Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - FS Investment Corp IV | tv500536_ex32-1.htm |
EX-31.2 - EXHIBIT 31.2 - FS Investment Corp IV | tv500536_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - FS Investment Corp IV | tv500536_ex31-1.htm |
EX-10.32 - EXHIBIT 10.32 - FS Investment Corp IV | tv500536_ex10-32.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 JUNE 30, 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: 814-01151
FS Investment Corporation IV
(Exact name of registrant as specified in its charter)
|
Maryland
|
| |
47-3258730
|
|
|
(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.
| Large accelerated filer | | | ☐ | | | Accelerated filer | | | ☐ | |
| Non-accelerated filer | | | ☒ (Do not check if a smaller reporting company) | | | Smaller reporting company | | | ☐ | |
| | | | | | | Emerging growth company | | | ☒ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 31,569,628 shares of the registrant’s Class T common stock outstanding as of August 10, 2018.
TABLE OF CONTENTS
| | |
Page
|
| |||
PART I—FINANCIAL INFORMATION | | | | | | | |
ITEM 1.
FINANCIAL STATEMENTS
|
| | | | | | |
| | | | 1 | | | |
| | | | 2 | | | |
| | | | 3 | | | |
| | | | 4 | | | |
| | | | 5 | | | |
| | | | 12 | | | |
| | | | 40 | | | |
| | | | 56 | | | |
| | | | 57 | | | |
PART II—OTHER INFORMATION | | | | | | | |
| | | | 58 | | | |
| | | | 58 | | | |
| | | | 58 | | | |
| | | | 58 | | | |
| | | | 58 | | | |
| | | | 58 | | | |
| | | | 59 | | | |
| | | | 62 | | |
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements.
FS Investment Corporation IV
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
| | |
June 30, 2018
(Unaudited) |
| |
December 31, 2017
|
| ||||||
Assets | | | | | | | | | | | | | |
Investments, at fair value (amortized cost—$261,277 and $262,292, respectively)
|
| | | $ | 262,195 | | | | | $ | 267,170 | | |
Cash
|
| | | | 38,691 | | | | | | 31,977 | | |
Due from counterparty
|
| | | | 71,500 | | | | | | 70,500 | | |
Receivable for investments sold and repaid
|
| | | | 25 | | | | | | 1,850 | | |
Interest receivable
|
| | | | 3,216 | | | | | | 3,128 | | |
Receivable due on total return swap(1)
|
| | | | 938 | | | | | | 795 | | |
Unrealized appreciation on total return swap(1)
|
| | | | — | | | | | | 868 | | |
Prepaid expenses and other assets
|
| | | | 50 | | | | | | 18 | | |
Total assets
|
| | | $ | 376,615 | | | | | $ | 376,306 | | |
Liabilities | | | | | | | | | | | | | |
Unrealized depreciation on total return swap(1)
|
| | | $ | 1,889 | | | | | $ | — | | |
Payable for investments purchased
|
| | | | 1,242 | | | | | | — | | |
Credit facility payable(1)
|
| | | | 19,900 | | | | | | 19,900 | | |
Stockholder distributions payable
|
| | | | 804 | | | | | | 258 | | |
Distribution fees payable
|
| | | | 672 | | | | | | 302 | | |
Management fees payable
|
| | | | 1,415 | | | | | | 1,596 | | |
Subordinated income incentive fees payable(2)
|
| | | | 372 | | | | | | — | | |
Accrued capital gains incentive fees(2)
|
| | | | 828 | | | | | | 1,981 | | |
Administrative services expense payable
|
| | | | 106 | | | | | | 47 | | |
Interest payable(1)
|
| | | | 165 | | | | | | 75 | | |
Directors’ fees payable
|
| | | | 76 | | | | | | 110 | | |
Other accrued expenses and liabilities
|
| | | | 457 | | | | | | 500 | | |
Total liabilities
|
| | | | 27,926 | | | | | | 24,769 | | |
Commitments and contingencies(3) | | | | | | | | | | | | | |
Stockholders’ equity | | | | | | | | | | | | | |
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding
|
| | | | — | | | | | | — | | |
Class A common stock, $0.001 par value, 250,000,000 shares authorized, none issued and outstanding
|
| | | | — | | | | | | — | | |
Class D common stock, $0.001 par value, 250,000,000 shares authorized, none issued and outstanding
|
| | | | — | | | | | | — | | |
Class T common stock, $0.001 par value, 250,000,000 shares authorized, 31,791,118 and 31,614,476 shares issued and outstanding, respectively
|
| | | | 32 | | | | | | 32 | | |
Class I common stock, $0.001 par value, 350,000,000 shares authorized, none issued and outstanding
|
| | | | — | | | | | | — | | |
Capital in excess of par value
|
| | | | 344,835 | | | | | | 342,864 | | |
Accumulated undistributed net realized gains (losses) on investments and total return swap(4)
|
| | | | 11,158 | | | | | | 5,371 | | |
Accumulated undistributed distributions in excess of net investment income(4)
|
| | | | (6,365) | | | | | | (2,476) | | |
Net unrealized appreciation (depreciation) on investments and total return swap
|
| | | | (971) | | | | | | 5,746 | | |
Total stockholders’ equity
|
| | | | 348,689 | | | | | | 351,537 | | |
Total liabilities and stockholders’ equity
|
| | | $ | 376,615 | | | | | $ | 376,306 | | |
Net asset value per share of common stock at period end
|
| | | $ | 10.97 | | | | | $ | 11.12 | | |
(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 and capital gains 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.
1
FS Investment Corporation IV
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
| | |
Three Months Ended
June 30, |
| |
Six Months Ended
June 30, |
| ||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||
Investment income | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income
|
| | | $ | 6,026 | | | | | $ | 3,788 | | | | | $ | 12,115 | | | | | $ | 5,762 | | |
Paid-in-kind interest income
|
| | | | 283 | | | | | | 9 | | | | | | 562 | | | | | | 20 | | |
Fee income
|
| | | | 528 | | | | | | 585 | | | | | | 558 | | | | | | 1,959 | | |
Dividend income
|
| | | | — | | | | | | — | | | | | | 15 | | | | | | — | | |
Total investment income
|
| | | | 6,837 | | | | | | 4,382 | | | | | | 13,250 | | | | | | 7,741 | | |
Operating expenses | | | | | | | | | | | | | | | | | | | | | | | | | |
Management fees(1)
|
| | | | 1,436 | | | | | | 1,354 | | | | | | 3,293 | | | | | | 2,381 | | |
Subordinated income incentive fees(2)
|
| | | | 372 | | | | | | — | | | | | | 372 | | | | | | — | | |
Capital gains incentive fees(2)
|
| | | | (179) | | | | | | 214 | | | | | | (914) | | | | | | 911 | | |
Administrative services expenses
|
| | | | 153 | | | | | | 100 | | | | | | 231 | | | | | | 200 | | |
Stock transfer agent fees
|
| | | | 50 | | | | | | 37 | | | | | | 100 | | | | | | 107 | | |
Accounting and administrative fees
|
| | | | 27 | | | | | | 30 | | | | | | 78 | | | | | | 54 | | |
Interest expense(3)
|
| | | | 236 | | | | | | 205 | | | | | | 458 | | | | | | 251 | | |
Distribution fees
|
| | | | 1,440 | | | | | | 988 | | | | | | 2,061 | | | | | | 1,304 | | |
Offering costs
|
| | | | — | | | | | | 471 | | | | | | — | | | | | | 852 | | |
Directors’ fees
|
| | | | 76 | | | | | | 96 | | | | | | 360 | | | | | | 185 | | |
Other general and administrative expenses
|
| | | | 240 | | | | | | 264 | | | | | | 544 | | | | | | 517 | | |
Operating expenses
|
| | | | 3,851 | | | | | | 3,759 | | | | | | 6,583 | | | | | | 6,762 | | |
Management fee waiver(1)
|
| | | | (21) | | | | | | (169) | | | | | | (253) | | | | | | (258) | | |
Add: Expense recoupment to sponsor(4)
|
| | | | — | | | | | | — | | | | | | — | | | | | | 666 | | |
Net expenses
|
| | | | 3,830 | | | | | | 3,590 | | | | | | 6,330 | | | | | | 7,170 | | |
Net investment income (loss)
|
| | | | 3,007 | | | | | | 792 | | | | | | 6,920 | | | | | | 571 | | |
Realized and unrealized gain/loss | | | | | | | | | | | | | | | | | | | | | | | | | |
Net realized gain (loss) on investments
|
| | | | 272 | | | | | | 499 | | | | | | 722 | | | | | | 818 | | |
Net realized gain (loss) on total return swap(3)
|
| | | | 2,588 | | | | | | 3,388 | | | | | | 5,065 | | | | | | 5,063 | | |
Net change in unrealized appreciation (depreciation) on investments
|
| | | | 647 | | | | | | 751 | | | | | | (3,960) | | | | | | 2,192 | | |
Net change in unrealized appreciation (depreciation) on total return swap(3)
|
| | | | (2,637) | | | | | | (1,245) | | | | | | (2,757) | | | | | | 436 | | |
Total net realized and unrealized gain/loss
|
| | | | 870 | | | | | | 3,393 | | | | | | (930) | | | | | | 8,509 | | |
Net increase (decrease) in net assets resulting from operations
|
| | | $ | 3,877 | | | | | $ | 4,185 | | | | | $ | 5,990 | | | | | $ | 9,080 | | |
Per share information—basic and diluted | | | | | | | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in net assets resulting from operations (Earnings per Share)
|
| | | $ | 0.12 | | | | | $ | 0.19 | | | | | $ | 0.19 | | | | | $ | 0.46 | | |
Weighted average shares outstanding
|
| | | | 31,649,628 | | | | | | 21,946,297 | | | | | | 31,649,011 | | | | | | 19,645,725 | | |
(1)
See Note 4 for a discussion of the waiver by FSIC IV 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 and capital gains incentive fees.
(3)
See Note 8 for a discussion of the Company’s financing arrangements.
(4)
See Note 4 for a discussion of expense reimbursements paid to the Company by its former investment adviser and affiliates and recoupment of such amounts paid by the Company to its former investment adviser and affiliates.
See notes to unaudited consolidated financial statements.
2
FS Investment Corporation IV
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
(in thousands)
| | |
Six Months Ended
June 30, |
| |||||||||
| | |
2018
|
| |
2017
|
| ||||||
Operations | | | | | | | | | | | | | |
Net investment income (loss)
|
| | | $ | 6,920 | | | | | $ | 571 | | |
Net realized gain (loss) on investments and total return swap(1)
|
| | | | 5,787 | | | | | | 5,881 | | |
Net change in unrealized appreciation (depreciation) on investments
|
| | | | (3,960) | | | | | | 2,192 | | |
Net change in unrealized appreciation (depreciation) on total return swap(1)
|
| | | | (2,757) | | | | | | 436 | | |
Net increase (decrease) in net assets resulting from operations
|
| | | | 5,990 | | | | | | 9,080 | | |
Stockholder distributions(2) | | | | | | | | | | | | | |
Distributions from net investment income
|
| | | | (10,809) | | | | | | (5,597) | | |
Distributions from net realized gain on investments
|
| | | | — | | | | | | (2,032) | | |
Net decrease in net assets resulting from stockholder distributions
|
| | | | (10,809) | | | | | | (7,629) | | |
Capital share transactions(3) | | | | | | | | | | | | | |
Issuance of common stock
|
| | | | — | | | | | | 109,381 | | |
Reinvestment of stockholder distributions
|
| | | | 6,431 | | | | | | 4,670 | | |
Repurchases of common stock
|
| | | | (4,460) | | | | | | (738) | | |
Net increase in net assets resulting from capital share transactions
|
| | | | 1,971 | | | | | | 113,313 | | |
Total increase (decrease) in net assets
|
| | | | (2,848) | | | | | | 114,764 | | |
Net assets at beginning of period
|
| | | | 351,537 | | | | | | 161,996 | | |
Net assets at end of period
|
| | | $ | 348,689 | | | | | $ | 276,760 | | |
Accumulated distributions in excess of net investment income(2)
|
| | | $ | (6,365) | | | | | $ | (6,449) | | |
(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.
3
FS Investment Corporation IV
Unaudited Consolidated Statements of Cash Flows
(in thousands)
(in thousands)
| | |
Six Months Ended
June 30, |
| |||||||||
| | |
2018
|
| |
2017
|
| ||||||
Cash flows from operating activities | | | | | | | | | | | | | |
Net increase (decrease) in net assets resulting from operations
|
| | | $ | 5,990 | | | | | $ | 9,080 | | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
|
| | | | | | | | | | | | |
Purchases of investments
|
| | | | (51,503) | | | | | | (173,105) | | |
Paid-in-kind interest
|
| | | | (562) | | | | | | (20) | | |
Proceeds from sales and repayments of investments
|
| | | | 54,089 | | | | | | 37,953 | | |
Net realized (gain) loss on investments
|
| | | | (722) | | | | | | (818) | | |
Net change in unrealized (appreciation) depreciation on investments
|
| | | | 3,960 | | | | | | (2,192) | | |
Net change in unrealized (appreciation) depreciation on total return swap(1)
|
| | | | 2,757 | | | | | | (436) | | |
Accretion of discount
|
| | | | (287) | | | | | | (143) | | |
Amortization of deferred financing costs
|
| | | | — | | | | | | 26 | | |
(Increase) decrease in due from counterparty
|
| | | | (1,000) | | | | | | (18,500) | | |
(Increase) decrease in receivable for investments sold and repaid
|
| | | | 1,825 | | | | | | 12,480 | | |
(Increase) decrease in interest receivable
|
| | | | (88) | | | | | | (995) | | |
(Increase) decrease in receivable due on total return swap(1)
|
| | | | (143) | | | | | | (1,600) | | |
(Increase) decrease in prepaid expenses and other assets
|
| | | | (32) | | | | | | (17) | | |
Increase (decrease) in payable for investments purchased
|
| | | | 1,242 | | | | | | 860 | | |
Increase (decrease) in distribution fees payable
|
| | | | 370 | | | | | | 608 | | |
Increase (decrease) in management fees payable
|
| | | | (181) | | | | | | 369 | | |
Increase (decrease) in subordinated income incentive fees payable
|
| | | | 372 | | | | | | — | | |
Increase (decrease) in accrued capital gains incentive fees
|
| | | | (1,153) | | | | | | 426 | | |
Increase (decrease) in administrative services expense payable
|
| | | | 59 | | | | | | (58) | | |
Increase (decrease) in interest payable(1)
|
| | | | 90 | | | | | | 70 | | |
Increase (decrease) in directors’ fees payable
|
| | | | (34) | | | | | | 24 | | |
Increase (decrease) in other accrued expenses and liabilities
|
| | | | (43) | | | | | | 66 | | |
Net cash provided by (used in) operating activities
|
| | | | 15,006 | | | | | | (135,922) | | |
Cash flows from financing activities | | | | | | | | | | | | | |
Issuance of common stock
|
| | | | — | | | | | | 109,381 | | |
Reinvestment of stockholder distributions
|
| | | | 6,431 | | | | | | 4,670 | | |
Repurchases of common stock
|
| | | | (4,460) | | | | | | (738) | | |
Stockholder distributions
|
| | | | (10,263) | | | | | | (7,572) | | |
Borrowings under credit facility(1)
|
| | | | 10,000 | | | | | | 24,800 | | |
Repayment under credit facility(1)
|
| | | | (10,000) | | | | | | (4,900) | | |
Deferred financing costs paid
|
| | | | — | | | | | | (75) | | |
Net cash provided by financing activities
|
| | | | (8,292) | | | | | | 125,566 | | |
Total increase (decrease) in cash
|
| | | | 6,714 | | | | | | (10,356) | | |
Cash at beginning of period
|
| | | | 31,977 | | | | | | 47,008 | | |
Cash at end of period
|
| | | $ | 38,691 | | | | | $ | 36,652 | | |
Supplemental disclosure | | | | | | | | | | | | | |
Excise and state taxes paid
|
| | | $ | 225 | | | | | $ | 43 | | |
(1)
See Note 8 for a discussion of the Company’s financing arrangements. During the six months ended June 30, 2018, the Company paid $368 in interest expense on the credit facility.
See notes to unaudited consolidated financial statements.
4
FS Investment Corporation IV
Unaudited Consolidated Schedule of Investments
As of June 30, 2018
(in thousands, except share amounts)
As of June 30, 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—40.8% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actian Corp.
|
| | | | | Software & Services | | |
L+786
|
| | | | 1.0% | | | |
6/30/22
|
| | | $ | 1,524 | | | | | $ | 1,524 | | | | | $ | 1,569 | | |
AG Group Merger Sub, Inc.
|
| | | | |
Commercial & Professional Services
|
| |
L+750
|
| | | | 1.0% | | | |
12/29/23
|
| | | | 8,771 | | | | | | 8,771 | | | | | | 9,034 | | |
All Systems Holding LLC
|
| | | | |
Commercial & Professional Services
|
| |
L+767
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 3,341 | | | | | | 3,341 | | | | | | 3,441 | | |
AVF Parent, LLC
|
| | | | | Retailing | | |
L+725
|
| | | | 1.3% | | | |
3/1/24
|
| | | | 14,032 | | | | | | 14,032 | | | | | | 13,302 | | |
Borden Dairy Co.
|
| | | | | Food, Beverage & Tobacco | | |
L+821
|
| | | | 1.0% | | | |
7/6/23
|
| | | | 4,375 | | | | | | 4,375 | | | | | | 4,441 | | |
CSafe Acquisition Co., Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
11/1/21
|
| | | | 9 | | | | | | 9 | | | | | | 8 | | |
CSafe Acquisition Co., Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
11/1/21
|
| | | | 252 | | | | | | 252 | | | | | | 246 | | |
CSafe Acquisition Co., Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 2,244 | | | | | | 2,244 | | | | | | 2,182 | | |
CSafe Acquisition Co., Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 943 | | | | | | 943 | | | | | | 917 | | |
Dade Paper & Bag, LLC
|
| | | | | Capital Goods | | |
L+700
|
| | | | 1.0% | | | |
6/10/24
|
| | | | 424 | | | | | | 424 | | | | | | 420 | | |
Dade Paper & Bag, LLC
|
| | | | | Capital Goods | | |
L+750
|
| | | | 1.0% | | | |
6/10/24
|
| | | | 3,327 | | | | | | 3,327 | | | | | | 3,365 | | |
Eagle Family Foods Group LLC
|
| | | | | Food, Beverage & Tobacco | | |
L+650
|
| | | | 1.0% | | | |
6/14/23
|
| | | | 84 | | | | | | 83 | | | | | | 83 | | |
Eagle Family Foods Group LLC
|
| |
(e)
|
| | Food, Beverage & Tobacco | | |
L+650
|
| | | | 1.0% | | | |
6/14/23
|
| | | | 295 | | | | | | 291 | | | | | | 291 | | |
Eagle Family Foods Group LLC
|
| | | | | Food, Beverage & Tobacco | | |
L+650
|
| | | | 1.0% | | | |
6/14/24
|
| | | | 2,526 | | | | | | 2,498 | | | | | | 2,498 | | |
Empire Today, LLC
|
| | | | | Retailing | | |
L+800
|
| | | | 1.0% | | | |
11/17/22
|
| | | | 2,955 | | | | | | 2,955 | | | | | | 2,985 | | |
FullBeauty Brands Holdings Corp.
|
| | | | | Consumer Durables & Apparel | | |
L+800
|
| | | | 1.0% | | | |
10/14/20
|
| | | | 7,000 | | | | | | 7,000 | | | | | | 7,000 | | |
GC Agile Intermediate Holdings Ltd.
|
| |
(e)(g)
|
| |
Commercial & Professional Services
|
| |
L+650
|
| | | | | | | |
6/15/23
|
| | | | 211 | | | | | | 205 | | | | | | 205 | | |
GC Agile Intermediate Holdings Ltd.
