Attached files
file | filename |
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EX-32.1 - EX-32.1 - FS KKR Capital Corp. II | d774435dex321.htm |
EX-31.1 - EX-31.1 - FS KKR Capital Corp. II | d774435dex311.htm |
EX-31.2 - EX-31.2 - FS KKR Capital Corp. II | d774435dex312.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-00926
FS Investment Corporation II
(Exact name of registrant as specified in its charter)
Maryland | 80-0741103 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Cira Centre | ||
2929 Arch Street, Suite 675 | ||
Philadelphia, Pennsylvania | 19104 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (215) 495-1150
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
The issuer had 308,179,780 shares of common stock outstanding as of August 12, 2014.
Table of Contents
Page | ||||||
PART IFINANCIAL INFORMATION |
| |||||
ITEM 1. |
FINANCIAL STATEMENTS | |||||
Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013 |
1 | |||||
2 | ||||||
3 | ||||||
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 |
4 | |||||
Consolidated Schedules of Investments as of June 30, 2014 (Unaudited) and December 31, 2013 |
5 | |||||
24 | ||||||
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
54 | ||||
ITEM 3. |
80 | |||||
ITEM 4. |
81 | |||||
PART IIOTHER INFORMATION |
||||||
ITEM 1. |
82 | |||||
ITEM 1A. |
82 | |||||
ITEM 2. |
83 | |||||
ITEM 3. |
84 | |||||
ITEM 4. |
84 | |||||
ITEM 5. |
84 | |||||
ITEM 6. |
84 | |||||
89 |
Table of Contents
Item 1. | Financial Statements. |
FS Investment Corporation II
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
June 30, 2014 (Unaudited) |
December 31, 2013 | |||||||
Assets |
||||||||
Investments, at fair value (amortized cost$3,673,278 and $2,626,969, respectively) |
$ | 3,763,944 | $ | 2,655,828 | ||||
Cash |
349,898 | 581,632 | ||||||
Receivable for investments sold and repaid |
41,111 | 52,817 | ||||||
Interest receivable |
43,680 | 29,855 | ||||||
Receivable for common stock purchased |
| 532 | ||||||
Deferred financing costs |
6,387 | 1,273 | ||||||
Prepaid expenses and other assets |
121 | 30 | ||||||
|
|
|
|
|||||
Total assets |
$ | 4,205,141 | $ | 3,321,967 | ||||
|
|
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|||||
Liabilities |
||||||||
Payable for investments purchased |
$ | 123,906 | $ | 163,785 | ||||
Repurchase agreement payable(1) |
550,000 | 550,000 | ||||||
Credit facilities payable |
513,994 | 170,494 | ||||||
Stockholder distributions payable |
19,269 | 17,826 | ||||||
Management fees payable |
19,849 | 15,013 | ||||||
Accrued capital gains incentive fees(2) |
21,555 | 9,234 | ||||||
Subordinated income incentive fees payable(2) |
9,679 | | ||||||
Administrative services expense payable |
1,888 | 571 | ||||||
Interest payable |
4,472 | 2,858 | ||||||
Directors fees payable |
223 | 183 | ||||||
Other accrued expenses and liabilities |
2,082 | 1,018 | ||||||
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|
|||||
Total liabilities |
1,266,917 | 930,982 | ||||||
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|
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Commitments and contingencies(3) |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding |
| | ||||||
Common stock, $0.001 par value, 450,000,000 shares authorized, 306,677,823 and 254,572,096 shares issued and outstanding, respectively |
307 | 255 | ||||||
Capital in excess of par value |
2,856,162 | 2,363,943 | ||||||
Accumulated undistributed net realized gains on investments and gain/loss on foreign currency(4) |
7,707 | 7,911 | ||||||
Accumulated distributions in excess of net investment income(4) |
(16,608 | ) | (9,983 | ) | ||||
Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency |
90,656 | 28,859 | ||||||
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|
|||||
Total stockholders equity |
2,938,224 | 2,390,985 | ||||||
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Total liabilities and stockholders equity |
$ | 4,205,141 | $ | 3,321,967 | ||||
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Net asset value per share of common stock at period end |
$ | 9.58 | $ | 9.39 |
(1) | See Note 8 for a discussion of the Companys repurchase transaction. |
(2) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
(3) | See Note 9 for a discussion of the Companys commitments and contingencies. |
(4) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
See notes to unaudited consolidated financial statements.
1
Table of Contents
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Investment income |
||||||||||||||||
Interest income |
$ | 80,066 | $ | 26,896 | $ | 148,650 | $ | 42,276 | ||||||||
Fee income |
18,924 | 1,330 | 31,405 | 2,923 | ||||||||||||
Dividend income |
526 | | 526 | | ||||||||||||
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|
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Total investment income |
99,516 | 28,226 | 180,581 | 45,199 | ||||||||||||
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|
|||||||||
Operating expenses |
||||||||||||||||
Management fees |
19,849 | 7,595 | 37,490 | 12,580 | ||||||||||||
Capital gains incentive fees(1) |
6,387 | (2,839 | ) | 12,321 | 1,020 | |||||||||||
Subordinated income incentive fees(1) |
9,679 | | 9,679 | | ||||||||||||
Administrative services expenses |
1,216 | 644 | 2,590 | 1,105 | ||||||||||||
Stock transfer agent fees |
850 | 612 | 1,700 | 1,047 | ||||||||||||
Accounting and administrative fees |
350 | 131 | 667 | 220 | ||||||||||||
Interest expense |
7,252 | 1,967 | 13,153 | 3,111 | ||||||||||||
Directors fees |
279 | 157 | 458 | 303 | ||||||||||||
Other general and administrative expenses |
1,101 | 677 | 2,270 | 1,154 | ||||||||||||
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Operating expenses |
46,963 | 8,944 | 80,328 | 20,540 | ||||||||||||
Add: Expense recoupment to sponsor(2) |
| | | 2,041 | ||||||||||||
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Total operating expenses |
46,963 | 8,944 | 80,328 | 22,581 | ||||||||||||
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|
|||||||||
Net investment income (loss) |
52,553 | 19,282 | 100,253 | 22,618 | ||||||||||||
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Realized and unrealized gain/loss |
||||||||||||||||
Net realized gain (loss) on investments |
(2,815 | ) | 811 | (210 | ) | 1,659 | ||||||||||
Net realized gain (loss) on total return swap(3) |
| 12,426 | | 19,689 | ||||||||||||
Net realized gain (loss) on foreign currency |
2 | (41 | ) | 6 | (100 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) on investments |
34,748 | (13,734 | ) | 61,807 | (1,258 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) on total return swap(3) |
| (9,612 | ) | | (5,641 | ) | ||||||||||
Net change in unrealized gain (loss) on foreign currency |
(10 | ) | 30 | (10 | ) | 150 | ||||||||||
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Total net realized and unrealized gain (loss) on investments |
31,925 | (10,120 | ) | 61,593 | 14,499 | |||||||||||
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Net increase (decrease) in net assets resulting from operations |
$ | 84,478 | $ | 9,162 | $ | 161,846 | $ | 37,117 | ||||||||
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Per share informationbasic and diluted |
||||||||||||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) |
$ | 0.28 | $ | 0.08 | $ | 0.55 | $ | 0.39 | ||||||||
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Weighted average shares outstanding |
305,302,628 | 116,647,055 | 293,671,272 | 96,371,312 | ||||||||||||
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(1) | See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees. |
(2) | See Note 4 for a discussion of expense reimbursements payable to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates. |
(3) | On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A. |
See notes to unaudited consolidated financial statements.
2
Table of Contents
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Operations |
||||||||
Net investment income (loss) |
$ | 100,253 | $ | 22,618 | ||||
Net realized gain (loss) on investments, total return swap and foreign currency(1) |
(204 | ) | 21,248 | |||||
Net change in unrealized appreciation (depreciation) on investments |
61,807 | (1,258 | ) | |||||
Net change in unrealized appreciation (depreciation) on total return swap(1) |
| (5,641 | ) | |||||
Net change in unrealized gain (loss) on foreign currency |
(10 | ) | 150 | |||||
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|
|||||
Net increase (decrease) in net assets resulting from operations |
161,846 | 37,117 | ||||||
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Stockholder distributions(2) |
||||||||
Distributions from net investment income |
(106,878 | ) | (26,613 | ) | ||||
Distributions from net realized gain on investments |
| (10,825 | ) | |||||
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Net decrease in net assets resulting from stockholder distributions |
(106,878 | ) | (37,438 | ) | ||||
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Capital share transactions |
||||||||
Issuance of common stock(3) |
442,395 | 739,199 | ||||||
Reinvestment of stockholder distributions(3) |
56,392 | 16,436 | ||||||
Repurchases of common stock(3) |
(4,830 | ) | (712 | ) | ||||
Offering costs |
(1,686 | ) | (2,800 | ) | ||||
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Net increase in net assets resulting from capital share transactions |
492,271 | 752,123 | ||||||
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Total increase in net assets |
547,239 | 751,802 | ||||||
Net assets at beginning of period |
2,390,985 | 527,727 | ||||||
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Net assets at end of period |
$ | 2,938,224 | $ | 1,279,529 | ||||
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Accumulated distributions in excess of net investment income(2) |
$ | (16,608 | ) | $ | (7,477 | ) | ||
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(1) | On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A. |
(2) | See Note 5 for a discussion of the sources of distributions paid by the Company. |
(3) | See Note 3 for a discussion of transactions with respect to shares of the Companys common stock during the six months ended June 30, 2014 and 2013. |
See notes to unaudited consolidated financial statements.
3
Table of Contents
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Cash flows from operating activities |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 161,846 | $ | 37,117 | ||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
||||||||
Purchases of investments |
(1,755,780 | ) | (1,100,342 | ) | ||||
Paid-in-kind interest |
(3,797 | ) | (51 | ) | ||||
Proceeds from sales and repayments of investments |
720,033 | 195,909 | ||||||
Net realized (gain) loss on investments |
210 | (1,659 | ) | |||||
Net change in unrealized (appreciation) depreciation on investments |
(61,807 | ) | 1,258 | |||||
Net change in unrealized (appreciation) depreciation on total return swap(1) |
| 5,641 | ||||||
Accretion of discount |
(6,975 | ) | (3,412 | ) | ||||
Amortization of deferred financing costs |
761 | 165 | ||||||
(Increase) decrease in due from counterparty |
| 97,441 | ||||||
(Increase) decrease in receivable for investments sold and repaid |
11,706 | (7,960 | ) | |||||
(Increase) decrease in expense reimbursement due from sponsor(2) |
| 1,635 | ||||||
(Increase) decrease in interest receivable |
(13,825 | ) | (18,377 | ) | ||||
(Increase) decrease in receivable due on total return swap(1) |
| 396 | ||||||
(Increase) decrease in prepaid expenses and other assets |
(91 | ) | 49 | |||||
Increase (decrease) in payable for investments purchased |
(39,879 | ) | 103,674 | |||||
Increase (decrease) in management fees payable |
4,836 | 5,128 | ||||||
Increase (decrease) in accrued capital gains incentive fees |
12,321 | 542 | ||||||
Increase (decrease) in subordinated income incentive fees payable |
9,679 | | ||||||
Increase (decrease) in administrative services expense payable |
1,317 | 387 | ||||||
Increase (decrease) in interest payable |
1,614 | 707 | ||||||
Increase (decrease) in directors fees payable |
40 | 177 | ||||||
Increase (decrease) in other accrued expenses and liabilities |
1,064 | 157 | ||||||
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Net cash used in operating activities |
(956,727 | ) | (681,418 | ) | ||||
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Cash flows from financing activities |
||||||||
Issuance of common stock |
442,927 | 739,596 | ||||||
Reinvestment of stockholder distributions |
56,392 | 16,436 | ||||||
Repurchases of common stock |
(4,830 | ) | (712 | ) | ||||
Offering costs |
(1,686 | ) | (2,800 | ) | ||||
Stockholder distributions |
(105,435 | ) | (32,312 | ) | ||||
Borrowings under credit facilities(3) |
343,500 | 100,194 | ||||||
Borrowings under repurchase agreement(4) |
| 76,500 | ||||||
Deferred financing costs paid |
(5,875 | ) | (1,557 | ) | ||||
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Net cash provided by financing activities |
724,993 | 895,345 | ||||||
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Total increase (decrease) in cash |
(231,734 | ) | 213,927 | |||||
Cash at beginning of period |
581,632 | 107,157 | ||||||
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Cash at end of period |
$ | 349,898 | $ | 321,084 | ||||
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Supplemental disclosure |
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Local and excise taxes paid |
$ | 352 | $ | | ||||
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(1) | On June 13, 2013, the Company terminated its total return swap agreement with Citibank, N.A. |
(2) | See Note 4 for a discussion of expense reimbursements payable to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates. |
(3) | See Note 8 for a discussion of the Companys credit facilities. During the six months ended June 30, 2014 and 2013, the Company paid $1,791 and $0, respectively, in interest expense on the credit facilities. |
(4) | See Note 8 for a discussion of the Companys repurchase transaction. During the six months ended June 30, 2014 and 2013, the Company paid $8,987 and $2,239, respectively, in interest expense pursuant to the repurchase agreement. |
See notes to unaudited consolidated financial statements.
4
Table of Contents
Unaudited Consolidated Schedule of Investments
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||||
Senior Secured LoansFirst Lien62.8% |
||||||||||||||||||||||||
A.T. Cross Co. |
(e)(g) | Retailing | L+825 | 9/6/19 | $ | 36,723 | $ | 36,723 | $ | 36,355 | ||||||||||||||
A.T. Cross Co. |
(p) | Retailing | L+825 | 9/6/19 | 20,000 | 20,000 | 19,800 | |||||||||||||||||
Air Medical Group Holdings, Inc. |
(g) | Health Care Equipment & Services | L+400 | 1.0 | % | 6/30/18 | 5,451 | 5,532 | 5,478 | |||||||||||||||
Alon USA Partners, L.P. |
(e)(l) | Energy | L+800 | 1.3 | % | 11/26/18 | 4,104 | 3,938 | 4,279 | |||||||||||||||
Alvogen Pharma US, Inc. |
(g)(i) | Pharmaceuticals, Biotechnology & Life Sciences | L+575 | 1.3 | % | 5/23/18 | 9,183 | 9,136 | 9,378 | |||||||||||||||
American Tire Distributors, Inc. |
(g) | Automobiles & Components | L+475 | 1.0 | % | 6/1/18 | 1,287 | 1,284 | 1,298 | |||||||||||||||
AP Exhaust Acquisition, LLC |
(e)(h)(i) | Automobiles & Components | L+775 | 1.5 | % | 1/16/21 | 155,000 | 155,000 | 155,000 | |||||||||||||||
Apex Tool Group, LLC |
(i) | Capital Goods | L+325 | 1.3 | % | 1/31/20 | 5,273 | 5,251 | 5,220 | |||||||||||||||
ARG IH Corp. |
(h) | Consumer Services | L+400 | 1.0 | % | 11/15/20 | 1,393 | 1,390 | 1,403 | |||||||||||||||
Ascend Learning, LLC |
(i)(k) | Software & Services | L+500 | 1.0 | % | 7/26/19 | 3,934 | 3,917 | 3,988 | |||||||||||||||
Ascension Insurance, Inc. |
(e)(f) | Insurance | L+825 | 1.3 | % | 3/5/19 | 79,038 | 77,841 | 78,247 | |||||||||||||||
Aspect Software, Inc. |
(h)(i) | Software & Services | L+550 | 1.8 | % | 5/7/16 | 7,671 | 7,695 | 7,758 | |||||||||||||||
Attachmate Corp. |
(g)(h) | Software & Services | L+575 | 1.5 | % | 11/22/17 | 6,724 | 6,784 | 6,794 | |||||||||||||||
Avaya Inc. |
(i) | Technology Hardware & Equipment | L+450 | 10/26/17 | 3,965 | 3,742 | 3,891 | |||||||||||||||||
Azure Midstream Energy LLC |
(g) | Energy | L+550 | 1.0 | % | 11/15/18 | 4,388 | 4,328 | 4,434 | |||||||||||||||
BlackBrush TexStar L.P. |
(e)(g) | Energy | L+650 | 1.3 | % | 6/4/19 | 16,333 | 16,217 | 16,511 | |||||||||||||||
Boomerang Tube, LLC |
(e) | Energy | L+950 | 1.5 | % | 10/11/17 | 4,563 | 4,462 | 4,152 | |||||||||||||||
BPA Laboratories, Inc. |
(e) | Pharmaceuticals, Biotechnology & Life Sciences | 2.5% | 7/3/17 | 3,763 | 3,414 | 3,481 | |||||||||||||||||
BRG Sports, Inc. |
(g)(h) | Retailing | L+550 | 1.0 | % | 4/15/21 | 5,870 | 5,755 | 5,936 | |||||||||||||||
Cadillac Jack, Inc. |
(e)(g)(h)(i)(l) | Consumer Services | L+850 | 1.0 | % | 5/15/19 | 164,375 | 162,424 | 164,375 | |||||||||||||||
Caesars Entertainment Operating Co. |
(k)(l) | Consumer Services | L+425 | 1/26/18 | 16,524 | 15,588 | 15,292 | |||||||||||||||||
Caesars Entertainment Operating Co. |
(k)(l) | Consumer Services | L+525 | 1/28/18 | 16,617 | 15,771 | 15,542 | |||||||||||||||||
Caesars Entertainment Operating Co. |
(l) | Consumer Services | L+750 | 2.0 | % | 10/31/16 | 4,328 | 4,378 | 4,355 | |||||||||||||||
Caesars Entertainment Operating Co. |
(e)(g)(i)(j)(k)(l) | Consumer Services | L+875 | 1.0 | % | 3/1/17 | 68,921 | 68,404 | 68,111 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(e)(f)(g) | Consumer Services | L+600 | 1.0 | % | 10/11/20 | 58,798 | 55,534 | 59,257 | |||||||||||||||
Cengage Learning, Inc. |
(g)(j) | Media | L+600 | 1.0 | % | 3/6/20 | 5,392 | 5,366 | 5,460 | |||||||||||||||
Clear Channel Communications, Inc. |
(e) | Media | L+365 | 1/29/16 | 6,156 | 5,453 | 6,124 | |||||||||||||||||
Community Health Systems, Inc. |
(g)(l) | Health Care Equipment & Services | L+325 | 1.0 | % | 1/17/21 | 4,020 | 4,001 | 4,048 | |||||||||||||||
Corner Investment PropCo, LLC |
(e)(g) | Consumer Services | L+975 | 1.3 | % | 11/2/19 | 41,000 | 41,577 | 42,230 | |||||||||||||||
CoSentry.Net, LLC |
(f) | Software & Services | L+800 | 1.3 | % | 12/31/19 | 54,228 | 54,228 | 55,041 | |||||||||||||||
Crestwood Holdings LLC |
(g) | Energy | L+600 | 1.0 | % | 6/19/19 | 5,593 | 5,569 | 5,692 | |||||||||||||||
Cumulus Media Inc. |
(h)(l) | Media | L+325 | 1.0 | % | 12/23/20 | 3,872 | 3,836 | 3,891 | |||||||||||||||
DAE Aviation Holdings, Inc. |
(h)(i)(l) | Capital Goods | L+400 | 1.0 | % | 11/2/18 | 3,895 | 3,886 | 3,942 | |||||||||||||||
Del Monte Foods Consumer Products, Inc. |
(i)(l) | Food, Beverage & Tobacco | L+325 | 1.0 | % | 12/6/20 | 2,802 | 2,789 | 2,792 |
See notes to unaudited consolidated financial statements.
5
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||||
Drew Marine Group Inc. |
(h)(l) | Energy | L+350 | 1.0 | % | 11/19/20 | $ | 2,653 | $ | 2,650 | $ | 2,668 | ||||||||||||
Eastman Kodak Co. |
(g) | Consumer Durables & Apparel | L+625 | 1.0 | % | 9/3/19 | 7,200 | 7,072 | 7,326 | |||||||||||||||
EnergySolutions, LLC |
(g) | Energy | L+575 | 1.0 | % | 5/29/20 | 4,364 | 4,276 | 4,420 | |||||||||||||||
EquiPower Resources Holdings, LLC |
(g) | Utilities | L+325 | 1.0 | % | 12/21/18 | 1,461 | 1,489 | 1,473 | |||||||||||||||
ERC Ireland Holdings Ltd. |
(l) | Telecommunication Services | EURIBOR+450 | 9/30/19 | | 9,928 | 7,856 | 13,328 | ||||||||||||||||
Extreme Reach, Inc. |
(g) | Media | L+575 | 1.0 | % | 1/24/20 | $ | 2,889 | 2,849 | 2,929 | ||||||||||||||
FairPoint Communications, Inc. |
(e)(h)(l) | Telecommunication Services | L+625 | 1.3 | % | 2/14/19 | 21,602 | 21,769 | 22,416 | |||||||||||||||
Filtration Group Corp. |
(h) | Energy | L+350 | 1.0 | % | 11/20/20 | 2,437 | 2,425 | 2,460 | |||||||||||||||
FR Dixie Acquisition Corp. |
(g) | Energy | L+475 | 1.0 | % | 12/18/20 | 4,189 | 4,170 | 4,216 | |||||||||||||||
FR Utility Services LLC |
(g)(k) | Energy | L+575 | 1.0 | % | 10/18/19 | 5,584 | 5,543 | 5,647 | |||||||||||||||
Fram Group Holdings Inc. |
(g) | Automobiles & Components | L+500 | 1.5 | % | 7/29/17 | 2,009 | 2,032 | 2,018 | |||||||||||||||
Ikaria Acquisition Inc. |
(g) | Pharmaceuticals, Biotechnology & Life Sciences | L+400 | 1.0 | % | 2/12/21 | 4,696 | 4,673 | 4,733 | |||||||||||||||
ILC Industries, LLC |
(g) | Capital Goods | L+650 | 1.5 | % | 7/11/18 | 4,575 | 4,563 | 4,587 | |||||||||||||||
Industrial Group Intermediate Holdings, LLC |
(h)(i) | Materials | L+800 | 1.3 | % | 5/31/20 | 84,785 | 84,785 | 84,785 | |||||||||||||||
Industry City TI Lessor, L.P. |
(e) | Real Estate | 10.3% | 6/30/26 | 9,700 | 9,700 | 9,700 | |||||||||||||||||
Internap Network Services Corp. |
(g)(l) | Software & Services | L+500 | 1.0 | % | 11/26/19 | 9,950 | 9,860 | 10,006 | |||||||||||||||
Intralinks, Inc. |
(g)(h)(l) | Software & Services | L+525 | 2.0 | % | 2/24/19 | 24,938 | 24,705 | 24,969 | |||||||||||||||
Intrawest Operations Group, LLC |
(i) | Consumer Services | L+450 | 1.0 | % | 12/9/20 | 7,463 | 7,393 | 7,593 | |||||||||||||||
Kanders C3 Holdings, LLC |
(e)(f) | Capital Goods | L+900 | 1.3 | % | 12/19/18 | 21,600 | 21,439 | 22,680 | |||||||||||||||
Kanders C3 Holdings, LLC |
(e)(f) | Capital Goods | L+900 | 1.3 | % | 12/19/18 | 1,765 | 1,752 | 1,765 | |||||||||||||||
Kanders C3 Holdings, LLC |
(p) | Capital Goods | L+900 | 1.3 | % | 12/19/18 | 10,204 | 10,204 | 10,204 | |||||||||||||||
Lantiq Deutschland GmbH |
(e)(l) | Software & Services | L+900 | 2.0 | % | 11/16/15 | 1,521 | 1,462 | 1,513 | |||||||||||||||
Larchmont Resources, LLC |
(g) | Energy | L+725 | 1.0 | % | 8/7/19 | 7,354 | 7,289 | 7,520 | |||||||||||||||
MB Precision Holdings LLC |
(e)(h)(i) | Capital Goods | L+725 | 1.3 | % | 1/23/20 | 62,685 | 62,685 | 62,685 | |||||||||||||||
MMI International Ltd. |
(g)(l) | Technology Hardware & Equipment | L+600 | 1.3 | % | 11/20/18 | 6,518 | 6,362 | 6,453 | |||||||||||||||
MMM Holdings, Inc. |
(g) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 2,849 | 2,865 | 2,874 | |||||||||||||||
MModal Inc. |
(e)(g)(m) | Health Care Equipment & Services | Prime+575 | 8/16/19 | 15,768 | 15,467 | 12,496 | |||||||||||||||||
MModal Inc. |
(p) | Health Care Equipment & Services | L+795 | 1.5 | % | 8/28/14 | 2,891 | 2,891 | 2,877 | |||||||||||||||
Mood Media Corp. |
(g)(l) | Media | L+600 | 1.0 | % | 5/1/19 | 1,817 | 1,799 | 1,822 | |||||||||||||||
Moxie Liberty LLC |
(g)(i) | Energy | L+650 | 1.0 | % | 8/21/20 | 11,853 | 11,900 | 12,209 | |||||||||||||||
Moxie Patriot LLC |
(i) | Energy | L+575 | 1.0 | % | 12/19/20 | 5,556 | 5,504 | 5,722 | |||||||||||||||
MSO of Puerto Rico, Inc. |
(g) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 2,072 | 2,083 | 2,090 |
See notes to unaudited consolidated financial statements.
