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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

 

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  ☒    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   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
    

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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 325,821,024 shares of common stock outstanding as of May 2, 2017.


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

 

ITEM 1.

   FINANCIAL STATEMENTS   
  

Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016

     1  
  

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016

     2  
  

Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March  31, 2017 and 2016

     3  
  

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

     4  
  

Consolidated Schedules of Investments as of March 31, 2017 (Unaudited) and December 31, 2016

     5  
  

Notes to Unaudited Consolidated Financial Statements

     31  

ITEM 2.

  

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

     65  

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     88  

ITEM 4.

  

CONTROLS AND PROCEDURES

     89  

PART II—OTHER INFORMATION

 

ITEM 1.

  

LEGAL PROCEEDINGS

     90  

ITEM 1A.

  

RISK FACTORS

     90  

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     90  

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     90  

ITEM 4.

  

MINE SAFETY DISCLOSURES

     90  

ITEM 5.

  

OTHER INFORMATION

     90  

ITEM 6.

  

EXHIBITS

     91  
  

SIGNATURES

     96  


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)

 

 

 

     March 31, 2017
(Unaudited)
    December 31, 2016  

Assets

    

Investments, at fair value

    

Non-controlled/unaffiliated investments (amortized cost—$4,340,648 and $4,270,442, respectively)

   $ 4,356,217     $ 4,212,299  

Non-controlled/affiliated investments (amortized cost—$271,804 and $266,825, respectively)

     274,516       285,096  
  

 

 

   

 

 

 

Total investments, at fair value (amortized cost—$4,612,452 and $4,537,267, respectively)

     4,630,733       4,497,395  

Cash

     206,089       347,076  

Receivable for investments sold and repaid

     311,797       73,994  

Income receivable

     63,158       43,078  

Deferred financing costs

     7,413       6,315  

Prepaid expenses and other assets

     215       —    
  

 

 

   

 

 

 

Total assets

   $ 5,219,405     $ 4,967,858  
  

 

 

   

 

 

 

Liabilities

    

Payable for investments purchased

   $ 43,010     $ 14,089  

Repurchase agreements payable (net of deferred financing costs of $931 and $1,065, respectively)(1)

     399,069       398,935  

Credit facilities payable (net of deferred financing costs of $5,173 and $5,534, respectively)

     1,730,706       1,569,845  

Secured borrowing, at fair value (amortized proceeds of $8,143 and $8,139, respectively)(2)

     8,311       8,273  

Stockholder distributions payable

     10,431       10,181  

Management fees payable

     22,285       21,610  

Subordinated income incentive fees payable(3)

     17,499       16,493  

Administrative services expense payable

     856       792  

Interest payable

     14,201       13,669  

Directors’ fees payable

     278       282  

Other accrued expenses and liabilities

     5,420       3,829  
  

 

 

   

 

 

 

Total liabilities

     2,252,066       2,057,998  
  

 

 

   

 

 

 

Commitments and contingencies(4)

     —         —    

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, 328,034,516 and 326,909,727 shares issued and outstanding, respectively

     328       327  

Capital in excess of par value

     3,026,292       3,015,993  

Accumulated undistributed net realized gains (losses) on investments and gain/loss on foreign currency(5)

     (140,030     (120,529

Accumulated undistributed net investment income(5)

     62,636       54,075  

Net unrealized appreciation (depreciation) on investments and secured borrowing

     18,113       (40,006
  

 

 

   

 

 

 

Total stockholders’ equity

     2,967,339       2,909,860  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,219,405     $ 4,967,858  
  

 

 

   

 

 

 

Net asset value per share of common stock at period end

   $ 9.05     $ 8.90  

 

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

 

(2) See Note 8 for a discussion of the Company’s secured borrowing.

 

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

 

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

 

(5) 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
March 31,
 
     2017     2016  

Investment income

    

From non-controlled/unaffiliated investments:

    

Interest income

   $ 103,755     $ 114,589  

Fee income

     21,479       2,891  

From non-controlled/affiliated investments:

    

Interest income

     6,709       2,511  
  

 

 

   

 

 

 

Total investment income

     131,943       119,991  
  

 

 

   

 

 

 

Operating expenses

    

Management fees(1)

     25,468       24,008  

Subordinated income incentive fees(2)

     17,499       15,840  

Administrative services expenses

     867       1,028  

Stock transfer agent fees

     495       537  

Accounting and administrative fees

     431       350  

Interest expense

     19,611       16,534  

Directors’ fees

     276       272  

Other general and administrative expenses

     482       1,065  
  

 

 

   

 

 

 

Operating expenses

     65,129       59,634  

Management fee waiver(1)

     (3,183     (3,001
  

 

 

   

 

 

 

Net expenses

     61,946       56,633  
  

 

 

   

 

 

 

Net investment income

     69,997       63,358  
  

 

 

   

 

 

 

Realized and unrealized gain/loss

    

Net realized gain (loss) on investments:

    

Non-controlled/unaffiliated investments

     (19,501     (14,602

Net realized gain (loss) on foreign currency

     —         3  

Net change in unrealized appreciation (depreciation) on investments:

    

Non-controlled/unaffiliated investments

     73,712       (62,809

Non-controlled/affiliated investments

     (15,559     2,625  

Net change in unrealized appreciation (depreciation) on secured borrowing

     (34     —    
  

 

 

   

 

 

 

Total net realized and unrealized gain (loss)

     38,618       (74,783
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 108,615     $ (11,425
  

 

 

   

 

 

 

Per share information—basic and diluted

    

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

   $ 0.33     $ (0.04
  

 

 

   

 

 

 

Weighted average shares outstanding

     325,822,908       322,374,639  
  

 

 

   

 

 

 

 

(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.

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)

 

 

 

     Three Months Ended
March 31,
 
     2017     2016  

Operations

    

Net investment income

   $ 69,997     $ 63,358  

Net realized gain (loss) on investments and foreign currency

     (19,501     (14,599

Net change in unrealized appreciation (depreciation) on investments

     58,153       (60,184

Net change in unrealized appreciation (depreciation) on secured borrowing

     (34     —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     108,615       (11,425
  

 

 

   

 

 

 

Stockholder distributions(1)

    

Distributions from net investment income

     (61,436     (60,744
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (61,436     (60,744
  

 

 

   

 

 

 

Capital share transactions(2)

    

Reinvestment of stockholder distributions

     31,286       42,657  

Repurchases of common stock

     (20,986     (15,214
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     10,300       27,443  
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     57,479       (44,726

Net assets at beginning of period

     2,909,860       2,690,412  
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,967,339     $ 2,645,686  
  

 

 

   

 

 

 

Accumulated undistributed net investment income(1)

   $ 62,636     $ 37,638  
  

 

 

   

 

 

 

 

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

 

(2) See Note 3 for a discussion of the Company’s capital share transactions.

See notes to unaudited consolidated financial statements.

 

3


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash flows from operating activities

    

Net increase (decrease) in net assets resulting from operations

   $ 108,615     $ (11,425

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

    

Purchases of investments

     (498,247     (93,612

Paid-in-kind interest

     (5,994     (5,285

Proceeds from sales and repayments of investments

     416,532       179,160  

Net realized (gain) loss on investments

     19,501       14,602  

Net change in unrealized (appreciation) depreciation on investments

     (58,153     60,184  

Net change in unrealized (appreciation) depreciation on secured borrowing

     34       —    

Accretion of discount

     (6,977     (4,638

Amortization of deferred financing costs and discount

     1,297       852  

(Increase) decrease in receivable for investments sold and repaid

     (237,803     (7,121

(Increase) decrease in income receivable

     (20,080     (13,720

(Increase) decrease in prepaid expenses and other assets

     (215     59  

Increase (decrease) in payable for investments purchased

     28,921       4,480  

Increase (decrease) in management fees payable

     675       1,571  

Increase (decrease) in subordinated income incentive fees payable

     1,006       1,223  

Increase (decrease) in administrative services expense payable

     64       (263

Increase (decrease) in interest payable

     532       536  

Increase (decrease) in directors’ fees payable

     (4     (4

Increase (decrease) in other accrued expenses and liabilities

     1,591       (2,295
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (248,705     124,304  
  

 

 

   

 

 

 

Cash flows from financing activities

    

Reinvestment of stockholder distributions

     31,286       42,657  

Repurchases of common stock

     (20,986     (15,214

Stockholder distributions

     (61,186     (71,228

Borrowings under credit facilities(1)

     160,500       35,000  

Borrowings under repurchase agreements(2)

     —         —    

Proceeds from secured borrowing(3)

     —         —    

Repayments of credit facilities(1)

     —         (961

Deferred financing costs paid

     (1,896     (164
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     107,718       (9,910
  

 

 

   

 

 

 

Total increase (decrease) in cash

     (140,987     114,394  

Cash at beginning of period

     347,076       228,781  
  

 

 

   

 

 

 

Cash at end of period

   $ 206,089     $ 343,175  
  

 

 

   

 

 

 

Supplemental disclosure

    

Local and excise taxes paid

   $ 1,992     $ 2,010  
  

 

 

   

 

 

 

 

(1) See Note 8 for a discussion of the Company’s credit facilities. During the three months ended March 31, 2017 and 2016, the Company paid $14,186 and $7,554, respectively, in interest expense on the credit facilities.

 

(2) See Note 8 for a discussion of the Company’s repurchase transactions. During the three months ended March 31, 2017 and 2016, the Company paid $3,481 and $7,592, respectively, in interest expense pursuant to its repurchase agreements.

 

(3) See Note 8 for a discussion of the Company’s secured borrowing. During the three months ended March 31, 2017 and 2016, the Company paid $119 and $0, respectively, in interest expense on the secured borrowing.

See notes to unaudited consolidated financial statements.

 

4


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments

As of March 31, 2017

(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—105.9%

               

5 Arch Income Fund 2, LLC

  (o)(s)  

Diversified Financials

  10.5%     11/18/21   $ 8,071     $ 8,095     $ 8,071  

5 Arch Income Fund 2, LLC

  (o)(p)(s)  

Diversified Financials

  10.5%     11/18/21     10,929       10,929       10,929  

A.T. Cross Co.

  (f)(m)(n)(x)  

Retailing

  L+500, 5.0% PIK

(5.0% Max PIK)

  1.0%   9/6/19     45,303       33,076       23,558  

Abaco Energy Technologies LLC

  (f)(j)  

Energy

  L+700, 2.5% PIK

(2.5% Max PIK)

  1.0%   11/20/20     25,734       24,770       22,903  

AG Group Merger Sub, Inc.

  (f)(h)(j)  

Commercial & Professional Services

  L+750   1.0%   12/29/23     43,641       43,641       43,968  

AG Group Merger Sub, Inc.

  (p)   Commercial & Professional Services   L+750   1.0%   12/29/23     19,250       19,250       19,394  

All Systems Holding LLC

  (h)(j)(k)   Commercial & Professional Services   L+770   1.0%   10/31/23     93,000       93,000       93,660  

Altus Power America, Inc.

  (k)   Energy   L+750   1.5%   9/30/21     2,805       2,805       2,854  

Altus Power America, Inc.

  (p)   Energy   L+750   1.5%   9/30/21     945       945       962  

AP Exhaust Acquisition, LLC

  (g)(h)(j)   Automobiles & Components   L+775   1.5%   1/16/21     163,378       163,378       159,702  

Ascension Insurance, Inc.

  (f)(g)(h)(j)   Insurance   L+825   1.3%   3/5/19     76,666       76,159       77,912  

ASG Technologies Group, Inc.

  (f)(g)(h)(j)(x)   Software & Services   L+786, 1.2% PIK

(1.2% Max PIK)

  1.0%   4/30/20     79,551       79,390       80,745  

Aspect Software, Inc.

    Software & Services   L+1000   1.0%   5/25/18     1,018       1,018       1,015  

Aspect Software, Inc.

  (p)   Software & Services   L+1000   1.0%   5/25/18     833       833       831  

Aspect Software, Inc.

  (j)   Software & Services   L+1000   1.0%   5/25/20     3,691       3,691       3,705  

Aspect Software, Inc.

  (p)   Software & Services   L+1200   1.0%   5/25/18     657       657       657  

Atlas Aerospace LLC

  (f)(k)   Capital Goods   L+803   1.0%   5/8/19     57,000       57,000       57,855  

ATX Networks Corp.

  (f)(g)(o)   Technology Hardware & Equipment   L+600   1.0%   6/11/21     1,945       1,924       1,926  

ATX Networks Corp.

  (f)(k)(o)   Technology Hardware & Equipment   L+600   1.0%   6/11/21     26,027       25,291       25,767  

AVF Parent, LLC

  (f)(j)   Retailing   L+725   1.3%   3/1/24     43,000       43,000       43,318  

AVF Parent, LLC

  (p)   Retailing   L+725   1.3%   3/1/24     12,900       12,900       12,995  

BenefitMall Holdings, Inc.

  (g)(h)(j)(k)   Commercial & Professional Services   L+725   1.0%   11/24/20     112,413       112,412       112,975  

Cactus Wellhead, LLC

  (f)(g)   Energy   L+600   1.0%   7/31/20     16,337       15,582       15,684  

Cadence Aerospace Finance, Inc.

  (f)   Capital Goods   L+575   1.3%   5/9/18     2,709       2,715       2,583  

Caesars Entertainment Resort Properties, LLC

  (j)   Consumer Services   L+600   1.0%   10/11/20     30,483       29,402       30,712  

CEVA Group Plc

  (o)   Transportation   L+500     3/19/19     7,200       7,200       6,624  

CEVA Group Plc

  (o)(p)   Transportation   L+500     3/19/19     12,800       12,800       11,776  

 

See notes to unaudited consolidated financial statements.

 

5


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Cimarron Energy Inc.

  (k)   Energy   L+775, 3.8% PIK

(3.8% Max PIK)

  1.0%   12/15/19   $ 23,664     $ 23,664     $ 23,546  

Corner Investment PropCo, LLC

  (f)(j)   Consumer Services   L+975   1.3%   11/2/19     38,758       39,066       39,436  

Crestwood Holdings LLC

  (f)   Energy   L+800   1.0%   6/19/19     5,006       4,997       5,019  

CSafe Acquisition Co., Inc.

  (f)(g)(h)(j)   Capital Goods   L+725   1.0%   11/1/21     1,670       1,670       1,670  

CSafe Acquisition Co., Inc.

  (p)   Capital Goods   L+725   1.0%   11/1/21     4,591       4,591       4,591  

CSafe Acquisition Co., Inc.

    Capital Goods   L+725   1.0%   10/31/23     47,880       47,880       48,299  

CSafe Acquisition Co., Inc.

  (p)   Capital Goods   L+725   1.0%   10/31/23     29,217       29,217       29,473  

Dayton Superior Corp.

  (k)   Materials   L+800   1.0%   11/15/21     11,638       11,306       11,638  

Diamond Resorts International, Inc.

  (g)   Consumer Services   L+600   1.0%   9/2/23     14,925       14,581       15,098  

Eastman Kodak Co.

  (f)   Consumer Durables & Apparel   L+625   1.0%   9/3/19     6,958       6,901       6,993  

Empire Today, LLC

  (f)(g)(h)(j)(k)   Retailing   L+800   1.0%   11/17/22     89,775       89,775       90,381  

Equian Buyer Corp.

  (f)(g)   Health Care Equipment & Services   L+500   1.0%   12/18/21     16,282       16,282       16,282  

Equian Buyer Corp.

  (k)   Health Care Equipment & Services   L+812   1.0%   12/18/21     585       585       594  

Fairway Group Acquisition Co.

    Food & Staples Retailing   10.0% PIK

(10.0% Max PIK)

    1/3/20     1,649       1,649       1,377  

Fairway Group Acquisition Co.

  (j)   Food & Staples Retailing   L+800   1.0%   1/3/20     2,492       2,492       2,504  

Fox Head, Inc.

  (g)(j)(k)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     13,120       13,120       13,184  

FR Dixie Acquisition Corp.

  (f)   Energy   L+475   1.0%   12/18/20     4,074       4,062       3,025  

FullBeauty Brands Holdings Corp.

  (k)   Consumer Durables & Apparel   L+475   1.0%   10/14/22     4,987       4,549       4,189  

Greystone Equity Member Corp.

  (e)(o)   Diversified Financials   L+1050     3/31/21     25,831       25,954       25,960  

Greystone Equity Member Corp.

  (p)   Diversified Financials   L+1100     3/31/21     14,169       14,169       14,240  

Gulf Finance, LLC

  (g)   Energy   L+525   1.0%   8/25/23     4,975       4,837       4,977  

H.M. Dunn Co., Inc.

  (j)(k)   Capital Goods   L+954   1.0%   3/26/21     64,286       64,286       64,286  

Hybrid Promotions, LLC

  (g)(j)(k)   Consumer Durables & Apparel   L+850   1.0%   12/19/20     48,105       48,105       48,341  

Industrial Group Intermediate Holdings, LLC

  (f)(g)(h)(j)(k)   Materials   L+800   1.3%   5/31/20     125,901       125,900       127,789  

Industry City TI Lessor, L.P.

  (j)   Consumer Services   10.8%, 1.0% PIK

(1.0% Max PIK)

    6/30/26     12,872       12,872       13,065  

JMC Acquisition Merger Corp.

  (f)(g)(h)   Capital Goods   L+857   1.0%   11/6/21     18,995       18,995       19,090  

JSS Holdings, Inc.

  (f)(g)(j)(k)   Capital Goods   L+800, 0.0% PIK

(2.5% Max PIK)

  1.0%   3/31/23     73,000       72,270       72,270  

 

See notes to unaudited consolidated financial statements.

 

6


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

JSS Holdings, Inc.

  (p)   Capital Goods   L+800   1.0%   3/31/23   $ 13,273     $ 13,273     $ 13,273  

Latham Pool Products, Inc.

  (f)(g)(j)   Commercial & Professional Services   L+775   1.0%   6/29/21     35,000       35,000       35,175  

LD Intermediate Holdings, Inc.

  (k)   Software & Services   L+588   1.0%   12/9/22     16,894       15,266       16,197  

MB Precision Holdings LLC

  (g)(h)(j)   Capital Goods   L+725, 1.5% PIK

(1.5% Max PIK)

  1.3%   1/23/20     60,051       60,051       59,150  

MMM Holdings, Inc.

  (f)   Health Care Equipment & Services   L+875   1.5%   6/30/19     2,009       2,012       1,989  

MORSCO, Inc.

  (e)(f)   Capital Goods   L+700   1.0%   10/31/23     19,875       19,124       20,136  

Moxie Liberty LLC

  (f)(h)   Energy   L+650   1.0%   8/21/20     11,722       11,745       11,576  

Moxie Patriot LLC

  (h)   Energy   L+575   1.0%   12/19/20     5,424       5,395       5,329  

MSO of Puerto Rico, Inc.

  (f)   Health Care Equipment & Services   L+875   1.5%   6/30/19     1,461       1,463       1,446  

Nobel Learning Communities, Inc.

    Consumer Services   L+450   1.0%   4/27/20     5,031       5,031       5,031  

Nobel Learning Communities, Inc.

  (p)   Consumer Services   L+450   1.0%   4/27/20     6,149       6,149       6,149  

Nobel Learning Communities, Inc.

  (f)(j)(k)   Consumer Services   L+840   1.0%   4/27/21     84,472       84,472       84,894  

North Haven Cadence Buyer, Inc.

  (p)   Consumer Services   L+500   1.0%   9/2/21     2,625       2,625       2,625  

North Haven Cadence Buyer, Inc.

  (f)(h)(j)(k)   Consumer Services   L+812   1.0%   9/2/22     76,110       76,110       76,585  

North Haven Cadence Buyer, Inc.