|
| |
(g)
|
| |
Commercial & Professional Services
|
| |
L+650
|
| | | | 1.0% | | | |
6/15/25
|
| | | | 1,437 | | | | | | 1,408 | | | | | | 1,408 | | |
GC Agile Intermediate Holdings Ltd.
|
| |
(e)(g)
|
| |
Commercial & Professional Services
|
| |
L+650
|
| | | | 1.0% | | | |
6/15/25
|
| | | | 690 | | | | | | 676 | | | | | | 676 | | |
GC Agile Intermediate Holdings Ltd.
|
| |
(e)(g)
|
| |
Commercial & Professional Services
|
| |
L+650
|
| | | | 1.0% | | | |
6/15/25
|
| | | | 575 | | | | | | 563 | | | | | | 563 | | |
Harrison Gypsum, LLC
|
| | | | | Materials | | |
L+700
|
| | | | 1.0% | | | |
4/29/24
|
| | | | 2,682 | | | | | | 2,656 | | | | | | 2,651 | | |
Harrison Gypsum, LLC
|
| |
(e)
|
| | Materials | | |
L+700
|
| | | | 1.0% | | | |
4/29/24
|
| | | | 858 | | | | | | 858 | | | | | | 848 | | |
Hudson Technologies Co.
|
| |
(g)
|
| |
Commercial & Professional Services
|
| |
L+725
|
| | | | 1.0% | | | |
10/10/23
|
| | | | 5,678 | | | | | | 5,678 | | | | | | 4,876 | | |
Hudson Technologies Co.
|
| |
(e)(g)
|
| |
Commercial & Professional Services
|
| |
L+725
|
| | | | 1.0% | | | |
10/10/23
|
| | | | 1,359 | | | | | | 1,359 | | | | | | 1,167 | | |
Icynene U.S. Acquisition Corp.
|
| |
(g)
|
| | Materials | | |
L+700
|
| | | | 1.0% | | | |
11/30/24
|
| | | | 6,965 | | | | | | 6,965 | | | | | | 7,170 | | |
JSS Holdings, Inc.
|
| | | | | Capital Goods | | |
L+800, 0.0% PIK (2.5% Max PIK)
|
| | | | 1.0% | | | |
3/31/23
|
| | | | 9,947 | | | | | | 9,864 | | | | | | 10,438 | | |
JSS Holdings, Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+800, 0.0% PIK (2.5% Max PIK)
|
| | | | 1.0% | | | |
3/31/23
|
| | | | 1,818 | | | | | | 1,818 | | | | | | 1,908 | | |
Kodiak BP, LLC
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
12/1/24
|
| | | | 12,911 | | | | | | 12,911 | | | | | | 12,766 | | |
Kodiak BP, LLC
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
12/1/24
|
| | | | 582 | | | | | | 582 | | | | | | 575 | | |
Murray Energy Corp.
|
| | | | | Energy | | |
L+900
|
| | | | 1.0% | | | |
2/12/21
|
| | | | 1,000 | | | | | | 993 | | | | | | 993 | | |
North Haven Cadence Buyer, Inc.
|
| |
(e)
|
| | Consumer Services | | |
L+500
|
| | | | 1.0% | | | |
9/2/21
|
| | | | 188 | | | | | | 187 | | | | | | 187 | | |
See notes to unaudited consolidated financial statements.
5
FS Investment Corporation IV
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2018
(in thousands, except share amounts)
As of June 30, 2018
(in thousands, except share amounts)
Portfolio Company(a)
|
| |
Footnotes
|
| |
Industry
|
| |
Rate(b)
|
| |
Floor
|
| |
Maturity
|
| |
Principal
Amount(c) |
| |
Amortized
Cost |
| |
Fair
Value(d) |
| ||||||||||||
North Haven Cadence Buyer, Inc.
|
| | | | | Consumer Services | | |
L+804
|
| | | | 1.0% | | | |
9/2/22
|
| | | $ | 4,422 | | | | | $ | 4,422 | | | | | $ | 4,422 | | |
North Haven Cadence Buyer, Inc.
|
| |
(e)
|
| | Consumer Services | | |
L+750
|
| | | | 1.0% | | | |
9/2/22
|
| | | | 479 | | | | | | 479 | | | | | | 479 | | |
One Call Corp.
|
| | | | |
Health Care Equipment & Services
|
| |
L+375, 6.0% PIK (6.0% Max PIK)
|
| | | | | | | |
4/11/24
|
| | | | 1,343 | | | | | | 1,330 | | | | | | 1,327 | | |
Power Distribution, Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.3% | | | |
1/25/23
|
| | | | 4,916 | | | | | | 4,916 | | | | | | 5,033 | | |
Propulsion Acquisition, LLC
|
| |
(k)
|
| |
Commercial & Professional Services
|
| |
L+600
|
| | | | 1.0% | | | |
7/13/21
|
| | | | 8,324 | | | | | | 8,228 | | | | | | 8,240 | | |
Safariland, LLC
|
| | | | | Capital Goods | | |
L+768
|
| | | | 1.1% | | | |
11/18/23
|
| | | | 4,766 | | | | | | 4,766 | | | | | | 4,367 | | |
Sequel Youth and Family Services, LLC
|
| | | | |
Health Care Equipment & Services
|
| |
L+776
|
| | | | 1.0% | | | |
9/1/22
|
| | | | 8,229 | | | | | | 8,229 | | | | | | 8,311 | | |
Sequel Youth and Family Services, LLC
|
| |
(e)
|
| |
Health Care Equipment & Services
|
| |
L+700
|
| | | | 1.0% | | | |
9/1/22
|
| | | | 412 | | | | | | 412 | | | | | | 416 | | |
SSC (Lux) Limited S.Ã r.l.
|
| |
(g)
|
| |
Health Care Equipment & Services
|
| |
L+750
|
| | | | 1.0% | | | |
9/10/24
|
| | | | 4,545 | | | | | | 4,545 | | | | | | 4,642 | | |
Strike, LLC
|
| |
(k)
|
| | Energy | | |
L+800
|
| | | | 1.0% | | | |
5/30/19
|
| | | | 305 | | | | | | 304 | | | | | | 307 | | |
Trace3, LLC
|
| |
(h)
|
| | Software & Services | | |
L+750
|
| | | | 1.0% | | | |
6/6/23
|
| | | | 3,097 | | | | | | 3,097 | | | | | | 3,136 | | |
VP Parent Holdings, Inc.
|
| | | | | Software & Services | | |
L+650
|
| | | | 1.0% | | | |
5/22/25
|
| | | | 8,222 | | | | | | 8,142 | | | | | | 8,148 | | |
Westbridge Technologies, Inc.
|
| |
(k)
|
| | Software & Services | | |
L+850
|
| | | | 1.0% | | | |
4/28/23
|
| | | | 2,925 | | | | | | 2,875 | | | | | | 2,976 | | |
York Risk Services Holding Corp.
|
| |
(k)
|
| | Insurance | | |
L+375
|
| | | | 1.0% | | | |
10/1/21
|
| | | | 985 | | | | | | 979 | | | | | | 958 | | |
Total Senior Secured Loans—First Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 151,516 | | | | | | 150,975 | | |
Unfunded Loan Commitments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | (8,625) | | | | | | (8,625) | | |
Net Senior Secured Loans—First Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 142,891 | | | | | | 142,350 | | |
Senior Secured Loans—Second Lien—6.7% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Chisholm Oil and Gas Operating, LLC
|
| | | | | Energy | | |
L+800
|
| | | | 1.0% | | | |
3/21/24
|
| | | | 6,000 | | | | | | 6,000 | | | | | | 5,960 | | |
LBM Borrower, LLC
|
| |
(k)
|
| | Capital Goods | | |
L+925
|
| | | | 1.0% | | | |
8/20/23
|
| | | | 2,427 | | | | | | 2,382 | | | | | | 2,445 | | |
LTI Holdings, Inc.
|
| |
(k)
|
| | Materials | | |
L+875
|
| | | | 1.0% | | | |
5/16/25
|
| | | | 3,000 | | | | | | 2,948 | | | | | | 3,045 | | |
TKC Holdings, Inc.
|
| |
(k)
|
| | Retailing | | |
L+800
|
| | | | 1.0% | | | |
2/1/24
|
| | | | 8,500 | | | | | | 8,487 | | | | | | 8,528 | | |
TravelCLICK, Inc.
|
| |
(k)
|
| | Software & Services | | |
L+775
|
| | | | 1.0% | | | |
11/6/21
|
| | | | 3,365 | | | | | | 3,379 | | | | | | 3,367 | | |
Total Senior Secured Loans—Second Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 23,196 | | | | | | 23,345 | | |
Senior Secured Bonds—6.9% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
APX Group, Inc.
|
| |
(f)(k)
|
| | Consumer Services | | |
7.9%
|
| | | | | | | |
12/1/22
|
| | | | 2,079 | | | | | | 2,065 | | | | | | 2,066 | | |
AssuredPartners, Inc.
|
| |
(f)(k)
|
| | Insurance | | |
7.0%
|
| | | | | | | |
8/15/25
|
| | | | 5,682 | | | | | | 5,682 | | | | | | 5,476 | | |
Avantor, Inc.
|
| |
(f)(k)
|
| | Materials | | |
6.0%
|
| | | | | | | |
10/1/24
|
| | | | 1,282 | | | | | | 1,282 | | | | | | 1,271 | | |
Black Swan Energy Ltd.
|
| |
(g)
|
| | Energy | | |
9.0%
|
| | | | | | | |
1/20/24
|
| | | | 1,334 | | | | | | 1,334 | | | | | | 1,321 | | |
Boyne USA Inc.
|
| |
(f)(k)
|
| | Consumer Services | | |
7.3%
|
| | | | | | | |
5/1/25
|
| | | | 16 | | | | | | 17 | | | | | | 17 | | |
See notes to unaudited consolidated financial statements.
6
FS Investment Corporation IV
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2018
(in thousands, except share amounts)
As of June 30, 2018
(in thousands, except share amounts)
Portfolio Company(a)
|
| |
Footnotes
|
| |
Industry
|
| |
Rate(b)
|
| |
Floor
|
| |
Maturity
|
| |
Principal
Amount(c) |
| |
Amortized
Cost |
| |
Fair
Value(d) |
| |||||||||
CSVC Acquisition Corp.
|
| |
(f)(k)
|
| | Diversified Financials | | |
7.8%
|
| | | | |
6/15/25
|
| | | $ | 9,183 | | | | | $ | 9,183 | | | | | $ | 7,446 | | |
DJO Finance LLC
|
| |
(f)(k)
|
| |
Health Care Equipment & Services
|
| |
8.1%
|
| | | | |
6/15/21
|
| | | | 723 | | | | | | 729 | | | | | | 734 | | |
Eagle Intermediate Global Holding B.V.
|
| |
(f)(g)(k)
|
| | Consumer Durables & Apparel | | |
7.5%
|
| | | | |
5/1/25
|
| | | | 538 | | | | | | 550 | | | | | | 538 | | |
Genesys Telecommunications Laboratories, Inc.
|
| |
(f)(k)
|
| | Software & Services | | |
10.0%
|
| | | | |
11/30/24
|
| | | | 428 | | | | | | 476 | | | | | | 477 | | |
JW Aluminum Co.
|
| |
(f)(k)
|
| | Materials | | |
10.3%
|
| | | | |
6/1/26
|
| | | | 759 | | | | | | 759 | | | | | | 763 | | |
Pisces Midco Inc.
|
| |
(f)(k)
|
| | Capital Goods | | |
8.0%
|
| | | | |
4/15/26
|
| | | | 730 | | | | | | 717 | | | | | | 705 | | |
Velvet Energy Ltd.
|
| |
(g)
|
| | Energy | | |
9.0%
|
| | | | |
10/5/23
|
| | | | 3,000 | | | | | | 3,000 | | | | | | 3,135 | | |
Total Senior Secured Bonds
|
| | | | | | | | | | | | | | | | | | | | | | | | | 25,794 | | | | | | 23,949 | | |
Subordinated Debt—18.6% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AmWINS Group, Inc.
|
| |
(f)(h)
|
| | Insurance | | |
7.8%
|
| | | | |
7/1/26
|
| | | | 481 | | | | | | 481 | | | | | | 481 | | |
APX Group, Inc.
|
| |
(f)(k)
|
| | Consumer Services | | |
8.8%
|
| | | | |
12/1/20
|
| | | | 569 | | | | | | 510 | | | | | | 545 | | |
Ascent Resources Utica Holdings, LLC
|
| |
(f)(k)
|
| | Energy | | |
10.0%
|
| | | | |
4/1/22
|
| | | | 10,000 | | | | | | 10,000 | | | | | | 11,013 | | |
Avantor, Inc.
|
| |
(f)(k)
|
| | Materials | | |
9.0%
|
| | | | |
10/1/25
|
| | | | 12,500 | | | | | | 12,502 | | | | | | 12,612 | | |
CEC Entertainment, Inc.
|
| |
(f)(k)
|
| | Consumer Services | | |
8.0%
|
| | | | |
2/15/22
|
| | | | 7,297 | | | | | | 6,949 | | | | | | 6,458 | | |
ClubCorp Holdings, Inc.
|
| |
(f)(h)(k)
|
| | Consumer Services | | |
8.5%
|
| | | | |
9/15/25
|
| | | | 1,946 | | | | | | 1,873 | | | | | | 1,851 | | |
Exterran Energy Solutions, L.P.
|
| |
(f)(g)(k)
|
| | Capital Goods | | |
8.1%
|
| | | | |
5/1/25
|
| | | | 5,143 | | | | | | 5,143 | | | | | | 5,473 | | |
Great Lakes Dredge & Dock Corp.
|
| |
(f)(g)(k)
|
| | Capital Goods | | |
8.0%
|
| | | | |
5/15/22
|
| | | | 7,000 | | | | | | 7,000 | | | | | | 7,162 | | |
P.F. Chang’s China Bistro, Inc.
|
| |
(f)(k)
|
| | Consumer Services | | |
10.3%
|
| | | | |
6/30/20
|
| | | | 3,624 | | | | | | 3,370 | | | | | | 3,343 | | |
Quorum Health Corp.
|
| |
(f)(k)
|
| |
Health Care Equipment & Services
|
| |
11.6%
|
| | | | |
4/15/23
|
| | | | 491 | | | | | | 489 | | | | | | 492 | | |
S1 Blocker Buyer Inc.
|
| |
(f)
|
| |
Commercial & Professional Services
|
| |
10.0% PIK (10.0% Max PIK)
|
| | | | |
10/31/22
|
| | | | 8 | | | | | | 8 | | | | | | 8 | | |
SRS Distribution Inc.
|
| |
(f)(k)
|
| | Capital Goods | | |
8.3%
|
| | | | |
7/1/26
|
| | | | 2,180 | | | | | | 2,170 | | | | | | 2,184 | | |
Stars Group Holdings B.V.
|
| |
(f)(g)(h)(k)
|
| | Consumer Services | | |
7.0%
|
| | | | |
7/15/26
|
| | | | 521 | | | | | | 521 | | | | | | 528 | | |
Surgery Center Holdings, Inc.
|
| |
(f)(k)
|
| |
Health Care Equipment & Services
|
| |
6.8%
|
| | | | |
7/1/25
|
| | | | 499 | | | | | | 474 | | | | | | 474 | | |
Team Health Holdings Inc
|
| |
(f)(k)
|
| |
Health Care Equipment & Services
|
| |
6.4%
|
| | | | |
2/1/25
|
| | | | 1,635 | | | | | | 1,437 | | | | | | 1,407 | | |
Vertiv Group Corp.
|
| |
(f)(k)
|
| | Capital Goods | | |
9.3%
|
| | | | |
10/15/24
|
| | | | 2,903 | | | | | | 2,830 | | | | | | 2,876 | | |
York Risk Services Holding Corp.
|
| |
(f)(k)
|
| | Insurance | | |
8.5%
|
| | | | |
10/1/22
|
| | | | 8,695 | | | | | | 8,283 | | | | | | 7,994 | | |
Total Subordinated Debt
|
| | | | | | | | | | | | | | | | | | | | | | | | | 64,040 | | | | | | 64,901 | | |
|
See notes to unaudited consolidated financial statements.
7
FS Investment Corporation IV
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2018
(in thousands, except share amounts)
As of June 30, 2018
(in thousands, except share amounts)
Portfolio Company(a)
|
| |
Footnotes
|
| |
Industry
|
| |
Rate(b)
|
| |
Floor
|
| |
Maturity
|
| |
Number of
Shares |
| |
Cost
|
| |
Fair
Value(d) |
| ||||||||||||
Equity/Other—2.2% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ASG Everglades Holdings, Inc., Warrants
|
| |
(i)
|
| | Software & Services | | | | | | | | | | | 6/27/22 | | | | | | 12,081 | | | | | $ | 344 | | | | | $ | 340 | | |
Chisholm Oil and Gas, LLC, Series A Units
|
| |
(i)(j)
|
| | Energy | | | | | | | | | | | | | | | | | 75,000 | | | | | | 75 | | | | | | 61 | | |
CSF Group Holdings, Inc., Common Equity
|
| |
(i)
|
| | Capital Goods | | | | | | | | | | | | | | | | | 17,400 | | | | | | 17 | | | | | | 15 | | |
Escape Velocity Holdings, Inc., Common Equity
|
| |
(i)
|
| | Software & Services | | | | | | | | | | | | | | | | | 1,545 | | | | | | 16 | | | | | | 56 | | |
H.I.G. Empire Holdco, Inc., Common Equity
|
| |
(i)
|
| | Retailing | | | | | | | | | | | | | | | | | 14 | | | | | | 41 | | | | | | 40 | | |
JSS Holdco, LLC, Net Profits Interest
|
| |
(i)
|
| | Capital Goods | | | | | | | | | | | | | | | | | — | | | | | | — | | | | | | 59 | | |
JW Aluminum Co., Common Equity
|
| |
(i)
|
| | Materials | | | | | | | | | | | | | | | | | 41 | | | | | | — | | | | | | — | | |
JW Aluminum Co., Preferred Equity
|
| | | | | Materials | | |
12.5% PIK
|
| | | | | | | 11/17/25 | | | | | | 1,003 | | | | | | 4,158 | | | | | | 6,262 | | |
North Haven Cadence TopCo, LLC, Common Equity
|
| |
(i)
|
| | Consumer Services | | | | | | | | | | | | | | | | | 208,333 | | | | | | 208 | | | | | | 323 | | |
PDI Parent LLC, Common Equity
|
| |
(i)
|
| | Capital Goods | | | | | | | | | | | | | | | | | 230,769 | | | | | | 231 | | | | | | 219 | | |
S1 Blocker Buyer Inc., Common Equity
|
| | | | |
Commercial & Professional Services
|
| | | | | | | | | | | | | | | | 4 | | | | | | 39 | | | | | | 51 | | |
SSC Holdco Limited, Common Equity
|
| |
(g)(i)
|
| |
Health Care Equipment & Services
|
| | | | | | | | | | | | | | | | 11,364 | | | | | | 227 | | | | | | 224 | | |
Total Equity/Other
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,356 | | | | | | 7,650 | | |
TOTAL INVESTMENTS—75.2%
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 261,277 | | | | | | 262,195 | | |
OTHER ASSETS IN EXCESS OF LIABILITIES—24.8%
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 86,494 | | |
NET ASSETS—100.0%
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 348,689 | | |
|
Total Return Swap
|
| | | | | | | | | | | | | | | | |
Notional
Amount |
| | | | |
Unrealized
Depreciation |
| ||||||
Citibank TRS Facility (Note 8)
|
| |
(g)
|
| | | | | | | | | | | | | | | $ | 129,781 | | | | | | | | $ | (1,889) | | |
|
(a)
Security may be an obligation of one or more entities affiliated with the named company.