6
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||||
New HB Acquisition, LLC |
(h)(i) | Food, Beverage & Tobacco | L+550 | 1.3% | 4/9/20 | $ | 3,886 | $ | 3,853 | $ | 4,037 | |||||||||||||
New Star Metals Inc. |
(e)(g)(h)(i) | Capital Goods | L+800 | 1.3% | 3/20/20 | 110,325 | 110,325 | 110,325 | ||||||||||||||||
Nexeo Solutions, LLC |
(h)(i) | Capital Goods | L+350 | 1.5% | 9/8/17 | 2,446 | 2,438 | 2,452 | ||||||||||||||||
Nova Wildcat Amerock, LLC |
(e)(g)(h) | Consumer Durables & Apparel | L+814 | 1.3% | 9/10/19 | 75,000 | 75,000 | 75,000 | ||||||||||||||||
Opal Acquisition, Inc. |
(h)(i) | Consumer Services | L+400 | 1.0% | 11/27/20 | 10,891 | 10,811 | 10,933 | ||||||||||||||||
Panda Sherman Power, LLC |
(e) | Energy | L+750 | 1.5% | 9/14/18 | 3,818 | 3,817 | 3,921 | ||||||||||||||||
Panda Temple Power, LLC (TLA) |
(e) | Energy | L+700 | 1.5% | 7/17/18 | 2,000 | 2,015 | 2,050 | ||||||||||||||||
Payless ShoeSource, Inc. |
(g) | Consumer Durables & Apparel | L+400 | 1.0% | 3/5/21 | 5,359 | 5,333 | 5,382 | ||||||||||||||||
PeroxyChem LLC |
(h)(i) | Capital Goods | L+650 | 1.0% | 2/28/20 | 9,975 | 9,784 | 10,075 | ||||||||||||||||
PharMEDium Healthcare Corp. |
(g) | Health Care Equipment & Services | L+325 | 1.0% | 1/22/21 | 723 | 719 | 723 | ||||||||||||||||
Professional Plumbing Group, Inc. |
(e)(g) | Capital Goods | L+875 | 0.8% | 7/31/19 | 32,256 | 32,256 | 32,901 | ||||||||||||||||
PRV Aerospace, LLC |
(g) | Capital Goods | L+525 | 1.3% | 5/9/18 | 2,981 | 3,001 | 2,988 | ||||||||||||||||
Reddy Ice Holdings, Inc. |
(g) | Food & Staples Retailing | L+550 | 1.3% | 5/1/19 | 1,176 | 1,165 | 1,152 | ||||||||||||||||
Serena Software, Inc. |
(g)(h) | Software & Services | L+650 | 1.0% | 4/14/20 | 18,000 | 17,647 | 18,180 | ||||||||||||||||
Sheridan Holdings, Inc. |
(h) | Health Care Equipment & Services | L+350 | 1.0% | 6/29/18 | 3,697 | 3,680 | 3,703 | ||||||||||||||||
Sirius Computer Solutions, Inc. |
(e) | Software & Services | L+575 | 1.3% | 12/7/18 | 7,519 | 7,461 | 7,632 | ||||||||||||||||
Smile Brands Group Inc. |
(e)(f)(g)(h)(i) | Health Care Equipment & Services | L+625 | 1.3% | 8/15/19 | 43,856 | 43,273 | 42,760 | ||||||||||||||||
Sorenson Communications, Inc. |
(e)(g)(h)(i) | Telecommunication Services | L+575 | 2.3% | 4/30/20 | 102,010 | 101,514 | 104,625 | ||||||||||||||||
Sports Authority, Inc. |
(g) | Consumer Durables & Apparel | L+600 | 1.5% | 11/16/17 | 7,818 | 7,878 | 7,839 | ||||||||||||||||
Sprint Industrial Holdings LLC |
(g) | Energy | L+575 | 1.3% | 11/14/19 | 7,265 | 7,210 | 7,320 | ||||||||||||||||
Stallion Oilfield Holdings, Inc. |
(e)(g) | Energy | L+675 | 1.3% | 6/19/18 | 9,671 | 9,590 | 9,827 | ||||||||||||||||
Swift Worldwide Resources US Holdings Corp. |
(g)(i) | Energy | L+800 | 1.3% | 4/30/19 | 19,987 | 19,987 | 19,987 | ||||||||||||||||
Therakos, Inc. |
(e)(g) | Pharmaceuticals, Biotechnology & Life Sciences | L+625 | 1.3% | 12/27/17 | 6,443 | 6,355 | 6,490 | ||||||||||||||||
ThermaSys Corp. |
(g)(k) | Capital Goods | L+400 | 1.3% | 5/3/19 | 5,000 | 5,003 | 4,996 | ||||||||||||||||
Tri-Northern Acquisition, Inc. |
(e)(f)(g) | Retailing | L+800 | 1.3% | 7/1/19 | 89,053 | 89,053 | 90,389 | ||||||||||||||||
Tri-Northern Acquisition, Inc. |
(p) | Retailing | L+800 | 1.3% | 7/1/19 | 18,621 | 18,621 | 18,900 | ||||||||||||||||
U.S. Xpress Enterprises, Inc. |
(e)(h)(i) | Transportation | L+850, 1.5% PIK (1.5% Max PIK) |
1.5% | 5/30/19 | 95,000 | 95,000 | 95,000 | ||||||||||||||||
UTEX Industries, Inc. |
Energy | L+400 | 1.0% | 5/21/21 | 1,154 | 1,148 | 1,170 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansFirst Lien |
1,876,662 | 1,898,496 | ||||||||||||||||||||||
Unfunded Loan Commitments |
(51,716 | ) | (51,716 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Senior Secured LoansFirst Lien |
1,824,946 | 1,846,780 | ||||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
7
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||||
Senior Secured LoansSecond Lien36.9% |
||||||||||||||||||||||||
Accellent Inc. |
Health Care Equipment & Services | L+650 | 1.0% | 2/21/22 | $ | 8,814 | $ | 8,793 | $ | 8,770 | ||||||||||||||
Advantage Sales & Marketing Inc. |
(f) | Commercial & Professional Services | L+725 | 1.0% | 6/12/18 | 471 | 471 | 473 | ||||||||||||||||
Alison US LLC |
(g)(k)(l) | Utilities | L+850 | 1.0% | 6/17/22 | 4,444 | 4,267 | 4,350 | ||||||||||||||||
Alliance Laundry Systems LLC |
(e) | Capital Goods | L+825 | 1.3% | 12/10/19 | 3,450 | 3,421 | 3,514 | ||||||||||||||||
American EnergyUtica, LLC |
(e)(f) | Energy | L+400, 5.5% PIK (5.5% Max PIK) |
1.5% | 9/30/18 | 103,744 | 103,744 | 105,301 | ||||||||||||||||
American EnergyUtica, LLC |
(f) | Energy | L+400, 5.5% PIK (5.5% Max PIK) |
1.5% | 9/30/18 | 70,444 | 70,444 | 71,500 | ||||||||||||||||
AssuredPartners, Inc. |
Insurance | L+675 | 1.0% | 3/31/22 | 7,000 | 6,932 | 7,031 | |||||||||||||||||
Asurion, LLC |
Insurance | L+750 | 1.0% | 3/3/21 | 15,957 | 15,726 | 16,586 | |||||||||||||||||
Attachmate Corp. |
(e) | Software & Services | L+950 | 1.5% | 11/22/18 | 20,919 | 20,940 | 21,233 | ||||||||||||||||
Berlin Packaging LLC |
Commercial & Professional Services | L+750 | 1.3% | 4/2/20 | 3,571 | 3,633 | 3,670 | |||||||||||||||||
BPA Laboratories, Inc. |
(e) | Pharmaceuticals, Biotechnology & Life Sciences | 2.5% | 7/3/17 | 3,272 | 2,515 | 2,728 | |||||||||||||||||
Brasa (Holdings) Inc. |
(e) | Consumer Services | L+950 | 1.5% | 1/20/20 | 621 | 601 | 631 | ||||||||||||||||
BRG Sports, Inc. |
Retailing | L+925 | 1.0% | 4/15/22 | 12,500 | 12,192 | 12,625 | |||||||||||||||||
Camp International Holding Co. |
(g) | Capital Goods | L+725 | 1.0% | 11/29/19 | 1,106 | 1,106 | 1,137 | ||||||||||||||||
Capital Automotive L.P. |
(g) | Real Estate | L+500 | 1.0% | 4/30/20 | 7,895 | 7,861 | 8,089 | ||||||||||||||||
Catalina Marketing Corp. |
Media | L+675 | 1.0% | 4/1/22 | 10,000 | 9,927 | 10,025 | |||||||||||||||||
Centaur Acquisition, LLC |
Consumer Services | L+750 | 1.3% | 2/20/20 | 15,585 | 15,882 | 15,897 | |||||||||||||||||
Cervalis LLC |
(e)(f) | Commercial & Professional Services | L+875 | 1.3% | 2/8/19 | 30,000 | 29,651 | 30,300 | ||||||||||||||||
CHG Buyer Corp. |
(e) | Health Care Equipment & Services | L+775 | 1.3% | 11/19/20 | 5,747 | 5,661 | 5,864 | ||||||||||||||||
Chief Exploration & Development LLC |
(g) | Energy | L+650 | 1.0% | 5/16/21 | 2,259 | 2,236 | 2,315 | ||||||||||||||||
Citrus Energy Appalachia, LLC |
(e) | Energy | L+850 | 1.3% | 7/26/18 | 15,392 | 14,979 | 15,430 | ||||||||||||||||
Colouroz Investment 2 LLC |
(i)(k)(l) | Consumer Durables & Apparel | L+725 | 1.0% | 5/2/22 | 5,714 | 5,671 | 5,769 | ||||||||||||||||
Consolidated Precision Products Corp. |
(e) | Capital Goods | L+775 | 1.0% | 4/30/21 | 16,750 | 16,672 | 16,949 | ||||||||||||||||
Crossmark Holdings, Inc. |
Commercial & Professional Services | L+750 | 1.3% | 12/21/20 | 7,778 | 7,797 | 7,739 | |||||||||||||||||
CT Technologies Intermediate Holdings, Inc. |
Software & Services | L+800 | 1.3% | 10/2/20 | 5,000 | 4,930 | 5,056 | |||||||||||||||||
DAE Aviation Holdings, Inc. |
(l) | Capital Goods | L+675 | 1.0% | 7/30/19 | 18,750 | 18,572 | 19,125 | ||||||||||||||||
Del Monte Foods Consumer Products, Inc. |
(l) | Food, Beverage & Tobacco | L+725 | 1.0% | 6/6/21 | 3,333 | 3,301 | 3,282 | ||||||||||||||||
Devix US, Inc. |
Health Care Equipment & Services | L+700 | 1.0% | 5/2/22 | 1,364 | 1,350 | 1,372 | |||||||||||||||||
Drew Marine Group Inc. |
(l) | Energy | L+700 | 1.0% | 5/19/21 | 2,500 | 2,494 | 2,538 | ||||||||||||||||
Eastman Kodak Co. |
(j) | Consumer Durables & Apparel | L+950 | 1.3% | 9/3/20 | 25,000 | 24,426 | 25,547 | ||||||||||||||||
Extreme Reach, Inc. |
Media | L+950 | 1.0% | 1/24/21 | 10,000 | 9,810 | 10,225 | |||||||||||||||||
Filtration Group Corp. |
Energy | L+725 | 1.0% | 11/21/21 | 5,158 | 5,174 | 5,289 | |||||||||||||||||
Flexera Software LLC |
Software & Services | L+700 | 1.0% | 4/2/21 | 10,000 | 9,952 | 10,038 | |||||||||||||||||
Ikaria Acquisition Inc. |
(j) | Pharmaceuticals, Biotechnology & Life Sciences | L+775 | 1.0% | 2/14/22 | 5,000 | 4,964 | 5,098 | ||||||||||||||||
ILC Industries, LLC |
(f) | Capital Goods | L+1000 | 1.5% | 7/11/19 | 3,024 | 2,879 | 2,979 | ||||||||||||||||
Inmar Acquisition Sub, Inc. |
Software & Services | L+700 | 1.0% | 1/27/22 | 2,830 | 2,803 | 2,814 | |||||||||||||||||
Kronos Inc. |
Software & Services | L+850 | 1.3% | 4/30/20 | 9,914 | 9,921 | 10,347 |
See notes to unaudited consolidated financial statements.
8
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||||
Leedsworld Inc. |
(e)(f)(g) | Retailing | L+875 | 1.3% | 6/28/20 | $ | 62,500 | $ | 62,500 | $ | 62,500 | |||||||||||||
LM U.S. Member LLC |
(e) | Transportation | L+825 | 1.3% | 10/26/20 | 15,137 | 15,216 | 15,289 | ||||||||||||||||
Mitchell International, Inc. |
Software & Services | L+750 | 1.0% | 10/11/21 | 10,000 | 10,238 | 10,233 | |||||||||||||||||
Neff Rental LLC |
Capital Goods | L+625 | 1.0% | 6/9/21 | 14,493 | 14,421 | 14,484 | |||||||||||||||||
Onex Carestream Finance L.P. |
(e)(f) | Health Care Equipment & Services | L+850 | 1.0% | 12/5/19 | 9,435 | 9,271 | 9,659 | ||||||||||||||||
P2 Upstream Acquisition Co. |
Energy | L+800 | 1.0% | 4/30/21 | 14,500 | 14,769 | 14,784 | |||||||||||||||||
Paw Luxco II Sarl |
(l) | Consumer Durables & Apparel | EURIBOR+950 | 1/29/19 | | 5,727 | 7,025 | 7,429 | ||||||||||||||||
Payless ShoeSource, Inc. |
Consumer Durables & Apparel | L+750 | 1.0% | 3/4/22 | $ | 14,092 | 13,955 | 14,136 | ||||||||||||||||
Peak 10, Inc. |
(j)(k) | Software & Services | L+725 | 1.0% | 6/17/22 | 5,500 | 5,445 | 5,511 | ||||||||||||||||
Pelican Products, Inc. |
Capital Goods | L+825 | 1.0% | 4/9/21 | 5,438 | 5,398 | 5,519 | |||||||||||||||||
Penton Media, Inc. |
(j) | Media | L+775 | 1.3% | 10/2/20 | 9,000 | 8,878 | 9,105 | ||||||||||||||||
Printpack Holdings, Inc. |
(e)(i) | Consumer Durables & Apparel | L+875 | 1.0% | 5/28/21 | 60,000 | 58,811 | 60,300 | ||||||||||||||||
PSAV Acquisition Corp. |
(e) | Technology Hardware & Equipment | L+825 | 1.0% | 1/24/22 | 80,000 | 78,847 | 81,600 | ||||||||||||||||
Redtop Acquisitions Ltd. |
(l) | Consumer Services | L+725 | 1.0% | 5/22/21 | 7,481 | 7,394 | 7,706 | ||||||||||||||||
Renaissance Learning, Inc. |
Software & Services | L+700 | 1.0% | 4/11/22 | 12,857 | 12,731 | 12,849 | |||||||||||||||||
Road Infrastructure Investment, LLC |
Consumer Services | L+675 | 9/21/21 | 7,759 | 7,721 | 7,733 | ||||||||||||||||||
Sabine Oil & Gas LLC |
Energy | L+750 | 1.3% | 12/31/18 | 1,907 | 1,892 | 1,945 | |||||||||||||||||
Securus Technologies Holdings, Inc. |
Telecommunication Services | L+775 | 1.3% | 4/30/21 | 4,000 | 3,965 | 4,066 | |||||||||||||||||
Sensus USA Inc. |
(f) | Capital Goods | L+725 | 1.3% | 5/9/18 | 2,050 | 2,056 | 2,063 | ||||||||||||||||
Sheridan Holdings, Inc. |
Health Care Equipment & Services | L+725 | 1.0% | 12/20/21 | 10,784 | 10,733 | 11,054 | |||||||||||||||||
StoneRiver Group, L.P. |
(f) | Software & Services | L+725 | 1.3% | 5/30/20 | 6,618 | 6,589 | 6,663 | ||||||||||||||||
The Telx Group, Inc. |
(j) | Software & Services | L+650 | 1.0% | 4/2/21 | 7,000 | 6,932 | 7,028 | ||||||||||||||||
Templar Energy LLC |
(h) | Energy | L+700 | 1.0% | 11/25/20 | 19,231 | 18,870 | 19,135 | ||||||||||||||||
Therakos, Inc. |
(e) | Pharmaceuticals, Biotechnology & Life Sciences | L+1000 | 1.3% | 6/27/18 | 28,000 | 27,395 | 28,770 | ||||||||||||||||
TNS, Inc. |
(f)(h) | Telecommunication Services | L+800 | 1.0% | 8/14/20 | 51,469 | 50,981 | 52,032 | ||||||||||||||||
Travelport LLC |
(f) | Consumer Services | L+800 | 1.5% | 1/31/16 | 5,119 | 5,194 | 5,285 | ||||||||||||||||
Travelport LLC |
(e)(i) | Consumer Services | 4.0%, 4.4% PIK (4.4% Max PIK) |
12/1/16 | 8,398 | 7,592 | 8,503 | |||||||||||||||||
TriZetto Group, Inc. |
(e) | Software & Services | L+725 | 1.3% | 3/28/19 | 12,558 | 12,519 | 12,652 | ||||||||||||||||
Ultima US Holdings LLC |
(l) | Capital Goods | L+850 | 1.0% | 12/31/20 | 57,000 | 55,976 | 55,860 | ||||||||||||||||
US Renal Care, Inc. |
(i) | Health Care Equipment & Services | L+750 | 1.0% | 7/3/20 | 2,500 | 2,455 | 2,538 | ||||||||||||||||
UTEX Industries, Inc. |
Energy | L+725 | 1.0% | 5/20/22 | 1,909 | 1,900 | 1,935 | |||||||||||||||||
Vantage Energy II, LLC |
(i) | Energy | L+750 | 1.0% | 5/8/17 | 13,000 | 13,000 | 13,000 | ||||||||||||||||
Vantage Energy, LLC |
(i) | Energy | L+750 | 1.0% | 12/20/18 | 18,369 | 18,202 | 18,507 | ||||||||||||||||
Vertafore, Inc. |
(f) | Software & Services | L+825 | 1.5% | 10/27/17 | 830 | 831 | 849 | ||||||||||||||||
Wencor Group, LLC |
(g)(k) | Capital Goods | L+675 | 1.0% | 6/19/22 | 4,200 | 4,263 | 4,246 | ||||||||||||||||
Winebow Holdings, Inc. |
(g)(k) | Retailing | L+750 | 1.0% | 1/2/22 | 2,775 | 2,755 | 2,781 | ||||||||||||||||
WNA Holdings, Inc. |
Materials | L+725 | 1.3% | 12/7/20 | 5,000 | 4,955 | 5,050 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansSecond Lien |
1,063,373 | 1,084,435 | ||||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
9
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Senior Secured Bonds8.7% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(e)(f) | Materials | 10.5% | 6/1/19 | $ | 35,500 | $ | 31,504 | $ | 25,738 | ||||||||||||
Allen Systems Group, Inc. |
(f)(m)(q) | Software & Services | 10.5% | 11/15/16 | 14,225 | 10,243 | 7,539 | |||||||||||||||
Altice Financing S.A. |
(j)(l) | Media | 7.8% | 5/15/22 | 7,000 | 7,000 | 7,508 | |||||||||||||||
Aspect Software, Inc. |
(j) | Software & Services | 10.6% | 5/15/17 | 6,005 | 6,321 | 6,343 | |||||||||||||||
Avaya Inc. |
(e)(j) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 14,500 | 13,944 | 14,554 | |||||||||||||||
Avaya Inc. |
(e) | Technology Hardware & Equipment | 9.0% | 4/1/19 | 6,500 | 6,479 | 6,768 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(e)(f)(j) | Consumer Services | 11.0% | 10/1/21 | 60,000 | 60,716 | 64,825 | |||||||||||||||
CEVA Group Plc |
(j)(l) | Transportation | 9.0% | 9/1/21 | 2,000 | 2,000 | 2,065 | |||||||||||||||
Clear Channel Communications, Inc. |
(e) | Media | 9.0% | 12/15/19 | 1,844 | 1,720 | 1,970 | |||||||||||||||
Erickson Air-Crane Inc. |
(e)(l) | Capital Goods | 8.3% | 5/1/20 | 13,312 | 13,068 | 13,778 | |||||||||||||||
FourPoint Energy, LLC |
(f) | Energy | 8.5% | 12/31/20 | 14,625 | 12,790 | 12,651 | |||||||||||||||
Global A&T Electronics Ltd. |
(f)(l) | Technology Hardware & Equipment | 10.0% | 2/1/19 | 9,000 | 9,000 | 7,763 | |||||||||||||||
Greektown Holdings, LLC. |
(j) | Consumer Services | 8.9% | 3/15/19 | 3,000 | 3,000 | 3,065 | |||||||||||||||
Guitar Center, Inc. |
(j) | Retailing | 6.5% | 4/15/19 | 7,000 | 6,929 | 6,904 | |||||||||||||||
JW Aluminum Co. |
(e)(f) | Materials | 11.5% | 11/15/17 | 17,550 | 17,525 | 17,967 | |||||||||||||||
Logans Roadhouse Inc. |
(f)(j) | Consumer Services | 10.8% | 10/15/17 | 29,314 | 25,991 | 23,964 | |||||||||||||||
Modular Space Corp. |
(j) | Consumer Services | 10.3% | 1/31/19 | 3,950 | 4,047 | 4,162 | |||||||||||||||
Prince Mineral Holding Corp. |
(e) | Materials | 11.5% | 12/15/19 | 2,750 | 2,724 | 3,135 | |||||||||||||||
Signode Industrial Group US Inc. |
(j) | Commercial & Professional Services | 6.4% | 5/1/22 | 4,900 | 4,900 | 4,986 | |||||||||||||||
Sorenson Communications, Inc. |
(e)(f)(j) | Telecommunication Services | 9.0% | 10/31/20 | 18,877 | 18,131 | 17,271 | |||||||||||||||
Waterjet Holdings, Inc. |
(j) | Automobiles & Components | 7.6% | 2/1/20 | 1,850 | 1,850 | 1,966 | |||||||||||||||
WMG Acquisition Corp. |
(j) | Media | 5.6% | 4/15/22 | 650 | 650 | 655 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
260,532 | 255,577 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Subordinated Debt10.0% |
||||||||||||||||||||||
The AES Corp. |
(j)(l) | Energy | 5.5% | 3/15/24 | 1,950 | 1,950 | 2,003 | |||||||||||||||
Atlas Energy Holdings Operating Co., LLC |
(j)(l) | Energy | 7.8% | 1/15/21 | 5,000 | 5,000 | 5,184 | |||||||||||||||
Aurora Diagnostics, LLC |
(e) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 7,000 | 7,035 | 5,933 | |||||||||||||||
Avaya Inc. |
(j) | Technology Hardware & Equipment | 10.5% | 3/1/21 | 6,950 | 6,407 | 6,437 | |||||||||||||||
Beazer Homes USA, Inc. |
(j)(l) | Capital Goods | 7.3% | 2/1/23 | 2,750 | 2,750 | 2,846 |
See notes to unaudited consolidated financial statements.
