FS Investment Corp III - FORM 10-Q

FS Investment Corp III - FORM 10-Q - May 14, 2018

Attached files

Attached files

FS Investment Corp III Reports

file	filename
EX-32.1 - EX-32.1 - FS Investment Corp III	d586604dex321.htm
EX-31.2 - EX-31.2 - FS Investment Corp III	d586604dex312.htm
EX-31.1 - EX-31.1 - FS Investment Corp III	d586604dex311.htm

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, 2018

☐	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: 814-01047

FS Investment Corporation III

(Exact name of registrant as specified in its charter)


Maryland		90-0994912
(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)

(215) 495-1150

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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.

There were 288,516,408 shares of the registrant’s common stock outstanding as of May 14, 2018.

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS		1

	Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017		1

	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017		2

	Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2018 and 2017		3

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017		4

	Consolidated Schedules of Investments as of March 31, 2018 (Unaudited) and December 31, 2017		5

	Notes to Unaudited Consolidated Financial Statements		21

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		53

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68

ITEM 4.	CONTROLS AND PROCEDURES		69

PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		70

ITEM 1A.	RISK FACTORS		70

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		70

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		71

ITEM 4.	MINE SAFETY DISCLOSURES		71

ITEM 5.	OTHER INFORMATION		71

ITEM 6.	EXHIBITS		72

	SIGNATURES		77

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FS Investment Corporation III

Consolidated Balance Sheets

(in thousands, except share and per share amounts)


	March 31, 2018 (Unaudited)			December 31, 2017
Assets
Investments, at fair value
Non-controlled/unaffiliated investments (amortized cost—$3,338,294 and $3,326,008, respectively)	$	3,285,271		$	3,301,261
Non-controlled/affiliated investments (amortized cost—$95,462 and $107,137, respectively)		29,598			40,265

Total investments, at fair value (amortized cost—$3,433,756 and $3,433,145, respectively)		3,314,869			3,341,526
Cash		296,671			359,975
Foreign currency, at fair value (cost—$8,450 and $8,178, respectively)		8,600			8,369
Due from counterparty		108,016			98,005
Receivable for investments sold and repaid		3,826			675
Interest receivable		38,503			35,499
Deferred financing costs		1,576			1,874
Receivable due on total return swap⁽¹⁾		1,116			1,107
Prepaid expenses and other assets		211			250

Total assets	$	3,773,388		$	3,847,280


Liabilities
Unrealized depreciation on total return swap⁽¹⁾	$	1,560		$	3,756
Payable for investments purchased		62			22,175
Repurchase agreement payable (net of deferred financing costs of $513 and $611, respectively)⁽¹⁾		299,487			299,389
Credit facilities payable (net of deferred financing costs of $160 and $196, respectively)⁽¹⁾		1,087,540			1,087,504
Stockholder distributions payable		8,819			—
Management fees payable		16,693			17,015
Subordinated income incentive fees payable⁽²⁾		1,623			14,487
Administrative services expense payable		666			277
Interest payable⁽¹⁾		11,098			10,870
Directors’ fees payable		450			253
Other accrued expenses and liabilities		2,223			2,830

Total liabilities		1,430,221			1,458,556

Commitments and contingencies⁽³⁾

Stockholders’ equity
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.001 par value, 550,000,000 shares authorized, 290,499,333 and 290,566,041 shares issued and outstanding, respectively		290			291
Capital in excess of par value		2,528,443			2,529,098
Accumulated net realized losses on investments and total return swap⁽⁴⁾		(74,941	)		(57,587	)
Accumulated undistributed net investment income⁽⁴⁾		9,672			12,106
Net unrealized appreciation (depreciation) on investments, total return swap, secured borrowing and unrealized gain/loss on foreign currency		(120,297	)		(95,184	)

Total stockholders’ equity		2,343,167			2,388,724

Total liabilities and stockholders’ equity	$	3,773,388		$	3,847,280

Net asset value per share of common stock at period end	$	8.07		$	8.22

(1)	See Note 8 for a discussion of the Company’s financing arrangements.

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

(3)	See Note 9 for a discussion of the Company’s commitments and contingencies.

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

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2018			2017
Investment income
From non-controlled/unaffiliated investments:
Interest income	$	74,221		$	72,660
Paid-in-kind interest income		6,175			5,704
Fee income		1,783			5,919
From non-controlled/affiliated investments:
Interest income		946			944
Paid-in-kind interest income		213			225
Fee income		478			185

Total investment income		83,816			85,637

Operating expenses
Management fees⁽¹⁾		19,078			18,616
Subordinated income incentive fees⁽²⁾		1,623			9,619
Administrative services expenses		854			819
Stock transfer agent fees		387			387
Accounting and administrative fees		277			278
Interest expense		14,692			11,820
Directors’ fees		450			261
Offering costs		—			504
Other general and administrative expenses		784			739

Operating expenses		38,145			43,043
Management fees waiver⁽¹⁾		(2,385	)		(1,504	)

Net expenses		35,760			41,539

Net investment income		48,056			44,098

Realized and unrealized gain/loss
Net realized gain (loss) on investments:
Non-controlled/unaffiliated investments		(22,865	)		3,912
Net realized gain (loss) on total return swap⁽³⁾		5,285			6,240
Net realized gain (loss) on foreign currency		226			—
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/unaffiliated investments		(28,276	)		11,583
Non-controlled/affiliated investments		1,008			(8,317	)
Net change in unrealized appreciation (depreciation) on total return swap⁽³⁾		2,196			1,124
Net change in unrealized appreciation (depreciation) on secured borrowing⁽³⁾		—			(45	)
Net change in unrealized gain (loss) on foreign currency		(41	)		—

Total net realized gain (loss) and unrealized appreciation (depreciation)		(42,467	)		14,497

Net increase (decrease) in net assets resulting from operations	$	5,589		$	58,595

Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share)	$	0.02		$	0.21

Weighted average shares outstanding		289,190,554			274,381,521

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

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

(3)	See Note 8 for a discussion of the Company’s financing arrangements.

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)


	Three Months Ended March 31,
	2018			2017
Operations
Net investment income	$	48,056		$	44,098
Net realized gain (loss) on investments, total return swap and foreign currency⁽¹⁾		(17,354	)		10,152
Net change in unrealized appreciation (depreciation) on investments		(27,268	)		3,266
Net change in unrealized appreciation (depreciation) on total return swap⁽¹⁾		2,196			1,124
Net change in unrealized appreciation (depreciation) on secured borrowing⁽¹⁾		—			(45	)
Net change in unrealized gain (loss) on foreign currency		(41	)		—

Net increase in net assets resulting from operations		5,589			58,595

Stockholder distributions⁽²⁾
Distributions from net investment income		(50,490	)		(48,011	)

Net decrease in net assets resulting from stockholder distributions		(50,490	)		(48,011	)

Capital share transactions⁽³⁾
Issuance of common stock		—			47,979
Reinvestment of stockholder distributions		24,279			24,568
Repurchases of common stock		(24,935	)		(13,133	)

Net increase (decrease) in net assets resulting from capital share transactions		(656	)		59,414

Total increase in net assets		(45,557	)		69,998
Net assets at beginning of period		2,388,724			2,323,940

Net assets at end of period	$	2,343,167		$	2,393,938


Accumulated undistributed (distributions in excess of) net investment income⁽²⁾	$	9,672		$	(195	)

(1)	See Note 8 for a discussion of the Company’s financing arrangements.

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

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

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Statements of Cash Flows

(in thousands)


	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations	$	5,589		$	58,595
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investments		(177,850	)		(341,257	)
Paid-in-kind interest		(6,388	)		(5,929	)
Proceeds from sales and repayments of investments		161,895			207,531
Net realized (gain) loss on investments		22,865			(3,912	)
Net change in unrealized (appreciation) depreciation on investments		27,268			(3,266	)
Net change in unrealized (appreciation) depreciation on total return swap⁽¹⁾		(2,196	)		(1,124	)
Net change in unrealized appreciation (depreciation) on secured borrowing⁽¹⁾		—			45
Accretion of discount		(1,133	)		(4,305	)
Amortization of deferred financing costs and discount on secured borrowing		432			458
Amortization of deferred offering costs		—			504
(Increase) decrease in due from counterparty		(10,011	)		10,000
(Increase) decrease in receivable for investments sold and repaid		(3,151	)		(10,921	)
(Increase) decrease in interest receivable		(3,004	)		(5,022	)
(Increase) decrease in receivable due on total return swap⁽¹⁾		(9	)		(813	)
(Increase) decrease in prepaid expenses and other assets		39			(166	)
Increase (decrease) in payable for investments purchased		(22,113	)		72,961
Increase (decrease) in management fees payable		(322	)		(711	)
Increase (decrease) in subordinated income incentive fees payable		(12,864	)		(2,704	)
Increase (decrease) in administrative services expense payable		389			150
Increase (decrease) in interest payable⁽¹⁾		228			495
Increase (decrease) in directors’ fees payable		197			18
Increase (decrease) in other accrued expenses and liabilities		(607	)		(761	)

Net cash provided by (used in) operating activities		(20,746	)		(30,134	)

Cash flows from financing activities
Issuance of common stock		—			47,979
Reinvestment of stockholder distributions		24,279			24,568
Repurchases of common stock		(24,935	)		(13,133	)
Offering costs incurred		—			(576	)
Stockholder distributions		(41,671	)		(48,011	)
Borrowings under credit facilities⁽¹⁾		—			51,000
Deferred financing costs paid		—			(500	)

Net cash provided by financing activities		(42,327	)		61,327

Total increase (decrease) in cash		(63,073	)		31,193
Cash and foreign currency at beginning of period		368,344			249,862

Cash and foreign currency at end of period	$	305,271		$	281,055

Supplemental disclosure
Excise and state taxes paid	$	527		$	229

(1)

See Note 8 for a discussion of the Company’s financing arrangements. During the three months ended March 31, 2018 and 2017, the Company paid $0 and $196, respectively, in interest expense on its secured borrowing, $11,073 and $8,081, respectively, in interest expense on the credit facilities and $2,959 and $2,590, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments

As of March 31, 2018

(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—95.2%
5 Arch Income Fund 2, LLC	(j)(o)	Diversified Financials	10.5%			11/18/21	$	124,335	$	124,494	$	124,335
5 Arch Income Fund 2, LLC	(j)(k)(o)	Diversified Financials	10.5%			11/18/21		8,665		8,665		8,665
Actian Corp.	(g)(i)	Software & Services	L+786	1.0%		6/30/22		21,333		21,333		21,853
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750	1.0%		12/29/23		17,789		17,789		18,033
All Systems Holding LLC	(f)(g)(i)	Commercial & Professional Services	L+767	1.0%		10/31/23		50,108		50,108		50,860
Altus Power America, Inc.		Energy	L+750	1.5%		9/30/21		2,866		2,866		2,809
Altus Power America, Inc.	(k)	Energy	L+750	1.5%		9/30/21		884		884		866
Aspect Software, Inc.	(t)	Software & Services	L+1050	1.0%		5/25/18		5,004		5,004		4,654
Aspect Software, Inc.	(k)(t)	Software & Services	L+1050	1.0%		5/25/18		128		128		119
Aspect Software, Inc.	(f)(t)	Software & Services	L+1050	1.0%		5/25/20		9,834		9,834		9,146
Aspect Software, Inc.	(k)(t)	Software & Services	L+1200	1.0%		5/25/18		1,822		1,822		—
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+800	1.0%		12/29/22		42,667		42,667		43,093
ATX Networks Corp.	(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%		6/11/21		9,581		9,500		8,911
ATX Networks Corp.	(g)(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%		6/11/21		29,189		28,543		27,146
Avaya Inc.	(h)	Technology Hardware & Equipment	L+475	1.0%		12/15/24		7,980		7,903		8,047
AVF Parent, LLC	(f)(h)	Retailing	L+725	1.3%		3/1/24		30,008		30,008		30,032
BMC Software Finance, Inc.	(k)	Software & Services	L+400			9/10/20		10,000		10,000		10,000
Borden Dairy Co.	(f)(g)	Food, Beverage & Tobacco	L+789	1.0%		7/6/23		48,125		48,125		48,539
CEVA Group Plc	(j)(k)	Transportation	L+500			3/19/19		15,000		14,477		13,950
ConnectiveRx, LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+826	1.0%		11/25/21		157,004		157,004		158,715
CSafe Acquisition Co., Inc.	(k)	Capital Goods	L+725	1.0%		11/1/21		2,609		2,609		2,550
CSafe Acquisition Co., Inc.	(f)(h)	Capital Goods	L+725	1.0%		10/31/23		22,493		22,493		21,987
CSafe Acquisition Co., Inc.	(k)	Capital Goods	L+725	1.0%		10/31/23		9,426		9,426		9,214
Dade Paper & Bag, LLC	(h)	Capital Goods	L+700	1.0%		6/10/24		5,673		5,673		5,680
Dade Paper & Bag, LLC	(g)(i)	Capital Goods	L+750	1.0%		6/10/24		44,477		44,477		45,645
Elo Touch Solutions, Inc.	(h)	Technology Hardware & Equipment	L+600	1.0%		10/25/23		3,996		3,959		4,034
Empire Today, LLC	(f)(g)(h)	Retailing	L+800	1.0%		11/17/22		44,438		44,438		44,882
Fairway Group Acquisition Co.	(t)	Food & Staples Retailing	12.0% PIK (12.0% Max PIK)			1/3/20		6,343		6,343		6,343
Fairway Group Acquisition Co.	(l)(m)(t)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)			1/3/20		4,115		3,916		617
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850	1.0%		12/19/20		1,676		1,676		1,608
FullBeauty Brands Holdings Corp.		Consumer Durables & Apparel	L+800	1.0%		10/14/20		13,000		13,000		12,870
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1050			3/31/21		15,435		15,462		15,454
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21		50,000		50,000		50,500
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21		40,565		40,565		41,529
Gulf Finance, LLC	(h)	Energy	L+525	1.0%		8/25/23		4,852		4,738		4,498

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity		Principal Amount^(c)		Amortized Cost		Fair Value^(d)
H.M. Dunn Co., Inc.	(l)(m)	Capital Goods	L+150, 7.8% PIK (7.8% Max PIK)	1.0%		3/26/21	$	9,873	$	9,643	$	4,492
Hudson Technologies Co.	(g)(j)	Commercial & Professional Services	L+725	1.0%		10/10/23		7,969		7,969		8,019
Hudson Technologies Co.	(j)(k)	Commercial & Professional Services	L+725	1.0%		10/10/23		1,902		1,902		1,914
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850	1.0%		12/19/20		6,144		6,144		5,894
Icynene U.S. Acquisition Corp.	(f)(g)(h)(i)(j)	Materials	L+700	1.0%		11/30/24		76,808		76,808		77,526
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800	1.3%		5/31/20		10,740		10,740		10,901
JMC Acquisition Merger Corp.	(f)(g)(h)(i)	Capital Goods	L+750	1.0%		1/29/24		176,168		176,168		177,049
JMC Acquisition Merger Corp.	(k)	Capital Goods	L+750	1.0%		1/29/24		21,787		21,786		21,895
JSS Holdings, Inc.	(f)(g)(h)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)	1.0%		3/31/23		65,667		65,095		67,069
JSS Holdings, Inc.	(k)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)	1.0%		3/31/23		12,000		12,000		12,256
Kodiak BP, LLC	(f)(g)(h)(i)	Capital Goods	L+725	1.0%		12/1/24		68,348		68,348		68,007
Kodiak BP, LLC	(k)	Capital Goods	L+725	1.0%		12/1/24		19,697		19,697		19,598
Latham Pool Products, Inc.	(g)(h)	Commercial & Professional Services	L+775	1.0%		6/29/21		36,118		36,118		36,614
Logan’s Roadhouse, Inc.		Consumer Services	L+1300 PIK (L+1300 Max PIK)	1.0%		5/5/19		1,302		1,302		1,302
Logan’s Roadhouse, Inc.	(k)	Consumer Services	L+1300 PIK (L+1300 Max PIK)	1.0%		5/5/19		202		204		202
Logan’s Roadhouse, Inc.		Consumer Services	L+1300 PIK (L+1300 Max PIK)	1.0%		5/5/19		329		329		329
Logan’s Roadhouse, Inc.	(k)	Consumer Services	L+1300 PIK (L+1300 Max PIK)	1.0%		5/5/19		220		220		220
Nobel Learning Communities, Inc.		Consumer Services	L+450	1.0%		5/5/21		2,516		2,516		2,516
Nobel Learning Communities, Inc.	(k)	Consumer Services	L+450	1.0%		5/5/21		8,665		8,665		8,665
Nobel Learning Communities, Inc.	(f)(g)(h)(i)	Consumer Services	L+383	4.5%		5/5/23		84,472		84,472		83,412
Nobel Learning Communities, Inc.	(k)	Consumer Services	L+375	4.5%		5/5/23		49,689		49,689		49,066
North Haven Cadence Buyer, Inc.	(k)	Consumer Services	L+500	1.0%		9/2/21		750		750		750
North Haven Cadence Buyer, Inc.	(f)(g)	Consumer Services	L+809	1.0%		9/2/22		23,066		23,066		23,498
North Haven Cadence Buyer, Inc.	(k)	Consumer Services	L+750	1.0%		9/2/22		1,917		1,917		1,953
PHRC License, LLC	(f)	Consumer Services	L+850	1.5%		4/28/22		16,875		16,875		17,508
Polymer Additives, Inc.	(f)(i)	Materials	L+850	1.0%		12/19/22		18,920		18,920		19,346
Polymer Additives, Inc.	(f)(h)	Materials	L+795	1.0%		12/19/22		21,623		21,623		22,001
Power Distribution, Inc.		Capital Goods	L+725	1.3%		1/25/23		19,902		19,902		20,250
Production Resource Group, LLC	(f)	Media	L+750	1.0%		1/14/19		65,208		65,208		68,306
Propulsion Acquisition, LLC	(f)(h)(i)	Commercial & Professional Services	L+600	1.0%		7/13/21		60,759		59,511		60,151
Quest Software US Holdings Inc.	(h)	Software & Services	L+550	1.0%		10/31/22		5,867		5,840		5,983
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+725	1.0%		3/15/23		98,438		98,438		99,599
Rogue Wave Software, Inc.	(f)(g)(h)(i)	Software & Services	L+847	1.0%		9/25/21		151,900		151,900		153,419

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry		Rate^(b)		Floor		Maturity	Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Safariland, LLC		(f)(h)		Capital Goods		L+768		1.1%	11/18/23	$	42,893	$	42,893		$	40,051
Safariland, LLC		(k)		Capital Goods		L+725		1.1%	11/18/23		11,566		11,566			10,800
Sequel Youth and Family Services, LLC		(f)(g)		Health Care Equipment & Services		L+775		1.0%	9/1/22		15,288		15,288			15,441
Sequel Youth and Family Services, LLC		(k)		Health Care Equipment & Services		L+700		1.0%	9/1/22		765		765			772
Sequential Brands Group, Inc.		(f)(g)(h)(i)		Consumer Durables & Apparel		L+900			7/1/22		127,783		127,783			127,943
Sorenson Communications, Inc.		(f)		Telecommunication Services		L+575		2.3%	4/30/20		4,837		4,828			4,858
Specialty Building Products Holdings, LLC		(h)		Capital Goods		L+600		1.0%	10/26/23		9,515		9,203			9,634
SSC (Lux) Limited S.Ã r.l.		(f)(g)(j)		Health Care Equipment & Services		L+750		1.0%	9/10/24		45,455		45,455			46,307
Strike, LLC				Energy		L+800		1.0%	5/30/19		611		604			614
Strike, LLC		(h)		Energy		L+800		1.0%	11/30/22		2,975		2,904			3,020
SunGard Availability Services Capital, Inc.		(f)(h)(i)		Software & Services		L+700		1.0%	9/30/21		24,822		24,615			23,376
SunGard Availability Services Capital, Inc.				Software & Services		L+1000		1.0%	10/1/22		2,500		2,375			2,472
Swift Worldwide Resources US Holdings Corp.				Energy		L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	7/20/21		17,228		17,228			17,357
Trace3, LLC		(f)(h)		Software & Services		L+775		1.0%	6/6/23		15,524		15,524			15,582
U.S. Xpress Enterprises, Inc.		(f)		Transportation		L+1075, 0.0% PIK (1.8% Max PIK)		1.5%	5/30/20		10,499		10,499			10,565
USI Senior Holdings, Inc.		(f)		Capital Goods		L+778		1.0%	1/5/22		5,787		5,787			5,917
UTEX Industries, Inc.		(f)		Energy		L+400		1.0%	5/21/21		740		739			728
Warren Resources, Inc.		(g)(t)		Energy		L+900, 1.0% PIK (1.0% Max PIK)		1.0%	5/22/20		6,129		6,129			6,129
York Risk Services Holding Corp.				Insurance		L+375		1.0%	10/1/21		987		981			969
Zeta Interactive Holdings Corp.		(g)(h)(i)		Software & Services		L+750		1.0%	7/29/22		57,358		57,358			58,218

