% – 102.5%   93.9%
    253,602      Other(2)   Other   N/A   N/A

Senior Secured Loans—Second Lien

    561,271      Market Comparables   Market Yield (%)   9.0% – 22.8%   13.6%
    297,505      Market Quotes   Indicative Dealer Quotes   14.8% – 100.3%   88.9%
    13,000      Other(2)   Other   N/A   N/A

Senior Secured Bonds

    61,366      Market Comparables   Market Yield (%)   9.5% – 14.3%   10.1%
      EBITDA Multiples (x)   4.0x – 5.0x   4.5x
    86,781      Market Quotes   Indicative Dealer Quotes   21.5% – 102.1%   77.4%
    4,422      Cost   Cost   N/A   N/A

Subordinated Debt

    165,587      Market Comparables   Market Yield (%)   8.5% – 15.3%   12.7%
    198,272      Market Quotes   Indicative Dealer Quotes   12.0% – 100.0%   85.8%

Collateralized Securities

    73,972      Market Comparables   Market Yield (%)   12.9% – 12.9%   12.9%
    22,394      Market Quotes   Indicative Dealer Quotes   36.6% – 89.0%   68.3%

Equity/Other

    262,416      Market Comparables   EBITDA Multiples (x)   4.8x – 16.8x   9.1x
      Production Multiples
(Mboe/d)
  $35,000.0 –$45,000.0   $40,422.8
      Proved Reserves
Multiples (Mmboe)
  $8.0 – $10.0   $8.7
      Undeveloped Acreage
Multiples ($)
  $8,000.0 – $10,000.0   $9,000.0
      Capacity Multiple ($/kW)   $2,000.0 – $2,500.0   $2,250.0
      PV-10 Multiples (x)   1.7x – 1.8x   1.8x
    Discounted Cash Flow   Discount Rate (%)   11.5% – 23.5%   13.6%
    Option Valuation Model   Volatility (%)   35.5% – 55.5%   49.4%
    18,711      Other(2)   Other   N/A   N/A
 

 

 

         

Total

    $4,454,323           
 

 

 

         

 

46


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)

 

 

(1) Investments using a market quotes valuation technique 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. 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. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

(2) Fair value based on expected outcome of proposed corporate transactions and/or other factors.

 

Type of Investment

  Fair Value at
December 31, 2015
   

Valuation
Technique(1)

 

Unobservable Input

  Range     Weighted
Average
 

Senior Secured Loans—First Lien

  $ 2,316,852      Market Comparables   Market Yield (%)     5.5% – 16.8%        10.0%   
    1,192      Other(2)   Other     N/A        N/A   
    474,663      Market Quotes   Indicative Dealer Quotes     30.0% – 102.0%        88.1%   
    9,500      Cost   Cost     100.0% – 100.0%        100.0%   

Senior Secured Loans—Second Lien

    533,919      Market Comparables   Market Yield (%)     9.0% – 19.9%        14.5%   
    368,194      Market Quotes   Indicative Dealer Quotes     1.8% – 100.0%        90.3%   

Senior Secured Bonds

    81,382      Market Comparables   Market Yield (%)     14.0% – 31.5%        20.6%   
      EBITDA Multiples (x)     7.0x – 7.5x        7.3x   
    99,818      Market Quotes   Indicative Dealer Quotes     14.0% – 94.4%        72.3%   

Subordinated Debt

    139,922      Market Comparables   Market Yield (%)     8.8% – 13.8%        12.2%   
    12,959      Other(2)   Other     N/A        N/A   
    166,138      Market Quotes   Indicative Dealer Quotes     14.0% – 104.1%        71.9%   

Collateralized Securities

    72,828      Market Comparables   Market Yield (%)     13.2% – 13.2%        13.2%   
    40,555      Market Quotes   Indicative Dealer Quotes     37.9% – 91.0%        67.9%   

Equity/Other

    203,182      Market Comparables   EBITDA Multiples (x)     5.3x – 14.3x        8.9x   
      Production Multiples (Mboe/d)     $50,000.0 –$55,000.0        $52,500.0   
      Proved Reserves Multiples (Mmboe)     $8.8 – $11.0        $9.4   
      Capacity Multiple ($/kW)     $2,000.0 – $2,500.0        $2,250.0   
    Option Valuation Model   Volatility (%)     40.0% – 72.5%        46.8%   
    11,748      Other(2)   Other     N/A        N/A   
 

 

 

         

Total

  $ 4,532,852           
 

 

 

         

 

(1) Investments using a market quotes valuation technique 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. 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. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.

 

(2) Fair value based on expected outcome of proposed corporate transactions and/or other factors.

 

47


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 8. Financing Arrangements

The following table presents summary information with respect to the Company’s outstanding financing arrangements as of June 30, 2016. For additional information regarding these financing arrangements, please see the notes to the Company’s audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2015 and the additional disclosure set forth in this Note 8.

 

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
   

Maturity
Date

JPM Facility

  Repurchase Agreement   3.25%   $ 550,000      $ —        May 20, 2017

Goldman Facility

  Repurchase Agreement   L+2.50%   $ 400,000      $ —        December 15, 2018

Cooper River Credit Facility

  Revolving Credit Facility   L+2.25%   $ 190,533      $ 9,467      May 29, 2020

Wissahickon Creek Credit Facility

  Revolving Credit Facility   L+1.50% to L+2.50%   $ 225,146      $ 24,854      February 19, 2019

Darby Creek Credit Facility

  Revolving Credit Facility   L+2.50%   $ 250,000      $ —        February 20, 2018

Dunning Creek Credit Facility(1)

  Revolving Credit Facility   L+1.70%   $ 114,200      $ 35,800      May 14, 2017

Juniata River Credit Facility

  Term Loan Credit Facility   L+2.50%   $ 300,000      $ —        November 14, 2019

FSIC II Revolving Credit Facility

  Revolving Credit Facility   L+1.75%   $ 80,000      $ 40,000      February 23, 2021

 

(1) On May 13, 2016, the Dunning Creek Credit Facility was amended to (a) extend the maturity date to May 14, 2017; (b) decrease the maximum commitment available to $150,000; and (c) increase the applicable spread over LIBOR to 1.70%.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the six months ended June 30, 2016 were $2,079,615 and 3.09%, respectively. As of June 30, 2016, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.12%.

JPM Facility

On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Lehigh River LLC, or Lehigh River, and Cobbs Creek LLC, or Cobbs Creek, the Company entered into an amendment, or the April 2013 amendment, to its debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or JPM, which the Company originally entered into on October 26, 2012 (and previously 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.

Pursuant to the financing arrangement, the assets held by Lehigh River secure the obligations of Lehigh River under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Lehigh River to Cobbs Creek pursuant to an Amended and Restated Indenture, dated as of February 6, 2013, as supplemented by Supplemental Indenture No. 1, dated as of April 23, 2013, with Citibank N.A., or 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 is $660,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of May 20, 2024. 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.

Cobbs Creek, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and related annex and amended and restated

 

48


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

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 is $660,000. Accordingly, the maximum amount payable at any time to Cobbs Creek under the JPM facility is $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 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.

Pursuant to the financing arrangement, the assets held by Cobbs Creek secure the obligations of Cobbs Creek under the JPM facility.

As of June 30, 2016 and December 31, 2015, Class A Notes in the aggregate principal amount of $660,000 and $660,000, respectively, had been purchased by Cobbs Creek from Lehigh River and subsequently sold to JPM under the JPM facility for aggregate proceeds of $550,000 and $550,000, respectively. The carrying amount outstanding under the JPM facility approximates its fair value. The Company funded each purchase of Class A Notes by Cobbs Creek through a capital contribution to Cobbs Creek. As of June 30, 2016 and December 31, 2015, Cobbs Creek’s liability under the JPM facility was $550,000 and $550,000, respectively, plus $2,085 and $2,085, respectively, of accrued interest expense. The Class A Notes issued by Lehigh River and purchased by Cobbs Creek eliminate in consolidation on the Company’s financial statements.

As of June 30, 2016 and December 31, 2015, the fair value of assets held by Lehigh River was $1,142,822 and $1,150,608, respectively, which included assets purchased by Lehigh River with proceeds from the issuance of Class A Notes. As of June 30, 2016 and December 31, 2015, the fair value of assets held by Cobbs Creek was $329,116 and $345,813, respectively.

The Company 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, 2016, $15 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the JPM facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 4,518       $ 4,518       $ 9,036       $ 8,987   

Amortization of deferred financing costs

     10         10         20         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 4,528       $ 4,528       $ 9,056       $ 9,007   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

49


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM facility were as follows:

 

     Six Months Ended
June 30,
 
           2016                 2015        

Cash paid for interest expense(1)

   $ 9,036      $ 8,987   

Average borrowings under the facility

   $ 550,000      $ 550,000   

Effective interest rate on borrowings

     3.25     3.25

Weighted average interest rate

     3.25     3.25

 

(1) Interest under the JPM facility is payable quarterly in arrears and commenced in May 2013.

Amounts outstanding under the JPM facility are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Goldman Facility

On December 15, 2014, the Company, through its two wholly-owned, special-purpose financing subsidiaries, Green Creek LLC, or Green Creek, and Schuylkill River LLC, or Schuylkill River, entered into a debt financing arrangement with Goldman Sachs Bank USA, or Goldman, pursuant to which up to $400,000 is available to the Company. 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 have been available through alternate arrangements.

The Company may sell and/or contribute assets to Green Creek from time to time pursuant to an Amended and Restated Sale and Contribution Agreement, dated as of December 15, 2014, between the Company and Green Creek, or the Sale and Contribution Agreement. The assets held by Green Creek secure the obligations of Green Creek under Floating Rate Notes, or the Notes, to be issued from time to time by Green Creek to Schuylkill River pursuant to an Indenture, dated as of December 15, 2014, with Citibank, as trustee, or the Indenture. Pursuant to the Indenture, the aggregate principal amount of Notes that may be issued by Green Creek from time to time is $690,000. Schuylkill River will purchase the Notes to be issued by Green Creek from time to time at a purchase price equal to their par value.

Interest on the Notes under the Indenture will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal and any unpaid interest on the Notes will be due and payable on the stated maturity date of February 15, 2026.