10
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Brocade Communications Systems, Inc. |
(j)(l) | Telecommunication Services | 4.6% | 1/15/23 | $ | 2,750 | $ | 2,750 | $ | 2,674 | ||||||||||||
Cadillac Jack, Inc. |
(f)(l) | Consumer Services | 6.0%, 7.0% PIK (7.0% Max PIK) |
5/15/20 | 50,447 | 33,837 | 44,394 | |||||||||||||||
Calumet Specialty Products Partners, L.P. |
(j)(l) | Energy | 6.5% | 4/15/21 | 2,500 | 2,500 | 2,558 | |||||||||||||||
CEC Entertainment, Inc. |
(j) | Consumer Services | 8.0% | 2/15/22 | 11,000 | 11,019 | 11,409 | |||||||||||||||
DigitalGlobe, Inc. |
(j)(l) | Software & Services | 5.3% | 2/1/21 | 1,100 | 1,100 | 1,092 | |||||||||||||||
Entegris, Inc. |
(j)(l) | Technology Hardware & Equipment | 6.0% | 4/1/22 | 3,750 | 3,750 | 3,863 | |||||||||||||||
Era Group Inc. |
(j)(l) | Energy | 7.8% | 12/15/22 | 7,250 | 7,141 | 7,721 | |||||||||||||||
First Data Corp. |
(j) | Software & Services | 11.8% | 8/15/21 | 1,000 | 1,033 | 1,190 | |||||||||||||||
Hub International Ltd. |
(j) | Insurance | 7.9% | 10/1/21 | 3,500 | 3,500 | 3,758 | |||||||||||||||
Jefferies Finance LLC |
(j)(l) | Diversified Financials | 7.4% | 4/1/20 | 1,500 | 1,500 | 1,579 | |||||||||||||||
Jefferies Finance LLC |
(j)(l) | Diversified Financials | 6.9% | 4/15/22 | 950 | 950 | 964 | |||||||||||||||
The Kenan Advantage Group, Inc. |
(e)(j) | Transportation | 8.4% | 12/15/18 | 6,250 | 6,420 | 6,711 | |||||||||||||||
Kinetic Concepts, Inc. |
(f) | Health Care Equipment & Services | 12.5% | 11/1/19 | 7,800 | 8,122 | 8,980 | |||||||||||||||
Legacy Reserves L.P. |
(e)(l) | Energy | 8.0% | 12/1/20 | 8,250 | 8,098 | 8,853 | |||||||||||||||
Memorial Resource Development LLC |
(j) | Energy | 10.8% PIK (10.8% Max PIK) |
12/15/18 | 6,700 | 6,576 | 6,881 | |||||||||||||||
Mood Media Corp. |
(e)(f)(j)(l) | Media | 9.3% | 10/15/20 | 46,207 | 45,559 | 41,478 | |||||||||||||||
MultiPlan Holdings, Inc. |
(j) | Software & Services | 6.6% | 4/1/22 | 950 | 950 | 1,000 | |||||||||||||||
NRG Energy, Inc. |
(j)(l) | Energy | 6.3% | 7/15/22 | 4,750 | 4,750 | 5,083 | |||||||||||||||
Nuveen Investments, Inc. |
(e) | Diversified Financials | 9.1% | 10/15/17 | 12,000 | 12,000 | 13,076 | |||||||||||||||
Ocean Rig UDW Inc |
(j)(l) | Energy | 7.3% | 4/1/19 | 4,700 | 4,700 | 4,677 | |||||||||||||||
Opal Acquisition, Inc. |
(j) | Consumer Services | 8.9% | 12/15/21 | 27,000 | 27,000 | 28,552 | |||||||||||||||
Resolute Energy Corp. |
(j)(l) | Energy | 8.5% | 5/1/20 | 5,800 | 5,860 | 6,119 | |||||||||||||||
Rex Energy Corp. |
(e)(l) | Energy | 8.9% | 12/1/20 | 15,000 | 14,910 | 16,740 | |||||||||||||||
Rockies Express Pipeline LLC |
(j) | Energy | 6.0% | 1/15/19 | 3,250 | 3,250 | 3,424 | |||||||||||||||
Sidewinder Drilling Inc. |
(e) | Capital Goods | 9.8% | 11/15/19 | 2,000 | 2,000 | 2,045 | |||||||||||||||
Sophia Holding Finance, L.P. |
(f) | Software & Services | 9.6% | 12/1/18 | 2,750 | 2,725 | 2,867 | |||||||||||||||
Sorenson Communications, Inc. |
(e)(f)(j) | Telecommunication Services | 13.0% | 10/31/21 | 14,346 | 13,348 | 13,163 | |||||||||||||||
Southern Graphics Inc. |
(e) | Media | 8.4% | 10/15/20 | 1,000 | 1,000 | 1,065 |
See notes to unaudited consolidated financial statements.
11
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Rate(b) | Floor | Maturity | Principal Amount(c) |
Amortized Cost |
Fair Value(d) |
||||||||||||||
Spirit AeroSystems Holdings, Inc. |
(j)(l) | Capital Goods | 5.3% | 3/15/22 | $ | 750 | $ | 750 | $ | 765 | ||||||||||||
Tenet Healthcare Corp. |
(j)(l) | Health Care Equipment & Services | 8.1% | 4/1/22 | 5,500 | 5,500 | 6,387 | |||||||||||||||
TMS International Corp. |
(j) | Energy | 7.6% | 10/15/21 | 1,250 | 1,250 | 1,338 | |||||||||||||||
U.S. Coatings Acquisition Inc. |
(j) | Capital Goods | 7.4% | 5/1/21 | 2,000 | 2,000 | 2,193 | |||||||||||||||
Windstream Corp. |
(j)(l) | Telecommunication Services | 6.4% | 8/1/23 | 2,600 | 2,600 | 2,642 | |||||||||||||||
WMG Acquisition Corp. |
(j) | Media | 6.8% | 4/15/22 | 6,000 | 6,000 | 6,023 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
277,590 | 293,667 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Collateralized Securities6.2% |
||||||||||||||||||||||
AMMC 2012 CDO 11A Class Subord. |
(l) | Diversified Financials | 10.2% | 10/30/23 | 6,000 | 4,275 | 4,779 | |||||||||||||||
Apidos CLO XIV Class E |
(l) | Diversified Financials | L+440 | 4/15/25 | 6,000 | 5,356 | 5,386 | |||||||||||||||
Ares 2012 CLO 2A Class Subord. |
(l) | Diversified Financials | 6.6% | 10/12/23 | 8,500 | 7,038 | 6,448 | |||||||||||||||
CGMS CLO 2013-3A Class E |
(l) | Diversified Financials | L+525 | 7/15/25 | 5,000 | 4,476 | 4,460 | |||||||||||||||
CGMS CLO 2013-3A Class Subord. |
(l) | Diversified Financials | 17.1% | 7/15/25 | 22,000 | 17,192 | 21,583 | |||||||||||||||
Halcyon Loan Advisors Funding 2013-2 Class Subord. |
(l) | Diversified Financials | 16.7% | 8/1/25 | 15,000 | 12,278 | 15,721 | |||||||||||||||
JPMorgan Chase Bank, N.A. Credit-Linked Notes |
(l) | Diversified Financials | 14.5% | 12/20/21 | 76,260 | 75,454 | 79,692 | |||||||||||||||
Octagon CLO 2012-1A Class Income |
(l) | Diversified Financials | 16.5% | 1/15/24 | 4,650 | 3,192 | 3,897 | |||||||||||||||
Wind River CLO Ltd. 2013-1A Class Subord. B |
(l) | Diversified Financials | 10.7% | 4/20/25 | 40,720 | 34,940 | 39,158 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
164,201 | 181,124 | ||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
12
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry |
Number of Shares/Contracts |
Cost | Fair Value(d) |
|||||||||||||||||
Equity/Other3.5% |
||||||||||||||||||||||
A.T. Cross Co., Common Equity, Class A Units |
(m) | Retailing | 1,000,000 | $ | 1,000 | $ | 1,000 | |||||||||||||||
Amaya Gaming Group Inc., Warrants |
(l)(m) | Consumer Services | 2,000,000 | 16,832 | 27,560 | |||||||||||||||||
American Energy Ohio Holdings, LLC, Common Equity |
(m)(n) | Energy | 12,900,000 | 12,900 | 12,900 | |||||||||||||||||
AP Exhaust Holdings, LLC, Common Equity |
(m)(o) | Automobiles & Components | 8,378 | 8,378 | 9,551 | |||||||||||||||||
BPA Laboratories, Inc., Series A Warrants |
(e)(m) | Pharmaceuticals, Biotechnology & Life Sciences | 10,924 | | | |||||||||||||||||
BPA Laboratories, Inc., Series B Warrants |
(e)(m) | Pharmaceuticals, Biotechnology & Life Sciences | 17,515 | | | |||||||||||||||||
Burleigh Point, Ltd., Warrants |
(l)(m) | Retailing | 17,256,081 | 1,898 | 4,487 | |||||||||||||||||
CoSentry.Net, LLC, Preferred Equity |
(m) | Software & Services | 2,632 | 2,500 | 3,027 | |||||||||||||||||
Eastman Kodak Co., Common Equity |
(m) | Consumer Durables & Apparel | 1,846 | 36 | 45 | |||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(l)(m) | Telecommunication Services | 4,943 | 551 | 1,097 | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(l)(m) | Telecommunication Services | 22,401 | 2,595 | 4,971 | |||||||||||||||||
FourPoint Energy, LLC, Common Equity |
(m)(o) | Energy | 2,437 | 1,610 | 2,437 | |||||||||||||||||
Industrial Group Intermediate Holdings, LLC, Common Equity |
(m)(o) | Materials | 2,107,438 | 2,107 | 2,107 | |||||||||||||||||
Kanders C3 Holdings, LLC, Common Equity |
(f) | Capital Goods | 60,872 | 5,000 | 140 | |||||||||||||||||
MB Precision Holdings LLC, Common Equity |
(m) | Capital Goods | 2,100,000 | 2,100 | 2,310 | |||||||||||||||||
New Star Metals Inc., Common Equity |
(m) | Capital Goods | 2,250,000 | 2,250 | 2,475 | |||||||||||||||||
Professional Plumbing Group, Inc., Common Equity |
(m) | Capital Goods | 3,000,000 | 3,000 | 3,000 | |||||||||||||||||
PSAV Holdings LLC, Common Equity |
(m) | Technology Hardware & Equipment | 10,000,000 | 10,000 | 11,000 | |||||||||||||||||
Sorenson Communications, Inc., Common Equity |
(e)(f)(m) | Telecommunication Services | 43,796 | | 2,080 | |||||||||||||||||
Swift Worldwide Resources Holdco Limited, Common Equity |
(l)(m) | Energy | 1,250,000 | 2,010 | 2,459 | |||||||||||||||||
Therakos, Inc., Common Equity |
Pharmaceuticals, Biotechnology & Life Sciences | 14,366 | 1,478 | 4,307 | ||||||||||||||||||
Weight Watchers International, Inc., Put Option |
(l)(m)(r) | Food & Staples Retailing | 4,000 | 2,864 | 2,120 | |||||||||||||||||
Weight Watchers International, Inc., Put Option |
(l)(m)(r) | Food & Staples Retailing | 5,000 | 2,022 | 1,925 | |||||||||||||||||
Weight Watchers International, Inc., Put Option |
(l)(m)(r) | Food & Staples Retailing | 5,000 | 1,505 | 1,363 | |||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
82,636 | 102,361 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS128.1% |
$ | 3,673,278 | 3,763,944 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(28.1%) |
(825,720 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 2,938,224 | ||||||||||||||||||||
|
|
See notes to unaudited consolidated financial statements.
13
Table of Contents
FS Investment Corporation II
Unaudited Consolidated Schedule of Investments (continued)
As of June 30, 2014
(in thousands, except share amounts)
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Certain variable rate securities in the Companys portfolio bear interest at a rate determined by a publicly-disclosed base rate plus a basis point spread. As of June 30, 2014, the three-month London Interbank Offered Rate was 0.23%, the Euro Interbank Offered Rate was 0.21% and the U.S. Prime Lending Rate was 3.25%. |
(c) | Denominated in U.S. dollars unless otherwise noted. |
(d) | Fair value determined by the Companys board of directors (see Note 7). |
(e) | Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(f) | Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(g) | Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8). |
(h) | Security or portion thereof held within Wissahickon Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Bank, National Association (see Note 8). |
(i) | Security or portion thereof held within Darby Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(j) | Security or portion thereof held within Dunning Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8). |
(k) | Position or portion thereof unsettled as of June 30, 2014. |
(l) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development companys total assets. As of June 30, 2014, 78.5% of the Companys total assets represented qualifying assets. |
(m) | Security is non-income producing. |
(n) | Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company. |
(o) | Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company. |
(p) | Security is an unfunded loan commitment. |
(q) | Security was on non-accrual status as of June 30, 2014. |
(r) | Put options expire January 15, 2016. The strike prices are $20.00, $17.50 and $15.00, respectively. |
See notes to unaudited consolidated financial statements.
14
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair
Value(c) |
||||||||||||||||
Senior Secured LoansFirst Lien53.0% |
||||||||||||||||||||||||
A.T. Cross Co. |
(d)(f) | Retailing | L+825 | 9/6/19 | $ | 36,908 | $ | 36,908 | $ | 36,908 | ||||||||||||||
A.T. Cross Co. |
(d)(f) | Retailing | L+825 | 9/6/19 | 20,000 | 20,000 | 20,000 | |||||||||||||||||
Advantage Sales & Marketing Inc. |
(g) | Commercial & Professional Services | L+325 | 1.0 | % | 12/18/17 | 2,107 | 2,097 | 2,120 | |||||||||||||||
Air Medical Group Holdings, Inc. |
(f)(g) | Health Care Equipment & Services | L+400 | 1.0 | % | 6/30/18 | 5,474 | 5,566 | 5,546 | |||||||||||||||
Alcatel-Lucent USA Inc. |
(d)(f)(h) | Technology Hardware & Equipment | L+475 | 1.0 | % | 1/30/19 | 8,138 | 8,182 | 8,188 | |||||||||||||||
Alon USA Partners, L.P. |
(d)(h) | Energy | L+800 | 1.3 | % | 11/26/18 | 4,125 | 3,944 | 4,256 | |||||||||||||||
Alvogen Pharma US, Inc. |
(f)(g) | Pharmaceuticals, Biotechnology & Life Sciences | L+575 | 1.3 | % | 5/23/18 | 9,781 | 9,724 | 9,927 | |||||||||||||||
Apex Tool Group, LLC |
Capital Goods | L+325 | 1.3 | % | 1/31/20 | 5,300 | 5,276 | 5,334 | ||||||||||||||||
ARG IH Corp. |
Consumer Services | L+400 | 1.0 | % | 11/15/20 | 1,400 | 1,397 | 1,410 | ||||||||||||||||
Ascension Insurance, Inc. |
(d)(e) | Insurance | L+825 | 1.3 | % | 3/5/19 | 79,423 | 78,097 | 78,628 | |||||||||||||||
Aspect Software, Inc. |
(g) | Software & Services | L+525 | 1.8 | % | 5/7/16 | 7,873 | 7,902 | 7,915 | |||||||||||||||
Attachmate Corp. |
(f) | Software & Services | L+575 | 1.5 | % | 11/22/17 | 2,607 | 2,637 | 2,660 | |||||||||||||||
Audio Visual Services Group, Inc. |
(d)(f) | Technology Hardware & Equipment | L+550 | 1.3 | % | 11/9/18 | 10,107 | 10,110 | 10,182 | |||||||||||||||
Audio Visual Services Group, Inc. |
Technology Hardware & Equipment | L+550 | 1.3 | % | 11/9/17 | 7,500 | 7,500 | 7,479 | ||||||||||||||||
Avaya Inc. |
(d)(g) | Technology Hardware & Equipment | L+450 | 10/26/17 | 7,340 | 6,809 | 7,200 | |||||||||||||||||
Avaya Inc. |
(d)(f) | Technology Hardware & Equipment | L+675 | 1.3 | % | 3/31/18 | 11,896 | 11,318 | 12,092 | |||||||||||||||
Azure Midstream Energy LLC |
(f) | Energy | L+550 | 1.0 | % | 11/15/18 | 4,500 | 4,434 | 4,534 | |||||||||||||||
BlackBrush TexStar L.P. |
(d)(f) | Energy | L+650 | 1.3 | % | 6/4/19 | 14,179 | 14,049 | 14,311 | |||||||||||||||
Blue Coat Systems, Inc. |
(d) | Software & Services | L+350 | 1.0 | % | 5/31/19 | 2,121 | 2,121 | 2,132 | |||||||||||||||
Boomerang Tube, LLC |
(d) | Energy | L+950 | 1.5 | % | 10/11/17 | 4,688 | 4,573 | 4,523 | |||||||||||||||
Bright Horizons Family Solutions LLC |
Health Care Equipment & Services | L+300 | 1.0 | % | 1/30/20 | 1,003 | 994 | 1,011 | ||||||||||||||||
Cadillac Jack, Inc. |
(d)(f)(h) | Consumer Services | L+700 | 1.0 | % | 12/20/17 | 125,000 | 123,770 | 123,750 | |||||||||||||||
Caesars Entertainment Operating Co. |
(g)(h) | Consumer Services | L+425 | 1/26/18 | 5,000 | 4,731 | 4,744 | |||||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(d)(e)(f) | Consumer Services | L+600 | 1.0 | % | 10/1/20 | 59,093 | 55,624 | 58,908 | |||||||||||||||
Cenveo Corp. |
(f) | Commercial & Professional Services | L+500 | 1.3 | % | 2/13/17 | 2,822 | 2,810 | 2,845 | |||||||||||||||
Clear Channel Communications, Inc. |
(d) | Media | L+365 | 1/29/16 | 6,156 | 5,267 | 5,974 | |||||||||||||||||
Clover Technologies Group, LLC |
(f) | Commercial & Professional Services | L+550 | 1.3 | % | 5/7/18 | 5,772 | 5,772 | 5,772 | |||||||||||||||
Collective Brands, Inc. |
(d)(f) | Consumer Durables & Apparel | L+600 | 1.3 | % | 10/9/19 | 18,768 | 18,814 | 18,862 | |||||||||||||||
Corner Investment PropCo, LLC |
(d)(f)(g) | Consumer Services | L+975 | 1.3 | % | 11/2/19 | 41,000 | 41,624 | 41,820 | |||||||||||||||
CoSentry.Net, LLC |
(e) | Software & Services | L+800 | 1.3 | % | 12/31/19 | 54,500 | 54,500 | 54,500 |
See notes to unaudited consolidated financial statements.