Total Senior Secured Loans—First Lien													2,406,218			2,407,647
Unfunded Loan Commitments													(177,172	)		(177,172	)

Net Senior Secured Loans—First Lien													2,229,046			2,230,475

Senior Secured Loans—Second Lien—10.8%
Arena Energy, LP		(f)(g)		Energy		L+900, 4.0% PIK (4.0% Max PIK)		1.0%	1/24/21		25,092		25,092			24,214
Byrider Finance, LLC				Automobiles & Components		L+1000, 0.5% PIK (4.0% Max PIK)		1.3%	8/22/20		5,916		5,916			5,798
CDS U.S. Intermediate Holdings, Inc.		(f)(j)		Media		L+825		1.0%	7/10/23		9,000		8,909			8,955
Chief Exploration & Development LLC				Energy		L+650		1.0%	5/16/21		165		155			164
Chisholm Oil and Gas Operating, LLC				Energy		L+800		1.0%	3/21/24		16,000		16,000			15,994
Crossmark Holdings, Inc.				Media		L+750		1.3%	12/21/20		1,500		1,345			134
Fairway Group Acquisition Co.		(l)(m)(t)		Food & Staples Retailing		11.0% PIK (11.0% Max PIK)			10/3/21		3,629		3,436			544
Gruden Acquisition, Inc.		(i)		Transportation		L+850		1.0%	8/18/23		10,000		9,657			10,075
Jazz Acquisition, Inc.				Capital Goods		L+675		1.0%	6/19/22		1,998		2,005			1,891

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry		Rate^(b)		Floor		Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
JW Aluminum Co.				Materials		L+850		0.8%	11/17/20	$	778	$	777	$	782
Logan’s Roadhouse, Inc.				Consumer Services		L+850 PIK (L+850 Max PIK)		1.0%	11/23/20		4,054		3,981		2,001
LTI Holdings, Inc.		(i)		Materials		L+875		1.0%	5/16/25		9,259		9,093		9,398
Panda Temple Power, LLC				Energy		L+800 PIK (L+800 Max PIK)		1.0%	2/7/23		8,741		8,574		8,931
Production Resource Group, LLC		(f)(g)(h)(i)		Media		L+850		1.0%	7/23/19		128,402		128,340		127,278
Spencer Gifts LLC		(g)(i)		Retailing		L+825		1.0%	6/29/22		37,000		36,956		24,050
Talos Production LLC				Energy		11.0%			4/3/22		4,500		4,227		4,500
Titan Energy Operating, LLC		(g)		Energy		2.0%, L+1100 PIK (L+1100 Max PIK)		1.0%	2/23/20		39,826		33,111		6,344
UTEX Industries, Inc.				Energy		L+725		1.0%	5/20/22		1,273		1,269		1,236

Total Senior Secured Loans—Second Lien													298,843		252,289

Senior Secured Bonds—2.5%
Avantor, Inc.		(e)		Materials		6.0%			10/1/24		1,361		1,361		1,355
Black Swan Energy Ltd.		(j)		Energy		9.0%			1/20/24		1,333		1,333		1,303
CSVC Acquisition Corp.		(e)		Diversified Financials		7.8%			6/15/25		13,774		13,774		11,897
Diamond Resorts International, Inc.		(e)(q)		Consumer Services		7.8%			9/1/23		11,965		11,965		13,030
Global A&T Electronics Ltd.		(e)(j)		Semiconductors & Semiconductor Equipment		8.5%			1/12/23		11,411		11,519		11,568
Ridgeback Resources Inc.		(j)		Energy		12.0%			12/29/20		335		330		335
Sorenson Communications, Inc.		(e)		Telecommunication Services		9.0%, 0.0% PIK (9.0% Max PIK)			10/31/20		11,820		11,570		11,886
Sunnova Energy Corp.				Energy		6.0%, 6.0% PIK (6.0% Max PIK)			10/24/18		2,453		2,453		2,450
Velvet Energy Ltd.		(j)		Energy		9.0%			10/5/23		4,500		4,500		4,482

Total Senior Secured Bonds													58,805		58,306

Subordinated Debt—28.0%
Ascent Resources Utica Holdings, LLC		(e)(q)		Energy		10.0%			4/1/22		30,000		30,000		32,513
Avantor, Inc.		(e)(g)(i)		Materials		9.0%			10/1/25		52,500		52,502		51,483
Bellatrix Exploration Ltd.		(e)(j)		Energy		8.5%			5/15/20		10,000		9,904		8,168
Byrider Holding Corp.				Automobiles & Components		20.0% PIK (20.0% Max PIK)			4/1/22		278		278		278
Calumet Specialty Products Partners, L.P.		(e)(j)		Energy		7.8%			4/15/23		10,300		10,247		10,209
Canbriam Energy Inc.		(e)(j)		Energy		9.8%			11/15/19		19,550		19,473		19,965
CEC Entertainment, Inc.		(e)(q)		Consumer Services		8.0%			2/15/22		39,014		37,796		34,966
Ceridian HCM Holding, Inc.		(e)(q)		Commercial & Professional Services		11.0%			3/15/21		92,439		92,432		95,732
Coveris Holdings S.A.		(e)(i)(j)		Materials		7.9%			11/1/19		64,255		63,625		64,496
Eclipse Resources Corp.		(e)(j)		Energy		8.9%			7/15/23		9,175		9,031		8,682
EV Energy Partners, L.P.		(l)(m)		Energy		8.0%			4/15/19		2,150		2,027		1,045

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry		Rate^(b)		Floor		Maturity		Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Exterran Energy Solutions, L.P.		(e)(j)(q)		Capital Goods		8.1%				5/1/25	$	7,714	$	7,714		$	8,180
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				1/30/25		881		881			889
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				4/30/25		5,600		5,600			5,649
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				9/3/25		1,157		1,157			1,167
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				9/29/25		1,089		1,089			1,099
Global Jet Capital Inc.		(j)		Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/4/25		72,376		72,376			73,009
Global Jet Capital Inc.		(j)		Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/9/25		11,837		11,837			11,941
Global Jet Capital Inc.		(j)		Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				1/29/26		6,199		6,199			6,253
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				2/17/26		15,156		15,156			15,288
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				4/14/26		9,386		9,386			9,468
Global Jet Capital Inc.				Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/2/26		13,872		13,872			13,993
Great Lakes Dredge & Dock Corp.		(e)(j)		Capital Goods		8.0%				5/15/22		8,352		8,365			8,582
Greystone Mezzanine Equity Member Corp.		(j)		Diversified Financials		L+650		4.5%		9/15/25		9,025		9,025			9,014
Greystone Mezzanine Equity Member Corp.		(j)(k)		Diversified Financials		L+650		4.5%		9/15/25		43,975		43,975			43,920
P.F. Chang’s China Bistro, Inc.		(e)(g)(i)(q)		Consumer Services		10.3%				6/30/20		73,286		73,148			57,988
PriSo Acquisition Corp.		(e)(q)		Capital Goods		9.0%				5/15/23		47,859		47,519			50,282
S1 Blocker Buyer Inc.				Commercial & Professional Services		10.0% PIK (10.0% Max PIK)				10/31/22		116		116			133
Sorenson Communications, Inc.		(e)		Telecommunication Services		13.9%, 0.0% PIK (13.9% Max PIK)				10/31/21		8,983		9,294			9,208
SunGard Availability Services Capital, Inc.		(e)(q)		Software & Services		8.8%				4/1/22		16,400		12,334			10,244
TI Group Automotive Systems, LLC		(e)(j)(q)		Automobiles & Components		8.8%				7/15/23		3,408		3,408			3,598
York Risk Services Holding Corp.		(e)(i)		Insurance		8.5%				10/1/22		36,050		33,877			33,879

Total Subordinated Debt														713,643			701,321
Unfunded Debt Commitment														(43,975	)		(43,975	)

Net Subordinated Debt														669,668			657,346

Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D		(j)		Diversified Financials		L+435				1/25/27		730		695			731
NewStar Clarendon 2014-1A Class Subord. B		(j)		Diversified Financials		16.1%				1/25/27		8,310		5,841			6,673

Total Collateralized Securities														6,536			7,404

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry		Rate^(b)		Floor	Maturity		Number of Shares		Cost		Fair Value^(d)
Equity/Other—4.7%
5 Arches, LLC, Common Equity		(j)(n)		Diversified Financials							70,000	$	1,750	$	2,625
ACP FH Holdings GP, LLC, Common Equity		(l)		Consumer Durables & Apparel							11,429		11		6
ACP FH Holdings, LP, Common Equity		(l)		Consumer Durables & Apparel							1,131,428		1,131		604
Altus Power America Holdings, LLC, Common Equity		(l)		Energy							462,008		462		—
Altus Power America Holdings, LLC, Preferred Equity		(p)		Energy		9.0%, 5.0% PIK			10/3/23		955,284		955		951
ASG Everglades Holdings, Inc., Warrants		(l)		Software & Services					6/27/22		48,325		1,377		1,484
Aspect Software Parent, Inc., Common Equity		(l)(t)		Software & Services							1,142,735		53,808		—
ATX Holdings, LLC, Common Equity		(j)(l)		Technology Hardware & Equipment							83,488		134		109
Byrider Holding Corp., Common Equity		(l)		Automobiles & Components							278		—		—
Chisholm Oil and Gas, LLC, Series A Units		(l)(n)		Energy							70,947		71		71
CSF Group Holdings, Inc., Common Equity		(l)		Capital Goods							173,900		174		122
Escape Velocity Holdings, Inc., Common Equity		(l)		Software & Services							7,725		77		147
Fairway Group Holdings Corp., Common Equity		(l)(t)		Food & Staples Retailing							71,465		2,296		—
Global Jet Capital Holdings, LP, Preferred Equity		(j)(l)		Commercial & Professional Services							42,484,416		42,484		38,236
H.I.G. Empire Holdco, Inc., Common Equity		(l)		Retailing							206		614		607
Harvey Holdings, LLC, Common Equity		(l)		Capital Goods							2,000,000		2,000		4,300
Industrial Group Intermediate Holdings, LLC, Common Equity		(l)(n)		Materials							220,619		221		276
JMC Acquisition Holdings, LLC, Common Equity		(l)		Capital Goods							8,068		8,068		8,068
JSS Holdco, LLC, Net Profits Interest		(l)		Capital Goods							—		—		299
JW Aluminum Co., Common Equity		(l)		Materials							18		—		—
JW Aluminum Co., Preferred Equity				Materials		12.5% PIK			11/17/25		862		3,318		3,257
North Haven Cadence TopCo, LLC, Common Equity		(l)		Consumer Services							833,333		833		1,375
PDI Parent LLC, Common Equity		(l)		Capital Goods							923,077		923		923
Ridgeback Resources Inc., Common Equity		(j)(l)(r)		Energy							827,156		5,082		4,713
Roadhouse Holding Inc., Common Equity		(l)		Consumer Services							1,202,991		1,250		—
S1 Blocker Buyer Inc., Common Equity				Commercial & Professional Services							60		581		980
Sequential Brands Group, Inc., Common Equity		(l)(s)		Consumer Durables & Apparel							125,391		1,693		261
SSC Holdco Limited, Common Equity		(j)(l)		Health Care Equipment & Services							113,636		2,273		2,307
Sunnova Energy Corp., Common Equity		(l)		Energy							577,086		2,166		29
Sunnova Energy Corp., Preferred Equity		(l)		Energy							105,341		561		624
T1 Power Holdings LLC, Common Equity		(l)(n)		Energy							616,122		9,396		10,744
TE Holdings, LLC, Common Equity		(l)(n)		Energy							129,829		1,104		162
TE Holdings, LLC, Preferred Equity		(l)		Energy							86,061		859		645
Titan Energy, LLC, Common Equity		(l)(s)		Energy							72,739		2,299		80
Warren Resources, Inc., Common Equity		(l)(t)		Energy							998,936		4,695		3,996
White Star Petroleum Holdings, LLC, Common Equity		(l)(n)		Energy							1,738,244		1,478		999
Zeta Interactive Holdings Corp., Preferred Equity, Series E-1		(l)		Software & Services							1,051,348		8,357		10,404
Zeta Interactive Holdings Corp., Preferred Equity, Series F		(l)		Software & Services							956,233		8,357		9,145

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry		Rate^(b)	Floor	Maturity		Number of Shares		Cost		Fair Value^(d)
Zeta Interactive Holdings Corp., Warrants		(l)		Software & Services				4/20/27		143,435	$	—	$	500

Total Equity/Other												170,858		109,049

TOTAL INVESTMENTS—141.5%											$	3,433,756		3,314,869

LIABILITIES IN EXCESS OF OTHER ASSETS—(41.5%)														(971,702	)

NET ASSETS—100.0%													$	2,343,167


Total Return Swap		Notional Amount		Unrealized Depreciation
Citibank TRS Facility (Note 8)	(j)	$	437,855	$	(1,560	)

(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, 2018, the three-month London Interbank Offered Rate, or LIBOR or “L” was 2.31%, and the U.S. Prime Lending Rate, or Prime, was 4.75%. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment.

(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 Burholme Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage International, Ltd. (as assignee of BNP Paribas Prime Brokerage, Inc., or BNPP. Securities held within Burholme Funding LLC may be rehypothecated from time to time as permitted under Rule 15c-1(a)(1) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8).

(f)	Security or portion thereof held within Dunlap Funding 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).

(g)	Security or portion thereof held within Jefferson Square Funding LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, National Association (see Note 8).

(h)	Security or portion thereof held within Chestnut Hill Funding LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Capital One, National Association (see Note 8).

(i)	Security or portion thereof held within Germantown Funding LLC and is pledged as collateral supporting the amounts outstanding under the notes issued to Society Hill Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

(j)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. 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, 2018, 83.7% of the Company’s total assets represented qualifying assets. In addition, the Company also calculates its compliance with the qualifying asset test on a “look through” basis by disregarding the value of the Company’s total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 83.5% of the Company’s total assets represented qualifying assets as of March 31, 2018.

(k)	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.

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2018

(in thousands, except share amounts)

(l)	Security is non-income producing.

(m)	Security was on non-accrual status as of March 31, 2018.

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

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

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

(q)

Security or portion thereof held within Burholme Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8). As of March 31, 2018, the fair value of securities rehypothecated by BNPP was $182,357.

(r)	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 $0.78 as of March 31, 2018.

(s)	Security is classified as Level 1 in the Company’s fair value hierarchy (see Note 7).

(t)

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, 2018, 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, 2018:


Portfolio Company	Fair Value at December 31, 2017				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, 2018				Interest Income⁽³⁾			PIK Income⁽³⁾			Fee Income⁽³⁾
Senior Secured Loans—First Lien
Aspect Software, Inc.⁽¹⁾		$	5,004			$	—		$	—			$	—		$	—		$	(359	)		$	4,645			$	300		$	—		$	—
Aspect Software, Inc.			9,156				—			(64	)			—			—			54				9,146				151			—			3
Aspect Software, Inc.⁽²⁾			(1,822	)			—			—				—			—			—				(1,822	)			—			—			2
Fairway Group Acquisition Co.			6,159				185			—				—			—			(1	)			6,343				185			185			—
Fairway Group Acquisition Co.			903				—			—				—			—			(286	)			617				—			—			—
Warren Resources, Inc.			18,372				28			(11,824	)			—			—			(447	)			6,129				310			28			473
Senior Secured Loans—Second Lien																														—
Fairway Group Acquisition Co.			795				—			—				—			—			(251	)			544				—			—			—
Equity/Other																														—
Aspect Software Parent, Inc., Common Equity			—				—			—				—			—			—				—				—			—			—
Fairway Group Holdings Corp., Common Equity			—				—			—				—			—			—				—				—			—			—
Warren Resources, Inc., Common Equity			1,698				—			—				—			—			2,298				3,996				—			—			—

Total		$	40,265			$	213		$	(11,888	)		$	—		$	—		$	1,008			$	29,598			$	946		$	213		$	478

(1)	Security includes a partially unfunded commitment with an amortized cost of $128 and a fair value of $119.

(2)	Security is an unfunded commitment with an amortized cost of $1,822 and a fair value of $0.

(3)	Interest income, PIK income and fee income presented for the full three months ended March 31, 2018.

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments

As of December 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—93.0%
5 Arch Income Fund 2, LLC	(j)(p)	Diversified Financials	10.5%			11/18/21	$	104,385	$	104,547	$	104,385
5 Arch Income Fund 2, LLC	(j)(l)(p)	Diversified Financials	10.5%			11/18/21		28,615		28,615		28,615
Actian Corp.	(g)(i)	Software & Services	L+806		1.0%	6/30/22		21,333		21,333		21,600
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750		1.0%	12/29/23		17,834		17,834		18,146
All Systems Holding LLC	(f)(g)(i)	Commercial & Professional Services	L+767		1.0%	10/31/23		50,108		50,108		50,860
Altus Power America, Inc.		Energy	L+750		1.5%	9/30/21		2,866		2,866		2,809
Altus Power America, Inc.	(l)	Energy	L+750		1.5%	9/30/21		884		884		866
Aspect Software, Inc.	(u)	Software & Services	L+1050		1.0%	5/25/18		5,004		5,004		5,004
Aspect Software, Inc.	(l)(u)	Software & Services	L+1050		1.0%	5/25/18		128		128		128
Aspect Software, Inc.	(f)(u)	Software & Services	L+1050		1.0%	5/25/20		9,899		9,899		9,156
Aspect Software, Inc.	(l)(u)	Software & Services	L+1200		1.0%	5/25/18		1,822		1,822		—
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+802		1.0%	12/29/22		42,667		42,667		42,667
ATX Networks Corp.	(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21		9,649		9,561		9,589
ATX Networks Corp.	(g)(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21		29,390		28,692		29,206
Avaya Inc.	(h)	Technology Hardware & Equipment	L+475		1.0%	12/15/24		8,000		7,920		7,888
AVF Parent, LLC	(f)(h)	Retailing	L+725		1.3%	3/1/24		30,198		30,198		30,823
BMC Software Finance, Inc.	(l)	Software & Services	L+400			9/10/20		10,000		10,000		9,100
Borden Dairy Co.	(f)(g)	Food, Beverage & Tobacco	L+804		1.0%	7/6/23		48,125		48,125		48,111
Cactus Wellhead, LLC	(f)(i)	Energy	L+600		1.0%	7/31/20		11,365		10,909		11,384
CEVA Group Plc	(j)(l)	Transportation	L+500			3/19/19		15,000		14,350		14,062
ConnectiveRx, LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+828		1.0%	11/25/21		157,004		157,004		157,067
CSafe Acquisition Co., Inc.		Capital Goods	L+725		1.0%	11/1/21		1,478		1,478		1,465
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0%	11/1/21		1,130		1,131		1,121
CSafe Acquisition Co., Inc.	(f)(h)	Capital Goods	L+725		1.0%	10/31/23		20,806		20,806		20,624
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0%	10/31/23		11,165		11,165		11,068
Dade Paper & Bag, LLC	(g)(i)	Capital Goods	L+750		1.0%	6/10/24		44,589		44,589		46,150
Elo Touch Solutions, Inc.	(h)	Technology Hardware & Equipment	L+600		1.0%	10/25/23		4,267		4,225		4,277
Empire Today, LLC	(f)(g)(h)	Retailing	L+800		1.0%	11/17/22		44,550		44,550		44,995
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	12.0% PIK (12.0% Max PIK)			1/3/20		6,159		6,159		6,159
Fairway Group Acquisition Co.	(m)(n)(u)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)			1/3/20		4,015		3,916		903
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20		1,680		1,680		1,679
FullBeauty Brands Holdings Corp.		Consumer Durables & Apparel	L+800		1.0%	10/14/20		13,000		13,000		12,837
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1050			3/31/21		19,015		19,054		19,038
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21		50,000		50,000		50,500
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21		29,467		29,467		29,762
Greystone Equity Member Corp.	(j)(l)	Diversified Financials	L+1100			3/31/21		7,518		7,518		7,594
Gulf Finance, LLC	(h)	Energy	L+525		1.0%	8/25/23		4,864		4,745		4,391