Schuylkill River, in turn, has entered into a repurchase transaction with Goldman, pursuant to the terms of a master repurchase agreement and the related annex and master confirmation thereto, each dated as of December 15, 2014, or collectively, the Goldman facility. Pursuant to the Goldman facility, on one or more occasions beginning December 15, 2014, Goldman will purchase Notes held by Schuylkill River for an aggregate purchase price equal to 58.00% of the principal amount of Notes purchased. Subject to certain conditions, the maximum principal amount of Notes that may be purchased under the Goldman facility is $690,000. Accordingly, the aggregate maximum amount payable to Schuylkill River under the Goldman facility will not exceed $400,000.

 

50


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

Schuylkill River will repurchase the Notes sold to Goldman under the Goldman facility no later than December 15, 2018. The repurchase price paid by Schuylkill River to Goldman will be equal to the purchase price paid by Goldman for the repurchased Notes, plus interest (referred to as financing fees) accrued at the applicable pricing rate under the Goldman facility. Up until March 15, 2015, financing fees accrued on the aggregate purchase price paid by Goldman for such Notes. Thereafter, financing fees commenced accruing on $400,000 (even if the aggregate purchase price paid for Notes purchased by Goldman was less than that amount), unless and until the outstanding amount is reduced in accordance with the terms of the Goldman facility. If the Goldman facility is accelerated prior to December 15, 2018 due to an event of default or the failure of Green Creek to commit to sell any underlying assets that become defaulted obligations within 30 days, then Schuylkill River must pay to Goldman a fee equal to the present value of the aggregate amount of the financing fees that would have been payable to Goldman from the date of acceleration through December 15, 2018 had the acceleration not occurred. The financing fee under the Goldman facility is equal to three-month LIBOR plus a spread of up to 2.50% per annum for the relevant period.

As of June 30, 2016 and December 31, 2015, Notes in an aggregate principal amount of $689,655 and $689,655, respectively, had been purchased by Schuylkill River from Green Creek and subsequently sold to Goldman under the Goldman facility for aggregate proceeds of $400,000 and $400,000, respectively. The carrying amount outstanding under the Goldman facility approximates its fair value. The Company funded each purchase of the Notes by Schuylkill River through a capital contribution to Schuylkill River. As of June 30, 2016 and December 31, 2015, Schuylkill River’s liability under the Goldman facility was $400,000 and $400,000, respectively, plus $1,600 and $1,443, respectively, of accrued interest expense. The Notes issued by Green Creek and purchased by Schuylkill River eliminate in consolidation on the Company’s financial statements.

As of June 30, 2016 and December 31, 2015, the fair value of assets held by Green Creek was $717,978 and $717,247, respectively.

The Company incurred costs of $2,167 in connection with obtaining the Goldman 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 Goldman facility. As of June 30, 2016, $1,340 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Goldman facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 3,286       $ 3,087       $ 6,200       $ 4,129   

Amortization of deferred financing costs

     135         133         272         259   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 3,421       $ 3,220       $ 6,472       $ 4,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

51


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Goldman facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 6,043      $ 2,769   

Average borrowings under the facility

   $ 400,000      $ 247,708   

Effective interest rate on borrowings

     3.13     3.00

Weighted average interest rate

     3.07     3.32

 

(1) Interest under the Goldman facility is paid quarterly in arrears and commenced on May 15, 2015.

Amounts outstanding under the Goldman facility are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Cooper River Credit Facility

On May 29, 2015, the Company’s wholly-owned, special-purpose financing subsidiary, Cooper River LLC, or Cooper River, entered into a revolving credit facility, or the Cooper River facility, which amends and restates that certain credit facility dated as of March 27, 2013, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Cooper River facility provides for a five-year credit facility with a three-year reinvestment period, during which Cooper River, subject to compliance with the terms of the facility, including maintenance of the required borrowing base, is permitted to borrow, repay and re-borrow advances up to a maximum commitment of $200,000, followed by a two-year amortization period.

The Company may contribute cash or debt securities to Cooper River from time to time, subject to certain restrictions set forth in the Cooper River 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 River’s obligations to the lenders under the Cooper River 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 Cooper River facility are non-recourse to the Company and the Company’s exposure under the Cooper River facility is limited to the value of the Company’s investment in Cooper River.

Borrowings under the Cooper River facility, prior to its amendment and restatement, accrued interest at a rate equal to three-month LIBOR, plus a spread of (a) 1.75% per annum from closing through March 26, 2015 and (b) 2.00% per annum thereafter. Borrowings under the amended and restated Cooper River facility will accrue interest at a rate per annum equal to three-month LIBOR (subject to a 0% floor) plus a spread of (i) 2.25% during the reinvestment period, (ii) 2.75% during the first year of the amortization period and (iii) 3.75% thereafter.

Under the terms of the original Cooper River facility, from June 24, 2013 through March 26, 2015, Cooper River was subject to a non-usage fee of 0.50% per annum to the extent the aggregate principal amount available under the Cooper River facility had not been borrowed. Such non-usage fee did not apply from March 27, 2015

 

52


Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

through the date the Cooper River facility was amended and restated. Under the amended and restated Cooper River facility, Cooper River pays a commitment fee of 0.75% per annum of the aggregate principal amount available under the Cooper River facility that has not been borrowed. Any amounts borrowed under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 29, 2020.

As of June 30, 2016 and December 31, 2015, $190,533 and $191,494, respectively, was outstanding under the Cooper River facility. The carrying amount outstanding under the Cooper River facility approximates its fair value. The Company incurred costs of $3,975 in connection with obtaining the Cooper River facility (including the original facility and amended and restated 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 Cooper River facility. As of June 30, 2016, $1,818 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Cooper River facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 1,384       $ 1,024       $ 2,815       $ 1,867   

Non-usage fees

     18         44         35         81   

Amortization of deferred financing costs

     128         565         268         693   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 1,530       $ 1,633       $ 3,118       $ 2,641   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Cooper River facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 2,667      $ 1,814   

Average borrowings under the facility

   $ 190,681      $ 170,494   

Effective interest rate on borrowings (including the effect of non-usage fees)

     2.91     2.63

Weighted average interest rate (including the effect of non-usage fees)

     2.96     2.27

 

(1) Interest under the Cooper River facility is payable quarterly in arrears and commenced on March 27, 2013.

Borrowings of Cooper River are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Wissahickon Creek Credit Facility

On February 19, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Wissahickon Creek LLC, or Wissahickon Creek, entered into a revolving credit facility, or the Wissahickon Creek facility, with Wells Fargo Securities, LLC, as administrative agent, each of the conduit lenders and institutional lenders

 

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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)

 

from time to time party thereto and Wells Fargo Bank, National Association, or, collectively with Wells Fargo Securities, LLC, Wells Fargo, as the collateral agent, account bank and collateral custodian under the Wissahickon Creek facility. The Wissahickon Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

The Company may contribute cash, loans or bonds to Wissahickon Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Wissahickon Creek or will receive fair market value for any assets sold to Wissahickon Creek. Wissahickon Creek may purchase additional assets from various sources. Wissahickon Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of a collateral management agreement. Wissahickon Creek’s obligations to Wells Fargo under the Wissahickon Creek facility are secured by a first priority security interest in substantially all of the assets of Wissahickon Creek, including its portfolio of assets. The obligations of Wissahickon Creek under the Wissahickon Creek facility are non-recourse to the Company, and the Company’s exposure under the facility is limited to the value of its investment in Wissahickon Creek.

Pricing under the Wissahickon Creek facility is based on LIBOR for a three-month interest period, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of assets for the relevant period. Interest is payable quarterly in arrears. Beginning June 19, 2014, Wissahickon Creek became subject to a non-usage fee to the extent the aggregate principal amount available under the facility is not borrowed. The non-usage fee equals 0.50% per annum on unborrowed amounts up to and including $25,000 and 2.00% on unborrowed amounts exceeding $25,000. Any amounts borrowed under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019.

As of June 30, 2016 and December 31, 2015, $225,146 and $240,146, respectively, was outstanding under the Wissahickon Creek facility. The carrying amount outstanding under the Wissahickon Creek facility approximates its fair value. The Company incurred costs of $3,410 in connection with obtaining the 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 facility. As of June 30, 2016, $1,802 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Wissahickon Creek facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
           2016                  2015                  2016                  2015        

Direct interest expense

   $ 1,750       $ 1,267       $ 3,583       $ 2,490   

Non-usage fees

     30         217         42         440   

Amortization of deferred financing costs

     170         170         340         338   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 1,950       $ 1,654       $ 3,965       $ 3,268   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wissahickon Creek facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 3,513      $ 2,828   

Average borrowings under the facility

   $ 233,223      $ 187,401   

Effective interest rate on borrowings (including the effect of non-usage fees)

     3.11     3.09

Weighted average interest rate (including the effect of non-usage fees)

     3.07     3.11

 

(1) Interest under the Wissahickon Creek facility is payable quarterly in arrears and commenced on May 27, 2014.

Borrowings of Wissahickon Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Darby Creek Credit Facility

On February 20, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Darby Creek LLC, or Darby Creek, entered into a revolving credit facility, or the Darby Creek facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent, each of the lenders from time to time party thereto, the other agents party thereto and Wells Fargo Bank, National Association, as the collateral agent and collateral custodian under the Darby Creek facility. The Darby Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.

The Company may sell or contribute assets to Darby Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Darby Creek or will receive fair market value for any assets sold to Darby Creek. Darby Creek may purchase additional assets from various sources. Darby Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Darby Creek’s obligations to Deutsche Bank under the Darby Creek facility are secured by a first priority security interest in substantially all of the assets of Darby Creek, including its portfolio of assets. The obligations of Darby Creek under the Darby Creek facility are non-recourse to the Company and the Company’s exposure under the facility is limited to the value of its investment in Darby Creek.

Pricing under the Darby Creek facility is based on LIBOR for a three-month interest period (for each committed lender) or the commercial paper rate of each conduit lender, plus, in each case, a spread of 2.50% per annum. Darby Creek is subject to a non-usage fee of 0.50% per annum to the extent the aggregate principal amount available under the Darby Creek facility is not borrowed. In addition, Darby Creek is subject to (i) a make-whole fee on a quarterly basis effectively equal to a portion of the spread that would have been payable if the full amount under the Darby Creek facility had been borrowed, less the non-usage fee accrued during such quarter and (ii) an administration fee. Any amounts borrowed under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018.