15
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair
Value(c) |
||||||||||||||||
Crestwood Holdings LLC |
(f) | Energy | L+600 | 1.0 | % | 6/19/19 | $ | 5,735 | $ | 5,709 | $ | 5,907 | ||||||||||||
Cumulus Media Inc. |
(g)(h) | Media | L+325 | 1.0 | % | 12/23/20 | 7,865 | 7,786 | 7,924 | |||||||||||||||
DAE Aviation Holdings, Inc. |
(h) | Capital Goods | L+500 | 1.3 | % | 11/2/18 | 3,928 | 3,964 | 3,969 | |||||||||||||||
Del Monte Foods Consumer Products, Inc. |
(g)(h) | Food, Beverage & Tobacco | L+325 | 1.0 | % | 12/6/20 | 2,809 | 2,795 | 2,828 | |||||||||||||||
DigitalGlobe, Inc. |
(d)(h) | Software & Services | L+275 | 1.0 | % | 1/31/20 | 2,528 | 2,528 | 2,545 | |||||||||||||||
Drew Marine Group Inc. |
(h) | Energy | L+350 | 1.0 | % | 11/19/20 | 2,667 | 2,663 | 2,680 | |||||||||||||||
Drumm Investors LLC |
Health Care Equipment & Services | L+375 | 1.3 | % | 5/4/18 | 1,471 | 1,421 | 1,447 | ||||||||||||||||
Eastman Kodak Co. |
(f) | Consumer Durables & Apparel | L+625 | 1.0 | % | 9/3/19 | 7,236 | 7,098 | 7,229 | |||||||||||||||
Education Management LLC |
(f)(h) | Consumer Services | L+400 | 6/1/16 | 3,967 | 3,573 | 3,819 | |||||||||||||||||
Edwards (Cayman Island II) Ltd. |
(f)(h) | Capital Goods | L+350 | 1.3 | % | 3/26/20 | 3,195 | 3,166 | 3,203 | |||||||||||||||
EFS Cogen Holdings I LLC |
(g) | Energy | L+275 | 1.0 | % | 12/17/20 | 1,852 | 1,833 | 1,868 | |||||||||||||||
EquiPower Resources Holdings, LLC |
(f) | Utilities | L+325 | 1.0 | % | 12/21/18 | 1,463 | 1,494 | 1,471 | |||||||||||||||
ERC Ireland Holdings Ltd. |
(h) | Telecommunication Services | EURIBOR+300, 1.0% PIK |
9/30/17 | | 11,298 | 11,389 | 18,514 | ||||||||||||||||
FairPoint Communications, Inc. |
(d)(h) | Telecommunication Services | L+625 | 1.3 | % | 2/14/19 | $ | 13,027 | 12,910 | 13,492 | ||||||||||||||
Filtration Group Corp. |
Energy | L+350 | 1.0 | % | 11/20/20 | 2,449 | 2,437 | 2,447 | ||||||||||||||||
FR Utility Services LLC |
(f) | Energy | L+575 | 1.0 | % | 10/18/19 | 4,630 | 4,584 | 4,630 | |||||||||||||||
Fram Group Holdings Inc. |
(f) | Automobiles & Components | L+500 | 1.5 | % | 7/29/17 | 2,015 | 2,042 | 2,003 | |||||||||||||||
Hamilton Lane Advisors, LLC |
(f) | Diversified Financials | L+400 | 1.3 | % | 2/23/18 | 1,726 | 1,739 | 1,739 | |||||||||||||||
Harlan Sprague Dawley, Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+550 | 7/11/14 | 7,041 | 6,747 | 6,337 | |||||||||||||||||
Ikaria Acquisition Inc. |
(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3 | % | 7/3/18 | 7,088 | 6,990 | 7,141 | |||||||||||||||
ILC Industries, LLC |
(f) | Capital Goods | L+650 | 1.5 | % | 7/11/18 | 4,786 | 4,772 | 4,798 | |||||||||||||||
Inmar, Inc. |
(f) | Software & Services | L+525 | 1.3 | % | 8/4/17 | 4,874 | 4,903 | 4,896 | |||||||||||||||
Internap Network Services Corp. |
(f)(h) | Software & Services | L+500 | 1.0 | % | 11/26/19 | 10,000 | 9,901 | 9,988 | |||||||||||||||
Intrawest Operations Group, LLC |
Consumer Services | L+450 | 1.0 | % | 12/9/20 | 7,500 | 7,425 | 7,594 | ||||||||||||||||
Kanders C3 Holdings, LLC |
(d)(e) | Capital Goods | L+900 | 1.3 | % | 12/19/18 | 24,565 | 24,362 | 24,381 | |||||||||||||||
Kanders C3 Holdings, LLC |
(d)(e) | Capital Goods | L+900 | 1.3 | % | 12/19/18 | 10,204 | 10,204 | 10,128 | |||||||||||||||
Keystone Automotive Operations, Inc. |
(f) | Automobiles & Components | L+575 | 1.3 | % | 8/15/19 | 4,988 | 4,916 | 5,023 | |||||||||||||||
Lantiq Deutschland GmbH |
(d)(h) | Software & Services | L+900 | 2.0 | % | 11/16/15 | 1,521 | 1,445 | 1,475 | |||||||||||||||
Larchmont Resources, LLC |
(f) | Energy | L+725 | 1.0 | % | 8/7/19 | 7,391 | 7,321 | 7,530 | |||||||||||||||
MetoKote Corp. |
(d)(f) | Materials | L+800 | 1.3 | % | 9/30/19 | 85,000 | 85,000 | 85,850 | |||||||||||||||
MetoKote Corp. |
(d)(f) | Materials | L+800 | 1.3 | % | 9/30/19 | 16,190 | 16,190 | 16,352 |
See notes to unaudited consolidated financial statements.
16
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair
Value(c) |
||||||||||||||||
MMI International Ltd. |
(f)(g)(h) | Technology Hardware & Equipment | L+600 | 1.3 | % | 11/20/18 | $ | 11,550 | $ | 11,244 | $ | 11,254 | ||||||||||||
MMM Holdings, Inc. |
(f) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 3,012 | 3,030 | 3,036 | |||||||||||||||
MModal Inc. |
(d)(f) | Health Care Equipment & Services | L+650 | 1.3 | % | 8/16/19 | 16,801 | 16,469 | 14,480 | |||||||||||||||
Moxie Liberty LLC |
(f)(g) | Energy | L+650 | 1.0 | % | 8/21/20 | 11,853 | 11,901 | 12,179 | |||||||||||||||
Moxie Patriot, LLC |
(g) | Energy | L+575 | 1.0 | % | 12/18/20 | 5,556 | 5,500 | 5,694 | |||||||||||||||
MSO of Puerto Rico, Inc. |
(f) | Health Care Equipment & Services | L+825 | 1.5 | % | 12/12/17 | 2,191 | 2,204 | 2,208 | |||||||||||||||
National Mentor Holdings, Inc. |
(f) | Health Care Equipment & Services | L+525 | 1.3 | % | 2/9/17 | 7,899 | 8,003 | 7,964 | |||||||||||||||
National Vision, Inc. |
(f) | Health Care Equipment & Services | L+575 | 1.3 | % | 8/2/18 | 2,336 | 2,363 | 2,343 | |||||||||||||||
New HB Acquisition, LLC |
Food, Beverage & Tobacco | L+550 | 1.3 | % | 4/9/20 | 3,896 | 3,860 | 4,042 | ||||||||||||||||
Nexeo Solutions, LLC |
(d) | Capital Goods | L+350 | 1.5 | % | 9/8/17 | 6,903 | 6,823 | 6,911 | |||||||||||||||
Nova Wildcat Amerock, LLC |
(d)(f) | Consumer Durables & Apparel | L+825 | 1.3 | % | 9/10/19 | 75,000 | 75,000 | 75,000 | |||||||||||||||
Opal Acquisition, Inc. |
(g) | Consumer Services | L+400 | 1.0 | % | 11/27/20 | 14,946 | 14,821 | 14,983 | |||||||||||||||
Panda Sherman Power, LLC |
(d) | Energy | L+750 | 1.5 | % | 9/14/18 | 3,818 | 3,816 | 3,933 | |||||||||||||||
Panda Temple Power, LLC (TLA) |
(d) | Energy | L+700 | 1.5 | % | 7/17/18 | 2,000 | 2,017 | 2,054 | |||||||||||||||
Patheon Inc. |
(d)(h) | Pharmaceuticals, Biotechnology & Life Sciences | L+600 | 1.3 | % | 12/14/18 | 10,156 | 9,892 | 10,275 | |||||||||||||||
Professional Plumbing Group, Inc. |
(d)(f) | Capital Goods | L+875 | 0.8 | % | 7/31/19 | 32,419 | 32,419 | 32,743 | |||||||||||||||
PRV Aerospace, LLC |
(f) | Capital Goods | L+525 | 1.3 | % | 5/9/18 | 3,039 | 3,063 | 3,053 | |||||||||||||||
Reddy Ice Holdings, Inc. |
(f) | Food & Staples Retailing | L+550 | 1.3 | % | 5/1/19 | 1,182 | 1,170 | 1,181 | |||||||||||||||
Sheridan Holdings, Inc. |
(g) | Health Care Equipment & Services | L+350 | 1.0 | % | 6/29/18 | 2,035 | 2,025 | 2,046 | |||||||||||||||
Sheridan Holdings, Inc. |
(g) | Health Care Equipment & Services | L+350 | 1.0 | % | 6/29/18 | 1,680 | 1,672 | 1,680 | |||||||||||||||
Sirius Computer Solutions, Inc. |
(d) | Software & Services | L+575 | 1.3 | % | 12/7/18 | 8,096 | 8,027 | 8,228 | |||||||||||||||
Smile Brands Group Inc. |
(d)(e)(f) | Health Care Equipment & Services | L+625 | 1.3 | % | 8/15/19 | 39,090 | 38,429 | 38,650 | |||||||||||||||
Sorenson Communication, Inc. |
(d)(f) | Telecommunication Services | L+825 | 1.3 | % | 10/31/14 | 29,754 | 29,830 | 30,200 | |||||||||||||||
Sports Authority, Inc. |
(f) | Consumer Durables & Apparel | L+600 | 1.5 | % | 11/16/17 | 8,222 | 8,293 | 8,212 | |||||||||||||||
Sprint Industrial Holdings LLC |
(f) | Energy | L+575 | 1.3 | % | 11/14/19 | 6,396 | 6,338 | 6,476 | |||||||||||||||
Stallion Oilfield Holdings, Inc. |
(d)(f) | Energy | L+675 | 1.3 | % | 6/19/18 | 9,950 | 9,859 | 10,174 | |||||||||||||||
Swift Worldwide Resources US Holdings Corp. A |
Energy | L+800 | 1.3 | % | 4/30/19 | 20,088 | 20,088 | 20,088 | ||||||||||||||||
Technicolor SA |
(d)(f)(g)(h) | Media | L+600 | 1.3 | % | 7/10/20 | 32,194 | 31,776 | 32,544 | |||||||||||||||
Therakos, Inc. |
(d)(f) | Pharmaceuticals, Biotechnology & Life Sciences | L+625 | 1.3 | % | 12/27/17 | 6,605 | 6,503 | 6,630 | |||||||||||||||
Totes Isotoner Corp. |
(e) | Consumer Durables & Apparel | L+575 | 1.5 | % | 7/7/17 | 911 | 910 | 916 | |||||||||||||||
TravelCLICK, Inc. |
(f) | Consumer Services | L+450 | 1.3 | % | 3/16/16 | 1,969 | 1,970 | 1,988 |
See notes to unaudited consolidated financial statements.
17
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Tri-Northern Acquisition, Inc. |
(d)(e)(f) | Retailing | L+800 | 1.3 | % | 7/1/19 | $ | 89,550 | $ | 89,550 | $ | 89,550 | ||||||||||||
Tri-Northern Acquisition, Inc. |
(d)(e)(f) | Retailing | L+800 | 1.3 | % | 7/1/19 | 18,621 | 18,621 | 18,621 | |||||||||||||||
UTEX Industries, Inc. |
(f) | Energy | L+325 | 1.3 | % | 4/10/20 | 2,689 | 2,677 | 2,705 | |||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansFirst Lien |
1,316,020 | 1,334,780 | ||||||||||||||||||||||
Unfunded Loan Commitments |
(66,687 | ) | (66,687 | ) | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net Senior Secured LoansFirst Lien |
1,249,333 | 1,268,093 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Senior Secured LoansSecond Lien29.2% |
||||||||||||||||||||||||
Advantage Sales & Marketing Inc. |
(e) | Commercial & Professional Services | L+725 | 1.0 | % | 6/12/18 | 471 | 471 | 479 | |||||||||||||||
Alliance Laundry Systems LLC |
(d) | Capital Goods | L+825 | 1.3 | % | 12/10/19 | 3,450 | 3,419 | 3,499 | |||||||||||||||
American EnergyUtica, LLC |
(d)(e) | Energy | L+950 | 1.5 | % | 9/30/18 | 100,919 | 100,919 | 100,919 | |||||||||||||||
Attachmate Corp. |
(d) | Software & Services | L+950 | 1.5 | % | 11/22/18 | 17,223 | 17,246 | 16,907 | |||||||||||||||
Audio Visual Services Group, Inc. |
(d) | Technology Hardware & Equipment | L+950 | 1.3 | % | 5/9/18 | 15,320 | 15,195 | 15,818 | |||||||||||||||
Berlin Packaging LLC |
Commercial & Professional Services | L+750 | 1.3 | % | 4/2/20 | 3,571 | 3,638 | 3,665 | ||||||||||||||||
Brasa (Holdings) Inc. |
(d) | Consumer Services | L+950 | 1.5 | % | 1/20/20 | 1,118 | 1,079 | 1,129 | |||||||||||||||
Camp International Holding Co. |
(e)(f)(g) | Capital Goods | L+725 | 1.0 | % | 11/29/19 | 2,106 | 2,106 | 2,152 | |||||||||||||||
Capital Automotive L.P. |
(f) | Real Estate | L+500 | 1.0 | % | 4/30/20 | 7,895 | 7,858 | 8,171 | |||||||||||||||
Centaur Acquisition, LLC |
(g) | Consumer Services | L+750 | 1.3 | % | 2/20/20 | 13,585 | 13,840 | 13,993 | |||||||||||||||
Cervalis LLC |
(d)(e) | Commercial & Professional Services | L+875 | 1.3 | % | 2/8/19 | 30,000 | 29,615 | 30,000 | |||||||||||||||
CHG Buyer Corp. |
(d) | Health Care Equipment & Services | L+775 | 1.3 | % | 11/19/20 | 5,747 | 5,655 | 5,847 | |||||||||||||||
Citrus Energy Appalachia, LLC |
(d) | Energy | L+850 | 1.3 | % | 7/26/18 | 15,430 | 14,979 | 15,392 | |||||||||||||||
Consolidated Precision Products Corp. |
(d) | Capital Goods | L+775 | 1.0 | % | 4/30/21 | 16,750 | 16,668 | 17,085 | |||||||||||||||
CT Technologies Intermediate Holdings, Inc. |
Software & Services | L+800 | 1.3 | % | 10/2/20 | 5,000 | 4,927 | 5,016 | ||||||||||||||||
Del Monte Foods Consumer Products, Inc. |
(g)(h) | Food, Beverage & Tobacco | L+725 | 1.0 | % | 6/6/21 | 3,333 | 3,300 | 3,375 | |||||||||||||||
Digital Insight Corp. |
Software & Services | L+775 | 1.0 | % | 10/16/20 | 12,000 | 12,253 | 12,255 | ||||||||||||||||
Drew Marine Group Inc. |
(h) | Energy | L+700 | 1.0 | % | 5/19/21 | 2,500 | 2,494 | 2,519 | |||||||||||||||
Eastman Kodak Co. |
Consumer Durables & Apparel | L+950 | 1.3 | % | 9/3/20 | 25,000 | 24,395 | 25,219 | ||||||||||||||||
Filtration Group Corp. |
(g) | Energy | L+725 | 1.0 | % | 11/21/21 | 5,158 | 5,174 | 5,287 | |||||||||||||||
ILC Industries, LLC |
(e) | Capital Goods | L+1000 | 1.5 | % | 7/11/19 | 3,024 | 2,869 | 2,903 | |||||||||||||||
Keystone Automotive Operations, Inc. |
(d)(e) | Automobiles & Components | L+950 | 1.3 | % | 8/15/20 | 44,500 | 43,644 | 46,169 | |||||||||||||||
Kronos Inc. |
Software & Services | L+850 | 1.3 | % | 4/30/20 | 7,715 | 7,644 | 7,999 |
See notes to unaudited consolidated financial statements.
18
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||||
Leedsworld Inc. |
(d)(e)(f) | Retailing | L+875 | 1.3 | % | 6/28/20 | $ | 62,500 | $ | 62,500 | $ | 62,500 | ||||||||||||
LM U.S. Member LLC |
(d) | Transportation | L+825 | 1.3 | % | 10/26/20 | 15,137 | 15,221 | 15,355 | |||||||||||||||
Onex Carestream Finance L.P. |
(d)(e) | Health Care Equipment & Services | L+850 | 1.0 | % | 12/5/19 | 9,700 | 9,519 | 9,906 | |||||||||||||||
P2 Upstream Acquisition Co. |
Energy | L+800 | 1.0 | % | 4/30/21 | 14,500 | 14,788 | 14,790 | ||||||||||||||||
Paw Luxco II Sarl |
(h) | Consumer Durables & Apparel | EURIBOR+950 | 1/29/19 | | 7,000 | 8,524 | 8,709 | ||||||||||||||||
Penton Media, Inc. |
Media | L+775 | 1.3 | % | 10/2/20 | $ | 9,000 | 8,868 | 9,000 | |||||||||||||||
Redtop Acquisitions Ltd. |
(g)(h) | Consumer Services | L+725 | 1.0 | % | 5/22/21 | 7,500 | 7,406 | 7,622 | |||||||||||||||
Renaissance Learning, Inc. |
(g) | Software & Services | L+775 | 1.0 | % | 4/24/21 | 7,000 | 6,895 | 7,083 | |||||||||||||||
Sabine Oil & Gas LLC |
Energy | L+750 | 1.3 | % | 12/31/18 | 1,907 | 1,891 | 1,931 | ||||||||||||||||
Securus Technologies Holdings, Inc. |
Telecommunication Services | L+775 | 1.3 | % | 4/30/21 | 4,000 | 3,963 | 3,979 | ||||||||||||||||
Sensus USA Inc. |
(e) | Capital Goods | L+725 | 1.3 | % | 5/9/18 | 2,050 | 2,056 | 2,050 | |||||||||||||||
SESAC Holdings Inc. |
(d) | Media | L+875 | 1.3 | % | 7/12/19 | 2,000 | 1,974 | 2,050 | |||||||||||||||
Sheridan Holdings, Inc. |
(g) | Health Care Equipment & Services | L+725 | 1.0 | % | 12/20/21 | 10,784 | 10,730 | 10,885 | |||||||||||||||
StoneRiver Group, L.P. |
(e) | Software & Services | L+725 | 1.3 | % | 5/30/20 | 7,246 | 7,212 | 7,323 | |||||||||||||||
Teine Energy Ltd. |
(e)(h) | Energy | L+625 | 1.3 | % | 5/17/19 | 5,459 | 5,385 | 5,541 | |||||||||||||||
Templar Energy LLC |
Energy | L+700 | 1.0 | % | 11/25/20 | 19,231 | 18,849 | 19,339 | ||||||||||||||||
Therakos, Inc. |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | L+1000 | 1.3 | % | 6/27/18 | 28,000 | 27,310 | 28,677 | |||||||||||||||
TNS, Inc. |
(e) | Telecommunication Services | L+800 | 1.0 | % | 8/14/20 | 30,469 | 30,056 | 30,878 | |||||||||||||||
Travelport LLC |
(e) | Consumer Services | L+800 | 1.5 | % | 1/31/16 | 5,119 | 5,216 | 5,313 | |||||||||||||||
Travelport LLC |
(d) | Consumer Services | 4.0%, 4.4% PIK | 12/1/16 | 8,207 | 7,282 | 8,381 | |||||||||||||||||
TriZetto Group, Inc. |
(d) | Software & Services | L+725 | 1.3 | % | 3/28/19 | 4,186 | 4,133 | 4,019 | |||||||||||||||
Ultima US Holdings LLC |
(h) | Capital Goods | L+850 | 1.0 | % | 12/31/20 | 57,000 | 55,919 | 55,860 | |||||||||||||||
US Renal Care, Inc. |
Health Care Equipment & Services | L+750 | 1.0 | % | 7/3/20 | 2,500 | 2,452 | 2,538 | ||||||||||||||||
UTEX Industries, Inc. |
Energy | L+750 | 1.3 | % | 4/10/21 | 3,243 | 3,228 | 3,324 | ||||||||||||||||
Vantage Energy, LLC |
(g) | Energy | L+750 | 1.0 | % | 12/20/18 | 18,462 | 18,277 | 18,462 | |||||||||||||||
Vertafore, Inc. |
(e) | Software & Services | L+825 | 1.5 | % | 10/27/17 | 830 | 831 | 846 | |||||||||||||||
WNA Holdings, Inc. |
Materials | L+725 | 1.3 | % | 12/7/20 | 5,000 | 4,952 | 5,081 | ||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total Senior Secured LoansSecond Lien |
684,825 | 697,240 | ||||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
19
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal
Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Senior Secured Bonds8.5% |
||||||||||||||||||||||
Advanced Lighting Technologies, Inc. |
(d)(e) | Materials | 10.5% | 6/1/19 | $ | 35,500 | $ | 31,238 | $ | 25,561 | ||||||||||||
Allen Systems Group, Inc. |
(e) | Software & Services | 10.5% | 11/15/16 | 14,225 | 9,814 | 8,037 | |||||||||||||||
Avaya Inc. |
(d)(e) | Technology Hardware & Equipment | 7.0% | 4/1/19 | 16,000 | 14,990 | 15,760 | |||||||||||||||
Avaya Inc. |
(d)(e) | Technology Hardware & Equipment | 9.0% | 4/1/19 | 8,000 | 7,955 | 8,400 | |||||||||||||||
Caesars Entertainment Operating Co. |
(h) | Consumer Services | 9.0% | 2/15/20 | 10,000 | 9,593 | 9,741 | |||||||||||||||
Caesars Entertainment Resort Properties, LLC |
(d)(e) | Consumer Services | 11.0% | 10/1/21 | 45,000 | 44,910 | 46,484 | |||||||||||||||
Clear Channel Communications, Inc. |
(d) | Media | 9.0% | 12/15/19 | 1,844 | 1,712 | 1,892 | |||||||||||||||
Erickson Air-Crane Inc. |
(d)(h) | Capital Goods | 8.3% | 5/1/20 | 13,312 | 13,053 | 13,811 | |||||||||||||||
Global A&T Electronics Ltd. |
(e)(h) | Technology Hardware & Equipment | 10.0% | 2/1/19 | 9,000 | 9,000 | 7,920 | |||||||||||||||
JW Aluminum Co. |
(d)(e) | Materials | 11.5% | 11/15/17 | 11,750 | 11,722 | 11,735 | |||||||||||||||
Logans Roadhouse Inc. |
(e) | Consumer Services | 10.8% | 10/15/17 | 26,564 | 23,779 | 19,883 | |||||||||||||||
Neff Rental LLC |
(e) | Capital Goods | 9.6% | 5/15/16 | 3,750 | 3,785 | 3,975 | |||||||||||||||
Prince Mineral Holding Corp. |
(d) | Materials | 11.5% | 12/15/19 | 2,750 | 2,722 | 3,053 | |||||||||||||||
Sorenson Communication, Inc. |
(d)(e) | Telecommunication Services | 10.5% | 2/1/15 | 37,000 | 34,302 | 27,675 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Senior Secured Bonds |
218,575 | 203,927 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Subordinated Debt11.6% |
||||||||||||||||||||||
Accellent Inc. |
Health Care Equipment & Services | 10.0% | 11/1/17 | 10,000 | 9,989 | 10,375 | ||||||||||||||||
Alliant Holdings I, Inc. |
(d) | Insurance | 7.9% | 12/15/20 | 4,000 | 4,000 | 4,220 | |||||||||||||||
Atlas Energy Holdings Operating Co., LLC |
(h) | Energy | 7.8% | 1/15/21 | 5,000 | 5,000 | 4,773 | |||||||||||||||
Aurora Diagnostics, LLC |
(d) | Pharmaceuticals, Biotechnology & Life Sciences | 10.8% | 1/15/18 | 7,000 | 7,039 | 5,180 | |||||||||||||||
Beazer Homes USA, Inc. |
(h) | Capital Goods | 7.3% | 2/1/23 | 2,750 | 2,750 | 2,750 | |||||||||||||||
BOE Intermediate Holding Corp. |
Materials | 9.8% PIK | 11/1/17 | 6,012 | 5,960 | 6,297 | ||||||||||||||||
Brocade Communications Systems, Inc. |
(h) | Telecommunication Services | 4.6% | 1/15/23 | 2,750 | 2,750 | 2,532 | |||||||||||||||
CrownRock, L.P. |
(d)(e) | Energy | 7.1% | 4/15/21 | 30,000 | 30,000 | 29,827 | |||||||||||||||
Diamondback Energy, Inc. |
(h) | Energy | 7.6% | 10/1/21 | 4,250 | 4,250 | 4,483 | |||||||||||||||
DigitalGlobe, Inc. |
(h) | Software & Services | 5.3% | 2/1/21 | 1,100 | 1,100 | 1,077 | |||||||||||||||
EPE Holdings LLC |
(d) | Energy | 8.9% PIK | 12/15/17 | 4,357 | 4,340 | 4,537 | |||||||||||||||
EPL Oil & Gas, Inc. |
(e)(h) | Energy | 8.3% | 2/15/18 | 2,150 | 2,133 | 2,317 | |||||||||||||||
Era Group Inc. |
(h) | Energy | 7.8% | 12/15/22 | 7,250 | 7,136 | 7,540 |
See notes to unaudited consolidated financial statements.