  (p)   Consumer Services   L+750         11,375       11,375       11,446  

Nova Wildcat Amerock, LLC

  (f)(g)(j)   Consumer Durables & Apparel   L+856   1.3%   9/10/19     64,759       64,759       65,406  

PHRC License, LLC

  (e)(g)(h)   Consumer Services   L+900   1.5%   8/14/20     58,296       58,296       59,171  

Polymer Additives, Inc.

  (g)(h)(k)   Materials   L+888   1.0%   12/19/22     63,068       63,068       64,172  

Polymer Additives, Inc.

  (h)(k)   Materials   L+978   1.0%   12/19/22     29,005       29,005       29,005  

Power Distribution, Inc.

  (f)(g)(k)   Capital Goods   L+725   1.3%   1/25/23     45,233       45,233       45,233  

Production Resource Group, LLC

  (f)(g)(h)(k)   Media   L+850   1.0%   7/23/19     47,500       47,500       47,025  

Production Resource Group, LLC

  (f)(j)(k)   Media   L+850   1.0%   7/23/19     48,099       48,098       47,617  

Propulsion Acquisition, LLC

  (f)(g)(j)   Commercial & Professional Services   L+600   1.0%   7/13/21     37,311       35,009       37,124  

PSKW, LLC

  (f)(g)(j)   Health Care Equipment & Services   L+838   1.0%   11/25/21     26,000       26,000       25,337  

Roadrunner Intermediate Acquisition Co., LLC

  (f)   Health Care Equipment & Services   L+725   1.0%   3/15/23     7,700       7,700       7,815  

Rogue Wave Software, Inc.

  (j)   Software & Services   L+861   1.0%   9/25/21     19,913       19,912       20,012  

Safariland, LLC

  (h)(j)   Capital Goods   L+740   1.0%   11/18/23     70,234       70,234       71,463  

Safariland, LLC

  (p)   Capital Goods   L+740   1.0%   11/18/23     13,867       13,867       14,109  

Sequential Brands Group, Inc.

  (h)(j)(k)   Consumer Durables & Apparel   L+900     7/1/22     158,492       158,492       160,076  

Sorenson Communications, Inc.

  (f)(g)(h)(j)   Telecommunication Services   L+575   2.3%   4/30/20     99,205       98,923       99,577  

 

See notes to unaudited consolidated financial statements.

 

7


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

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

Sports Authority, Inc.

    (f)(m)(n)     Retailing     L+600       1.5%       11/16/17     $ 7,818     $ 5,778     $ 561  

SSC (Lux) Limited S.à r.l.

    (g)(h)(j)(o)     Health Care Equipment & Services     L+750       1.0%       9/10/24       104,545       104,545       104,676  

Strike, LLC

    (p)     Energy     L+800       1.0%       5/30/19       5,000       4,929       5,100  

Strike, LLC

    (k)     Energy     L+800       1.0%       11/30/22       7,406       7,190       7,554  

SunGard Availability Services Capital, Inc.

    (f)(i)     Software & Services     L+500       1.0%       3/29/19       10,749       10,240       10,440  

Sunnova Asset Portfolio 5 Holdings, LLC

    Energy    

12.0%, 0.0% PIK

(12.0% Max PIK)

 

 

      11/14/21       8,639       8,519       8,639  

Swift Worldwide Resources US Holdings Corp.

    (f)(h)     Energy     L+1100       1.0%       7/20/21       19,489       19,489       19,830  

ThermaSys Corp.

    (f)     Capital Goods     L+400       1.3%       5/3/19       4,618       4,619       4,179  

TierPoint, LLC

    (f)     Software & Services     L+450       1.0%       12/2/21       4,514       4,437       4,539  

Transplace Texas, LP

    (j)     Transportation     L+744       1.0%       9/16/21       22,038       22,038       22,203  

U.S. Xpress Enterprises, Inc.

    (g)(h)(j)     Transportation    

L+1000, 0.0% PIK

(1.8% Max PIK)

 

 

    1.5%       5/30/19       67,209       67,209       66,873  

USI Senior Holdings, Inc.

    (h)(j)     Capital Goods     L+782       1.0%       1/5/22       40,000       40,000       40,084  

USI Senior Holdings, Inc.

    (p)     Capital Goods     L+725       1.0%       1/5/22       9,524       9,524       9,544  

UTEX Industries, Inc.

    (k)     Energy     L+400       1.0%       5/21/21       1,122       1,118       1,056  

Vertellus Performance Chemicals LLC

    (j)(k)     Materials     L+950       1.0%       1/30/20       65,000       65,000       60,788  

Warren Resources, Inc.

    (e)(j)(x)     Energy    

L+900, 1.0% PIK

(1.0% Max PIK)

 

 

    1.0%       5/22/20       42,229       42,229       41,542  

Warren Resources, Inc.

    (p)(x)     Energy    

L+900, 1.0% PIK

(1.0% Max PIK)

 

 

    1.0%       5/22/20       3,002       3,002       2,953  

Waste Pro USA, Inc.

    (g)(h)(j)(k)     Commercial & Professional Services     L+750       1.0%       10/15/20       122,051       122,051       124,034  

Weight Watchers International, Inc.

    (f)(k)(l)(o)     Consumer Services     L+325       0.8%       4/2/20       16,656       15,371       15,553  

York Risk Services Holding Corp.

    (l)     Insurance     L+375       1.0%       10/1/21       997       990       975  

Zeta Interactive Holdings Corp.

    (f)(g)(j)     Software & Services     L+750       1.0%       7/29/22       28,076       28,148       28,544  

Zeta Interactive Holdings Corp.

    (f)(g)(v)     Software & Services     L+750       1.0%       7/29/22       8,214       8,143       8,291  

Zeta Interactive Holdings Corp.

    (p)     Software & Services     L+750       1.0%       7/29/22       5,109       5,109       5,186  

Zeta Interactive Holdings Corp.

    (p)(v)     Software & Services     L+750       1.0%       7/29/22       1,314       1,314       1,334  
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                3,321,817       3,319,019  

Unfunded Loan Commitments

                (177,458     (177,458
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                3,144,359       3,141,561  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

8


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(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—Second Lien—16.3%

               

Alison US LLC

    (i)(o)    

Capital Goods

    L+850       1.0%       8/29/22     $ 4,444     $ 4,308     $ 4,433  

American Bath Group, LLC

    (k)    

Capital Goods

    L+975       1.0%       9/30/24       7,000       6,459       6,755  

AP Exhaust Acquisition, LLC

   

Automobiles & Components

   

12.0% PIK

(12.0% Max PIK)


 

      9/28/21       40,056       40,056       41,458  

Arena Energy, LP

    (f)(j)    

Energy

   

L+900, 4.0% PIK

(4.0% Max PIK)

 

 

    1.0%       1/24/21       24,105       24,105       24,226  

Ascent Resources—Marcellus, LLC

    (f)(m)    

Energy

    L+750       1.0%       8/4/21       3,333       3,291       425  

ASG Technologies Group, Inc.

    (j)(x)    

Software & Services

   

L+1100, 0.0% PIK

(6.0% Max PIK)

 

 

    1.0%       6/27/22       26,989       20,360       26,584  

BPA Laboratories Inc.

    (j)    

Pharmaceuticals, Biotechnology & Life Sciences

    L+250         7/3/17       3,272       3,199       2,209  

Byrider Finance, LLC

    (e)    

Automobiles & Components

   

L+1000, 0.5% PIK

(0.5% Max PIK)

 

 

    1.3%       8/22/20       16,850       16,850       16,850  

Checkout Holding Corp.

    (k)    

Media

    L+675       1.0%       4/11/22       10,000       9,947       7,700  

Chief Exploration & Development LLC

    (f)    

Energy

    L+650       1.3%       5/16/21       1,174       1,166       1,147  

Chisholm Oil and Gas Operating, LLC

   

Energy

    L+800       1.0%       3/21/24       750       750       750  

Chisholm Oil and Gas Operating, LLC

    (p)    

Energy

    L+800       1.0%       3/21/24       250       250       250  

Compuware Corp.

    (j)    

Software & Services

    L+825       1.0%       12/15/22       8,032       7,186       8,096  

Crossmark Holdings, Inc.

    (k)    

Media

    L+750       1.3%       12/21/20       7,778       7,790       5,192  

Fairway Group Acquisition Co.

   

Food & Staples Retailing

   

11.0% PIK

(11.0% Max PIK)

 

 

      10/3/21       1,439       1,439       1,094  

Fieldwood Energy LLC

    (e)(k)    

Energy

    L+713       1.3%       9/30/20       2,667       2,072       1,940  

Gruden Acquisition, Inc.

    (j)    

Transportation

    L+850       1.0%       8/18/23       15,000       14,383       14,550  

Inmar, Inc.

    (k)    

Software & Services

    L+700       1.0%       1/27/22       2,830       2,811       2,682  

Jazz Acquisition, Inc.

    (f)    

Capital Goods

    L+675       1.0%       6/19/22       3,700       3,741       3,302  

Jonah Energy LLC

    (e)    

Energy

    L+650       1.0%       5/12/21       1,250       1,102       1,203  

JW Aluminum Co.

    (e)(j)(k)(x)    

Materials

   

L+850 PIK

(L+850 Max PIK)

 

 

    0.8%       11/17/20       33,950       33,941       34,120  

Logan’s Roadhouse, Inc.

    (x)    

Consumer Services

   

L+850 PIK

(L+850 Max PIK)

 

 

    1.0%       11/23/20       13,662       13,555       12,977  

National Surgical Hospitals, Inc.

    (j)    

Health Care Equipment & Services

    L+900       1.0%       6/1/23       17,500       17,500       17,578  

Neff Rental LLC

    (k)    

Capital Goods

    L+625       1.0%       6/9/21       7,072       7,049       7,093  

 

See notes to unaudited consolidated financial statements.

 

9


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Nielsen & Bainbridge, LLC

  (f)(g)  

Consumer Durables & Apparel

  L+925   1.0%   8/15/21   $ 16,675     $ 16,499     $ 16,633  

P2 Upstream Acquisition Co.

  (k)  

Energy

  L+800   1.3%   4/30/21     14,500       14,680       13,968  

Paw Luxco II Sarl

  (o)(m)(n)  

Consumer Durables & Apparel

  EURIBOR+950     1/29/19   5,727       7,262       297  

Payless Inc.

  (k)(m)(n)  

Retailing

  L+750   1.0%   3/11/22   $ 10,841       10,765       1,511  

Peak 10, Inc.

  (g)  

Software & Services

  L+725   1.0%   6/17/22     5,500       5,462       5,421  

PSAV Acquisition Corp.

  (j)(k)  

Technology Hardware & Equipment

  L+825   1.0%   1/24/22     80,000       79,187       80,400  

Spencer Gifts LLC

  (k)  

Retailing

  L+825   1.0%   6/29/22     20,000       20,088       16,200  

Titan Energy Operating, LLC

  (g)(j)  

Energy

  2.0%, L+900 PIK

(L+900 Max PIK)

  1.0%   2/23/20     71,737       60,885       55,022  

TNS, Inc.

  (g)(i)(k)  

Software & Services

  L+800   1.0%   8/14/20     43,475       43,235       43,556  

WP CPP Holdings, LLC

  (j)  

Capital Goods

  L+775   1.0%   4/30/21     6,932       6,910       6,681  
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                508,283       482,303  

Unfunded Loan Commitments

                (250     (250
             

 

 

   

 

 

 

Net Senior Secured Loans—Second Lien

                508,033       482,053  
             

 

 

   

 

 

 

Senior Secured Bonds—5.1%

               

Advanced Lighting Technologies, Inc.

  (e)(j)  

Materials

  5.3%, 7.3% PIK

(7.3% Max PIK)

    6/1/19     37,364       14,572       15,599  

Black Swan Energy Ltd.

  (o)  

Energy

  9.0%     1/20/24     1,333       1,333       1,316  

Caesars Entertainment Resort Properties, LLC

  (i)(j)  

Consumer Services

  11.0%     10/1/21     37,350       37,886       40,758  

CEVA Group Plc

  (i)(o)  

Transportation

  7.0%     3/1/21     5,000       4,423       4,469  

CEVA Group Plc

  (i)(o)  

Transportation

  9.0%     9/1/21     2,000       2,000       1,430  

Diamond Resorts International, Inc.

  (k)  

Consumer Services

  7.8%     9/1/23     10,000       10,000       10,461  

FourPoint Energy, LLC

  (e)(j)(k)  

Energy

  9.0%     12/31/21     46,313       44,960       46,776  

Global A&T Electronics Ltd.

  (e)(k)(o)  

Semiconductors & Semiconductor Equipment

  10.0%     2/1/19     19,490       19,035       14,179  

Ridgeback Resources Inc.

  (e)(o)(w)  

Energy

  12.0%     12/29/20     331       324       331  

Sorenson Communications, Inc.

  (j)  

Telecommunication Services

  9.0%, 0.0% PIK

(9.0% Max PIK)

    10/31/20     7,058       6,871       6,634  

Velvet Energy Ltd.

  (o)  

Energy

  9.0%     10/5/23     10,000       10,000       9,945  
             

 

 

   

 

 

 

Total Senior Secured Bonds

                151,404       151,898  
             

 

 

   

 

 

 

 

See notes to unaudited consolidated financial statements.

 

10


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

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

Subordinated Debt—16.4%

               

Ascent Resources Utica Holdings, LLC

    (l)    

Energy

    10.0%         4/1/22     $ 40,000     $ 40,000     $ 41,375  

Aurora Diagnostics, LLC

    (j)    

Health Care Equipment & Services

    10.8%         1/15/18       6,130       6,137       5,405  

Bellatrix Exploration Ltd.

    (o)    

Energy

    8.5%         5/15/20       5,000       4,932       4,766  

BMC Software Finance, Inc.

    (k)    

Software & Services

    7.3%         6/1/18       2,548       2,451       2,624  

Brooklyn Basketball Holdings, LLC

    (h)(j)    

Consumer Services

    L+725         10/25/19       39,746       39,746       39,944  

CEC Entertainment, Inc.

    (i)    

Consumer Services

    8.0%         2/15/22       18,715       18,551       19,621  

Ceridian HCM Holding, Inc.

    (i)(k)    

Commercial & Professional Services

    11.0%         3/15/21       46,250       45,871       48,698  

Coveris Holdings S.A.

    (i)(o)    

Materials

    7.9%         11/1/19       8,450       8,346       8,343  

Eclipse Resources Corp.

    (i)(o)    

Energy

    8.9%         7/15/23       9,175       9,011       9,366  

EV Energy Partners, L.P.

    (e)    

Energy

    8.0%       4/15/19       259       241       198  

Global Jet Capital Inc.

   

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      1/30/25       759       759       754  

Global Jet Capital Inc.

   

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      4/30/25       4,824       4,824       4,794  

Global Jet Capital Inc.

   

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      9/3/25       997       997       991  

Global Jet Capital Inc.

   

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      9/29/25       938       938       933  

Global Jet Capital Inc.

    (e)(o)    

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      12/4/25       6,927       6,927       6,883  

Global Jet Capital Inc.

    (e)(o)    

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      12/9/25       1,133       1,133       1,126  

Global Jet Capital Inc.

    (e)(o)    

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      1/29/26       593       593       590  

Global Jet Capital Inc.

   

Commercial & Professional Services

   

15.0% PIK

(15.0% Max PIK)

 

 

      12/2/26       1,795       1,795       1,784  

Jupiter Resources Inc.

    (h)(k)(o)    

Energy

    8.5%         10/1/22       28,800       26,842       23,832  

Mood Media Corp.

    (o)    

Media

    10.0%         8/6/23       6,930       6,123       6,895  

Mood Media Corp.

    (e)(j)(o)    

Media

    9.3%         10/15/20       46,207       45,796       32,345  

NewStar Financial, Inc.

    (h)(j)(k)(o)    

Diversified Financials

   
8.3%, 0.0% PIK
(8.8% Max PIK)
 
 
      12/4/24       150,000       123,700       140,250  

 

See notes to unaudited consolidated financial statements.

 

11


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes    

Industry

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

P.F. Chang’s China Bistro, Inc.

    (i)(j)    

Consumer Services

    10.3%         6/30/20       $31,353     $ 31,255     $ 31,358  

S1 Blocker Buyer Inc.

   

Commercial & Professional Services

   
10.0% PIK
(10.0% Max PIK)
 
 
      10/31/22       268       268       279  

Sorenson Communications, Inc.

    (e)(j)    

Telecommunication Services

   
13.9%, 0.0% PIK
(13.9% Max PIK)
 
 
      10/31/21       5,364       5,086       5,122  

SunGard Availability Services Capital, Inc.

    (i)    

Software & Services

    8.8%         4/1/22       5,900       4,485       4,243  

Talos Production LLC

   

Energy

    9.8%         2/15/18       4,500       4,334       3,083  

TI Group Automotive Systems, LLC

    (i)(o)    

Automobiles & Components

    8.8%         7/15/23       7,302       7,302       7,713  

York Risk Services Holding Corp.

    (i)(j)(k)    

Insurance

    8.5%         10/1/22       35,710       32,666       33,634  
             

 

 

   

 

 

 

Total Subordinated Debt

                481,109       486,949  
             

 

 

   

 

 

 

Collateralized Securities—0.7%

               

CGMS CLO 2013-3A Class Subord.

    (o)    

Diversified Financials

    16.1%         7/15/25       17,000       7,686       10,014  

NewStar Clarendon 2014-1A Class D

    (o)    

Diversified Financials

    L+435         1/25/27       1,060       1,005       1,060  

NewStar Clarendon 2014-1A Class Subord. B

    (o)    

Diversified Financials

    15.8%         1/25/27       12,140       9,544       9,830  
             

 

 

   

 

 

 

Total Collateralized Securities

                18,235       20,904  
             

 

 

   

 

 

 
                                Number
of Shares
    Cost     Fair
Value(d)
 

Equity/Other—11.7%

               

5 Arches, LLC, Common Equity

    (n)(o)(r)    

Diversified Financials

          4,738       125       125  

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

    (e)(n)(x)    

Retailing

          1,000,000       1,000       —    

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

    (e)(n)(x)    

Retailing

          243,478       243       —    

A.T. Cross Co., GSO Special Unit

    (n)(x)    

Retailing

          1       —         —    

Abaco Energy Technologies LLC, Common Equity

    (n)    

Energy

          3,055,556       3,055       153  

Abaco Energy Technologies LLC, Preferred Equity

    (n)    

Energy

          12,734,481       637       637  

ACP FH Holdings GP, LLC, Common Equity

    (e)(n)    

Consumer Durables & Apparel

          88,571       89       68  

ACP FH Holdings, LP, Common Equity

    (e)(n)    

Consumer Durables & Apparel

          8,768,572       8,769       6,770  

Advanced Lighting Technologies, Inc., Preferred Equity

    (n)    

Materials

          1,652       —         —    

 

See notes to unaudited consolidated financial statements.