As of June 30, 2016 and December 31, 2015, $250,000 and $250,000, respectively, was outstanding under the Darby Creek facility. The carrying amount outstanding under the Darby Creek facility approximates its fair value. The Company incurred costs of $3,054 in connection with obtaining the facility, which the Company has

 

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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)

 

recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2016, $1,392 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Darby Creek facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 2,291       $ 1,908       $ 4,249       $ 3,769   

Amortization of deferred financing costs

     208         203         417         377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 2,499       $ 2,111       $ 4,666       $ 4,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Darby Creek facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 4,185      $ 3,720   

Average borrowings under the facility

   $ 250,000      $ 249,500   

Effective interest rate on borrowings

     3.37     3.00

Weighted average interest rate

     3.36     3.00

 

(1) Interest under the Darby Creek facility is payable quarterly in arrears and commenced on February 20, 2014.

Borrowings of Darby Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Dunning Creek Credit Facility

On May 14, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Dunning Creek LLC, or Dunning Creek, entered into a revolving credit facility, or the Dunning Creek facility, with Deutsche Bank, as administrative agent and lender, and each of the other lenders from time to time party thereto. On May 14, 2015, the Dunning Creek facility was amended to extend the maturity date to May 14, 2016 and to reduce the applicable spread over LIBOR to 1.45% per annum. On May 13, 2016, the Dunning Creek facility was amended to (a) extend the maturity date to May 14, 2017; (b) set the maximum commitments available under the facility at $150,000; (c) increase the applicable spread over LIBOR to 1.70% per annum; (d) add a commitment fee of 0.75% per annum on unborrowed amounts; (e) add an excess unused fee of 0.95% per annum payable on any unborrowed amounts in excess of $75,000; and (f) add a commitment reduction fee in an amount equal to the commitment fee and, as applicable, excess unused fee that would have accrued through scheduled maturity on any amount by which the commitments are reduced.

The Company may contribute cash, loans or bonds to Dunning Creek from time to time, subject to certain restrictions set forth in the Dunning Creek facility, and will retain a residual interest in any assets contributed

 

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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)

 

through its ownership of Dunning Creek or will receive fair market value for any assets sold to Dunning Creek. Dunning Creek may purchase additional assets from various sources. Dunning Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Dunning Creek’s obligations to the lenders under the Dunning Creek facility are secured by a first priority security interest in substantially all of the assets of Dunning Creek, including its portfolio of assets. The obligations of Dunning Creek under the Dunning Creek facility are non-recourse, to the Company and the Company’s exposure under the facility is limited to the value of its investment in Dunning Creek.

As of June 30, 2016, pricing under the Dunning Creek facility was based on LIBOR for an interest period reasonably close to the weighted average LIBOR applicable to the assets held by Dunning Creek, plus a spread of 1.70% per annum. Any amounts borrowed under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2017.

As of June 30, 2016 and December 31, 2015, $114,200 and $114,200, respectively, was outstanding under the Dunning Creek facility. The carrying amount outstanding under the Dunning Creek facility approximates its fair value. The Company incurred costs of $1,755 in connection with obtaining and amending the 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 facility. As of June 30, 2016, $364 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Dunning Creek facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 637       $ 1,048       $ 1,226       $ 2,079   

Non-usage fees

     36         —           36         —     

Amortization of deferred financing costs

     131         169         286         350   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 804       $ 1,217       $ 1,548       $ 2,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Dunning Creek facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 1,158      $ 2,099   

Average borrowings under the facility

   $ 114,200      $ 231,476   

Effective interest rate on borrowings (including the effect of non-usage fees)

     2.55     1.72

Weighted average interest rate (including the effect of non-usage fees)

     2.18     1.79

 

(1) Interest under the Dunning Creek facility is payable quarterly in arrears and commenced on May 14, 2014.

Borrowings of Dunning Creek are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

 

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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)

 

Juniata River Credit Facility

On November 14, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Juniata River LLC, or Juniata River, entered into a $300,000 senior secured term loan facility, or the Juniata River facility, with JPM, as administrative agent, and the financial institutions and other lenders from time to time party thereto, Citibank, as collateral agent, and Virtus Group, LP, as collateral administrator.

The Company may contribute cash, loans or bonds to Juniata River from time to time, subject to certain restrictions set forth in the Juniata River facility, and will retain a residual interest in any assets contributed through its ownership of Juniata River or will receive fair market value for any assets sold to Juniata River. Juniata River may purchase additional assets from various sources. Juniata River has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Juniata River’s obligations to the lenders under the Juniata River facility are secured by a first priority security interest in substantially all of the assets of Juniata River, including its portfolio of debt securities. The obligations of Juniata River under the Juniata River facility are non-recourse to the Company, and the Company’s exposure under the Juniata River facility is limited to the value of the Company’s investment in Juniata River.

Pricing under the Juniata River facility is based on LIBOR for a six month interest period for the first interest payment due and thereafter a three-month interest period, in each case, plus a spread of 2.50% per annum. Interest is payable in arrears beginning on April 25, 2015 and each quarter thereafter. Any amounts borrowed under the Juniata River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 14, 2019.

As of June 30, 2016 and December 31, 2015, $300,000 and $300,000, respectively, was outstanding under the Juniata River facility. The carrying amount outstanding under the Juniata River facility approximates its fair value. The Company incurred costs of $355 in connection with obtaining the Juniata River facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortize to interest expense over the life of the Juniata River facility. As of June 30, 2016, $240 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016 and 2015, the components of total interest expense for the Juniata River facility were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2016              2015              2016              2015      

Direct interest expense

   $ 2,372       $ 2,101       $ 4,704       $ 3,790   

Amortization of deferred financing costs

     17         22         34         36   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 2,389       $ 2,123       $ 4,738       $ 3,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

 

For the six months ended June 30, 2016 and 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Juniata River facility were as follows:

 

     Six Months Ended
June 30,
 
     2016     2015  

Cash paid for interest expense(1)

   $ 4,530      $ 2,486   

Average borrowings under the facility

   $ 300,000      $ 273,425   

Effective interest rate on borrowings

     3.13     2.78

Weighted average interest rate

     3.10     2.76

 

(1) Interest under the Juniata River facility is payable quarterly in arrears and commenced on April 25, 2015.

Borrowings of Juniata River are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

FSIC II Revolving Credit Facility

On February 23, 2016, the Company entered into the FSIC II revolving credit facility with ING Capital LLC, or ING, as administrative agent, and the lenders party thereto. The FSIC II revolving credit facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $95,000, with an option for the Company to request, at one or more times after closing, that existing or new lenders, at their election, provide up to $80,000 of additional commitments. On April 26, 2016, the Company entered into an incremental commitment and assumption agreement pursuant to which an additional lender provided an additional commitment of $25,000. The FSIC II revolving credit facility provides for the issuance of letters of credit in an aggregate face amount not to exceed $25,000 if one of the lenders or another party assumes the role of letter of credit issuer. The Company’s obligations under the FSIC II revolving credit facility are guaranteed by all of the Company’s subsidiaries, other than its special-purpose financing subsidiaries, tax blocker subsidiaries and foreign subsidiaries. The Company’s obligations under the FSIC II revolving credit facility are secured by a first priority security interest in substantially all of the assets of the Company and the subsidiary guarantors thereunder.

As of June 30, 2016, $80,000 was outstanding under the FSIC II revolving credit facility. The carrying amount outstanding under the facility approximates its fair value. The Company incurred costs of $208 in connection with obtaining the FSIC II revolving credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortize to interest expense over the life of the FSIC II revolving credit facility. As of June 30, 2016, $158 of such deferred financing costs had yet to be amortized to interest expense.

For the three and six months ended June 30, 2016, the components of total interest expense for the FSIC II revolving credit facility were as follows:

 

     Three Months Ended
June 30, 2016
     Six Months Ended
June 30, 2016
 

Direct interest expense

   $ 433       $ 480   

Non-usage fees

     35         66   

Amortization of deferred financing costs

     36         50   
  

 

 

    

 

 

 

Total interest expense

   $ 504       $ 596   
  

 

 

    

 

 

 

 

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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)

 

For the six months ended June 30, 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the FSIC II revolving credit facility were as follows:

 

     Six Months Ended
June 30, 2016
 

Cash paid for interest expense(1)

   $ 391   

Average borrowings under the facility(2)

   $ 58,566   

Effective interest rate on borrowings (including the effect of non-usage fees)

     2.44

Weighted average interest rate (including the effect of non-usage fees)

     2.60

 

(1) Interest under the FSIC II revolving credit facility is payable quarterly and commenced on March 29, 2016.

 

(2) The average borrowings under the FSIC II revolving credit facility are calculated for the period since the Company commenced borrowing thereunder to June 30, 2016.

Note 9. Financial Instruments

The Company is subject to credit risk in the normal course of pursuing its investment objectives. The Company has in the past, and may in the future, enter into credit default swap contracts to manage its credit risk, to gain exposure to a credit in which it may otherwise invest or to enhance its returns, which may involve elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Company has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered.

The Company may enter into swap contracts containing provisions allowing the counterparty to terminate the contract under certain conditions, including, but not limited to, a decline in the Company’s net asset value below a certain level over a certain period of time, which would trigger a payment by the Company for those swaps in a liability position.

The Company had certain credit default swap contracts outstanding during the year ended December 31, 2015. As of June 30, 2016, the Company had no outstanding credit default swap contracts. The effect of derivative instruments (which are not considered to be hedging instruments for accounting disclosure purposes) on the Company’s consolidated statements of operations whose primary underlying risk exposure is credit risk for the six months ended June 30, 2015 was as follows:

 

Derivative

   Realized Gain
(Loss) on
Derivatives
Recognized in
Income(1)
    Change in
Unrealized
Appreciation
(Depreciation) on
Derivatives
Recognized in
Income(2)
 

Credit Default Swap Contracts

   $ (19,588   $ 19,426   

 

(1) Reflected on the consolidated statement of operations as: Net realized gain (loss) on credit default swaps.

 

(2) Reflected on the consolidated statement of operations as: Net change in unrealized appreciation (depreciation) on credit default swaps.

 

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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 Instruments (continued)

 

See Note 7 for a summary of credit default swap activity for the six months ended June 30, 2015.

Note 10. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of FSIC II Advisor has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial condition or results of operations.