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor		Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
H.M. Dunn Co., Inc.		Capital Goods	L+946		1.0%	3/26/21	$	9,643	$	9,643	$	9,209
Hudson Technologies Co.	(g)(j)	Commercial & Professional Services	L+725		1.0%	10/10/23		7,989		7,989		8,099
Hudson Technologies Co.	(j)(l)	Commercial & Professional Services	L+725		1.0%	10/10/23		1,902		1,902		1,928
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20		6,160		6,160		6,155
Icynene U.S. Acquisition Corp.	(f)(g)(h)(i)	Materials	L+700		1.0%	11/30/24		77,000		77,000		77,015
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800		1.3%	5/31/20		10,746		10,746		10,907
JMC Acquisition Merger Corp.	(f)(g)(h)(i)	Capital Goods	L+854		1.0%	11/6/21		114,086		114,086		115,940
JSS Holdings, Inc.	(f)(g)(h)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23		65,742		65,147		66,761
JSS Holdings, Inc.	(l)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23		12,000		12,000		12,186
Kodiak BP, LLC	(f)(g)(h)(i)	Capital Goods	L+725		1.0%	12/1/24		68,348		68,348		68,519
Kodiak BP, LLC	(l)	Capital Goods	L+725		1.0%	12/1/24		19,697		19,697		19,746
Latham Pool Products, Inc.	(g)(h)	Commercial & Professional Services	L+775		1.0%	6/29/21		36,118		36,118		36,524
Logan’s Roadhouse, Inc.		Consumer Services	L+1100 PIK (L+1100 Max PIK)		1.0%	5/5/19		1,256		1,256		1,256
Logan’s Roadhouse, Inc.	(l)	Consumer Services	L+1100 PIK (L+1100 Max PIK)		1.0%	5/5/19		202		204		202
Nobel Learning Communities, Inc.		Consumer Services	L+450		1.0%	5/5/21		3,075		3,075		3,075
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+450		1.0%	5/5/21		8,106		8,106		8,106
Nobel Learning Communities, Inc.	(f)(g)(h)(i)	Consumer Services	L+436		4.5%	5/5/23		84,472		84,472		84,044
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+375		4.5%	5/5/23		49,689		49,689		49,439
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+500		1.0%	9/2/21		750		750		750
North Haven Cadence Buyer, Inc.	(f)(g)	Consumer Services	L+810		1.0%	9/2/22		22,149		22,149		22,564
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+750		1.0%	9/2/22		2,833		2,833		2,886
Panda Temple Power, LLC	(m)(n)	Energy	L+625		1.0%	3/6/22		24,808		21,322		18,048
Panda Temple Power, LLC		Energy	L+900		1.0%	4/28/18		943		943		944
PHRC License, LLC	(f)	Consumer Services	L+850		1.5%	4/28/22		16,875		16,875		17,297
Polymer Additives, Inc.	(f)(i)	Materials	L+888		1.0%	12/19/22		18,920		18,920		19,583
Polymer Additives, Inc.	(f)(h)	Materials	L+834		1.0%	12/19/22		21,623		21,623		22,056
Power Distribution, Inc.		Capital Goods	L+725		1.3%	1/25/23		19,952		19,952		20,252
Production Resource Group, LLC	(f)	Media	L+750		1.0%	1/14/19		65,208		65,208		68,958
Propulsion Acquisition, LLC	(f)(h)(i)(k)	Commercial & Professional Services	L+600		1.0%	7/13/21		60,966		59,633		60,356
Quest Software US Holdings Inc.	(h)	Software & Services	L+550		1.0%	10/31/22		5,867		5,838		5,971
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+725		1.0%	3/15/23		99,094		99,094		99,931
Rogue Wave Software, Inc.	(f)(g)(h)(i)	Software & Services	L+858		1.0%	9/25/21		151,900		151,900		151,900
Safariland, LLC	(f)(h)	Capital Goods	L+768		1.1%	11/18/23		42,893		42,893		43,483
Safariland, LLC	(l)	Capital Goods	L+725		1.1%	11/18/23		11,566		11,566		11,725
Sequel Youth and Family Services, LLC	(f)(g)	Health Care Equipment & Services	L+778		1.0%	9/1/22		15,294		15,294		15,435
Sequel Youth and Family Services, LLC	(l)	Health Care Equipment & Services	L+700		1.0%	9/1/22		765		765		772
Sequential Brands Group, Inc.	(f)(g)(h)(i)	Consumer Durables & Apparel	L+900			7/1/22		128,439		128,439		127,154
Sorenson Communications, Inc.	(f)	Telecommunication Services	L+575		2.3%	4/30/20		4,849		4,838		4,889

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor		Maturity	Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Specialty Building Products Holdings, LLC	(h)	Capital Goods	L+600		1.0%	10/26/23	$	9,538	$	9,213		$	9,574
SSC (Lux) Limited S.Ã r.l.	(f)(g)(j)	Health Care Equipment & Services	L+750		1.0%	9/10/24		45,455		45,455			46,364
Strike, LLC		Energy	L+800		1.0%	5/30/19		3,734		3,687			3,752
Strike, LLC	(h)	Energy	L+800		1.0%	11/30/22		3,015		2,939			3,060
SunGard Availability Services Capital, Inc.	(l)	Software & Services	L+450			3/8/18		7,000		5,539			6,685
SunGard Availability Services Capital, Inc.	(f)(h)(i)	Software & Services	L+700		1.0%	9/30/21		24,822		24,600			23,022
SunGard Availability Services Capital, Inc.	(k)	Software & Services	L+1000		1.0%	10/1/22		2,500		2,375			2,405
Swift Worldwide Resources US Holdings Corp.		Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	7/20/21		17,226		17,226			17,571
Trace3, LLC	(f)	Software & Services	L+775		1.0%	6/6/23		12,438		12,438			12,733
U.S. Xpress Enterprises, Inc.	(f)	Transportation	L+1075, 0.0% PIK (1.8% Max PIK)		1.5%	5/30/20		10,537		10,537			10,563
USI Senior Holdings, Inc.	(f)	Capital Goods	L+779		1.0%	1/5/22		5,144		5,144			5,173
USI Senior Holdings, Inc.	(l)	Capital Goods	L+725		1.0%	1/5/22		1,047		1,047			1,053
UTEX Industries, Inc.	(f)	Energy	L+400		1.0%	5/21/21		742		740			730
Warren Resources, Inc.	(g)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0%	5/22/20		17,924		17,924			18,372
Waste Pro USA, Inc.	(f)(g)	Commercial & Professional Services	L+750		1.0%	10/15/20		33,032		33,032			33,651
York Risk Services Holding Corp.		Insurance	L+375		1.0%	10/1/21		990		983			971
Zeta Interactive Holdings Corp.	(g)(h)(i)	Software & Services	L+750		1.0%	7/29/22		57,358		57,358			58,218
Zeta Interactive Holdings Corp.	(l)	Software & Services	L+750		1.0%	7/29/22		10,892		10,892			11,056

Total Senior Secured Loans—First Lien									$	2,413,551		$	2,423,047
Unfunded Loan Commitments										(200,603	)		(200,603	)

Net Senior Secured Loans—First Lien										2,212,948			2,222,444

Senior Secured Loans—Second Lien—11.0%
Arena Energy, LP	(f)(g)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0%	1/24/21		24,844		24,844			23,621
Byrider Finance, LLC		Automobiles & Components	L+1000, 0.5% PIK (4.0% Max PIK)		1.3%	8/22/20		4,522		4,522			4,256
Casablanca US Holdings Inc.		Consumer Services	L+900		1.0%	3/31/25		3,330		3,220			3,409
CDS U.S. Intermediate Holdings, Inc.	(f)(j)	Media	L+825		1.0%	7/10/23		9,000		8,905			8,916
Chief Exploration & Development LLC		Energy	L+650		1.0%	5/16/21		165		154			163
Chisholm Oil and Gas Operating, LLC		Energy	L+800		1.0%	3/21/24		16,000		16,000			15,998
Compuware Corp.	(f)(g)	Software & Services	L+825		1.0%	12/15/22		2,901		2,709			2,915
Crossmark Holdings, Inc.		Media	L+750		1.3%	12/21/20		1,500		1,331			169
Fairway Group Acquisition Co.	(m)(n)(u)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)			10/3/21		3,531		3,436			795
Fieldwood Energy LLC	(m)(n)	Energy	L+713		1.3%	9/30/20		5,011		4,127			1,679
Gruden Acquisition, Inc.	(i)	Transportation	L+850		1.0%	8/18/23		10,000		9,642			9,988
Jazz Acquisition, Inc.		Capital Goods	L+675		1.0%	6/19/22		1,998		2,005			1,890
JW Aluminum Co.		Materials	L+850		0.8%	11/17/20		779		779			791

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor		Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Logan’s Roadhouse, Inc.		Consumer Services	L+850 PIK (L+850 Max PIK)		1.0%	11/23/20	$	3,953	$	3,930	$	1,817
LTI Holdings, Inc.	(i)	Materials	L+875		1.0%	5/16/25		9,259		9,087		9,421
Production Resource Group, LLC	(f)(g)(h)(i)	Media	L+850		1.0%	7/23/19		128,402		128,329		129,284
Spencer Gifts LLC	(g)(i)	Retailing	L+825		1.0%	6/29/22		37,000		36,951		19,980
Talos Production LLC		Energy	11.0%			4/3/22		4,500		4,211		4,466
Titan Energy Operating, LLC	(g)	Energy	2.0%, L+1100 PIK (L+1100 Max PIK)		1.0%	2/23/20		38,598		33,110		20,469
UTEX Industries, Inc.		Energy	L+725		1.0%	5/20/22		1,273		1,269		1,212

Total Senior Secured Loans—Second Lien										298,561		261,239

Senior Secured Bonds—2.5%
Avantor, Inc.	(e)	Materials	6.0%			10/1/24		1,361		1,361		1,363
Black Swan Energy Ltd.	(j)	Energy	9.0%			1/20/24		1,333		1,333		1,343
CSVC Acquisition Corp.	(e)	Diversified Financials	7.8%			6/15/25		13,774		13,774		13,257
Diamond Resorts International, Inc.	(e)(r)	Consumer Services	7.8%			9/1/23		11,965		11,965		12,992
Global A&T Electronics Ltd.	(e)(j)(m)(n)	Semiconductors & Semiconductor Equipment	10.0%			2/1/19		12,550		12,179		11,635
Ridgeback Resources Inc.	(j)	Energy	12.0%			12/29/20		335		330		335
Sorenson Communications, Inc.	(e)	Telecommunication Services	9.0%, 0.0% PIK (9.0% Max PIK)			10/31/20		11,820		11,551		11,820
Sunnova Energy Corp.		Energy	6.0%, 6.0% PIK (6.0% Max PIK)			10/24/18		3,175		3,175		3,175
Velvet Energy Ltd.	(j)	Energy	9.0%			10/5/23		4,500		4,500		4,558

Total Senior Secured Bonds										60,168		60,478

Subordinated Debt—28.8%
Ascent Resources Utica Holdings, LLC	(e)(r)	Energy	10.0%			4/1/22		30,000		30,000		32,420
Avantor, Inc.	(e)(g)(i)	Materials	9.0%			10/1/25		52,500		52,502		52,205
Bellatrix Exploration Ltd.	(e)(j)	Energy	8.5%			5/15/20		10,000		9,894		9,550
Calumet Specialty Products Partners, L.P.	(e)(j)(r)	Energy	7.8%			4/15/23		10,300		10,243		10,403
Canbriam Energy Inc.	(e)(j)	Energy	9.8%			11/15/19		20,300		20,193		20,731
CEC Entertainment, Inc.	(e)(r)	Consumer Services	8.0%			2/15/22		39,014		37,733		36,917
Ceridian HCM Holding, Inc.	(e)(r)	Commercial & Professional Services	11.0%			3/15/21		92,439		92,417		96,707
Coveris Holdings S.A.	(e)(i)(j)	Materials	7.9%			11/1/19		64,255		63,530		64,135
Eclipse Resources Corp.	(e)(j)	Energy	8.9%			7/15/23		9,175		9,028		9,439
EV Energy Partners, L.P.	(n)	Energy	8.0%			4/15/19		2,150		2,028		1,097
Exterran Energy Solutions, L.P.	(e)(j)(r)	Capital Goods	8.1%			5/1/25		7,714		7,714		8,331
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			1/30/25		849		849		864
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			4/30/25		5,398		5,398		5,492

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes		Industry	Rate^(b)		Floor		Maturity		Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				9/3/25	$	1,115	$	1,115		$	1,135
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				9/29/25		1,050		1,050			1,069
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/4/25		69,760		69,760			70,980
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/9/25		11,409		11,409			11,609
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				1/29/26		5,975		5,975			6,079
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				2/17/26		14,608		14,608			14,864
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				4/14/26		9,047		9,047			9,205
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)				12/2/26		13,370		13,371			13,604
Great Lakes Dredge & Dock Corp.		(e)(j)	Capital Goods		8.0%				5/15/22		8,352		8,366			8,773
Greystone Mezzanine Equity Member Corp.		(j)	Diversified Financials		L+650		4.5%		9/15/25		2,680		2,680			2,680
Greystone Mezzanine Equity Member Corp.		(j)(l)	Diversified Financials		L+650		4.5%		9/15/25		50,320		50,320			50,320
Jupiter Resources Inc.		(e)(j)	Energy		8.5%				10/1/22		31,850		29,228			19,667
Northern Oil and Gas, Inc.		(e)	Energy		8.0%				6/1/20		3,150		3,065			2,461
P.F. Chang’s China Bistro, Inc.		(e)(g)(i)(r)	Consumer Services		10.3%				6/30/20		73,286		73,162			67,162
PriSo Acquisition Corp.		(e)(r)	Capital Goods		9.0%				5/15/23		47,859		47,506			50,760
S1 Blocker Buyer Inc.			Commercial & Professional Services		10.0% PIK (10.0% Max PIK)				10/31/22		143		143			159
Sorenson Communications, Inc.		(e)	Telecommunication Services		13.9%, 0.0% PIK (13.9% Max PIK)				10/31/21		8,983		9,312			9,320
SunGard Availability Services Capital, Inc.		(e)(r)	Software & Services		8.8%				4/1/22		16,400		12,157			10,230
TI Group Automotive Systems, LLC		(e)(j)	Automobiles & Components		8.8%				7/15/23		3,408		3,408			3,664
York Risk Services Holding Corp.		(e)(i)	Insurance		8.5%				10/1/22		36,050		33,775			35,509

Total Subordinated Debt													740,986			737,541
Unfunded Debt Commitments													(50,320	)		(50,320	)

Net Subordinated Debt													690,666			687,221


Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D		(j)	Diversified Financials		L+435				1/25/27		730		695			731
NewStar Clarendon 2014-1A Class Subord. B		(j)	Diversified Financials		15.8%				1/25/27		8,310		6,002			6,831

Total Collateralized Securities													6,697			7,562

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity		Number of Shares		Cost		Fair Value^(d)
Equity/Other—4.3%
5 Arches, LLC, Common Equity	(j)(o)	Diversified Financials						70,000	$	1,750	$	1,750
ACP FH Holdings GP, LLC, Common Equity	(m)	Consumer Durables & Apparel						11,429		11		9
ACP FH Holdings, LP, Common Equity	(m)	Consumer Durables & Apparel						1,131,428		1,132		860
Altus Power America Holdings, LLC, Common Equity	(m)	Energy						462,008		462		69
Altus Power America Holdings, LLC, Preferred Equity	(q)	Energy	9.0%, 5.0% PIK			10/3/23		955,284		955		955
ASG Everglades Holdings, Inc., Warrants, 6/27/2022	(m)	Software & Services						48,325		1,377		1,324
Aspect Software Parent, Inc., Common Equity	(m)(u)	Software & Services						1,142,735		53,808		—
ATX Holdings, LLC, Common Equity	(j)(m)	Technology Hardware & Equipment						83,488		134		96
Chisholm Oil and Gas, LLC, Series A Units	(m)(o)	Energy						70,947		71		70
CSF Group Holdings, Inc., Common Equity	(m)	Capital Goods						173,900		174		122
Escape Velocity Holdings, Inc., Common Equity	(m)	Software & Services						7,725		77		182
Fairway Group Holdings Corp., Common Equity	(m)(u)	Food & Staples Retailing						71,465		2,296		—
Global Jet Capital Holdings, LP, Preferred Equity	(j)(m)	Commercial & Professional Services						42,484,416		42,484		38,236
H.I.G. Empire Holdco, Inc., Common Equity	(m)	Retailing						206		614		613
Harvey Holdings, LLC, Common Equity	(m)	Capital Goods						2,000,000		2,000		5,100
Industrial Group Intermediate Holdings, LLC, Common Equity	(m)(o)	Materials						220,619		221		331
JMC Acquisition Holdings, LLC, Common Equity	(m)	Capital Goods						8,068		8,068		10,932
JSS Holdco, LLC, Net Profits Interest	(m)	Capital Goods						—		—		452
JW Aluminum Co., Common Equity	(m)	Materials						18		—		—
JW Aluminum Co., Preferred Equity	(m)	Materials						83		294		827
North Haven Cadence TopCo, LLC, Common Equity	(m)	Consumer Services						833,333		833		1,292
PDI Parent LLC, Common Equity	(m)	Capital Goods						923,077		923		969
Ridgeback Resources Inc., Common Equity	(j)(m)(s)	Energy						827,156		5,082		5,022
Roadhouse Holding Inc., Common Equity	(m)	Consumer Services						1,202,991		1,250		—
S1 Blocker Buyer Inc., Common Equity		Commercial & Professional Services						60		600		913
SandRidge Energy, Inc., Common Equity	(e)(j)(m)(t)	Energy						253,009		5,647		5,331
Sequential Brands Group, Inc., Common Equity	(m)(t)	Consumer Durables & Apparel						125,391		1,693		223
SSC Holdco Limited, Common Equity	(j)(m)	Health Care Equipment & Services						113,636		2,273		2,716
Sunnova Energy Corp., Common Equity	(m)	Energy						577,086		2,166		—
Sunnova Energy Corp., Preferred Equity	(m)	Energy						105,341		561		425
TE Holdings, LLC, Common Equity	(m)(o)	Energy						129,829		1,104		211
TE Holdings, LLC, Preferred Equity	(m)	Energy						86,061		859		818
Titan Energy, LLC, Common Equity	(m)(t)	Energy						72,739		2,299		111
Warren Resources, Inc., Common Equity	(m)(u)	Energy						998,936		4,695		1,698
White Star Petroleum Holdings, LLC, Common Equity	(m)(o)	Energy						1,738,244		1,478		1,304
Zeta Interactive Holdings Corp., Preferred Equity, Series E-1	(m)	Software & Services						1,051,348		8,357		10,200
Zeta Interactive Holdings Corp., Preferred Equity, Series F	(m)	Software & Services						956,233		8,357		8,922

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)


Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Number of Shares		Cost		Fair Value^(d)
Zeta Interactive Holdings Corp., Warrants, 4/20/2027	(m)	Software & Services					143,435	$	—	$	499

Total Equity/Other									164,105		102,582

TOTAL INVESTMENTS—139.9%								$	3,433,145		3,341,526

LIABILITIES IN EXCESS OF OTHER ASSETS—(39.9%)											(952,802	)

NET ASSETS—100.0%										$	2,388,724


Total Return Swap		Notional Amount		Unrealized Depreciation
Citibank TRS Facility (Note 8)	(j)	$	340,523	$	(3,756	)

(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, 2017, the three-month London Interbank Offered Rate, or LIBOR or L, was 1.69% and the U.S. Prime Lending Rate, or Prime, was 4.50%. 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)

(f)	Security or portion thereof held within Dunlap Funding 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).

(g)	Security or portion thereof held within Jefferson Square Funding LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, National Association (see Note 8).

(h)	Security or portion thereof held within Chestnut Hill Funding LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Capital One, National Association (see Note 8).

(i)	Security or portion thereof held within Germantown Funding LLC and is pledged as collateral supporting the amounts outstanding under the notes issued to Society Hill Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

(j)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. 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, 2017, 86.1% of the Company’s total assets represented qualifying assets. In addition, the Company also calculates its compliance with the qualifying asset test on a “look through” basis by disregarding the value of the Company’s total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 85.9% of the Company’s total assets represented qualifying assets as of December 31, 2017.

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2017

(in thousands, except share amounts)

(k)	Position or portion thereof unsettled as of December 31, 2017.

(l)	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.

(m)	Security is non-income producing.

(n)	Security was on non-accrual status as of December 31, 2017.

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

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

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

(r)

Security or portion thereof held within Burholme Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8). As of December 31, 2017, the fair value of securities rehypothecated by BNPP was $185,262.

(s)	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 $0.80 as of December 31, 2017.

(t)	Security is classified as Level 1 in the Company’s fair value hierarchy (see Note 7).