20
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal
Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
First Data Corp. |
(g) | Software & Services | 11.8% | 8/15/21 | $ | 1,000 | $ | 1,035 | $ | 1,057 | ||||||||||||
Halcon Resources Corp. |
(d)(h) | Energy | 8.9% | 5/15/21 | 2,250 | 2,353 | 2,276 | |||||||||||||||
Hub International Ltd. |
Insurance | 7.9% | 10/1/21 | 3,500 | 3,500 | 3,618 | ||||||||||||||||
Jefferies Finance LLC |
(h) | Diversified Financials | 7.4% | 4/1/20 | 1,500 | 1,500 | 1,564 | |||||||||||||||
The Kenan Advantage Group, Inc. |
(d) | Transportation | 8.4% | 12/15/18 | 6,250 | 6,436 | 6,609 | |||||||||||||||
Kinetic Concepts, Inc. |
(e) | Health Care Equipment & Services | 12.5% | 11/1/19 | 7,800 | 8,145 | 8,795 | |||||||||||||||
LBC Tank Terminals Holding Netherlands BV |
(e)(h) | Materials | 6.9% | 5/15/23 | 1,000 | 1,000 | 1,038 | |||||||||||||||
Legacy Reserves L.P. |
(d)(h) | Energy | 8.0% | 12/1/20 | 8,250 | 8,089 | 8,524 | |||||||||||||||
Legacy Reserves L.P. |
(d)(h) | Energy | 6.6% | 12/1/21 | 4,900 | 4,826 | 4,740 | |||||||||||||||
Memorial Production Partners L.P. |
(d)(h) | Energy | 7.6% | 5/1/21 | 2,600 | 2,564 | 2,678 | |||||||||||||||
Memorial Resource Development LLC |
Energy | 10.8% PIK | 12/15/18 | 6,700 | 6,566 | 6,700 | ||||||||||||||||
Mood Media Corp. |
(d)(e)(h) | Media | 9.3% | 10/15/20 | 46,207 | 45,524 | 40,662 | |||||||||||||||
NeuStar, Inc. |
(h) | Software & Services | 4.5% | 1/15/23 | 2,750 | 2,750 | 2,499 | |||||||||||||||
Nuveen Investments, Inc. |
(d)(e) | Diversified Financials | 9.1% | 10/15/17 | 15,000 | 15,000 | 15,082 | |||||||||||||||
Opal Acquisition, Inc. |
Consumer Services | 8.9% | 12/15/21 | 27,000 | 27,000 | 27,169 | ||||||||||||||||
Resolute Energy Corp. |
(h) | Energy | 8.5% | 5/1/20 | 5,800 | 5,864 | 6,106 | |||||||||||||||
Revlon Consumer Products Corp. |
(h) | Household & Personal Products | 5.8% | 2/15/21 | 5,050 | 5,050 | 5,000 | |||||||||||||||
Rex Energy Corp. |
(d)(h) | Energy | 8.9% | 12/1/20 | 15,000 | 14,904 | 16,425 | |||||||||||||||
Rockies Express Pipeline LLC |
Energy | 6.0% | 1/15/19 | 3,250 | 3,250 | 3,024 | ||||||||||||||||
Sidewinder Drilling Inc. |
(d) | Capital Goods | 9.8% | 11/15/19 | 2,000 | 2,000 | 1,770 | |||||||||||||||
Six Flags Entertainment Corp. |
(h) | Consumer Services | 5.3% | 1/15/21 | 2,500 | 2,500 | 2,456 | |||||||||||||||
Sophia Holding Finance, L.P. |
(e) | Software & Services | 9.6% | 12/1/18 | 9,750 | 9,653 | 10,067 | |||||||||||||||
Southern Graphics Inc. |
(d) | Media | 8.4% | 10/15/20 | 1,000 | 1,000 | 1,025 | |||||||||||||||
Tenet Healthcare Corp. |
(h) | Health Care Equipment & Services | 8.1% | 4/1/22 | 5,500 | 5,500 | 5,940 | |||||||||||||||
TMS International Corp. |
Energy | 7.6% | 10/15/21 | 1,250 | 1,250 | 1,331 | ||||||||||||||||
U.S. Coatings Acquisition Inc. |
Capital Goods | 7.4% | 5/1/21 | 2,000 | 2,000 | 2,143 | ||||||||||||||||
Windstream Corp. |
(h) | Telecommunication Services | 6.4% | 8/1/23 | 2,600 | 2,600 | 2,434 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Subordinated Debt |
278,306 | 276,640 | ||||||||||||||||||||
|
|
|
|
See notes to unaudited consolidated financial statements.
21
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) |
Footnotes | Industry | Rate | Floor | Maturity | Principal
Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||||||||
Collateralized Securities7.6% |
||||||||||||||||||||||
AMMC 2012 CDO 11A Class Subord. |
(h) | Diversified Financials | 14.2% | 10/30/23 | $ | 6,000 | $ | 4,527 | $ | 4,906 | ||||||||||||
Apidos CLO XIV Class E |
(h) | Diversified Financials | L+440 | 4/15/25 | 6,000 | 5,331 | 5,421 | |||||||||||||||
Ares 2012 CLO 2A Class Subord. |
(h) | Diversified Financials | 7.1% | 10/12/23 | 8,500 | 7,569 | 6,855 | |||||||||||||||
CGMS CLO 2013-3A Class E |
(h) | Diversified Financials | L+525 | 7/15/25 | 5,000 | 4,457 | 4,453 | |||||||||||||||
CGMS CLO 2013-3A Class Subord. |
(h) | Diversified Financials | 12.8% | 7/15/25 | 22,000 | 20,653 | 23,313 | |||||||||||||||
Halcyon Loan Advisors Funding 2013-2 Class Subord. |
(h) | Diversified Financials | 13.1% | 8/1/25 | 15,000 | 13,472 | 15,651 | |||||||||||||||
JPMorgan Chase Bank, N.A. Credit-Linked Notes |
(h) | Diversified Financials | 11.2% | 12/20/21 | 76,260 | 76,125 | 76,260 | |||||||||||||||
Octagon CLO 2012-1A Class Income |
(h) | Diversified Financials | 17.7% | 1/15/24 | 4,650 | 3,454 | 4,111 | |||||||||||||||
Wind River CLO Ltd. 2013-1A Class Subord. B |
(h) | Diversified Financials | 13.1% | 4/20/25 | 40,720 | 36,677 | 41,130 | |||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Collateralized Securities |
172,265 | 182,100 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Number of Shares |
Cost | Fair Value(c) |
||||||||||||||||||||
Equity/Other1.2% |
||||||||||||||||||||||
A.T. Cross Co., Common Equity, Class A Units |
(i) | Retailing | 1,000,000 | 1,000 | 1,200 | |||||||||||||||||
American Energy Ohio Holdings, LLC, Common Equity |
(i)(j) | Energy | 6,743,362 | 6,743 | 6,743 | |||||||||||||||||
Burleigh Point, Ltd., Warrants |
(h)(i) | Retailing | 17,256,081 | 1,898 | 4,659 | |||||||||||||||||
CoSentry.Net, LLC, Preferred Equity |
(i) | Software & Services | 2,632 | 2,500 | 2,500 | |||||||||||||||||
Eastman Kodak Co., Common Equity |
(i) | Consumer Durables & Apparel | 1,846 | 36 | 64 | |||||||||||||||||
ERC Ireland Holdings Ltd., Warrants |
(h)(i) | Telecommunication Services | 4,943 | | | |||||||||||||||||
ERC Ireland Holdings Ltd., Common Equity |
(h)(i) | Telecommunication Services | 21,099 | | | |||||||||||||||||
Kanders C3 Holdings, LLC, Common Equity |
(e) | Capital Goods | 60,872 | 5,000 | 3,756 | |||||||||||||||||
Professional Plumbing Group, Inc., Common Equity |
(i) | Capital Goods | 3,000,000 | 3,000 | 3,000 | |||||||||||||||||
Swift Worldwide Resources US Holdings Corp. B, Common Equity |
(h)(i) | Energy | 1,250,000 | 2,010 | 2,072 | |||||||||||||||||
Therakos, Inc., Common Equity |
Pharmaceuticals, Biotechnology & Life Sciences | 14,366 | 1,478 | 3,834 | ||||||||||||||||||
|
|
|
|
|||||||||||||||||||
Total Equity/Other |
23,665 | 27,828 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||
TOTAL INVESTMENTS111.1% |
$ | 2,626,969 | 2,655,828 | |||||||||||||||||||
|
|
|||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(11.1%) |
(264,843 | ) | ||||||||||||||||||||
|
|
|||||||||||||||||||||
NET ASSETS100.0% |
$ | 2,390,985 | ||||||||||||||||||||
|
|
See notes to unaudited consolidated financial statements.
22
Table of Contents
FS Investment Corporation II
Consolidated Schedule of Investments (continued)
As of December 31, 2013
(in thousands, except share amounts)
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Fair value determined by the Companys board of directors (see Note 7). |
(d) | Security or portion thereof held within Lehigh River LLC and is pledged as collateral supporting the amounts outstanding under the Class A Notes issued to Cobbs Creek LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8). |
(e) | Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the obligations of Cobbs Creek LLC under the repurchase transaction with JPMorgan Chase Bank, N.A., London Branch (see Note 8). |
(f) | Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the obligations of Cooper River LLC under the revolving credit facility with Citibank, N.A. (see Note 8). |
(g) | Position or portion thereof unsettled as of December 31, 2013. |
(h) | The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development companys total assets. As of December 31, 2013, 79.0% of the Companys total assets represented qualifying assets. |
(i) | Security is non-income producing. |
(j) | Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company. |
See notes to unaudited consolidated financial statements.
23
Table of Contents
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Investment Corporation II, or the Company, was incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of shares of its common stock in its continuous public offering to persons who were not affiliated with the Company or the Companys investment adviser, FSIC II Advisor, LLC, or FSIC II Advisor, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering requirement, the Company had no operations except for matters relating to its organization.
The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for 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, 2014, the Company had six wholly-owned financing subsidiaries and two wholly-owned subsidiaries through which it holds interests in certain non-controlled and non-affiliated portfolio companies. The unaudited consolidated financial statements include both the Companys accounts and the accounts of its wholly-owned subsidiaries as of June 30, 2014. All significant intercompany transactions have been eliminated in consolidation. Certain of the Companys consolidated subsidiaries are subject to U.S. federal and state income taxes.
The Companys investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or may issue loans to its target companies as primary market or directly originated investments.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Companys interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2013 included in the Companys annual report on Form 10-K. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The December 31, 2013 consolidated balance sheet and consolidated schedule of investments are derived from the Companys audited consolidated financial statements as of and for the year ended December 31, 2013. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
24
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded and all amounts are in thousands, except share and per share amounts.
Capital Gains Incentive Fee: The Company entered into an investment advisory and administrative services agreement with FSIC II Advisor, dated as of February 8, 2012, or the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of the Companys incentive fee capital gains (i.e., the Companys realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if the Companys entire portfolio were liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
In addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which was terminated on June 13, 2013), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their interpretation of the applicable language in the Advisers Act that the Company should look through the TRS in calculating its capital gains incentive fee. Under this look through methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a look through basis under which the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on income
25
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a look through basis.
Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Companys pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until the Companys pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Companys pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a catch-up fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Companys pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.
Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three and six months ended June 30, 2013 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and six months ended June 30, 2014. These reclassifications had no material impact on the Companys consolidated financial position, results of operations or cash flows as previously reported.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Companys common stock during the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Gross Proceeds from Offering |
46,680,052 | $ | 486,879 | 78,912,060 | $ | 815,652 | ||||||||||
Reinvestment of Distributions |
5,933,163 | 56,392 | 1,753,461 | 16,436 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Gross Proceeds |
52,613,215 | 543,271 | 80,665,521 | 832,088 | ||||||||||||
Commissions and Dealer Manager Fees |
| (44,484 | ) | | (76,453 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Proceeds to Company |
52,613,215 | 498,787 | 80,665,521 | 755,635 | ||||||||||||
Share Repurchase Program |
(507,488 | ) | (4,830 | ) | (76,086 | ) | (712 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Proceeds from Share Transactions |
52,105,727 | $ | 493,957 | 80,589,435 | $ | 754,923 | ||||||||||
|
|
|
|
|
|
|
|
Public Offering of Shares
In March 2014, the Company closed its continuous public offering of shares of common stock to new investors. The Company sold 302,266,066 shares of common stock for gross proceeds of $3,112,692 in its continuous public offering, including shares issued pursuant to its distribution reinvestment plan. Following the
26
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
closing of its continuous public offering, the Company has continued to issue shares pursuant to its distribution reinvestment plan. As of August 12, 2014, the Company had sold a total of 309,614,338 shares of common stock and raised total gross proceeds of $3,181,690, including $200 of seed capital contributed by the principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from the principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of the Companys board of directors and certain individuals and entities affiliated with GSO / Blackstone Debt Funds Management LLC, or GDFM, the Companys investment sub-adviser, in a private placement completed in June 2012 (See Note 4).
During the six months ended June 30, 2014 and 2013, the Company sold 52,613,215 and 80,665,521 shares of common stock for gross proceeds of $543,271 and $832,088, respectively, at an average price per share of $10.33 and $10.32, respectively. The gross proceeds received during the six months ended June 30, 2014 and 2013 include reinvested stockholder distributions of $56,392 and $16,436, respectively, for which the Company issued 5,933,163 and 1,753,461 shares of common stock, respectively. During the period from July 1, 2014 to August 12, 2014, the Company issued 2,144,481 shares of common stock for gross proceeds of $20,683 at an average price per share of $9.64 pursuant to its distribution reinvestment plan.
The proceeds from the issuance of common stock as presented on the Companys unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $44,484 and $76,453 for the six months ended June 30, 2014 and 2013, respectively.
Share Repurchase Program
The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Companys board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:
| the effect of such repurchases on the Companys qualification as a RIC (including the consequences of any necessary asset sales); |
| the liquidity of the Companys assets (including fees and costs associated with disposing of assets); |
| the Companys investment plans and working capital requirements; |
| the relative economies of scale with respect to the Companys size; |
| the Companys history in repurchasing shares of common stock or portions thereof; and |
| the condition of the securities markets. |
The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the issuance of shares of common stock under its distribution reinvestment plan. At the discretion of the Companys board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above.
27
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
On February 24, 2014, the Company amended the terms of its share repurchase program. The amendment to the share repurchase program became effective as of the Companys quarterly repurchase offer for the second quarter of 2014, which was completed in June 2014. Prior to the amendment of the share repurchase program, the Company offered to repurchase shares of common stock on each date of repurchase at a price equal to 90% of the share price in effect on the date of repurchase. Under the amended share repurchase program, the Company intends to offer to repurchase shares of common stock on each date of repurchase at a price equal to the price at which shares of common stock are issued pursuant to the Companys distribution reinvestment plan on the distribution date coinciding with the applicable share repurchase date. The repurchase price will be determined by the Companys board of directors or a committee thereof, in its sole discretion, and will be (i) not less than the net asset value per share of the Companys common stock (as determined in good faith by the Companys board of directors or a committee thereof, in its sole discretion) immediately prior to the repurchase date and (ii) not more than 2.5% greater than the net asset value per share as of such date.
The Companys board of directors may amend, suspend or terminate the share repurchase program at any time upon 30 days notice. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Companys October 1, 2012 semi-monthly closing.
The following table provides information concerning the Companys repurchases of shares of common stock pursuant to its share repurchase program during the six months ended June 30, 2014 and 2013:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
|||||||||||||
Fiscal 2013 |
||||||||||||||||||
December 31, 2012(1) |
January 2, 2013 | | | $ | 9.225 | | ||||||||||||
March 31, 2013 |
April 1, 2013 | 76,086 | 100 | % | $ | 9.360 | $ | 712 | ||||||||||
Fiscal 2014 |
||||||||||||||||||
December 31, 2013 |
January 2, 2013 | 135,094 | 100 | % | $ | 9.450 | $ | 1,277 | ||||||||||
March 31, 2014 |
April 1, 2014 | 372,394 | 100 | % | $ | 9.540 | $ | 3,553 |
(1) | No shares were tendered for repurchase in connection with the quarterly tender offer. |
On July 1, 2014, the Company repurchased 642,524 shares of common stock (representing 100% of the shares of common stock tendered for repurchase) at $9.64 per share for aggregate consideration totaling $6,194.
Note 4. Related Party Transactions
Compensation of the Investment Adviser and Dealer Manager
Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of the Companys gross assets and an incentive fee based on the Companys performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of the Companys investment operations. Base management fees are paid on a quarterly basis in arrears.
28
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of the Companys pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until the Companys pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Companys pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a catch-up fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Companys pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. This catch-up feature allows FSIC II Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Companys incentive fee capital gains, which equals the Companys realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Note 2 for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.
The Company reimburses FSIC II Advisor for expenses necessary to perform services related to the Companys administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisors actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to the Company based on factors such as assets, revenues, time allocations and/or other reasonable metrics. The Companys board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Companys board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Companys board of directors compares the total amount paid to FSIC II Advisor for such services as a percentage of the Companys net assets to the same ratio as reported by other comparable BDCs.
Franklin Square Holdings, L.P., or Franklin Square Holdings, the Companys sponsor and an affiliate of FSIC II Advisor, has funded certain of the Companys offering costs and organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in the Companys continuous public offering until all offering and organization costs
29
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On June 18, 2012, the Company satisfied the minimum offering requirement. During the six months ended June 30, 2014 and 2013, Franklin Square Holdings did not fund any of the Companys offering and organization costs, and the Company did not pay any reimbursements to FSIC II Advisor and its affiliates for offering and organization costs previously funded.
The dealer manager for the Companys continuous public offering was FS2 Capital Partners, LLC, or FS2, which is one of the Companys affiliates. Under the dealer manager agreement among the Company, FSIC II Advisor and FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in the Companys continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.
The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six months ended June 30, 2014 and 2013:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||
Related Party |
Source Agreement |
Description | 2014 | 2013 | 2014 | 2013 | ||||||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) |
$ | 19,849 | $ | 7,595 | $ | 37,490 | $ | 12,580 | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) |
$ | 6,387 | $ | (2,839 | ) | $ | 12,321 | $ | 1,020 | |||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Subordinated Incentive Fee on Income(3) |
$ | 9,679 | $ | | $ | 9,679 | $ | | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(4) |
$ | 1,216 | $ | 644 | $ | 2,590 | $ | 1,105 | ||||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(5) |
$ | | $ | 7,863 | $ | 8,821 | $ | 14,680 |
(1) | During the six months ended June 30, 2014 and 2013, $32,654 and $7,452, respectively, in base management fees were paid to FSIC II Advisor. As of June 30, 2014, $19,849 in base management fees were payable to FSIC II Advisor. |
(2) | During the six months ended June 30, 2014 and 2013, the Company accrued capital gains incentive fees of $12,321 and $1,020, respectively, based on the performance of its portfolio, all of which was based on unrealized gains. No such fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the look through methodology described more fully in Note 2. This waiver resulted in a reduction of $441 to the amount of |
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, the Company reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. The Company did not pay any capital gains incentive fees to FSIC II Advisor during the six months ended June 30, 2014 or 2013. As of June 30, 2014, the Company had accrued capital gains incentive fees of $21,555 based on the performance of its portfolio, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor. |
(3) | During the six months ended June 30, 2014, no amounts were paid to FSIC II Advisor in respect of the subordinated incentive fee on income. As of June 30, 2014, a subordinated incentive fee on income of $9,679 was payable to FSIC II Advisor. |
(4) | During the six months ended June 30, 2014 and 2013, $2,396 and $932, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC II Advisor and the remainder related to other reimbursable expenses. The Company paid $1,273 and $718, respectively, in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2014 and 2013. |
(5) | Represents aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
Capital Contribution by FSIC II Advisor and GDFM
In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Companys investment adviser.
In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains the Companys investment adviser. In connection with the same private placement, certain members of the Companys board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, the Company issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of August 12, 2014, the Company has sold an aggregate of 3,311,040 shares of common stock for aggregate gross proceeds of $30,280 to members of the Companys board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold to Messrs. Forman and Adelman in December 2011 and shares sold in the private placement completed in June 2012.
Potential Conflicts of Interest
FSIC II Advisors senior management team is comprised of substantially the same personnel as the senior management teams of FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings other affiliated BDCs and affiliated
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III and FS Global Credit Opportunities Fund. While none of FSIC II Advisor, FB Income Advisor, LLC, FS Investment Advisor, LLC, FSIC III Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FSIC II Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Companys investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FSIC II Advisor or its management team. In addition, even in the absence of FSIC II Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.