(b)
Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of June 30, 2018, the three-month London Interbank Offered Rate, or LIBOR or “L,” was 2.34%. PIK means paid-in-kind.
(c)
Denominated in U.S. dollars unless otherwise noted.
(d)
Investments classified as Level 3 in the Company’s fair value hierarchy whereby fair value was determined by the Company’s board of directors, unless otherwise noted (see Note 7).
(e)
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.
(f)
Security or portion thereof held within Broomall Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc., or BNP. Securities held within Broomall 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 BNP (see Note 8).
(g)
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 June 30, 2018, 90.4% of the Company’s total assets represented qualifying assets. In addition, as described in Note 8, 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, 89.3% of the Company’s total assets represented qualifying assets as of June 30, 2018.
(h)
Position or portion thereof unsettled as of June 30, 2018.
(i)
Security is non-income producing.
(j)
Security held within FSIC IV Investments, LLC, a wholly-owned subsidiary of the Company.
(k)
Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 7).
See notes to unaudited consolidated financial statements.
8
FS Investment Corporation IV
Consolidated Schedule of Investments
As of December 31, 2017
(in thousands, except share amounts)
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—39.2% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actian Corp.
|
| | | | | Software & Services | | |
L+806
|
| | | | 1.0% | | | |
6/30/22
|
| | | $ | 1,524 | | | | | $ | 1,524 | | | | | $ | 1,543 | | |
AG Group Merger Sub, Inc.
|
| | | | |
Commercial & Professional Services
|
| |
L+750
|
| | | | 1.0% | | | |
12/29/23
|
| | | | 8,917 | | | | | | 8,917 | | | | | | 9,073 | | |
All Systems Holding LLC
|
| | | | |
Commercial & Professional Services
|
| |
L+767
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 3,341 | | | | | | 3,341 | | | | | | 3,391 | | |
American Bath Group, LLC
|
| | | | | Capital Goods | | |
L+525
|
| | | | 1.0% | | | |
9/30/23
|
| | | | 2,970 | | | | | | 2,958 | | | | | | 3,002 | | |
AVF Parent, LLC
|
| | | | | Retailing | | |
L+725
|
| | | | 1.3% | | | |
3/1/24
|
| | | | 14,211 | | | | | | 14,211 | | | | | | 14,505 | | |
Borden Dairy Co.
|
| | | | | Food, Beverage & Tobacco | | |
L+804
|
| | | | 1.0% | | | |
7/6/23
|
| | | | 4,375 | | | | | | 4,375 | | | | | | 4,374 | | |
Casablanca US Holdings Inc.
|
| | | | | Consumer Services | | |
L+475
|
| | | | 1.0% | | | |
3/29/24
|
| | | | 2,463 | | | | | | 2,406 | | | | | | 2,468 | | |
CSafe Acquisition Co., Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
11/1/21
|
| | | | 148 | | | | | | 148 | | | | | | 147 | | |
CSafe Acquisition Co., Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
11/1/21
|
| | | | 113 | | | | | | 113 | | | | | | 112 | | |
CSafe Acquisition Co., Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 2,081 | | | | | | 2,081 | | | | | | 2,062 | | |
CSafe Acquisition Co., Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
10/31/23
|
| | | | 1,117 | | | | | | 1,117 | | | | | | 1,107 | | |
Dade Paper & Bag, LLC
|
| | | | | Capital Goods | | |
L+750
|
| | | | 1.0% | | | |
6/10/24
|
| | | | 3,344 | | | | | | 3,344 | | | | | | 3,461 | | |
Empire Today, LLC
|
| | | | | Retailing | | |
L+800
|
| | | | 1.0% | | | |
11/17/22
|
| | | | 2,970 | | | | | | 2,970 | | | | | | 3,000 | | |
FullBeauty Brands Holdings Corp.
|
| | | | | Consumer Durables & Apparel | | |
L+800
|
| | | | 1.0% | | | |
10/14/20
|
| | | | 7,000 | | | | | | 7,000 | | | | | | 6,912 | | |
Hudson Technologies Co.
|
| |
(g)
|
| |
Commercial & Professional Services
|
| |
L+725
|
| | | | 1.0% | | | |
10/10/23
|
| | | | 5,707 | | | | | | 5,707 | | | | | | 5,785 | | |
Hudson Technologies Co.
|
| |
(e)(g)
|
| |
Commercial & Professional Services
|
| |
L+725
|
| | | | 1.0% | | | |
10/10/23
|
| | | | 1,359 | | | | | | 1,359 | | | | | | 1,377 | | |
Icynene U.S. Acquisition Corp.
|
| | | | | Materials | | |
L+700
|
| | | | 1.0% | | | |
11/30/24
|
| | | | 7,000 | | | | | | 7,000 | | | | | | 7,001 | | |
JSS Holdings, Inc.
|
| | | | | Capital Goods | | |
L+800, 0.0% PIK (2.5% Max PIK)
|
| | | | 1.0% | | | |
3/31/23
|
| | | | 9,961 | | | | | | 9,871 | | | | | | 10,115 | | |
JSS Holdings, Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+800, 0.0% PIK (2.5% Max PIK)
|
| | | | 1.0% | | | |
3/31/23
|
| | | | 1,818 | | | | | | 1,818 | | | | | | 1,846 | | |
Kodiak BP, LLC
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
12/1/24
|
| | | | 10,515 | | | | | | 10,515 | | | | | | 10,541 | | |
Kodiak BP, LLC
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
12/1/24
|
| | | | 3,030 | | | | | | 3,030 | | | | | | 3,038 | | |
North Haven Cadence Buyer, Inc.
|
| |
(e)
|
| | Consumer Services | | |
L+500
|
| | | | 1.0% | | | |
9/2/21
|
| | | | 188 | | | | | | 187 | | | | | | 188 | | |
North Haven Cadence Buyer, Inc.
|
| | | | | Consumer Services | | |
L+810
|
| | | | 1.0% | | | |
9/2/22
|
| | | | 5,537 | | | | | | 5,537 | | | | | | 5,641 | | |
North Haven Cadence Buyer, Inc.
|
| |
(e)
|
| | Consumer Services | | |
L+750
|
| | | | 1.0% | | | |
9/2/22
|
| | | | 708 | | | | | | 708 | | | | | | 722 | | |
Power Distribution, Inc.
|
| | | | | Capital Goods | | |
L+725
|
| | | | 1.3% | | | |
1/25/23
|
| | | | 4,988 | | | | | | 4,988 | | | | | | 5,063 | | |
Propulsion Acquisition, LLC
|
| | | | |
Commercial & Professional Services
|
| |
L+600
|
| | | | 1.0% | | | |
7/13/21
|
| | | | 8,366 | | | | | | 8,257 | | | | | | 8,283 | | |
Safariland, LLC
|
| | | | | Capital Goods | | |
L+768
|
| | | | 1.1% | | | |
11/18/23
|
| | | | 4,766 | | | | | | 4,766 | | | | | | 4,831 | | |
Safariland, LLC
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.1% | | | |
11/18/23
|
| | | | 1,285 | | | | | | 1,285 | | | | | | 1,303 | | |
Sequel Youth and Family Services, LLC
|
| | | | |
Health Care Equipment & Services
|
| |
L+778
|
| | | | 1.0% | | | |
9/1/22
|
| | | | 8,235 | | | | | | 8,235 | | | | | | 8,311 | | |
Sequel Youth and Family Services, LLC
|
| |
(e)
|
| |
Health Care Equipment & Services
|
| |
L+700
|
| | | | 1.0% | | | |
9/1/22
|
| | | | 412 | | | | | | 412 | | | | | | 416 | | |
SSC (Lux) Limited S.à r.l.
|
| |
(g)
|
| |
Health Care Equipment & Services
|
| |
L+750
|
| | | | 1.0% | | | |
9/10/24
|
| | | | 4,545 | | | | | | 4,545 | | | | | | 4,636 | | |
Strike, LLC
|
| | | | | Energy | | |
L+800
|
| | | | 1.0% | | | |
5/30/19
|
| | | | 1,866 | | | | | | 1,842 | | | | | | 1,875 | | |
Trace3, LLC
|
| | | | | Software & Services | | |
L+775
|
| | | | 1.0% | | | |
6/6/23
|
| | | | 2,488 | | | | | | 2,487 | | | | | | 2,547 | | |
USI Senior Holdings, Inc.
|
| | | | | Capital Goods | | |
L+779
|
| | | | 1.0% | | | |
1/5/22
|
| | | | 5,144 | | | | | | 5,144 | | | | | | 5,173 | | |
USI Senior Holdings, Inc.
|
| |
(e)
|
| | Capital Goods | | |
L+725
|
| | | | 1.0% | | | |
1/5/22
|
| | | | 1,047 | | | | | | 1,047 | | | | | | 1,053 | | |
See notes to unaudited consolidated financial statements.
9
FS Investment Corporation IV
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
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) |
| ||||||||||||
Westbridge Technologies, Inc.
|
| | | | | Software & Services | | |
L+850
|
| | | | 1.0% | | | |
4/28/23
|
| | | $ | 2,963 | | | | | $ | 2,908 | | | | | $ | 2,940 | | |
York Risk Services Holding Corp.
|
| | | | | Insurance | | |
L+375
|
| | | | 1.0% | | | |
10/1/21
|
| | | | 990 | | | | | | 983 | | | | | | 971 | | |
Total Senior Secured Loans—First Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 147,136 | | | | | | 148,813 | | |
Unfunded Loan Commitments
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | (11,076) | | | | | | (11,076) | | |
Net Senior Secured Loans—First Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 136,060 | | | | | | 137,737 | | |
Senior Secured Loans—Second Lien—10.1% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Casablanca US Holdings Inc.
|
| | | | | Consumer Services | | |
L+900
|
| | | | 1.0% | | | |
3/31/25
|
| | | | 8,337 | | | | | | 8,062 | | | | | | 8,535 | | |
Chisholm Oil and Gas Operating, LLC
|
| | | | | Energy | | |
L+800
|
| | | | 1.0% | | | |
3/21/24
|
| | | | 6,000 | | | | | | 6,000 | | | | | | 5,999 | | |
JW Aluminum Co.
|
| | | | | Materials | | |
L+850
|
| | | | 0.8% | | | |
11/17/20
|
| | | | 779 | | | | | | 779 | | | | | | 791 | | |
LBM Borrower, LLC
|
| | | | | Capital Goods | | |
L+925
|
| | | | 1.0% | | | |
8/20/23
|
| | | | 2,427 | | | | | | 2,379 | | | | | | 2,440 | | |
LTI Holdings, Inc.
|
| | | | | Materials | | |
L+875
|
| | | | 1.0% | | | |
5/16/25
|
| | | | 3,000 | | | | | | 2,944 | | | | | | 3,052 | | |
TKC Holdings, Inc.
|
| | | | | Retailing | | |
L+800
|
| | | | 1.0% | | | |
2/1/24
|
| | | | 8,500 | | | | | | 8,487 | | | | | | 8,564 | | |
TravelCLICK, Inc.
|
| | | | | Software & Services | | |
L+775
|
| | | | 1.0% | | | |
11/6/21
|
| | | | 6,009 | | | | | | 6,026 | | | | | | 6,039 | | |
Total Senior Secured Loans—Second Lien
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 34,677 | | | | | | 35,420 | | |
Senior Secured Bonds—5.7% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
AssuredPartners, Inc.
|
| |
(f)
|
| | Insurance | | |
7.0%
|
| | | | | | | |
8/15/25
|
| | | | 5,682 | | | | | | 5,682 | | | | | | 5,691 | | |
Avantor, Inc.
|
| |
(f)
|
| | Materials | | |
6.0%
|
| | | | | | | |
10/1/24
|
| | | | 1,282 | | | | | | 1,282 | | | | | | 1,284 | | |
Black Swan Energy Ltd.
|
| |
(g)
|
| | Energy | | |
9.0%
|
| | | | | | | |
1/20/24
|
| | | | 1,334 | | | | | | 1,334 | | | | | | 1,344 | | |
CSVC Acquisition Corp.
|
| |
(f)
|
| | Diversified Financials | | |
7.8%
|
| | | | | | | |
6/15/25
|
| | | | 9,183 | | | | | | 9,183 | | | | | | 8,839 | | |
Velvet Energy Ltd.
|
| |
(g)
|
| | Energy | | |
9.0%
|
| | | | | | | |
10/5/23
|
| | | | 3,000 | | | | | | 3,000 | | | | | | 3,038 | | |
Total Senior Secured Bonds
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,481 | | | | | | 20,196 | | |
Subordinated Debt—20.3% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ascent Resources Utica Holdings, LLC
|
| |
(f)
|
| | Energy | | |
10.0%
|
| | | | | | | |
4/1/22
|
| | | | 10,000 | | | | | | 10,000 | | | | | | 10,806 | | |
Avantor, Inc.
|
| |
(f)
|
| | Materials | | |
9.0%
|
| | | | | | | |
10/1/25
|
| | | | 12,500 | | | | | | 12,502 | | | | | | 12,430 | | |
CEC Entertainment, Inc.
|
| |
(f)
|
| | Consumer Services | | |
8.0%
|
| | | | | | | |
2/15/22
|
| | | | 7,297 | | | | | | 6,911 | | | | | | 6,905 | | |
Coveris Holdings S.A.
|
| |
(f)(g)
|
| | Materials | | |
7.9%
|
| | | | | | | |
11/1/19
|
| | | | 14,529 | | | | | | 14,448 | | | | | | 14,502 | | |
Covey Park Energy LLC
|
| |
(f)
|
| | Energy | | |
7.5%
|
| | | | | | | |
5/15/25
|
| | | | 1,667 | | | | | | 1,667 | | | | | | 1,741 | | |
Exterran Energy Solutions, L.P.
|
| |
(f)(g)
|
| | Capital Goods | | |
8.1%
|
| | | | | | | |
5/1/25
|
| | | | 5,143 | | | | | | 5,143 | | | | | | 5,554 | | |
Great Lakes Dredge & Dock Corp.
|
| |
(f)(g)
|
| | Capital Goods | | |
8.0%
|
| | | | | | | |
5/15/22
|
| | | | 7,000 | | | | | | 7,000 | | | | | | 7,353 | | |
P.F. Chang’s China Bistro, Inc.
|
| |
(f)
|
| | Consumer Services | | |
10.3%
|
| | | | | | | |
6/30/20
|
| | | | 4,000 | | | | | | 3,659 | | | | | | 3,666 | | |
S1 Blocker Buyer Inc.
|
| | | | |
Commercial & Professional Services
|
| |
10.0% PIK (10.0% Max PIK)
|
| | | | | | | |
10/31/22
|
| | | | 10 | | | | | | 10 | | | | | | 11 | | |
York Risk Services Holding Corp.
|
| |
(f)
|
| | Insurance | | |
8.5%
|
| | | | | | | |
10/1/22
|
| | | | 8,695 | | | | | | 8,245 | | | | | | 8,564 | | |
Total Subordinated Debt
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | 69,585 | | | | | | 71,532 | | |
|
See notes to unaudited consolidated financial statements.
10
FS Investment Corporation IV
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
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—0.7% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
ASG Everglades Holdings, Inc., Warrants, 6/27/2022
|
| |
(h)
|
| | Software & Services | | | | | | | | | | | | | | 12,081 | | | | | $ | 344 | | | | | $ | 331 | | |
Chisholm Oil and Gas, LLC, Series A Units
|
| |
(h)(i)
|
| | Energy | | | | | | | | | | | | | | 70,947 | | | | | | 71 | | | | | | 71 | | |
CSF Group Holdings, Inc., Common Equity
|
| |
(h)
|
| | Capital Goods | | | | | | | | | | | | | | 17,400 | | | | | | 17 | | | | | | 12 | | |
Escape Velocity Holdings, Inc., Common Equity
|
| |
(h)
|
| | Software & Services | | | | | | | | | | | | | | 1,545 | | | | | | 15 | | | | | | 36 | | |
H.I.G. Empire Holdco, Inc., Common Equity
|
| |
(h)
|
| | Retailing | | | | | | | | | | | | | | 14 | | | | | | 41 | | | | | | 41 | | |
JSS Holdco, LLC, Net Profits Interest
|
| |
(h)
|
| | Capital Goods | | | | | | | | | | | | | | — | | | | | | — | | | | | | 69 | | |
JW Aluminum Co., Common Equity
|
| |
(h)
|
| | Materials | | | | | | | | | | | | | | 18 | | | | | | — | | | | | | — | | |
JW Aluminum Co., Preferred Equity
|
| |
(h)
|
| | Materials | | | | | | | | | | | | | | 83 | | | | | | 295 | | | | | | 827 | | |
North Haven Cadence TopCo, LLC, Common Equity
|
| |
(h)
|
| | Consumer Services | | | | | | | | | | | | | | 208,333 | | | | | | 208 | | | | | | 323 | | |
PDI Parent LLC, Common Equity
|
| |
(h)
|
| | Capital Goods | | | | | | | | | | | | | | 230,769 | | | | | | 231 | | | | | | 242 | | |
S1 Blocker Buyer Inc., Common Equity
|
| | | | |
Commercial & Professional Services
|
| | | | | | | | | | | | | 4 | | | | | | 40 | | | | | | 61 | | |
SSC Holdco Limited, Common Equity
|
| |
(g)(h)
|
| |
Health Care Equipment & Services
|
| | | | | | | | | | | | | 11,364 | | | | | | 227 | | | | | | 272 | | |
Total Equity/Other
|
| | | | | | | | | | | | | | | | | | | | | | | | | 1,489 | | | | | | 2,285 | | |
TOTAL INVESTMENTS—76.0%
|
| | | | | | | | | | | | | | | | | | | | | | | | $ | 262,292 | | | | | | 267,170 | | |
OTHER ASSETS IN EXCESS OF LIABILITIES—24.0%
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 84,367 | | |
NET ASSETS—100.0%
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 351,537 | | |
|
Total Return Swap
|
| | | | | | | | | | | | | | | | |
Notional
Amount |
| | | | |
Unrealized
Appreciation |
| ||||||
Citibank TRS Facility (Note 8)
|
| |
(g)
|
| | | | | | | | | | | | | | | $ | 151,866 | | | | | | | | $ | 868 | | |
|
(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%. PIK means paid-in-kind.
(c)
Denominated in U.S. dollars unless otherwise noted.
(d)
|
Investments classified as Level 3 in the Company’s fair value hierarchy whereby fair value was determined by the Company’s board of directors, unless otherwise noted (see Note 7). |
(e)
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.
(f)
Security or portion thereof held within Broomall Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc., or BNP. Securities held within Broomall 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 BNP (see Note 8).
(g)
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, 88.1% of the Company’s total assets represented qualifying assets. In addition, as described in Note 8, 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, 88.6% of the Company’s total assets represented qualifying assets as of December 31, 2017.
(h)
Security is non-income producing.
(i)
Security held within FSIC IV Investments, LLC, a wholly-owned subsidiary of the Company.
See notes to unaudited consolidated financial statements.
11
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation IV, or the Company, was incorporated under the general corporation laws of the State of Maryland on February 25, 2015 and formally commenced investment operations on January 6, 2016. 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 June 30, 2018, the Company had two wholly-owned subsidiaries through which it has entered into financing arrangements, one wholly-owned subsidiary through which it holds an interest in a certain non-controlled and non-affiliated portfolio company and one wholly-owned subsidiary through which it may in the future enter into a financing arrangement. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of June 30, 2018. All significant intercompany transactions have been eliminated in consolidation.
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 IV Advisor, LLC, or FSIC IV 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 investment advisory and administrative services agreement, dated September 21, 2015, or the FSIC IV Advisor investment advisory and administrative services agreement, by and between the Company and FSIC IV Advisor.
12
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2017 included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the 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 consolidated 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 FS/KKR Advisor 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 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.