(u)

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, 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 year ended December 31, 2017:


Portfolio Company	Fair Value at December 31, 2016		Purchases and Paid-in-Kind Interest		Sales and Repayments			Net Realized Gain (Loss)		Net Change in Unrealized Appreciation (Depreciation)			Fair Value at December 31, 2017			Interest Income		PIK Income		Fee Income
Senior Secured Loans—First Lien
Aspect Software, Inc.⁽¹⁾	$	3,200	$	2,703	$	(899	)	$	—	$	—		$	5,004		$	1,151	$	—	$	51
Aspect Software, Inc.		10,270		—		(257	)		—		(857	)		9,156			453		—		90
Aspect Software, Inc.⁽²⁾		—		—							(1,822	)		(1,822	)		21		—		63
Fairway Group Acquisition Co.		5,687		528		—			—		(56	)		6,159			132		528		—
Fairway Group Acquisition Co.		3,306		283		—			—		(2,686	)		903			—		283		—
Warren Resources, Inc.⁽²⁾		17,744		180		—			—		448			18,372			1,845		180		—
Senior Secured Loans—Second Lien
Fairway Group Acquisition Co.		2,595		272		—			—		(2,072	)		795			—		272		—
Equity/Other											—
Aspect Software, Inc., Common Equity		59,634		270		—			811		(60,715	)		—			—		—		—
Fairway Group Acquisition Co., Common Equity		1,858		—		—			—		(1,858	)		—			—		—		—
Warren Resources, Inc., Common Equity		4,295		—		—			—		(2,597	)		1,698			—		—		—

Total	$	108,589	$	4,236	$	(1,156	)	$	811	$	(72,215	)	$	40,265		$	3,602	$	1,263	$	204

(1)	Security includes a partially unfunded commitment with an amortized cost of $128 and a fair value of $128.

(2)	Security includes a partially unfunded commitment with an amortized cost of $1,822 and a fair value of $0.

See notes to unaudited consolidated financial statements.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

FS Investment Corporation III, or the Company, was incorporated under the general corporation laws of the State of Maryland on June 7, 2013 and formally commenced investment operations on April 2, 2014. In November 2017, the Company closed its continuous public offering of common stock to new investors. 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, 2018, the Company had seven wholly-owned financing subsidiaries, three wholly-owned subsidiaries through which it holds equity interests in non-controlled portfolio companies and one wholly-owned subsidiary through which it expects to hold equity interests in non-controlled 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, 2018. All significant intercompany transactions have been eliminated in consolidation. One of the Company’s consolidated subsidiaries is 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, including through the restructuring of such 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 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.

As the Company previously announced on April 9, 2018, GSO / Blackstone Debt Funds Management LLC, or GDFM, resigned as the investment sub-adviser to the Company and terminated the investment sub-advisory agreement, or the investment sub-advisory agreement, between FSIC III Advisor, LLC, or FSIC III Advisor, and GDFM, effective April 9, 2018. In connection with GDFM’s resignation as the investment sub-adviser to the Company on April 9, 2018, the Company entered into an investment advisory and administrative services agreement, or the FS/KKR Advisor investment advisory and administrative services agreement, with FS/KKR Advisor, LLC, or FS/KKR Advisor, a newly-formed investment adviser jointly operated by an affiliate of Franklin Square Holdings, L.P. (which does business as FS Investments) and by KKR Credit Advisors (US), LLC, or KKR Credit, pursuant to which FS/KKR Advisor acts as investment adviser to the Company. The FS/KKR Advisor investment advisory and administrative services agreement replaced the amended and restated investment advisory and administrative services agreement, dated August 6, 2014, or the FSIC III Advisor investment advisory and administrative services agreement, by and between the Company and FSIC III Advisor. See Note 11 for additional information.

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

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

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, 2017 included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018. The December 31, 2017 consolidated balance sheet and consolidated schedule of investments are derived from the Company’s audited consolidated financial statements as of and for the year ended December 31, 2017. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Codification, or ASC, Topic 946, 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: Pursuant to the terms of the FSIC III 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 FSIC III Advisor 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, 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. 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.

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 III Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC III Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

The Company “looks through” its total return swap, or TRS, in calculating the capital gains incentive fee. Under this methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans underlying the TRS directly is treated as net investment income subject to the subordinated incentive fee on income payable to FSIC III Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans underlying the TRS further reduces the capital gains incentive fee payable to FSIC III Advisor with respect to realized gains. See Note 8 for additional information regarding the TRS.

See Note 11 for information relating to the incentive fee on capital gains under the FS/KKR Advisor investment advisory and administrative services agreement.

Subordinated Income Incentive Fee: Pursuant to the terms of the FSIC III Advisor investment advisory and administrative services agreement, FSIC III 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, or DRP) reduced for amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, FSIC III 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

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

fee net investment income in any quarter exceeds the hurdle rate, FSIC III 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 III Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

See Note 11 for information relating to the subordinated incentive fee on income under the FS/KKR Advisor investment advisory and administrative services agreement.

Offering Costs: Offering costs primarily included, among other things, marketing expenses and printing, legal and due diligence fees and other costs pertaining to the Company’s continuous public offering of shares of its common stock. Historically, the Company has charged offering costs against capital in excess of par value on its consolidated balance sheets. Following discussions with the Staff of the Division of Investment Management of the SEC, the Company changed its accounting treatment of offering costs to defer and amortize such costs to expense over twelve months. The Company evaluated this change in accounting treatment of offering costs, which it implemented effective January 1, 2016, and determined that it did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Following the closing of the Company’s continuous public offering to new investors in November 2017, all deferred offering costs that had not been amortized were expensed.

Partial Loan Sales: The Company followed the guidance in ASC 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 were carried at fair value to correspond with the related investments, which were 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, 2017 and the audited consolidated financial statements as of and for the year ended December 31, 2017 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, 2018. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Revenue Recognition: Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that it expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. The Company’s policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. The Company considers 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 the Company 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 the Company’s judgment.

Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. The Company records prepayment premiums on loans and securities as fee income when it earns such amounts.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. The Company did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which the Company has applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

For the three months ended March 31, 2018, the Company recognized $1,521 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on its consolidated statement of operations. Comparative periods are presented in accordance with revenue recognition guidance effective prior to January 1, 2018, under which the Company recorded structuring and other non-recurring upfront fees as income when earned. The Company has determined that the adoption of the new revenue recognition guidance did not have a material impact on the amount of revenue recognized for the three months ended March 31, 2018.

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, 2018 and 2017:


	Three Months Ended March 31,
	2018						2017
	Shares			Amount			Shares			Amount
Gross Proceeds from Offering		—		$	—			5,567,346		$	47,979
Reinvestment of Distributions		2,919,541			24,279			2,849,070			24,568

Total Gross Proceeds		2,919,541			24,279			8,416,416			72,547
Share Repurchase Program		(2,986,249	)		(24,935	)		(1,536,048	)		(13,133	)

Net Proceeds from Share Transactions		(66,708	)	$	(656	)		6,880,368		$	59,414

During the period from April 1, 2018 to May 14, 2018, the Company issued 960,273 shares of common stock pursuant to its DRP at an average price per share of $8.25 (totaling $7,922). For additional information regarding the terms of the DRP, see Note 5.

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);

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

•

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 issuance of shares of common stock under the DRP and (ii) 10% 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 10, 2017, the board of directors of the Company amended the share repurchase program. As amended, the Company limits the maximum number of shares of common stock to be repurchased for any repurchase offer to the greater of (A) the number of shares of common stock that the Company can repurchase with the proceeds it has received from the sale of shares of common stock under the DRP during the twelve-month period ending on the date the applicable repurchase offer expires (less the amount of proceeds used to repurchase shares of common stock on each previous repurchase date for repurchase offers conducted during such twelve-month period) (the Company refers to this limitation as the twelve-month repurchase limitation) and (B) the number of shares of common stock that the Company can repurchase with the proceeds it received from the sale of shares of common stock under the DRP during the three-month period ending on the date the applicable repurchase offer expires (the Company refers to this limitation as the three-month repurchase limitation). In addition to this limitation, the maximum number of shares of common stock to be repurchased for any repurchase offer will also be limited to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. As a result, the maximum number of shares of common stock to be repurchased for any repurchase offer will not exceed the lesser of (i) 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter, and (ii) whichever is greater of the twelve-month repurchase limitation described in clause (A) above and the three-month repurchase limitation described in clause (B) above. 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.

On October 13, 2017, the Company further amended the terms of its share repurchase program, or the amended share repurchase program, which was first effective for the Company’s quarterly repurchase offer for the fourth quarter of 2017. Prior to amending the share repurchase program, the Company offered to repurchase shares of its common stock on a quarterly basis at a repurchase price equal to the institutional offering price in effect on each date of repurchase. Under the amended share repurchase program, the Company intends to offer to repurchase shares of its common stock at a price equal to the price at which shares of its common stock are issued pursuant to the DRP on the distribution date coinciding with the applicable share repurchase date. See Note 4 for additional information regarding the institutional offering price and note 5 for additional information regarding the DRP.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

The following table provides information concerning the Company’s repurchases of shares of its common stock pursuant to its share repurchase program during the three months ended March 31, 2018 and 2017:


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⁽¹⁾		Aggregate Consideration for Repurchased Shares
Fiscal 2017
December 31, 2016		January 4, 2017		1,536,048		100	%		0.56	%	$	8.55	$	13,133
Fiscal 2018
December 31, 2017		January 10, 2018		2,986,249		40	%		1.03	%	$	8.35	$	24,935

(1)

On October 13, 2017, and in connection with the closing of its continuous public offering, the Company amended the terms of its share repurchase program, which was first effective for the Company’s quarterly repurchase offer for the fourth quarter of 2017 to provide that shares repurchased under the program would be repurchased at a price determined as described above. Prior to amending the share repurchase program, the Company offered to repurchase common shares at a repurchase price equal to the institutional offering price in effect on the date of repurchase.

On April 2, 2018, the Company repurchased 2,943,198 shares of common stock (representing approximately 28% of the shares of common stock tendered for repurchase and 1.01% of the shares outstanding as of such date) at $8.25 per share for aggregate consideration totaling $24,281.

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the FSIC III Advisor investment advisory and administrative services agreement, FSIC III Advisor is entitled to an annual base management fee of 2.0% of the average weekly value of the Company’s gross assets (gross assets equal the total assets of the Company 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 FSIC III Advisor investment advisory and administrative services agreement on April 2, 2014, upon commencement of the Company’s investment operations. Base management fees are paid on a quarterly basis in arrears. Effective February 3, 2017, FSIC III Advisor has contractually agreed to permanently waive 0.25% of the base management fee to which it is entitled under the FSIC III Advisor investment advisory and administrative services agreement so that the fee received equals 1.75% of the Company’s average weekly gross assets. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that FSIC III Advisor may be entitled to under the FSIC III Advisor investment advisory and administrative services agreement.

Pursuant to the investment sub-advisory agreement, GDFM is entitled to receive 50% of all management and incentive fees payable to FSIC III Advisor under the FSIC III Advisor investment advisory and administrative services agreement with respect to each year.

The Company reimburses FSIC III Advisor for expenses necessary to perform services related to the Company’s administration and operations, including FSIC III Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P., or FS Investments, providing administrative services to the Company on behalf of FSIC III Advisor. The amount of this reimbursement is set at the lesser of (1) FSIC III 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 III Advisor is required to allocate the cost of such services to the Company based on factors such as 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 III 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-

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

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 III 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 III 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 III Advisor.

Under the investment advisory and administrative services agreement, the Company, either directly or through reimbursement to FSIC III Advisor or its affiliates, is responsible for its organization and offering costs in an amount up to 1.5% of gross proceeds raised in the Company’s continuous public offering. Organization and offering costs primarily include legal, accounting, printing and other expenses relating to the Company’s continuous public offering, including costs associated with technology integration between the Company’s systems and those of its selected broker-dealers, marketing expenses, salaries and direct expenses of FSIC III Advisor’s personnel, employees of its affiliates and others while engaged in registering and marketing the Company’s common stock, which includes the development of marketing materials and presentations, training and educational meetings, and generally coordinating the marketing process for the Company.

Prior to satisfaction of the minimum offering requirement and for a period of time thereafter, FS Investments funded certain of the Company’s organization and offering costs. Following this period, the Company has paid certain of its organization and offering costs directly and reimbursed FSIC III Advisor for offering costs incurred by FSIC III Advisor on the Company’s behalf, including marketing expenses, salaries and other direct expenses of FSIC III Advisor’s personnel and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock. Organization and offering costs funded directly by FS Investments were recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. All other offering costs, including costs incurred directly by the Company, amounts reimbursed to FSIC III Advisor for ongoing offering costs and any reimbursements paid to FS Investments for organization and offering costs previously funded, were recorded as a reduction of capital. Commencing January 1, 2016, offering costs incurred by the Company were deferred and amortized to expense over twelve months. Following the closing of the Company’s continuous public offering to new investors in November 2017, all deferred offering costs were expensed (see Note 2).

Since June 7, 2013 (Inception) through December 31, 2014, FS Investments funded $3,801 in organization and offering costs, all of which were reimbursed during the period from April 2, 2014 (Commencement of Operations) through December 31, 2014. The reimbursements were recorded as a reduction of capital. As of March 31, 2018, no amounts remain reimbursable to FSIC III Advisor and its affiliates under this arrangement.

The dealer manager for the Company’s continuous public offering was FS Investment Solutions, which is one of the Company’s affiliates. Prior to the closing of the Company’s continuous public offering, the dealer manager was entitled under the dealer manager agreement, dated as of December 20, 2013, by and among the Company, FSIC III Advisor and FS Investment Solutions, or the dealer manager agreement, to receive selling commissions and dealer manager fees in connection with the sale of shares of common stock in the Company’s continuous public offering, all or a portion of which could be re-allowed to selected broker-dealers. In February 2016, the Company closed its continuous public offering to investors investing through the IBD Channel, or the IBD Channel closing. As used herein, the IBD Channel refers to sales of shares of the Company’s common stock through broker-dealers (other than the dealer manager) that are members of the Financial Industry Regulatory Authority, or FINRA, and other properly licensed financial securities firms whose contracts for investment advisory and related services do not include a fixed or “wrap” fee or other asset-based fee arrangement, and who are collectively referred to herein as selected broker-dealers. Historically, sales through the IBD Channel constituted the majority of shares sold in the Company’s continuous public offering. Prior to the IBD Channel closing, shares of the Company’s common stock in its continuous public offering were subject to a sales load of up to 10.0% of the public offering price, which consisted of selling commissions and dealer manager fees of up to 7.0% and 3.0%, respectively, of the public offering price. Following the IBD Channel closing, the dealer manager waived its right to receive any selling commissions or dealer manager fees in connection with shares of the Company’s common stock sold pursuant to its continuous public offering and, as a result, no selling commissions or dealer manager fees were paid to the dealer

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

manager from that date forward. The price at which shares of the Company’s common stock were sold following the IBD Channel Closing is referred to as the institutional offering price. The dealer manager agreement terminated in connection with the closing of the Company’s continuous public offering in November 2017.

The following table describes the fees and expenses the Company accrued under the FSIC III Advisor investment advisory and administrative services agreement and the dealer manager fees FS Investment Solutionsreceived under the dealer manager agreement during the three months ended March 31, 2018 and 2017:


			Three Months Ended March 31,
Related Party	Source Agreement	Description	2018		2017
FSIC III Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement	Base Management Fee⁽¹⁾	$	16,693	$	17,112
FSIC III Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income⁽²⁾	$	1,623	$	9,619
FSIC III Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement	Administrative Services Expenses⁽³⁾	$	854	$	819
FSIC III Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement	Offering Costs⁽⁴⁾	$	—	$	447

(1)

FSIC III Advisor has contractually agreed, effective February 3, 2017, to permanently waive 0.25% of its base management fee to which it is entitled under the FSIC III Advisor investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of the Company’s weekly gross assets. As a result, the amounts shown for the three months ended March 31, 2018 and 2017 are net of waivers of $2,385 and $1,504, respectively. During the three months ended March 31, 2018 and 2017, $17,015 and $17,823, respectively, in base management fees were paid to FSIC III Advisor. As of March 31, 2018, $16,693 in net base management fees were payable to FSIC III Advisor.

(2)	During the three months ended March 31, 2018 and 2017, $14,487 and $12,323, respectively, of subordinated incentive fees on income were paid to FSIC III Advisor. As of March 31, 2018, a subordinated incentive fee on income of $1,623 was payable to FSIC III Advisor.

(3)

During the three months ended March 31, 2018 and 2017, $668 and $802, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC III Advisor and the remainder related to other reimbursable expenses. The Company paid $465 and $669 in administrative services expenses to FSIC III Advisor during the three months ended March 31, 2018 and 2017, respectively.

(4)

During the three months ended March 31, 2018 and 2017, the Company incurred offering costs of $0 and $576, respectively, of which $0 and $447, respectively, generally related to the reimbursement of marketing expenses, salaries and direct expenses of FSIC III Advisor’s employees and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock. See Note 2 for a discussion regarding the Company’s change in accounting treatment of offering costs.

See Note 11 for information relating to the compensation of FS/KKR Advisor under the FS/KKR Advisor investment advisory and administrative services agreement.

Potential Conflicts of Interest

Exemptive Relief

As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

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, or the FS Order, 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 III Advisor, including FS Energy and Power Fund, FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation IV and any future BDCs that are advised by FSIC III Advisor. However, in connection with the investment advisory relationship with FS/KKR Advisor, and in an effort to mitigate potential future conflicts of interest, the Company’s board of directors authorized and directed that the Company (i) withdraw from the FS Order, except with respect to any transaction in which the Company participated in reliance on the FS Order prior to April 9, 2018, and (ii) rely on an exemptive relief order, dated April 3, 2018, that permits the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by FS/KKR Advisor or KKR Credit, with certain affiliates of FS/KKR Advisor.

Expense Reimbursement

Pursuant to the expense support and conditional reimbursement agreement, dated as of December 20, 2013, by and between FS Investments and the Company, or 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 arrangement 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 the Company’s 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 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company’s average net assets attributable to 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 for any calendar quarter if the annualized rate of regular cash distributions declared by the Company at the time of such reimbursement payment is less than the annualized rate of regular cash distributions

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

declared by the Company at the time FS Investments made the expense support payment to which such reimbursement payment relates. The Company is not obligated to pay interest on the reimbursements it is required to make to FS Investments under the expense reimbursement agreement. “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 expense reimbursement agreement was terminated on April 9, 2018. The Company’s conditional obligation to reimburse FS Investments pursuant to the terms of the expense reimbursement agreement survived the termination of such agreement. As of March 31, 2018, there were no unreimbursed expense support payments subject to future reimbursement by the Company.

FS Benefit Trust

FS Benefit Trust, or FS Trust, was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of FS Investments and its affiliates. During the three months ended March 31, 2018 and 2017, FS Trust did not purchase any shares of the Company’s common stock.

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, 2018 and 2017:


	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2017
March 31, 2017	$	0.17499	$	48,011
Fiscal 2018
March 31, 2018	$	0.17499	$	50,490

The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On March 6, 2018 and May 10, 2018, the Company’s board of directors declared regular monthly cash distributions for April 2018 through June 2018 and July 2018 through September 2018, respectively, each in the amount of $0.058331 per share. These distributions have been or will be paid monthly to stockholders of record as of monthly record dates previously determined by the Company’s board of directors. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive the distribution in cash unless they specifically “opt in” to the DRP 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 DRP.

On October 13, 2017, the Company amended and restated its DRP, or the amended DRP, which first applied to the reinvestment of cash distributions paid on or after November 29, 2017. Under the original DRP, cash distributions to participating stockholders were reinvested in additional shares of the Company’s common stock at a purchase price equal to the institutional offering price in effect on the date of issuance. Under the amended DRP, 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,

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

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 DRP 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 shares 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. No portion of the distributions paid during the three months ended March 31, 2018 and 2017 was funded through the reimbursement of operating expenses by FS Investments.

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, 2018 and 2017:


	Three Months Ended March 31,
	2018					2017
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income⁽¹⁾		50,490		100	%		48,011		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	$	50,490		100	%	$	48,011		100	%

(1)

During the three months ended March 31, 2018 and 2017, 91.4% and 91.0%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.0% and 2.1%, respectively, was attributable to non-cash accretion of discount and 7.6% and 6.9%, respectively, was attributable to PIK interest.

The Company’s net investment income on a tax basis for the three months ended March 31, 2018 and 2017 was $52,104 and $46,093, respectively. As of March 31, 2018 and December 31, 2017, the Company had $18,953 and $17,339, respectively, of undistributed net investment income and $75,325 and $54,056, respectively, 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 for tax purposes, the inclusion of a portion of the periodic net settlement payments due on the TRS in tax-basis net investment income and the accretion of discount on the TRS.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2018 and 2017:


	Three Months Ended March 31,
	2018				2017
GAAP-basis net investment income		$	48,056			$	44,098
Reclassification of unamortized original issue discount and prepayment fees			(1,089	)			(4,137	)
Tax-basis net investment income portion of total return swap payments			3,674				4,960
Accretion of discount on total return swap			362				869
Other miscellaneous differences			1,101				303

Tax-basis net investment income		$	52,104			$	46,093

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.

As of March 31, 2018 and December 31, 2017, the components of accumulated earnings (deficit) on a tax basis were as follows:


	March 31, 2018 (Unaudited)			December 31, 2017
Distributable ordinary income	$	18,953		$	17,339
Accumulated capital losses⁽¹⁾		(75,325	)		(54,056	)
Other temporary differences		(185	)		(189	)
Net unrealized appreciation (depreciation) on investments, secured borrowing and total return swap and gain/loss on foreign currency⁽²⁾		(124,531	)		(103,759	)

Total	$	(181,088	)	$	(140,665	)

(1)	Net capital losses may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2018, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $0 and $75,325, respectively.