See Note 6 for a discussion of the Company’s unfunded commitments.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

 

Note 11. Financial Highlights

The following is a schedule of financial highlights of the Company for the six months ended June 30, 2016 and the year ended December 31, 2015:

 

     Six Months Ended
June 30, 2016 
(Unaudited)
    Year Ended
December 31, 2015
 

Per Share Data:(1)

    

Net asset value, beginning of period

   $ 8.37      $ 9.30   

Results of operations(2)

    

Net investment income

     0.39        0.92   

Net realized and unrealized appreciation (depreciation) on investments, total return swap, credit default swaps and gain/loss on foreign currency

     0.12        (1.11
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.51        (0.19
  

 

 

   

 

 

 

Stockholder distributions(3)

    

Distributions from net investment income

     (0.38     (0.72

Distributions from net realized gain on investments

     —          (0.03
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.38     (0.75
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(4)

     0.00        0.01   

Repurchases of common stock(5)

     0.00        0.00   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     0.00        0.01   
  

 

 

   

 

 

 

Net asset value, end of period

   $ 8.50      $ 8.37   
  

 

 

   

 

 

 

Shares outstanding, end of period

     325,888,111        321,507,876   
  

 

 

   

 

 

 

Total return(6)

     6.09     (1.94 )% 
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 2,771,242      $ 2,690,412   
  

 

 

   

 

 

 

Ratio of net investment income to average net assets(7)

     4.73     10.03
  

 

 

   

 

 

 

Ratio of operating expenses and excise taxes to average net assets(7)

     4.53     8.59

Ratio of waived expenses to average net assets(7)

     (0.22 )%      (0.35 )% 
  

 

 

   

 

 

 

Ratio of net operating expenses and excise taxes to average net assets(7)

     4.31     8.24
  

 

 

   

 

 

 

Portfolio turnover(8)

     8.47     31.79
  

 

 

   

 

 

 

Total amount of senior securities outstanding, exclusive of treasury securities

   $ 2,109,879      $ 2,045,840   
  

 

 

   

 

 

 

Asset coverage per unit(9)

     2.31        2.32   

 

(1) Per share data may be rounded in order to recompute the ending net asset value per share.

 

(2) The per share data was derived by using the weighted average shares outstanding during the applicable period.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 11. Financial Highlights (continued)

 

(3) The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.

 

(4) 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, pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at a price that is greater than the net asset value per share results in an increase in net asset value per share.

 

(5) The per share impact of the Company’s repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the period.

 

(6) The total return for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share which were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s 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 Company’s future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s 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 calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

 

(7) Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the six months ended June 30, 2016 and the year ended December 31, 2015:

 

    Six Months Ended
June 30, 2016 
(Unaudited)
    Year Ended
December 31, 2015
 

Ratio of subordinated income incentive fees to average net assets

    1.18     2.51

Ratio of interest expense to average net assets

    1.28     2.13

Ratio of excise taxes to average net assets

    —          0.07

 

(8) Portfolio turnover for the six months ended June 30, 2016 is not annualized.

 

(9) Asset coverage per unit is the ratio of the carrying value of the Company’s total consolidated assets, less liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness.

 

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Item 2. Management’s 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,” “our” and the “Company” 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 the companies in which we may invest;

 

   

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;

 

   

changes in the general interest rate environment;

 

   

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, FSIC III Advisor, LLC, FS Investment Corporation III, FSIC IV Advisor, LLC, FS Investment Corporation IV, FS Global Advisor, LLC, FS Global Credit Opportunities 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 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, as amended, 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 may 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;

 

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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.

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 investment operations on June 18, 2012. 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 has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. In March 2014, we closed our continuous public offering of shares of common stock to new investors.

Our investment activities are managed by FSIC II Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory and administrative services agreement, we have agreed to pay FSIC II Advisor an annual base management fee based on the average value of 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 investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.

Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform, including its industry relationships, to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not generally make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

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. Such opportunities may include event driven investments, anchor orders and CLOs.

In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market’s apparent expectation of value differs substantially from our

 

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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 impair a company’s 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.

We may also 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, i.e., an anchor order. 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. 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 addition, our relationship with GSO Capital Partners LP, the parent of GDFM and one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. 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.

Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, 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 directly originated investments and provide a complement to our less liquid 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 middle market 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 or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from our target companies as primary market or directly originated investments. 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 or otherwise acquire minority interests in target companies, in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity. Any such minority interests are generally acquired 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, CLOs, other debt securities and derivatives, including total return swaps and credit default swaps. FSIC II Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structure or otherwise make opportunistic investments.

The senior secured loans, second lien secured loans, and senior secured bonds, in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven

 

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years. However, there is no limit on the maturity or duration of any security in our portfolio. Our debt investments may be rated by a nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Services, Inc. or lower than “BBB-” by Standard & Poor’s Ratings Services). We also invest in non-rated debt securities.

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 or loss on investments, net realized gain or loss on total return swap, net realized gain or loss on credit default swaps, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments, net unrealized appreciation or depreciation on total return swap, net unrealized appreciation or depreciation on credit default swaps and net unrealized gain or loss on foreign currency.

Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net gain or loss on credit default swaps represents the amortized portion of swap premiums received, the periodic payments received and the net realized gain or loss resulting from the exit of our credit default swaps. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized appreciation or depreciation on credit default swaps is the net change in the market value of our credit default swaps. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.

We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we may generate revenues in the form of non-recurring 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. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.

Expenses

Our primary operating expenses include the payment of management and incentive fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive 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, including FSIC II Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FSIC II Advisor. 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 that 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

 

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the payment of our expenses and the performance of administrative and professional services rendered to us by others. See Note 4 to our unaudited consolidated financial statements included herein 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, 2015.

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 an expense support and conditional reimbursement agreement, dated as of May 10, 2012 and amended and restated as of May 16, 2013, or, as amended and restated, 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 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 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, as the purpose of the expense reimbursement agreement 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 company taxable income, 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 company taxable income or net capital gains) in each quarter.

Pursuant to the expense reimbursement agreement, we 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 company taxable income, 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 company taxable income or net capital gains) exceeds the regular cash distributions paid by us to our 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 support 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

 

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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. 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.

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, 2016 and December 31, 2015, no amounts remained subject to repayment by us to Franklin Square Holdings in the future.

Portfolio Investment Activity for the Three and Six Months Ended June 30, 2016 and for the Year Ended December 31, 2015

During the six months ended June 30, 2016, we made investments in portfolio companies totaling $377,800. During the same period, we sold investments for proceeds of $167,505 and received principal repayments of $342,576. As of June 30, 2016, our investment portfolio, with a total fair value of $4,457,614 (60% in first lien senior secured loans, 20% in second lien senior secured loans, 4% in senior secured bonds, 8% in subordinated debt, 2% in collateralized securities and 6% in equity/other), consisted of interests in 148 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $137.9 million. As of June 30, 2016, the debt investments in our portfolio were purchased at a weighted average price of 97.8% of par and our estimated gross portfolio yield, prior to leverage, was 9.2% based upon the amortized cost of our investments.

During the year ended December 31, 2015, we made investments in portfolio companies totaling $1,904,545. During the same period, we sold investments for proceeds of $872,333 and received principal repayments of $590,278. As of December 31, 2015, our investment portfolio, with a total fair value of $4,532,875 (62% in first lien senior secured loans, 20% in second lien senior secured loans, 4% in senior secured bonds, 7% in subordinated debt, 2% in collateralized securities and 5% in equity/other), consisted of interests in 165 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $168.7 million. As of December 31, 2015, the debt investments in our portfolio were purchased at a weighted average price of 98.0% of par and our estimated gross portfolio yield, prior to leverage, was 9.6% based upon the amortized cost of our investments.

Based on our regular monthly cash distribution amount of $0.06283 per share as of June 30, 2016 and December 31, 2015 and our final public offering price of $10.60 per share, the annualized distribution rate to stockholders as of June 30, 2016 and December 31, 2015 was 7.11%. Based on our regular monthly cash distribution amount of $0.06283 per share as of June 30, 2016 and December 31, 2015 and our distribution reinvestment price of $8.45 as of June 30, 2016 and $8.90 as of December 31, 2015, the annualized distribution rate to stockholders as of June 30, 2016 and December 31, 2015 was 8.92% and 8.47%, respectively. The annualized distribution rate to stockholders, in each case, is expressed as a percentage equal to the projected annualized distribution amount per share (which is calculated by annualizing the regular monthly cash distribution per share as of the dates indicated above without compounding), divided by our final public offering price per share or our distribution reinvestment price, as applicable as of the dates indicated above.

 

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Our estimated gross portfolio yield may be higher than a stockholder’s yield on an investment in shares of our common stock. Our estimated gross portfolio yield does not reflect operating expenses that may be incurred by us. In addition, our estimated gross portfolio yield and total return figures disclosed above do not consider the effect of any selling commissions or charges that may have been incurred in connection with the sale of shares of our common stock. Our estimated gross portfolio yield, total return and annualized distribution rate to stockholders do not represent actual investment returns 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 “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2015 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2016:

 

Net Investment Activity

   For the Three Months Ended
June 30, 2016
    For the Six Months Ended
June 30, 2016
 

Purchases

   $ 284,188      $ 377,800   

Sales and Redemptions

     (330,921     (510,081
  

 

 

   

 

 

 

Net Portfolio Activity

   $ (46,733   $ (132,281
  

 

 

   

 

 

 

 

     For the Three Months Ended
June 30, 2016
    For the Six Months Ended
June 30, 2016
 

New Investment Activity by Asset Class

   Purchases      Percentage     Purchases      Percentage  

Senior Secured Loans—First Lien

   $ 158,491         56   $ 186,277         49

Senior Secured Loans—Second Lien

     18,578         7     38,702         10

Senior Secured Bonds

     14,914         5     14,914         4

Subordinated Debt

     42,994         15     59,205         16

Collateralized Securities

     —           —          —           —     

Equity/Other

     49,211         17     78,702         21
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 284,188         100   $ 377,800         100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2016 and December 31, 2015:

 

    June 30, 2016
(Unaudited)
    December 31, 2015  
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 2,780,619      $ 2,688,626        60   $ 2,916,090      $ 2,802,207        62

Senior Secured Loans—Second Lien

    959,643        871,776        20     1,012,224        902,113        20

Senior Secured Bonds

    213,916        152,569        4     244,558        181,200        4

Subordinated Debt

    416,489        363,859        8     411,824        319,019        7

Collateralized Securities

    97,696        96,366        2     118,590        113,383        2

Equity/Other

    247,552        284,418        6     174,099        214,953        5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,715,915      $ 4,457,614        100   $ 4,877,385      $ 4,532,875        100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

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The following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016   December 31, 2015