The Company “looks through” its total return swap, or TRS, between its wholly-owned financing subsidiary Cheltenham Funding LLC, or Cheltenham Funding, and Citibank, N.A., or Citibank, 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 FS/KKR Advisor pursuant to the FS/KKR Advisor 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 FS/KKR Advisor with respect to realized gains. See Note 8 for additional information regarding the Company’s TRS.
13
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
The terms of the incentive fee on capital gains were substantially similar under the FSIC IV Advisor investment advisory and administrative services agreement.
Subordinated Income Incentive Fee: Pursuant to the terms of the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the FS/KKR Advisor investment advisory and administrative services agreement 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 subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.75% per quarter (1.875% under the FSIC IV Advisor investment advisory and administrative services agreement), or an annualized hurdle rate of 7.0% (7.5% under the FSIC IV Advisor investment advisory and administrative services agreement). For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of the Company’s common stock (including proceeds from its distribution reinvestment plan) reduced for amounts paid for share repurchases pursuant to the Company’s share repurchase program. 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% (1.875% under the FSIC IV Advisor investment advisory and administrative services agreement). 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 (2.34375%, or 9.375% annually under the FSIC IV Advisor investment advisory and administrative services agreement), of the Company’s adjusted capital. Thereafter, FS/KKR Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.
Offering Costs: Offering costs primarily included, among other things, marketing expenses, certain government and regulatory affairs activities, and printing, legal and due diligence fees and other costs pertaining to the Company’s continuous public offering of shares of its common stock, including the preparation of the Company’s registration statement on Form N-2 and salaries and direct expenses of FSIC IV Advisor’s personnel, employees of its affiliates and others while engaged in such activities. The Company deferred and amortized such costs as an expense over twelve months as the Company raised proceeds in its continuous public offering. During the three and six months ended June 30, 2017, the Company expensed $471 and $852 of offering costs as it raised proceeds in its continuous public offering, which commenced on January 6, 2016. During the period from February 25, 2015 (Inception) to December 31, 2017, the Company incurred offering costs of $9,358 which were paid on the Company’s behalf by FS Investments (see Note 4). In November 2017, the Company closed its continuous public offering to new investors.
Under the terms of the FSIC IV Advisor investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC IV Advisor was entitled to receive up to 0.75% of gross proceeds raised in the Company’s continuous public offering until all organization and offering costs funded by FSIC IV Advisor or its affiliates (including FS Investments) have been recovered.
Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three and six months ended June 30, 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 and six months ended June 30, 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
14
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
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 receives such amounts.
Effective January 1, 2018, the Company adopted ACS 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, the Company 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 six months ended June 30, 2018, the Company recognized $54 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on its consolidated statements 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 six months ended June 30, 2018.
15
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Company’s common stock during the six months ended June 30, 2018 and 2017:
| | |
Six Months Ended June 30,
|
| |||||||||||||||||||||
| | |
2018
|
| |
2017
|
| ||||||||||||||||||
| | |
Shares
|
| |
Amount
|
| |
Shares
|
| |
Amount
|
| ||||||||||||
Gross Proceeds from Offering
|
| | | | — | | | | | $ | — | | | | | | 9,868,469 | | | | | $ | 113,601 | | |
Reinvestment of Distributions
|
| | | | 576,472 | | | | | | 6,431 | | | | | | 420,486 | | | | | | 4,670 | | |
Total Gross Proceeds
|
| | | | 576,472 | | | | | | 6,431 | | | | | | 10,288,955 | | | | | | 118,271 | | |
Upfront Selling Commissions and Dealer Manager Fees(1)
|
| | | | — | | | | | | — | | | | | | — | | | | | | (4,220) | | |
Net Proceeds to Company
|
| | | | 576,472 | | | | | | 6,431 | | | | | | 10,288,955 | | | | | | 114,051 | | |
Share Repurchase Program(2)
|
| | | | (399,830) | | | | | | (4,460) | | | | | | (66,790) | | | | | | (738) | | |
Net Proceeds from Share Transactions
|
| | | | 176,642 | | | | | $ | 1,971 | | | | | | 10,222,165 | | | | | $ | 113,313 | | |
(1)
Effective January 25, 2017, in connection with certain changes to the Company’s plan of distribution, FS Investment Solutions, LLC (formerly FS2 Capital Partners, LLC), or FS Investment Solutions, the dealer manager for the Company’s continuous public offering and an affiliate of the Company, began receiving upfront selling commissions of up to 3.00% and dealer manager fees of up to 1.25% of the gross proceeds received on Class T shares sold in the offering. All of the upfront selling commissions and all or a portion of the dealer manager fees were reallowed to selected broker-dealers and financial representatives. Prior to January 25, 2017, Class T shares were subject to upfront selling commissions of up to 2.20% of gross proceeds and were not subject to dealer manager fees.
(2)
Share repurchase program amounts are presented including any applicable contingent deferred sales charge. Beginning with the quarterly tender offer conducted during the three months ended March 31, 2017, Class T shares tendered pursuant to the Company’s share repurchase program were no longer subject to a contingent deferred sales charge. See below for a discussion of the Company’s share repurchase program and see Note 4 for the amount of the contingent deferred sales charge earned by FS Investment Solutions.
During the period from July 1, 2018 to August 10, 2018, the Company issued 94,092 shares of Class T common stock pursuant to the DRP for gross proceeds of $1,049 at an average price per share of $11.15. For additional information regarding the terms of the DRP, see Note 5.
The Company has submitted to the SEC an application for an exemptive order to permit it to offer multiple classes of shares of common stock. On July 31, 2018, the Company filed a new registration statement to offer multiple classes of shares of common stock, with each class having a different upfront sales load and fee and expense structure. The Company intends to commence this offering upon receipt of an exemptive order from the SEC, although there is no assurance the Company will receive such relief.
Share Repurchase Program
The Company intends to continue to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:
•
the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);
•
the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);
•
the Company’s investment plans and working capital requirements;
16
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
•
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 its common stock under the DRP and (ii) 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. On May 9, 2017, the Company’s board of directors 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 10.0% 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) 10.0% 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 net 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 repurchase 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 5 for additional information regarding the DRP.
Prior to January 25, 2017, if a stockholder tendered his or her shares for repurchase by the Company, such shares were subject to a contingent deferred sales charge of 3.90% which was calculated based upon the lesser of the estimated value of Class T shares as of the date of repurchase and the public offering price at the time such shares were purchased. The contingent deferred sales charge was not payable with respect to shares issued under the Company’s distribution reinvestment plan. Beginning with the tender offer conducted in the calendar quarter ended March 31, 2017, shares were no longer subject to a contingent deferred sales charge.
17
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(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 six months ended June 30, 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 |
| |
Aggregate
Consideration for Repurchased Shares |
| |||||||||||||||
Fiscal 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016
|
| |
January 4, 2017
|
| | | | 24,998 | | | | | | 100% | | | | | | 0.17% | | | | | $ | 10.9536 | | | | | $ | 274 | | |
March 31, 2017
|
| |
April 5, 2017
|
| | | | 41,792 | | | | | | 100% | | | | | | 0.22% | | | | | $ | 11.1070 | | | | | | 464 | | |
Total
|
| | | | | | | 66,790 | | | | | | | | | | | | | | | | | | | | | | | $ | 738 | | |
Fiscal 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017
|
| |
January 10, 2018
|
| | | | 113,036 | | | | | | 100% | | | | | | 0.36% | | | | | $ | 11.1549 | | | | | $ | 1,261 | | |
March 31, 2018
|
| |
April 2, 2018
|
| | | | 286,794 | | | | | | 100% | | | | | | 0.90% | | | | | $ | 11.1549 | | | | | | 3,199 | | |
Total
|
| | | | | | | 399,830 | | | | | | | | | | | | | | | | | | | | | | | $ | 4,460 | | |
|
On July 2, 2018, the Company repurchased 315,582 shares of common stock (representing 100% of the shares of common stock tendered for repurchase and 0.99% of the shares outstanding as of such date) at $11.1549 per share for aggregate consideration totaling $3,520.
Note 4. Related Party Transactions
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 (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. The 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. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that FS/KKR Advisor may be entitled to under the FS/KKR Advisor investment advisory and administrative services agreement.
Pursuant to the FSIC IV Advisor investment advisory and administrative services agreement, FSIC IV Advisor was entitled to an annual base management fee equal to 2.0% of the average weekly value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. Effective February 1, 2017, FSIC IV Advisor contractually agreed to permanently waive 0.25% of the base management fee to which it is entitled under the FSIC IV Advisor investment advisory and administrative services agreement, so that the fee received equaled 1.75% of the Company’s average weekly gross assets. Pursuant to the investment sub-advisory agreement, GDFM was entitled to receive 50% of all management and incentive fees payable to FSIC IV Advisor under the FSIC IV Advisor investment advisory and administrative services agreement with respect to each year.
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
18
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
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. The administrative services provisions of the FSIC IV Advisor investment advisory and administrative services agreement were substantially similar to the administrative services provisions of the FS/KKR Advisor investment advisory and administrative services agreement.
Under the FSIC IV Advisor investment advisory and administrative services agreement, the Company, either directly or through reimbursement to FSIC IV Advisor or its affiliates, was responsible for its organization and offering costs in an amount up to 0.75% of gross proceeds raised in the Company’s continuous public offering. Organization and offering costs primarily included 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 IV Advisor’s personnel, employees of its affiliates and others while engaged in registering and marketing the Company’s common stock, which included 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 the Company’s organization and offering costs. Following this period, the Company paid certain of its organization and offering costs directly and has reimbursed FSIC IV Advisor for offering costs incurred by FSIC IV Advisor on the Company’s behalf, including marketing expenses, salaries and other direct expenses of FSIC IV Advisor’s personnel and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock. On January 6, 2016, the FSIC IV Advisor investment advisory and administrative services agreement became effective upon satisfaction of the minimum offering requirement, and FSIC IV Advisor became entitled to receive up to 0.75% of the
19
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
gross proceeds raised in the Company’s continuous public offering until all organization and offering costs incurred have been recovered. As the Company reimbursed FSIC IV Advisor for such costs, organization costs were charged to expense and offering costs were deferred and amortized to expense over twelve months.
FS Investments funded certain of the Company’s organization and offering costs in the amounts of $0 and $9,675, respectively, for the six months ended June 30, 2018 and the period from February 25, 2015 (Inception) to December 31, 2017. Under the FSIC IV Advisor investment advisory and administrative services agreement, there was no liability on the Company’s part for the organization and offering costs funded by FSIC IV Advisor or its affiliates (including FS Investments) until the Company satisfied the minimum offering requirement on January 6, 2016. Since commencing its continuous public offering and through June 30, 2018, the Company paid total reimbursements of $2,584 to FSIC IV Advisor and its affiliates for organization and offering costs funded by them. Following the closing of the Company’s continuous public offering to new investors in November 2017, no amounts were reimbursable to FS Investments and its affiliates under this arrangement.
The dealer manager for the Company’s continuous public offering was FS Investment Solutions, or the dealer manager agreement, 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 a second amended and restated dealer manager agreement, dated as of January 25, 2017, among the Company, FSIC IV Advisor and FS Investment Solutions, to receive upfront 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 reallowed to selected broker-dealers and financial representatives. The dealer manager reallowed to selected broker dealers and other financial representatives the upfront selling commissions and dealer manager fees, as applicable, it was entitled to receive, unless otherwise noted in the table below. The dealer manager agreement terminated in connection with the closing of the Company’s continuous public offering in November 2017.
Shares of Class T common stock are subject to annual distribution fees of 1.00% of the estimated value of such shares, as determined in accordance with applicable rules of The Financial Industry Regulatory Authority, Inc., or FINRA. The annual distribution fees is paid by the Company to the dealer manager pursuant to a distribution plan adopted by the Company in compliance with Rules 12b-1 and 17d-3 under the 1940 Act, as if those rules applied to the Company. Among other requirements, such plan must be approved annually by a vote of the Company’s board of directors, including the directors who are not “interested persons” as defined in the 1940 Act and have no direct or indirect financial interest in the operation of such plan or in any agreements related to such plan.
Except for Class T shares purchased by the principal of FSIC IV Advisor, members of the Company’s board of directors and other individuals and entities affiliated with FSIC IV Advisor and GDFM, or through investment advisors whose contracts for investment advisory and related services include a fixed or “wrap” fee or other asset-based fee arrangement, annual distribution fees are expected to be reallowed to selected broker-dealers and financial representatives, unless noted in the table below. The annual distribution fees are intended to compensate the dealer manager and its affiliates, selected broker-dealers and financial representatives for services rendered and expenses incurred in connection with the ongoing marketing, sale and distribution of such shares.
The annual distribution fees accrue daily commencing upon the initial sale of shares of common stock in the Company’s continuous public offering until an investor reaches the sales charge cap, as defined below. The accruals as of and for the six months ended June 30, 2018 and 2017 reflect amounts beginning with the initial sale of shares of common stock in the Company’s continuous public offering through June 30, 2018 and 2017, respectively. The annual distribution fees are payable with respect to all shares of Class T
20
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
common stock, other than shares issued under the Company’s distribution reinvestment plan. The annual distribution fees will terminate for all Class T stockholders upon a liquidity event. In addition, the Company will stop paying the annual distribution fees with respect to any outstanding Class T share when the total underwriting compensation from the upfront selling commissions, dealer manager fees and annual distribution fees attributable to any share equals 7.25% of gross offering proceeds, or the sales charge cap. The sales charge cap applicable to certain shares, including shares sold prior to January 25, 2017, will be reduced by the amount of any upfront sales load that is waived for such shares or to otherwise account for any lower upfront sales load paid by an investor with respect to such shares.
The annual distribution fees for all Class T shares currently will terminate upon the earliest of (i) any Class T share purchased after January 25, 2017 reaching the applicable sales charge cap, (ii) the Company’s dealer manager advising the Company that the aggregate underwriting compensation payable from all sources (determined in accordance with applicable FINRA rules) would be in excess of 10% of the gross proceeds of this offering and (iii) a liquidity event. If, in the future, the Company receives exemptive relief to offer multiple share classes and if it offers a class of common stock with no sales load or asset-based service or annual distribution fee, or a No-Load Share Class, upon a Class T share reaching the applicable sales charge cap, such share will be converted into a share of such No-Load Share Class and will no longer be subject to ongoing annual distribution fees.
The following table describes the fees and expenses the Company accrued under the FSIC IV Advisor investment advisory and administrative services agreement and the FS/KKR Advisor investment advisory and administrative services agreement, amounts recouped by FS Investments under the expense reimbursement agreement, as defined below, and fees that FS Investment Solutions received pursuant to the Company’s distribution plan and share repurchase program during the three and six months ended June 30, 2018 and 2017:
Related Party
|
| |
Source
|
| |
Description
|
| |
Three Months Ended
June 30, |
| |
Six Months Ended
June 30, |
| ||||||||||||||||||
|
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||||||||||
FSIC IV Advisor and
FS/KKR Advisor |
| | FSIC IV Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement |
| | Base Management Fees(1) |
| | | $ |
1,415 |
| | | | $ |
1,185 |
| | | | $ |
3,040 |
| | | | $ |
2,123 |
| |
FSIC IV Advisor and
FS/KKR Advisor |
| | FSIC IV Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement |
| | Subordinated Incentive Fee on Income(2) |
| | | $ |
372 |
| | | | |
— |
| | | | $ |
372 |
| | | | |
— |
| |
FSIC IV Advisor and
FS/KKR Advisor |
| | FSIC IV Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement |
| | Capital Gains Incentive Fees(3) |
| | | $ |
(179) |
| | | | $ |
214 |
| | | | $ |
(914) |
| | | | $ |
911 |
| |
21
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Related Party
|
| |
Source
|
| |
Description
|
| |
Three Months Ended
June 30, |
| |
Six Months Ended
June 30, |
| ||||||||||||||||||
|
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||||||||||
FSIC IV Advisor and
FS/KKR Advisor |
| | FSIC IV Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement |
| | Administrative Services Expenses(4) |
| | | $ |
153 |
| | | | $ |
100 |
| | | | $ |
231 |
| | | | $ |
200 |
| |
FSIC IV Advisor and
FS/KKR Advisor |
| | FSIC IV Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement |
| | Offering Costs(5) |
| | | |
— |
| | | | $ |
471 |
| | | | |
— |
| | | | $ |
852 |
| |
FSIC IV Advisor and
FS/KKR Advisor |
| | FS Investments Expense Support and Conditional Reimbursement and FS/KKR Advisor Expense Reimbursement Agreement |
| | Expense Recoupment(6) |
| | | |
— |
| | | | |
— |
| | | | |
— |
| | | | $ |
666 |
| |
FS Investment Solutions
|
| | Distribution Plan | | | Distribution Fees(7) | | | | $ | 39 | | | | | $ | 27 | | | | | $ | 79 | | | | | $ | 42 | | |
FS Investment Solutions
|
| | Share Repurchase Program | | | Contingent Deferred Sales Charges(8) | | | | | — | | | | | | — | | | | | | — | | | | | $ | 10 | | |
(1)
FSIC IV Advisor contractually agreed, effective February 1, 2017, to permanently waive 0.25% of its base management fee to which it is entitled under the FSIC IV 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 and six months ended June 30, 2018 are net of waivers of $21 and $253, respectively, and the amounts shown for the three and six months ended June 30, 2017 are net of waivers of $169 and $258, respectively. During the six months ended June 30, 2018 and 2017, $3,221 and $1,754, respectively, in base management fees were paid to FSIC IV Advisor. As of June 30, 2018, $1,415 in base management fees were payable to FSIC IV Advisor and FS/KKR Advisor.
(2)
During the six months ended June 30, 2018 and 2017, no amounts of subordinated incentive fees on income were paid to FSIC IV Advisor or FS/KKR Advisor. As of June 30, 2018, a subordinated incentive fee on income of $372 was payable to FS/KKR Advisor.
(3)
During the six months ended June 30, 2018, the Company reversed $914 of capital gains incentive fees previously accrued based on the performance of its portfolio. During the six months ended June 30, 2017, the Company accrued capital gains incentive fees of $911 based on the performance of its portfolio. As of June 30, 2018, the Company had accrued $828 in capital gains incentive fees, all of which was based on unrealized gains. As of December 31, 2017, the Company had accrued $1,981 in capital gains incentive fees, of which $1,742 was based on unrealized gains and $239 was based on realized gains. No capital gains incentive fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. The Company paid FSIC IV Advisor $239 in capital gains incentive fees during the six months ended June 30, 2018. See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees.
(4)
During the six months ended June 30, 2018 and 2017, $201 and $179, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC IV Advisor and the remainder related to other reimbursable expenses. The Company paid $172 and $258 in administrative services expenses to FSIC IV Advisor and FS/KKR Advisor during the six months ended June 30, 2018 and 2017, respectively.
(5)
During the six months ended June 30, 2018 and 2017, the Company expensed offering costs of $0 and $852, respectively, all of which related to reimbursements to FSIC IV Advisor for offering costs incurred on the Company’s behalf, including marketing expenses, salaries and other direct expenses of FSIC IV Advisor’s personnel and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock.
22
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
(6)
During the six months ended June 30, 2017, the Company accrued $666 for expense recoupments payable to FSIC IV Advisor under the expense reimbursement agreement (see “—Expense Reimbursement” below). As of June 30, 2018, the Company did not have any expense recoupments payable to FSIC IV Advisor and FS/KKR Advisor.
(7)
Represents the distribution fees retained by FS Investment Solutions and not re-allowed to selected broker-dealers or financial representatives.
(8)
Represents the total amount of contingent deferred sales charges paid to FS Investment Solutions by stockholders who tendered shares pursuant to the Company’s share repurchase program. Beginning with the quarterly tender offer conducted during the three months ended March 31, 2017, Class T shares tendered pursuant to the Company’s share repurchase program were no longer subject to a contingent deferred sales charge.