(2)

As of March 31, 2018 and December 31, 2017, the gross unrealized appreciation on the Company’s investments, secured borrowing and TRS and gain on foreign currency was $55,906 and $65,093, respectively, and the gross unrealized depreciation on the Company’s investments, secured borrowing and TRS and loss on foreign currency was $180,437 and $168,852, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $3,437,990 and $3,441,720 as of March 31, 2018 and December 31, 2017, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis, including the TRS, was $(124,531) and $(103,759) as of March 31, 2018 and December 31, 2017, respectively.

As of March 31, 2018 and December 31, 2017, the Company had total deferred tax assets of $1,141 and $1,384, respectively, comprised of the Company’s wholly-owned taxable subsidiary’s unrealized depreciation on investments, net operating loss carryforward and capital loss carryforward. As of March 31, 2018 and December 31, 2017, the wholly-owned taxable subsidiary anticipated that it would be unable to fully utilize the components of the deferred tax assets, therefore, the deferred tax assets were offset by valuation allowances of $1,141 and $1,384, respectively. During the three months ended March 31, 2018 and the year ended December 31, 2017, the Company did not record provisions for taxes related to its wholly-owned taxable subsidiary.

FS Investment Corporation III

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, 2018 and December 31, 2017:


	March 31, 2018 (Unaudited)							December 31, 2017
	Amortized Cost		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,229,046	$	2,230,475		67	%	$	2,212,948	$	2,222,444		66	%
Senior Secured Loans—Second Lien		298,843		252,289		8	%		298,561		261,239		8	%
Senior Secured Bonds		58,805		58,306		2	%		60,168		60,478		2	%
Subordinated Debt		669,668		657,346		20	%		690,666		687,221		21	%
Collateralized Securities		6,536		7,404		0	%		6,697		7,562		0	%
Equity/Other		170,858		109,049		3	%		164,105		102,582		3	%

Total	$	3,433,756	$	3,314,869		100	%	$	3,433,145	$	3,341,526		100	%

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of March 31, 2018 and December 31, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8. The investments underlying the TRS had a notional amount and market value of $437,855 and $434,665, respectively, as of March 31, 2018 and $340,523 and $334,647, respectively, as of December 31, 2017.


	March 31, 2018 (Unaudited)							December 31, 2017
	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,608,104	$	2,606,215		70	%	$	2,489,749	$	2,493,086		68	%
Senior Secured Loans—Second Lien		357,640		311,214		8	%		362,283		325,244		9	%
Senior Secured Bonds		58,805		58,306		2	%		60,168		60,478		1	%
Subordinated Debt		669,668		657,346		17	%		690,666		687,221		19	%
Collateralized Securities		6,536		7,404		0	%		6,697		7,562		0	%
Equity/Other		170,858		109,049		3	%		164,105		102,582		3	%

Total	$	3,871,611	$	3,749,534		100	%	$	3,773,668	$	3,676,173		100	%

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

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.

As of March 31, 2018, the Company did not “control” any of its portfolio companies. As of March 31, 2018, the Company held investments in three portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control.” For additional information with respect to such portfolio companies, see footnote (t) to the unaudited consolidated schedule of investments as of March 31, 2018 in this quarterly report on Form 10-Q.

As of December 31, 2017, the Company did not “control” any of its portfolio companies. As of December 31, 2017, the Company held investments in three portfolio companies of which it is deemed to be an “affiliated person” but is not deemed to “control.” For additional information with respect to such portfolio companies, see footnote (u) to the consolidated schedule of investments as of December 31, 2017 in this quarterly report on Form 10-Q.

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, which require the Company to provide

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (continued)

funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2018, the Company had twenty-one unfunded debt investments with aggregate unfunded commitments of $221,147, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $4 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2017, the Company had twenty-three unfunded debt investments with aggregate unfunded commitments of $250,923, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $4 in shares of common stock of Chisholm Oil and Gas, 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, 2018 and audited consolidated schedule of investments as of December 31, 2017.

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, 2018 and December 31, 2017:


	March 31, 2018 (Unaudited)					December 31, 2017
Industry Classification	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Automobiles & Components	$	9,674		0	%	$	7,920		0	%
Capital Goods		590,750		18	%		537,439		16	%
Commercial & Professional Services		447,526		14	%		478,578		14	%
Consumer Durables & Apparel		149,186		5	%		148,917		4	%
Consumer Services		237,336		7	%		251,626		8	%
Diversified Financials		262,703		8	%		229,010		7	%
Energy		208,686		6	%		279,844		8	%
Food & Staples Retailing		7,504		0	%		7,857		0	%
Food, Beverage & Tobacco		48,539		1	%		48,111		1	%
Health Care Equipment & Services		322,376		10	%		321,520		10	%
Insurance		34,848		1	%		36,480		1	%
Materials		260,821		8	%		258,634		8	%
Media		204,673		6	%		207,327		6	%
Retailing		99,571		3	%		96,411		3	%
Semiconductors & Semiconductor Equipment		11,568		0	%		11,635		0	%
Software & Services		324,796		10	%		322,869		10	%
Technology Hardware & Equipment		48,247		1	%		51,056		2	%
Telecommunication Services		25,952		1	%		26,029		1	%
Transportation		20,113		1	%		20,263		1	%

Total	$	3,314,869		100	%	$	3,341,526		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 valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

FS Investment Corporation III

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 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, 2018 and December 31, 2017, the Company’s investments and total return swap were categorized as follows in the fair value hierarchy:


Valuation Inputs	March 31, 2018 (Unaudited)					December 31, 2017
	Investments		Total Return Swap			Investments		Total Return Swap
Level 1—Price quotations in active markets	$	341	$	—		$	5,665	$	—
Level 2—Significant other observable inputs		—		—			—		—
Level 3—Significant unobservable inputs		3,314,528		(1,560	)		3,335,861		(3,756	)

Total	$	3,314,869	$	(1,560	)	$	3,341,526	$	(3,756	)

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 borrowing 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 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 Company’s investments consist primarily of debt investments that were acquired directly from the issuer. Debt investments, for which broker quotes are not available, are valued by independent valuation firms, which determine 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 are also valued by independent valuation firms, which determine 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. An investment that is newly issued and purchased near the date of the financial statements is valued at cost if the Company’s board of directors determines that the cost of such investment is the best indication of its fair value. Investments that are traded on an active public market are valued at their closing price as of the date of the financial statements. Except as described above, the Company values 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 are provided by independent third-party pricing services and screened for validity by such services.

The Company values the TRS in accordance with the agreements between Center City Funding LLC, or Center City Funding, and Citibank N.A., or Citibank, that collectively established the TRS, which agreements are collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The valuation committee of the Company’s board of directors, or the valuation committee, and the board of directors review and approve the value of the TRS, as well as the value of

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

the loans underlying the TRS, on a quarterly basis. To the extent the Company’s valuation committee or board of directors has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation is discussed or challenged pursuant to the terms of the TRS Agreement. See Note 8 for additional information regarding the TRS.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which the Company purchases and sells its investments. 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, 2018 and 2017 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:


	For the Three Months Ended March 31, 2018
	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	$	2,222,444		$	261,239		$	60,478		$	687,221		$	7,562		$	96,917		$	3,335,861
Accretion of discount (amortization of premium)		355			217			13			548			—			—			1,133
Net realized gain (loss)		(3,317	)		(3,199	)		(1,064	)		(14,396	)		—			—			(21,976	)
Net change in unrealized appreciation (depreciation)		(8,067	)		(9,232	)		(809	)		(8,877	)		3			(609	)		(27,591	)
Purchases		137,699			9,849			11,525			6,623			—			12,154			177,850
Paid-in-kind interest		635			420			96			4,972			—			265			6,388
Sales and repayments		(119,274	)		(7,005	)		(11,933	)		(18,745	)		(161	)		(19	)		(157,137	)
Net transfers in or out of Level 3		—			—			—			—			—			—			—

Fair value at end of period	$	2,230,475		$	252,289		$	58,306		$	657,346		$	7,404		$	108,708		$	3,314,528

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	$	(9,076	)	$	(11,278	)	$	(1,353	)	$	(19,042	)	$	3		$	159		$	(40,587	)

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)


	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	$	2,135,929		$	235,293		$	84,664		$	614,442		$	7,327		$	160,682		$	3,238,337
Accretion of discount (amortization of premium)		1,283			1,996			247			871			(92	)		—			4,305
Net realized gain (loss)		520			174			1,363			1,044			—			811			3,912
Net change in unrealized appreciation (depreciation)		4,740			(356	)		172			9,129			223			(9,315	)		4,593
Purchases		199,924			9,440			44,015			81,467			—			3,567			338,413
Paid-in-kind interest		338			1,309			—			4,282			—			—			5,929
Sales and repayments		(92,859	)		(35,371	)		(34,209	)		(45,092	)		—			—			(207,531	)
Net transfers in or out of Level 3		—			—			—			—			—			—			—

Fair value at end of period	$	2,249,875		$	212,485		$	96,252		$	666,143		$	7,458		$	155,745		$	3,387,958

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	$	8,859		$	1,571		$	1,515		$	10,002		$	223		$	(9,997	)	$	12,173

The following is a reconciliation for the three months ended March 31, 2018 and 2017 of the secured borrowing and total return swap for which significant unobservable inputs (Level 3) were used in determining fair value:


	Secured Borrowing							Total Return Swap
	For the Three Months Ended March 31,							For the Three Months Ended March 31,
	2018			2017				2018				2017
Fair value at beginning of period		$	—		$	(14,040	)		$	(3,756	)		$	11,403
Amortization of premium (accretion of discount)			—			(7	)			—				—
Net realized gain (loss)			—			—				5,285				6,240
Net change in unrealized appreciation (depreciation)			—			(45	)			2,196				1,124
Proceeds			—			—				—				—
Sales and repayments			—			—				(5,285	)			(6,240	)
Net transfers in or out of Level 3			—			—				—				—

Fair value at end of period		$	—		$	(14,092	)		$	(1,560	)		$	12,527

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 and the total return swap still held at the reporting date		$	—		$	(45	)		$	2,196			$	1,124

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of March 31, 2018 and December 31, 2017 were as follows:


Type of Investment	Fair Value at March 31, 2018 (Unaudited)			Valuation Technique⁽¹⁾	Unobservable Input	Range	Weighted Average
Senior Secured Loans—First Lien	$	1,929,137		Market Comparables	Market Yield (%)	6.8% - 15.6%	9.9%
					EBITDA Multiples (x)	5.8x - 9.0x	7.5x
		136,807		Other⁽²⁾	Other	N/A	N/A
		164,531		Market Quotes	Indicative Dealer Quotes	14.0% - 102.3%	97.0%
Senior Secured Loans—Second Lien		180,566		Market Comparables	Market Yield (%)	9.0% - 18.5%	17.1%
					EBITDA Multiples (x)	5.8x - 6.8x	6.3x
		6,344		Other⁽²⁾	Other	N/A	N/A
		65,379		Market Quotes	Indicative Dealer Quotes	7.6% - 102.7%	86.6%
Senior Secured Bonds		8,570		Market Comparables	Market Yield (%)	9.1% - 12.5%	10.5%
					EBITDA Multiples (x)	4.5x - 5.0x	4.8x
					Production Multiples (Mboe/d)	$41,000.0 - $43,500.0	$42,250.0
					Proved Reserves Multiples (Mmboe)	$13.5 - $14.5	$14.0
					PV-10 Multiples (x)	1.0x - 1.0x	1.0x
		49,736		Market Quotes	Indicative Dealer Quotes	86.3% - 109.2%	99.5%
Subordinated Debt		148,126		Market Comparables	Market Yield (%)	11.6% - 20.3%	14.6%
					EBITDA Multiples (x)	10.8x - 11.3x	11.0x
		509,220		Market Quotes	Indicative Dealer Quotes	47.5% - 108.5%	97.1%
Collateralized Securities		7,404		Market Quotes	Indicative Dealer Quotes	80.3% - 100.2%	82.3%
Equity/Other		69,834		Market Comparables	Market Yield (%)	16.0% - 16.5%	16.3%
					EBITDA Multiples (x)	4.5x - 27.8x	11.5x
					Production Multiples (Mboe/d)	$37,500.0 - $43,500.0	$41,637.6
					Proved Reserves Multiples (Mmboe)	$8.5 - $14.5	$13.1
					PV-10 Multiples (x)	1.0x - 1.5x	1.1x
					Capacity Multiple ($/kW)	$1,875.0 - $2,125.0	$2,000.0
				Option Valuation Model	Volatility (%)	30.0%	30.0%
		27,323		Other⁽²⁾	Other	N/A	N/A
		11,551		Market Quotes	Indicative Dealer Quotes	1.0% - 18.5%	16.7%

Total	$	3,314,528

Total Return Swap	$	(1,560	)	Market Quotes	Indicative Dealer Quotes	56.5% - 101.7%	98.1%

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)


Type of Investment	Fair Value at December 31, 2017			Valuation Technique⁽¹⁾	Unobservable Input	Range	Weighted Average
Senior Secured Loans—First Lien	$	1,893,151		Market Comparables	Market Yield (%)	4.8% - 14.0%	9.6%
					EBITDA Multiples (x)	5.0x - 7.5x	7.2x
		128,916		Other⁽²⁾	Other	N/A	N/A
		200,377		Market Quotes	Indicative Dealer Quotes	20.0% - 102.1%	95.8%
Senior Secured Loans—Second Lien		200,702		Market Comparables	Market Yield (%)	8.3% - 20.7%	15.4%
					EBITDA Multiples (x)	5.0x - 6.5x	6.2x
		60,537		Market Quotes	Indicative Dealer Quotes	9.4% - 103.3%	81.7%
Senior Secured Bonds		9,411		Market Comparables	Market Yield (%)	7.7% - 12.3%	10.0%
					EBITDA Multiples (x)	4.8x - 5.3x	5.0x
					Production Multiples (Mboe/d)	$42,250.0 - $44,750.0	$43,500.0
					Proved Reserves Multiples (Mmboe)	$10.3 - $11.3	$10.8
					PV-10 Multiples (x)	0.8x - 0.8x	0.8x
		11,635		Other⁽²⁾	Other	N/A	N/A
		39,432		Market Quotes	Indicative Dealer Quotes	95.5% - 109.0%	101.6%
Subordinated Debt		137,741		Market Comparables	Market Yield (%)	11.6% - 14.8%	14.4%
					EBITDA Multiples (x)	10.5x - 11.0x	10.8x
		549,480		Market Quotes	Indicative Dealer Quotes	50.0% - 108.5%	98.4%
Collateralized Securities		7,562		Market Quotes	Indicative Dealer Quotes	82.2% - 100.2%	83.9%
Equity/Other		72,394		Market Comparables	Market Yield (%)	15.3% - 15.8%	15.5%
					Capacity Multiple ($/kW)	$2,000.0 - $2,250.0	$2,125.0
					EBITDA Multiples (x)	4.8x - 23.5x	11.4x
					Production Multiples (Mboe/d)	$42,250.0 - $51,250.0	$44,839.6
					Proved Reserves Multiples (Mmboe)	$10.0 - $11.3	$10.6
					PV-10 Multiples (x)	0.8x - 2.4x	1.1x
				Option Valuation Model	Volatility (%)	30.0%	30.0%
		23,494		Other⁽²⁾	Other	N/A	N/A
		1,029		Market Quotes	Indicative Dealer Quotes	1.6% - 9.5%	7.9%

Total	$	3,335,861

Total Return Swap	$	(3,756	)	Market Quotes	Indicative Dealer Quotes	58.3% - 101.5%	96.7%

(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, with the exception of investments in the Total Return Swap, which was valued by using the bid price from dealers on the date of the relevant period end. 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.

FS Investment Corporation III

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, 2018 and December 31, 2017. For additional information regarding these financing arrangements, 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, 2017 and the additional disclosure set forth in this Note 8.

As of March 31, 2018

(Unaudited)

Arrangement

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility⁽¹⁾

Prime Brokerage Facility

L+1.25%

187,700

62,300

December 26, 2018⁽²⁾

Deutsche Bank Credit Facility⁽¹⁾

Revolving Credit Facility

L+2.25%

350,000

—

September 22, 2019

JPM Credit Facility⁽¹⁾

Term Loan Credit Facility

L+2.69%

400,000

—

May 8, 2019

Goldman Facility⁽¹⁾

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Capital One Credit Facility⁽¹⁾

Revolving Credit Facility

L+1.75% to L+2.50%

150,000

—

August 13, 2020

Total

1,387,700

62,300

Citibank Total Return Swap

Total Return Swap

L+1.55%

437,855

62,145

N/A⁽³⁾

As of December 31, 2017

Arrangement

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility⁽¹⁾

Prime Brokerage Facility

L+1.25%

187,700

62,300

September 27, 2018⁽²⁾

Deutsche Bank Credit Facility⁽¹⁾

Revolving Credit Facility

L+2.25%

350,000

—

September 22, 2019

JPM Credit Facility⁽¹⁾

Term Loan Credit Facility

L+2.69%

400,000

—

May 8, 2019

Goldman Facility⁽¹⁾

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Capital One Credit Facility⁽¹⁾

Revolving Credit Facility

L+1.75% to L+2.50%

150,000

—

August 13, 2020

Total

1,387,700

62,300

Citibank Total Return Swap

Total Return Swap

L+1.55%

340,523

159,477

N/A⁽⁴⁾

(1)	The carrying amount outstanding under the facility approximates its fair value.

(2)	As described below, this facility generally is terminable upon 270 days’ notice by either party. As of March 31, 2018 and December 31, 2017, neither party to the facility had provided notice of its intent to terminate the facility.

(3)	The TRS may be terminated by Center City Funding at any time, subject to payment of an early termination fee if prior to the date 90 days before June 30, 2018, or by Citibank on or after June 30, 2018, in each case, in whole or in part, upon prior written notice to the other party.

(4)	The TRS may be terminated by Center City Funding at any time, subject to payment of an early termination fee if prior to the date 90 days before March 31, 2018, or by Citibank on or after March 31, 2018, in each case, in whole or in part, upon prior written notice to the other party.

For the three months ended March 31, 2018 and 2017, the components of total interest expense for the Company’s financing arrangements were as follows:


	Three Months Ended March 31,
	2018						2017
Arrangement⁽¹⁾	Interest Expense⁽²⁾		Amortization of Deferred Financing Costs		Total Interest Expense		Interest Expense⁽²⁾		Amortization of Deferred Financing Costs		Total Interest Expense
BNP Facility	$	1,593	$	—	$	1,593	$	1,190	$	25	$	1,215
Deutsche Bank Credit Facility		3,682		230		3,912		2,334		225		2,559
JPM Credit Facility		4,354		36		4,390		3,690		35		3,725
Goldman Facility		3,121		98		3,219		2,623		98		2,721
Capital One Credit Facility		1,510		68		1,578		1,333		68		1,401
Partial Loan Sale⁽³⁾		—		—		—		192		7		199

Total	$	14,260	$	432	$	14,692	$	11,362	$	458	$	11,820

(1)	Borrowings of each of the Company’s wholly-owned financing subsidiaries are considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

(2)	Interest expense includes the effect of non-usage fees, administration fees and make-whole fees, if any.

(3)	Total interest expense for the secured borrowing includes the effect of amortization of discount.

For the three months ended March 31, 2018 and 2017, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Company’s financing arrangements were as follows:


	Three Months Ended March 31,
	2018								2017
Arrangement	Cash Paid for Interest Expense		Average Borrowings		Effective Interest Rate⁽¹⁾		Weighted Average Interest Rate⁽¹⁾		Cash Paid for Interest Expense		Average Borrowings		Effective Interest Rate⁽¹⁾	Weighted Average Interest Rate⁽¹⁾
BNP Facility⁽²⁾	$	2,043	$	187,700		3.78%		3.40%	$	1,130	$	187,700	2.62%	2.53%
Deutsche Bank Credit Facility⁽³⁾		3,452		350,000		4.22%		4.21%		2,040		252,048	3.45%	3.71%
JPM Credit Facility⁽³⁾		4,091		400,000		4.40%		4.35%		3,608		400,000	3.71%	3.69%
Goldman Facility⁽³⁾		2,959		300,000		4.22%		4.16%		2,590		300,000	3.52%	3.50%
Capital One Credit Facility⁽³⁾		1,487		150,000		4.02%		4.02%		1,303		150,000	3.37%	3.55%
Partial Loan Sale⁽³⁾		—		—		—		—		196		13,929	5.53%	5.50%

Total/Average	$	14,032	$	1,387,700		4.19%		4.11%	$	10,867	$	1,303,677	3.44%	3.49%

(1)	Effective interest rate and weighted average interest rate include the effect of non-usage fees, administration fees and make-whole fees, if any. If applicable, the weighted average interest rate presented for periods of less than one year is annualized.