Number of Portfolio Companies

   148   165

% Variable Rate (based on fair value)

   77.5%   79.5%

% Fixed Rate (based on fair value)

   16.1%   15.7%

% Income Producing Equity or Other Investments (based on fair value)

   0.6%   0.8%

% Non-Income Producing Equity or Other Investments (based on fair value)

   5.8%   4.0%

Average Annual EBITDA of Portfolio Companies

   $137,900   $168,700

Weighted Average Purchase Price of Debt Investments (as a % of par)

   97.8%   98.0%

% of Investments on Non-Accrual (based on fair value)

   1.5%   0.0%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)

   9.2%   9.6%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets

   9.8%   10.0%

Direct Originations

The following tables present certain selected information regarding our direct originations for the three and six months ended June 30, 2016:

 

New Direct Originations

   For the Three Months Ended
June 30, 2016
    For the Six Months Ended
June 30, 2016
 

Total Commitments (including unfunded commitments)

   $ 155,019      $ 222,020   

Exited Investments (including partial paydowns)

     (157,712     (284,613
  

 

 

   

 

 

 

Net Direct Originations

   $ (2,693   $ (62,593
  

 

 

   

 

 

 

 

     For the Three Months Ended
June 30, 2016
    For the Six Months Ended
June 30, 2016
 

New Direct Originations by Asset Class (including

unfunded commitments)

   Commitment
Amount
     Percentage     Commitment
Amount
     Percentage  

Senior Secured Loans—First Lien

   $ 92,188         60   $ 115,338         52

Senior Secured Loans—Second Lien

     23,836         15     23,836         11

Senior Secured Bonds

     4,467         3     4,467         2

Subordinated Debt

     —           —          12,998         6

Collateralized Securities

     —           —          —           —     

Equity/Other

     34,528         22     65,381         29
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 155,019         100   $ 222,020         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the Three Months Ended
June 30, 2016
   For the Six Months Ended
June 30, 2016

Average New Direct Origination Commitment Amount

   $19,377    $14,801

Weighted Average Maturity for New Direct Originations

   5/16/20    1/13/21

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations funded during Period

   8.8%    8.0%

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations funded during Period—Excluding Non-Income Producing Assets

   11.4%    11.1%

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period

   9.4%    9.3%

 

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The following table presents certain selected information regarding our direct originations as of June 30, 2016 and December 31, 2015:

 

Characteristics of All Direct Originations Held in Portfolio

   June 30, 2016      December 31, 2015  

Number of Portfolio Companies

     67         69   

Average Annual EBITDA of Portfolio Companies

   $ 73,800       $ 70,300   

Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities

     4.8x         4.7x   

% of Investments on Non-Accrual (based on fair value)

     1.4%         —     

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations

     9.2%         9.6%   

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets

     9.8%         10.1%   

Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of June 30, 2016 and December 31, 2015:

 

     June 30, 2016     December 31, 2015  

Portfolio Composition by Strategy

   Fair Value      Percentage  of
Portfolio
    Fair Value      Percentage  of
Portfolio
 

Direct Originations

   $ 3,539,251         79   $ 3,568,330         79

Opportunistic

     601,580         14     587,065         13

Broadly Syndicated/Other

     316,783         7     377,480         8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,457,614         100   $ 4,532,875         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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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, 2016 and December 31, 2015:

 

     June 30, 2016
(Unaudited)
    December 31, 2015  

Industry Classification

   Fair
Value
     Percentage
of  Portfolio
    Fair
Value
     Percentage
of  Portfolio
 

Automobiles & Components

   $ 201,590         5   $ 234,923         5

Capital Goods

     403,487         9     474,141         11

Commercial & Professional Services

     366,834         8     335,256         7

Consumer Durables & Apparel

     342,271         8     351,431         8

Consumer Services

     474,539         11     470,309         10

Diversified Financials

     259,981         6     275,053         6

Energy

     705,055         16     624,508         14

Food & Staples Retailing

     7,858         0     7,566         0

Food, Beverage & Tobacco

     —           —          4,310         0

Health Care Equipment & Services

     106,636         2     98,425         2

Household & Personal Products

     13,097         0     —           —     

Insurance

     83,620         2     83,488         2

Materials

     382,365         9     337,665         7

Media

     143,243         3     102,906         2

Pharmaceuticals, Biotechnology & Life Sciences

     2,372         0     2,659         0

Real Estate

     —           —          1,707         0

Retailing

     118,786         3     113,654         3

Semiconductors & Semiconductor Equipment

     13,789         0     15,397         0

Software & Services

     451,740         10     490,803         11

Technology Hardware & Equipment

     108,920         2     234,989         5

Telecommunication Services

     152,680         3     158,383         4

Transportation

     118,751         3     115,302         3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,457,614         100   $ 4,532,875         100
  

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2016, except for Allen Systems Group, Inc., in which we held two senior secured loans and two equity/other investments, and JW Aluminum Co., in which we held a senior secured loan, a senior secured bond and two equity/other investments, we were not an “affiliated person” of any of our portfolio companies, as defined in the 1940 Act. As of June 30, 2016, we did not “control” any of our portfolio companies, as defined in the 1940 Act.

As of December 31, 2015, except for Allen Systems Group, Inc., in which we held a senior secured loan and an equity/other investment, and JW Aluminum Co., in which we held a senior secured loan and two equity/other investments, we were not an “affiliated person” of any of our portfolio companies, as defined in the 1940 Act. As of December 31, 2015, we did not “control” any of our portfolio companies, as defined in the 1940 Act.

In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned more than 25% of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if we owned 5% or more of its voting securities.

Our investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, pursuant to which we may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of June 30, 2016, we had sixteen senior secured loan investments with aggregate unfunded commitments of $169,965 and one unfunded commitment to purchase up to $217 in shares of preferred

 

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stock of Altus Power America Holdings, LLC. As of December 31, 2015, we had eighteen senior secured loan investments with aggregate unfunded commitments of $203,409, one senior secured bond investment with an unfunded commitment of $3,638 and two unfunded commitments to purchase up to $467 and $246, respectively, in shares of preferred stock of Altus Power America Holdings, LLC and common equity of Sunnova Holdings, LLC. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise. For additional details regarding our unfunded debt investments, see our unaudited consolidated schedule of investments as of June 30, 2016 and audited consolidated schedule of investments as of December 31, 2015.

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 company’s business plan—full return of principal and interest expected.
3    Performing investment requiring closer monitoring.
4    Underperforming investment—some 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, 2016 and December 31, 2015:

 

     June 30, 2016     December 31, 2015  

Investment Rating

   Fair
Value
     Percentage  of
Portfolio
    Fair
Value
     Percentage  of
Portfolio
 

1

   $ 574,674         13   $ 291,690         6

2

     2,829,594         64     3,301,347         73

3

     894,923         20     798,045         18

4

     62,125         1     122,185         3

5

     96,298         2     19,608         0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,457,614         100   $ 4,532,875         100
  

 

 

    

 

 

   

 

 

    

 

 

 

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

Comparison of the Three Months Ended June 30, 2016 and 2015

Revenues

We generated investment income of $121,210 and $167,830 for the three months ended June 30, 2016 and 2015, respectively, in the form of interest and fees earned on senior secured loans (first and second lien), senior

 

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secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues represent $114,132 and $161,902 of cash income earned as well as $7,078 and $5,928 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2016 and 2015, 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.

During the three months ended June 30, 2016 and 2015, we generated $112,538 and $129,382, respectively, of interest income, which represented 92.8% and 77.1%, respectively, of total investment income. The level of investment 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 proportion of directly originated investments in our portfolio continues to increase.

During the three months ended June 30, 2016 and 2015, we generated $8,672 and $33,014, respectively, of fee income, which represented 7.2% and 19.7%, respectively, of total investment income. Fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.

The decrease in interest and fee income in the aggregate during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 was primarily due to the prepayment of several large investments during the three months ended June 30, 2015.

During the three months ended June 30, 2016 and 2015, we generated $0 and $5,434, respectively, of dividend income, which represented 0.0% and 3.2%, respectively, of total investment income.

Expenses

Our net operating expenses were $58,234 and $67,456 for the three months ended June 30, 2016 and 2015, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $21,303 and $22,063, net of waivers by FSIC II Advisor of base management fees to which it was otherwise entitled of $3,043 and $3,151, for the three months ended June 30, 2016 and 2015, respectively. Our operating expenses also include administrative services expenses attributed to FSIC II Advisor of $1,029 and $1,140 for the three months ended June 30, 2016 and 2015, respectively.

FSIC II Advisor is eligible to receive incentive fees based on our performance. During the three months ended June 30, 2016 and 2015, we accrued a subordinated incentive fee on income of $15,744 and $25,095, respectively. During the three months ended June 30, 2016 and 2015, we did not accrue any capital gains incentive fees. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $17,625 and $16,486 for the three months ended June 30, 2016 and 2015, respectively, in connection with our financing arrangements. For the three months ended June 30, 2016 and 2015, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $351 and $429, respectively, and fees and expenses incurred with our stock transfer agent totaled $506 and $677, respectively. Fees for our board of directors were $273 and $224 for the three months ended June 30, 2016 and 2015, respectively.

 

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Our other general and administrative expenses totaled $1,403 and $1,342 for the three months ended June 30, 2016 and 2015, respectively, and consisted of the following:

 

     Three Months Ended
June 30,
 
         2016              2015      

Expenses associated with our independent audit and related fees

   $ 150       $ 110   

Legal fees

     137         200   

Printing fees

     512         275   

Other

     604         757   
  

 

 

    

 

 

 

Total

   $ 1,403       $ 1,342   
  

 

 

    

 

 

 

During the three months ended June 30, 2016 and 2015, the ratio of our net expenses to our average net assets was 2.16% and 2.28%, respectively. During the three months ended June 30, 2016 and 2015, the ratio of our net expenses to average net assets included $17,625 and $16,486, respectively, related to interest expense and $15,744 and $25,095, respectively, related to accruals of incentive fees. Without such expenses, our ratio of net expenses to average net assets would have been 0.92% and 0.87% for the three months ended June 30, 2016 and 2015, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance, and changes in benchmark interest rates such as LIBOR among other factors.

Net Investment Income

Our net investment income totaled $62,976 ($0.19 per share) and $100,374 ($0.32 per share) for the three months ended June 30, 2016 and 2015, respectively. The decrease in net investment income can be attributed to the decrease in investment income, as described above, for the three months ended June 30, 2016.