Potential Conflicts of Interest
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 the Company does, 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 III, 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 the Company’s best interests or in the best interest of the Company’s stockholders. The Company’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For additional information regarding potential conflicts of interest, see the Company’s annual report on Form 10-K for the year ended December 31, 2017.
Co-Investment Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term.
In an order dated June 4, 2013, 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 IV Advisor, including FS Energy and Power Fund, FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and any future BDCs that are advised by FSIC IV Advisor or its affiliated investment advisers. 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 an expense support and conditional reimbursement agreement, dated as of April 9, 2018, by and between FS/KKR Advisor and the Company, or the FS/KKR Advisor expense reimbursement agreement, FS/KKR Advisor 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
23
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
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/KKR Advisor 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 FS/KKR Advisor expense reimbursement agreement, FS/KKR Advisor 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 were not included in net investment company taxable income or net capital gains) in each quarter.
Pursuant to the FS/KKR Advisor expense reimbursement agreement, the Company has a conditional obligation to reimburse FS/KKR Advisor for any amounts funded by FS/KKR Advisor under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which FS/KKR Advisor 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 cumulative distributions paid by the Company to its stockholders during such quarter; provided, however, that (i) the Company will only reimburse FS/KKR Advisor for expense support payments made by FS/KKR Advisor 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/KKR Advisor was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from FS/KKR Advisor made during the same fiscal year); and (ii) the Company will not reimburse FS/KKR Advisor for expense support payments made by FS/KKR Advisor 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 declared by the Company at the time FS/KKR Advisor 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/KKR Advisor under the FS/KKR Advisor expense reimbursement agreement. “Other operating expenses” means the Company’s total “operating expenses” (as defined below), excluding base management fees, incentive fees, annual distribution 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 FS/KKR Advisor expense reimbursement agreement replaced an amended and restated expense support and conditional reimbursement agreement with FS Investments, or the FS Investments expense reimbursement agreement. The FS Investments expense reimbursement agreement had substantially similar terms to the FS/KKR Advisor expense reimbursement agreement.
24
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
During the six months ended June 30, 2018 and 2017, the Company did not accrue any amounts for expense reimbursements that FS Investments or FS/KKR Advisor had agreed to pay and the Company did not have any reimbursements due from FS Investments or FS/KKR Advisor.
As discussed above, under the FS Investments expense reimbursement agreement and the FS/KKR Advisor expense reimbursement agreement, amounts reimbursed to the Company by FS Investments or FS/KKR Advisor, respectively, may become subject to repayment by the Company in the future. During the six months ended June 30, 2018, no such repayments were made by the Company. During the six months ended June 30, 2017, the Company repaid $666 of expense recoupments to FS Investments under the FS Investments expense reimbursement agreement. As of June 30, 2018, there were no unreimbursed expense support payments subject to future reimbursement by the Company.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company declared and paid to stockholders on its common stock during the six months ended June 30, 2018 and 2017:
| | |
Distribution(1)
|
| |||||||||
For the Three Months Ended
|
| |
Per Share
|
| |
Amount
|
| ||||||
Fiscal 2017 | | | | | | | | | | | | | |
March 31, 2017(2)
|
| | | $ | 0.18770 | | | | | $ | 2,917 | | |
June 30, 2017(2)
|
| | | | 0.20171 | | | | | | 4,712 | | |
Total
|
| | | $ | 0.38941 | | | | | $ | 7,629 | | |
Fiscal 2018 | | | | | | | | | | | | | |
March 31, 2018
|
| | | $ | 0.17452 | | | | | $ | 5,247 | | |
June 30, 2018
|
| | | | 0.17545 | | | | | $ | 5,562 | | |
Total
|
| | | $ | 0.34997 | | | | | $ | 10,809 | | |
(1)
Distribution amounts and per share amounts shown are net of annual distribution fees, which began accruing on February 1, 2017, and reflect the special cash distributions described in footnote (2) below. See Note 4 for a discussion regarding annual distribution fees.
(2)
On a monthly basis from February 2017 through June 2017, the Company paid special cash distributions in the weekly amount of approximately $0.002 per share, to stockholders of record as of the weekly record dates previously determined by the Company’s board of directors for that period. The Company paid a total of approximately $884 in special cash distributions to stockholders. The Company’s board of directors ratified and approved such monthly special cash distribution payments on August 10, 2017.
The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On May 2, 2018 and August 1, 2018, the Company’s board of directors declared regular monthly cash distributions for July 2018 through September 2018 and October 2018 through December 2018, respectively, each in the gross amount of $0.067258 per share. The gross amount declared includes the portion of the annual distribution fee amount, which is an expense of the Company and not paid to stockholders. These distributions, less the annual distribution fee amount, 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.
25
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
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 prior DRP, cash distributions to participating stockholders were reinvested in additional shares of the Company’s common stock at a purchase price equal to the net 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, 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 the Company’s common stock pursuant to its DRP, 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 six months ended June 30, 2018 and 2017 was funded through the reimbursement of operating expenses by FS Investments or FS/KKR Advisor.
The following table reflects the sources of the cash distributions paid to stockholders on a tax basis that the Company paid on its common stock during the six months ended June 30, 2018 and 2017:
| | |
Six Months Ended June 30,
|
| |||||||||||||||||||||
| | |
2018
|
| |
2017
|
| ||||||||||||||||||
Source of Distribution
|
| |
Distribution
Amount |
| |
Percentage
|
| |
Distribution
Amount |
| |
Percentage
|
| ||||||||||||
Offering proceeds
|
| | | $ | — | | | | | | — | | | | | $ | — | | | | | | — | | |
Borrowings
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Net investment income(1)
|
| | | | 10,809 | | | | | | 100% | | | | | | 5,597 | | | | | | 73% | | |
Short-term capital gains proceeds from the sale of assets
|
| | | | — | | | | | | — | | | | | | 2,032 | | | | | | 27% | | |
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
|
| | | $ | 10,809 | | | | | | 100% | | | | | $ | 7,629 | | | | | | 100% | | |
26
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
(1)
During the six months ended June 30, 2018 and 2017, 94.3% and 97.9%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.5% and 1.8%, respectively, was attributable to non-cash accretion of discount and 4.2% and 0.3%, respectively, was attributed to paid-in-kind, or PIK, interest.
The Company’s net investment income on a tax basis for the six months ended June 30, 2018 and 2017 was $9,544 and $6,871, respectively. As of June 30, 2018 and December 31, 2017, the Company had $7,821 and $6,277, respectively, of undistributed net investment income and accumulated undistributed net realized gains on a tax basis.
The difference between the Company’s GAAP-basis net investment income (loss) and its tax-basis net investment income is primarily due to the reclassification of unamortized original issue discount, certain amendment fees and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company and the inclusion of a portion of the periodic net settlement payments due on its TRS in tax-basis net investment income.
The following table sets forth a reconciliation between GAAP-basis net investment income (loss) and tax-basis net investment income during the six months ended June 30, 2018 and 2017:
| | |
Six Months Ended
June 30, |
| |||||||||
| | |
2018
|
| |
2017
|
| ||||||
GAAP-basis net investment income (loss)
|
| | | $ | 6,920 | | | | | $ | 571 | | |
Reversal of incentive fee accrual on unrealized gains
|
| | | | (914) | | | | | | 802 | | |
Reclassification of unamortized original issue discount, amendment fees and prepayment fees
|
| | | | (143) | | | | | | (186) | | |
Tax-basis net investment income portion of total return swap payments
|
| | | | 2,891 | | | | | | 3,634 | | |
Accretion of discount on total return swap
|
| | | | 361 | | | | | | 815 | | |
Other miscellaneous differences
|
| | | | 429 | | | | | | 1,235 | | |
Tax-basis net investment income
|
| | | $ | 9,544 | | | | | $ | 6,871 | | |
|
The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
As of June 30, 2018 and December 31, 2017, the components of accumulated earnings on a tax basis were as follows:
| | |
June 30, 2018
(Unaudited) |
| |
December 31, 2017
|
| ||||||
Distributable ordinary income (net investment income and short-term capital gains)
|
| | | $ | 6,788 | | | | | $ | 5,882 | | |
Distributable capital gains (accumulated capital losses)
|
| | | | 1,033 | | | | | | 395 | | |
Other temporary differences
|
| | | | (1,765) | | | | | | (2,318) | | |
Net unrealized appreciation (depreciation) on investments and total return swap(1)
|
| | | | (2,164) | | | | | | 4,682 | | |
Total
|
| | | $ | 3,892 | | | | | $ | 8,641 | | |
|
27
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
(1)
As of June 30, 2018 and December 31, 2017, the gross unrealized appreciation on the Company’s investments and TRS was $918 and $5,256, respectively, and the gross unrealized depreciation on the Company’s investments was $3,082 and $574, respectively.
The aggregate cost of the Company’s investments, including the accretion of discount on the TRS, for U.S. federal income tax purposes totaled $262,470 and $263,356 as of June 30, 2018 and December 31, 2017, respectively. The aggregate net unrealized appreciation (depreciation) on investments on a tax basis, including the TRS, was $(2,164) and $4,682 as of June 30, 2018 and December 31, 2017, respectively.
Note 6. Investment Portfolio
The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of June 30, 2018 and December 31, 2017:
| | |
June 30, 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
|
| | | $ | 142,891 | | | | | $ | 142,350 | | | | | | 54% | | | | | $ | 136,060 | | | | | $ | 137,737 | | | | | | 51% | | |
Senior Secured Loans—Second Lien
|
| | | | 23,196 | | | | | | 23,345 | | | | | | 9% | | | | | | 34,677 | | | | | | 35,420 | | | | | | 13% | | |
Senior Secured Bonds
|
| | | | 25,794 | | | | | | 23,949 | | | | | | 9% | | | | | | 20,481 | | | | | | 20,196 | | | | | | 8% | | |
Subordinated Debt
|
| | | | 64,040 | | | | | | 64,901 | | | | | | 25% | | | | | | 69,585 | | | | | | 71,532 | | | | | | 27% | | |
Equity/Other
|
| | | | 5,356 | | | | | | 7,650 | | | | | | 3% | | | | | | 1,489 | | | | | | 2,285 | | | | | | 1% | | |
Total
|
| | | $ | 261,277 | | | | | $ | 262,195 | | | | | | 100% | | | | | $ | 262,292 | | | | | $ | 267,170 | | | | | | 100% | | |
|
The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of June 30, 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 $129,781 and $127,073, respectively as of June 30, 2018 and $151,866 and $151,348, respectively, as of December 31, 2017.
| | |
June 30, 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
|
| | | $ | 240,315 | | | | | $ | 236,477 | | | | | | 61% | | | | | $ | 252,241 | | | | | $ | 252,500 | | | | | | 60% | | |
Senior Secured Loans—Second Lien
|
| | | | 55,553 | | | | | | 56,291 | | | | | | 14% | | | | | | 70,362 | | | | | | 72,005 | | | | | | 17% | | |
Senior Secured Bonds
|
| | | | 25,794 | | | | | | 23,949 | | | | | | 6% | | | | | | 20,481 | | | | | | 20,196 | | | | | | 5% | | |
Subordinated Debt
|
| | | | 64,040 | | | | | | 64,901 | | | | | | 17% | | | | | | 69,585 | | | | | | 71,532 | | | | | | 17% | | |
Equity/Other
|
| | | | 5,356 | | | | | | 7,650 | | | | | | 2% | | | | | | 1,489 | | | | | | 2,285 | | | | | | 1% | | |
Total
|
| | | $ | 391,058 | | | | | $ | 389,268 | | | | | | 100% | | | | | $ | 414,158 | | | | | $ | 418,518 | | | | | | 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 June 30, 2018 and December 31, 2017, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the 1940 Act.
28
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, pursuant to which the Company may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of June 30, 2018, the Company had thirteen unfunded debt investments with aggregate unfunded commitments of $8,625. As of December 31, 2017, the Company had ten unfunded debt investments with aggregate unfunded commitments of $11,076 and an unfunded equity/other commitment to purchase up to $4 in shares of Series A units 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 June 30, 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 June 30, 2018 and December 31, 2017:
| | |
June 30, 2018
(Unaudited) |
| |
December 31, 2017
|
| ||||||||||||||||||
Industry Classification
|
| |
Fair Value
|
| |
Percentage
of Portfolio |
| |
Fair Value
|
| |
Percentage
of Portfolio |
| ||||||||||||
Capital Goods
|
| | | $ | 59,768 | | | | | | 23% | | | | | $ | 60,114 | | | | | | 22% | | |
Commercial & Professional Services
|
| | | | 26,866 | | | | | | 10% | | | | | | 26,622 | | | | | | 10% | | |
Consumer Durables & Apparel
|
| | | | 7,538 | | | | | | 3% | | | | | | 6,912 | | | | | | 3% | | |
Consumer Services
|
| | | | 19,553 | | | | | | 7% | | | | | | 27,553 | | | | | | 10% | | |
Diversified Financials
|
| | | | 7,446 | | | | | | 3% | | | | | | 8,839 | | | | | | 3% | | |
Energy
|
| | | | 22,790 | | | | | | 9% | | | | | | 24,874 | | | | | | 9% | | |
Food, Beverage & Tobacco
|
| | | | 7,022 | | | | | | 3% | | | | | | 4,374 | | | | | | 2% | | |
Health Care Equipment & Services
|
| | | | 17,615 | | | | | | 6% | | | | | | 13,223 | | | | | | 5% | | |
Insurance
|
| | | | 14,909 | | | | | | 6% | | | | | | 15,226 | | | | | | 6% | | |
Materials
|
| | | | 33,764 | | | | | | 13% | | | | | | 39,887 | | | | | | 15% | | |
Retailing
|
| | | | 24,855 | | | | | | 9% | | | | | | 26,110 | | | | | | 10% | | |
Software & Services
|
| | | | 20,069 | | | | | | 8% | | | | | | 13,436 | | | | | | 5% | | |
Total
|
| | | $ | 262,195 | | | | | | 100% | | | | | $ | 267,170 | | | | | | 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.
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.
29
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of June 30, 2018 and December 31, 2017, the Company’s investments and total return swap were categorized as follows in the fair value hierarchy:
Valuation Inputs
|
| |
June 30, 2018
(Unaudited) |
| |
December 31, 2017
|
| ||||||||||||||||||
|
Investments
|
| |
Total Return
Swap |
| |
Investments
|
| |
Total Return
Swap |
| ||||||||||||||
Level 1—Price quotations in active markets
|
| | | $ | — | | | | | $ | — | | | | | $ | — | | | | | $ | — | | |
Level 2—Significant other observable inputs
|
| | | | 113,771 | | | | | | — | | | | | | — | | | | | | — | | |
Level 3—Significant unobservable inputs
|
| | | | 148,424 | | | | | | (1,889) | | | | | | 267,170 | | | | | | 868 | | |
Total
|
| | | $ | 262,195 | | | | | $ | (1,889) | | | | | $ | 267,170 | | | | | $ | 868 | | |
|
The Company’s investments consist primarily of debt investments that were either acquired directly from the issuer or traded on an over-the-counter market for institutional investors. 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. Such investments described above are typically classified as Level 3 within the fair value hierarchy. Investments that are traded on an active public market are valued at their closing price as of the date of the financial statements and are classified as Level 1 within the fair value hierarchy. 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 and are typically classified as Level 2 within the fair value hierarchy.
The Company values the TRS in accordance with the agreements between Cheltenham Funding and 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 the loans underlying the TRS, on a quarterly basis. To the extent the 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.
30
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers and independent valuation firms, 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. The valuation committee of the Company’s board of directors, or the valuation committee, and the board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.
The following is a reconciliation for the six months ended June 30, 2018 and 2017 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
| | |
For the Six Months Ended June 30, 2018
|
| |||||||||||||||||||||||||||||||||
| | |
Senior Secured
Loans— First Lien |
| |
Senior Secured
Loans— Second Lien |
| |
Senior
Secured Bonds |
| |
Subordinated
Debt |
| |
Equity/
Other |
| |
Total
|
| ||||||||||||||||||
Fair value at beginning of period
|
| | | $ | 137,737 | | | | | $ | 35,420 | | | | | $ | 20,196 | | | | | $ | 71,532 | | | | | $ | 2,285 | | | | | $ | 267,170 | | |
Accretion of discount (amortization of premium)
|
| | | | 29 | | | | | | — | | | | | | — | | | | | | — | | | | | | 2 | | | | | | 31 | | |
Net realized gain (loss)
|
| | | | (19) | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | (19) | | |
Net change in unrealized appreciation (depreciation)
|
| | | | (2,128) | | | | | | (51) | | | | | | 74 | | | | | | (1) | | | | | | 1,498 | | | | | | (608) | | |
Purchases
|
| | | | 21,510 | | | | | | — | | | | | | — | | | | | | 481 | | | | | | 3,350 | | | | | | 25,341 | | |
Paid-in-kind interest
|
| | | | 46 | | | | | | — | | | | | | — | | | | | | — | | | | | | 516 | | | | | | 562 | | |
Sales and repayments
|
| | | | (7,767) | | | | | | (779) | | | | | | — | | | | | | (2) | | | | | | (1) | | | | | | (8,549) | | |
Net transfers in or out of Level 3(1)
|
| | | | (19,539) | | | | | | (28,630) | | | | | | (15,814) | | | | | | (71,521) | | | | | | — | | | | | | (135,504) | | |
Fair value at end of period
|
| | | $ | 129,869 | | | | | $ | 5,960 | | | | | $ | 4,456 | | | | | $ | 489 | | | | | $ | 7,650 | | | | | $ | 148,424 | | |
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 |
| | | $ | (2,057) | | | | | $ | (40) | | | | | $ | 74 | | | | | $ | (1) | | | | | $ | 1,500 | | | | | $ | (524) | | |
|
| | |
For the Six Months Ended June 30, 2017
|
| |||||||||||||||||||||||||||||||||
| | |
Senior Secured
Loans— First Lien |
| |
Senior Secured
Loans— Second Lien |
| |
Senior
Secured Bonds |
| |
Subordinated
Debt |
| |
Equity/
Other |
| |
Total
|
| ||||||||||||||||||
Fair value at beginning of period
|
| | | $ | 41,296 | | | | | $ | 5,843 | | | | | $ | 2,045 | | | | | $ | 13,502 | | | | | $ | 624 | | | | | $ | 63,310 | | |
Accretion of discount (amortization of premium)
|
| | | | 48 | | | | | | 33 | | | | | | (21) | | | | | | 83 | | | | | | — | | | | | | 143 | | |
Net realized gain (loss)
|
| | | | 175 | | | | | | 182 | | | | | | 248 | | | | | | 213 | | | | | | — | | | | | | 818 | | |
Net change in unrealized appreciation (depreciation)
|
| | | | 1,167 | | | | | | 389 | | | | | | 194 | | | | | | 460 | | | | | | (18) | | | | | | 2,192 | | |
Purchases
|
| | | | 74,361 | | | | | | 31,184 | | | | | | 26,018 | | | | | | 41,009 | | | | | | 533 | | | | | | 173,105 | | |
Paid-in-kind interest
|
| | | | 20 | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 20 | | |
Sales and repayments
|
| | | | (18,687) | | | | | | (6,848) | | | | | | (5,216) | | | | | | (7,202) | | | | | | — | | | | | | (37,953) | | |
Net transfers in or out of Level 3
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Fair value at end of period
|
| | | $ | 98,380 | | | | | $ | 30,783 | | | | | $ | 23,268 | | | | | $ | 48,065 | | | | | $ | 1,139 | | | | | $ | 201,635 | | |
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
|
| | | $ | 1,312 | | | | | $ | 468 | | | | | $ | 194 | | | | | $ | 574 | | | | | $ | (18) | | | | | $ | 2,530 | | |
|
31
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
(1)
As of June 30, 2018, the Company determined to classify certain investments whose valuations were obtained from independent third-party pricing services as Level 2 in the fair value hierarchy as the Company identified significant other observable inputs in these market quotations. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.