 

12


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Number
of Shares
    Cost     Fair
Value(d)
 

Altus Power America Holdings, LLC, Common Equity

  (n)  

Energy

          462,008     $ 462     $ 462  

Altus Power America Holdings, LLC, Preferred Equity

  (t)  

Energy

          934,959       935       935  

Amaya Inc., Warrants, 5/15/2024

  (n)(o)  

Consumer Services

          2,000,000       16,832       17,140  

AP Exhaust Holdings, LLC, Common Equity

  (n)(r)  

Automobiles & Components

          8,378       8,378       8,378  

Ascent Resources Utica Holdings, LLC, Common Equity

  (n)(q)  

Energy

          128,734,129       38,700       30,639  

ASG Technologies Group, Inc., Common Equity

  (n)(x)  

Software & Services

          625,178       13,475       24,288  

ASG Technologies Group, Inc., Warrants, 6/27/2022

  (n)(x)  

Software & Services

          253,704       7,231       4,338  

Aspect Software Parent, Inc., Common Equity

  (n)  

Software & Services

          403,955       19,021       19,430  

ATX Holdings, LLC, Common Equity

  (n)(o)  

Technology Hardware & Equipment

          72,635       116       116  

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

  (j)(n)  

Pharmaceuticals, Biotechnology & Life Sciences

          10,924       —         —    

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

  (j)(n)  

Pharmaceuticals, Biotechnology & Life Sciences

          17,515       —         —    

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

  (n)(o)  

Retailing

          3,451,216       1,898       276  

Chisholm Oil and Gas, LLC, Series A Units

  (n)  

Energy

          53,793       54       54  

Cimarron Energy Holdco Inc., Common Equity

  (n)  

Energy

          3,201,631       2,991       1,601  

CSF Group Holdings, Inc., Common Equity

  (n)  

Capital Goods

          417,400       417       417  

DHS Technologies LLC, Common Equity

  (e)(n)  

Capital Goods

          60,872       5,000       623  

Eastman Kodak Co., Common Equity

  (n)  

Consumer Durables & Apparel

          1,846       36       21  

Fairway Group Holdings Corp., Common Equity

  (n)  

Food & Staples Retailing

          31,626       1,016       95  

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

  (n)(r)  

Energy

          13,000       13,000       6,175  

FourPoint Energy, LLC, Common Equity, Class D Units

  (n)(r)  

Energy

          2,437       1,610       1,170  

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

  (n)(r)  

Energy

          54,104       13,526       24,347  

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

  (n)(r)  

Energy

          43,875       10,969       20,841  

Global Jet Capital Holdings, LP, Preferred Equity

  (e)(n)  

Commercial & Professional Services

          62,289       6,229       6,229  

H.I.G. Empire Holdco, Inc., Common Equity

  (n)  

Retailing

          411       1,227       1,256  

Harvey Holdings, LLC, Common Equity

  (n)  

Capital Goods

          666,667       667       1,667  

Industrial Group Intermediate Holdings, LLC, Common Equity

  (n)(r)  

Materials

          2,678,947       2,679       4,688  

JMC Acquisition Holdings, LLC, Common Equity

  (n)  

Capital Goods

          1,449       1,449       1,616  

JSS Holdco, LLC, Net Profits Interest

  (n)  

Capital Goods

          —         —         —    

JW Aluminum Co., Common Equity

  (e)(k)(n)(x)  

Materials

          256       —         —    

JW Aluminum Co., Preferred Equity

  (e)(k)(x)  

Materials

          1,184       11,502       11,016  

 

See notes to unaudited consolidated financial statements.

 

13


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Number
of Shares
    Cost     Fair
Value(d)
 

MB Precision Investment Holdings LLC, Class A-2 Units

  (n)(r)  

Capital Goods

          2,287,659     $ 2,288     $ 686  

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

  (e)(n)(o)  

Diversified Financials

          6,000,000       30,114       12,960  

North Haven Cadence TopCo, LLC, Common Equity

  (n)  

Consumer Services

          2,916,667       2,917       3,500  

PDI Parent LLC, Common Equity

  (n)  

Capital Goods

          2,076,923       2,077       2,077  

Professional Plumbing Group, Inc., Common Equity

  (e)(n)  

Capital Goods

          3,000,000       3,000       6,600  

PSAV Holdings LLC, Common Equity

   

Technology Hardware & Equipment

          10,000       10,000       32,500  

Ridgeback Resources Inc., Common Equity

  (e)(n)(o)(w)  

Energy

          817,308       5,022       4,785  

Roadhouse Holding Inc., Common Equity

  (n)(x)  

Consumer Services

          4,481,763       4,657       5,200  

S1 Blocker Buyer Inc., Common Equity

   

Commercial & Professional Services

          124       1,240       1,399  

SandRidge Energy, Inc., Common Equity

  (n)(o)  

Energy

          253,009       5,647       4,678  

Sequential Brands Group, Inc., Common Equity

  (e)(n)  

Consumer Durables & Apparel

          408,685       5,517       1,590  

Sorenson Communications, Inc., Common Equity

  (e)(n)  

Telecommunication Services

          43,796       —         34,769  

SSC Holdco Limited, Common Equity

  (n)(o)  

Health Care Equipment & Services

          261,364       5,227       5,227  

Sunnova Energy Corp., Common Equity

  (n)  

Energy

          384,746       1,444       2,205  

Sunnova Energy Corp., Preferred Equity

  (n)  

Energy

          36,363       194       208  

Swift Worldwide Resources Holdco Limited, Common Equity

  (n)(o)(u)  

Energy

          1,250,000       2,010       687  

TE Holdings, LLC, Common Equity

  (e)(n)(r)  

Energy

          717,718       6,101       5,787  

TE Holdings, LLC, Preferred Equity

  (e)(n)  

Energy

          475,758       4,751       6,066  

Titan Energy, LLC, Common Equity

  (e)(n)  

Energy

          200,040       6,322       3,641  

Warren Resources, Inc., Common Equity

  (n)(x)  

Energy

          2,371,337       11,145       10,197  

White Star Petroleum Holdings, LLC, Common Equity

  (n)  

Energy

          1,613,753       1,372       1,372  

Zeta Interactive Holdings Corp., Preferred Equity

  (n)  

Software & Services

          620,025       4,929       5,663  
             

 

 

   

 

 

 

Total Equity/Other

                309,312       347,368  
             

 

 

   

 

 

 

TOTAL INVESTMENTS—156.1%

              $ 4,612,452       4,630,733  
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(56.1%)

                  (1,663,394
               

 

 

 

NET ASSETS—100.0%

                $ 2,967,339  
               

 

 

 

 

See notes to unaudited consolidated financial statements.

 

14


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

 

(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 March 31, 2017, the three-month London Interbank Offered Rate, or LIBOR or L, was 1.15%, the Euro Interbank Offered Rate, or EURIBOR, was (0.33)% and the U.S. Prime Lending Rate, or Prime, was 4.00%. PIK means paid-in-kind.

 

(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 Cobbs Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with ING Capital LLC (see Note 8).

 

(f) 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).

 

(g) 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).

 

(h) 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).

 

(i) 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).

 

(j) 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).

 

(k) 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).

 

(l) Position or portion thereof unsettled as of March 31, 2017.

 

(m) Security was on non-accrual status as of March 31, 2017.

 

(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 March 31, 2017, 90.1% 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.

 

See notes to unaudited consolidated financial statements.

 

15


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

(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 at an exchange rate of £1.00 to USD$1.25 as of March 31, 2017.

 

(v) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the unaudited consolidated schedule of investments as of March 31, 2017 (see Note 8).

 

(w) Investment denominated in Canadian dollars. Cost and fair value are converted into U.S. dollars at an exchange rate of CAD$1.00 to USD$0.75 as of March 31, 2017.

 

(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 March 31, 2017, the Company held investments in portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control”. The following table presents certain financial information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person for the three months ended March 31, 2017:

 

Portfolio Company

  Fair Value at
December 31, 2016
    Purchases  and
Paid-in-Kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net
Realized
Gain
(Loss)
    Net
Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
March 31, 2017
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—First Lien

                   

A.T. Cross Co.

  $ 28,081     $ 553       —       $ 814       —       $ (5,890   $ 23,558     $ 1,217       —         —    

ASG Technologies Group, Inc.

  $ 80,505     $ 236       —       $ 11       —       $ (7   $ 80,745     $ 1,990       —         —    

Warren Resources, Inc.(1)

  $ 42,122     $ 107       —         —         —       $ (736   $ 41,493     $ 1,158       —         —    

Senior Secured Loans—Second Lien

                   

ASG Technologies Group, Inc.

  $ 26,179       —         —       $ 171       —       $ 234     $ 26,584     $ 810       —         —    

JW Aluminum Co.

  $ 34,410     $ 132       —       $ 1       —       $ (423   $ 34,120     $ 803       —         —    

Logan’s Roadhouse, Inc.

  $ 10,355     $ 2,728       —       $ 3       —       $ (109   $ 12,977     $ 306       —         —    

Equity/Other

                   

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

    —         —         —         —         —         —         —         —         —         —    

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

    —         —         —         —         —         —         —         —         —         —    

A.T. Cross Co., GSO Special Unit

    —         —         —         —         —         —         —         —         —         —    

ASG Technologies Group, Inc. Common Equity

  $ 29,477       —         —         —         —       $ (5,189   $ 24,288       —         —         —    

 

See notes to unaudited consolidated financial statements.

 

16


Table of Contents

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

 

 

 

Portfolio Company

  Fair Value at
December 31, 2016
    Purchases  and
Paid-in-Kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net
Realized
Gain
(Loss)
    Net
Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
March 31, 2017
    Interest
Income
    Fee
Income
    Dividend
Income
 

ASG Technologies Group, Inc., Warrants, 6/27/2022

  $ 6,444       —         —         —         —       $ (2,106   $ 4,338       —         —         —    

JW Aluminum Co., Common Equity

    —         —         —         —         —         —         —         —         —         —    

JW Aluminum Co., Preferred Equity

  $ 11,854     $ 223       —         —         —       $ (1,061   $ 11,016     $ 425       —         —    

Roadhouse Holding Inc., Common Equity

  $ 5,472       —         —         —         —       $ (272   $ 5,200       —         —         —    

Warren Resources, Inc., Common Equity

  $ 10,197       —         —         —         —         —       $ 10,197       —         —         —    

 

(1) Security includes a partially unfunded commitment with an amortized cost of $3,002 and a fair value of $2,953.

 

See notes to unaudited consolidated financial statements.

 

17


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments

As of December 31, 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—98.4%

               

5 Arch Income Fund 2, LLC

  (o)(s)  

Diversified Financials

  10.5%     11/18/21   $ 9,781     $ 9,806     $ 9,781  

5 Arch Income Fund 2, LLC

  (o)(p)(s)  

Diversified Financials

  10.5%     11/18/21     9,219       9,219       9,219  

A.T. Cross Co.

  (f)(x)  

Retailing

  L+500, 5.0% PIK

(5.0% Max PIK)

  1.0%   9/6/19     44,750       31,709       28,081  

Abaco Energy Technologies LLC

  (f)(j)  

Energy

  L+700, 2.5% PIK

(2.5% Max PIK)

  1.0%   11/20/20     26,600       25,531       20,150  

Aeneas Buyer Corp.

  (f)(g)  

Health Care Equipment & Services

  L+500   1.0%   12/18/21     16,481       16,481       16,481  

Aeneas Buyer Corp.

   

Health Care Equipment & Services

  L+815   1.0%   12/18/21     585       585       594  

AG Group Merger Sub, Inc.

  (f)(h)(j)  

Commercial & Professional Services

  L+750   1.0%   12/29/23     43,750       43,750       43,750  

AG Group Merger Sub, Inc.

  (p)  

Commercial & Professional Services

  L+750   1.0%   12/29/23     19,250       19,250       19,250  

All Systems Holding LLC

  (e)(h)(j)(k)  

Commercial & Professional Services

  L+770   1.0%   10/31/23     93,000       93,000       93,781  

Altus Power America, Inc.

  (k)  

Energy

  L+750   1.5%   9/30/21     2,665       2,665       2,715  

Altus Power America, Inc.

  (p)  

Energy

  L+750   1.5%   9/30/21     1,085       1,085       1,106  

American Bath Group, LLC

  (f)(g)  

Capital Goods

  L+575   1.0%   9/30/23     24,938       23,963       25,031  

AP Exhaust Acquisition, LLC

  (g)(h)(j)  

Automobiles & Components

  L+775   1.5%   1/16/21     163,378       163,378       147,857  

Ascension Insurance, Inc.

  (f)(g)(h)(j)  

Insurance

  L+825   1.3%   3/5/19     76,837       76,270       77,702  

ASG Technologies Group, Inc.

  (f)(g)(h)(j)(x)  

Software & Services

  L+786, 1.2% PIK

(1.2% Max PIK)

  1.0%   4/30/20     79,315       79,143       80,505  

Aspect Software, Inc.

   

Software & Services

  L+1000   1.0%   5/25/18     1,154       1,154       1,154  

Aspect Software, Inc.

  (p)  

Software & Services

  L+1000   1.0%   5/25/18     40       40       40  

Aspect Software, Inc.

  (j)  

Software & Services

  L+1000   1.0%   5/25/20     3,714       3,714       3,756  

Atlas Aerospace LLC

  (f)(k)  

Capital Goods

  L+804   1.0%   5/8/19     57,000       57,000       57,855  

ATX Networks Corp.

  (f)(g)(o)  

Technology Hardware & Equipment

  L+600   1.0%   6/11/21     1,950       1,928       1,916  

ATX Networks Corp.

  (f)(k)(o)  

Technology Hardware & Equipment

  L+600   1.0%   6/11/21     26,092       25,311       25,309  

BenefitMall Holdings, Inc.

  (g)(h)(j)(k)  

Commercial & Professional Services

  L+725   1.0%   11/24/20     112,700       112,700       113,827  

Cactus Wellhead, LLC

  (f)(g)  

Energy

  L+600   1.0%   7/31/20     16,379       15,579       14,946  

Cadence Aerospace Finance, Inc.

  (f)  

Capital Goods

  L+575   1.3%   5/9/18     2,709       2,717       2,628  

Caesars Entertainment Operating Co., Inc.

  (j)(n)(o)  

Consumer Services

  L+575     3/1/17     11,502       11,425       11,818  

Caesars Entertainment Operating Co., Inc.

  (j)(n)(o)  

Consumer Services

  L+675     3/1/17     3,856       3,833       3,943  

Caesars Entertainment Operating Co., Inc.

  (f)(i)(j)(n)(o)  

Consumer Services

  L+875   1.0%   3/1/17     9,086       9,078       9,458  

 

See notes to unaudited consolidated financial statements.

 

18


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 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 Resort Properties, LLC

  (j)  

Consumer Services

  L+600   1.0%   10/11/20   $ 30,562     $ 29,416     $ 30,896  

CEVA Group Plc

  (o)(p)  

Transportation

  L+500     3/19/19     20,000       20,000       16,000  

Cimarron Energy Inc.

  (k)  

Energy

  L+775, 3.8% PIK

(3.8% Max PIK)

  1.0%   12/15/19     23,664       23,664       24,019  

Corner Investment PropCo, LLC

  (f)(j)  

Consumer Services

  L+975   1.3%   11/2/19     38,758       39,092       39,145  

Crestwood Holdings LLC

  (f)  

Energy

  L+800   1.0%   6/19/19     5,021       5,010       4,927  

CSafe Acquisition Co., Inc.

   

Capital Goods

  L+725     11/1/21     835       835       835  

CSafe Acquisition Co., Inc.

  (p)  

Capital Goods

  L+725     11/1/21     5,426       5,426       5,426  

CSafe Acquisition Co., Inc.

  (f)(g)(h)(j)  

Capital Goods

  L+725     10/31/23     48,000       48,000       48,000  

CSafe Acquisition Co., Inc.

  (p)  

Capital Goods

  L+725     10/31/23     29,217       29,217       29,217  

Dayton Superior Corp.

  (k)  

Materials

  L+800   1.0%   11/15/21     11,667       11,321       11,754  

Diamond Resorts International, Inc.

  (g)  

Consumer Services

  L+600   1.0%   9/2/23     14,963       14,604       15,031  

Eastman Kodak Co.

  (f)  

Consumer Durables & Apparel

  L+625   1.0%   9/3/19     6,958       6,895       7,002  

Emerging Markets Communications, LLC

  (f)(g)  

Telecommunication Services

  L+575   1.0%   7/1/21     12,805       11,985       12,613  

Empire Today, LLC

  (f)(g)(h)(j)(k)  

Retailing

  L+800   1.0%   11/17/22     90,000       90,000       90,797  

Fairway Group Acquisition Co.

  (j)  

Food & Staples Retailing

  L+800   1.0%   1/3/20     2,492       2,492       2,517  

Fairway Group Acquisition Co.

   

Food & Staples Retailing

  10.0% PIK
(10.0% Max PIK)
    1/3/20     1,608       1,608       1,463  

Fox Head, Inc.

  (g)(j)(k)  

Consumer Durables & Apparel

  L+850   1.0%   12/19/20     13,153       13,153       12,963  

FR Dixie Acquisition Corp.

  (f)  

Energy

  L+475   1.0%   12/18/20     4,084       4,072       2,144  

Greystone Equity Member Corp.

  (e)(o)  

Diversified Financials

  L+1050     3/31/21     33,076       33,209       33,366  

Greystone Equity Member Corp.

  (e)(o)(p)  

Diversified Financials

  L+1100     3/31/21     6,924       6,924       6,984  

Gulf Finance, LLC

  (g)  

Energy

  L+525   1.0%   8/25/23     4,988       4,844       5,025  

H.M. Dunn Co., Inc.

  (j)(k)  

Capital Goods

  L+955   1.0%   3/26/21     64,286       64,286       65,009  

H.M. Dunn Co., Inc.

  (p)  

Capital Goods

  L+775   1.0%   3/26/21     21,429       21,429       21,670  

Hybrid Promotions, LLC

  (g)(j)(k)  

Consumer Durables & Apparel

  L+850   1.0%   12/19/20     48,227       48,227       47,530  

Industrial Group Intermediate Holdings, LLC

  (f)(g)(h)(j)(k)  

Materials

  L+800   1.3%   5/31/20     126,026       126,026       127,916  

Industry City TI Lessor, L.P.

  (j)  

Consumer Services

  10.8%, 1.0% PIK
(1.0% Max PIK)
    6/30/26     13,045       13,045       13,241  

Intralinks, Inc.

  (f)(g)(j)(o)  

Software & Services

  L+525   2.0%   2/24/19     24,313       24,197       24,099  

JMC Acquisition Merger Corp.

  (f)(g)(h)  

Capital Goods

  L+857   1.0%   11/6/21     18,995       18,995       18,995  

 

See notes to unaudited consolidated financial statements.

 

19


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

JSS Holdings, Inc.

  (f)  

Capital Goods

  L+650   1.0%   8/31/21   $ 7,500     $ 7,085     $ 7,462  

Latham Pool Products, Inc.

  (f)(g)(j)  

Commercial & Professional Services

  L+775   1.0%   6/29/21     35,000       35,000       35,350  

LD Intermediate Holdings, Inc.

  (k)  

Software & Services

  L+588   1.0%   12/9/22     17,000       15,305       15,810  

MB Precision Holdings LLC

  (g)(h)(j)  

Capital Goods

  L+725, 1.5% PIK
(1.5% Max PIK)
  1.3%   1/23/20     59,981       59,981       57,657  

MMM Holdings, Inc.

  (f)  

Health Care Equipment & Services

  L+825   1.5%   6/30/19     2,009       2,013       1,964  

MORSCO, Inc.

  (e)(f)  

Capital Goods

  L+700   1.0%   10/31/23     20,000       19,217       20,200  

Moxie Liberty LLC

  (f)(h)  

Energy

  L+650   1.0%   8/21/20     11,752       11,777       11,619  

Moxie Patriot LLC

  (h)  

Energy

  L+575   1.0%   12/19/20     5,438       5,406       5,411  

MSO of Puerto Rico, Inc.

  (f)  

Health Care Equipment & Services

  L+825   1.5%   6/30/19     1,461       1,463       1,428  

Nobel Learning Communities, Inc.

   

Consumer Services

  L+450   1.0%   4/27/20     4,193       4,193       4,193  

Nobel Learning Communities, Inc.

  (p)  

Consumer Services

  L+450   1.0%   4/27/20     6,988       6,988       6,988  

Nobel Learning Communities, Inc.