Exemptive Relief
In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FSIC II Advisor, including FS Investment Corporation, FS Energy and Power Fund, FS Investment Corporation III and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers, or, collectively, the Companys co-investment affiliates. The Company believes this relief may not only enhance its ability to further its investment objectives and strategies, but may also increase favorable investment opportunities for the Company, in part by allowing it to participate in larger investments, together with the Companys co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, it will continue to be permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance.
Expense Reimbursement
Pursuant to an expense support and conditional reimbursement agreement, dated as of May 10, 2012 and amended and restated as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Companys distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Companys distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Companys cumulative distributions paid to its
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
stockholders in each quarter, less the sum of its net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Companys net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to stockholders; provided, however, that (i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Companys average net assets attributable to its shares of common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Companys average net assets attributable to its shares of common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means the Companys total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Companys conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
Franklin Square Holdings is controlled by the Companys chairman, president and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Companys expenses in future quarters.
As of December 31, 2012, the Company had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains
33
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the three months ended March 31, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, the Company accrued an expense recoupment payable to sponsor of $2,041, which the Company offset against the reimbursements due on the Companys consolidated balance sheet as of December 31, 2012. As of June 30, 2014 no further amounts remained subject to repayment by the Company to Franklin Square Holdings in the future.
FS Benefit Trust
On May 30, 2013, FS Benefit Trust, or FS Trust, was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of Franklin Square Holdings and its affiliates. In connection with the Companys semi-monthly closing that occurred on June 17, 2013, FS Trust purchased approximately $34 of the Companys shares at a purchase price equal to 90% of the offering price in effect on such date, or $9.45 per share.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared and paid on its common stock during the six months ended June 30, 2014 and 2013:
Distribution | ||||||||
For the Three Months Ended |
Per Share | Amount | ||||||
Fiscal 2013 |
||||||||
March 31, 2013 |
$ | 0.1871 | $ | 14,791 | ||||
June 30, 2013 |
$ | 0.1883 | $ | 22,647 | ||||
Fiscal 2014 |
||||||||
March 31, 2014 |
$ | 0.1740 | $ | 49,274 | ||||
June 30, 2014 |
$ | 0.1885 | $ | 57,604 |
On June 30, 2014, the Companys board of directors declared a regular monthly cash distribution of $0.06283 per share, which was paid on July 31, 2014 to stockholders of record on July 30, 2014. On August 5, 2014, the Companys board of directors declared a regular monthly cash distribution of $0.06283 per share, which will be paid on August 29, 2014 to stockholders of record on August 28, 2014. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Companys board of directors.
The Company has adopted an opt in distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically opt in to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Companys common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholders ability to participate in the distribution reinvestment plan.
The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of shares of the Companys common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions.
For a period of time following commencement of the Companys continuous public offering, substantial portions of the Companys distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that were subject to repayment by the Company within three years. The purpose of this arrangement was to ensure that no portion of the Companys distributions to stockholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on the Companys investment performance. No portion of the distributions paid during the six months ended June 30, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, the Companys repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that stockholders may otherwise have received during the six months ended June 30, 2013. During the six months ended June 30, 2014, the Company did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that the Company will continue to achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.
The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common stock during the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||
Offering proceeds |
$ | | | $ | | | ||||||||||
Borrowings |
| | | | ||||||||||||
Net investment income(1) |
106,878 | 100 | % | 26,613 | 71 | % | ||||||||||
Short-term capital gains proceeds from the sale of assets |
| | 10,825 | 29 | % | |||||||||||
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 |
$ | 106,878 | 100 | % | $ | 37,438 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | During the six months ended June 30, 2014 and 2013, 94.0% and 92.3%, respectively, of the Companys gross investment income was attributable to cash interest earned, 3.9% and 7.6%, respectively, was attributable to non-cash accretion of discount and 2.1% and 0.1%, respectively, was attributable to paid-in-kind, or PIK, interest. |
The Companys net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $110,880 and $33,900, respectively. As of June 30, 2014 and December 31, 2013, the Company had $13,877 and $7,638, respectively, of undistributed net investment income and realized gains on a tax basis.
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The difference between the Companys GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes and, with respect to the six months ended June 30, 2013, the inclusion of a portion of the periodic net settlement payments due on the Companys total return swap in tax-basis net investment income.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
GAAP-basis net investment income |
$ | 100,253 | $ | 22,618 | ||||
Reversal of incentive fee accrual on unrealized gains |
12,321 | 1,020 | ||||||
Reclassification of unamortized original issue discount |
(2,447 | ) | | |||||
Tax-basis net investment income portion of total return swap payments |
| 10,269 | ||||||
Other miscellaneous differences |
753 | (7 | ) | |||||
|
|
|
|
|||||
Tax-basis net investment income |
$ | 110,880 | $ | 33,900 | ||||
|
|
|
|
The determination of the tax attributes of the Companys distributions is made annually as of the end of the Companys fiscal year based upon the Companys taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Companys distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.
As of June 30, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows:
June 30, 2014 (Unaudited) |
December 31, 2013 |
|||||||
Distributable ordinary income (income and short-term capital gains) |
$ | 12,032 | $ | 7,389 | ||||
Distributable realized gains (long-term capital gains) |
1,845 | 249 | ||||||
Incentive fee accrual on unrealized gains |
(21,555 | ) | (9,234 | ) | ||||
Unamortized organization costs |
(196 | ) | (203 | ) | ||||
Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency(1) |
90,383 | 28,586 | ||||||
|
|
|
|
|||||
Total |
$ | 82,509 | $ | 26,787 | ||||
|
|
|
|
(1) | As of June 30, 2014 and December 31, 2013, the gross unrealized appreciation on the Companys investments and unrealized gain on foreign currency was $121,159 and $61,822, respectively. As of June 30, 2014 and December 31, 2013, the gross unrealized depreciation on the Companys investments and unrealized loss on foreign currency was $30,776 and $33,236, respectively. |
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The aggregate cost of the Companys investments for federal income tax purposes totaled $3,673,551 and $2,627,242 as of June 30, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $90,383 and $28,586 as of June 30, 2014 and December 31, 2013, respectively.
Note 6. Investment Portfolio
The following table summarizes the composition of the Companys investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:
June 30,
2014 (Unaudited) |
December 31, 2013 | |||||||||||||||||||||||
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 1,824,946 | $ | 1,846,780 | 49 | % | $ | 1,249,333 | $ | 1,268,093 | 48 | % | ||||||||||||
Senior Secured LoansSecond Lien |
1,063,373 | 1,084,435 | 29 | % | 684,825 | 697,240 | 26 | % | ||||||||||||||||
Senior Secured Bonds |
260,532 | 255,577 | 7 | % | 218,575 | 203,927 | 8 | % | ||||||||||||||||
Subordinated Debt |
277,590 | 293,667 | 8 | % | 278,306 | 276,640 | 10 | % | ||||||||||||||||
Collateralized Securities |
164,201 | 181,124 | 5 | % | 172,265 | 182,100 | 7 | % | ||||||||||||||||
Equity/Other |
82,636 | 102,361 | 2 | % | 23,665 | 27,828 | 1 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,673,278 | $ | 3,763,944 | 100 | % | $ | 2,626,969 | $ | 2,655,828 | 100 | % | ||||||||||||
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|
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|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
As of June 30, 2014, the Company did not control and was not an affiliated person of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to control a portfolio company if it owned 25% or more of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an affiliated person of a portfolio company if it owned 5% or more of its voting securities.
The Companys investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, the Company had four senior secured loan investments with aggregate unfunded commitments of $51,716. As of December 31, 2013, the Company had five senior secured loan investments with aggregate unfunded commitments of $66,687 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $6,157. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.
37
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The 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, 2014 and December 31, 2013:
June 30,
2014 (Unaudited) |
December 31, 2013 | |||||||||||||||
Industry Classification |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 169,833 | 5 | % | $ | 53,195 | 2 | % | ||||||||
Capital Goods |
420,044 | 11 | % | 199,070 | 8 | % | ||||||||||
Commercial & Professional Services |
47,168 | 1 | % | 44,881 | 2 | % | ||||||||||
Consumer Durables & Apparel |
208,773 | 6 | % | 144,211 | 5 | % | ||||||||||
Consumer Services |
642,777 | 17 | % | 401,187 | 15 | % | ||||||||||
Diversified Financials |
196,743 | 5 | % | 200,485 | 8 | % | ||||||||||
Energy |
496,912 | 13 | % | 417,589 | 16 | % | ||||||||||
Food & Staples Retailing |
6,560 | 0 | % | 1,181 | 0 | % | ||||||||||
Food, Beverage & Tobacco |
10,111 | 0 | % | 10,245 | 0 | % | ||||||||||
Health Care Equipment & Services |
128,782 | 3 | % | 133,025 | 5 | % | ||||||||||
Household & Personal Products |
| | 5,000 | 0 | % | |||||||||||
Insurance |
105,622 | 3 | % | 86,466 | 3 | % | ||||||||||
Materials |
138,782 | 4 | % | 138,777 | 5 | % | ||||||||||
Media |
108,280 | 3 | % | 101,071 | 4 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
70,918 | 2 | % | 78,001 | 3 | % | ||||||||||
Real Estate |
17,789 | 1 | % | 8,171 | 0 | % | ||||||||||
Retailing |
223,056 | 6 | % | 194,817 | 7 | % | ||||||||||
Software & Services |
264,212 | 7 | % | 181,024 | 7 | % | ||||||||||
Technology Hardware & Equipment |
142,329 | 4 | % | 104,293 | 4 | % | ||||||||||
Telecommunication Services |
240,365 | 6 | % | 129,704 | 5 | % | ||||||||||
Transportation |
119,065 | 3 | % | 21,964 | 1 | % | ||||||||||
Utilities |
5,823 | 0 | % | 1,471 | 0 | % | ||||||||||
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|
|
|||||||||
Total |
$ | 3,763,944 | 100 | % | $ | 2,655,828 | 100 | % | ||||||||
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|
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
38
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of June 30, 2014 and December 31, 2013, the Companys investments were categorized as follows in the fair value hierarchy:
Valuation Inputs |
June 30, 2014 (Unaudited) |
December 31, 2013 | ||||||
Level 1Price quotations in active markets |
$ | 5,453 | $ | 64 | ||||
Level 2Significant other observable inputs |
| | ||||||
Level 3Significant unobservable inputs |
3,758,491 | 2,655,764 | ||||||
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|
|
|
|||||
Total |
$ | 3,763,944 | $ | 2,655,828 | ||||
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|
|
The Companys investments as of June 30, 2014 consisted primarily of debt securities that were either traded on a private over-the-counter market for institutional investors or acquired directly from the issuer. Nineteen senior secured loan investments, one senior secured bond investment, one subordinated debt investment and one collateralized security were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of the Companys equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Four equity/other investments, which were traded on active public markets, were valued at their closing price as of June 30, 2014. One senior secured loan investment, which was newly-issued and purchased near June 30, 2014, was valued at cost, as the Companys board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, the Company valued its other investments, including two equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.
The Companys investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Thirteen senior secured loan investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments
39
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
by considering, among other factors, the borrowers 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 debt. Except as described below, all of the Companys equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Companys management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Companys board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Companys valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Companys valuation process.
The following is a reconciliation for the six months ended June 30, 2014 and 2013 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Six Months Ended June 30, 2014 | ||||||||||||||||||||||||||||
Senior
Secured LoansFirst Lien |
Senior
Secured LoansSecond Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/ Other |
Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 1,268,093 | $ | 697,240 | $ | 203,927 | $ | 276,640 | $ | 182,100 | $ | 27,764 | $ | 2,655,764 | ||||||||||||||
Accretion of discount (amortization of premium) |
1,700 | 1,898 | 1,874 | 1,459 | 44 | | 6,975 | |||||||||||||||||||||
Net realized gain (loss) |
1,008 | 290 | (4,692 | ) | 3,184 | | | (210 | ) | |||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
3,074 | 8,647 | 9,693 | 17,743 | 7,088 | 16,564 | 62,809 | |||||||||||||||||||||
Purchases |
942,191 | 491,895 | 121,551 | 141,172 | | 52,580 | 1,749,389 | |||||||||||||||||||||
Paid-in-kind interest |
50 | 3,007 | | 740 | | | 3,797 | |||||||||||||||||||||
Sales and redemptions |
(369,336 | ) | (118,542 | ) | (76,776 | ) | (147,271 | ) | (8,108 | ) | | (720,033 | ) | |||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
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|
|||||||||||||||
Fair value at end of period |
$ | 1,846,780 | $ | 1,084,435 | $ | 255,577 | $ | 293,667 | $ | 181,124 | $ | 96,908 | $ | 3,758,491 | ||||||||||||||
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|||||||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 8,233 | $ | 15,120 | $ | 4,413 | $ | 19,801 | $ | 7,088 | $ | 16,564 | $ | 71,219 | ||||||||||||||
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40
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
For the Six Months Ended June 30, 2013 | ||||||||||||||||||||||||||||
Senior Secured LoansFirst Lien |
Senior Secured LoansSecond Lien |
Senior Secured Bonds |
Subordinated Debt |
Collateralized Securities |
Equity/ Other |
Total | ||||||||||||||||||||||
Fair value at beginning of period |
$ | 159,824 | $ | 149,497 | $ | 48,608 | $ | 107,407 | $ | 18,308 | $ | 4,998 | $ | 488,642 | ||||||||||||||
Accretion of discount (amortization of premium) |
1,843 | 542 | 950 | 77 | | | 3,412 | |||||||||||||||||||||
Net realized gain (loss) |
303 | 52 | 453 | 851 | | | 1,659 | |||||||||||||||||||||
Net change in unrealized appreciation (depreciation) |
3,083 | 5,488 | (4,092 | ) | (5,733 | ) | 683 | (687 | ) | (1,258 | ) | |||||||||||||||||
Purchases |
483,284 | 258,092 | 116,615 | 155,288 | 84,063 | 3,000 | 1,100,342 | |||||||||||||||||||||
Paid-in-kind interest |
51 | | | | | | 51 | |||||||||||||||||||||
Sales and redemptions |
(87,801 | ) | (40,714 | ) | (10,465 | ) | (55,517 | ) | (1,412 | ) | | (195,909 | ) | |||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | |||||||||||||||||||||
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|||||||||||||||
Fair value at end of period |
$ | 560,587 | $ | 372,957 | $ | 152,069 | $ | 202,373 | $ | 101,642 | $ | 7,311 | $ | 1,396,939 | ||||||||||||||
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|
|
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|
|||||||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 4,033 | $ | 6,159 | $ | (3,588 | ) | $ | (5,360 | ) | $ | 683 | $ | (687 | ) | $ | 1,240 | |||||||||||
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The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of June 30, 2014 and December 31, 2013 were as follows:
Type of Investment |
Fair Value at June 30, 2014 (Unaudited) |
Valuation Technique(1) |
Unobservable Input | Range | Weighted Average |
|||||||||
Senior Secured LoansFirst Lien |
$ | 1,084,535 | Market Comparables | Market Yield (%) | 8.3% 11.8% | 9.4 | % | |||||||
752,545 | Market Quotes | Indicative Dealer Quotes | 78.5% 104.8% | 100.2 | % | |||||||||
9,700 | Cost | Cost | 100.0% 100.0% | 100.0 | % | |||||||||
Senior Secured LoansSecond Lien |
282,601 | Market Comparables | Market Yield (%) | 8.3% 11.0% | 10.2 | % | ||||||||
801,834 | Market Quotes | Indicative Dealer Quotes | 82.4% 105.1% | 101.0 | % | |||||||||
Senior Secured Bonds |
12,651 | Market Comparables | Market Yield (%) | 11.3% 11.8% | 11.5 | % | ||||||||
242,926 | Market Quotes | Indicative Dealer Quotes | 51.5% 114.5% | 96.2 | % | |||||||||
Subordinated Debt |
44,394 | Market Comparables | Market Yield (%) | 15.5% 16.0% | 15.8 | % | ||||||||
249,273 | Market Quotes | Indicative Dealer Quotes | 83.8% 119.3% | 102.1 | % | |||||||||
Collateralized Securities |
79,692 | Market Comparables | Market Yield (%) | 10.8% 11.8% | 11.3 | % | ||||||||
101,432 | Market Quotes | Indicative Dealer Quotes | 75.9% 104.8% | 94.7 | % | |||||||||
Equity/Other |
90,840 | Market Comparables | EBITDA Multiples (x) | 4.0x 11.5x | 7.6x | |||||||||
Production Multiples (Mmb/d) |
$57,500.0 $62,500.0 | $ | 60,000.0 | |||||||||||
Proved Reserves Multiples (Mmboe) |
$10.3 $10.8 | $ | 10.5 | |||||||||||
PV-10 Multiples (x) | 1.5x 1.6x | 1.5x | ||||||||||||
Discounted Cash Flow | Discount Rate (%) | 26.6% 31.6% | 29.1 | % | ||||||||||
Option Valuation Model | Volatility (%) | 46.5% 61.5% | 48.5 | % | ||||||||||
6,068 | Market Quotes | Indicative Dealer Quotes | $160.8 $163.4 | $ | 162.1 | |||||||||
|
|
|||||||||||||
Total |
$ | 3,758,491 | ||||||||||||
|
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41
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
(1) | Investments using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
Type of Investment(1) |
Fair Value at December 31, 2013(2) |
Valuation Technique(3) |
Unobservable Input | Range | Weighted Average | |||||||
Senior Secured LoansFirst Lien |
$ | 686,413 | Market Comparables | Market Yield (%) | 8.3% 10.8% | 9.2% | ||||||
Senior Secured LoansSecond Lien |
$ | 193,419 | Market Comparables | Market Yield (%) | 9.8% 11.3% | 10.5% | ||||||
Senior Secured Bonds |
$ | 76,260 | Market Comparables | Market Yield (%) | 11.5% 12.5% | 12.0% | ||||||
Equity/Other |
$ | 27,764 | Market Comparables | EBITDA Multiples (x) | 5.5x 11.3x | 7.7x | ||||||
Discounted Cash Flow | Discount Rate (%) | 19.3% 24.3% | 21.8% | |||||||||
Option Valuation Model | Volatility (%) | 60.0% 61.5% | 60.8% |
(1) | Table includes only those Level 3 assets that were valued by an independent valuation firm as of December 31, 2013. |
(2) | The remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers as of December 31, 2013, which were provided by independent third-party pricing services and screened for validity by such services. As of December 31, 2013, $65,015 of the senior secured loansfirst lien investments valued by the independent valuation firm consisted of unfunded loan commitments. |
(3) | For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement. |
Note 8. Financing Arrangements
The following table presents summary information with respect to the Companys outstanding financing arrangements as of June 30, 2014. For additional information regarding these financing facilities, please see the notes to the Companys audited consolidated financial statements contained in its annual report on Form 10-K for the fiscal year ended December 31, 2013 and the additional disclosure set forth in this Note 8.
Facility |
Type of Facility |
Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
JPM Facility |
Repurchase | 3.25% | $ | 550,000 | $ | | May 20, 2017 | |||||||
Cooper River Credit Facility |
Revolving | L + 1.75% | $ | 170,494 | $ | 29,506 | March 27, 2016 | |||||||
Wissahickon Creek Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 100,000 | $ | 150,000 | February 19, 2019 | |||||||
Darby Creek Credit Facility |
Revolving | L + 2.75% | $ | 130,500 | $ | 119,500 | February 20, 2018 | |||||||
Dunning Creek Credit Facility |
Revolving | L + 1.55% | $ | 113,000 | $ | 137,000 | May 14, 2015 |
JPM Financing
On April 23, 2013, through its two wholly-owned, special-purpose financing subsidiaries, Lehigh River LLC, or Lehigh River, and Cobbs Creek LLC, or Cobbs Creek, the Company entered into an amendment, or the April 2013 amendment, to its debt financing arrangement with JPMorgan Chase Bank, N.A., London Branch, or
42
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
JPM, which the Company originally entered into with JPM on October 26, 2012 (and previously amended on February 6, 2013). The April 2013 amendment, among other things: (i) increased the amount of debt financing available under the arrangement from $300,000 to $550,000; and (ii) extended the final repurchase date under the financing arrangement from February 20, 2017 to May 20, 2017. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
Pursuant to the financing arrangement, the assets held by Lehigh River secure the obligations of Lehigh River under certain Class A Floating Rate Notes, or the Class A Notes, to be issued from time to time by Lehigh River to Cobbs Creek pursuant to an Amended and Restated Indenture, dated as of February 6, 2013, as supplemented by Supplemental Indenture No. 1, dated as of April 23, 2013, with Citibank, N.A., or Citibank, as trustee, or the Amended and Restated Indenture. Pursuant to the Amended and Restated Indenture, the aggregate principal amount of Class A Notes that may be issued by Lehigh River from time to time is $660,000. All principal and interest on the Class A Notes will be due and payable on the stated maturity date of May 20, 2024. Cobbs Creek will purchase the Class A Notes to be issued by Lehigh River from time to time at a purchase price equal to their par value.
Cobbs Creek, in turn, has entered into an amended repurchase transaction with JPM pursuant to the terms of an amended and restated global master repurchase agreement and the related annex and amended and restated confirmation thereto, each dated as of April 23, 2013, or, collectively, the JPM facility. The assets held by Cobbs Creek secure the obligations of Cobbs Creek under the JPM facility. Pursuant to the JPM facility, JPM has agreed to purchase from time to time Class A Notes held by Cobbs Creek for an aggregate purchase price equal to approximately 83.33% of the principal amount of Class A Notes purchased. Subject to certain conditions, the maximum principal amount of Class A Notes that may be purchased under the JPM facility is $660,000. Accordingly, the maximum amount payable at any time to Cobbs Creek under the JPM facility is $550,000.
Under the JPM facility, Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction must occur no later than May 20, 2017. The repurchase price paid by Cobbs Creek to JPM for each repurchase of Class A Notes will be equal to the purchase price paid by JPM for such Class A Notes, plus interest thereon accrued at a fixed rate of 3.25% per annum. Commencing May 20, 2015, Cobbs Creek is permitted to reduce (based on certain thresholds) the aggregate principal amount of Class A Notes subject to the JPM facility. Such reductions, and any other reductions of the principal amount of Class A Notes, including upon an event of default, will be subject to breakage fees in an amount equal to the present value of 1.25% per annum over the remaining term of the JPM facility applied to the amount of such reduction.