The following is a reconciliation for the six months ended June 30, 2018 and 2017 of the total return swap for which significant unobservable inputs (Level 3) were used in determining the fair value:
| | |
For the Six Months Ended
June 30, |
| |||||||||
| | |
2018
|
| |
2017
|
| ||||||
Fair value at beginning of period
|
| | | $ | 868 | | | | | $ | 2,422 | | |
Accretion of discount (amortization of premium)
|
| | | | — | | | | | | — | | |
Net realized gain (loss)
|
| | | | 5,065 | | | | | | 5,063 | | |
Net change in unrealized appreciation (depreciation)
|
| | | | (2,757) | | | | | | 436 | | |
Sales and repayments
|
| | | | (5,065) | | | | | | (5,063) | | |
Net transfers in or out of Level 3
|
| | | | | | | | | | — | | |
Fair value at end of period
|
| | | $ | (1,889) | | | | | $ | 2,858 | | |
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 the total return swap still held at the reporting date
|
| | | $ | (2,757) | | | | | $ | 436 | | |
|
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of June 30, 2018 and December 31, 2017 were as follows:
Type of Investment
|
| |
Fair Value at
June 30, 2018 (Unaudited) |
| |
Valuation
Technique(1) |
| |
Unobservable Input
|
| |
Range
|
| |
Weighted
Average |
| |||
Senior Secured Loans—First Lien
|
| | |
$
|
113,182
|
| | |
Market Comparables
|
| |
Market Yield (%)
|
| |
8.7% – 14.2%
|
| |
10.5%
|
|
| |
|
11,705
|
| | | Other(2) | | | Other | | |
N/A
|
| |
N/A
|
| ||
| |
|
4,982
|
| | | Cost | | | Cost | | |
100.0% – 100.0%
|
| |
100.0%
|
| ||
Senior Secured Loans—Second Lien
|
| | |
|
5,960
|
| | |
Market Comparables
|
| | Market Yield (%) | | |
9.7% – 12.3%
|
| |
11.0%
|
|
Senior Secured Bonds
|
| | |
|
4,456
|
| | |
Market Comparables
|
| | Market Yield (%) | | |
7.5% – 9.5%
|
| |
8.2%
|
|
Subordinated Debt
|
| | |
|
8
|
| | |
Market Comparables
|
| |
EBITDA Multiples (x)
|
| |
11.2x – 11.7x
|
| |
11.4x
|
|
| |
|
481
|
| | | Cost | | | Cost | | |
100.0% – 100.0%
|
| |
100.0%
|
| ||
Equity/Other
|
| | |
|
7,650
|
| | |
Market Comparables
|
| | EBITDA Multiples (x) | | |
5.5x – 14.0x
|
| |
7.7x
|
|
| | | | | | | | |
Option Valuation
Model |
| |
Volatility (%)
|
| |
30.0% – 30.0%
|
| |
30.0%
|
|
Total
|
| | |
$
|
148,424
|
| | | | | | ||||||||
Total Return Swap
|
| | |
$
|
(1,889)
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
40.0% – 101.2%
|
| |
96.2%
|
|
Type of Investment
|
| |
Fair Value at
December 31, 2017 |
| |
Valuation
Technique(1) |
| |
Unobservable Input
|
| |
Range
|
| |
Weighted
Average |
| |||
Senior Secured Loans—First Lien
|
| | |
$
|
118,198
|
| | |
Market Comparables
|
| |
Market Yield (%)
|
| |
8.0% – 12.0%
|
| |
9.2%
|
|
| |
|
19,539
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
97.7% – 101.5%
|
| |
99.6%
|
| ||
Senior Secured Loans—Second Lien
|
| | |
|
6,790
|
| | |
Market Comparables
|
| |
Market Yield (%)
|
| |
8.3% – 11.7%
|
| |
10.5%
|
|
| |
|
28,630
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
99.8% – 103.3%
|
| |
101.3%
|
| ||
Senior Secured Bonds
|
| | |
|
4,382
|
| | |
Market Comparables
|
| |
Market Yield (%)
|
| |
7.7% – 10.2%
|
| |
8.9%
|
|
| |
|
15,814
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
95.5% – 100.6%
|
| |
98.0%
|
| ||
Subordinated Debt
|
| | |
|
11
|
| | |
Market Comparables
|
| |
EBITDA Multiples (x)
|
| |
10.5x – 11.0x
|
| |
10.8x
|
|
| |
|
71,521
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
91.1% – 108.5%
|
| |
101.2%
|
| ||
Equity/Other
|
| | |
|
2,285
|
| | |
Market Comparables
|
| | EBITDA Multiples (x) | | |
5.5x – 23.5x
|
| |
9.5x
|
|
| | | | | | | | |
Option Valuation
Model |
| |
Volatility (%)
|
| |
30.0% – 30.0%
|
| |
30.0%
|
|
Total
|
| | |
$
|
267,170
|
| | | | | | ||||||||
Total Return Swap
|
| | |
$
|
868
|
| | | Market Quotes | | |
Indicative Dealer Quotes
|
| |
58.3% – 101.5%
|
| |
97.4%
|
|
32
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
(1)
Investments using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services, with the exception of investments in the Total Return Swap, which were 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 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.
Note 8. Financing Arrangements
The following tables present summary information with respect to the Company’s outstanding financing arrangements as of June 30, 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. Any significant changes to the Company’s financing arrangements during the three months ended June 30, 2018 are discussed below.
| | |
As of June 30, 2018
(Unaudited) |
| ||||||||||||||||||
Arrangement
|
| |
Type of Arrangement
|
| |
Rate
|
| |
Amount
Outstanding |
| |
Amount
Available |
| |
Maturity Date
|
| ||||||
BNP Facility(1)
|
| |
Prime Brokerage
|
| |
L+1.25%
|
| | | $ | 19,900 | | | | | $ | 30,100 | | | |
March 27, 2019(2)
|
|
Citibank Total Return Swap
|
| |
Total Return Swap
|
| |
L+1.60%
|
| | | $ | 129,781 | | | | | $ | 45,219 | | | |
N/A(3)
|
|
| | |
As of December 31, 2017
|
| ||||||||||||||||||
Arrangement
|
| |
Type of Arrangement
|
| |
Rate
|
| |
Amount
Outstanding |
| |
Amount
Available |
| |
Maturity Date
|
| ||||||
BNP Facility(1)
|
| |
Prime Brokerage
|
| |
L+1.25%
|
| | | $ | 19,900 | | | | | $ | 30,100 | | | |
September 27, 2018(2)
|
|
Citibank Total Return Swap
|
| |
Total Return Swap
|
| |
L+1.60%
|
| | | $ | 151,866 | | | | | $ | 23,134 | | | |
N/A(3)
|
|
(1)
The carrying amount outstanding under the facility approximates its fair value.
(2)
This facility generally is terminable upon 270 days’ notice by either party. As of June 30, 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 Cheltenham Funding at any time, subject to payment of an early termination fee if prior to the date 30 days before January 19, 2019 (July 19, 2018 as of June 30, 2018 and January 19, 2018 as of December 31, 2017), or by Citibank on or after January 19, 2019 (July 19, 2018 as of June 30, 2018 and January 19, 2018 as of December 31, 2017), in each case, in whole or in part, upon prior written notice to the other party.
33
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three and six months ended June 30, 2018 and 2017, the components of total interest expense for the Company’s financing arrangement were as follows:
| | |
Three Months Ended June 30,
|
| |||||||||||||||||||||||||||||||||
| | |
2018
|
| |
2017
|
| ||||||||||||||||||||||||||||||
Arrangement(1)
|
| |
Direct Interest
Expense |
| |
Amortization of
Deferred Financing Costs and Discount |
| |
Total Interest
Expense |
| |
Direct Interest
Expense |
| |
Amortization of
Deferred Financing Costs and Discount |
| |
Total Interest
Expense |
| ||||||||||||||||||
BNP Facility(2)
|
| | | $ | 236 | | | | | | — | | | | | $ | 236 | | | | | $ | 188 | | | | | $ | 17 | | | | | $ | 205 | | |
| | |
Six Months Ended June 30,
|
| |||||||||||||||||||||||||||||||||
| | |
2018
|
| |
2017
|
| ||||||||||||||||||||||||||||||
Arrangement(1)
|
| |
Direct Interest
Expense |
| |
Amortization of
Deferred Financing Costs and Discount |
| |
Total Interest
Expense |
| |
Direct Interest
Expense |
| |
Amortization of
Deferred Financing Costs and Discount |
| |
Total Interest
Expense |
| ||||||||||||||||||
BNP Facility(2)
|
| | | $ | 458 | | | | | | — | | | | | $ | 458 | | | | | $ | 225 | | | | | $ | 26 | | | | | $ | 251 | | |
(1)
Borrowings of the Company’s wholly-owned financing subsidiary are considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.
(2)
Direct interest expense includes the effect of non-usage fees.
The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the six months ended June 30, 2018 were $19,237 and 4.74%, respectively. As of June 30, 2018, the Company’s effective interest rate on borrowings was 4.94%.
Citibank Total Return Swap
Counterparty
|
| |
Description
|
| |
Termination Date
|
| |
Value as of
June 30, 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 January 19, 2019 (July 19, 2018 as of June 30, 2018), unless certain specified events permit Citibank to terminate the TRS on an earlier date. Cheltenham 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, subject to an early termination fee if prior to the date 30 days before January 19, 2019 (July 19, 2018 as of June 30, 2018). | | |
$(1,889)
|
|
34
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
As of June 30, 2018 and December 31, 2017, the fair value of the TRS was $(1,889) and $868, respectively, which is reflected on the Company’s consolidated balance sheets as unrealized appreciation (depreciation) on total return swap. As of June 30, 2018 and December 31, 2017, the receivable due on the TRS was $938 and $795, respectively, which is reflected on the Company’s consolidated balance sheets as a receivable due on total return swap. As of June 30, 2018 and December 31, 2017, the Company posted $71,500 and 70,500, respectively, in cash collateral held by Citibank, of which only $49,723 and $57,806, 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 or depreciation outstanding on its consolidated balance sheets as of June 30, 2018 and December 31, 2017.
For the six months ended June 30, 2018 and 2017, transactions in the TRS resulted in net realized gain (loss) on total return swap of $5,065 and $5,063, respectively, and unrealized appreciation (depreciation) on total return swap of $(2,757) and $436, respectively, both of which are reported on the Company’s consolidated statements of operations.
35
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(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 June 30, 2018:
Underlying Loan(1)
|
| |
Industry
|
| |
Rate(2)
|
| |
Floor
|
| |
Maturity
|
| |
Notional
Amount |
| |
Market
Value |
| |
Unrealized
Appreciation/ (Depreciation) |
| |||||||||
Accuride Corporation
|
| | Automobiles & Components | | | L+525 | | | 1.0% | | |
11/17/23
|
| | |
$
|
61
|
| | | |
$
|
61
|
| | | |
$
|
—
|
| |
Acosta, Inc.
|
| | Media | | | L+325 | | | 1.0% | | |
9/26/21
|
| | |
|
2,172
|
| | | |
|
2,032
|
| | | |
|
(140)
|
| |
Advantage Sales & Marketing Inc.
|
| |
Commercial & Professional Services
|
| | L+325 | | | 1.0% | | |
7/23/21
|
| | |
|
470
|
| | | |
|
462
|
| | | |
|
(8)
|
| |
Advantage Sales & Marketing Inc.
|
| |
Commercial & Professional Services
|
| | L+650 | | | 1.0% | | |
7/25/22
|
| | |
|
212
|
| | | |
|
206
|
| | | |
|
(6)
|
| |
Aleris International, Inc.
|
| | Materials | | | L+475 | | | | | |
2/27/23
|
| | |
|
493
|
| | | |
|
493
|
| | | |
|
—
|
| |
American Bath Group, LLC
|
| | Capital Goods | | | L+975 | | | 1.0% | | |
9/30/24
|
| | |
|
2,760
|
| | | |
|
3,015
|
| | | |
|
255
|
| |
American Tire Distributors, Inc.
|
| | Retailing | | | L+425 | | | 1.0% | | |
9/1/21
|
| | |
|
1,353
|
| | | |
|
999
|
| | | |
|
(354)
|
| |
ATX Networks Corp.(3)
|
| |
Technology Hardware & Equipment
|
| |
L+600, 1.0% PIK (1.0% Max PIK) |
| | 1.0% | | |
6/11/21
|
| | |
|
6,481
|
| | | |
|
6,301
|
| | | |
|
(180)
|
| |
Avaya Inc.
|
| |
Technology Hardware & Equipment
|
| | L+425 | | | | | |
12/15/24
|
| | |
|
5,250
|
| | | |
|
5,306
|
| | | |
|
56
|
| |
CDS U.S. Intermediate Holdings,
Inc.(3) |
| | Media | | | L+825 | | | 1.0% | | |
7/10/23
|
| | |
|
3,238
|
| | | |
|
3,143
|
| | | |
|
(95)
|
| |
Dayton Superior Corp.
|
| | Materials | | | L+800 | | | 1.0% | | |
11/15/21
|
| | |
|
3,716
|
| | | |
|
2,988
|
| | | |
|
(728)
|
| |
Diamond Resorts International,
Inc. |
| | Consumer Services | | | L+375 | | | 1.0% | | |
9/2/23
|
| | |
|
7,568
|
| | | |
|
7,701
|
| | | |
|
133
|
| |
Elo Touch Solutions, Inc.
|
| |
Technology Hardware & Equipment
|
| | L+600 | | | 1.0% | | |
10/31/23
|
| | |
|
2,587
|
| | | |
|
2,633
|
| | | |
|
46
|
| |
EmployBridge, LLC
|
| |
Commercial & Professional Services
|
| | L+500 | | | 1.0% | | |
4/18/25
|
| | |
|
552
|
| | | |
|
548
|
| | | |
|
(4)
|
| |
FPC Holdings, Inc.
|
| | Capital Goods | | | L+450 | | | 1.3% | | |
11/18/22
|
| | |
|
528
|
| | | |
|
524
|
| | | |
|
(4)
|
| |
Foresight Energy LLC
|
| | Materials | | | L+575 | | | 1.0% | | |
3/28/22
|
| | |
|
2,170
|
| | | |
|
2,165
|
| | | |
|
(5)
|
| |
FullBeauty Brands Holdings Corp.
|
| | Consumer Durables & Apparel | | | L+475 | | | 1.0% | | |
10/14/22
|
| | |
|
4,595
|
| | | |
|
1,935
|
| | | |
|
(2,660)
|
| |
Gulf Finance, LLC
|
| | Energy | | | L+525 | | | 1.0% | | |
8/25/23
|
| | |
|
4,569
|
| | | |
|
4,055
|
| | | |
|
(514)
|
| |
Inmar, Inc.
|
| | Software & Services | | | L+800 | | | 1.0% | | |
5/1/25
|
| | |
|
6,895
|
| | | |
|
7,000
|
| | | |
|
105
|
| |
Ivanti Software, Inc.
|
| | Software & Services | | | L+425 | | | 1.0% | | |
1/20/24
|
| | |
|
2,506
|
| | | |
|
2,491
|
| | | |
|
(15)
|
| |
J.C. Penney Corp., Inc.(3)
|
| | Retailing | | | L+425 | | | 1.0% | | |
6/23/23
|
| | |
|
420
|
| | | |
|
422
|
| | | |
|
2
|
| |
LBM Borrower, LLC
|
| | Capital Goods | | | L+375 | | | 1.0% | | |
8/20/22
|
| | |
|
8,475
|
| | | |
|
8,499
|
| | | |
|
24
|
| |
LBM Borrower, LLC(4)
|
| | Capital Goods | | | L+925 | | | 1.0% | | |
8/20/23
|
| | |
|
2,876
|
| | | |
|
3,000
|
| | | |
|
124
|
| |
LD Intermediate Holdings, Inc.
|
| | Software & Services | | | L+588 | | | 1.0% | | |
12/9/22
|
| | |
|
6,930
|
| | | |
|
7,084
|
| | | |
|
154
|
| |
MORSCO, Inc.
|
| | Capital Goods | | | L+700 | | | 1.0% | | |
10/31/23
|
| | |
|
2,802
|
| | | |
|
2,948
|
| | | |
|
146
|
| |
nThrive, Inc.
|
| |
Health Care Equipment & Services
|
| | L+450 | | | 1.0% | | |
10/19/22
|
| | |
|
5,634
|
| | | |
|
5,670
|
| | | |
|
36
|
| |
P.F. Chang’s China Bistro, Inc.
|
| | Consumer Services | | | L+500 | | | 1.0% | | |
9/1/22
|
| | |
|
3,350
|
| | | |
|
3,432
|
| | | |
|
82
|
| |
P2 Upstream Acquisition Co.
|
| | Energy | | | L+400 | | | 1.3% | | |
10/30/20
|
| | |
|
2,413
|
| | | |
|
2,542
|
| | | |
|
129
|
| |
P2 Upstream Acquisition Co.
|
| | Energy | | | L+800 | | | 1.0% | | |
4/30/21
|
| | |
|
1,309
|
| | | |
|
1,386
|
| | | |
|
77
|
| |
Peak 10 Holding Corp.
|
| | Software & Services | | | L+725 | | | 1.0% | | |
8/1/25
|
| | |
|
4,582
|
| | | |
|
4,593
|
| | | |
|
11
|
| |
Sequa Mezzanine Holdings L.L.C.
|
| | Capital Goods | | | L+900 | | | 1.0% | | |
4/28/22
|
| | |
|
434
|
| | | |
|
430
|
| | | |
|
(4)
|
| |
SGS Cayman, L.P(3)
|
| | Software & Services | | | L+538 | | | 1.0% | | |
4/23/21
|
| | |
|
370
|
| | | |
|
368
|
| | | |
|
(2)
|
| |
Specialty Building Products Holdings,
LLC |
| | Capital Goods | | | L+600 | | | 1.0% | | |
10/26/23
|
| | |
|
6,411
|
| | | |
|
6,677
|
| | | |
|
266
|
| |
Strike, LLC
|
| | Energy | | | L+800 | | | 1.0% | | |
11/30/22
|
| | |
|
2,848
|
| | | |
|
2,970
|
| | | |
|
122
|
| |
Sutherland Global Services Inc.
|
| | Software & Services | | | L+538 | | | 1.0% | | |
4/23/21
|
| | |
|
1,591
|
| | | |
|
1,580
|
| | | |
|
(11)
|
| |
ThermaSys Corp.
|
| | Capital Goods | | | L+400 | | | 1.3% | | |
5/3/19
|
| | |
|
3,288
|
| | | |
|
3,344
|
| | | |
|
56
|
| |
TKC Holdings, Inc.(4)
|
| | Retailing | | | L+800 | | | 1.0% | | |
2/1/24
|
| | |
|
7,772
|
| | | |
|
7,817
|
| | | |
|
45
|
| |
TravelCLICK, Inc.(4)
|
| | Software & Services | | | L+775 | | | 1.0% | | |
11/6/21
|
| | |
|
2,279
|
| | | |
|
2,356
|
| | | |
|
77
|
| |
Westbridge Technologies, Inc.(4)
|
| | Software & Services | | | L+850 | | | 1.0% | | |
4/28/23
|
| | |
|
4,778
|
| | | |
|
4,924
|
| | | |
|
146
|
| |
York Risk Services Holding Corp.(4)
|
| | Insurance | | | L+375 | | | 1.0% | | |
10/1/21
|
| | |
|
3,043
|
| | | |
|
2,973
|
| | | |
|
(70)
|
| |
Total
|
| | | | | | | | | | | | | | |
$
|
129,781
|
| | | |
$
|
127,073
|
| | | |
|
(2,708)
|
| |
Total TRS Accrued Income and Liabilities:
|
| | |
|
819
|
| | ||||||||||||||||||||||||
Total TRS Fair Value:
|
| | |
$
|
(1,889)
|
| | ||||||||||||||||||||||||
|
36
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(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) |
| |||||||||
American Bath Group, LLC(4)
|
| | Capital Goods | | | L+525 | | | 1.0% | | |
9/30/23
|
| | |
$
|
3,792
|
| | | |
$
|
3,978
|
| | | |
$
|
186
|
| |
American Bath Group, LLC
|
| | Capital Goods | | | L+975 | | | 1.0% | | |
9/30/24
|
| | |
|
2,760
|
| | | |
|
2,993
|
| | | |
|
233
|
| |
ATX Networks Corp.(3)
|
| |
Technology Hardware & Equipment
|
| |
L+600, 1.0% PIK (1.0% Max PIK) |
| | 1.0% | | |
6/11/21
|
| | |
|
6,617
|
| | | |
|
6,737
|
| | | |
|
120
|
| |
Avaya Inc.