  (f)(j)(k)  

Consumer Services

  L+841   1.0%   4/27/21     84,472       84,472       85,739  

North Haven Cadence Buyer, Inc.

  (p)  

Consumer Services

  L+500   1.0%   9/2/21     2,625       2,625       2,625  

North Haven Cadence Buyer, Inc.

  (f)(h)(j)(k)  

Consumer Services

  L+813   1.0%   9/2/22     74,958       74,958       74,958  

North Haven Cadence Buyer, Inc.

  (p)  

Consumer Services

  L+750   1.0%   9/2/22     12,542       12,542       12,542  

Nova Wildcat Amerock, LLC

  (f)(g)(j)  

Consumer Durables & Apparel

  L+859   1.3%   9/10/19     64,759       64,759       62,816  

PHRC License, LLC

  (e)(g)(h)  

Consumer Services

  L+900   1.5%   8/14/20     58,506       58,506       59,091  

Polymer Additives, Inc.

  (g)(h)(k)  

Materials

  L+888   1.0%   12/20/21     63,068       63,068       63,384  

Polymer Additives, Inc.

  (k)  

Materials

  L+978   1.0%   12/20/21     1,941       1,941       2,019  

Production Resource Group, LLC

  (f)(g)(h)(k)  

Media

  L+850   1.0%   7/23/19     47,500       47,500       47,025  

Production Resource Group, LLC

  (f)(j)(k)  

Media

  L+850   1.0%   7/23/19     48,099       48,099       47,617  

Propulsion Acquisition, LLC

  (f)(g)(j)  

Commercial & Professional Services

  L+600   1.0%   7/13/21     37,405       34,996       36,657  

PSKW, LLC

  (f)(g)(j)  

Health Care Equipment & Services

  L+839   1.0%   11/25/21     26,000       26,000       25,297  

Roadrunner Intermediate Acquisition Co., LLC

  (f)  

Health Care Equipment & Services

  L+800   1.0%   9/22/21     7,750       7,750       7,866  

Rogue Wave Software, Inc.

  (j)  

Software & Services

  L+802   1.0%   9/25/21     19,913       19,913       19,913  

Safariland, LLC

  (h)(j)  

Capital Goods

  L+769   1.0%   11/18/23     70,234       70,234       70,059  

Safariland, LLC

  (p)  

Capital Goods

  L+725   1.0%   11/18/23     13,867       13,867       13,832  

Sequential Brands Group, Inc.

  (h)(j)(k)(o)  

Consumer Durables & Apparel

  L+900     7/1/22     159,288       159,288       160,881  

Sorenson Communications, Inc.

  (f)(g)(h)(j)  

Telecommunication Services

  L+575   2.3%   4/30/20     99,460       99,158       98,714  

Sports Authority, Inc.

  (f)(m)(n)  

Retailing

  L+600   1.5%   11/16/17     7,818       6,676       1,593  

 

See notes to unaudited consolidated financial statements.

 

20


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Strike, LLC

  (p)  

Energy

  L+800   1.0%   5/30/19   $ 5,000     $ 4,926     $ 4,925  

Strike, LLC

  (k)(l)  

Energy

  L+800   1.0%   11/30/22     7,500       7,275       7,425  

SunGard Availability Services Capital, Inc.

  (f)(i)  

Software & Services

  L+500   1.0%   3/29/19     10,749       10,184       10,436  

Sunnova Asset Portfolio 5 Holdings, LLC

   

Energy

  12.0%, 0.0% PIK
(12.0% Max PIK)
    11/14/21     9,406       9,267       9,500  

Swift Worldwide Resources US Holdings Corp.

  (f)(h)  

Energy

  L+1100   1.0%   7/20/21     19,538       19,538       19,538  

ThermaSys Corp.

  (f)  

Capital Goods

  L+400   1.3%   5/3/19     4,650       4,651       4,010  

TierPoint, LLC

  (f)  

Software & Services

  L+450   1.0%   12/2/21     4,526       4,445       4,562  

Transplace Texas, LP

  (j)  

Transportation

  L+744   1.0%   9/16/21     22,038       22,038       22,038  

Transplace Texas, LP

  (p)  

Transportation

  L+700   1.0%   9/16/21     486       486       486  

U.S. Xpress Enterprises, Inc.

  (g)(h)(j)  

Transportation

  L+1000, 0.0% PIK
(1.8% Max PIK)
  1.5%   5/30/19     67,684       67,684       67,684  

UTEX Industries, Inc.

  (k)  

Energy

  L+400   1.0%   5/21/21     1,125       1,121       1,053  

Vertellus Performance Chemicals LLC

  (j)(k)  

Materials

  L+950   1.0%   1/30/20     65,000       65,000       61,054  

Warren Resources, Inc.

  (e)(j)(x)  

Energy

  L+900, 1.0% PIK
(1.0% Max PIK)
  1.0%   5/22/20     42,122       42,122       42,122  

Warren Resources, Inc.

  (p)(x)  

Energy

  L+900, 1.0% PIK
(1.0% Max PIK)
  1.0%   5/22/20     3,002       3,002       3,002  

Waste Pro USA, Inc.

  (g)(h)(j)(k)  

Commercial & Professional Services

  L+750   1.0%   10/15/20     122,363       122,363       124,657  

Zeta Interactive Holdings Corp.

  (f)(g)(j)  

Software & Services

  L+750   1.0%   7/29/22     28,076       28,152       28,356  

Zeta Interactive Holdings Corp.

  (f)(g)(v)  

Software & Services

  L+750   1.0%   7/29/22     8,214       8,139       8,268  

Zeta Interactive Holdings Corp.

  (p)  

Software & Services

  L+750   1.0%   7/29/22     5,109       5,109       5,156  

Zeta Interactive Holdings Corp.

  (p)(v)  

Software & Services

  L+750   1.0%   7/29/22     1,314       1,314       1,319  
             

 

 

   

 

 

 

Total Senior Secured Loans—First Lien

                3,049,882       3,027,538  

Unfunded Loan Commitments

                (163,449     (163,449
             

 

 

   

 

 

 

Net Senior Secured Loans—First Lien

                2,886,433       2,864,089  
             

 

 

   

 

 

 

Senior Secured Loans—Second Lien—24.7%

               

Alison US LLC

  (i)(o)  

Capital Goods

  L+850   1.0%   8/29/22     4,444       4,303       4,311  

American Bath Group, LLC

  (k)  

Capital Goods

  L+975   1.0%   9/30/24     7,000       6,448       6,755  

 

See notes to unaudited consolidated financial statements.

 

21


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

AP Exhaust Acquisition, LLC

   

Automobiles & Components

  12.0% PIK
(12.0% Max PIK)
    9/28/21   $ 38,889     $ 38,889     $ 33,882  

Arena Energy, LP

  (f)(j)  

Energy

  L+900, 4.0% PIK
(4.0% Max PIK)
  1.0%   1/24/21     23,864       23,864       23,983  

Ascent Resources—Marcellus, LLC

  (f)  

Energy

  L+750   1.0%   8/4/21     3,333       3,291       442  

Ascent Resources—Utica, LLC

  (e)(h)(j)(k)  

Energy

  L+950   1.5%   9/30/18     248,050       247,400       250,220  

ASG Technologies Group, Inc.

  (j)(x)  

Software & Services

  L+1100, 0.0% PIK
(6.0% Max PIK)
  1.0%   6/27/22     26,989       20,189       26,179  

BPA Laboratories Inc.

  (j)  

Pharmaceuticals, Biotechnology & Life Sciences

  L+250     7/3/17     3,272       3,129       2,263  

Byrider Finance, LLC

  (e)  

Automobiles & Components

  L+1000, 0.5% PIK
(0.5% Max PIK)
  1.3%   8/22/20     16,745       16,745       16,493  

Checkout Holding Corp.

  (k)  

Media

  L+675   1.0%   4/11/22     10,000       9,945       7,200  

Chief Exploration & Development LLC

  (f)  

Energy

  L+650   1.3%   5/16/21     1,174       1,166       1,154  

Compuware Corp.

  (j)  

Software & Services

  L+825   1.0%   12/15/22     10,000       8,915       10,050  

Crossmark Holdings, Inc.

  (k)  

Media

  L+750   1.3%   12/21/20     7,778       7,791       3,694  

Fairway Group Acquisition Co.

   

Food & Staples Retailing

  11.0% PIK
(11.0% Max PIK)
    10/3/21     1,400       1,400       1,148  

Fieldwood Energy LLC

  (e)  

Energy

  L+713   1.3%   9/30/20     2,667       2,040       1,900  

Gruden Acquisition, Inc.

  (j)  

Transportation

  L+850   1.0%   8/18/23     15,000       14,366       11,875  

Inmar, Inc.

  (k)  

Software & Services

  L+700   1.0%   1/27/22     2,830       2,810       2,713  

Jazz Acquisition, Inc.

  (f)  

Capital Goods

  L+675   1.0%   6/19/22     3,700       3,742       3,139  

Jonah Energy LLC

  (e)  

Energy

  L+650   1.0%   5/12/21     1,250       1,095       1,188  

JW Aluminum Co.

  (e)(j)(k)(x)  

Materials

  L+850 PIK
(L+850 Max PIK)
  0.8%   11/17/20     33,818       33,808       34,410  

Logan’s Roadhouse, Inc.

  (x)  

Consumer Services

  L+850 PIK
(L+850 Max PIK)
  1.0%   11/23/20     10,824       10,824       10,355  

National Surgical Hospitals, Inc.

  (j)  

Health Care Equipment & Services

  L+900   1.0%   6/1/23     17,500       17,500       17,508  

Neff Rental LLC

  (k)  

Capital Goods

  L+625   1.0%   6/9/21     7,253       7,227       7,224  

Nielsen & Bainbridge, LLC

  (f)(g)  

Consumer Durables & Apparel

  L+925   1.0%   8/15/21     16,675       16,490       16,341  

P2 Upstream Acquisition Co.

  (k)  

Energy

  L+800   1.3%   4/30/21     14,500       14,688       13,286  

Paw Luxco II Sarl

  (o)  

Consumer Durables & Apparel

  EURIBOR+950     1/29/19   5,727       7,241       719  

 

See notes to unaudited consolidated financial statements.

 

22


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

Payless Inc.

  (k)  

Retailing

  L+750   1.0%   3/11/22   $ 10,841     $ 10,762     $ 1,771  

Peak 10, Inc.

  (g)  

Software & Services

  L+725   1.0%   6/17/22     5,500       5,460       5,184  

PSAV Acquisition Corp.

  (j)  

Technology Hardware & Equipment

  L+825   1.0%   1/24/22     80,000       79,153       80,000  

Spencer Gifts LLC

  (k)  

Retailing

  L+825   1.0%   6/29/22     20,000       20,091       16,550  

Titan Energy Operating, LLC

  (g)(j)  

Energy

  2.0%, L+900 PIK
(L+900 Max PIK)
  1.0%   2/23/20     69,954       58,348       57,236  

TNS, Inc.

  (g)(i)(k)  

Software & Services

  L+800   1.0%   8/14/20     43,475       43,220       43,222  

WP CPP Holdings, LLC

  (j)  

Capital Goods

  L+775   1.0%   4/30/21     6,932       6,909       6,576  
             

 

 

   

 

 

 

Total Senior Secured Loans—Second Lien

                749,249       718,971  
             

 

 

   

 

 

 

Senior Secured Bonds—5.1%

               

Advanced Lighting Technologies, Inc.

  (e)(j)  

Materials

  10.5%     6/1/19     35,500       33,181       12,709  

Caesars Entertainment Resort Properties, LLC

  (i)(j)  

Consumer Services

  11.0%     10/1/21     37,350       37,903       40,815  

CEVA Group Plc

  (i)(o)  

Transportation

  7.0%     3/1/21     5,000       4,393       4,082  

CEVA Group Plc

  (i)(o)  

Transportation

  9.0%     9/1/21     2,000       2,000       1,310  

Diamond Resorts International, Inc.

  (k)  

Consumer Services

  7.8%     9/1/23     10,000       10,000       10,083  

FourPoint Energy, LLC

  (e)(j)  

Energy

  9.0%     12/31/21     46,313       44,892       47,413  

Global A&T Electronics Ltd.

  (e)(k)(o)  

Semiconductors & Semiconductor Equipment

  10.0%     2/1/19     19,490       18,983       14,837  

Ridgeback Resources Inc.

  (e)(o)(w)  

Energy

  12.0%     12/29/20     331       324       331  

Sorenson Communications, Inc.

  (j)  

Telecommunication Services

  9.0%, 0.0% PIK
(9.0% Max PIK)
    10/31/20     7,058       6,861       6,281  

Velvet Energy Ltd.

  (o)  

Energy

  9.0%     10/5/23     10,000       10,000       10,224  
             

 

 

   

 

 

 

Total Senior Secured Bonds

                168,537       148,085  
             

 

 

   

 

 

 

Subordinated Debt—13.9%

               

Aurora Diagnostics, LLC

  (j)  

Health Care Equipment & Services

  10.8%     1/15/18     6,130       6,140       5,287  

Bellatrix Exploration Ltd.

  (o)  

Energy

  8.5%     5/15/20     5,000       4,928       4,922  

BMC Software Finance, Inc.

  (k)  

Software & Services

  7.3%     6/1/18     3,820       3,651       3,837  

Brooklyn Basketball Holdings, LLC

  (h)(j)  

Consumer Services

  L+725     10/25/19     39,746       39,746       39,944  

CEC Entertainment, Inc.

  (i)  

Consumer Services

  8.0%     2/15/22     18,715       18,545       19,152  

Ceridian HCM Holding, Inc.

  (i)(k)  

Commercial & Professional Services

  11.0%     3/15/21     46,250       45,843       47,753  

 

See notes to unaudited consolidated financial statements.

 

23


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 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.

  (i)(o)  

Energy

  8.9%     7/15/23   $ 9,175     $ 9,008     $ 9,573  

EV Energy Partners, L.P.

  (e)  

Energy

  8.0%     4/15/19     259       239       184  

Global Jet Capital Inc.

   

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    1/30/25     732       732       727  

Global Jet Capital Inc.

   

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    4/30/25     4,649       4,649       4,620  

Global Jet Capital Inc.

   

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    9/3/25     961       961       955  

Global Jet Capital Inc.

   

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    9/29/25     904       904       899  

Global Jet Capital Inc.

  (e)(o)  

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    12/4/25     6,676       6,676       6,635  

Global Jet Capital Inc.

  (e)(o)  

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    12/9/25     1,092       1,092       1,085  

Global Jet Capital Inc.

  (e)(o)  

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    1/29/26     572       572       568  

Global Jet Capital Inc.

   

Commercial & Professional Services

  15.0% PIK
(15.0% Max PIK)
    12/2/26     1,730       1,730       1,730  

Jupiter Resources Inc.

  (h)(o)  

Energy

  8.5%     10/1/22     28,800       26,772       25,008  

Mood Media Corp.

  (l)(o)  

Media

  10.0%     8/6/23     6,930       6,103       6,410  

Mood Media Corp.

  (e)(j)(o)  

Media

  9.3%     10/15/20     46,207       45,764       28,648  

NewStar Financial, Inc.

  (h)(j)(k)(o)  

Diversified Financials

  8.3%, 0.0% PIK
(8.8% Max PIK)
    12/4/24     150,000       123,230       130,500  

P.F. Chang’s China Bistro, Inc.

  (i)(j)  

Consumer Services

  10.3%     6/30/20     31,353       31,262       30,778  

S1 Blocker Buyer Inc.

   

Commercial & Professional Services

  10.0% PIK
(10.0% Max PIK)
    10/31/22     268       268       272  

SandRidge Energy, Inc.

  (n)(o)  

Energy

  0.0%     10/4/20     2,643       3,522       3,318  

Scientific Games Corp.

  (i)(o)  

Consumer Services

  8.1%     9/15/18     3,340       3,285       3,383  

Sorenson Communications, Inc.

  (e)(j)  

Telecommunication Services

  13.9%, 0.0% PIK
(13.9% Max PIK)
    10/31/21     5,364       5,075       4,935  

 

See notes to unaudited consolidated financial statements.

 

24


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

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

SunGard Availability Services Capital, Inc.

  (i)  

Software & Services

  8.8%     4/1/22   $ 5,900     $ 4,436     $ 4,064  

Talos Production LLC

  (e)  

Energy

  9.8%     2/15/18     4,500       4,291       2,497  

TI Group Automotive Systems, LLC

  (i)(o)  

Automobiles & Components

  8.8%     7/15/23     7,302       7,302       7,699  

York Risk Services Holding Corp.

  (i)(j)  

Insurance

  8.5%     10/1/22     8,350       7,594       7,014  
             

 

 

   

 

 

 

Total Subordinated Debt

                414,320       402,397  
             

 

 

   

 

 

 

Collateralized Securities—0.8%

               

CGMS CLO 2013-3A Class Subord.

  (o)  

Diversified Financials

  16.8%     7/15/25     17,000       7,941       10,674  

NewStar Clarendon 2014-1A Class D

  (o)  

Diversified Financials

  L+435     1/25/27     1,060       1,003       1,000  

NewStar Clarendon 2014-1A Class Subord. B

  (o)  

Diversified Financials

  16.4%     1/25/27     12,140       9,680       9,698  

Octagon CLO 2012-1A Class Income

  (o)  

Diversified Financials

  5.8%     1/15/24     4,650       1,644       1,801  
             

 

 

   

 

 

 

Total Collateralized Securities

                20,268       23,173  
             

 

 

   

 

 

 
                        Number
of Shares
    Cost     Fair
Value(d)
 

Equity/Other—11.7%

               

5 Arches, LLC, Common Equity

  (n)(o)(r)  

Diversified Financials

          4,738       125       125  

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

  (e)(n)(x)  

Retailing

          1,000,000       1,000       —    

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

  (e)(n)(x)  

Retailing

          243,478       243       —    

A.T. Cross Co., GSO Special Unit

  (n)(x)   Retailing           1       —         —    

Abaco Energy Technologies LLC, Common Equity

  (n)  

Energy

          3,055,556       3,056       153  

Abaco Energy Technologies LLC, Preferred Equity

  (n)  

Energy

          12,734,481       637       637  

ACP FH Holdings GP, LLC, Common Equity

  (e)(n)  

Consumer Durables & Apparel

          88,571       89       71  

 

See notes to unaudited consolidated financial statements.