Net Realized Gains or Losses

We sold investments and received principal repayments of $135,875 and $195,046, respectively, during the three months ended June 30, 2016, from which we realized a net loss of $32,219. During the three months ended June 30, 2016, we did not realize any net gains (losses) from settlements on foreign currency. We sold investments and received principal repayments of $252,511 and $334,388, respectively, during the three months ended June 30, 2015, from which we realized a net loss of $14,081. During the three months ended June 30, 2015, we realized a net loss of $269 from settlements on foreign currency.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency

For the three months ended June 30, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $146,393, and the net change in unrealized gain (loss) on foreign currency was $0. For the three months ended June 30, 2015, the net change in unrealized appreciation (depreciation) on investments totaled $(29,753), the net change in unrealized gain (loss) on foreign currency was $191. The net change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2016 was primarily driven by improvement in the high yield markets, a general tightening of credit spreads and specific improvements with respect to certain of our energy investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended June 30, 2016 and 2015, the net increase (decrease) in net assets resulting from operations was $177,150 ($0.55 per share) and $56,462 ($0.18 per share), respectively.

 

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Comparison of the Six Months Ended June 30, 2016 and 2015

Revenues

We generated investment income of $241,201 and $283,570 for the six months ended June 30, 2016 and 2015, respectively, in the form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues represent $225,270 and $270,715 of cash income earned as well as $15,931 and $12,855 in non-cash portions relating to accretion of discount and PIK interest for the six months ended June 30, 2016 and 2015, 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.

During the six months ended June 30, 2016 and 2015, we generated $229,638 and $237,046, respectively, of interest income, which represented 95.2% and 83.6%, respectively, of total investment income. The level of investment 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 proportion of directly originated investments in our portfolio continues to increase.

During the six months ended June 30, 2016 and 2015, we generated $11,563 and $40,720, respectively, of fee income, which represented 4.8% and 14.4%, respectively, of total investment income. Fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.

The decrease in interest and fee income in the aggregate was primarily due to the prepayment of several large investments during the six months ended June 30, 2015.

During the six months ended June 30, 2016 and 2015, we generated $0 and $5,804, respectively, of dividend income, which represented 0.0% and 2.0%, respectively, of total investment income.

Expenses

Our net operating expenses were $114,867 and $122,346 for the six months ended June 30, 2016 and 2015, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $42,310 and $45,438, net of waivers by FSIC II Advisor of base management fees to which it was otherwise entitled of $6,044 and $4,002, for the six months ended June 30, 2016 and 2015, respectively. Our operating expenses also include administrative services expenses attributed to FSIC II Advisor of $2,057 and $2,216 for the six months ended June 30, 2016 and 2015, respectively.

FSIC II Advisor is eligible to receive incentive fees based on our performance. During the six months ended June 30, 2016 and 2015, we accrued a subordinated incentive fee on income of $31,584 and $40,308, respectively. During the six months ended June 30, 2016 and 2015, we did not accrue any capital gains incentive fees. See “—Critical Accounting Policies—Capital Gains Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $34,159 and $29,705 for the six months ended June 30, 2016 and 2015, respectively, in connection with our financing arrangements. For the six months ended June 30, 2016 and 2015, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $701 and $856, respectively, and fees and expenses incurred with our stock transfer agent totaled $1,043 and $1,018, respectively. Fees for our board of directors were $545 and $412 for the six months ended June 30, 2016 and 2015, respectively.

 

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Our other general and administrative expenses totaled $2,468 and $2,393 for the six months ended June 30, 2016 and 2015, respectively, and consisted of the following:

 

     Six Months Ended
June 30,
 
     2016      2015  

Expenses associated with our independent audit and related fees

   $ 220       $ 219   

Compensation of our chief compliance officer(1)

     —           30   

Legal fees

     275         401   

Printing fees

     894         547   

Other

     1,079         1,196   
  

 

 

    

 

 

 

Total

   $ 2,468       $ 2,393   
  

 

 

    

 

 

 

 

(1) On April 1, 2015, James F. Volk was appointed as our chief compliance officer. Prior to that date, we had contracted with Vigilant Compliance, LLC to provide the services of Salvatore Faia as our chief compliance officer. Mr. Volk is employed by Franklin Square Holdings and does not receive any direct compensation from us in this capacity.

During the six months ended June 30, 2016 and 2015, the ratio of our net expenses to our average net assets was 4.31% and 4.16%, respectively. During the six months ended June 30, 2016 and 2015, the ratio of our net expenses to average net assets included $34,159 and $29,705, respectively, related to interest expense and $31,584 and $40,308, respectively, related to accruals of incentive fees. Without such expenses, our ratio of net expenses to average net assets would have been 1.84% and 1.78% for the six months ended June 30, 2016 and 2015, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance, and changes in benchmark interest rates such as LIBOR among other factors.

Net Investment Income

Our net investment income totaled $126,334 ($0.39 per share) and $161,224 ($0.51 per share) for the six months ended June 30, 2016 and 2015, respectively. The decrease in net investment income can be attributed to the decrease in investment income, as described above, for the six months ended June 30, 2016.

Net Realized Gains or Losses

We sold investments and received principal repayments of $167,505 and $342,576, respectively, during the six months ended June 30, 2016, from which we realized a net loss of $46,821. During the six months ended June 30, 2016, we also realized net gains of $3 from settlements on foreign currency. We sold investments and received principal repayments of $456,918 and $374,779, respectively, during the six months ended June 30, 2015, from which we realized a net loss of $11,696. During the six months ended June 30, 2015, we also realized net losses of $19,588 and $294, respectively, on our credit default swaps and from settlements on foreign currency.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Credit Default Swaps and Unrealized Gain (Loss) on Foreign Currency

For the six months ended June 30, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $86,209, and the net change in unrealized gain (loss) on foreign currency was $0. For the six months ended June 30, 2015, the net change in unrealized appreciation (depreciation) on investments totaled $(30,964), the net change in unrealized gain (loss) on foreign currency was $120 and the net change in unrealized appreciation (depreciation) on our credit default swaps was $19,426. The net change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2016 was primarily driven by improvement in the high yield markets, a general tightening of credit spreads and improvements with respect to certain of our energy investments.

 

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Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended June 30, 2016 and 2015, the net increase (decrease) in net assets resulting from operations was $165,725 ($0.51 per share) and $118,228 ($0.38 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of June 30, 2016, we had $375,396 in cash, which we and our wholly-owned financing subsidiaries held in custodial accounts, and $110,121 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of June 30, 2016, we had sixteen senior secured loan investments with aggregate unfunded commitments of $169,965 and one unfunded equity investment with an unfunded commitment of $217. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.

We currently generate cash primarily from cash flows from fees, interest and dividends earned from our investments as well as from the issuance of shares under our distribution reinvestment plan, and principal repayments and proceeds from sales of our investments. To seek to enhance our returns, we also employ leverage as market conditions permit and at the discretion of FSIC II Advisor, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act. See “—Financing Arrangements.”

Prior to investing in securities of portfolio companies, we invest the cash received from fees, interest and dividends earned from our investments and from the issuance of shares under our distribution reinvestment plan, as well as principal repayments and proceeds from sales of our 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 election to be taxed as a RIC.

Distribution Reinvestment Plan

Following the closing of our continuous public offering, we have continued to issue shares pursuant to our distribution reinvestment plan. The gross proceeds received from the issuance of our common stock under our distribution reinvestment plan during the six months ended June 30, 2016 was $74,576 for which we issued 8,874,917 shares of common stock. During the period from July 1, 2016 to August 2, 2016, we issued 1,245,597 shares of common stock pursuant to our distribution reinvestment plan at an average price per share of $8.55 for gross proceeds of $10,645.

Share Repurchase Program

To provide our stockholders with limited liquidity, we intend to continue to conduct quarterly tender offers pursuant to our share repurchase program.

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, 2016 and 2015:

 

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
 

Fiscal 2015

        

December 31, 2014

   January 2, 2015      578,569         100   $ 9.500       $ 5,496   

March 31, 2015

   April 1, 2015      885,509         100   $ 9.450       $ 8,368   

Fiscal 2016

        

December 31, 2015

   January 4, 2016      1,779,357         100   $ 8.550       $ 15,214   

March 31, 2016

   April 1, 2016      2,715,325         100   $ 8.300       $ 22,537   

 

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On July 1, 2016, we repurchased 2,874,151 shares of common stock (representing 100% of the shares of the common stock tendered for repurchase) at $8.55 per share for aggregate consideration totaling $24,574.

For additional information regarding our share repurchase program, see Note 3 to our unaudited consolidated financial statements included herein.

Financing Arrangements

Below is a summary of our outstanding financing arrangements as of June 30, 2016:

 

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
   

Maturity
Date

JPM Facility

  Repurchase Agreement   3.25%   $ 550,000      $ —        May 20, 2017

Goldman Facility

  Repurchase Agreement   L+2.50%   $ 400,000      $ —        December 15, 2018

Cooper River Credit Facility

  Revolving Credit Facility   L+2.25%   $ 190,533      $ 9,467      May 29, 2020

Wissahickon Creek Credit Facility

  Revolving Credit Facility   L+1.50% to L+2.50%   $ 225,146      $ 24,854      February 19, 2019

Darby Creek Credit Facility

  Revolving Credit Facility   L+2.50%   $ 250,000      $ —        February 20, 2018

Dunning Creek Credit Facility(1)

  Revolving Credit Facility   L+1.70%   $ 114,200      $ 35,800      May 14, 2017

Juniata River Credit Facility

  Term Loan Credit Facility   L+2.50%   $ 300,000      $ —        November 14, 2019

FSIC II Revolving Credit Facility

  Revolving Credit Facility   L+1.75%   $ 80,000      $ 40,000      February 23, 2021

 

(1) On May 13, 2016, the Dunning Creek Credit Facility was amended to (a) extend the maturity date to May 14, 2017; (b) decrease the maximum commitment available to $150,000; and (c) increase the applicable spread over LIBOR to 1.70%.

Our average borrowings and weighted average interest rate, including the effect of non-usage fees, for the six months ended June 30, 2016 were $2,079,615 and 3.09%, respectively. As of June 30, 2016, our weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.12%.

For additional information regarding our financing arrangements, see Note 8 to our unaudited consolidated financial statements included herein.