|
| |
Technology Hardware & Equipment
|
| | L+475 | | | 1.0% | | |
12/15/24
|
| | |
|
9,900
|
| | | |
|
9,829
|
| | | |
|
(71)
|
| |
CDS U.S. Intermediate Holdings, Inc.(3)
|
| | Media | | | L+825 | | | 1.0% | | |
7/10/23
|
| | |
|
3,238
|
| | | |
|
3,196
|
| | | |
|
(42)
|
| |
Dayton Superior Corp.
|
| | Materials | | | L+800 | | | 1.0% | | |
11/15/21
|
| | |
|
3,734
|
| | | |
|
3,234
|
| | | |
|
(500)
|
| |
Diamond Resorts International, Inc.
|
| | Consumer Services | | | L+450 | | | 1.0% | | |
9/2/23
|
| | |
|
6,740
|
| | | |
|
6,958
|
| | | |
|
218
|
| |
Elo Touch Solutions, Inc.
|
| |
Technology Hardware & Equipment
|
| | L+600 | | | 1.0% | | |
10/25/23
|
| | |
|
3,168
|
| | | |
|
3,192
|
| | | |
|
24
|
| |
FullBeauty Brands Holdings Corp.
|
| | Consumer Durables & Apparel | | | L+475 | | | 1.0% | | |
10/14/22
|
| | |
|
4,619
|
| | | |
|
2,832
|
| | | |
|
(1,787)
|
| |
Gulf Finance, LLC
|
| | Energy | | | L+525 | | | 1.0% | | |
8/25/23
|
| | |
|
4,718
|
| | | |
|
4,356
|
| | | |
|
(362)
|
| |
Inmar, Inc.
|
| | Software & Services | | | L+800 | | | 1.0% | | |
5/1/25
|
| | |
|
6,895
|
| | | |
|
7,000
|
| | | |
|
105
|
| |
Interior Logic Group, Inc.
|
| | Capital Goods | | | L+600 | | | 1.0% | | |
3/1/24
|
| | |
|
6,669
|
| | | |
|
6,901
|
| | | |
|
232
|
| |
Ivanti Software, Inc.
|
| | Software & Services | | | L+425 | | | 1.0% | | |
1/20/24
|
| | |
|
2,518
|
| | | |
|
2,401
|
| | | |
|
(117)
|
| |
LBM Borrower, LLC
|
| | Capital Goods | | | L+450 | | | 1.0% | | |
8/20/22
|
| | |
|
8,565
|
| | | |
|
8,691
|
| | | |
|
126
|
| |
LBM Borrower, LLC(4)
|
| | Capital Goods | | | L+925 | | | 1.0% | | |
8/20/23
|
| | |
|
2,876
|
| | | |
|
2,994
|
| | | |
|
118
|
| |
LD Intermediate Holdings, Inc.
|
| | Software & Services | | | L+588 | | | 1.0% | | |
12/9/22
|
| | |
|
7,020
|
| | | |
|
6,949
|
| | | |
|
(71)
|
| |
MORSCO, Inc.
|
| | Capital Goods | | | L+700 | | | 1.0% | | |
10/31/23
|
| | |
|
3,042
|
| | | |
|
3,208
|
| | | |
|
166
|
| |
nThrive, Inc.
|
| |
Health Care Equipment & Services
|
| | L+450 | | | 1.0% | | |
10/19/22
|
| | |
|
5,663
|
| | | |
|
5,749
|
| | | |
|
86
|
| |
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
|
| | |
|
2,437
|
| | | |
|
2,532
|
| | | |
|
95
|
| |
P2 Upstream Acquisition Co.
|
| | Energy | | | L+800 | | | 1.0% | | |
4/30/21
|
| | |
|
1,309
|
| | | |
|
1,365
|
| | | |
|
56
|
| |
Peak 10 Holding Corp.
|
| | Software & Services | | | L+725 | | | 1.0% | | |
8/1/25
|
| | |
|
4,582
|
| | | |
|
4,646
|
| | | |
|
64
|
| |
Quest Software US Holdings Inc.
|
| | Software & Services | | | L+550 | | | 1.0% | | |
10/31/22
|
| | |
|
9,121
|
| | | |
|
9,303
|
| | | |
|
182
|
| |
Specialty Building Products Holdings,
LLC |
| | Capital Goods | | | L+600 | | | 1.0% | | |
10/26/23
|
| | |
|
6,443
|
| | | |
|
6,677
|
| | | |
|
234
|
| |
Strike, LLC
|
| | Energy | | | L+800 | | | 1.0% | | |
11/30/22
|
| | |
|
2,925
|
| | | |
|
3,045
|
| | | |
|
120
|
| |
ThermaSys Corp.
|
| | Capital Goods | | | L+400 | | | 1.3% | | |
5/3/19
|
| | |
|
3,335
|
| | | |
|
3,273
|
| | | |
|
(62)
|
| |
TKC Holdings, Inc.(4)
|
| | Retailing | | | L+800 | | | 1.0% | | |
2/1/24
|
| | |
|
7,771
|
| | | |
|
7,850
|
| | | |
|
79
|
| |
TravelCLICK, Inc.(4)
|
| | Software & Services | | | L+775 | | | 1.0% | | |
11/6/21
|
| | |
|
4,070
|
| | | |
|
4,218
|
| | | |
|
148
|
| |
Westbridge Technologies, Inc.(4)
|
| | Software & Services | | | L+850 | | | 1.0% | | |
4/28/23
|
| | |
|
4,839
|
| | | |
|
4,876
|
| | | |
|
37
|
| |
WP CPP Holdings, LLC
|
| | Capital Goods | | | L+775 | | | 1.0% | | |
4/30/21
|
| | |
|
2,184
|
| | | |
|
2,323
|
| | | |
|
139
|
| |
York Risk Services Holding Corp.(4)
|
| | Insurance | | | L+375 | | | 1.0% | | |
10/1/21
|
| | |
|
3,059
|
| | | |
|
3,016
|
| | | |
|
(43)
|
| |
Total
|
| | | | | | | | | | | | | | |
$
|
151,866
|
| | | |
$
|
151,348
|
| | | |
|
(518)
|
| |
Total TRS Accrued Income and Liabilities:
|
| | |
|
1,386
|
| | ||||||||||||||||||||||||
Total TRS Fair Value:
|
| | |
$
|
868
|
| | ||||||||||||||||||||||||
|
(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 June 30, 2018 and December 31, 2017, three-month LIBOR was 2.34% and 1.69%, respectively.
(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 as of June 30, 2018 and/or December 31, 2017.
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
37
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 9. Commitments and Contingencies (continued)
prior claims or losses pursuant to these contracts. Management of FS/KKR 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 FS/KKR Advisor and its affiliates and Note 6 for a discussion of the Company’s unfunded commitments.
Note 10. Financial Highlights
The following is a schedule of financial highlights of the Company for the six months ended June 30, 2018 and the year ended December 31, 2017:
| | |
Six Months Ended
June 30, 2018 (Unaudited) |
| |
Year Ended
December 31, 2017 |
| ||||||
Per Share Data:(1) | | | | | | | | | | | | | |
Net asset value, beginning of period
|
| | | $ | 11.12 | | | | | $ | 10.96 | | |
Results of operations(2) | | | | | | | | | | | | | |
Net investment income
|
| | | | 0.22 | | | | | | 0.25 | | |
Net realized gain (loss) and unrealized appreciation (depreciation)
|
| | | | (0.03) | | | | | | 0.58 | | |
Net increase (decrease) in net assets resulting from operations
|
| | | | 0.19 | | | | | | 0.83 | | |
Stockholder distributions(3) | | | | | | | | | | | | | |
Distributions from net investment income
|
| | | | (0.35) | | | | | | (0.65) | | |
Distributions from net realized gain on investments
|
| | | | — | | | | | | (0.09) | | |
Net decrease in net assets resulting from stockholder distributions
|
| | | | (0.35) | | | | | | (0.74) | | |
Capital share transactions | | | | | | | | | | | | | |
Issuance of common stock(4)
|
| | | | 0.01 | | | | | | 0.07 | | |
Repurchases of common stock(5)
|
| | | | — | | | | | | — | | |
Net increase in net assets resulting from capital share transactions
|
| | | | 0.01 | | | | | | 0.07 | | |
Net asset value, end of period
|
| | | $ | 10.97 | | | | | $ | 11.12 | | |
Shares outstanding, end of period
|
| | | | 31,791,118 | | | | | | 31,614,476 | | |
Total return(6)
|
| | | | 1.76% | | | | | | 8.34% | | |
Total return (without assuming reinvestment of distributions)(6)
|
| | | | 1.80% | | | | | | 8.21% | | |
Ratio/Supplemental Data: | | | | | | | | | | | | | |
Net assets, end of period
|
| | | $ | 348,689 | | | | | $ | 351,537 | | |
Ratio of net investment income to average net assets(7)
|
| | | | 3.69% | | | | | | 2.32% | | |
Ratio of operating expenses to average net assets(7)
|
| | | | 4.02% | | | | | | 5.27% | | |
Ratio of net expenses to average net assets(7)
|
| | | | 3.88% | | | | | | 5.26% | | |
Portfolio turnover(8)
|
| | | | 19.37% | | | | | | 38.13% | | |
Total amount of senior securities outstanding, exclusive of treasury securities
|
| | | $ | 99,958 | | | | | $ | 113,960 | | |
Asset coverage per unit(9)
|
| | | | 4.49 | | | | | | 4.08 | | |
(1)
Per share data may be rounded in order to recompute the ending net asset value per share.
38
FS Investment Corporation IV
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
(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, 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 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 six months ended June 30, 2018 are annualized, with the exception of capital gains incentive fees. Annualized ratios for the six months ended June 30, 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 six months ended June 30, 2018 and for the year ended December 31, 2017:
| | |
Six Months Ended
June 30, 2018 (Unaudited) |
| |
Year Ended
December 31, 2017 |
| ||||||
Ratio of subordinated income incentive fees to average net assets
|
| | | | 0.21% | | | | | | — | | |
Ratio of accrued capital gains incentive fees to average net assets
|
| | | | (0.26)% | | | | | | 0.44% | | |
Ratio of offering costs to average net assets
|
| | | | — | | | | | | 0.53% | | |
Ratio of interest expense to average net assets
|
| | | | 0.26% | | | | | | 0.26% | | |
(8)
Portfolio turnover for the six months ended June 30, 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.
39
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share amounts)
(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 IV.
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.
40
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Overview
We were incorporated under the general corporation laws of the State of Maryland on February 25, 2015 and formally commenced investment operations on January 6, 2016. 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 IV Advisor until April 9, 2018 and thereafter have been managed by FS/KKR Advisor. FSIC IV 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., 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
41
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 or 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 total return swap, net unrealized appreciation or depreciation on investments 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
42
cost. 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. 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/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.
43
For additional information regarding our expense reimbursement arrangement with FS Investments and, as of April 9, 2018, with FS/KKR Advisor, see Note 4 to our unaudited consolidated financial statements included herein.
Portfolio Investment Activity for the Three and Six Months Ended June 30, 2018
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2018:
Net Investment Activity
|
| |
For the Three Months Ended
June 30, 2018 |
| |
For the Six Months Ended
June 30, 2018 |
| ||||||
Purchases
|
| | | $ | 46,797 | | | | | $ | 51,503 | | |
Sales and Repayments
|
| | | | (42,069) | | | | | | (54,089) | | |
Net Portfolio Activity
|
| | | $ | 4,728 | | | | | $ | (2,586) | | |
|
| | |
For the Three Months Ended
June 30, 2018 |
| |
For the Six Months Ended
June 30, 2018 |
| ||||||||||||||||||
New Investment Activity by Asset Class
|
| |
Purchases
|
| |
Percentage
|
| |
Purchases
|
| |
Percentage
|
| ||||||||||||
Senior Secured Loans—First Lien
|
| | | $ | 30,110 | | | | | | 64% | | | | | $ | 32,058 | | | | | | 62% | | |
Senior Secured Loans—Second Lien
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Senior Secured Bonds
|
| | | | 5,314 | | | | | | 12% | | | | | | 5,314 | | | | | | 10% | | |
Subordinated Debt
|
| | | | 10,781 | | | | | | 23% | | | | | | 10,781 | | | | | | 21% | | |
Equity/Other
|
| | | | 592 | | | | | | 1% | | | | | | 3,350 | | | | | | 7% | | |
Total
|
| | | $ | 46,797 | | | | | | 100% | | | | | $ | 51,503 | | | | | | 100% | | |
|
The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2018 and December 31, 2017:
| | |
June 30, 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
|
| | | $ | 142,891 | | | | | $ | 142,350 | | | | | | 54% | | | | | $ | 136,060 | | | | | $ | 137,737 | | | | | | 51% | | |
Senior Secured Loans—Second Lien
|
| | | | 23,196 | | | | | | 23,345 | | | | | | 9% | | | | | | 34,677 | | | | | | 35,420 | | | | | | 13% | | |
Senior Secured Bonds
|
| | | | 25,794 | | | | | | 23,949 | | | | | | 9% | | | | | | 20,481 | | | | | | 20,196 | | | | | | 8% | | |
Subordinated Debt
|
| | | | 64,040 | | | | | | 64,901 | | | | | | 25% | | | | | | 69,585 | | | | | | 71,532 | | | | | | 27% | | |
Equity/Other
|
| | | | 5,356 | | | | | | 7,650 | | | | | | 3% | | | | | | 1,489 | | | | | | 2,285 | | | | | | 1% | | |
Total
|
| | | $ | 261,277 | | | | | $ | 262,195 | | | | | | 100% | | | | | $ | 262,292 | | | | | $ | 267,170 | | | | | | 100% | | |
The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 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 $129,781 and $127,073, respectively, as of June 30, 2018 and $151,866 and $151,348, respectively, as of December 31, 2017.
| | |
June 30, 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
|
| | | $ | 240,315 | | | | | $ | 236,477 | | | | | | 61% | | | | | $ | 252,241 | | | | | $ | 252,500 | | | | | | 60% | | |
Senior Secured Loans—Second Lien
|
| | | | 55,553 | | | | | | 56,291 | | | | | | 14% | | | | | | 70,362 | | | | | | 72,005 | | | | | | 17% | | |
Senior Secured Bonds
|
| | | | 25,794 | | | | | | 23,949 | | | | | | 6% | | | | | | 20,481 | | | | | | 20,196 | | | | | | 5% | | |
Subordinated Debt
|
| | | | 64,040 | | | | | | 64,901 | | | | | | 17% | | | | | | 69,585 | | | | | | 71,532 | | | | | | 17% | | |
Equity/Other
|
| | | | 5,356 | | | | | | 7,650 | | | | | | 2% | | | | | | 1,489 | | | | | | 2,285 | | | | | | 1% | | |
Total
|
| | | $ | 391,058 | | | | | $ | 389,268 | | | | | | 100% | | | | | $ | 414,158 | | | | | $ | 418,518 | | | | | | 100% | | |
(1)
Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
44
The following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2018 and December 31, 2017:
| | |
June 30, 2018
|
| |
December 31, 2017
|
|
Number of Portfolio Companies
|
| |
60
|
| |
45
|
|
% Variable Rate (based on fair value)
|
| |
63.2%
|
| |
64.8%
|
|
% Fixed Rate (based on fair value)
|
| |
33.9%
|
| |
34.4%
|
|
% Non-Income Producing Equity/Other Investments (based on fair value)
|
| |
0.5%
|
| |
0.8%
|
|
% Income Producing Equity/Other Investments (based on fair value)
|
| |
2.4%
|
| |
0.0%
|
|
Average Annual EBITDA of Portfolio Companies
|
| |
$135,000
|
| |
$99,700
|
|
Weighted Average Purchase Price of Debt Investments (as a % of par)
|
| |
99.1%
|
| |
99.1%
|
|
% of Investments on Non-Accrual (based on fair value)
|
| |
—
|
| |
—
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost)
|
| |
9.9%
|
| |
9.2%
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets
|
| |
10.0%
|
| |
9.2%
|
|
Based on our regular monthly gross cash distribution amount of $0.067258 per share as of June 30, 2018 and our distribution reinvestment price of $11.15 as of such date, the gross annualized distribution rate, which includes annualized distribution fees, was 7.24% as of June 30, 2018. The net annualized distribution rate to stockholders, which excludes annual distribution fees, was 6.30% as of June 30, 2018 based on our distribution reinvestment price of $11.15. During the six months ended June 30, 2018, our total return was 1.76% and our total return without assuming reinvestment of distributions was 1.80%.
Based on our regular weekly gross cash distribution amount of $0.015521 per share as of December 31, 2017 and our distribution reinvestment price of $11.15 as of such date, the gross annualized distribution rate, which includes annualized distribution fees, was 7.24% as of December 31, 2017. The net annualized distribution rate to stockholders, which excludes annual distribution fees, was 6.27% as of December 31, 2017 based on our distribution reinvestment price of $11.15. During the year ended December 31, 2017, our total return was 8.34% and our total return without assuming reinvestment of distributions was 8.21%.
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 and total return figures do not reflect operating expenses that may be incurred by us. In addition, our estimated gross portfolio yield and total return figures disclosed above do not consider the effect of any selling commissions or charges that may have been incurred in connection with the sale of shares of our common stock. Our estimated gross portfolio yield, total returns and annualized distribution rate to stockholders do not represent actual investment returns to stockholders, are subject to change and, in the future, may be greater or less than the rates set forth above. See the section entitled “Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 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 calculations of our total returns.