 

25


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Number
of Shares
    Cost     Fair
Value(d)
 

ACP FH Holdings, LP, Common Equity

  (e)(n)  

Consumer Durables & Apparel

          8,768,572     $ 8,769     $ 7,017  

Altus Power America Holdings, LLC, Common Equity

  (n)  

Energy

          462,008       462       462  

Altus Power America Holdings, LLC, Preferred Equity

  (t)  

Energy

          833,333       888       888  

Amaya Inc., Warrants, 5/15/2024

  (n)(o)  

Consumer Services

          2,000,000       16,832       13,360  

AP Exhaust Holdings, LLC, Common Equity

  (n)(r)  

Automobiles & Components

          8,378       8,378       419  

Ascent Resources Utica Holdings, LLC, Common Equity

  (n)(q)  

Energy

          128,734,129       38,700       28,836  

ASG Technologies Group, Inc., Common Equity

  (n)(x)  

Software & Services

          625,178       13,475       29,477  

ASG Technologies Group, Inc., Warrants, 6/27/2022

  (n)(x)  

Software & Services

          253,704       7,231       6,444  

Aspect Software, Inc., Common Equity

  (n)  

Software & Services

          386,092       18,639       21,081  

ATX Holdings, LLC, Common Equity

  (n)(o)  

Technology Hardware & Equipment

          72,635       116       116  

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

  (j)(n)  

Pharmaceuticals, Biotechnology & Life Sciences

          10,924       —         —    

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

  (j)(n)  

Pharmaceuticals, Biotechnology & Life Sciences

          17,515       —         —    

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

  (n)(o)  

Retailing

          3,451,216       1,898       276  

Cimarron Energy Holdco Inc., Common Equity

  (n)  

Energy

          3,201,631       2,991       1,921  

CSF Group Holdings, Inc., Common Equity

  (n)  

Capital Goods

          417,400       417       417  

DHS Technologies LLC, Common Equity

  (e)(n)  

Capital Goods

          60,872       5,000       626  

Eastman Kodak Co., Common Equity

  (n)  

Consumer Durables & Apparel

          1,846       36       29  

H.I.G. Empire Holdco, Inc., Common Equity

  (n)  

Retailing

          411       1,227       1,260  

Fairway Group Acquisition Co., Common Equity

  (n)  

Food & Staples Retailing

          31,626       1,016       822  

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

  (n)(r)  

Energy

          13,000       13,000       6,273  

FourPoint Energy, LLC, Common Equity, Class D Units

  (n)(r)  

Energy

          2,437       1,610       1,188  

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

  (n)(r)  

Energy

          54,104       13,526       24,753  

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

  (e)(n)(r)  

Energy

          43,875       10,969       21,170  

Global Jet Capital Holdings, LP, Preferred Equity

  (e)(n)(o)  

Commercial & Professional Services

          6,228,866       6,229       6,229  

Harvey Holdings, LLC, Common Equity

  (n)  

Capital Goods

          666,667       667       1,533  

Industrial Group Intermediate Holdings, LLC, Common Equity

  (n)(r)  

Materials

          2,678,947       2,679       4,688  

JMC Acquisition Holdings, LLC, Common Equity

  (n)  

Capital Goods

          1,449       1,449       1,616  

JW Aluminum Co., Common Equity

  (e)(k)(n)(x)  

Materials

          256       —         —    

JW Aluminum Co., Preferred Equity

  (e)(k)(x)  

Materials

          1,184       11,279       11,854  

MB Precision Investment Holdings LLC, Class A-2 Units

  (n)(r)  

Capital Goods

          2,287,659       2,288       458  

 

See notes to unaudited consolidated financial statements.

 

26


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company(a)

  Footnotes  

Industry

  Number
of Shares
    Cost     Fair
Value(d)
 

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

  (e)(n)(o)  

Diversified Financials

          6,000,000     $ 30,115     $ 16,620  

North Haven Cadence Buyer, Inc., Common Equity

  (n)  

Consumer Services

          2,916,667       2,917       3,063  

Professional Plumbing Group, Inc., Common Equity

  (e)(n)  

Capital Goods

          3,000,000       3,000       7,500  

PSAV Holdings LLC, Common Equity

   

Technology Hardware & Equipment

          10,000       10,000       28,500  

Ridgeback Resources Inc., Common Equity

  (e)(n)(o)(w)  

Energy

          817,308       5,022       5,022  

Roadhouse Holding Inc., Common Equity

  (n)(x)  

Consumer Services

          4,481,763       4,657       5,472  

S1 Blocker Buyer Inc., Common Equity

   

Commercial & Professional Services

          124       1,240       1,208  

SandRidge Energy, Inc., Common Equity

  (n)(o)  

Energy

          112,112       2,803       2,640  

Sequential Brands Group, Inc., Common Equity

  (e)(n)(o)  

Consumer Durables & Apparel

          408,685       5,517       1,913  

Sorenson Communications, Inc., Common Equity

  (e)(n)  

Telecommunication Services

          43,796       —         36,990  

Sunnova Energy Corp., Common Equity

  (n)  

Energy

          384,746       1,444       2,089  

Sunnova Energy Corp., Preferred Equity

  (n)  

Energy

          36,363       194       197  

Swift Worldwide Resources Holdco Limited, Common Equity

  (n)(o)(u)  

Energy

          1,250,000       2,010       625  

TE Holdings, LLC, Common Equity

  (e)(n)(r)  

Energy

          717,718       6,101       5,383  

TE Holdings, LLC, Preferred Equity

  (e)(n)  

Energy

          475,758       4,751       7,136  

Titan Energy LLC, Common Equity

  (e)(n)  

Energy

          200,040       6,322       4,801  

Warren Resources, Inc., Common Equity

  (n)(x)  

Energy

          2,371,337       11,145       10,197  

White Star Petroleum Holdings, LLC, Common Equity

  (e)(n)  

Energy

          1,613,753       1,372       1,573  

Zeta Interactive Holdings Corp., Preferred Equity

  (n)  

Software & Services

          620,025       4,929       5,552  
             

 

 

   

 

 

 

Total Equity/Other

                298,460       340,680  
             

 

 

   

 

 

 

TOTAL INVESTMENTS—154.6%

              $ 4,537,267       4,497,395  
             

 

 

   

LIABILITIES IN EXCESS OF OTHER ASSETS—(54.6%)

                  (1,587,535
               

 

 

 

NET ASSETS—100.0%

                $ 2,909,860  
               

 

 

 

 

See notes to unaudited consolidated financial statements.

 

27


Table of Contents

FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

 

(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, 2016, the three-month London Interbank Offered Rate, or LIBOR or L, was 1.00%, the Euro Interbank Offered Rate, or EURIBOR, was (0.32)% and the U.S. Prime Lending Rate, or Prime, was 3.75%. PIK means paid-in-kind.

 

(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 Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8).

 

(f) 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).

 

(g) 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).

 

(h) 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).

 

(i) 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).

 

(j) 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).

 

(k) 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).

 

(l) Position or portion thereof unsettled as of December 31, 2016.

 

(m) Security was on non-accrual status as of December 31, 2016.

 

(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, 2016, 87.9% 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.

 

See notes to unaudited consolidated financial statements.

 

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FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

(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, at an exchange rate of £1.00 to USD$1.23 as of December 31, 2016.

 

(v) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the consolidated schedule of investments as of December 31, 2016 (see Note 8).

 

(w) Investment denominated in Canadian dollars. Cost and fair value are converted into U.S. dollars at an exchange rate of CAD$1.00 to USD$0.74 as of December 31, 2016.

 

(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, 2016, the Company held investments in portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control”. The following table presents certain financial information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person for the year ended December 31, 2016:

 

Portfolio Company

  Fair Value at
December 31, 2015
    Purchases  and
Paid-in-Kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net
Realized
Gain
(Loss)
    Net
Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
December 31, 2016
    Interest
Income
    Fee
Income
    Dividend
Income
 

Senior Secured Loans—First Lien

                   

A.T. Cross Co.

    —       $ 31,027       —       $ 682       —       $ (3,628   $ 28,081     $ 1,807       —         —    

ASG Technologies Group, Inc.(1)

  $ 71,389     $ 8,439       —       $ 22       —       $ 655     $ 80,505     $ 7,735       —         —    

Warren Resources, Inc.(2)

    —       $ 42,122       —         —         —         —       $ 42,122     $ 1,095     $ 180       —    

Senior Secured Loans—Second Lien

                   

ASG Technologies Group, Inc.(1)

    —       $ 19,758       —       $ 431       —       $ 5,990     $ 26,179     $ 1,926     $ 810       —    

JW Aluminum Co.

  $ 30,061     $ 3,747       —         —         —       $ 602     $ 34,410     $ 3,040       —         —    

Logan’s Roadhouse, Inc.

    —       $ 10,824       —         —         —       $ (469   $ 10,355     $ 111     $ 9       —    

Senior Secured Bonds

                   

JW Aluminum Co.

    —       $ 4,421     $ (4,466   $ 59     $ (14     —         —       $ 115       —         —    

 

See notes to unaudited consolidated financial statements.

 

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FS Investment Corporation II

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

 

 

 

Portfolio Company

  Fair Value at
December 31, 2015
    Purchases  and
Paid-in-Kind
Interest
    Sales and
Repayments
    Accretion of
Discount
    Net
Realized
Gain
(Loss)
    Net
Change in
Unrealized
Appreciation
(Depreciation)
    Fair Value at
December 31, 2016
    Interest
Income
    Fee
Income
    Dividend
Income
 

Equity/Other

                   

A.T. Cross Co., Common Equity, Class A Units(3)

    —         —         —         —         —       $ (1,000     —         —         —         —    

A.T. Cross Co., Preferred Equity, Class A-1 Units(3)

    —         —         —         —         —       $ (243     —         —         —         —    

A.T. Cross Co., GSO Special Unit

    —         —         —         —         —         —         —         —         —         —    

ASG Technologies Group, Inc. Common Equity(1)

  $ 28,821       —         —         —         —       $ 656     $ 29,477       —         —         —    

ASG Technologies Group, Inc., Warrants, 6/27/2022(1)

    —       $ 7,231       —         —         —       $ (787   $ 6,444       —         —         —    

JW Aluminum Co., Common Equity

    —         —         —         —         —         —         —         —         —         —    

JW Aluminum Co., Preferred Equity

  $ 11,247     $ 223       —         —         —       $ 384     $ 11,854       —         —         —    

Roadhouse Holding Inc., Common Equity

    —       $ 4,657       —         —         —       $ 815     $ 5,472       —         —         —    

Warren Resources, Inc., Common Equity

    —       $ 11,145       —         —         —       $ (948   $ 10,197       —         —         —    

 

(1) ASG Technologies Group, Inc. was formerly known as Allen Systems Group, Inc.

 

(2) Security includes a partially unfunded commitment with an amortized cost of $3,002 and a fair value of $3,002.

 

(3) The Company held this investment as of December 31, 2015 but it was not deemed to be an “affiliated person” of the portfolio company or deemed to “control” the portfolio company as of December 31, 2015.

 

See notes to unaudited consolidated financial statements.

 

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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 March 31, 2017, the Company had eight wholly-owned financing subsidiaries, four wholly-owned subsidiaries through which it holds interests in portfolio companies and one wholly-owned subsidiary through which it expects to hold interests in portfolio companies. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2017. 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 interests 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, in the Company’s target companies, generally 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. The Company’s investment adviser, FSIC II Advisor, LLC, or FSIC II Advisor, will seek to tailor the Company’s investment focus as market conditions evolve. Depending on market conditions, the Company may increase or decrease its exposure to less senior portions of the capital structure or otherwise make opportunistic investments.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the 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, 2016 included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. Operating results

 

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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)

 

for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. The December 31, 2016 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2016. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Update No. 2013-08, Financial Services—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 FSIC II Advisor dated as of February 8, 2012, or the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 20.0% of the 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

 

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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)

 

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. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

Partial Loan Sales: The Company follows the guidance in Accounting Standards Codification Topic 860, Transfers and Servicing, or ASC Topic 860, when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 8 for additional information.

Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three months ended March 31, 2016 and the audited consolidated financial statements as of and for the year ended December 31, 2016 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements as of and for the three months ended March 31, 2017. These reclassifications 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 three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017     2016  
     Shares     Amount     Shares     Amount  

Reinvestment of Distributions

     3,469,599     $ 31,286       5,080,272     $ 42,657  

Share Repurchase Program

     (2,344,810     (20,986     (1,779,357     (15,214
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Proceeds from Share Transactions

     1,124,789     $ 10,300       3,300,915     $ 27,443  
  

 

 

   

 

 

   

 

 

   

 

 

 

Distribution Reinvestment Plan

During the three months ended March 31, 2017 and 2016, the Company issued 3,469,599 and 5,080,272 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $31,286 and $42,657 at an average price per share of $9.02 and $8.40, respectively. During the period from April 1, 2017 to May 2, 2017, the Company issued 1,139,836 shares of common stock pursuant to its distribution reinvestment plan for gross proceeds of $10,369 at an average price per share of $9.10.

 

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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.

Historically, the Company limited the number of shares of common stock to be repurchased during any calendar year to the lesser of (i) the number of shares of common stock that the Company could repurchase with the proceeds it received from the sale of shares of common stock under the Company’s distribution reinvestment plan during the calendar year (less the amount of any such proceeds used to repurchase shares of common stock on each previous repurchase date during the calendar year) and (ii) 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. On May 8, 2017, the board of directors of the Company amended the share repurchase program so that the maximum number of shares of common stock to be repurchased for any repurchase offer will not exceed (i) the greater of (x) the number of shares of common stock that the Company can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan during the twelve-month period ending on the expiration date of such repurchase offer (less the amount of any such proceeds used to repurchase shares of common stock on each previous repurchase date for tender offers conducted during such period) and (y) the number of shares of common stock that the Company can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan during three-month period ending on the expiration date of such repurchase offer and (ii) 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. The purpose of this amendment was to provide the potential for the repurchase of a greater number of shares of common stock under the share repurchase program, particularly in the early quarters of the calendar year, in light of the limitation relating to proceeds received in connection with the Company’s 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. 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

 

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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)

 

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.

The following table provides information concerning the Company’s repurchases of shares of common stock pursuant to its share repurchase program during the three months ended March 31, 2017 and 2016:

 

For the Three Months Ended

  Repurchase Date     Shares
Repurchased
    Percentage
of Shares
Tendered
That Were
Repurchased
    Percentage of
Outstanding Shares
Repurchased as of
the Repurchase
Date
    Repurchase
Price Per
Share
    Aggregate
Consideration
for Repurchased
Shares
 

Fiscal 2016

           

December 31, 2015

    January 4, 2016       1,779,357       100     0.55   $ 8.550     $ 15,214  

Fiscal 2017

           

December 31, 2016

    January 4, 2017       2,344,810       100     0.72   $ 8.950     $ 20,986  

On April 5, 2017, the Company repurchased 3,353,328 shares of common stock (representing 100% of the shares of the common stock tendered for repurchase and 1.02% of the shares outstanding as of such date) at $9.10 per share for aggregate consideration totaling $30,515.

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 (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) 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 0.25% 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

 

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Table of Contents

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 4. Related Party Transactions (continued)

 

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.

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 equal 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 FS Investments, 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 months ended March 31, 2017 and 2016:

 

               Three Months Ended
March 31,
 

Related Party

  

Source Agreement

  

Description

       2017              2016      

FSIC II Advisor

   Investment Advisory and Administrative Services Agreement    Base Management Fee(1)    $ 22,285      $ 21,007  

FSIC II Advisor

   Investment Advisory and Administrative Services Agreement    Subordinated Incentive Fee on Income(2)    $ 17,499      $ 15,840  

FSIC II Advisor

   Investment Advisory and Administrative Services Agreement    Administrative Services Expenses(3)    $ 867      $ 1,028  

 

(1) FSIC II Advisor agreed, effective March 5, 2015, to permanently waive 0.25% 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 months ended March 31, 2017 and 2016 are net of waivers of $3,183 and $3,001, respectively. During the three months ended March 31, 2017 and 2016, $21,610 and $19,436, respectively, in base management fees were paid to FSIC II Advisor. As of March 31, 2017, $22,285 in base management fees were payable to FSIC II Advisor.

 

(2) During the three months ended March 31, 2017 and 2016, $16,493 and $14,617, respectively, of subordinated incentive fees on income were paid to FSIC II Advisor. As of March 31, 2017, a subordinated incentive fee on income of $17,499 was payable to FSIC II Advisor.

 

(3) During the three months ended March 31, 2017 and 2016, $842 and $978, 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 $803 and $1,291 in administrative services expenses to FSIC II Advisor during the three months ended March 31, 2017 and 2016, 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 the investment advisers to certain other BDCs, open- and closed-end management investment companies and a real estate investment trust sponsored by FS Investments, or the Fund Complex. As a result, such personnel provide or expect to provide investment advisory services to certain others funds in the Fund Complex and such personnel may serve in similar or other capacities for the investment advisers to future investment vehicles in the Fund Complex. While none of the investment advisers are currently providing investment advisory services to clients other than the funds in the Fund Complex, 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. For additional information regarding potential conflicts of interest, please see the Company’s annual report on Form 10-K for the year ended December 31, 2016.

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

 

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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)

 

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, FS Investments 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, FS Investments 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, FS Investments 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 FS Investments for any amounts funded by FS Investments under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which FS Investments 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 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 FS Investments for expense support payments made by FS Investments 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

 

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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)

 

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 FS Investments was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from FS Investments made during the same fiscal year) and (ii) the Company will not reimburse FS Investments for expense support payments made by FS Investments 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 FS Investments 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 FS Investments may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by FS Investments, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by FS Investments, FS Investments will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Company’s conditional obligation to reimburse FS Investments pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

FS Investments 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 FS Investments will reimburse any portion of the Company’s expenses in future quarters. As of March 31, 2017, there were no unreimbursed expense support payments subject to future reimbursement by the Company.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the three months ended March 31, 2017 and 2016:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2016

     

March 31, 2016

   $ 0.1885      $ 60,744  

Fiscal 2017

     

March 31, 2017

   $ 0.1885      $ 61,436  

The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On March 14, 2017 and May 8, 2017, the Company’s board of directors declared regular monthly cash distributions for April 2017 through June 2017 and July 2017 through September 2017, respectively, each in the amount of $0.06283 per share. These distributions have been or will be paid monthly to

 

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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)

 

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, 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 FS Investments. The Company has not established limits on the amount of funds it may use from available 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.

 

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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 reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017     2016  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —          —       $ —          —    

Borrowings

     —          —         —          —    

Net investment income(1)

     61,436        100     60,744        100

Short-term capital gains proceeds from the sale of assets

     —          —         —          —    

Long-term capital gains proceeds from the sale of assets

     —          —         —          —    

Non-capital gains proceeds from the sale of assets

     —          —         —          —    

Distributions on account of preferred and common equity

     —          —         —          —    

Expense reimbursement from sponsor

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 61,436        100   $ 60,744        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the three months ended March 31, 2017 and 2016, 92.6% and 92.6%, respectively, of the Company’s gross investment income was attributable to cash income earned, 2.9% and 3.0%, respectively, was attributable to non-cash accretion of discount and 4.5% and 4.4%, respectively, was attributable to paid-in-kind, or PIK, interest.

The Company’s net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $53,897 and $61,262, respectively. As of March 31, 2017, the Company had $50,264 of undistributed net investment income and $120,145 of capital loss carryover on a tax basis. As of December 31, 2016, the Company had $57,803 of undistributed net investment income and $104,745 of accumulated capital losses on a tax basis.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income 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 or deferred to future periods for tax purposes and the impact of consolidating certain subsidiaries for purposes of computing GAAP-basis income but not for computing tax-basis net investment income.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2017 and 2016:

 

     Three Months Ended
March 31,
 
     2017     2016  

GAAP-basis net investment income

   $ 69,997     $ 63,358  

GAAP versus tax-basis of consolidation of certain subsidiaries

     1,843       793  

Reclassification or deferral of unamortized original issue discount and prepayment fees

     (17,173     (2,889

Other miscellaneous differences

     (770     —    
  

 

 

   

 

 

 

Tax-basis net investment income

   $ 53,897     $ 61,262  
  

 

 

   

 

 

 

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

 

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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)

 

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 March 31, 2017 and December 31, 2016, the components of accumulated earnings on a tax basis were as follows:

 

     March 31, 2017
(Unaudited)
    December 31,
2016
 

Distributable ordinary income

   $ 50,264     $ 57,803  

Distributable realized gains

     —         —    

Capital loss carryover(1)

     (120,145     (104,745

Unamortized organization costs

     (158     (161

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

     12,601       (59,357
  

 

 

   

 

 

 

Total

   $ (57,438   $ (106,460
  

 

 

   

 

 

 

 

(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 March 31, 2017, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $22,287 and $97,858, respectively.