As of June 30, 2014 and December 31, 2013, Class A Notes in the aggregate principal amount of $660,000 had been purchased by Cobbs Creek from Lehigh River and subsequently sold to JPM under the JPM facility for aggregate proceeds of $550,000. The carrying amount outstanding under the JPM facility approximates its fair value. The Company funded each purchase of Class A Notes by Cobbs Creek through a capital contribution to Cobbs Creek. As of June 30, 2014 and December 31, 2013, Cobbs Creeks liability under the JPM facility was $550,000, plus $2,085 of accrued interest expense. The Class A Notes issued by Lehigh River and purchased by Cobbs Creek eliminate in consolidation on the Companys financial statements.
43
Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
As of June 30, 2014 and December 31, 2013, the fair value of assets held by Lehigh River was $1,214,618 and $1,217,548, respectively, which included assets purchased by Lehigh River with proceeds from the issuance of Class A Notes. As of June 30, 2014 and December 31, 2013, the fair value of assets held by Cobbs Creek was $354,688 and $345,492, respectively.
The Company incurred costs of $159 in connection with obtaining and amending the JPM facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM facility. As of June 30, 2014, $93 of such deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2014 and 2013, the components of total interest expense for the JPM facility were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Direct interest expense |
$ | 4,518 | $ | 1,583 | $ | 8,987 | $ | 2,701 | ||||||||
Amortization of deferred financing costs |
10 | 10 | 20 | 20 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total interest expense |
$ | 4,528 | $ | 1,593 | $ | 9,007 | $ | 2,721 | ||||||||
|
|
|
|
|
|
|
|
For the six months ended June 30, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM facility were as follows:
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Cash paid for interest expense(1) |
$ | 8,987 | $ | 2,239 | ||||
Average borrowings under the facility |
$ | 550,000 | $ | 165,287 | ||||
Effective interest rate on borrowings |
3.25 | % | 3.25 | % | ||||
Weighted average interest rate |
3.25 | % | 3.25 | % |
(1) | Interest under the JPM facility is payable quarterly in arrears and commenced in May 2013. |
Amounts outstanding under the JPM facility will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Cooper River Credit Facility
On March 27, 2013, the Companys wholly-owned, special-purpose financing subsidiary, Cooper River LLC, or Cooper River, entered into a revolving credit facility, or the Cooper River facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Cooper River facility provides for borrowings in an aggregate principal amount up to $200,000 on a committed basis.
The Company may contribute cash or debt securities to Cooper River from time to time, subject to certain restrictions set forth in the Cooper River facility, and will retain a residual interest in any assets contributed
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
through its ownership of Cooper River or will receive fair market value for any debt securities sold to Cooper River. Cooper River may purchase additional debt securities from various sources. Cooper River has appointed the Company to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. Cooper Rivers obligations to the lenders under the Cooper River facility are secured by a first priority security interest in substantially all of the assets of Cooper River, including its portfolio of debt securities. The obligations of Cooper River under the Cooper River facility are non-recourse to the Company and the Companys exposure under the Cooper River facility is limited to the value of the Companys investment in Cooper River.
Borrowings under the Cooper River facility accrue interest at a rate equal to the three-month London Interbank Offered Rate, or LIBOR, plus 1.75% per annum during the first two years of the Cooper River facility and three-month LIBOR plus 2.00% per annum thereafter. Borrowings under the Cooper River facility are subject to compliance with an equity coverage ratio with respect to the current value of Cooper Rivers portfolio and a loan compliance test with respect to the initial acquisition of each debt security in Cooper Rivers portfolio.
Beginning on June 24, 2013, Cooper River became subject to a non-usage fee of 0.50% per annum to the extent that the aggregate principal amount available under the Cooper River facility is not borrowed. Outstanding borrowings under the Cooper River facility will be amortized beginning June 27, 2015. Any amounts borrowed under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016.
As of June 30, 2014 and December 31, 2013, $170,494 was outstanding under the Cooper River facility. The carrying amount outstanding under the Cooper River facility approximates its fair value. The Company incurred costs of $1,557 in connection with obtaining the Cooper River facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $903 of such deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2014 and 2013, the components of total interest expense for the Cooper River facility were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Direct interest expense |
$ | 855 | $ | 233 | $ | 1,701 | $ | 237 | ||||||||
Non-usage fees |
37 | 8 | 74 | 8 | ||||||||||||
Amortization of deferred financing costs |
130 | 128 | 257 | 135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
$ | 1,022 | $ | 369 | $ | 2,032 | $ | 380 | ||||||||
|
|
|
|
|
|
|
|
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the six months ended June 30, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Cooper River facility were as follows:
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Cash paid for interest expense(1) |
$ | 1,791 | $ | | ||||
Average borrowings under the facility(2) |
$ | 170,494 | $ | 44,059 | ||||
Effective interest rate on borrowings |
2.08 | % | 2.48 | % | ||||
Weighted average interest rate (including the effect of non-usage fees) |
2.08 | % | 2.08 | % |
(1) | Interest under the Cooper River facility is payable quarterly in arrears and commenced on March 27, 2013. |
(2) | Average borrowings under the facility for the six months ended June 30, 2013 are calculated since the inception date of the facility, or March 27, 2013. |
Borrowings of Cooper River will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Wissahickon Creek Credit Facility
On February 19, 2014, the Companys wholly-owned, special-purpose financing subsidiary, Wissahickon Creek LLC, or Wissahickon Creek, entered into a revolving credit facility, or the Wissahickon Creek facility, with Wells Fargo Securities, LLC, as administrative agent, each of the conduit lenders and institutional lenders from time to time party thereto and Wells Fargo Bank, National Association, or, collectively with Wells Fargo Securities, LLC, Wells Fargo, as the collateral agent, account bank and collateral custodian under the Wissahickon Creek facility. The Wissahickon Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.
The Company may contribute cash, loans or bonds to Wissahickon Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Wissahickon Creek or will receive fair market value for any assets sold to Wissahickon Creek. Wissahickon Creek may purchase additional assets from various sources. Wissahickon Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of a collateral management agreement. Wissahickon Creeks obligations to Wells Fargo under the Wissahickon Creek facility are secured by a first priority security interest in substantially all of the assets of Wissahickon Creek, including its portfolio of assets. The obligations of Wissahickon Creek under the Wissahickon Creek facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of its investment in Wissahickon Creek.
Pricing under the Wissahickon Creek facility is based on LIBOR for a three-month interest period, plus a spread ranging between 1.50% and 2.50% per annum, depending on the composition of the portfolio of assets for the relevant period. Beginning June 19, 2014, Wissahickon Creek became subject to a non-usage fee to the extent the aggregate principal amount available under the facility is not borrowed. The non-usage fee equals 0.50% per annum on unborrowed amounts up to and including $25,000 and 2.00% on unborrowed amounts exceeding $25,000. Any amounts borrowed under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019. Borrowings under the Wissahickon Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Wissahickon Creek varies depending upon the types of assets in Wissahickon Creeks portfolio.
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
As of June 30, 2014, $100,000 was outstanding under the Wissahickon Creek facility. The carrying amount outstanding under the Wissahickon Creek facility approximates its fair value. The Company incurred costs of $3,260 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $3,024 of such deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2014, the components of total interest expense for the Wissahickon Creek facility were as follows:
Three Months Ended June 30, 2014 |
Six Months Ended June 30, 2014 |
|||||||
Direct interest expense |
$ | 258 | $ | 258 | ||||
Non-usage fees |
88 | 88 | ||||||
Amortization of deferred financing costs |
163 | 236 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 509 | $ | 582 | ||||
|
|
|
|
For the six months ended June 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wissahickon Creek facility were as follows:
Six Months Ended June 30, 2014 |
||||
Cash paid for interest expense(1) |
$ | | ||
Average borrowings under the facility(2) |
$ | 97,143 | ||
Effective interest rate on borrowings |
5.36 | % | ||
Weighted average interest rate (including the effect of non-usage fees) |
3.66 | % |
(1) | Interest under the Wissahickon Creek facility is payable quarterly in arrears and commenced on May 27, 2014. |
(2) | The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to June 30, 2014. |
Borrowings of Wissahickon Creek will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Darby Creek Credit Facility
On February 20, 2014, the Companys wholly-owned, special-purpose financing subsidiary, Darby Creek LLC, or Darby Creek, entered into a revolving credit facility, or the Darby Creek facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent, each of the lenders from time to time party thereto, the other agents parties thereto and Wells Fargo Bank, National Association, as the collateral agent and collateral custodian under the Darby Creek facility. The Darby Creek facility provides for borrowings in an aggregate principal amount up to $250,000 on a committed basis.
The Company may contribute assets to Darby Creek from time to time and will retain a residual interest in any assets contributed through its ownership of Darby Creek or will receive fair market value for any assets sold
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FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
to Darby Creek. Darby Creek may purchase additional assets from various sources. Darby Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Darby Creeks obligations to Deutsche Bank under the Darby Creek facility are secured by a first priority security interest in substantially all of the assets of Darby Creek, including its portfolio of assets. The obligations of Darby Creek under the Darby Creek facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of its investment in Darby Creek.
Pricing under the Darby Creek facility is based on LIBOR for a three-month interest period (for each committed lender) or the commercial paper rate of each conduit lender, plus, in each case, a spread of 2.75% per annum. Darby Creek is subject to a non-usage fee of 0.75% per annum to the extent the aggregate principal amount available under the facility is not borrowed. In addition, Darby Creek is subject to a make-whole fee on a quarterly basis effectively equal to a portion of the spread that would have been payable if the full amount under the facility had been borrowed, less the non-usage fee accrued during such quarter. Any amounts borrowed under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018. Borrowings under the Darby Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Darby Creek varies depending upon the types of assets in Darby Creeks portfolio.
As of June 30, 2014, $130,500 was outstanding under the Darby Creek facility. The carrying amount outstanding under the Darby Creek facility approximates its fair value. The Company incurred costs of $1,934 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $1,761 of such deferred financing costs had yet to be amortized to interest expense.
For the three and six months ended June 30, 2014, the components of total interest expense for the Darby Creek facility were as follows:
Three Months Ended June 30, 2014 |
Six Months Ended June 30, 2014 |
|||||||
Direct interest expense |
$ | 310 | $ | 310 | ||||
Non-usage and make-whole fees |
475 | 761 | ||||||
Amortization of deferred financing costs |
120 | 173 | ||||||
|
|
|
|
|||||
Total interest expense |
$ | 905 | $ | 1,244 | ||||
|
|
|
|
For the six months ended June 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Darby Creek facility were as follows:
Six Months Ended June 30, 2014 |
||||
Cash paid for interest expense(1) |
$ | | ||
Average borrowings under the facility(2) |
$ | 73,845 | ||
Effective interest rate on borrowings |
3.44 | % | ||
Weighted average interest rate (including the effect of non-usage fees)(3) |
6.56 | % |
(1) | Interest under the Darby Creek facility is payable quarterly in arrears and commenced on February 20, 2014. |
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
(2) | The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to June 30, 2014. |
(3) | Weighted average interest rate excludes the effect of the make-whole fee. During the six months ended June 30, 2014, the Company recorded a make-whole fee of $336. |
Borrowings of Darby Creek will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Dunning Creek Credit Facility
On May 14, 2014, the Companys wholly-owned, special-purpose financing subsidiary, Dunning Creek LLC, or Dunning Creek, entered into a revolving credit facility, or the Dunning Creek facility, with Deutsche Bank, as administrative agent and lender, and each of the other lenders from time to time party thereto. The Dunning Creek facility originally provided for borrowings in an aggregate principal amount up to $150,000 on a committed basis. On June 4, 2014, the Dunning Creek facility was amended to increase the maximum commitments available under the facility to $250,000.
The Company may contribute cash, loans or bonds to Dunning Creek from time to time, subject to certain restrictions set forth in the Dunning Creek facility, and will retain a residual interest in any assets contributed through its ownership of Dunning Creek or will receive fair market value for any debt securities sold to Dunning Creek. Dunning Creek may purchase additional assets from various sources. Dunning Creek has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Dunning Creeks obligations to the lenders under the Dunning Creek facility are secured by a first priority security interest in substantially all of the assets of Dunning Creek, including its portfolio of assets. The obligations of Dunning Creek under the Dunning Creek facility are non-recourse to the Company and the Companys exposure under the facility is limited to the value of its investment in Dunning Creek.
Pricing under the Dunning Creek facility is based on LIBOR for an interest period reasonably close to the weighted average LIBOR applicable to the assets held by Dunning Creek, plus a spread of 1.55% per annum. Any amounts borrowed under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2015. Borrowings under the Dunning Creek facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Dunning Creek varies depending upon the types of assets in Dunning Creeks portfolio.
As of June 30, 2014, $113,000 was outstanding under the Dunning Creek facility. The carrying amount outstanding under the Dunning Creek facility approximates its fair value. The Company incurred costs of $681 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $606 of such deferred financing costs had yet to be amortized to interest expense.
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
For the three months ended June 30, 2014, the components of total interest expense for the Dunning Creek facility were as follows:
Three Months Ended June 30, 2014 |
||||
Direct interest expense |
$ | 213 | ||
Amortization of deferred financing costs |
75 | |||
|
|
|||
Total interest expense |
$ | 288 | ||
|
|
For the six months ended June 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Dunning Creek facility were as follows:
Six Months Ended June 30, 2014 |
||||
Cash paid for interest expense(1) |
$ | | ||
Average borrowings under the facility(2) |
$ | 100,675 | ||
Effective interest rate on borrowings |
1.77 | % | ||
Weighted average interest rate |
1.77 | % |
(1) | Interest under the Dunning Creek facility is payable quarterly in arrears and commenced on May 14, 2014. |
(2) | The average borrowings under the facility are calculated for the period since the Company commenced borrowings thereunder to June 30, 2014. |
The occurrence of certain events described as Super-Collateralization Events in the credit agreement that governs the Dunning Creek facility, or a decline in the Companys net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of the Companys investment sub-adviser, GSO / Blackstone Debt Funds Management LLC, or GDFM; (ii) the bankruptcy or insolvency of GDFM or FSIC II Advisor; (iii) GDFM ceasing to act as the Companys sub-adviser or FSIC II Advisor ceasing to act as the Companys investment adviser; (iv) the Company ceasing to act as Dunning Creeks investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value of at least $50,000 plus 50% of additional equity (in excess of $50,000) raised after the closing date of the facility; and (v) the Company, GDFM or FSIC II Advisor committing fraud or other illicit acts in their respective investment advisory capacities.
The occurrence of certain events described as Events of Default in the credit agreement which governs the Dunning Creek facility triggers, among other things, Dunning Creeks obligation to terminate the Company as investment manager (if directed by the administrative agent (acting with the consent of the lenders)) and, thereafter, Dunning Creeks right to select a replacement investment manager, subject to approval by the administrative agent and the lenders. Events of Default include non-performance of any obligation under the transaction documents by Dunning Creek or the Company, and other events with respect to such entities that are adverse to Deutsche Bank and the secured parties under the Dunning Creek facility.
In connection with the Dunning Creek facility, Dunning Creek has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
requirements for similar facilities. The facility contains various customary events of default for similar financing transactions, including: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) the failure to meet an overcollateralization test (which measures Dunning Creeks eligible assets, as adjusted by the prescribed advance rates) and such failure is not cured promptly on the same day; (c) the insolvency or bankruptcy of Dunning Creek or the Company; (d) the purchase of certain ineligible assets if the same is not cured within five business days; (e) the termination of the Company as investment manager; (f) the Companys failure to maintain a net asset value of at least $50,000 plus 50% of additional equity (in excess of $50,000) raised after the closing date of the facility; and (g) fraud or other illicit acts by the Company, Dunning Creek, GDFM or any of their respective directors, principals or officers, in each case, in their respective investment advisory capacities. Upon the occurrence and during the continuation of an event of default, Deutsche Bank may declare the outstanding advances and all other obligations under the Dunning Creek facility immediately due and payable. If such amounts are accelerated and not repaid immediately, Dunning Creek will be required to pay interest on such overdue amounts at a default rate.
Borrowings of Dunning Creek will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Note 9. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Companys maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management of FSIC II Advisor has reviewed the Companys 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 Companys 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 Companys rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material adverse effect upon its financial condition or results of operations.
See Note 6 for a discussion of the Companys unfunded commitments.
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights
The following is a schedule of financial highlights of the Company for the six months ended June 30, 2014 and the year ended December 31, 2013:
Six Months Ended June 30, 2014 (Unaudited) |
Year Ended December 31, 2013 |
|||||||
Per Share Data:(1) |
||||||||
Net asset value, beginning of period |
$ | 9.39 | $ | 9.16 | ||||
Results of operations(2) |
||||||||
Net investment income (loss) |
0.34 | 0.62 | ||||||
Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
0.21 | 0.27 | ||||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
0.55 | 0.89 | ||||||
|
|
|
|
|||||
Stockholder distributions(3) |
||||||||
Distributions from net investment income |
(0.36 | ) | (0.69 | ) | ||||
Distributions from net realized gain on investments |
| (0.07 | ) | |||||
|
|
|
|
|||||
Net decrease in net assets resulting from stockholder distributions |
(0.36 | ) | (0.76 | ) | ||||
|
|
|
|
|||||
Capital share transactions |
||||||||
Issuance of common stock(4) |
0.01 | 0.15 | ||||||
Repurchases of common stock(5) |
| | ||||||
Offering costs(2) |
(0.01 | ) | (0.05 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from capital share transactions |
| 0.10 | ||||||
|
|
|
|
|||||
Net asset value, end of period |
$ | 9.58 | $ | 9.39 | ||||
|
|
|
|
|||||
Shares outstanding, end of period |
306,677,823 | 254,572,096 | ||||||
|
|
|
|
|||||
Total return(6) |
5.86 | % | 10.81 | % | ||||
|
|
|
|
|||||
Ratio/Supplemental Data: |
||||||||
Net assets, end of period |
$ | 2,938,224 | $ | 2,390,985 | ||||
|
|
|
|
|||||
Ratio of net investment income to average net assets(7) |
3.58 | % | 6.60 | % | ||||
|
|
|
|
|||||
Ratio of operating expenses to average net assets(7) |
2.87 | % | 5.46 | % | ||||
Ratio of expense recoupment payable to sponsor to average net assets(7) |
| % | 0.15 | % | ||||
|
|
|
|
|||||
Ratio of total operating expenses to average net assets(7) |
2.87 | % | 5.61 | % | ||||
|
|
|
|
|||||
Portfolio turnover(8) |
21.56 | % | 46.38 | % |
(1) | Per share data may be rounded in order to recompute the ending net asset value per share. |
(2) | The per share data was derived by using the weighted average shares outstanding during the applicable period. |
(3) | The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period. |
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Table of Contents
FS Investment Corporation II
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Financial Highlights (continued)
(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 Companys continuous public offering and pursuant to the Companys distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share. |
(5) | The per share impact of the Companys repurchases of common stock is a reduction to net asset value of less than $0.01 per share during the period. |
(6) | The total return for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return does not consider the effect of the sales load from the sale of the Companys common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Companys future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Companys ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Companys expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Companys investment portfolio during the applicable period and are calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders. |
(7) | Weighted average net assets during the applicable period are used for this calculation. Ratios for the six months ended June 30, 2014 are not annualized. The following is a schedule of supplemental ratios for the six months ended June 30, 2014 and the year ended December 31, 2013: |
Six Months Ended June 30, 2014 (Unaudited) |
Year Ended December 31, 2013 |
|||||||
Ratio of accrued capital gains incentive fees to average net assets |
0.44 | % | 0.45 | % | ||||
Ratio of subordinated income incentive fees to average net assets |
0.35 | % | 0.65 | % | ||||
Ratio of interest expense to average net assets |
0.47 | % | 0.89 | % |
(8) | Portfolio turnover for the six months ended June 30, 2014 is not annualized. |
53
Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. (in thousands, except share and per share amounts) |
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, we, us and our refer to FS Investment Corporation II.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
| our future operating results; |
| our business prospects and the prospects of 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; |
| the adequacy of our cash resources, financing sources and working capital; |
| the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies; |
| our contractual arrangements and relationships with third parties; |
| actual and potential conflicts of interest with FSIC II Advisor, FB Income Advisor, LLC, FS Investment Corporation, FS Investment Advisor, LLC, FS Energy and Power Fund, FSIC III Advisor, LLC, FS Investment Corporation III, FS Global Advisor, LLC, FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA, FS Global Credit Opportunities FundD, GDFM or any of their affiliates; |
| the dependence of our future success on the general economy and its effect on the industries in which we may invest; |
| our use of financial leverage; |
| the ability of FSIC II Advisor to locate suitable investments for us and to monitor and administer our investments; |
| the ability of FSIC II Advisor or its affiliates to attract and retain highly talented professionals; |
| our ability to maintain our qualification as a RIC and as a BDC; |
| the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder; |
| the effect of changes to tax legislation and our tax position; and |
| the tax status of the enterprises in which we may invest. |
In addition, words such as anticipate, believe, expect and intend indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:
| changes in the economy; |
| risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and |
| future changes in laws or regulations and conditions in our operating areas. |
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We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Overview
We were incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012 upon raising gross proceeds in excess of $2,500 from sales of shares of our common stock in our continuous public offering to persons who were not affiliated with us or FSIC II Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization. In March 2014, we closed our continuous public offering of shares of common stock to new investors.
Our investment activities are managed by FSIC II Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory and administrative services agreement, we have agreed to pay FSIC II Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FSIC II Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FSIC II Advisor in identifying investment opportunities and makes investment recommendations for approval by FSIC II Advisor according to guidelines set by FSIC II Advisor.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.
Direct Originations: We intend to leverage our relationship with GDFM and its global sourcing and origination platform 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 expect to make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.
Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders and collateralized loan obligations, or 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 markets apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other
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corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a companys financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.
We may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank, but where we provide a capital commitment significantly above the average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of FSIC II Advisor and GDFM.
In addition, our relationship with GSO Capital Partners LP, the parent of GDFM and one of the largest CLO managers in the world, allows us to opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities.
Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans through secondary market transactions in the over-the-counter market for institutional loans or may issue loans to 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 minority interests in the form of common or preferred equity or other equity-related securities in our target companies, generally in conjunction with one of our debt investments or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, other debt securities and derivatives, including total return swaps and credit default swaps.
The senior secured and second lien secured loans in which we invest generally have stated terms of three to seven years and any subordinated debt investments that we make generally will have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. The loans in which we invest may be rated by a nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than Baa3 by Moodys Investors Service, Inc., or Moodys, or lower than BBB- by Standard & Poors Ratings Services). We also invest in non-rated debt securities.
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Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net realized gain or loss on total return swap, net unrealized appreciation or depreciation on investments, net unrealized appreciation or depreciation on total return swap and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net realized gain or loss on total return swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized appreciation or depreciation on total return swap is the net change in the fair value of the TRS. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. In future periods, we do not expect our revenues to include net realized gain or loss on total return swap or net unrealized appreciation or depreciation on total return swap as a result of the termination of our TRS on June 13, 2013. We may, however, elect to utilize a total return swap in the future.