RIC Status and Distributions

We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make distributions of an amount at least equal to 90% of our “investment company taxable income,” determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months 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 tax status each tax year. We are also subject to a 4% nondeductible federal excise taxes on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains in excess of capital losses, or “capital gain net income” (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our U.S. stockholders, on December 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

 

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Following formal commencement of our investment operations, we declared our first distribution on June 20, 2012. Prior to the closing of our continuous public offering in March 2014, we declared regular cash distributions on a weekly basis, and paid such distributions on a monthly basis. Effective January 1, 2015 and subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. 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.

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, 2016 and 2015:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2015

     

March 31, 2015

   $ 0.1885       $ 59,177   

June 30, 2015

   $ 0.1885       $ 59,567   

Fiscal 2016

     

March 31, 2016

   $ 0.1885       $ 60,744   

June 30, 2016

   $ 0.1885       $ 60,976   

On May 5, 2016 and August 3, 2016, our board of directors declared regular monthly cash distributions for July 2016 through September 2016 and October 2016 through December 2016, respectively, each in the amount of $0.06283 per share. These distributions have been or will be paid monthly to stockholders of record as of monthly record dates previously determined by our board of directors.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a cash distribution, stockholders will receive the distribution in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

Under our distribution reinvestment plan, cash distributions to participating stockholders will be reinvested in additional shares of our common stock at a purchase price determined by our board of directors, or a committee thereof, in its sole discretion, that is (i) not less than the net asset value per share of our common stock as determined in good faith by our board of directors or a committee thereof, in its sole discretion, immediately prior to the payment of the distribution and (ii) not more than 2.5% greater than the net asset value per share of our common stock as of such date. Although distributions paid in the form of additional shares of common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders who elect to participate in our distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes. Stockholders receiving distributions in the form of additional shares of common stock will be treated as receiving a distribution in the amount of the fair market value of our shares of common stock.

We intend to continue to make our regular distributions in the form of cash, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. From time to time and not less than quarterly, FSIC II Advisor must review our accounts to determine whether cash distributions are appropriate. We intend to distribute pro rata to our stockholders funds received by us which FSIC II Advisor deems unnecessary for us to retain. We may fund our cash distributions to stockholders from any sources of funds legally available to us, including proceeds from the sale of shares of our common stock,

 

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borrowings, net investment income from operations, capital gains proceeds from the sale of assets, gains from credit default swaps, non-capital gains proceeds from the sale of assets, and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and reimbursements of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees. We have not established limits on the amount of funds we may use from available sources to make distributions.

During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities and will be made after the deduction of fees and expenses, 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.

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. For a period of time following commencement of our continuous public offering, substantial portions of our distributions were 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 were subject to repayment by us within three years. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the six months ended June 30, 2016 and 2015 was funded through the reimbursement of operating expenses by Franklin Square Holdings. There can be no assurance that we will continue to 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.

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, 2016 and 2015:

 

     Six Months Ended June 30,  
     2016     2015  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —           —        $ —           —     

Borrowings

     —           —          —           —     

Net investment income(1)

     121,720         100     118,744         100

Short-term capital gains proceeds from the sale of assets

     —           —          —           —     

Long-term capital gains proceeds from the sale of assets

     —           —          —           —     

Gains from credit default swaps (ordinary income for tax)

     —           —          —           —     

Non-capital gains proceeds from the sale of assets

     —           —          —           —     

Distributions on account of preferred and common equity

     —           —          —           —     

Expense reimbursement from sponsor

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 121,720         100   $ 118,744         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the six months ended June 30, 2016 and 2015, 93.4% and 95.5%, respectively, of our gross investment income was attributable to cash income earned, 2.5% and 2.4%, respectively, was attributable to non-cash accretion of discount and 4.1% and 2.1%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the six months ended June 30, 2016 and 2015 was $121,990 and $128,465, respectively. As of June 30, 2016, we had $45,272 of undistributed net investment income, $13,825 of distributable realized gains and $38,671 of capital loss carryover on a tax basis. As of December 31, 2015, we had $58,827 of undistributed net investment income and realized capital gains on a tax basis.

 

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See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the six months ended June 30, 2016 and 2015.

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 management’s 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 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 independent 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, or the FASB, clarifies the definition of fair value and requires 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 fair valuation process begins with FSIC II Advisor’s management team reviewing and documenting valuations of each portfolio company or investment, which valuations may be obtained from an independent third-party valuation service, if applicable;

 

   

FSIC II Advisor’s management team then provides the valuation committee with the preliminary valuations for each portfolio company or investment;

 

   

preliminary valuations are then discussed with the valuation committee;

 

   

the valuation committee reviews the preliminary valuations and FSIC II Advisor’s management team, together with our independent third-party valuation services, if applicable, supplement the preliminary valuations to reflect any comments provided by the valuation committee;

 

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following its review, the valuation committee will recommend that our board of directors approve our fair valuations; and

 

   

our board of directors discusses the valuations and determines the fair value of each such 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 independent third-party valuation services, 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. In making its determination of fair value, our board of directors may use any approved independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FSIC II Advisor or any approved independent third-party valuation or pricing service that our board of directors deems to be reliable in determining fair value under the circumstances. Below is a description of factors that FSIC II Advisor’s management team, any approved independent third party valuation services and our board of directors may consider when determining the fair value of our 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 may be considered include the borrower’s ability to adequately service its debt, the fair market value of the borrower 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 generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., 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 determination 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.

FSIC II Advisor’s management team, any approved independent third-party valuation services and our board of directors may also consider 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. FSIC II Advisor’s management team, any approved independent third-party valuation services and our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with FSIC II Advisor’s management team and any approved independent third party valuation services, if applicable, may consider relevant in assessing fair 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.

When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of directors subsequently values these warrants or other equity securities received at their fair value.

 

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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 board of directors has delegated day-to-day responsibility for implementing our valuation policy to FSIC II Advisor’s management team, and has authorized FSIC II Advisor’s management team to utilize independent third-party valuation and pricing services that have been approved by our board of directors. The valuation committee is responsible for overseeing FSIC II Advisor’s implementation of the valuation process.

Our investments as of June 30, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-eight senior secured loan investments, three senior secured bond investments, ten subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the investments. Except as described below, all of our equity/other investments were also valued by independent valuation firms, 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. Two equity/other investments, which were traded on an active public market, were valued at their respective closing price as of June 30, 2016. One senior secured bond investment, which was newly issued and purchased near June 30, 2016, was valued at cost, as our board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, we valued our other 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.

Our investments as of December 31, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-five senior secured loan investments, three senior secured bond investments, eight subordinated debt investments and one collateralized security, for which broker quotes were not available, were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the investments. Except as described below, all of our equity/other investments were also valued by independent valuation firms, 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. One equity/other investment, which was traded on an active public market, was valued at its closing price as of December 31, 2015. Two senior secured loan investments, which were newly-issued and purchased near December 31, 2015, were valued at cost, as our board of directors determined that the cost of such investments was the best indication of its fair value. Except as described above, we valued our other 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.

We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers as applicable 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, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of such other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firms against the actual prices at which we purchase and sell our investments. The

 

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valuation committee and our board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation policy.

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. Our policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. We consider many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that we will receive any previously accrued interest, then the interest income will be written-off. Payments received on non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on our judgment.

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 the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and other non-recurring upfront fees are recorded as fee 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 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, 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 American Institute of Certified Public Accountants 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 were 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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Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our “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%. For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of our common stock (including proceeds from our distribution reinvestment plan) reduced for distributions paid to stockholders from proceeds of non-liquidating dispositions of our investments and amounts paid for share repurchases pursuant to our share repurchase program. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our 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 our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

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, 2016 and 2015, 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, GDFM, are reimbursed for administrative expenses incurred on our behalf. FSIC II Advisor agreed, effective March 5, 2015, to permanently waive a portion of the base management fee to which it is entitled under the investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of our gross assets. See Note 4 to our unaudited consolidated financial statements included herein and “—Related Party Transactions—Compensation of the Investment Adviser” for a discussion of this agreement.

 

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A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at June 30, 2016 is as follows:

 

     Payments Due By Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

JPM Facility(1)

   $ 550,000       $ 550,000         —           —           —     

Goldman Facility(2)

   $ 400,000       $ 400,000         —           —           —     

Cooper River Credit Facility(3)

   $ 190,533         —           —         $ 190,533         —     

Wissahickon Creek Credit Facility(4)

   $ 225,146         —         $ 225,146         —           —     

Darby Creek Credit Facility(5)

   $ 250,000         —         $ 250,000         —           —     

Dunning Creek Credit Facility(6)

   $ 114,200       $ 114,200         —           —           —     

Juniata River Credit Facility(7)

   $ 300,000         —           —         $ 300,000         —     

FSIC II Revolving Credit Facility(8)

   $ 80,000         —           —         $ 80,000         —     

 

(1) At June 30, 2016, no amounts 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. The final repurchase transaction is scheduled to occur no later than May 20, 2017.

 

(2) At June 30, 2016, no amounts remained unused under the Goldman facility. Amounts outstanding under the Goldman facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on December 15, 2018.

 

(3) At June 30, 2016, $9,467 remained unused under the Cooper River facility. Amounts outstanding under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 29, 2020.

 

(4) At June 30, 2016, $24,854 remained unused under the Wissahickon Creek facility. Amounts outstanding under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019.

 

(5) At June 30, 2016, no amounts remained unused under the Darby Creek facility. Amounts outstanding under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018.

 

(6) At June 30, 2016, $35,800 remained unused under the Dunning Creek facility. Amounts outstanding under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2017.

 

(7) At June 30, 2016, no amounts remained unused under the Juniata River facility. Amounts outstanding under the Juniata River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on November 14, 2019.

 

(8) At June 30, 2016, $40,000 remained unused under the ING facility. Amounts outstanding under the ING facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 23, 2021.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Related Party Transactions

Compensation of the 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. The investment sub-advisory agreement provides that GDFM will receive 50% of all management and incentive fees payable to FSIC II Advisor under the investment advisory and administrative services agreement with respect to each year. Effective March 5, 2015, FSIC II Advisor agreed to permanently waive a portion of its base management fee to which it is entitled under the investment advisory and administrative services agreement, so that the fee received equals 1.75% of the average value of our gross assets. We also reimburse FSIC II Advisor and GDFM for expenses necessary to perform services related to our administration and operations, including FSIC II Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FSIC II Advisor.