 

(2) As of March 31, 2017 and December 31, 2016, the gross unrealized appreciation on the Company’s investments, secured borrowing and unrealized gain on foreign currency was $177,383 and $169,146, respectively. As of March 31, 2017 and December 31, 2016, the gross unrealized depreciation on the Company’s investments, secured borrowing and unrealized loss on foreign currency was $164,782 and $228,503, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $4,617,964 and $4,556,618 as of March 31, 2017 and December 31, 2016, respectively. The aggregate net unrealized appreciation (depreciation) on investments, secured borrowing and gain/loss on foreign currency on a tax basis was $12,601 and $(59,357) as of March 31, 2017 and December 31, 2016, respectively.

As of March 31, 2017, the Company had a deferred tax liability of $17,306 resulting from tax basis unrealized appreciation on investments held by the Company’s wholly-owned taxable subsidiaries and a total deferred tax asset of $24,961 resulting from net operating loss carryforwards and capital loss carryforwards of the Company’s wholly-owned taxable subsidiaries. As of March 31, 2017, the wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their generated net operating losses, therefore the deferred tax asset was offset by a valuation allowance of $7,655. For the three months ended March 31, 2017, the Company did not record a provision for taxes related to its wholly-owned taxable subsidiaries.

 

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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 March 31, 2017 and December 31, 2016:

 

    March 31, 2017
(Unaudited)
    December 31, 2016  
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of  Portfolio
 

Senior Secured Loans—First Lien

  $ 3,144,359     $ 3,141,561       68   $ 2,886,433     $ 2,864,089       64

Senior Secured Loans—Second Lien

    508,033       482,053       10     749,249       718,971       16

Senior Secured Bonds

    151,404       151,898       3     168,537       148,085       3

Subordinated Debt

    481,109       486,949       11     414,320       402,397       9

Collateralized Securities

    18,235       20,904       0     20,268       23,173       1

Equity/Other

    309,312       347,368       8     298,460       340,680       7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,612,452     $ 4,630,733       100   $ 4,537,267     $ 4,497,395       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 March 31, 2017, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of A.T. Cross Co., in which the Company held a senior secured loan and three equity/other investments, ASG Technologies Group, Inc., in which the Company held two senior secured loans and two equity/other investments, JW Aluminum Co., in which the Company held a senior secured loan and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company held a senior secured loan and an equity/other investment, and Warren Resources, Inc., in which the Company held a senior secured loan, which was partially unfunded, and an equity/other investment. As of March 31, 2017, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.

As of December 31, 2016, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of A.T. Cross Co., in which the Company held a senior secured loan and three equity/other investments, ASG Technologies Group, Inc. (formerly Allen Systems Group, Inc.), in which the Company held two senior secured loans and two equity/other investments, JW Aluminum Co., in which the Company held a senior secured loan and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which the Company held a senior secured loan and an equity/other investment, and Warren Resources, Inc., in which the Company held a senior secured loan, which was partially unfunded, and an equity/other investment. As of December 31, 2016, except for these portfolio companies, the Company did not “control” and was not an “affiliated person”, each as defined in the 1940 Act, of any of its portfolio companies.

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 March 31, 2017, the Company had twenty-one senior secured

 

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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)

 

loan investments with aggregate unfunded commitments of $177,708, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, the Company had eighteen senior secured loan investments with aggregate unfunded commitments of $163,449 and one unfunded commitment to purchase up to $362 in shares of preferred stock of Altus Power America Holdings, LLC. The Company maintains sufficient cash on hand, available 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 March 31, 2017 and audited consolidated schedule of investments as of December 31, 2016.

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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017
(Unaudited)
    December 31, 2016  

Industry Classification

   Fair Value      Percentage
of  Portfolio
    Fair Value      Percentage
of  Portfolio
 

Automobiles & Components

   $ 234,101        5   $ 206,350        5

Capital Goods

     548,766        12     418,102        9

Commercial & Professional Services

     521,540        11     520,703        12

Consumer Durables & Apparel

     323,568        7     317,282        7

Consumer Services

     520,575        11     523,918        12

Diversified Financials

     208,341        5     213,625        5

Energy

     539,982        12     749,437        17

Food & Staples Retailing

     5,070        0     5,950        0

Health Care Equipment & Services

     186,349        4     76,425        2

Insurance

     112,521        2     84,716        2

Materials

     367,158        8     329,788        7

Media

     146,774        3     140,594        3

Pharmaceuticals, Biotechnology & Life Sciences

     2,209        0     2,263        0

Retailing

     177,156        4     140,328        3

Semiconductors & Semiconductor Equipment

     14,179        0     14,837        0

Software & Services

     320,508        7     354,714        8

Technology Hardware & Equipment

     140,709        3     135,841        3

Telecommunication Services

     146,102        3     159,533        3

Transportation

     115,125        3     102,989        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,630,733        100   $ 4,497,395        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

 

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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)

 

risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial 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 March 31, 2017 and December 31, 2016, the Company’s investments were categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2017
(Unaudited)
     December 31,
2016
 

Level 1—Price quotations in active markets

   $ 9,930      $ 9,383  

Level 2—Significant other observable inputs

     —          —    

Level 3—Significant unobservable inputs

     4,620,803        4,488,012  
  

 

 

    

 

 

 

Total

   $ 4,630,733      $ 4,497,395  
  

 

 

    

 

 

 

The Company has elected the fair value option under ASC Topic 825, Financial Instruments, relating to accounting for debt obligations at their fair value for its secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its secured borrowing as a component of the net change in unrealized appreciation (depreciation) on the secured borrowing in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal amount due on maturity.

The secured borrowing as of March 31, 2017 was valued using Level 3 inputs under the fair value hierarchy. The Company’s approach to determining fair value of the Level 3 secured borrowing is consistent with its approach to determining fair value of the Level 3 investments that are associated with the secured borrowing. See Note 2 and Note 8 for additional information.

As of March 31, 2017 and December 31, 2016, the Company’s secured borrowing was categorized as follows in the fair value hierarchy:

 

Valuation Inputs

   March 31, 2017
(Unaudited)
     December 31,
2016
 

Level 1—Price quotations in active markets

   $ —        $ —    

Level 2—Significant other observable inputs

     —          —    

Level 3—Significant unobservable inputs

     8,311        8,273  
  

 

 

    

 

 

 

Total

   $ 8,311      $ 8,273  
  

 

 

    

 

 

 

 

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 Company’s investments as of March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Sixty-four senior secured loan investments, five senior secured bond investments and eleven subordinated debt investments, 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. Four equity/other investments, which were traded on an active public market, were valued at their respective closing prices as of March 31, 2017. Two senior secured loan investments and two equity/other investments, which were newly-issued and purchased near March 31, 2017, were valued at cost, as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, the Company valued its other investments, including five equity/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, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-nine senior secured loan investments, four senior secured bond investments, and eleven subordinated debt investments, 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 EBITDA, cash flows, net income, revenues or in limited instances, book value or liquidation value. Four equity/other investments, which were traded on an active public market, were valued at their respective closing prices as of December 31, 2016. Three senior secured loan investments and an equity/other investment, which were newly-issued and purchased near December 31, 2016, were valued at cost, as the Company’s board of directors determined that the cost of each 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 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

 

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)

 

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.

The following is a reconciliation for the three months ended March 31, 2017 and 2016 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

    For the Three Months Ended March 31, 2017  
    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

  $ 2,864,089     $ 718,971     $ 148,085     $ 402,397     $ 23,173     $ 331,297     $ 4,488,012  

Accretion of discount (amortization of premium)

    3,932       2,035       156       854       —         —         6,977  

Net realized gain (loss)

    266       —         (19,350     (538     (166     287       (19,501

Net change in unrealized appreciation (depreciation)

    19,546       4,298       20,946       17,763       (236     (1,867     60,450  

Purchases

    394,038       3,181       15,906       74,781       —         7,497       495,403  

Paid-in-kind interest

    1,355       3,766       —         649       —         224       5,994  

Sales and redemptions

    (141,665     (250,198     (13,845     (8,957     (1,867     —         (416,532

Net transfers in or out of Level 3

    —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 3,141,561     $ 482,053     $ 151,898     $ 486,949     $ 20,904     $ 337,438     $ 4,620,803  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 24,576     $ 7,344     $ 476     $ 17,719     $ (79   $ 3,319     $ 53,355  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    For the Three Months Ended March 31, 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)

    1,113       1,402       1,233       793       97       —         4,638  

Net realized gain (loss)

    (1,676     (713     —         (13,470     —         1,257       (14,602

Net change in unrealized appreciation (depreciation)

    (9,105     (5,176     (25,207     3,890       (4,962     (19,441     (60,001

Purchases

    27,786       20,124       —         16,211       —         29,491       93,612  

Paid-in-kind interest

    700       4,037       —         548       —         —         5,285  

Sales and redemptions

    (104,582     (61,525     —         (7,599     (1,697     (3,757     (179,160

Net transfers in or out of Level 3(1)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value at end of period

  $ 2,716,443     $ 860,262     $ 157,226     $ 319,392     $ 106,821     $ 219,689     $ 4,379,833  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (5,062   $ (9,825   $ (25,207   $ (25,179   $ (4,963   $ (16,847   $ (87,083
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

47


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) There was one transfer of an investment from Level 3 to Level 1 during the three months ended March 31, 2016. It is the Company’s policy to recognize transfers between levels, if any, at the beginning of the reporting period.

The following is a reconciliation for the three months ended March 31, 2017 of a secured borrowing for which significant unobservable inputs (Level 3) were used in determining market value:

 

     For the Three Months Ended
March 31, 2017
 

Fair value at beginning of period

   $ (8,273

Amortization of premium (accretion of discount)

     (4

Net realized gain (loss)

     —    

Net change in unrealized (appreciation) depreciation

     (34

Proceeds from secured borrowing

     —    

Paid-in-kind interest

     —    

Repayments on secured borrowing

     —    

Net transfers in or out of Level 3

     —    
  

 

 

 

Fair value at end of period

   $ (8,311
  

 

 

 

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 a secured borrowing still held at the reporting date

   $ (34
  

 

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of March 31, 2017 and December 31, 2016 were as follows:

 

Type of Investment

  Fair Value at
March  31, 2017
(Unaudited)
   

Valuation
Technique(1)

 

Unobservable Input

  Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 2,276,655     Market Comparables   Market Yield (%)   5.6% – 16.7%   9.5%
    307,774     Other(2)   Other   N/A   N/A
    484,862     Market Quotes   Indicative Dealer Quotes   6.0% – 102.5%   98.4%
    72,270     Cost   Cost   99.0% – 99.0%   99.0%

Senior Secured Loans—Second Lien

    250,179     Market Comparables   Market Yield (%)   8.5% – 30.0%   14.2%
    59,036     Other(2)   Other   N/A   N/A
    172,088     Market Quotes   Indicative Dealer Quotes   2.9% – 101.4%   93.0%
    750     Cost   Cost   100.0% – 100.0%   100.0%

Senior Secured Bonds

    73,967     Market Comparables   Market Yield (%)   8.5% – 9.8%   8.9%
      EBITDA Multiples (x)   4.8x – 6.3x   6.0x
      Production Multiples (Mboe/d)   $40,000.0 – $42,500.0   $41,250.0
      Proved Reserves Multiples (Mmboe)   $11.5 – $12.5   $12.0
      PV-10 Multiples (x)   0.8x – 0.9x   0.8x
    77,931     Market Quotes   Indicative Dealer Quotes   71.0% – 109.3%   98.8%

Subordinated Debt

    198,328     Market Comparables   Market Yield (%)   8.0% – 15.3%   9.8%
      EBITDA Multiples (x)   10.5x – 11.5x   11.0x
    288,621     Market Quotes   Indicative Dealer Quotes   67.0% – 106.1%   95.3%

Collateralized Securities

    20,904     Market Quotes   Indicative Dealer Quotes   58.9% – 100.0%   71.4%

Equity/Other

    269,649     Market Comparables   EBITDA Multiples (x)   4.8x – 14.8x   7.8x
      Production Multiples (Mboe/d)   $37,500.0 – $57,500.0   $39,333.6
      Proved Reserves Multiples (Mmboe)   $5.9 – $12.5   $10.4
      Production Multiples (MMcfe/d)   $2,375.0 – $2,625.0   $2,500.0
      Proved Reserves Multiple (Bcfc)   $1.1 – $1.2   $1.1
      Undeveloped Acreage Multiples ($)   $8,000.0 – $10,000.0   $9,000.0
      Capacity Multiple ($/kW)   $2,750.0 – $3,250.0   $3,000.0
      PV-10 Multiples (x)   0.8x – 6.6x   3.7x
    Discounted Cash Flow   Discount Rate (%)   22.8% – 24.8%   23.8%
    Option Valuation Model   Volatility (%)   35.5% – 42.5%   39.5%
    11,948     Market Quotes   Indicative Dealer Quotes   0.0% – 13.3%   10.4%
    55,787     Other(2)   Other   N/A   N/A
    54     Cost   Cost   100.0% – 100.0%   100.0%
 

 

 

         

Total

  $ 4,620,803          
 

 

 

         

Secured Borrowing

  $ (8,311   Market Comparables   Market Yield (%)   (6.1)% – (7.1)%   (6.6)%

 

48


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, 2016
   

Valuation
Technique(1)

 

Unobservable Input

  Range   Weighted
Average

Senior Secured Loans—First Lien

  $ 2,266,541     Market Comparables   Market Yield (%)   5.5% – 17.3%   9.8%
      EBITDA Multiples (x)   6.8x – 7.3x   7.0x
    10,615     Other(2)   Other   N/A   N/A
    517,874     Market Quotes   Indicative Dealer Quotes   18.2% – 104.1%   98.0%
    69,059     Cost   Cost   100.0% – 100.0%   100.0%

Senior Secured Loans—Second Lien

    550,266     Market Comparables   Market Yield (%)   8.8% – 22.9%   11.9%
    168,705     Market Quotes   Indicative Dealer Quotes   8.8% – 101.0%   90.2%

Senior Secured Bonds

    70,677     Market Comparables   Market Yield (%)   7.5% – 9.0%   7.9%
      EBITDA Multiples (x)   6.3x – 7.3x   6.5x
      Production Multiples (Mboe/d)   $45,000.0 – $50,000.0   $47,500.0
      Proved Reserves Multiples (Mmboe)   $14.5 – $15.0   $14.8
      PV-10 Multiples (x)   0.8x – 0.9x   0.9x
    77,408     Market Quotes   Indicative Dealer Quotes   65.0% – 109.6%   98.0%

Subordinated Debt

    187,936     Market Comparables   Market Yield (%)   8.0% – 15.3%   10.6%
      EBITDA Multiples (x)   9.3x – 10.3x   9.8x
    214,461     Market Quotes   Indicative Dealer Quotes   54.5% – 125.5%   92.4%

Collateralized Securities

    23,173     Market Quotes   Indicative Dealer Quotes   38.7% – 94.3%   69.4%

Equity/Other

    305,308     Market Comparables   EBITDA Multiples (x)   4.5x – 16.3x   8.4x
      Production Multiples (Mboe/d)   $2,225.0 – $55,000.0   $37,276.1
      Proved Reserves Multiples (Mmboe)   $0.7 – $15.0   $8.1
      Undeveloped Acreage Multiples ($)   $8,000.0 – $10,000.0   $9,000.0
      Capacity Multiple ($/kW)   $2,375.0 – $2,875.0   $2,625.0
      PV-10 Multiples (x)   0.8x – 2.1x   1.6x
    Discounted Cash Flow   Discount Rate (%)   11.0% – 24.8%   18.7%
    Option Valuation Model   Volatility (%)   34.5% – 41.0%   39.3%
    12,532     Other(2)   Other   N/A   N/A
    13,341     Market Quotes   Indicative Dealer Quotes   0.0% – 32.0%   12.7%
    116     Cost   Cost   100% – 100.0%   100.0%
 

 

 

         

Total

  $ 4,488,012          
 

 

 

         

Secured Borrowing

  $ (8,273   Market Comparables   Market Yield (%)   (6.0)% – (7.1)%   (6.6)%

 

(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.

 

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

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2017 and December 31, 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, 2016 and the additional disclosure set forth in this Note 8.

 

    As of March 31, 2017
(Unaudited)

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity
Date

Goldman Facility

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

Cooper River Credit Facility

  Revolving Credit Facility   L+2.25%   $ 172,433     $ 27,567     May 29, 2020

Wissahickon Creek Credit Facility

  Revolving Credit Facility   L+1.50% to L+2.50%   $ 240,146     $ 9,854     February 18, 2022

Darby Creek Credit Facility

  Revolving Credit Facility   L+2.50%   $ 250,000     $ —       August 19, 2020

Dunning Creek Credit Facility

  Revolving Credit Facility   L+1.70%   $ 103,300     $ 46,700     May 14, 2017

Juniata River Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 850,000     $ —       October 11, 2020

FSIC II Revolving Credit Facility

  Revolving Credit Facility   See Note (1)   $ 120,000     $ —       February 23, 2021

Partial Loan Sale

  Secured Borrowing   L+4.50% (1.0% floor)   $ 8,214     $ —       July 29, 2022

 

(1) Interest under the FSIC II revolving credit facility for (i) loans for which the Company elects the base rate option is payable at a rate equal to 0.75% per annum plus the greatest of (a) the “U.S. Prime Rate” as published in The Wall Street Journal, (b) the federal funds effective rate for such day plus 0.5%, (c) the three-month LIBOR plus 1% per annum and (d) zero; and (ii) loans for which the Company elects the Eurocurrency option is payable at a rate equal to LIBOR plus 1.75% per annum.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2017 were $2,037,226 and 3.60%, respectively. As of March 31, 2017, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.58%.

 

    As of December 31, 2016

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity
Date

Goldman Facility

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

Cooper River Credit Facility

  Revolving Credit Facility   L+2.25%   $ 166,033     $ 33,967     May 29, 2020

Wissahickon Creek Credit Facility

  Revolving Credit Facility   L+1.50% to L+2.50%   $ 240,146     $ 9,854     February 19, 2019(1)

Darby Creek Credit Facility

  Revolving Credit Facility   L+2.50%   $ 225,000     $ 25,000     August 19, 2020

Dunning Creek Credit Facility

  Revolving Credit Facility   L+1.70%   $ 94,200     $ 55,800     May 14, 2017

Juniata River Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 850,000     $ —       October 11, 2020

FSIC II Revolving Credit Facility

  Revolving Credit Facility   L+1.75%   $ —       $ 120,000     February 23, 2021

Partial Loan Sale

  Secured Borrowing   L+4.50% (1.0% floor)   $ 8,214     $ —       July 29, 2022

 

(1) On February 17, 2017, the maturity date was extended to February 18, 2022 pursuant to an amendment.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2016 were $2,048,180 and 3.20%, respectively. As of December 31, 2016, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.27%.

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

 

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)

 

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. On October 11, 2016, in connection with the entrance into certain amendments to the Juniata River facility (as defined below), Lehigh River and Cobbs Creek entered into documentation under the JPM facility which, among other things, resulted in the prepayment and termination of the JPM facility and the merger of Lehigh River into Juniata River (as defined below).

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the JPM facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ —        $ 4,518  

Amortization of deferred financing costs

     —          10  
  

 

 

    

 

 

 

Total interest expense

   $ —        $ 4,528  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Cash paid for interest expense

     —        $ 4,667  

Average borrowings under the facility

     —        $ 550,000  

Effective interest rate on borrowings

     —          3.25

Weighted average interest rate(1)

     —          3.25

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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.

 

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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)

 

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.