(2)	Interest is paid monthly in arrears.

(3)	Interest is paid quarterly in arrears.

BNP Facility

On October 17, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Burholme Funding LLC, or Burholme Funding, entered into a committed facility arrangement, or the BNP facility, with BNP Paribas Prime Brokerage International, Ltd. (as assignee of BNP Paribas Prime Brokerage, Inc.), or BNPP. Under the terms of the BNP facility, as amended, the maximum committed financing available to Burholme Funding is $250,000, the interest rate payable on borrowings under the committed facility agreement is three-month LIBOR plus 125 basis points and the commitment fee payable under the committed facility agreement is (a) 65 basis points on unused amounts so long as 75% or more of the facility amount is utilized or (b) 85 basis points on unused amounts if less than 75% of the facility amount is utilized.

Burholme Funding may terminate the committed facility agreement upon 270 days’ notice. Absent a default or facility termination event (or the ratings decline described in the following sentence), BNPP is required to provide Burholme Funding with 270 days’ notice prior to terminating or materially amending the committed facility agreement. BNPP has a cancellation right if BNP Paribas’ long-term credit rating declines three or more notches below its highest rating by any of S&P, Moody’s or Fitch Ratings, Inc., during the term of the BNP facility. Upon any such termination, BNPP is required to pay Burholme Funding a fee equal to 0.50% of the maximum amount of financing available on the termination date.

The Company incurred costs in connection with obtaining the BNP facility, which the Company recorded as deferred financing costs on its consolidated balance sheets and amortized to interest expense over the life of the BNP facility. As of March 31, 2018, all of such deferred financing costs had been amortized to interest expense.

Deutsche Bank Credit Facility

On December 2, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Dunlap Funding LLC, or Dunlap Funding, entered into a revolving credit facility, or the Deutsche Bank credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent, each of the lenders and other agents from time to time party thereto, and Wells Fargo Bank, National Association, as the collateral agent and collateral custodian. Under the terms of the Deutsche Bank

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

credit facility, as amended, the aggregate principal amount of available borrowings is $350,000 on a committed basis and the interest rate payable on borrowings under the credit facility is three-month LIBOR plus 2.25% per annum. In addition, under the terms of the Deutsche Bank credit facility, as amended, Dunlap Funding is subject to (i) a non-usage fee of 0.50% per annum to the extent the aggregate principal amount available has not been borrowed, (ii) 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 Deutsche Bank credit facility had been borrowed, less the non-usage fee accrued during such quarter and (iii) an administration fee. Any amounts borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 22, 2019.

The Company incurred costs in connection with obtaining the facility, which the Company has recorded as deferred financing costs on the Company’s consolidated balance sheets and amortizes to interest expense over the life of the Deutsche Bank credit facility. As of March 31, 2018, $920 of such deferred financing costs had yet to be amortized to interest expense.

JPM Credit Facility

On May 8, 2015, the Company’s wholly-owned, special purpose financing subsidiary, Jefferson Square Funding LLC, or Jefferson Square Funding, entered into a senior secured term loan credit facility, or the JPM credit facility, with JPMorgan Chase Bank, National Association, or JPM, as administrative agent, each of the lenders from time to time party thereto, Citibank N.A., or Citibank, as collateral agent, and Virtus Group, LP, or Virtus, as collateral administrator. Under the terms of the JPM credit facility, as amended, the aggregate principal amount of available borrowings is $400,000, the interest rate payable on borrowings under the credit facility is three-month LIBOR plus 2.6875% per annum and any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 8, 2019.

Jefferson Square Funding’s obligations to JPM under the JPM credit facility are secured by a first priority security interest in substantially all of the assets of Jefferson Square Funding, including its portfolio of assets. The obligations of Jefferson Square Funding under the JPM credit facility are non-recourse to the Company, and the Company’s exposure under the JPM credit facility is limited to the value of the Company’s investment in Jefferson Square Funding.

The Company incurred costs in connection with obtaining the JPM credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM credit facility. As of March 31, 2018, $160 of such deferred financing costs had yet to be amortized to interest expense.

Goldman Facility

On June 18, 2015, the Company, through its two wholly-owned, special-purpose financing subsidiaries, Germantown Funding LLC, or Germantown Funding, and Society Hill Funding LLC, or Society Hill Funding, entered into a debt financing arrangement with Goldman Sachs Bank USA, or Goldman, pursuant to which up to $300,000 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 be available through alternative arrangements.

The Company may sell and/or contribute assets to Germantown Funding from time to time pursuant to an amended and restated sale and contribution agreement, dated as of June 18, 2015, between the Company and Germantown Funding, or the sale and contribution agreement. The assets held by Germantown Funding secure the obligations of Germantown Funding under floating rate notes, or the notes issued from time to time by Germantown Funding to Society Hill Funding pursuant to an indenture, dated as of June 18, 2015, with Citibank, as trustee, or the indenture. Pursuant to the indenture, the aggregate principal amount of notes that may be issued by Germantown Funding from time to time is $500,000. Society Hill Funding has purchased the notes issued by Germantown Funding 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 October 15, 2027.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

Society Hill Funding, 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 June 18, 2015 and effective as of July 15, 2015, or collectively, the Goldman facility. Pursuant to the Goldman facility, from time to time, Goldman has purchased notes held by Society Hill Funding for an aggregate purchase price equal to 60% 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 $500,000. Accordingly, the aggregate maximum amount made available under the Goldman facility will not exceed $300,000.

Society Hill Funding will repurchase the notes sold to Goldman under the Goldman facility no later than July 15, 2019. The repurchase price paid by Society Hill Funding to Goldman will be equal to the purchase price paid by Goldman for the repurchased notes, plus financing fees accrued at the applicable pricing rate under the Goldman facility. Up until November 15, 2015, financing fees were accrued on the aggregate purchase price paid by Goldman for such notes. Thereafter, financing fees have accrued, and will continue to accrue, on $300,000 (even if the aggregate purchase price paid for notes purchased by Goldman at that time is 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 July 15, 2019 due to an event of default or the failure of Germantown Funding to commit to sell any underlying assets that become defaulted obligations within 30 days, then Society Hill Funding 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 July 15, 2019 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.

Goldman may require Society Hill Funding to post cash collateral if the market value of the notes (measured by reference to the market value of Germantown Funding’s portfolio of assets), together with any posted cash collateral, is less than the required margin amount under the Goldman facility; provided, however, that Society Hill Funding will not be required to post cash collateral with Goldman until such market value has declined at least 10% from the initial market value of the notes. In addition, if the market value of any underlying asset held in Germantown Funding’s portfolio of assets is less than 70% of the initial market value of such underlying asset, Goldman may require Society Hill Funding to post additional cash collateral in an amount equal to 15% of the outstanding principal balance of such underlying asset. In each such event, in order to satisfy these requirements, Society Hill Funding intends to borrow funds from the Company pursuant to an uncommitted revolving credit agreement, dated as of June 18, 2015, between Society Hill Funding, as borrower, and the Company, as lender, or the revolving credit agreement. The Company may, in its sole discretion, make such loans from time to time to Society Hill Funding pursuant to the terms of the revolving credit agreement. Borrowings under the revolving credit agreement may not exceed $300,000 and will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

As of March 31, 2018 and December 31, 2017, notes in an aggregate principal amount of $500,000 and $500,000, respectively, had been purchased by Society Hill Funding from Germantown Funding and subsequently sold to Goldman under the Goldman facility for aggregate proceeds of $300,000 and $300,000, respectively. The Company funded each purchase of the notes by Society Hill Funding through a capital contribution to Society Hill Funding. As of March 31, 2018 and December 31, 2017, Society Hill Funding’s liability under the Goldman facility was $300,000 and $300,000, respectively, plus $2,638 and $2,476, respectively, of accrued interest expense. The notes issued by Germantown Funding and purchased by Society Hill Funding eliminate in consolidation on the Company’s financial statements.

As of March 31, 2018 and December 31, 2017, the fair value of assets held by Germantown Funding was $617,083 and $621,109, respectively.

The Company incurred costs 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, 2018, $513 of such deferred financing costs had yet to be amortized to interest expense.

Capital One Credit Facility

On August 13, 2015, the Company’s wholly-owned, special purpose financing subsidiary, Chestnut Hill Funding LLC or Chestnut Hill Funding, entered into a revolving credit facility, or the Capital One credit facility, with Capital One, National

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

Association, or Capital One, as administrative agent, hedge counterparty, lead arranger and sole bookrunner, each of the conduit lenders and institutional lenders from time to time party thereto, and Wells Fargo Bank, National Association, as collateral agent, account bank and collateral custodian. Under the terms of the Capital One credit facility, the aggregate principal amount of available borrowings is $150,000 on a committed basis and the borrowings under the credit facility accrue interest at a rate equal to LIBOR for each one-month, two-month or three-month interest period, as elected by Chestnut Hill Funding, in each case plus an applicable spread ranging between 1.75% and 2.50% per annum, depending on the composition of the portfolio of assets for the relevant period. In addition, under the terms of the Capital One credit facility, Chestnut Hill Funding is subject to (i) a non-usage fee to the extent it has not borrowed the aggregate principal amount available under the credit facility and (ii) a make-whole fee to the extent it has borrowed less than 60% of the aggregate principal amount available under the credit facility. Any amounts borrowed under the Capital One credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 13, 2020.

Chestnut Hill Funding’s obligations to Capital One under the Capital One credit facility are secured by a first priority security interest in substantially all of the assets of Chestnut Hill Funding, including its portfolio of assets. The obligations of Chestnut Hill Funding under the Capital One credit facility are non-recourse to the Company, and the Company’s exposure under the Capital One credit facility is limited to the value of the Company’s investment in Chestnut Hill Funding.

The Company incurred costs in connection with obtaining the Capital One credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the Capital One credit facility. As of March 31, 2018, $656 of such deferred financing costs had yet to be amortized to interest expense.

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. During the year ended December 31, 2017, the secured borrowing was fully repaid.

Citibank Total Return Swap


Counterparty	Description	Termination Date	Value as of March 31, 2018
Citibank	A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during a specified period, in return for periodic payments based on a fixed or variable interest rate.	Citibank may terminate the TRS on or after June 30, 2018, unless certain specified events permit Citibank to terminate the TRS on an earlier date. Center City Funding may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank.	$	(1,560	)

On June 26, 2014, the Company’s wholly-owned financing subsidiary, Center City Funding, entered into a TRS for a portfolio of primarily senior secured floating rate loans with Citibank which has subsequently been amended multiple times to, among other things, increase the maximum aggregate notional amount of the portfolio of loans subject to the TRS from $100,000, initially, to $500,000 and extend the date that Citibank may terminate the TRS to any time on or after June 30, 2018.

A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

often offers lower financing costs than are offered through more traditional borrowing arrangements. The TRS with Citibank enables the Company, through its ownership of Center City Funding, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Center City Funding borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Center City Funding under the TRS are non-recourse to the Company and its exposure under the TRS is limited to the value of the Company’s investment in Center City Funding, which generally will equal the value of cash collateral provided by Center City Funding under the TRS. Pursuant to the terms of the TRS, Center City Funding may select a portfolio of loans with a maximum aggregate notional amount (determined at the time each such loan becomes subject to the TRS) of $500,000. Center City Funding is required to initially cash collateralize a specified percentage of the notional amount of each loan that becomes subject to the TRS in accordance with margin requirements described in the agreements between Center City Funding and Citibank that collectively establish the TRS, or collectively, the TRS agreement. Under the terms of the TRS, Center City Funding has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS.

Pursuant to the terms of an investment management agreement that the Company has entered into with Center City Funding, the Company acts as the investment manager of the rights and obligations of Center City Funding under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS.

Each individual loan in the portfolio of loans subject to the TRS, and the portfolio of loans taken as a whole, must meet criteria described in the TRS agreement, including a requirement that substantially all of the loans underlying the TRS be rated by Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Ratings Services, or S&P, and quoted by a nationally recognized pricing service. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. Center City Funding receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Center City Funding pays to Citibank interest at a rate equal to one-month LIBOR plus 1.55% per annum on the utilized notional amount of the loans subject to the TRS.

Under the terms of the TRS, Center City Funding may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans below a specified amount. The amount of collateral required to be posted by Center City Funding is determined primarily on the basis of the aggregate value of the underlying loans. The terms of the TRS with Citibank, the counter-party, incorporate a master netting arrangement. If Center City Funding enters into another derivative with the counter party, it could be offset with the TRS. As of March 31, 2018 and December 31, 2017, there were no other contracts to offset the TRS.

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its equity investment in Center City Funding for the purpose of funding any additional collateral or payment obligations for which Center City Funding may become obligated during the term of the TRS. If the Company does not make any such additional investment in Center City Funding and Center City Funding fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Center City Funding under the TRS. In the event of an early termination of the TRS prior to the ramp-down period, Center City Funding would be required to pay an early termination fee.

Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments, based on the minimum utilization amount, which would be owed by Center City Funding to Citibank for the period from the termination date through and including June 30, 2018. Such monthly payments will equal the present value of the product of (x) 80%, multiplied by (y) the maximum notional amount of the TRS ($500,000), multiplied by (z) 1.55% per annum, as applicable.

Center City Funding will be required to pay an early termination fee to Citibank if it elects to terminate the TRS at any time prior to the date 90 days before June 30, 2018. If the TRS had been terminated as of March 31, 2018, Center City Funding would not have been required to pay an early termination fee. Other than during the first 90 days and last 90 days of the term of the TRS, Center City Funding is required to pay a minimum usage fee if less than 80% of the maximum notional amount of the TRS is

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

utilized and an unused fee on any amounts unutilized if greater than 80% but less than 100% of the maximum notional amount of the TRS is utilized.

As of March 31, 2018 and December 31, 2017, the fair value of the TRS was $(1,560) and $(3,756), respectively, which is reflected in the Company’s consolidated balance sheets as unrealized appreciation (depreciation) on total return swap. As of March 31, 2018 and December 31, 2017, the receivable due on the TRS was $1,116 and $1,107, respectively, which is reflected in the Company’s consolidated balance sheets as receivable due on total return swap. As of March 31, 2018 and December 31, 2017, the Company posted $108,016 and $98,005, respectively, in cash collateral held by Citibank (of which only $99,416 and $80,867, respectively, was required to be posted). The cash collateral held by Citibank is reflected in the Company’s consolidated balance sheets as due from counterparty. The Company does not offset collateral posted in relation to the TRS with any unrealized appreciation (depreciation) outstanding on the consolidated balance sheets as of March 31, 2018 and December 31, 2017.

For the three months ended March 31, 2018 and 2017, transactions in the TRS resulted in net realized gain (loss) on total return swap of $5,285 and $6,240, respectively, and unrealized appreciation (depreciation) on total return swap of $2,196 and $1,124, respectively, which are reflected in the Company’s consolidated statements of operations.

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Center City Funding under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

The following is a summary of the underlying loans subject to the TRS as of March 31, 2018:


Underlying Loan⁽¹⁾	Industry	Rate⁽²⁾	Floor	Maturity	Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
Alison US LLC⁽³⁾	Capital Goods	L+450	1.0%	8/29/21	$	7,171	$	7,075	$	(96	)
American Bath Group, LLC	Capital Goods	L+525	1.0%	9/30/23		3,310		3,480		170
American Bath Group, LLC	Capital Goods	L+975	1.0%	9/30/24		2,760		3,000		240
ATS Consolidated, Inc.	Technology Hardware & Equipment	L+375	1.0%	2/28/25		5,528		5,601		73
ATX Networks Corp.⁽³⁾⁽⁴⁾	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21		4,740		4,342		(398	)
ATX Networks Corp.⁽³⁾	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21		7,563		7,035		(528	)
Avantor, Inc.	Materials	L+400	1.0%	11/21/24		19,626		19,612		(14	)
Avaya Inc.⁽⁴⁾	Technology Hardware & Equipment	L+475	1.0%	12/15/24		14,813		15,056		243
BBB Industries US Holdings, Inc.	Automobiles & Components	L+450	1.0%	11/3/21		7,294		7,499		205
Brand Energy & Infrastructure Services, Inc.	Energy	L+425	1.0%	6/21/24		10,062		10,056		(6	)
CDS U.S. Intermediate Holdings, Inc.⁽³⁾⁽⁴⁾	Media	L+825	1.0%	7/10/23		8,865		8,888		23
Confie Seguros Holding II Co.⁽³⁾	Insurance	L+525	1.0%	4/19/22		6,843		6,904		61
Dayton Superior Corp.	Materials	L+800	1.0%	11/15/21		11,175		10,599		(576	)
Diamond Resorts International, Inc.	Consumer Services	L+450	1.0%	9/2/23		26,890		27,994		1,104
Elo Touch Solutions, Inc.⁽⁴⁾	Technology Hardware & Equipment	L+600	1.0%	10/25/23		7,913		8,033		120

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)


Underlying Loan⁽¹⁾	Industry		Rate⁽²⁾		Floor		Maturity		Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
FHC Health Systems, Inc.		Health Care Equipment & Services		L+400		1.0%		12/23/21	$	8,817	$	8,839	$	22
FullBeauty Brands Holdings Corp.		Consumer Durables & Apparel		L+475		1.0%		10/14/22		7,183		4,609		(2,574	)
Gulf Finance, LLC⁽⁴⁾		Energy		L+525		1.0%		8/25/23		9,414		8,916		(498	)
Inmar, Inc.		Software & Services		L+800		1.0%		5/1/25		14,775		15,000		225
Intelsat Jackson Holdings S.A.⁽³⁾		Telecommunication Services		L+375		1.0%		11/27/23		20,024		20,000		(24	)
Ivanti Software, Inc.		Software & Services		L+425		1.0%		1/20/24		7,440		7,338		(102	)
Jazz Acquisition, Inc.⁽⁴⁾		Capital Goods		L+675		1.0%		6/19/22		2,513		2,350		(163	)
LBM Borrower, LLC		Capital Goods		L+375		1.0%		8/20/22		5,345		5,416		71
LD Intermediate Holdings, Inc.		Software & Services		L+588		1.0%		12/9/22		8,719		8,525		(194	)
LTI Holdings, Inc.		Materials		L+475		1.0%		5/16/24		9,826		9,950		124
McGraw-Hill Global Education Holdings, LLC		Media		L+400		1.0%		5/4/22		17,766		17,707		(59	)
MORSCO, Inc.		Capital Goods		L+700		1.0%		10/31/23		9,000		9,480		480
Navistar, Inc.⁽³⁾		Capital Goods		L+350				11/6/24		9,701		9,795		94
P.F. Chang’s China Bistro, Inc.		Consumer Services		L+500		1.0%		9/1/22		7,239		7,058		(181	)
P2 Upstream Acquisition Co.		Energy		L+400		1.3%		10/30/20		2,267		2,401		134
Peak 10 Holding Corp.		Software & Services		L+725		1.0%		8/1/25		6,873		6,967		94
Quest Software US Holdings Inc.⁽⁴⁾		Software & Services		L+550		1.0%		10/31/22		17,877		18,270		393
Specialty Building Products Holdings, LLC⁽⁴⁾		Capital Goods		L+600		1.0%		10/26/23		7,345		7,688		343
Spencer Gifts LLC		Retailing		L+425		1.0%		7/16/21		15,438		13,304		(2,134	)
SRS Distribution Inc.		Capital Goods		L+325		1.0%		8/25/22		10,072		10,095		23
Strike, LLC⁽⁴⁾		Energy		L+800		1.0%		11/30/22		2,886		3,005		119
SunGard Availability Services Capital, Inc.⁽⁴⁾		Software & Services		L+700		1.0%		9/30/21		4,770		5,011		241
ThermaSys Corp.		Capital Goods		L+400		1.3%		5/3/19		6,566		6,672		106
TierPoint, LLC		Software & Services		L+725		1.0%		5/5/25		6,930		7,002		72
TKC Holdings, Inc.		Retailing		L+800		1.0%		2/1/24		4,020		4,040		20
TravelCLICK, Inc.		Software & Services		L+775		1.0%		11/6/21		7,183		7,159		(24	)
Veritas US Inc.		Software & Services		L+450		1.0%		1/27/23		19,894		19,857		(37	)
West Corp.		Telecommunication Services		L+400		1.0%		10/10/24		20,185		20,122		(63	)
West Corp.		Telecommunication Services		L+350		1.0%		10/10/24		4,994		5,003		9
Westbridge Technologies, Inc.		Software & Services		L+850		1.0%		4/28/23		6,731		6,852		121
Winebow Holdings, Inc.		Retailing		L+750		1.0%		1/2/22		4,878		4,519		(359	)
York Risk Services Holding Corp.⁽⁴⁾		Insurance		L+375		1.0%		10/1/21		6,631		6,541		(90	)

Total									$	437,855	$	434,665		(3,190	)

		Total TRS Accrued Income and Liabilities:												1,630

						Total TRS Fair Value:							$	(1,560	)

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

(2)	The variable rate securities underlying the TRS bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2018, three-month LIBOR was 2.31%.