 

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The following table describes the fees and expenses we accrued under the investment advisory and administrative services agreement during the three and six months ended June 30, 2016 and 2015:

 

            Three Months Ended
June 30,
    Six Months Ended
June 30,
 

Related Party

 

Source Agreement

 

Description

      2016             2015             2016             2015      

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Base Management Fee(1)   $ 21,303      $ 22,063      $ 42,310      $ 45,438   

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Subordinated Incentive Fee on Income(2)   $ 15,744      $ 25,095      $ 31,584      $ 40,308   

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement   Administrative Services Expenses(3)   $ 1,029      $ 1,140      $ 2,057      $ 2,216   

 

(1) FSIC II Advisor agreed, effective March 5, 2015, to permanently waive a portion of its base management fee to which it is entitled under the investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of our gross assets. As a result, the amount shown for the three and six months ended June 30, 2016 are net of waivers of $3,043 and $6,044, respectively, and the amounts shown for the three and six months ended June 30, 2015 are net of waivers of $3,151 and $4,002, respectively. During the six months ended June 30, 2016 and 2015, $42,536 and $46,444, respectively, in base management fees were paid to FSIC II Advisor. As of June 30, 2016, $21,303 in base management fees were payable to FSIC II Advisor.

 

(2) During the six months ended June 30, 2016 and 2015, $32,094 and $30,547, respectively, of subordinated incentive fees on income were paid to FSIC II Advisor. As of June 30, 2016, a subordinated incentive fee on income of $15,744 was payable to FSIC II Advisor.

 

(3) During the six months ended June 30, 2016 and 2015, $1,965 and $2,125, respectively, of 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. We paid $2,258 and $2,162 in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2016 and 2015, respectively.

See Note 4 to our unaudited consolidated financial statements included herein for additional information regarding our agreements with FSIC II Advisor, as well as our other related party transactions and relationships, including our potential conflicts of interest, our exemptive relief order from the SEC and our expense reimbursement agreement with Franklin Square Holdings.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

(in thousands)

We are subject to financial market risks, including changes in interest rates. As of June 30, 2016, 77.5% of our portfolio investments (based on fair value) paid variable interest rates, 16.1% paid fixed interest rates, 5.8% were non-income producing equity or other investments and the remaining 0.6% were income producing equity/other investments. 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. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income under 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 Cooper River facility, Wissahickon Creek facility, Darby Creek facility, Dunning Creek facility, Juniata River facility, Goldman facility and FSIC II Revolving credit facility, borrowings are at a floating rate based on LIBOR. Under the terms of the JPM facility, Cobbs Creek pays interest to JPM at a

 

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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 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 the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangements in effect as of June 30, 2016:

 

Basis Point Change in Interest Rates

   Increase
(Decrease)
in Interest
Income(1)
    Increase
(Decrease)
in Interest
Expense
    Increase
(Decrease)  in
Net Interest
Income
     Percentage
Change in  Net
Interest Income
 

Down 65 basis points

   $ (1,806   $ (8,463   $ 6,657         1.8

No change

     —          —          —           —     

Up 100 basis points

     18,822        13,020        5,802         1.6

Up 300 basis points

     88,724        39,061        49,663         13.3

Up 500 basis points

     159,311        65,101        94,210         25.2

 

(1) Assumes no 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, 2016 and 2015, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our 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, 2016.

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.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that occurred during the three-month period ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER 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, 2015.

 

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 three months ended June 30, 2016, 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, 2016

     2,715,325       $ 8.30         2,715,325         (1

May 1 to May 31, 2016

     —           —           —           —     

June 1 to June 30, 2016

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,715,325       $ 8.30         2,715,325         (1
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) A description of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements included herein.

See Note 3 to our unaudited consolidated financial statements included herein 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.

None.

 

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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 Company’s 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 Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
  4.1    Amended and Restated Distribution Reinvestment Plan of the Company, effective as of March 26, 2014. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 24, 2014.)
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 Company’s 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 Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
10.3    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 Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
10.4    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.5    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 Company’s Current Report on Form 8-K filed on February 7, 2013.)
10.6    Lehigh River LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.7    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 Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.8    Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 7, 2013.)
10.9    Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 26, 2013.)
10.10    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.11    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 Company’s Current Report on Form 8-K filed on April 26, 2013.)

 

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10.12    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.13    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.14    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.15    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 Company’s Current Report on Form 8-K filed on October 30, 2012.)
10.16    Amended and Restated Credit Agreement, dated as of May 29, 2015, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 4, 2015.)
10.17    Amended and Restated Account Control Agreement, dated as of May 29, 2015, by and among Cooper River LLC, as pledgor, Citibank, N.A., as secured party, and Citibank, N.A., as securities intermediary. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on June 4, 2015.)
10.18    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 Company’s Current Report on Form 8-K filed on March 28, 2013.)
10.19    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 Company’s Current Report on Form 8-K filed on March 28, 2013.)
10.20    Amended and Restated Investment Management Agreement, dated as of May 29, 2015, by and between the Company, as investment manager, and Cooper River LLC. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 4, 2015.)
10.21    Loan and Servicing Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as borrower, Wells Fargo Securities, LLC, as administrative agent, Wells Fargo Bank, National Association, as collateral agent, account bank and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.22    Purchase and Sale Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.23    Collateral Management Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC and the Company, as collateral manager. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.24    Securities Account Control Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as pledgor, Wells Fargo Bank, National Association, as collateral agent, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)

 

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10.25    Loan Financing and Servicing Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.26    Amendment No. 1 to Loan Financing and Servicing Agreement, dated as of January 12, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
10.27    Amendment No. 2 to Loan Financing and Servicing Agreement, dated as of February 3, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
10.28    Amendment No. 3 to Loan Financing and Servicing Agreement, dated as of May 7, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
10.29    Amendment No. 4 to Loan Financing and Servicing Agreement, dated as of October 8, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
10.30    Sale and Contribution Agreement, dated as of February 20, 2014, by and between Darby Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.31    Investment Management Agreement, dated as of February 20, 2014, by and between Darby Creek LLC and the Company, as investment manager. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.32    Securities Account Control Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as pledgor, Wells Fargo Bank, National Association, as secured party, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
10.33    Credit Agreement, dated as of May 14, 2014, by and among Dunning Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent and lender, and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)
10.34    First Amendment to Credit Agreement, dated as of June 4, 2014, by and between Dunning Creek LLC and Deutsche Bank AG, New York Branch, as administrative agent and lender. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 6, 2014.)
10.35    Second Amendment to Credit Agreement, dated as of May 14, 2015, by and among Dunning Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent and lender, and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)

 

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10.36    Third Amendment to Credit Agreement, dated as of May 13, 2016, by and among Dunning Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent and lender, and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 18, 2016.)
10.37    Amended and Restated Sale and Contribution Agreement, dated as of May 29, 2015, by and between the Company, as seller, and Cooper River LLC, as purchaser. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 4, 2015.)
10.38    Custodial Agreement, dated as of May 14, 2014, by and among Dunning Creek LLC, as borrower, the Company, as manager, Deutsche Bank AG, New York Branch, as administrative agent, and Deutsche Bank Trust Company Americas, as custodian. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)
10.39    Security Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)
10.40    Sale and Contribution Agreement, dated as of May 14, 2014, by and between the Company, as seller, and Dunning Creek LLC, as purchaser. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)
10.41    Investment Management Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC and the Company, as Investment Manager. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 19, 2014.)
10.42    Loan Agreement, dated as of November 14, 2014, by and among Juniata River LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent and lender, Citibank, N.A., as collateral agent and Virtus Group, LP as collateral administrator. (Incorporated by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K filed on March 18, 2015.)
10.43    Sale and Contribution Agreement, dated as of November 14, 2014, between Juniata River LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.52 to the Company’s Annual Report on Form 10-K filed on March 18, 2015.)
10.44    Investment Management Agreement, dated as of November 14, 2014, between Juniata River LLC and FS Investment Corporation, as investment manager. (Incorporated by reference to Exhibit 10.53 to the Company’s Annual Report on Form 10-K filed on March 18, 2015.)
10.45    Collateral Administration Agreement, dated as of November 14, 2014, by and among Juniata River LLC, JPMorgan Chase Bank, National Association, as administrative agent, the Company, as investment manager and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.54 to the Company’s Annual Report on Form 10-K filed on March 18, 2015.)
10.46    Amended and Restated Sale and Contribution Agreement, dated as of December 15, 2014, by and between the Company and Green Creek LLC. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.47    Indenture, dated as of December 15, 2014, by and between Green Creek LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.48    Green Creek LLC Floating Rate Notes due 2026. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.49    September 1996 Version Master Repurchase Agreement between Goldman Sachs Bank USA and Schuylkill River LLC, together with the related Annex and Master Confirmation thereto, each dated as of December 15, 2014. (Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)

 

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10.50    Revolving Credit Agreement, dated as of December 15, 2014, by and between the Company and Schuylkill River LLC. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.51    Amended and Restated Investment Management Agreement, dated as of December 15, 2014, by and between Green Creek LLC and the Company. (Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.52    Collateral Administration Agreement, dated as of December 15, 2014, by and among Green Creek LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 19, 2014.)
10.53    Senior Secured Revolving Credit Agreement, dated as of February 23, 2016, by and among the Company, ING Capital LLC, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 26, 2016.)
10.54    Amendment No. 1 to Senior Secured Revolving Credit Agreement, dated April 25, 2016, by and among the Company, ING Capital LLC, as administrative agent, and the lenders party thereto. (Incorporated by reference to Exhibit 10.53 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 filed on May 13, 2016.)
10.55    Incremental Commitment and Assumption Agreement, dated April 26, 2016, by and among the Company, ING Capital LLC, as administrative agent, the lenders party thereto and the assuming lenders party thereto. (Incorporated by reference to Exhibit 10.54 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016 filed on May 13, 2016.)
10.56    Guarantee, Pledge and Security Agreement, dated as of February 23, 2016, by and among the Company, ING Capital LLC, as revolving administrative agent and collateral agent, the subsidiary guarantors party thereto and each financing agent and designated indebtedness holder party thereto. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 26, 2016.)
10.57    Control Agreement, dated as of February 23, 2016, by and among the Company, ING Capital LLC, as collateral agent, and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 26, 2016.)
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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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized on August 12, 2016.

 

FS INVESTMENT CORPORATION II
By:  

/s/ Michael C. Forman

    Michael C. Forman
Chief Executive Officer
(Principal Executive Officer)
By:  

/s/ Michael Lawson

   

Michael Lawson

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

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