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 March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, Schuylkill River’s liability under the Goldman facility was $400,000 and $400,000, respectively, plus $1,771 and $1,733, 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 March 31, 2017 and December 31, 2016, the fair value of assets held by Green Creek was $818,046 and $802,689, 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 March 31, 2017, $931 of such deferred financing costs had yet to be amortized to interest expense.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Goldman facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 3,519      $ 2,914  

Amortization of deferred financing costs

     134        137  
  

 

 

    

 

 

 

Total interest expense

   $ 3,653      $ 3,051  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Goldman facility were as follows:

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash paid for interest expense

   $ 3,481     $ 2,925  

Average borrowings under the facility

   $ 400,000     $ 400,000  

Effective interest rate on borrowings

     3.54     3.12

Weighted average interest rate(1)

     3.52     2.88

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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.

 

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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)

 

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 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 March 31, 2017 and December 31, 2016, $172,433 and $166,033, 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 March 31, 2017, $1,468 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Cooper River facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 1,367      $ 1,431  

Non-usage fees

     64        17  

Amortization of deferred financing costs

     115        140  
  

 

 

    

 

 

 

Total interest expense

   $ 1,546      $ 1,588  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Cooper River facility were as follows:

 

     Three Months Ended
March 31,
 
         2017             2016      

Cash paid for interest expense

   $ 1,385     $ 1,264  

Average borrowings under the facility

   $ 166,246     $ 190,829  

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

     3.25     2.91

Weighted average interest rate (including the effect of non-usage fees)(1)

     3.44     3.00

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

 

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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)

 

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 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. Wissahickon Creek is 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 18, 2022.

As of March 31, 2017 and December 31, 2016, $240,146 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 $5,306 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 March 31, 2017, $3,141 of such deferred financing costs had yet to be amortized to interest expense.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Wissahickon Creek facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 2,038      $ 1,833  

Non-usage fees

     12        12  

Amortization of deferred financing costs

     213        170  
  

 

 

    

 

 

 

Total interest expense

   $ 2,263      $ 2,015  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wissahickon Creek facility were as follows:

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash paid for interest expense

   $ 2,003     $ 1,665  

Average borrowings under the facility

   $ 240,146     $ 240,146  

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

     3.53     3.03

Weighted average interest rate (including the effect of non-usage fees)(1)

     3.42     3.04

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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.

 

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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)

 

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 August 19, 2020.

As of March 31, 2017 and December 31, 2016, $250,000 and $225,000, 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 $5,179 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 March 31, 2017, $2,563 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Darby Creek facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 2,270      $ 1,958  

Non-usage fees

     14        —    

Amortization of deferred financing costs

     337        209  
  

 

 

    

 

 

 

Total interest expense

   $ 2,621      $ 2,167  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Darby Creek facility were as follows:

 

     Three Months Ended
March 31,
 
         2017             2016      

Cash paid for interest expense

   $ 2,117     $ 1,882  

Average borrowings under the facility

   $ 239,167     $ 250,000  

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

     3.63     3.07

Weighted average interest rate (including the effect of non-usage fees)(1)

     3.82     3.10

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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

 

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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)

 

Bank, as administrative agent and lender, and each of the other lenders from time to time party thereto. The Dunning Creek facility was most recently amended on May 13, 2016 to (a) extend the maturity date to May 14, 2017; (b) set the maximum commitments available under the facility at $150,000; (c) set the interest rate on borrowings at LIBOR for an interest period equal to the weighted average LIBOR interest period of the debt investments owned by Dunning Creek plus 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 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 March 31, 2017, 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 March 31, 2017 and December 31, 2016, $103,300 and $94,200, 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 March 31, 2017, $50 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Dunning Creek facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 676      $ 589  

Non-usage fees

     95        —    

Amortization of deferred financing costs

     103        155  
  

 

 

    

 

 

 

Total interest expense

   $ 874      $ 744  
  

 

 

    

 

 

 

 

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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 three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Dunning Creek facility were as follows:

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash paid for interest expense

   $ 748     $ 562  

Average borrowings under the facility

   $ 99,453     $ 114,200  

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

     3.05     2.04

Weighted average interest rate (including the effect of non-usage fees)(1)

     3.10     2.04

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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.

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. On October 11, 2016 Juniata River entered into amendments to the Juniata River facility which, among other things, (i) provided for an immediate upsize of $550,000, resulting in a total facility amount of $850,000, (ii) extended the maturity date of the facility to October 11, 2020 and (iii) increased the margin payable of borrowing to 2.6833% over the three-month LIBOR.

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 three-month interest period plus a spread of 2.6833% per annum. Interest is payable quarterly in arrears. Any amounts borrowed under the Juniata River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on October 11, 2020.

As of March 31, 2017 and December 31, 2016, $850,000 and $850,000, 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 $5,918 in connection with obtaining and amending the Juniata River 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 Juniata River facility. As of March 31, 2017, $5,173 of such deferred financing costs had yet to be amortized to interest expense.

 

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

 

 

Note 8. Financing Arrangements (continued)

 

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Juniata River facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 7,833      $ 2,332  

Amortization of deferred financing costs

     361        17  
  

 

 

    

 

 

 

Total interest expense

   $ 8,194      $ 2,349  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Juniata River facility were as follows:

 

     Three Months Ended
March 31,
 
     2017     2016  

Cash paid for interest expense

   $ 7,659     $ 2,162  

Average borrowings under the facility

   $ 850,000     $ 300,000  

Effective interest rate on borrowings

     3.71     3.12

Weighted average interest rate(1)

     3.69     3.08

 

(1) The weighted average interest rate presented for periods of less than one year is annualized.

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 March 31, 2017 and December 31, 2016, $120,000 and $0, respectively, were outstanding under the FSIC II revolving credit facility. The carrying amount outstanding under the facility approximates its fair value. The Company incurred costs of $356 in connection with obtaining the FSIC II revolving credit facility, which 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 8. Financing Arrangements (continued)

 

Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the FSIC II revolving credit facility. As of March 31, 2017, $191 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the FSIC II revolving credit facility were as follows:

 

     Three Months Ended
March 31,
 
         2017              2016      

Direct interest expense

   $ 232      $ 47  

Non-usage fees

     81        31  

Amortization of deferred financing costs

     30        14  
  

 

 

    

 

 

 

Total interest expense

   $ 343      $ 92  
  

 

 

    

 

 

 

For the three months ended March 31, 2017 and 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:

 

     Three Months Ended
March 31,
 
         2017               2016        

Cash paid for interest expense(1)

   $ 274     $ 19  

Average borrowings under the facility(2)

   $ 34,000     $ 15,921  

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

     3.55     2.83

Weighted average interest rate (including the effect of non-usage fees)(1)

     3.67     4.65

 

(1) Interest under the FSIC II revolving credit facility is payable quarterly and commenced on March 29, 2016. The weighted average interest rate presented for periods of less than one year is annualized.
(2) The average borrowings for the three months ended March 31, 2016 were calculated for the period since the Company commenced borrowing thereunder to March 31, 2016.

Partial Loan Sale

Certain partial loan sales do not qualify for sale accounting under ASC Topic 860 because these sales do not meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the consolidated balance sheets and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the consolidated statements of operations.

As of March 31, 2017 and December 31, 2016, the Company recognized a secured borrowing at a fair value of $8,311 and $8,273, respectively, and the fair value of the loan that is associated with the secured borrowing was $43,355 and $43,099, respectively. The secured borrowing was the result of the Company’s completion of a partial sale of a senior secured loan associated with one portfolio company that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and the partial loan sale was treated as a secured borrowing.

 

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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)

 

During the three months ended March 31, 2017, there were no partial loan sales and no fundings on revolving and delayed draw secured borrowings or repayments on secured borrowings.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the secured borrowing were as follows:

 

     Three Months Ended
March 31,
         2017              2016    

Direct interest expense

   $ 113     

Accretion of discount

     4     
  

 

 

    

 

Total interest expense

   $ 117     
  

 

 

    

 

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the secured borrowing were as follows:

 

     Three Months Ended
March 31,
 
         2017             2016      

Cash paid for interest expense(1)

   $ 119       —    

Average secured borrowing

   $ 8,214       —    

Effective interest rate on secured borrowing

     5.53     —    

Weighted average interest rate(1)

     5.50     —    

 

(1) Interest under the secured borrowing is paid quarterly in arrears. The weighted average interest rate presented for periods of less than one year is annualized.

Note 9. 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 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the three months ended March 31, 2017 and the year ended December 31, 2016:

 

     Three Months Ended
March 31, 2017
(Unaudited)
    Year Ended
December 31, 2016
 

Per Share Data:(1)

    

Net asset value, beginning of period

   $ 8.90     $ 8.37  

Results of operations(2)

    

Net investment income

     0.21       0.79  

Net realized and unrealized appreciation (depreciation) on investments, gain/loss on foreign currency and secured borrowing

     0.13       0.49  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.34       1.28  
  

 

 

   

 

 

 

Stockholder distributions(3)

    

Distributions from net investment income

     (0.19     (0.73

Distributions from net realized gain on investments

     —         (0.02
  

 

 

   

 

 

 

Net decrease in net assets resulting from stockholder distributions

     (0.19     (0.75
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of common stock(4)

     —         —    

Repurchases of common stock(5)

     —         —    
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     —         —    
  

 

 

   

 

 

 

Net asset value, end of period

   $ 9.05     $ 8.90  
  

 

 

   

 

 

 

Shares outstanding, end of period

     328,034,516       326,909,727  
  

 

 

   

 

 

 

Total return(6)

     3.83     16.07
  

 

 

   

 

 

 

Total return (without assuming reinvestment of distributions)(7)

     3.82     15.29
  

 

 

   

 

 

 

Ratio/Supplemental Data:

    

Net assets, end of period

   $ 2,967,339     $ 2,909,860  
  

 

 

   

 

 

 

Ratio of net investment income to average net assets(8)

     2.40     9.28
  

 

 

   

 

 

 

Ratio of operating expenses and excise taxes to average net assets(8)

     2.23     8.96
  

 

 

   

 

 

 

Ratio of net operating expenses and excise taxes to average net assets(8)

     2.12     8.51
  

 

 

   

 

 

 

Portfolio turnover(9)

     9.14     31.77
  

 

 

   

 

 

 

Total amount of senior securities outstanding, exclusive of treasury securities

   $ 2,144,093     $ 1,983,593  
  

 

 

   

 

 

 

Asset coverage per unit(10)

     2.38       2.47  

 

(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 10. 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 based on the change in net asset value during the applicable period, including the impact of distributions reinvested in accordance with the Company’s distribution reinvestment plan. 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) The total return (without assuming reinvestment of distributions) 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 (without assuming reinvestment of distributions) 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 (without assuming reinvestment of distributions) 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 (without assuming reinvestment of distributions) in the table should not be considered a representation of the Company’s future total return (without assuming reinvestment of distributions) 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 (without assuming reinvestment of distributions) on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

 

(8) Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the three months ended March 31, 2017 and the year ended December 31, 2016:

 

    Three Months Ended
March 31, 2017

(Unaudited)
    Year Ended
December 31, 2016
 

Ratio of subordinated income incentive fees to average net assets

    0.60     2.27

Ratio of interest expense to average net assets

    0.67     2.57

Ratio of excise taxes to average net assets

    —         0.07

 

(9) Portfolio turnover for the three months ended March 31, 2017 is not annualized.

 

(10) 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 the Fund Complex or any affiliate thereof;

 

   

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 on us and the portfolio companies in which we may invest and our and their 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;

 

   

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

 

   

future changes in laws or regulations and conditions in our operating areas.

 

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We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced 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 and an incentive fee 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 relationships and 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 (i.e., 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) 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 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

 

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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 anchor orders. 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, we 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 interests 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, in our target companies, generally 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 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.

 

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Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments 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 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 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 FS Investments 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 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, including all other expenses incurred by FSIC II Advisor, GDFM or us in connection with administering our business, including expenses incurred by FSIC II Advisor or GDFM in performing administrative services for us and administrative personnel paid by FSIC II Advisor or GDFM, to the extent they are not controlling persons of

 

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FSIC II Advisor, GDFM or any of their respective affiliates, subject to the limitations included in the investment advisory and administrative services agreement. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2016.

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, FS Investments 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, FS Investments 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, FS Investments 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 FS Investments for any amounts funded by FS Investments under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which FS Investments 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 FS Investments for expense support payments made by FS Investments 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 FS Investments was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from FS Investments made during the same fiscal year) and (ii) we will not reimburse FS Investments for expense support payments made by FS Investments 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 FS Investments made the expense support payment to which such reimbursement relates. “Other operating expenses” means our total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP, for investment companies.

 

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We or FS Investments may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by FS Investments, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by FS Investments, FS Investments will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse FS Investments pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

FS Investments 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 FS Investments will reimburse any portion of our expenses in future quarters. As of March 31, 2017 and December 31, 2016, no amounts remained subject to repayment by us to FS Investments.

Portfolio Investment Activity for the Three Months Ended March 31, 2017 and for the Year Ended December 31, 2016

During the three months ended March 31, 2017, we made investments in portfolio companies totaling $498,247. During the same period, we sold investments for proceeds of $90,079 and received principal repayments of $326,453. As of March 31, 2017, our investment portfolio, with a total fair value of $4,630,733 (68% in first lien senior secured loans, 10% in second lien senior secured loans, 3% in senior secured bonds, 11% in subordinated debt, 0% in collateralized securities and 8% in equity/other), consisted of interests in 142 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $109.7 million. As of March 31, 2017, the debt investments in our portfolio were purchased at a weighted average price of 97.2% of par and our estimated gross portfolio yield, prior to leverage, was 9.1% based upon the amortized cost of our investments. For the three months ended March 31, 2017, our total return was 3.83% and our total return without assuming reinvestment of distributions was 3.82%.

During the year ended December 31, 2016, we made investments in portfolio companies totaling $1,413,343. During the same period, we sold investments for proceeds of $510,114 and received principal repayments of $1,143,641. As of December 31, 2016, our investment portfolio, with a total fair value of $4,497,395 (64% in first lien senior secured loans, 16% in second lien senior secured loans, 3% in senior secured bonds, 9% in subordinated debt, 1% in collateralized securities and 7% in equity/other), consisted of interests in 138 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $125.0 million. As of December 31, 2016, the debt investments in our portfolio were purchased at a weighted average price of 97.5% of par and our estimated gross portfolio yield, prior to leverage, was 9.4% based upon the amortized cost of our investments. For the year ended December 31, 2016, our total return was 16.07% and our total return without assuming reinvestment of distributions was 15.29%.

Based on our regular monthly cash distribution amount of $0.06283 per share as of March 31, 2017 and December 31, 2016 and our final public offering price of $10.60 per share, the annualized distribution rate to stockholders as of March 31, 2017 and December 31, 2016 was 7.11%. Based on our regular monthly cash distribution amount of $0.06283 per share as of March 31, 2017 and December 31, 2016 and our distribution reinvestment price of $9.10 as of March 31, 2017 and $8.95 as of December 31, 2016, the annualized distribution rate to stockholders as of March 31, 2017 and December 31, 2016 was 8.29% and 8.42%, 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.

Our estimated gross portfolio yield may be higher than an investor’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

 

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effect of any sales 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 “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2016 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements. See footnotes 6 and 7 to the table included in Note 10 to our unaudited consolidated financial statements included herein for information regarding the calculation of our total return.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2017 and the year ended December 31, 2016:

 

Net Investment Activity

   For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

Purchases

   $ 498,247     $ 1,413,343  

Sales and Redemptions

     (416,532     (1,653,755
  

 

 

   

 

 

 

Net Portfolio Activity

   $ 81,715     $ (240,412
  

 

 

   

 

 

 

 

     For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

New Investment Activity by Asset Class

     Purchases          Percentage         Purchases          Percentage    

Senior Secured Loans—First Lien

   $ 394,038        79   $ 1,039,272        74

Senior Secured Loans—Second Lien

     3,181        1     124,554        9

Senior Secured Bonds

     15,906        3     35,918        2

Subordinated Debt

     74,781        15     80,741        6

Collateralized Securities

     —          —         —          —    

Equity/Other

     10,341        2     132,858        9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 498,247        100   $ 1,413,343        100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2017 and December 31, 2016:

 

    March 31, 2017
(Unaudited)
    December 31, 2016  
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
    Amortized
Cost(1)
    Fair Value     Percentage
of Portfolio
 

Senior Secured Loans—First Lien

  $ 3,144,359     $ 3,141,561       68   $ 2,886,433     $ 2,864,089       64

Senior Secured Loans—Second Lien

    508,033       482,053       10     749,249       718,971       16

Senior Secured Bonds

    151,404       151,898       3     168,537       148,085       3

Subordinated Debt

    481,109       486,949       11     414,320       402,397       9

Collateralized Securities

    18,235       20,904       0     20,268       23,173       1

Equity/Other

    309,312       347,368       8     298,460       340,680       7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,612,452     $ 4,630,733       100   $ 4,537,267     $ 4,497,395       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 March 31, 2017 and December 31, 2016:

 

    March 31, 2017   December 31, 2016

Number of Portfolio Companies

  142   138

% Variable Rate (based on fair value)

  77.0%   79.0%

% Fixed Rate (based on fair value)

  15.0%   13.4%

% Income Producing Equity or Other Investments (based on fair value)

  1.0%   1.0%

% Non-Income Producing Equity or Other Investments (based on fair value)

  7.0%   6.6%

Average Annual EBITDA of Portfolio Companies

  $109,700   $125,000

Weighted Average Purchase Price of Debt Investments (as a % of par)

  97.2%   97.5%

% of Investments on Non-Accrual (based on fair value)

  0.6%   0.0%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)

  9.1%   9.4%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets

  9.9%   10.1%

Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2017 and the year ended December 31, 2016:

 

New Direct Originations

   For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

Total Commitments (including unfunded commitments)

   $                         393,879     $             1,153,900  

Exited Investments (including partial paydowns)

     (318,443     (1,261,725
  

 

 

   

 

 

 

Net Direct Originations

   $ 75,436     $ (107,825
  

 

 

   

 

 

 

 

     For the Three Months Ended
March 31, 2017
    For the Year Ended
December 31, 2016
 

New Direct Originations by Asset Class (including
unfunded commitments)

   Commitment
Amount
     Percentage     Commitment
Amount
     Percentage  

Senior Secured Loans—First Lien

   $ 381,649        97   $ 892,789        78

Senior Secured Loans—Second Lien

     3,539        1     128,846        11

Senior Secured Bonds

     1,333        0     14,797        1

Subordinated Debt

     —          —         14,975        1

Collateralized Securities

     —          —         —          —    

Equity/Other

     7,358        2     102,493        9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 393,879        100   $ 1,153,900        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     For the Three Months Ended
March 31, 2017
   For the Year Ended
December 31, 2016

Average New Direct Origination Commitment Amount

   $35,807    $29,587

Weighted Average Maturity for New Direct Originations

   8/21/23    3/29/22

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period

   8.8%    9.8%

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets

   8.9%    11.7%

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period

   10.3%    8.6%

 

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The following table presents certain selected information regarding our direct originations as of March 31, 2017 and December 31, 2016:

 

Characteristics of All Direct Originations Held in Portfolio

   March 31, 2017     December 31, 2016  

Number of Portfolio Companies

     74       68  

Average Annual EBITDA of Portfolio Companies

   $ 64,100     $ 66,700  

Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities

     4.8x       4.8x  

% of Investments on Non-Accrual (based on fair value)

     0.6%       —    

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations

     9.1%       9.5%  

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets

     9.9%       10.2%  

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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  

Portfolio Composition by Strategy

   Fair Value      Percentage  of
Portfolio
    Fair Value      Percentage  of
Portfolio
 

Direct Originations

   $ 3,730,622        81   $ 3,635,978        81

Opportunistic

     603,187        13     568,120        13

Broadly Syndicated/Other

     296,924        6     293,297        6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,630,733        100   $ 4,497,395        100
  

 

 

    

 

 

   

 

 

    

 

 

 

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 March 31, 2017 and December 31, 2016:

 

     March 31, 2017
(Unaudited)
    December 31, 2016  

Industry Classification

   Fair Value      Percentage
of  Portfolio
    Fair Value      Percentage
of  Portfolio
 

Automobiles & Components

   $ 234,101        5   $ 206,350        5

Capital Goods

     548,766        12     418,102        9

Commercial & Professional Services

     521,540        11     520,703        12

Consumer Durables & Apparel

     323,568        7     317,282        7

Consumer Services

     520,575        11     523,918        12

Diversified Financials

     208,341        5     213,625        5

Energy

     539,982        12     749,437        17

Food & Staples Retailing

     5,070        0     5,950        0

Health Care Equipment & Services

     186,349        4     76,425        2

Insurance

     112,521        2     84,716        2

Materials

     367,158        8     329,788        7

Media

     146,774        3     140,594        3

Pharmaceuticals, Biotechnology & Life Sciences

     2,209        0     2,263        0

Retailing

     177,156        4     140,328        3

Semiconductors & Semiconductor Equipment

     14,179        0     14,837        0

Software & Services

     320,508        7     354,714        8

Technology Hardware & Equipment

     140,709        3     135,841        3

Telecommunication Services

     146,102        3     159,533        3

Transportation

     115,125        3     102,989        2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,630,733        100   $ 4,497,395        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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As of March 31, 2017, we were deemed to be an “affiliated person”, as defined in the 1940 Act, of A.T. Cross Co., in which we held a senior secured loan and three equity/other investments, ASG Technologies Group, Inc., in which we held two senior secured loans and two equity/other investments, JW Aluminum Co., in which we held a senior secured loan and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which we held a senior secured loan and an equity/other investment, and Warren Resources, Inc., in which we held a senior secured loan, which was partially unfunded, and an equity/other investment. As of March 31, 2017, except for these portfolio companies, we did not “control” and were not an “affiliated person”, each as defined in the 1940 Act, of any of our portfolio companies.