Direct Originations
The following tables present certain selected information regarding our direct originations for the three and six months ended June 30, 2018:
New Direct Originations
|
| |
For the Three Months Ended
June 30, 2018 |
| |
For the Six Months Ended
June 30, 2018 |
| ||||||
Total Commitments (including unfunded commitments)
|
| | | $ | 20,503 | | | | | $ | 24,311 | | |
Exited Investments (including partial paydowns)
|
| | | | (8,830) | | | | | | (9,193) | | |
Net Direct Originations
|
| | | $ | 11,673 | | | | | $ | 15,118 | | |
|
45
| | |
For the Three Months Ended
June 30, 2018 |
| |
For the Six Months Ended
June 30, 2018 |
| ||||||||||||||||||
New Direct Originations by Asset Class (including unfunded commitments)
|
| |
Commitment
Amount |
| |
Percentage
|
| |
Commitment
Amount |
| |
Percentage
|
| ||||||||||||
Senior Secured Loans—First Lien
|
| | | $ | 19,914 | | | | | | 97% | | | | | $ | 20,964 | | | | | | 86% | | |
Senior Secured Loans—Second Lien
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Senior Secured Bonds
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Subordinated Debt
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Equity/Other
|
| | | | 589 | | | | | | 3% | | | | | | 3,347 | | | | | | 14% | | |
Total
|
| | | $ | 20,503 | | | | | | 100% | | | | | $ | 24,311 | | | | | | 100% | | |
|
| | |
For the Three Months Ended
June 30, 2018 |
| |
For the Six Months Ended
June 30, 2018 |
|
Average New Direct Origination Commitment Amount
|
| |
$2,929
|
| |
$2,431
|
|
Weighted Average Maturity for New Direct Originations
|
| |
9/15/24
|
| |
8/30/24
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period
|
| |
10.2%
|
| |
12.9%
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets
|
| |
10.2%
|
| |
12.9%
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period
|
| |
10.1%
|
| |
10.1%
|
|
The following table presents certain selected information regarding our direct originations as of June 30, 2018 and December 31, 2017:
Characteristics of All Direct Originations Held in Portfolio
|
| |
June 30, 2018
|
| |
December 31, 2017
|
|
Number of Portfolio Companies
|
| |
30
|
| |
24
|
|
Average Annual EBITDA of Portfolio Companies
|
| |
$77,900
|
| |
$54,440
|
|
Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other Securities
|
| |
4.9x
|
| |
4.4x
|
|
% of Investments on Non-Accrual (based on fair value)
|
| |
—
|
| |
—
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations
|
| |
10.3%
|
| |
9.2%
|
|
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets
|
| |
10.4%
|
| |
9.3%
|
|
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 June 30, 2018 and December 31, 2017:
| | |
June 30, 2018
|
| |
December 31, 2017
|
| ||||||||||||||||||
Portfolio Composition by Strategy
|
| |
Fair
Value |
| |
Percentage
of Portfolio |
| |
Fair
Value |
| |
Percentage
of Portfolio |
| ||||||||||||
Direct Originations
|
| | | $ | 147,943 | | | | | | 56% | | | | | $ | 130,046 | | | | | | 49% | | |
Opportunistic
|
| | | | 51,251 | | | | | | 20% | | | | | | 86,229 | | | | | | 32% | | |
Broadly Syndicated/Other
|
| | | | 63,001 | | | | | | 24% | | | | | | 50,895 | | | | | | 19% | | |
Total
|
| | | $ | 262,195 | | | | | | 100% | | | | | $ | 267,170 | | | | | | 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.
46
Portfolio Asset Quality
In addition to various risk management and monitoring tools, FS/KKR Advisor uses, and FSIC IV 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 IV 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 June 30, 2018 and December 31, 2017:
| | |
June 30, 2018
|
| |
December 31, 2017
|
| ||||||||||||||||||
Investment Rating
|
| |
Fair
Value |
| |
Percentage
of Portfolio |
| |
Fair
Value |
| |
Percentage
of Portfolio |
| ||||||||||||
1
|
| | | $ | 1,965 | | | | | | 1% | | | | | $ | 367 | | | | | | 0% | | |
2
|
| | | | 220,630 | | | | | | 84% | | | | | | 266,803 | | | | | | 100% | | |
3
|
| | | | 39,600 | | | | | | 15% | | | | | | — | | | | | | — | | |
4
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
5
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Total
|
| | | $ | 262,195 | | | | | | 100% | | | | | $ | 267,170 | | | | | | 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 and Six Months Ended June 30, 2018 and 2017
Revenues
Our investment income for the three and six months ended June 30, 2018 and 2017 was as follows:
| | |
Three Months Ended June 30,
|
| |
Six Months Ended June 30,
|
| ||||||||||||||||||||||||||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||||||||||||||||||||||||||
| | |
Amount
|
| |
Percentage
of Total Income |
| |
Amount
|
| |
Percentage
of Total Income |
| |
Amount
|
| |
Percentage
of Total |
| |
Amount
|
| |
Percentage
of Total Income |
| ||||||||||||||||||||||||
Interest income
|
| | | $ | 6,026 | | | | | | 88% | | | | | $ | 3,788 | | | | | | 87% | | | | | $ | 12,115 | | | | | | 92% | | | | | $ | 5,762 | | | | | | 75% | | |
Paid-in-kind interest income
|
| | | | 283 | | | | | | 4% | | | | | | 9 | | | | | | 0% | | | | | | 562 | | | | | | 4% | | | | | | 20 | | | | | | 0% | | |
Fee income
|
| | | | 528 | | | | | | 8% | | | | | | 585 | | | | | | 13% | | | | | | 558 | | | | | | 4% | | | | | | 1,959 | | | | | | 25% | | |
Dividend income
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | | | | | 15 | | | | | | 0% | | | | | | — | | | | | | — | | |
Total investment income(1)
|
| | | $ | 6,837 | | | | | | 100% | | | | | $ | 4,382 | | | | | | 100% | | | | | $ | 13,250 | | | | | | 100% | | | | | $ | 7,741 | | | | | | 100% | | |
|
(1)
Such revenues represent $6,456 and $4,298 of cash income earned as well as $381 and $84 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2018 and 2017, respectively.
47
Such revenues represent $12,487 and $7,579 of cash income earned as well as $763 and $162 in non-cash portions relating to accretion of discount and PIK interest for the six months ended June 30, 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 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. 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 and six months ended June 30, 2018 and 2017 were as follows:
| | |
Three Months Ended June 30,
|
| |
Six Months Ended June 30,
|
| ||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||
Management fees
|
| | | $ | 1,436 | | | | | $ | 1,354 | | | | | $ | 3,293 | | | | | $ | 2,381 | | |
Subordinated income incentive fees
|
| | | | 372 | | | | | | — | | | | | | 372 | | | | | | — | | |
Capital gains incentive fees
|
| | | | (179) | | | | | | 214 | | | | | | (914) | | | | | | 911 | | |
Administrative services expenses
|
| | | | 153 | | | | | | 100 | | | | | | 231 | | | | | | 200 | | |
Stock transfer agent fees
|
| | | | 50 | | | | | | 37 | | | | | | 100 | | | | | | 107 | | |
Accounting and administrative fees
|
| | | | 27 | | | | | | 30 | | | | | | 78 | | | | | | 54 | | |
Interest expense
|
| | | | 236 | | | | | | 205 | | | | | | 458 | | | | | | 251 | | |
Distribution fees
|
| | | | 1,440 | | | | | | 988 | | | | | | 2,061 | | | | | | 1,304 | | |
Offering costs
|
| | | | — | | | | | | 471 | | | | | | — | | | | | | 852 | | |
Directors’ fees
|
| | | | 76 | | | | | | 96 | | | | | | 360 | | | | | | 185 | | |
Expenses associated with our independent audit and related fees
|
| | | | 63 | | | | | | 70 | | | | | | 126 | | | | | | 140 | | |
Legal fees
|
| | | | 19 | | | | | | 20 | | | | | | 39 | | | | | | 39 | | |
Printing fees
|
| | | | 75 | | | | | | 75 | | | | | | 148 | | | | | | 150 | | |
Other
|
| | | | 83 | | | | | | 99 | | | | | | 231 | | | | | | 188 | | |
Total operating expenses
|
| | | | 3,851 | | | | | | 3,759 | | | | | | 6,583 | | | | | | 6,762 | | |
Management fee waiver
|
| | | | (21) | | | | | | (169) | | | | | | (253) | | | | | | (258) | | |
Add: Expense recoupment to sponsor
|
| | | | — | | | | | | — | | | | | | — | | | | | | 666 | | |
Net expenses
|
| | | $ | 3,830 | | | | | $ | 3,590 | | | | | $ | 6,330 | | | | | $ | 7,170 | | |
|
The following table reflects selected expense ratios as a percent of average net assets for the three and six months ended June 30, 2018 and 2017 were as follows:
| | |
Three Months Ended June 30,
|
| |
Six Months Ended June 30,
|
| ||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||
Ratio of operating expenses to average net assets
|
| | | | 1.10% | | | | | | 1.57% | | | | | | 1.88% | | | | | | 3.16% | | |
Ratio of management fee waiver to average net
assets |
| | | | (0.01)% | | | | | | (0.07)% | | | | | | (0.07)% | | | | | | (0.12)% | | |
Ratio of expense recoupment to sponsor to average net assets
|
| | | | — | | | | | | — | | | | | | — | | | | | | 0.31% | | |
Ratio of net operating expenses to average net assets
|
| | | | 1.09% | | | | | | 1.50% | | | | | | 1.81% | | | | | | 3.35% | | |
Ratio of subordinated income incentive fees, capital gains incentive fees, interest expense and offering costs to average net assets(1)
|
| | | | (0.13)% | | | | | | (0.37)% | | | | | | 0.02% | | | | | | (0.94)% | | |
Ratio of net operating expenses to average net assets, excluding certain expenses
|
| | | | 0.96% | | | | | | 1.13% | | | | | | 1.83% | | | | | | 2.41% | | |
|
(1)
Ratio may be rounded in order to recompute the ending ratio of net operating expenses, excluding certain expenses, to average net assets.
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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.
Expense Reimbursement
During the three months ended June 30, 2018 and 2017, we did not accrue any amounts for expense reimbursements that FS Investments or FS/KKR Advisor has agreed to pay. During the six months ended June 30, 2018 and 2017 and 2017, we accrued $0 and $666, respectively, for expense recoupments payable to FS Investments. See “—Overview—Expenses” for a discussion of the FS Investments expense reimbursement agreement and the FS/KKR Advisor expense reimbursement agreement.
Net Investment Income (Loss)
Our net investment income (loss) totaled $3,007 ($0.10 per share) and $792 ($0.04 per share) for the three months ended June 30, 2018 and 2017, respectively. Our net investment income (loss) totaled $6,920 ($0.22 per share) and $571 ($0.03 per share) for the six months ended June 30, 2018 and 2017.
Net Realized Gains or Losses
Our net realized gains (losses) on investments and the total return swap for the three and six months ended June 30, 2018 and 2017, were as follows:
| | |
Three Months Ended June 30,
|
| |
Six Months Ended June 30,
|
| ||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||
Net realized gain (loss) on investments(1)
|
| | | $ | 272 | | | | | $ | 499 | | | | | $ | 722 | | | | | $ | 818 | | |
Net realized gain (loss) on total return swap
|
| | | | 2,588 | | | | | | 3,388 | | | | | | 5,065 | | | | | | 5,063 | | |
Total net realized gain (loss)
|
| | | $ | 2,860 | | | | | $ | 3,887 | | | | | $ | 5,787 | | | | | $ | 5,881 | | |
|
(1)
We sold investments and received principal repayments of $11,103 and $30,966, respectively, during the three months ended June 30, 2018 and $17,391 and $5,601, respectively, during the three months ended June 30, 2017. We sold investments and received principal repayments of $21,289 and $32,800, respectively, during the six months ended June 30, 2018 and $23,408 and $14,545, respectively, during the six months ended June 30, 2017.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap
Our net change in unrealized appreciation (depreciation) on investments and the total return swap for the three and six months ended June 30, 2018 and 2017, were as follows:
| | |
Three Months Ended June 30,
|
| |
Six Months Ended June 30
|
| ||||||||||||||||||
| | |
2018
|
| |
2017
|
| |
2018
|
| |
2017
|
| ||||||||||||
Net change in unrealized appreciation (depreciation) on investments
|
| | | $ | 647 | | | | | $ | 751 | | | | | $ | (3,960) | | | | | $ | 2,192 | | |
Net change in unrealized appreciation (depreciation) on total return swap
|
| | | | (2,637) | | | | | | (1,245) | | | | | | (2,757) | | | | | | 436 | | |
Total net change in unrealized appreciation (depreciation)
|
| | | $ | (1,990) | | | | | $ | (494) | | | | | $ | (6,717) | | | | | $ | 2,628 | | |
|
During the three months ended June 30, 2018, the net unrealized appreciation on our investments was primarily driven by valuations of our preferred equity. During the six months ended June 30, 2018, the net unrealized depreciation on our investments was primarily driven by lower valuations of our senior secured bonds and subordinated debt. During the three and six months ended June 30, 2018, the net unrealized depreciation on our TRS was primarily driven by depreciation of our first lien senior secured loans.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended June 30, 2018 and 2017, the net increase (decrease) in net assets resulting from operations was $3,877 ($0.12 per share) and $4,185 ($0.19 per share), respectively. For the six months ended June 30, 2018 and 2017, the net increase (decrease) in net assets resulting from operations was $5,990 ($0.19 per share) and $9,080 ($0.46 per share), respectively.
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Financial Condition, Liquidity and Capital Resources
Overview
As of June 30, 2018, we had $38,691 in cash, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $71,500 in cash held as collateral by Citibank under the terms of the TRS. In addition, as of June 30, 2018, we had $30,100 in borrowings available under our financing arrangement. As of June 30, 2018, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of June 30, 2018, we had thirteen unfunded debt investments with aggregate unfunded commitments of $8,625. 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 the issuance of shares under the DRP and from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments. 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.
In November 2017, we closed our continuous public offering of common stock to new investors. We have submitted to the SEC an application for an exemptive order to permit us to offer multiple classes of shares of common stock. On July 31, 2018, we filed a new registration statement to offer multiple classes of shares of common stock, with each class having a different upfront sales load and fee and expense structure. We intend to commence this offering upon receipt of an exemptive order from the SEC, although there is no assurance we will receive such relief.
Financing Arrangements
The following table presents summary information with respect to our outstanding financing arrangements as of June 30, 2018:
Arrangement
|
| |
Type of Arrangement
|
| |
Rate
|
| |
Amount
Outstanding |
| |
Amount
Available |
| |
Maturity Date
|
| ||||||
BNP Facility(1)
|
| |
Prime Brokerage
|
| |
L+1.25%
|
| | | $ | 19,900 | | | | | $ | 30,100 | | | |
March 27, 2019(2)
|
|
Citibank Total Return Swap
|
| |
Total Return Swap
|
| |
L+1.60%
|
| | | $ | 129,781 | | | | | $ | 45,219 | | | |
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 June 30, 2018, neither party to the facility had provided notice of its intent to terminate the facility.
(3)
The TRS may be terminated by Cheltenham Funding at any time, subject to payment of an early termination fee if prior to the date 30 days before January 19, 2019 (July 19, 2018 as of June 30, 2018), or by Citibank on or after January 19, 2019 (July 19, 2018 as of 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
50
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 also are subject to a nondeductible 4% 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 January 12, 2016. We previously declared regular cash distributions on a quarterly basis and paid such distribution 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 monthly basis and pay such distributions on a monthly basis. The gross amount declared by our board of directors is reduced for annual distribution fees. 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 and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FSIC IV Advisor. 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 six months ended June 30, 2018 was funded through the reimbursement of operating expenses by FS Investments.
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.
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The following table reflects the cash distributions per share that we declared and paid to stockholders on our common stock during the six months ended June 30, 2018 and 2017:
| | |
Distribution(1)
|
| |||||||||
For the Three Months Ended
|
| |
Per Share
|
| |
Amount
|
| ||||||
Fiscal 2017 | | | | | | | | | | | | | |
March 31, 2017(2)
|
| | | $ | 0.18770 | | | | | $ | 2,917 | | |
June 30, 2017(2)
|
| | | | 0.20171 | | | | | | 4,712 | | |
Total
|
| | | $ | 0.38941 | | | | | $ | 7,629 | | |
Fiscal 2018 | | | | | | | | | | | | | |
March 31, 2018
|
| | | $ | 0.17452 | | | | | $ | 5,247 | | |
June 30, 2018
|
| | | | 0.17545 | | | | | | 5,562 | | |
Total
|
| | | $ | 0.34997 | | | | | $ | 10,809 | | |
|
(1)
Distribution amounts and per share amounts shown are net of annual distribution fees, which began accruing on February 1, 2017, and reflect the special cash distributions discussed in footnote (2) below. See Note 4 to our unaudited consolidated financial statements included herein for a discussion regarding annual distribution fees.
(2)
On a monthly basis from February 2017 through June 2017, we paid special cash distributions in the weekly amount of approximately $0.002 per share, to stockholders of record as of the weekly record dates previously determined by our board of directors during that period. We paid a total of approximately $884 in special cash distributions to stockholders. Our board of directors ratified and approved such monthly special cash distribution payments on August 10, 2017.
See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the six months ended June 30, 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 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
52
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 or revenues or, in limited instances, book value or liquidation
53
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 receive 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
54
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.
For the six months ended June 30, 2018, we recognized $54 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on our consolidated statement of operations. Comparative periods are presented in accordance with revenue recognition guidance effective prior to January 1, 2018, under which we recorded structuring and other non-recurring upfront fees as income when earned. We have determined that the adoption of the new revenue recognition guidance did not have a material impact on the amount of revenue recognized for the six months ended June 30, 2018.
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.
Uncertainty in Income Taxes
We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended June 30, 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 Note 4 to our unaudited consolidated financial statements included herein and “—Related Party Transactions—Compensation of the Investment Adviser” for a discussion of these agreements and for the amount of fees and expenses accrued under similar agreements with FSIC IV Advisor during the six months ended June 30, 2018 and 2017.
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A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at June 30, 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)
|
| |
March 27, 2019
|
| | | $ | 19,900 | | | | | $ | 19,900 | | | | | | — | | | | | | — | | | | | | — | | |
(1)
Amounts outstanding under the financing arrangement will mature, and all accrued and unpaid interest thereunder will be due and payable, on the maturity date.
(2)
At June 30, 2018, $30,100 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days’ notice by either party. As of June 30, 2018, neither party to the facility had provided notice of its intent to terminate the facility.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
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 June 30, 2018, 63.2% of our portfolio investments (based on fair value) paid variable interest rates, 33.9% paid fixed interest rates, 0.5% consisted of non-income producing equity/other investments and the remaining 2.4% 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. 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 Cheltenham Funding and Citibank, Cheltenham Funding pays fees to Citibank at a floating rate equal to one-month LIBOR plus 1.60% or 1.50% per annum, as applicable, 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 $175,000. Pursuant to the terms of the BNP 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 June 30, 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 Interest Income |
| ||||||||||||
Down 100 basis points
|
| | | $ | (1,712) | | | | | $ | (255) | | | | | $ | (1,457) | | | | | | (4.7)% | | |
No change
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Up 100 basis points
|
| | | $ | 1,712 | | | | | $ | 255 | | | | | $ | 1,457 | | | | | | 4.7% | | |
Up 300 basis points
|
| | | $ | 5,136 | | | | | $ | 765 | | | | | $ | 4,371 | | | | | | 14.1% | | |
Up 500 basis points
|
| | | $ | 8,559 | | | | | $ | 1,275 | | | | | $ | 7,284 | | | | | | 23.6% | | |
(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,
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Cheltenham 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 1.60% per annum on the utilized notional amount of the loans subject to the TRS. As of June 30, 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 six months ended June 30, 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 June 30, 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) promulgated under the Exchange Act) that occurred during the three month period ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1.
Legal Proceedings.
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
Item 1A.
Risk Factors.
There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2017, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2018.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
The following table provides information concerning our repurchases of shares of our Class T common stock pursuant to our share repurchase program during the quarter ended June 30, 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 |
| ||||||||||||
April 1 to April 30, 2018
|
| | | | 286,794 | | | | | $ | 11.1549 | | | | | | 286,794 | | | | |
|
(1)
|
| |
May 1 to May 31, 2018
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
June 1 to June 30, 2018
|
| | | | — | | | | | | — | | | | | | — | | | | | | — | | |
Total
|
| | | | 286,794 | | | | | $ | 11.1549 | | | | | | 286,794 | | | | |
|
(1)
|
| |
|
(1)
The maximum number of shares available for repurchase on January 10, 2018 was 170,512. A description of the calculation of the maximum number of shares of common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.
See Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more
detailed discussion of the terms of our share repurchase program.
Item 3.
Defaults upon Senior Securities.
Not applicable.
Item 4.
Mine Safety Disclosures.
Not applicable.
Item 5.
Other Information.
Not applicable.
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Item 6.
Exhibits.
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*
Filed herewith.
c. Financial statement schedules
No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information has been presented in the aforementioned financial statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2018.
| | | | FS INVESTMENT CORPORATION IV | | |||
| | | | 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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