(3)	The investment is not a qualifying asset under the 1940 Act. A BDC 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.

(4)	Security is also held directly by the Company or one of its wholly-owned subsidiaries.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

The following is a summary of the underlying loans subject to the TRS as of December 31, 2017:


Underlying Loan⁽¹⁾	Industry	Rate⁽²⁾	Floor	Maturity	Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
Alison US LLC⁽³⁾	Capital Goods	L+450	1.0%	8/29/21	$	7,190	$	6,930	$	(260	)
American Bath Group, LLC	Capital Goods	L+525	1.0%	9/30/23		3,318		3,481		163
American BathGroup, LLC	Capital Goods	L+975	1.0%	9/30/24		2,760		2,992		232
AqGen Ascensus, Inc.	Diversified Financials	L+400	1.0%	12/5/22		13,828		14,753		925
ATX Networks Corp.⁽³⁾⁽⁴⁾	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21		4,740		4,752		12
ATX Networks Corp.⁽³⁾	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21		7,563		7,699		136
Avaya Inc.⁽⁴⁾	Technology Hardware & Equipment	L+475	1.0%	12/15/24		14,850		14,744		(106	)
BBB Industries US Holdings, Inc.	Automobiles & Components	L+450	1.0%	11/3/21		7,314		7,542		228
Casablanca US Holdings Inc.⁽⁴⁾	Consumer Services	L+900	1.0%	3/31/25		4,925		5,075		150
CDS U.S. Intermediate Holdings, Inc.⁽³⁾⁽⁴⁾	Media	L+825	1.0%	7/10/23		8,865		8,854		(11	)
Confie Seguros Holding II Co.⁽³⁾	Insurance	L+525	1.0%	4/19/22		6,861		6,909		48
Dayton Superior Corp.	Materials	L+800	1.0%	11/15/21		11,203		9,702		(1,501	)
Diamond Resorts International, Inc.	Consumer Services	L+450	1.0%	9/2/23		26,959		27,831		872
Elo Touch Solutions, Inc.⁽⁴⁾	Technology Hardware & Equipment	L+600	1.0%	10/25/23		8,448		8,512		64
FHC Health Systems, Inc.	Health Care Equipment & Services	L+400	1.0%	12/23/21		8,839		8,683		(156	)
FullBeauty Brands Holdings Corp.	Consumer Durables & Apparel	L+475	1.0%	10/14/22		7,201		4,765		(2,436	)
Gulf Finance, LLC⁽⁴⁾	Energy	L+525	1.0%	8/25/23		9,437		8,712		(725	)
Inmar, Inc.	Software & Services	L+800	1.0%	5/1/25		14,775		15,000		225
Ivanti Software, Inc.	Software & Services	L+425	1.0%	1/20/24		7,457		7,113		(344	)
Jazz Acquisition, Inc.⁽⁴⁾	Capital Goods	L+675	1.0%	6/19/22		2,513		2,345		(168	)
LBM Borrower, LLC	Capital Goods	L+450	1.0%	8/20/22		5,359		5,439		80
LD Intermediate Holdings, Inc.	Software & Services	L+588	1.0%	12/9/22		8,775		8,686		(89	)
LTI Holdings, Inc.	Materials	L+475	1.0%	5/16/24		9,851		9,987		136
MORSCO, Inc.	Capital Goods	L+700	1.0%	10/31/23		9,360		9,872		512
Navistar, Inc.⁽³⁾	Capital Goods	L+350		11/6/24		9,701		9,777		76
P.F. Chang’s China Bistro, Inc.	Consumer Services	L+500	1.0%	9/1/22		7,257		7,026		(231	)
P2 Upstream Acquisition Co.	Energy	L+400	1.3%	10/30/20		2,283		2,398		115
Peak 10 Holding Corp.	Software & Services	L+725	1.0%	8/1/25		6,873		6,969		96
Quest Software US Holdings Inc.⁽⁴⁾	Software & Services	L+550	1.0%	10/31/22		17,877		18,233		356
Specialty Building Products Holdings, LLC⁽⁴⁾	Capital Goods	L+600	1.0%	10/26/23		7,364		7,631		267
Spencer Gifts LLC	Retailing	L+425	1.0%	7/16/21		15,939		11,464		(4,475	)
SRS Distribution Inc.	Capital Goods	L+325	1.0%	8/25/22		10,098		10,099		1
Strike, LLC⁽⁴⁾	Energy	L+800	1.0%	11/30/22		2,925		3,045		120
SunGard Availability Services Capital, Inc.⁽⁴⁾	Software & Services	L+700	1.0%	9/30/21		4,770		4,986		216
ThermaSys Corp.	Capital Goods	L+400	1.3%	5/3/19		6,612		6,489		(123	)
TierPoint, LLC	Software & Services	L+725	1.0%	5/5/25		6,930		7,009		79
TKC Holdings, Inc.	Retailing	L+800	1.0%	2/1/24		4,020		4,020		—
TravelCLICK, Inc.	Software & Services	L+775	1.0%	11/6/21		7,183		7,173		(10	)
Westbridge Technologies, Inc.	Software & Services	L+850	1.0%	4/28/23		6,774		6,826		52
Winebow Holdings, Inc.	Retailing	L+750	1.0%	1/2/22		4,878		4,568		(310	)

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)


Underlying Loan⁽¹⁾	Industry	Rate⁽²⁾		Floor		Maturity		Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
York Risk Services Holding Corp.⁽⁴⁾	Insurance		L+375		1.0%		10/1/21	$	6,648	$	6,556	$	(92	)

Total								$	340,523	$	334,647		(5,876	)

			Total TRS Accrued Income and Liabilities:										2,120

					Total TRS Fair Value:							$	(3,756	)

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

(2)	The variable rate securities underlying the TRS bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2017, three-month LIBOR was 1.69%.

(3)	The investment is not a qualifying asset under the 1940 Act. A BDC 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.

(4)	Security is also held directly by the Company or one of its wholly-owned subsidiaries.

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 III 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 4 for a discussion of the Company’s commitments to FSIC III Advisor and its affiliates (including FS Investments) and Note 6 for a discussion of the Company’s unfunded commitments.

FS Investment Corporation III

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, 2018 and the year ended December 31, 2017:


	Three Months Ended March 31, 2018 (Unaudited)			Year Ended December 31, 2017
Per Share Data:⁽¹⁾
Net asset value, beginning of period	$	8.22		$	8.53
Results of operations⁽²⁾
Net investment income		0.17			0.69
Net realized gain (loss) and unrealized appreciation (depreciation)		(0.15	)		(0.32	)

Net increase (decrease) in net assets resulting from operations		0.02			0.37

Stockholder distributions⁽³⁾
Distributions from net investment income		(0.17	)		(0.70	)

Net decrease in net assets resulting from stockholder distributions		(0.17	)		(0.70	)

Capital share transactions
Issuance of common stock⁽⁴⁾		—			0.02
Repurchases of common stock⁽⁵⁾		—			—

Net increase in net assets resulting from capital share transactions		—			0.02

Net asset value, end of period	$	8.07		$	8.22

Shares outstanding, end of period		290,499,333			290,566,041

Total return⁽⁶⁾		0.26	%		4.50	%

Total return (without assuming reinvestment of distributions)⁽⁶⁾		0.24	%		4.57	%

Ratio/Supplemental Data:
Net assets, end of period	$	2,343,167		$	2,388,724
Ratio of net investment income to average net assets⁽⁷⁾		8.10	%		8.08	%
Ratio of operating expenses to average net assets⁽⁷⁾		6.43	%		7.64	%
Ratio of net operating expenses to average net assets⁽⁷⁾		6.03	%		7.27	%
Portfolio turnover⁽⁸⁾		4.92	%		36.76	%
Total amount of senior securities outstanding, exclusive of treasury securities	$	1,726,139		$	1,647,355
Asset coverage per unit⁽⁹⁾		2.36			2.45

(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.

(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 in the Company’s continuous public offering and pursuant to the DRP. The issuance of common stock at an offering price, net of selling commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share.

(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 each 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 DRP. 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 returns do not consider the effect of any selling commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The total returns include 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

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 10. Financial Highlights (continued)

calculations of total returns in the table should not be considered representations of the Company’s future total returns, which may be greater or less than the returns 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 returns on the Company’s investment portfolio during the applicable period and do not represent actual returns to stockholders.

(7)

Weighted average net assets during the applicable period are used for this calculation. Ratios for the three months ended March 31, 2018 are annualized. Annualized ratios for the three months ended March 31, 2018, are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2018. The following is a schedule of supplemental ratios for the three months ended March 31, 2018 and the year ended December 31, 2017:


	Three Months Ended March 31, 2018 (Unaudited)			Year Ended December 31, 2017
Ratio of subordinated income incentive fees to average net assets		0.27	%		1.70	%
Ratio of interest expense to average net assets		2.48	%		2.20	%
Ratio of offering costs to average net assets		—			0.14	%

(8)	Portfolio turnover for the three months ended March 31, 2018 is not annualized.

(9)	Asset coverage per unit is the ratio of the carrying value of the Company’s total consolidated assets, less liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness.

Note 11. Subsequent Events

On April 9, 2018, the Company entered into the FS/KKR Advisor investment advisory and administrative services agreement, which replaced the FSIC III Advisor investment advisory and administrative services agreement. Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor is entitled to an annual base management fee based on the average weekly value of the Company’s gross assets and an incentive fee based on the Company’s performance. The base management fee is payable quarterly in arrears, and is calculated at an annual rate of 1.50% of the average weekly 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, and 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 the Company’s adjusted capital, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, FS/KKR Advisor will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS/KKR Advisor will be entitled to a “catch-up” fee equal to the amount of the Company’s 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 2.1875%, or 8.75% annually, of the value of the Company’s net assets. Thereafter, FS/KKR 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 FS/KKR Advisor investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to FS/KKR 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.

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 11. Subsequent Events (continued)

Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor also oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/KKR Advisor also performs, or oversees the performance of, the Company’s corporate operations and required administrative services, which includes being responsible for the financial records that the Company is required to maintain and preparing reports for the Company’s stockholders and reports filed with the SEC. In addition, FS/KKR Advisor assists the Company in calculating its net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others.

Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, the Company reimburses FS/KKR Advisor for expenses necessary to perform services related to its administration and operations, including FS/KKR Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to the Company on behalf of FS/KKR Advisor. The Company reimburses FS/KKR Advisor no less than monthly for expenses necessary to perform services related to the Company’s administration and operations. The amount of this reimbursement is set at the lesser of (1) FS/KKR 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. FS/KKR Advisor allocates 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 administrative expenses among the Company and certain affiliates of FS/KKR Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to it 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 FS/KKR Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

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 III.

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 FS/KKR Advisor, FS Investments, KKR Credit or any of their respective affiliates;

•

the dependence of our future success on the general economy and its effect on the industries in which we may invest;

•

our use of financial leverage;

•

the ability of FS/KKR Advisor to locate suitable investments for us and to monitor and administer our investments;

•

the ability of FS/KKR 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.

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 Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on June 7, 2013 and formally commenced investment operations on April 2, 2014. 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 November 2017, we closed our continuous public offering of shares of common stock to new investors.

Our investment activities are managed by FS/KKR Advisor and supervised by our board of directors, a majority of whom are independent. Under the FS/KKR Advisor investment advisory and administrative services agreement, we have agreed to pay FS/KKR Advisor an annual base management fee based on the average weekly value of our gross assets and an incentive fee based on our performance.

Our investment activities were managed by FSIC III Advisor until April 9, 2018 and thereafter have been managed by FS/KKR Advisor. FSIC III Advisor previously engaged GDFM to act as our investment sub-adviser. GDFM resigned as our investment sub-adviser and terminated the investment sub-advisory agreement on April 9, 2018.

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 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., certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the average syndicate participant) 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 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 our investment adviser.

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, including through the restructuring of such 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. FS/KKR 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 NRSRO and, in such case, generally will carry a rating below investment grade

Revenues

The principal measure of our financial performance is net increase (decrease) 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 realized gain or loss on total return swap, net unrealized appreciation or depreciation on investments, net unrealized gain or loss on foreign currency and net unrealized appreciation or depreciation on total return swap.

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 realized gain or loss on total return swap is the net monthly settlement payments received on the TRS. 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. Net unrealized appreciation or depreciation on total return swap is the net change in the fair value of the TRS.

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. 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 FS/KKR Advisor 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 FS/KKR Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

FS/KKR Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/KKR 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, FS/KKR 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.

Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, we reimburse FS/KKR Advisor for expenses necessary to perform services related to our administration and operations, including FS/KKR Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of FS/KKR Advisor. We reimburse FS/KKR Advisor no less than monthly for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FS/KKR Advisor’s actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FS/KKR Advisor allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of FS/KKR Advisor. Our board of directors then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to FS/KKR Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

We bear all other expenses of our operations and transactions, including all other expenses incurred by FS/KKR Advisor in performing services for us and administrative personnel paid by FS Investments and KKR Credit.

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 FS/KKR 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.

Portfolio Investment Activity for the Three Months Ended March 31, 2018 and for the Year Ended December 31, 2017

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2018 and the year ended December 31, 2017:


Net Investment Activity	For the Three Months Ended March 31, 2018			For the Year Ended December 31, 2017
Purchases	$	177,850		$	1,385,143
Sales and Repayments		(161,895	)		(1,235,500	)

Net Portfolio Activity	$	15,955		$	149,643


	For the Three Months Ended March 31, 2018					For the Year Ended December 31, 2017
New Investment Activity by Asset Class	Purchases		Percentage			Purchases		Percentage
Senior Secured Loans—First Lien	$	137,699		77	%	$	915,775		66	%
Senior Secured Loans—Second Lien		9,849		6	%		173,639		12	%
Senior Secured Bonds		11,525		6	%		91,758		7	%
Subordinated Debt		6,623		4	%		187,649		14	%
Collateralized Securities		—		—			—		—
Equity/Other		12,154		7	%		16,322		1	%

Total	$	177,850		100	%	$	1,385,143		100	%

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2018 and December 31, 2017:


	March 31, 2018 (Unaudited)							December 31, 2017
	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,229,046	$	2,230,475		67	%	$	2,212,948	$	2,222,444		66	%
Senior Secured Loans—Second Lien		298,843		252,289		8	%		298,561		261,239		8	%
Senior Secured Bonds		58,805		58,306		2	%		60,168		60,478		2	%
Subordinated Debt		669,668		657,346		20	%		690,666		687,221		21	%
Collateralized Securities		6,536		7,404		0	%		6,697		7,562		0	%
Equity/Other		170,858		109,049		3	%		164,105		102,582		3	%

Total	$	3,433,756	$	3,314,869		100	%	$	3,433,145	$	3,341,526		100	%

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

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2018 and December 31, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8 to our unaudited consolidated financial statements included herein. The investments underlying the TRS had a notional amount and market value of $437,855 and $434,665, respectively, as of March 31, 2018 and $340,523, and $334,647, respectively, as of December 31, 2017.


	March 31, 2018 (Unaudited)							December 31, 2017
	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,608,104	$	2,606,215		70	%	$	2,489,749	$	2,493,086		68	%
Senior Secured Loans—Second Lien		357,640		311,214		8	%		362,283		325,244		9	%
Senior Secured Bonds		58,805		58,306		2	%		60,168		60,478		1	%
Subordinated Debt		669,668		657,346		17	%		690,666		687,221		19	%
Collateralized Securities		6,536		7,404		0	%		6,697		7,562		0	%
Equity/Other		170,858		109,049		3	%		164,105		102,582		3	%

Total	$	3,871,611	$	3,749,534		100	%	$	3,773,668	$	3,676,173		100	%

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

The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2018 and December 31, 2017:


	March 31, 2018	December 31, 2017
Number of Portfolio Companies	101	109
% Variable Rate (based on fair value)	71.1%	70.9%
% Fixed Rate (based on fair value)	25.6%	26.0%
% Income Producing Equity/Other Investments (based on fair value)	0.2%	0.1%
% Non-Income Producing Equity/Other Investments (based on fair value)	3.1%	3.0%
Average Annual EBITDA of Portfolio Companies	$117,300	$124,000
Weighted Average Purchase Price of Debt Investments (as a % of par)	99.1%	98.9%
% of Investments on Non-Accrual (based on fair value)	0.2%	1.0%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)	9.8%	9.4%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets	10.4%	10.0%

Based on our regular monthly cash distribution amount of $0.058331 per share as of March 31, 2018 and our distribution reinvestment price of $8.25 per share, the annualized distribution rate to stockholders as of March 31, 2018 was 8.48%. The annualized distribution rate to stockholders is expressed as a percentage equal to the projected annualized distribution amount per share divided by our distribution reinvestment price per share. Our annualized distribution rate to stockholders may include income, realized capital gains and a return of investors’ capital. During the three months ended March 31, 2018, our total return was 0.26% and our total return without assuming reinvestment of distributions was 0.24%.

Based on our regular monthly cash distribution amount of $0.058331 per share as of December 31, 2017 and our distribution reinvestment price of $8.35 per share as of December 31, 2017, the annualized distribution rate to stockholders was 8.38%. During the year ended December 31, 2017, our total return was 4.50% and our total return without assuming reinvestment of distributions was 4.57%.

Our estimated gross portfolio yield may be higher than a stockholder’s yield on an investment in shares of our common stock. Our estimated gross portfolio yield does not reflect operating expenses that may be incurred by us. In addition, our estimated gross portfolio yield and total return figures disclosed above do not consider the effect of any 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 the section entitled “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2017 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements. See footnote 6 to the financial highlights table included in Note 10 to our unaudited consolidated financial statements included herein for information regarding the calculations of our total return.

Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2018 and the year ended December 31, 2017:


New Direct Originations	For the Three Months Ended March 31, 2018			For the Year Ended December 31, 2017
Total Commitments (including unfunded commitments)	$	97,529		$	806,211
Exited Investments (including partial paydowns)		(62,991	)		(636,672	)

Net Direct Originations	$	34,538		$	169,539


	For the Three Months Ended March 31, 2018					For the Year Ended December 31, 2017
New Direct Originations by Asset Class (including unfunded commitments)	Commitment Amount		Percentage			Commitment Amount		Percentage
Senior Secured Loans—First Lien	$	93,105		96	%	$	716,641		89	%
Senior Secured Loans—Second Lien		1,389		1	%		17,792		2	%
Senior Secured Bonds		—		—			5,927		1	%
Subordinated Debt		277		0	%		53,000		6	%
Collateralized Securities		—		—			—		—
Equity/Other		2,758		3	%		12,851		2	%

Total	$	97,529		100	%	$	806,211		100	%


	For the Three Months Ended March 31, 2018	For the Year Ended December 31, 2017
Average New Direct Origination Commitment Amount	$16,255	$21,216
Weighted Average Maturity for New Direct Originations	12/31/23	6/12/23
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period	11.0%	9.2%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets	11.0%	9.4%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period	10.6%	9.7%

The following table presents certain selected information regarding our direct originations as of March 31, 2018 and December 31, 2017:


Characteristics of All Direct Originations Held in Portfolio	March 31, 2018	December 31, 2017
Number of Portfolio Companies	59	59
Average Annual EBITDA of Portfolio Companies	$65,500	$65,900
Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities	4.9x	4.7x
% of Investments on Non-Accrual (based on fair value)	0.2%	—
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations	10.1%	9.7%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets	10.6%	10.1%

Portfolio Composition by Strategy

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, 2018 and December 31, 2017:


	March 31, 2018					December 31, 2017
Portfolio Composition by Strategy	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Direct Originations	$	2,469,989		75	%	$	2,427,744		73	%
Opportunistic		637,029		19	%		702,066		21	%
Broadly Syndicated/Other		207,851		6	%		211,716		6	%

Total	$	3,314,869		100	%	$	3,341,526		100	%

See Note 6 to our unaudited consolidated financial statements included herein for additional information regarding the composition of our investment portfolio by industry classification.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS/KKR Advisor uses, and FSIC III Advisor historically used, an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio.

FS/KKR Advisor uses, and FSIC III Advisor historically used, an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:


Investment Rating		Summary Description
1		Investment exceeding expectations and/or capital gain expected.
2		Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3		Performing investment requiring closer monitoring.
4		Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
5		Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2018 and December 31, 2017:


	March 31, 2018					December 31, 2017
Investment Rating	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
1	$	131,654		4	%	$	66,286		2	%
2		2,654,293		80	%		3,006,809		90	%
3		503,036		15	%		211,214		6	%
4		12,257		0	%		1,817		0	%
5		13,629		1	%		55,400		2	%

Total	$	3,314,869		100	%	$	3,341,526		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, 2018 and March 31, 2017

Revenues

Our investment income for the three months ended March 31, 2018 and 2017 was as follows:


	Three Months Ended March 31,
	2018					2017
	Amount		Percentage of Total Income			Amount		Percentage of Total Income
Interest income	$	75,167		90	%	$	73,604		86	%
Paid-in-kind interest income		6,388		7	%		5,929		7	%
Fee income		2,261		3	%		6,104		7	%

Total investment income⁽¹⁾	$	83,816		100	%	$	85,637		100	%

(1)

Such revenues represent $76,581 and $77,903 of cash income earned as well as $7,235 and $7,734 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2018 and 2017, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.