As of December 31, 2016, we were deemed to be an “affiliated person”, as defined in the 1940 Act, of A.T. Cross Co., in which we held a senior secured loan and three equity/other investments, ASG Technologies Group, Inc. (formerly Allen Systems Group, Inc.), in which we held two senior secured loans and two equity/other investments, JW Aluminum Co., in which we held a senior secured loan and two equity/other investments, Roadhouse Holding Inc. (Logan’s Roadhouse, Inc.), in which we held a senior secured loan and an equity/other investment, and Warren Resources, Inc., in which we held a senior secured loan, which was partially unfunded, and an equity/other investment. As of December 31, 2016, except for these portfolio companies, we did not “control” and were not an “affiliated person”, each as defined in the 1940 Act, of any of our portfolio companies.

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.

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 March 31, 2017, we had twenty-one senior secured loan investments with aggregate unfunded commitments of $177,708, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, we had eighteen senior secured loan investments with aggregate unfunded commitments of $163,449 and one unfunded commitment to purchase up to $362 in shares of preferred stock of Altus Power America 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 March 31, 2017 and audited consolidated schedule of investments as of December 31, 2016.

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.

 

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The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  

Investment Rating

   Fair
Value
     Percentage  of
Portfolio
    Fair
Value
     Percentage  of
Portfolio
 

1

   $ 520,943        11   $ 301,900        7

2

     3,731,874        81     3,628,492        81

3

     250,495        5     449,511        10

4

     55,022        1     87,088        2

5

     72,399        2     30,404        0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,630,733        100   $ 4,497,395        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 March 31, 2017 and 2016

Revenues

We generated investment income of $131,943 and $119,991 for the three months ended March 31, 2017 and 2016, 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 $122,126 and $111,138 of cash income earned as well as $9,817 and $8,853 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2017 and 2016, 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 March 31, 2017 and 2016, we generated $110,464 and $117,100, respectively, of interest income, which represented 83.7% and 97.6%, respectively, of total investment income. The level of interest income we receive is generally related to the balance of income-producing investments multiplied by the weighted average yield of our investments.

During the three months ended March 31, 2017 and 2016, we generated $21,479 and $2,891, respectively, of fee income, which represented 16.3% and 2.4%, 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 income and the increase in fee income during the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was primarily due to the prepayment of several large investments during the three months ended March 31, 2017 and the refinancing of certain investments during the twelve months ended March 31, 2017.

Expenses

Our net operating expenses were $61,946 and $56,633 for the three months ended March 31, 2017 and 2016, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of

 

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$22,285 and $21,007, net of waivers by FSIC II Advisor of base management fees to which it was otherwise entitled of $3,183 and $3,001, for the three months ended March 31, 2017 and 2016, respectively. Our operating expenses also include administrative services expenses attributed to FSIC II Advisor of $867 and $1,028 for the three months ended March 31, 2017 and 2016, respectively.

FSIC II Advisor is eligible to receive incentive fees based on our performance. During the three months ended March 31, 2017 and 2016, we accrued a subordinated incentive fee on income of $17,499 and $15,840, respectively. During the three months ended March 31, 2017 and 2016, 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 $19,611 and $16,534 for the three months ended March 31, 2017 and 2016, respectively, in connection with our financing arrangements. For the three months ended March 31, 2017 and 2016, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $431 and $350, respectively, and fees and expenses incurred with our stock transfer agent totaled $495 and $537, respectively. Fees for our board of directors were $276 and $272 for the three months ended March 31, 2017 and 2016, respectively.

Our other general and administrative expenses totaled $482 and $1,065 for the three months ended March 31, 2017 and 2016, respectively, and consisted of the following:

 

     Three Months Ended
March 31,
 
         2017              2016      

Expenses associated with our independent audit and related fees

   $ 126      $ 70  

Legal fees

     35        138  

Printing fees

     278        382  

Other

     43        475  
  

 

 

    

 

 

 

Total

   $ 482      $ 1,065  
  

 

 

    

 

 

 

During the three months ended March 31, 2017 and 2016, the ratio of our net expenses to our average net assets was 2.12% and 2.14%, respectively. During the three months ended March 31, 2017 and 2016, the ratio of our net expenses to average net assets included $19,611 and $16,534, respectively, related to interest expense and $17,499 and $15,840, respectively, related to accruals of incentive fees. Without such expenses, our ratio of net expenses to average net assets would have been 0.85% and 0.92% for the three months ended March 31, 2017 and 2016, 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 $69,997 ($0.21 per share) and $63,358 ($0.20 per share) for the three months ended March 31, 2017 and 2016, respectively. The increase in net investment income can primarily be attributed to an increase in fee income during the three months ended March 31, 2017.

Net Realized Gains or Losses

We sold investments and received principal repayments of $90,079 and $326,453, respectively, during the three months ended March 31, 2017, from which we realized a net loss of $19,501. We sold investments and received principal repayments of $31,630 and $147,530, respectively, during the three months ended March 31, 2016, from which we realized a net loss of $14,602. During the three months ended March 31, 2016, we also realized net gains of $3 from settlements on foreign currency.

 

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Net Change in Unrealized Appreciation (Depreciation) on Investments and Secured Borrowing and Unrealized Gain (Loss) on Foreign Currency

For the three months ended March 31, 2017, the net change in unrealized appreciation (depreciation) on investments totaled $58,153 and the net change in unrealized appreciation (depreciation) on the secured borrowing was $(34). For the three months ended March 31, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $(60,184). The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2017 was driven by the appreciation of several investments in select portfolio companies.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2017 and 2016, the net increase (decrease) in net assets resulting from operations was $108,615 ($0.33 per share) and $(11,425) ($(0.04) per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2017, we had $206,089 in cash, which we and our wholly-owned financing subsidiaries held in custodial accounts, and $84,121 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of March 31, 2017, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2017, we had twenty-one senior secured loan investments with aggregate unfunded commitments of $177,708, one unfunded commitment to purchase up to $315 in shares of preferred stock and one unfunded commitment to purchase up to $21 in shares of common stock. 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, including money market funds, 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 three months ended March 31, 2017 was $31,286 for which we issued 3,469,599 shares of common stock. During the period from April 1, 2017 to May 2, 2017, we issued 1,139,836 shares of common stock pursuant to our distribution reinvestment plan at an average price per share of $9.10 for gross proceeds of $10,369.

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.

 

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The following table provides information concerning our repurchases of shares of common stock pursuant to our share repurchase program during the three months ended March 31, 2017 and 2016:

 

For the Three Months Ended

  Repurchase Date     Shares
Repurchased
    Percentage
of Shares
Tendered
That Were
Repurchased
    Percentage of
Outstanding
Shares
Repurchased
as of the
Repurchase
Date
    Repurchase
Price Per
Share
    Aggregate
Consideration
for Repurchased
Shares
 

Fiscal 2016

           

December 31, 2015

    January 4, 2016       1,779,357       100     0.55   $ 8.550     $ 15,214  

Fiscal 2017

           

December 31, 2016

    January 4, 2017       2,344,810       100     0.72   $ 8.950     $ 20,986  

On April 5, 2017, we repurchased 3,353,328 shares of common stock (representing 100% of the shares of the common stock tendered for repurchase and 1.02% of the shares outstanding as of such date) at $9.10 per share for aggregate consideration totaling $30,515.

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 March 31, 2017:

 

Arrangement

  Type of Arrangement   Rate   Amount
Outstanding
    Amount
Available
    Maturity
Date

Goldman Facility

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

Cooper River Credit Facility

  Revolving Credit Facility   L+2.25%   $ 172,433     $ 27,567     May 29, 2020

Wissahickon Creek Credit Facility

  Revolving Credit Facility   L+1.50% to L+2.50%   $ 240,146     $ 9,854     February 18, 2022

Darby Creek Credit Facility

  Revolving Credit Facility   L+2.50%   $ 250,000     $ —       August 19, 2020

Dunning Creek Credit Facility

  Revolving Credit Facility   L+1.70%   $ 103,300     $ 46,700     May 14, 2017

Juniata River Credit Facility

  Term Loan Credit Facility   L+2.68%   $ 850,000     $ —       October 11, 2020

FSIC II Revolving Credit Facility

  Revolving Credit Facility   See Note (1)   $ 120,000     $ —       February 23, 2021

Partial Loan Sale

  Secured Borrowing   L+4.50% (1.0% floor)   $ 8,214     $ —       July 29, 2022

 

(1) Interest under the FSIC II revolving credit facility for (i) loans for which we had elected the base rate option is payable at a rate equal to 0.75% per annum plus the greatest of (a) the “U.S. Prime Rate” as published in The Wall Street Journal, (b) the federal funds effective rate for such day plus 0.5%, (c) the three-month LIBOR plus 1% per annum and (d) zero; and (ii) loans for which we had elected the Eurocurrency option is payable at a rate equal to LIBOR plus 1.75% per annum.

Our average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2017 were $2,037,226 and 3.60%, respectively. As of March 31, 2017, our weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.58%.

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

 

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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.

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 three months ended March 31, 2017 and 2016:

 

     Distribution  

For the Three Months Ended

   Per Share      Amount  

Fiscal 2016

     

March 31, 2016

   $ 0.1885      $ 60,744  

Fiscal 2017

     

March 31, 2017

   $ 0.1885      $ 61,436  

On March 14, 2017 and May 8, 2017, our board of directors declared regular monthly cash distributions for April 2017 through June 2017 and July 2017 through September 2017, 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

 

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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, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, 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 FS Investments 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, FS Investments 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 FS Investments 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 three months ended March 31, 2017 and 2016 was funded through the reimbursement of operating expenses by FS Investments. 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. FS Investments and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

 

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The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the three months ended March 31, 2017 and 2016:

 

     Three Months Ended March 31,  
     2017     2016  

Source of Distribution

   Distribution
Amount
     Percentage     Distribution
Amount
     Percentage  

Offering proceeds

   $ —          —       $ —          —    

Borrowings

     —          —         —          —    

Net investment income(1)

     61,436        100     60,744        100

Short-term capital gains proceeds from the sale of assets

     —          —         —          —    

Long-term capital gains proceeds from the sale of assets

     —          —         —          —    

Non-capital gains proceeds from the sale of assets

     —          —         —          —    

Distributions on account of preferred and common equity

     —          —         —          —    

Expense reimbursement from sponsor

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 61,436        100   $ 60,744        100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) During the three months ended March 31, 2017 and 2016, 92.6% and 92.6%, respectively, of our gross investment income was attributable to cash income earned, 2.9% and 3.0%, respectively, was attributable to non-cash accretion of discount and 4.5% and 4.4%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $53,897 and $61,262, respectively. As of March 31, 2017, we had $50,264 of undistributed net investment income and $120,145 of capital loss carryover on a tax basis. As of December 31, 2016, we had $57,803 of undistributed net investment income and $104,745 of accumulated capital losses on a tax basis.

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 three months ended March 31, 2017 and 2016.

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,

 

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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;

 

   

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.

 

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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.

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 March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Sixty-four senior secured loan investments, five senior secured bond investments and eleven subordinated debt investments, 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. Four equity/other investments, which were traded on an active public market, were valued at their respective closing prices as of March 31, 2017. Two senior secured loan investments and two equity/other investments, which were newly-issued and purchased near March 31, 2017, were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Except as described above, we valued our other investments, including five equity/

 

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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, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-nine senior secured loan investments, four senior secured bond investments, and eleven subordinated debt investments, 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. Four equity/other investments, which were traded on an active public market, were valued at their respective closing prices as of December 31, 2016. Three senior secured loan investments and an equity/other investment, which were newly-issued and purchased near December 31, 2016, were valued at cost, as our board of directors determined that the cost of each 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.

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 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

 

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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 earn 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.

We follow the guidance in ASC Topic 860 when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on our consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value.

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 the AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

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 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

 

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program. As a result, FSIC II Advisor will not earn this part of the 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 three months ended March 31, 2017 and 2016, 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 0.25% 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.

A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at March 31, 2017 is as follows:

 

     Payments Due By Period  
     Total      Less than 1 year      1-3 years      3-5 years      More than 5 years  

Goldman Facility(1)

   $ 400,000        —        $ 400,000        —          —    

Cooper River Credit Facility(2)

   $ 172,433        —          —        $ 172,433        —    

Wissahickon Creek Credit Facility(3)

   $ 240,146        —          —        $ 240,146        —    

Darby Creek Credit Facility(4)

   $ 250,000        —          —        $ 250,000        —    

Dunning Creek Credit Facility(5)

   $ 103,300      $ 103,300        —          —          —    

Juniata River Credit Facility(6)

   $ 850,000        —          —        $ 850,000        —    

FSIC II Revolving Credit Facility(7)

   $ 120,000        —          —        $ 120,000        —    

Partial Loan Sale(8)

   $ 8,214        —          —          —        $ 8,214  

 

(1) At March 31, 2017, 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.

 

(2) At March 31, 2017, $27,567 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.

 

(3) At March 31, 2017, $9,854 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 18, 2022.

 

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(4) At March 31, 2017, 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 August 19, 2020.

 

(5) At March 31, 2017, $46,700 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.

 

(6) At March 31, 2017, 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 October 11, 2020.

 

(7) At March 31, 2017, no amounts 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.

 

(8) All amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 29, 2022.

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 0.25% 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 FS Investments providing administrative services to us on behalf of FSIC II Advisor.

The following table describes the fees and expenses we accrued under the investment advisory and administrative services agreement during the three months ended March 31, 2017 and 2016:

 

            Three Months
Ended
March 31,
 

Related Party

 

Source Agreement

 

Description

  2017     2016  

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement  

Base Management Fee(1)

  $ 22,285     $ 21,007  

FSIC II Advisor

  Investment Advisory and Administrative Services Agreement  

Subordinated Incentive

Fee on Income(2)

  $ 17,499     $ 15,840  

FSIC II Advisor

 

Investment Advisory and Administrative

Services Agreement

  Administrative Services Expenses(3)   $ 867     $ 1,028  

 

(1) FSIC II Advisor agreed, effective March 5, 2015, to permanently waive 0.25% 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 amounts shown for the three months ended March 31, 2017 and 2016 are net of waivers of $3,183 and $3,001, respectively. During the three months ended March 31, 2017 and 2016, $21,610 and $19,436, respectively, in base management fees were paid to FSIC II Advisor. As of March 31, 2017, $22,285 in base management fees were payable to FSIC II Advisor.

 

(2) During the three months ended March 31, 2017 and 2016, $16,493 and $14,617, respectively, of subordinated incentive fees on income were paid to FSIC II Advisor. As of March 31, 2017, a subordinated incentive fee on income of $17,499 was payable to FSIC II Advisor.

 

(3) During the three months ended March 31, 2017 and 2016, $842 and $978, respectively, of administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FSIC II Advisor and the remainder related to other reimbursable expenses. We paid $803 and $1,291 in administrative services expenses to FSIC II Advisor during the three months ended March 31, 2017 and 2016, respectively.

 

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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 FS Investments.

 

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 March 31, 2017, 77.0% of our portfolio investments (based on fair value) paid variable interest rates, 15.0% paid fixed interest rates, 7.0% were non-income producing senior secured loans or equity/other investments and the remaining 1.0% 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, FSIC II Revolving credit facility and secured borrowing arrangement, borrowings are at a floating rate based on LIBOR. 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 March 31, 2017:

 

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 115 basis points

   $ (6,514   $ (20,599   $ 14,085        4.0

No change

     —         —         —          —    

Up 100 basis points

     33,337       17,912       15,425        4.4

Up 300 basis points

     104,972       53,735       51,237        14.7

Up 500 basis points

     176,707       89,559       87,148        24.9

 

(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 three months ended March 31, 2017 and 2016, we did not engage in interest rate hedging activities.

 

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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 March 31, 2017.

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 March 31, 2017 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, 2016.

 

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 March 31, 2017, 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
 

January 1 to January 31, 2017

     2,344,810      $ 8.95        2,344,810        (1

February 1 to February 28, 2017

     —          —          —          —    

March 1 to March 31, 2017

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,344,810      $ 8.95        2,344,810        (1
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The maximum number of shares available for repurchase on January 1, 2017 was 7,929,117. A description of the calculation 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    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.)
10.5    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.)
10.6    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.)
10.7    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.)
10.8    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 April 26, 2013.)
10.9    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.)
10.10    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.)

 

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10.11    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.)
10.12    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.)
10.13    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.)
10.14    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.)
10.15    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.)
10.16    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.)
10.17    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.)
10.18    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.)
10.19    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.)
10.20    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.)
10.21    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.)
10.22    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.)

 

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10.23    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.)
10.24    Amendment No. 6 to Loan Financing and Servicing Agreement, dated as of August 19, 2016, 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 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2016.)
10.25    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.)
10.26    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.)
10.27    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.)
10.28    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.)
10.29    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.)
10.30    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.)
10.31    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.)
10.32    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.)
10.33    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.)
10.34    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.)

 

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10.35    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.)
10.36    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.)
10.37    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.)
10.38    Amendment No. 1 to Loan Agreement, dated as of October 11, 2016, 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 10.1 to the Company’s Current Report on Form 8-K filed on October 13, 2016.)
10.39    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.)
10.4    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.)
10.41    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.)
10.42    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.)
10.43    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.)
10.44    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.)
10.45    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.)
10.46    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.)
10.47    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.)
10.48    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.)

 

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10.49    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 May 12, 2017.

 

FS INVESTMENT CORPORATION II
By:  

/s/ Michael C. Forman

    Michael C. Forman
Chief Executive Officer
(Principal Executive Officer)
By:  

/s/ William Goebel

   

William Goebel

Chief Financial Officer
(Principal Financial and Accounting Officer)

 

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