The increase in interest income was due primarily to LIBOR rate growth from 1.15% at March 31, 2017 to 2.31% at March 31, 2018 as well as an increase in the number of directly originated loans in our portfolio over the last year. 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. We expect the dollar amount of interest that we earn to increase as both the interest rates attributed to the investments within our investment portfolio and the proportion of directly originated investments in our investment portfolio increases.

Fee income is transaction based, and typically consists of prepayment fees and structuring 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.

Expenses

Our operating expenses for the three months ended March 31, 2018 and 2017 were as follows:


	Three Months Ended March 31,
	2018			2017
Management fees	$	19,078		$	18,616
Subordinated income incentive fees		1,623			9,619
Administrative services expenses		854			819
Stock transfer agent fees		387			387
Accounting and administrative fees		277			278
Interest expense		14,692			11,820
Directors’ fees		450			261
Offering costs		—			504
Expenses associated with our independent audit and related fees		99			99
Legal fees		34			43
Printing fees		250			315
Other		401			282

Total operating expenses		38,145			43,043
Management fee waiver		(2,385	)		(1,504	)

Net operating expenses	$	35,760		$	41,539

The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2018 and 2017:


	Three Months Ended March 31,
	2018			2017
Ratio of operating expenses to average net assets		1.61	%		1.82	%
Ratio of management fee waiver to average net assets⁽¹⁾		(0.10	)%		(0.06	)%

Ratio of net operating expenses to average net assets		1.51	%		1.76	%
Ratio of incentive fees, interest expense and offering costs to average net assets⁽¹⁾		(0.69	)%		(0.93	)%

Ratio of net operating expenses to average net assets, excluding certain expenses		0.82	%		0.83	%

(1)	Data may be rounded in order to recompute the ending ratio of net operating expenses to average net assets, excluding certain expenses.

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 amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors.

Net Investment Income

Our net investment income totaled $48,056 ($0.17 per share) and $44,098 ($0.16 per share) for the three months ended March 31, 2018 and 2017, respectively. The increase in net investment income for the year ended March 31, 2018 compared to 2017 can be attributed to the increase in interest income as discussed above.

Net Realized Gains or Losses

We sold investments and received principal repayments of $95,274 and $66,621, respectively, during the three months ended March 31, 2018, from which we realized a net loss of $22,865. We also realized a net gain of $226 from settlements on foreign currency during the three months ended March 31, 2018. We sold investments and received principal repayments of

$138,185 and $69,346, respectively, during the three months ended March 31, 2017, from which we realized a net gain of $3,912. During the three months ended March 31, 2018 and 2017, we earned $5,285 and $6,240, respectively, from periodic net settlement payments on our TRS, which are reflected as realized gains.

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

For the three months ended March 31, 2018, the net change in unrealized appreciation (depreciation) on investments totaled $(27,268), the net change in unrealized appreciation (depreciation) on our TRS was $2,196 and the net change in unrealized gain (loss) on foreign currency totaled $(41). For the three months ended March 31, 2017, the net change in unrealized appreciation (depreciation) on investments totaled $3,266, the net change in unrealized appreciation (depreciation) on the secured borrowing was $(45) and the net change in unrealized appreciation (depreciation) on our TRS was $1,124. The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2018 was primarily driven by lower valuations in several of our directly originated positions along with increased depreciation across several of our syndicated debt investments. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended March 31, 2017 was driven by increased appreciation across several of our syndicated investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2018 and 2017, the net increase in net assets resulting from operations was $5,589 ($0.02 per share) and $58,595 ($0.21 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2018, we had $305,271 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $108,016 in cash held as collateral by Citibank under the terms of the TRS. In addition, as of March 31, 2018, we had $62,145 in capacity available under the TRS and $62,300 in borrowings available under our other financing arrangements, subject to borrowing base and other limitations. As of March 31, 2018, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2018, we had twenty-one unfunded debt investments with aggregate unfunded commitments of $221,147, one unfunded commitment to purchase up to $295 in shares of preferred stock and one unfunded commitment to purchase up to $4 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 the DRP, 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 FS/KKR 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 the DRP, 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.

Financing Arrangements

We borrow funds to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. We do not currently anticipate issuing any preferred stock.

The following table presents summary information with respect to our outstanding financing arrangements as of March 31, 2018:

Arrangement

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility⁽¹⁾

Prime Brokerage Facility

L+1.25%

187,700

62,300

December 26, 2018⁽²⁾

Deutsche Bank Credit Facility⁽¹⁾

Revolving Credit Facility

L+2.25%

350,000

—

September 22, 2019

JPM Credit Facility⁽¹⁾

Term Loan Credit Facility

L+2.69%

400,000

—

May 8, 2019

Goldman Facility⁽¹⁾

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Capital One Credit Facility⁽¹⁾

Revolving Credit Facility

L+1.75%
to L+2.50%

150,000

—

August 13, 2020

Total

1,387,700

62,300

Citibank Total Return Swap

Total Return Swap

L+1.55%

437,855

62,145

N/A⁽³⁾

(1)	The carrying amount outstanding under the facility approximates its fair value.

(2)	As described in Note 8 to our unaudited consolidated financial statements included herein, this facility generally is terminable upon 270 days’ notice by either party. As of March 31, 2018, neither party to the facility had provided notice of its intent to terminate the facility.

(3)	The TRS may be terminated by Center City Funding at any time, subject to payment of an early termination fee if prior to the date 90 days before June 30, 2018, or by Citibank on or after June 30, 2018, in each case, in whole or in part, upon prior written notice to the other party.

For additional information regarding our financing arrangements, see Note 8 to our unaudited consolidated financial statements included herein.

RIC Status and Distributions

We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise tax 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.

Our first distribution was declared for stockholders of record as of April 8, 2014. We previously declared regular cash distributions on a quarterly basis and paid such distributions on a monthly basis to stockholders of record, as determined on a weekly basis. Subject to applicable legal restrictions and the sole discretion of our board of directors, following the closing of our public offering, 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.

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. 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 non-taxable distribution) will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2018 and 2017 represented a return of capital.

We intend to continue to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those stockholders who receive their distributions in the form of shares of our common stock under the DRP. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

The following table reflects the cash distributions per share that we declared and paid on our common stock during the three months ended March 31, 2018 and 2017:


	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2017
March 31, 2017	$	0.17499	$	48,011
Fiscal 2018
March 31, 2018	$	0.17499	$	50,490

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, 2018 and 2017.

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, FS/KKR Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.

ASC 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 FS/KKR 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;

•

FS/KKR 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 FS/KKR 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 FS/KKR 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 FS/KKR 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 FS/KKR Advisor’s management team, any approved independent third-party valuation services and our board of directors may consider when determining the fair value of our investments.

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that may be considered include the borrower’s ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.

For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

FS/KKR 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. FS/KKR 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 FS/KKR 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 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 FS/KKR Advisor’s management team, and has authorized FS/KKR 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 FS/KKR Advisor’s implementation of the valuation process.

See Note 7 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Our policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. We consider many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that we will receive any previously accrued interest, then the interest income will be written-off. Payments received on non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on our judgment.

Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. We record prepayment premiums on loans and securities as fee income when we earn such amounts.

Effective January 1, 2018, we adopted ASC Topic 606, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. We did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, we did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which we have applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

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 followed 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 were carried at fair value to correspond with the related investments, which were carried at fair value.

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, 2018 and 2017, we did not incur any interest or penalties.

See Note 2 to our unaudited consolidated financial statements included herein for additional information regarding our significant accounting policies.

Contractual Obligations

We have entered into an agreement with FS/KKR Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the FS/KKR Advisor investment advisory and administrative services agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets and (b) an incentive fee based on our performance. FS/KKR Advisor is reimbursed for administrative expenses incurred on our behalf. See Notes 4 and 11 to our unaudited consolidated financial statements included herein for a discussion of these agreements and for the amount of fees and expenses accrued under similar agreements with FSIC III Advisor during the three months ended March 31, 2018 and 2017.

A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at March 31, 2018 is as follows:


		Payments Due By Period
	Maturity Date⁽¹⁾	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
BNP Facility⁽²⁾	December 26, 2018	$	187,700	$	187,700		—		—		—
Deutsche Bank Credit Facility⁽³⁾	September 22, 2019	$	350,000		—	$	350,000		—		—
JPM Credit Facility⁽³⁾	May 8, 2019	$	400,000		—	$	400,000		—		—
Goldman Facility⁽³⁾	July 15, 2019	$	300,000		—	$	300,000		—		—
Capital One Credit Facility⁽³⁾	August 13, 2020	$	150,000		—	$	150,000		—		—

(1)	Amounts outstanding under the financing arrangements will mature, and all accrued and unpaid interest thereunder will be due and payable, on the maturity date.

(2)	At March 31, 2018, $62,300 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days’ notice by either party. As of March 31, 2018, neither party to the facility had provided notice of its intent to terminate the facility.

(3)	At December 31, 2017, no amounts remained unused under the financing arrangement.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

None.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands).

We are subject to financial market risks, including changes in interest rates. As of March 31, 2018, 71.1% of our portfolio investments (based on fair value) paid variable interest rates, 25.6% paid fixed interest rates, 3.1% were non-income producing equity/other investments and the remaining 0.2% 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 FS/KKR Advisor investment advisory and administrative services agreement, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FS/KKR Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the TRS between Center City Funding and Citibank, Center City Funding pays fees to Citibank at a floating rate equal to one-month LIBOR plus 1.55% per annum on the utilized notional amount of the loans subject to the TRS in exchange for the right to receive the economic benefit of a pool of loans having a maximum notional amount of $500,000. Pursuant to the terms of the BNP facility, Deutsche Bank credit facility, JPM credit facility, Goldman facility and the Capital One credit facility, 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, 2018:


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 100 basis points	$	(22,598	)	$	(11,610	)	$	(10,988	)		(3.7	)%
No change		—			—			—			—
Up 100 basis points	$	22,704		$	11,610		$	11,094			3.7	%
Up 300 basis points	$	68,861		$	34,829		$	34,032			11.4	%
Up 500 basis points	$	116,139		$	58,048		$	58,091			19.5	%

(1)

Assumes no defaults or prepayments by portfolio companies over the next twelve months. Includes the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Pursuant to the TRS, Center City Funding receives from Citibank all interest payable in respect of the loans included in the TRS and pays to Citibank interest at a rate equal to one-month LIBOR plus 1.55% per annum on the utilized notional amount of the loans subject to the TRS. As of March 31, 2018, all of the loans underlying the TRS (based on fair value) paid variable interest rates.

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, 2018 and 2017, we did not engage in interest rate hedging activities.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2018.

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 Exchange Act Rules 13a-15(f) or 15d-15(f)) that occurred during the three-month period ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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.

Investing in our common stock involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q, investors should consider carefully the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2017 and our additional filings with the SEC before making an investment in our common stock. All of the risk factors identified in Item 1A of our annual report on Form 10-K for the year ended December 31, 2017 that relate to our former investment adviser, FSIC III Advisor, are generally applicable to our current investment adviser, FS/KKR Advisor.

Risks Related to FS/KKR Advisor and Its Affiliates

There may be conflicts of interest related to obligations FS/KKR Advisor’s senior management and investment teams have to our affiliates and to other clients.

The members of the senior management and investment teams of FS/KKR Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do, or of investment vehicles managed by the same personnel. For example, FS/KKR Advisor is the investment adviser to FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation IV, Corporate Capital Trust, Inc. and Corporate Capital Trust II, and the officers, managers and other personnel of FS/KKR Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR Credit. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our stockholders. Our investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, we rely on FS/KKR Advisor to manage our day-to-day activities and to implement our investment strategy. FS/KKR Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to us. As a result of these activities, FS/KKR Advisor, its employees and certain of its affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of other entities affiliated with FS Investments or KKR Credit. FS/KKR Advisor and its employees will devote only as much of its or their time to our business as FS/KKR Advisor and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information concerning our repurchases of shares of our common stock pursuant to our share repurchase program during the quarter ended March 31, 2018:


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, 2018		2,986,249	$	8.35		2,986,249		(1	)
February 1 to February 28, 2018		—		—		—		—
March 1 to March 31, 2018		—		—		—		—

Total		2,986,249	$	8.35		2,986,249		(1	)

(1)

The maximum number of shares available for repurchase on January 10, 2018 was 3,512,399. 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.

Not applicable.

Item 6.

Exhibits.

Please note that the agreements included as exhibits to this quarterly report on Form 10-Q are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about FS Investment Corporation III or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.

The following exhibits are filed as part of this quarterly report or hereby incorporated by reference to exhibits previously filed with the SEC:



3.1		Articles of Amendment and Restatement of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2014).

3.2		Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit (b)(2) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013).

4.1		Form of Subscription Agreement (Incorporated by reference to Appendix A filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-215360) filed on June 29, 2017.)

4.2		Amended and Restated Distribution Reinvestment Plan of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’ s Current Report on Form 8-K filed on January 6, 2015).

4.3		Second Amended and Restated Distribution Reinvestment Plan of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’ s Current Report on Form 8-K filed on October 13, 2017.)

10.1		Investment Advisory and Administrative Services Agreement, dated as of April 9, 2018, by and between the Registrant and FS/KKR Advisor, LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2018).

10.2		Amended and Restated Investment Advisory and Administrative Services Agreement, dated as of August 6, 2014, by and between the Registrant and FSIC III Advisor, LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 14, 2014).

10.3		Investment Sub-Advisory Agreement, dated as of January 2, 2014, by and between FSIC III Advisor, LLC and GSO / Blackstone Debt Funds Management LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).

10.4		Investment Advisory and Administrative Services Agreement, dated as of December 20, 2013, by and between the Registrant and FSIC III Advisor, LLC (Incorporated by reference to Exhibit (g)(1) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013).

10.5		Dealer Manager Agreement, dated as of December 20, 2013, by and among the Registrant, FSIC III Advisor, LLC and FS² Capital Partners, LLC (Incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).

10.6		Follow-On Dealer Manager Agreement, dated as of June 2, 2017, by and among the Registrant, FSIC III Adviser, LLC and FS Investment Solutions, LLC (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-215360) filed on June 29, 2017).

10.7		Form of Selected Dealer Agreement (Included as Exhibit A to the Dealer Manager Agreement) (Incorporated by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).

10.8		Form of Follow-On Selected Investment Adviser Agreement (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement).

10.9		Custodian Agreement, dated as of January 6, 2014, by and between the Registrant and State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).



10.10		Escrow Agreement, dated as of January 9, 2014, by and among the Registrant, UMB Bank, N.A. and FS² Capital Partners, LLC (Incorporated by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).

10.11		ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of June 26, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).

10.12		Confirmation Letter Agreement, dated as of June 26, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).

10.13		Investment Management Agreement, dated as of June 26, 2014, by and between the Registrant and Center City Funding LLC (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).

10.14		Amended and Restated Confirmation Letter Agreement, dated as of August 25, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 27, 2014).

10.15		Second Amended and Restated Confirmation Letter Agreement, dated as of September 29, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014).

10.16		Third Amended and Restated Confirmation Letter Agreement, dated as of January 28, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 3, 2015).

10.17		Fourth Amended and Restated Confirmation Letter Agreement, dated as of June 26, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2015).

10.18		Fifth Amended and Restated Confirmation Letter Agreement, dated as of October 14, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015).

10.19		Sixth Amended and Restated Confirmation Letter Agreement, dated as of June 27, 2016, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 1, 2016).

10.20		Seventh Amended and Restated Confirmation Letter Agreement, dated as of June 27, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 28, 2017).

10.21		Eighth Amended and Restated Confirmation Letter Agreement, dated as of September 5, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 11, 2017).

10.22		Ninth Amended and Restated Confirmation Letter Agreement, dated as of March 31, 2018, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 4, 2018).

10.23		Expense Support and Conditional Reimbursement Agreement, dated as of December 20, 2013, by and between the Registrant and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit (k)(7) filed with Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form N-2 (File No. 333-191925) filed on October 22, 2014).

10.24		Committed Facility Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).

10.25		U.S. PB Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).



10.26		Special Custody and Pledge Agreement, dated as of October 17, 2014, by and among Burholme Funding LLC, BNP Paribas Prime Brokerage, Inc. and State Street Bank and Trust Company, as custodian (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).

10.27		Investment Management Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and the Registrant (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).

10.28		First Amendment Agreement, dated as of March 11, 2015, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities, and Burholme Funding LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 13, 2015).

10.29		Second Amendment Agreement, dated as of October 21, 2015, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).

10.30		Third Amendment Agreement, dated as of March 16, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).

10.31		Fourth Amendment Agreement, dated as of August 29, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 2, 2016).

10.32		Fifth Amendment Agreement, dated as of November 15, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 21, 2016).

10.33		Loan Financing and Servicing Agreement, dated as of December 2, 2014, by and among Dunlap Funding 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 Registrant’s Current Report on Form 8-K filed on December 8, 2014).

10.34		Sale and Contribution Agreement, dated as of December 2, 2014, by and between the Registrant, as seller, and Dunlap Funding LLC, as purchaser (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 8, 2014).

10.35		Investment Management Agreement, dated as of December 2, 2014, by and between Dunlap Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on December 8, 2014).

10.36		Amendment No. 1 to Investment Management Agreement, dated as of May 1, 2015, by and between Dunlap Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).

10.37		Securities Account Control Agreement, dated as of December 2, 2014, by and among Dunlap Funding 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 10.4 to the Registrant’ s Current Report on Form 8-K filed on December 8, 2014).

10.38		Amendment No. 1 to Loan Financing and Servicing Agreement, dated as of February 24, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 2, 2015).

10.39		Amendment No. 2 to Loan Financing and Servicing Agreement, dated as of March 24, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 26, 2015).



10.40		Amendment No. 3 to Loan Financing and Servicing Agreement, dated as of August 25, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).

10.41		Amendment No. 4 to Loan Financing and Servicing Agreement, dated as of September 22, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 24, 2015).

10.42		Amendment No. 5 to Loan Financing and Servicing Agreement, dated as of October 8, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 11, 2016).

10.43		Amendment No. 7 to Loan Financing and Servicing Agreement, dated as of January 12, 2017, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, each lender party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 19, 2017).

10.44		Amendment No. 8 to Loan Financing and Servicing Agreement, dated as of April 5, 2017, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, each lender party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.37 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 filed on May 10, 2017).

10.45		Amendment No. 9 to Loan Financing and Servicing Agreement, dated as of March 12, 2018, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as facility agent (formerly administrative agent), each lender party thereto, and Wells Fargo, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 15, 2018).

10.46		Loan Agreement, dated as of May 8, 2015, by and among Jefferson Square Funding LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).

10.47		Amendment No. 1 to Loan Agreement, dated as of September 8, 2015, between Jefferson Square Funding LLC, as borrower, and JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 14, 2015).

10.48		Amendment No. 2 to Loan Agreement, dated as of March 1, 2016, between Jefferson Square Funding LLC, as borrower, and JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 7, 2016).

10.49		Sale and Contribution Agreement, dated as of May 8, 2015, between Jefferson Square Funding LLC, as purchaser, and the Registrant, as seller (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).

10.50		Investment Management Agreement, dated as of May 8, 2015, by and between Jefferson Square Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).

10.51		Collateral Administration Agreement, dated as of May 8, 2015, by and among Jefferson Square Funding LLC, JPMorgan Chase Bank, National Association, as administrative agent, the Registrant, as investment manager and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).

10.52		Amended and Restated Sale and Contribution Agreement, dated as of June 18, 2015, by and between the Registrant and Germantown Funding LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).



10.53		Indenture, dated as of June 18, 2015, by and between Germantown Funding LLC and Citibank, N.A., as trustee (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.54		Germantown Funding LLC Floating Rate Notes due 2027 (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.55		September 1996 Version Master Repurchase Agreement between Goldman Sachs Bank USA and Society Hill Funding LLC, together with the related Annex and Master Confirmation thereto, each dated as of June 18, 2015 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.56		Revolving Credit Agreement, dated as of June 18, 2015, by and between the Registrant and Society Hill Funding LLC (Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.57		Amended and Restated Investment Management Agreement, dated as of June 18, 2015, by and between Germantown Funding LLC and the Registrant (Incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.58		Collateral Administration Agreement, dated as of June 18, 2015, by and among Germantown Funding LLC, the Registrant and Virtus Group, LP (Incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

10.59		ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of June 26, 2014, including the Amended and Restated Paragraph 13 to such Credit Support Annex, dated September 5, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 11, 2017).

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 under 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.

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 14, 2018.


FS INVESTMENT CORPORATION III

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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