We principally generate revenues in the form of interest income on the debt investments we hold. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.
Expenses
Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fee compensates FSIC II Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FSIC II Advisor is responsible for compensating our investment sub-adviser.
We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FSIC II Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, FSIC II Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See Related Party Transactions for additional information regarding the reimbursements payable to FSIC II Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the fiscal year ended December 31, 2013.
In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FSIC II Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
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Expense Reimbursement
Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to stockholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause other operating expenses (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by other operating expenses during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such reimbursement relates. Other operating expenses means our total operating expenses (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. Operating expenses means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.
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Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.
As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the three months ended March 31, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. As of June 30, 2014 and December 31, 2013, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. See Critical Accounting PoliciesCapital Gains Incentive Fee for a discussion of the methodology employed by us in calculating the capital gains incentive fee.
Portfolio Investment Activity for the Three and Six Months Ended June 30, 2014 and for the Year Ended December 31, 2013
During the six months ended June 30, 2014, we made investments in portfolio companies totaling $1,755,780. During the same period, we sold investments for proceeds of $321,629 and received principal repayments of $398,404. As of June 30, 2014, our investment portfolio, with a total fair value of $3,763,944, consisted of interests in 201 portfolio companies (49% in first lien senior secured loans, 29% in second lien senior secured loans, 7% in senior secured bonds, 8% in subordinated debt, 5% in collateralized securities and 2% in equity/other securities). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $273.4 million. As of June 30, 2014, the investments in our portfolio were purchased at a weighted average price of 98.0% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 46.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), was 9.4% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders.
Based on our regular monthly cash distribution rate of $0.06283 per share as of June 30, 2014 and our last offered price of $10.60 per share, the annualized distribution rate to stockholders as of June 30, 2014 was 7.11%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,838,032. During the same period, we sold investments for proceeds of $337,169 and received principal repayments of $374,483. As of December 31, 2013, our investment portfolio, with a total fair value of $2,655,828, consisted of interests in 179 portfolio companies (48% in first lien senior secured loans, 26% in second lien senior secured loans, 8% in senior secured bonds, 10% in subordinated debt, 7% in collateralized securities and 1% in equity/other securities). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $242.1 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 98.0% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting
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approximately 54.0% of our portfolio based on the fair value of our investments) was B3 based upon the Moodys scale and our estimated gross annual portfolio yield, prior to leverage, was 9.5% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2013. The portfolio yield does not represent an actual investment return to stockholders.
Based on our regular weekly cash distribution rate of $0.0145 per share as of December 31, 2013 and our public offering price of $10.50 per share as of such date, the annualized distribution rate to stockholders as of December 31, 2013 was 7.18%. The distribution rate to stockholders does not represent an actual investment return to stockholders and may include income, realized capital gains and a return of investors capital. Our gross annual portfolio yield and distribution rate to stockholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three and six months ended June 30, 2014:
Net Investment Activity |
For the Three Months Ended June 30, 2014 |
For the Six Months Ended June 30, 2014 |
||||||
Purchases |
$ | 828,724 | $ | 1,755,780 | ||||
Sales and Redemptions |
(409,435 | ) | (720,033 | ) | ||||
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|
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Net Portfolio Activity |
$ | 419,289 | $ | 1,035,747 | ||||
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|
|
For the Three Months Ended June 30, 2014 |
For the Six Months Ended June 30, 2014 |
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New Investment Activity by Asset Class |
Purchases | Percentage | Purchases | Percentage | ||||||||||||
Senior Secured LoansFirst Lien |
$ | 448,556 | 54 | % | $ | 942,191 | 54 | % | ||||||||
Senior Secured LoansSecond Lien |
249,768 | 30 | % | 491,895 | 28 | % | ||||||||||
Senior Secured Bonds |
44,329 | 6 | % | 121,551 | 7 | % | ||||||||||
Subordinated Debt |
60,268 | 7 | % | 141,172 | 8 | % | ||||||||||
Collateralized Securities |
| | | | ||||||||||||
Equity/Other |
25,803 | 3 | % | 58,971 | 3 | % | ||||||||||
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Total |
$ | 828,724 | 100 | % | $ | 1,755,780 | 100 | % | ||||||||
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The following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:
June 30, 2014 (Unaudited) |
December 31, 2013 | |||||||||||||||||||||||
Amortized
Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized
Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||||||||
Senior Secured LoansFirst Lien |
$ | 1,824,946 | $ | 1,846,780 | 49 | % | $ | 1,249,333 | $ | 1,268,093 | 48 | % | ||||||||||||
Senior Secured LoansSecond Lien |
1,063,373 | 1,084,435 | 29 | % | 684,825 | 697,240 | 26 | % | ||||||||||||||||
Senior Secured Bonds |
260,532 | 255,577 | 7 | % | 218,575 | 203,927 | 8 | % | ||||||||||||||||
Subordinated Debt |
277,590 | 293,667 | 8 | % | 278,306 | 276,640 | 10 | % | ||||||||||||||||
Collateralized Securities |
164,201 | 181,124 | 5 | % | 172,265 | 182,100 | 7 | % | ||||||||||||||||
Equity/Other |
82,636 | 102,361 | 2 | % | 23,665 | 27,828 | 1 | % | ||||||||||||||||
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Total |
$ | 3,673,278 | $ | 3,763,944 | 100 | % | $ | 2,626,969 | $ | 2,655,828 | 100 | % | ||||||||||||
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(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
The following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2014 and December 31, 2013:
June 30, 2014 | December 31, 2013 | |||
Number of Portfolio Companies |
201 | 179 | ||
% Variable Rate (based on fair value) |
77.5% | 74.0% | ||
% Fixed Rate (based on fair value) |
19.8% | 24.9% | ||
% Income Producing Equity or Other Investments (based on fair value) |
0.2% | 0.3% | ||
% Non-Income Producing Equity or Other Investments (based on fair value) |
2.5% | 0.8% | ||
Average Annual EBITDA of Portfolio Companies |
$273,400 | $242,100 | ||
Weighted Average Purchase Price of Investments (as a % of par or stated value) |
98.0% | 98.0% | ||
Weighted Average Credit Rating of Investments that were Rated |
B3 | B3 | ||
% of Investments on Non-Accrual |
0.2% | | ||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) |
9.4% | 9.5% | ||
Gross Portfolio Yield Prior to Leverage (based on amortized cost)Excluding Non-Income Producing Assets |
9.7% | 9.5% |
Direct Originations
The following tables present certain selected information regarding our direct originations for the three and six months ended June 30, 2014:
Net Direct Originations |
For the Three Months Ended June 30, 2014 |
For the Six Months Ended June 30, 2014 |
||||||
Total Commitments (including unfunded commitments) |
$ | 511,980 | $ | 1,069,512 | ||||
Exited Investments (including partial paydowns) |
(112,778 | ) | (169,338 | ) | ||||
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Net Direct Originations |
$ | 399,202 | $ | 900,174 | ||||
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New Direct Originations by Asset Class (including |
For the Three Months Ended June 30, 2014 |
For the Six Months
Ended June 30, 2014 |
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Commitment Amount | Percentage | Commitment Amount | Percentage | |||||||||||||
Senior Secured LoansFirst Lien |
$ | 331,495 | 65 | % | $ | 694,495 | 65 | % | ||||||||
Senior Secured LoansSecond Lien |
73,000 | 14 | % | 233,443 | 22 | % | ||||||||||
Senior Secured Bonds |
23,752 | 5 | % | 33,502 | 3 | % | ||||||||||
Subordinated Debt |
64,794 | 12 | % | 64,794 | 6 | % | ||||||||||
Collateralized Securities |
| | | | ||||||||||||
Equity/Other |
18,939 | 4 | % | 43,278 | 4 | % | ||||||||||
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Total |
$ | 511,980 | 100 | % | $ | 1,069,512 | 100 | % | ||||||||
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For the Three Months Ended June 30, 2014 |
For the Six Months Ended June 30, 2014 |
|||||||
Average New Direct Origination Commitment Amount |
$63,997 | $71,301 | ||||||
Weighted Average Maturity for New Direct Originations |
5/2/20 | 6/6/20 | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period |
10.7% | 9.7% | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during PeriodExcluding Non-Income Producing Assets |
11.1% | 10.2% | ||||||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period |
9.3% | 9.9% |
The following table presents certain selected information regarding our direct originations as of June 30, 2014 and December 31, 2013:
Characteristics of All Direct Originations held in Portfolio |
June 30, 2014 | December 31, 2013 | ||
Number of Portfolio Companies |
26 | 16 | ||
Average Annual EBITDA of Portfolio Companies |
$52,100 | $32,100 | ||
Average Leverage through Tranche of Portfolio CompaniesExcluding Equity/Other and Collateralized Securities |
4.8x | 6.3x | ||
% of Investments on Non-Accrual |
| | ||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations |
9.9% | 9.7% | ||
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct OriginationsExcluding Non-Income Producing Assets |
10.3% | 9.8% |
Portfolio Composition by Strategy and Industry
The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of June 30, 2014 and December 31, 2013:
June 30, 2014 | December 31, 2013 | |||||||||||||||
Portfolio Composition by Strategy |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
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Direct Originations |
$ | 1,902,114 | 50 | % | $ | 961,269 | 36 | % | ||||||||
Opportunistic |
741,045 | 20 | % | 765,748 | 29 | % | ||||||||||
Broadly Syndicated/Other |
1,120,785 | 30 | % | 928,811 | 35 | % | ||||||||||
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Total |
$ | 3,763,944 | 100 | % | $ | 2,655,828 | 100 | % | ||||||||
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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2014 and December 31, 2013:
June 30, 2014 (Unaudited) |
December 31, 2013 | |||||||||||||||
Industry Classification |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
Automobiles & Components |
$ | 169,833 | 5 | % | $ | 53,195 | 2 | % | ||||||||
Capital Goods |
420,044 | 11 | % | 199,070 | 8 | % | ||||||||||
Commercial & Professional Services |
47,168 | 1 | % | 44,881 | 2 | % | ||||||||||
Consumer Durables & Apparel |
208,773 | 6 | % | 144,211 | 5 | % | ||||||||||
Consumer Services |
642,777 | 17 | % | 401,187 | 15 | % | ||||||||||
Diversified Financials |
196,743 | 5 | % | 200,485 | 8 | % | ||||||||||
Energy |
496,912 | 13 | % | 417,589 | 16 | % | ||||||||||
Food & Staples Retailing |
6,560 | 0 | % | 1,181 | 0 | % | ||||||||||
Food, Beverage & Tobacco |
10,111 | 0 | % | 10,245 | 0 | % | ||||||||||
Health Care Equipment & Services |
128,782 | 3 | % | 133,025 | 5 | % | ||||||||||
Household & Personal Products |
| | 5,000 | 0 | % | |||||||||||
Insurance |
105,622 | 3 | % | 86,466 | 3 | % | ||||||||||
Materials |
138,782 | 4 | % | 138,777 | 5 | % | ||||||||||
Media |
108,280 | 3 | % | 101,071 | 4 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences |
70,918 | 2 | % | 78,001 | 3 | % | ||||||||||
Real Estate |
17,789 | 1 | % | 8,171 | 0 | % | ||||||||||
Retailing |
223,056 | 6 | % | 194,817 | 7 | % | ||||||||||
Software & Services |
264,212 | 7 | % | 181,024 | 7 | % | ||||||||||
Technology Hardware & Equipment |
142,329 | 4 | % | 104,293 | 4 | % | ||||||||||
Telecommunication Services |
240,365 | 6 | % | 129,704 | 5 | % | ||||||||||
Transportation |
119,065 | 3 | % | 21,964 | 1 | % | ||||||||||
Utilities |
5,823 | 0 | % | 1,471 | 0 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,763,944 | 100 | % | $ | 2,655,828 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
As of June 30, 2014, we did not control and were not an affiliated person of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to control a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an affiliated person of a portfolio company if we owned 5% or more of its voting securities.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, we had four senior secured loan investments with aggregate unfunded commitments of $51,716. As of December 31, 2013, we had five senior secured loan investments with aggregate unfunded commitments of $66,687 and one equity/other investment, American Energy Ohio Holdings, LLC, with an unfunded commitment of $6,157. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.
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Portfolio Asset Quality
In addition to various risk management and monitoring tools, FSIC II Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FSIC II Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment Rating |
Summary Description | |
1 | Investment exceeding expectations and/or capital gain expected. | |
2 | Performing investment generally executing in accordance with the portfolio companys business planfull return of principal and interest expected. | |
3 | Performing investment requiring closer monitoring. | |
4 | Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment. | |
5 | Underperforming investment with expected loss of interest and some principal. |
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2014 and December 31, 2013:
June 30, 2014 | December 31, 2013 | |||||||||||||||
Investment Rating |
Fair Value | Percentage
of Portfolio |
Fair Value | Percentage
of Portfolio |
||||||||||||
1 |
$ | 88,254 | 2 | % | $ | 86,131 | 3 | % | ||||||||
2 |
3,331,001 | 88 | % | 2,286,820 | 86 | % | ||||||||||
3 |
294,136 | 8 | % | 269,660 | 10 | % | ||||||||||
4 |
30,378 | 1 | % | 13,217 | 1 | % | ||||||||||
5 |
20,175 | 1 | % | | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,763,944 | 100 | % | $ | 2,655,828 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended June 30, 2014 and 2013
Revenues
We generated investment income of $99,516 and $28,226 for the three months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends earned on equity/other investments. Such revenues represent $94,180 and $26,186 of cash income earned as well as $5,336 and $2,040 in non-cash portions relating to accretion of discount and PIK interest for the three months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. We expect the dollar amount of interest that we earn to level off as the size of our investment portfolio stabilizes as a result of the closing of our continuous public offering in March 2014.
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Expenses
Our total operating expenses were $46,963 and $8,944 for the three months ended June 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $19,849 and $7,595 for the three months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FSIC II Advisor of $1,216 and $644 for the three months ended June 30, 2014 and 2013, respectively.
FSIC II Advisor is eligible to receive incentive fees based on performance. During the three months ended June 30, 2014, we accrued subordinated incentive fees on income of $9,679 based on the performance of our portfolio. We did not accrue any subordinated incentive fees on income during the three months ended June 30, 2013. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $6,387 based on the performance of our portfolio, all of which was based on unrealized gains. During the three months ended June 30, 2013, we reversed $2,839 of capital gains incentive fees previously accrued based on the performance of our portfolio. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $7,252 and $1,967 for the three months ended June 30, 2014 and 2013, respectively, in connection with our financing arrangements. For the three months ended June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $350 and $131, respectively, and fees and expenses incurred with our stock transfer agent totaled $850 and $612, respectively. Fees for our board of directors were $279 and $157 for the three months ended June 30, 2014 and 2013, respectively.
Our other general and administrative expenses totaled $1,101 and $677 for the three months ended June 30, 2014 and 2013, respectively, and consisted of the following:
Three Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Expenses associated with our independent audit and related fees |
$ | 109 | $ | 85 | ||||
Compensation of our chief compliance officer |
30 | 11 | ||||||
Legal fees |
200 | 199 | ||||||
Printing fees |
275 | 109 | ||||||
Other |
487 | 273 | ||||||
|
|
|
|
|||||
Total |
$ | 1,101 | $ | 677 | ||||
|
|
|
|
During the three months ended June 30, 2014 and 2013, the ratio of our operating expenses to our average net assets was 1.62% and 0.82%, respectively. During the three months ended June 30, 2014 and 2013, the ratio of our total operating expenses to average net assets included $7,252 and $1,967, respectively, related to interest expense and $16,066 and $(2,839), respectively, related to accruals for (reversals of) incentive fees. Without such expenses, our ratio of total operating expenses to average net assets would have been 0.82% and 0.90% for the three months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.
Net Investment Income
Our net investment income totaled $52,553 ($0.17 per share) and $19,282 ($0.17 per share) for the three months ended June 30, 2014 and 2013, respectively. Net investment income for the three months ended June 30, 2014 was benefited by an increase in the number of directly originated investments in our portfolio and improved economies of scale. These benefits were offset by increases in interest expense and accruals for incentive fees during the period.
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Net Realized Gains or Losses
We sold investments and received principal repayments of $192,330 and $217,105, respectively, during the three months ended June 30, 2014, from which we realized a net loss of $2,815. During the three months ended June 30, 2014, we realized a net gain of $2 from settlements on foreign currency. We sold investments and received principal repayments of $72,845 and $31,485, respectively, during the three months ended June 30, 2013, from which we realized a net gain of $811. During the three months ended June 30, 2013, we earned $12,426 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net loss of $41 from settlements on foreign currency.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the three months ended June 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $34,748 and the net change in unrealized gain (loss) on foreign currency was $(10). The net change in unrealized appreciation (depreciation) on our investments during the three months ended June 30, 2014 was primarily driven by the performance of certain of our subordinated debt and equity/other investments. For the three months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(13,734), the net change in unrealized appreciation (depreciation) on our TRS was $(9,612); and the net change in unrealized gain (loss) on foreign currency was $30. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended June 30, 2013 was primarily driven by a general widening of credit spreads and the termination of our TRS, which converted unrealized gains as of March 31, 2013 into realized gains.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended June 30, 2014 and 2013, the net increase in net assets resulting from operations was $84,478 ($0.28 per share) and $9,162 ($0.08 per share), respectively.
Comparison of the Six Months Ended June 30, 2014 and 2013
Revenues
We generated investment income of $180,581 and $45,199 for the six months ended June 30, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds, subordinated debt and collateralized securities in our portfolio and dividends earned on equity/other investments. Such revenues represent $169,809 and $41,736 of cash income earned as well as $10,772 and $3,463 in non-cash portions relating to accretion of discount and PIK interest for the six months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. We expect the dollar amount of interest that we earn to level off as the size of our investment portfolio stabilizes as a result of the closing of our continuous public offering in March 2014.
Expenses
Our total operating expenses were $80,328 and $20,540 for the six months ended June 30, 2014 and 2013, respectively. Our operating expenses include base management fees attributed to FSIC II Advisor of $37,490 and $12,580 for the six months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FSIC II Advisor of $2,590 and $1,105 for the six months ended June 30, 2014 and 2013, respectively.
FSIC II Advisor is eligible to receive incentive fees based on performance. During the six months ended June 30, 2014, we accrued subordinated incentive fees on income of $9,679 based on the performance of our
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portfolio. We did not accrue any subordinated incentive fees on income during the six months ended June 30, 2013. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $12,321 and $1,020, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee.
We recorded interest expense of $13,153 and $3,111 for the six months ended June 30, 2014 and 2013, respectively, in connection with our financing arrangements. For the six months ended June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $667 and $220, respectively, and fees and expenses incurred with our stock transfer agent totaled $1,700 and $1,047, respectively. Fees for our board of directors were $458 and $303 for the six months ended June 30, 2014 and 2013, respectively.
Our other general and administrative expenses totaled $2,270 and $1,154 for the six months ended June 30, 2014 and 2013, respectively, and consisted of the following:
Six Months Ended June 30, |
||||||||
2014 | 2013 | |||||||
Expenses associated with our independent audit and related fees |
$ | 230 | $ | 163 | ||||
Compensation of our chief compliance officer |
60 | 22 | ||||||
Legal fees |
397 | 399 | ||||||
Printing fees |
524 | 216 | ||||||
Other |
1,059 | 354 | ||||||
|
|
|
|
|||||
Total |
$ | 2,270 | $ | 1,154 | ||||
|
|
|
|
During the six months ended June 30, 2014 and 2013, the ratio of our operating expenses to our average net assets was 2.87% and 2.28%, respectively. During the six months ended June 30, 2013, the ratio of our total operating expenses to our average net assets, which includes $2,041 of expense recoupments paid to Franklin Square Holdings, was 2.51%. During the six months ended June 30, 2014 and 2013, the ratio of our total operating expenses to average net assets included $13,153 and $3,111, respectively, related to interest expense and $22,000 and $1,020, respectively, related to accruals for incentive fees. Without such expenses, our ratio of total operating expenses to average net assets would have been 1.61% and 2.05% for the six months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.
Expense Reimbursement
As of December 31, 2012, we had $1,635 of reimbursements due from Franklin Square Holdings. In connection with FSIC II Advisors voluntary agreement to waive $441 of accrued but unpaid capital gains incentive fees, a corresponding reduction was made to the amount of accrued expense reimbursements due from Franklin Square Holdings. During the six months ended June 30, 2013, this balance was offset against expense recoupment payable to sponsor. For the six months ended June 30, 2013, we accrued an expense recoupment payable to sponsor of $2,041, which we offset against the reimbursements due on our consolidated balance sheet as of December 31, 2012. As of June 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see OverviewExpense Reimbursement.
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Net Investment Income
Our net investment income totaled $100,253 ($0.34 per share) and $22,618 ($0.23 per share) for the six months ended June 30, 2014 and 2013, respectively. Net investment income for the six months ended June 30, 2014 was benefited by an increase in the number of directly originated investments in our portfolio.
Net Realized Gains or Losses
We sold investments and received principal repayments of $321,629 and $398,404, respectively, during the six months ended June 30, 2014, from which we realized a net loss of $210. During the six months ended June 30, 2014, we realized a net gain of $6 from settlements on foreign currency. We sold investments and received principal repayments of $120,101 and $75,808, respectively, during the six months ended June 30, 2013, from which we realized a net gain of $1,659. During the six months ended June 30, 2013, we earned $19,689 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net loss of $100 from settlements on foreign currency.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain (Loss) on Foreign Currency
For the six months ended June 30, 2014, the net change in unrealized appreciation (depreciation) on investments totaled $61,807 and the net change in unrealized gain (loss) on foreign currency was $(10). The net change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2014, was primarily driven by the performance of certain of our subordinated debt and equity/other investments. For the six months ended June 30, 2013, the net change in unrealized appreciation (depreciation) on investments totaled $(1,258), the net change in unrealized appreciation (depreciation) on our TRS was $(5,641); and the net change in unrealized gain (loss) on foreign currency was $150. The net change in unrealized appreciation (depreciation) on our investments and TRS during the six months ended June 30, 2013 was primarily driven by a general widening of credit spreads and the termination of our TRS which converted unrealized gains as of December 31, 2012 into realized gains.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the six months ended June 30, 2014 and 2013, the net increase in net assets resulting from operations was $161,846 ($0.55 per share) and $37,117 ($0.39 per share), respectively.
Financial Condition, Liquidity and Capital Resources
As of June 30, 2014, we had $349,898 in cash, which we held in a custodial account, and $436,006 in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of June 30, 2014:
Facility |
Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||||
JPM Facility |
Repurchase | 3.25% | $ | 550,000 | $ | | May 20, 2017 | |||||||
Cooper River Credit Facility |
Revolving | L + 1.75% | $ | 170,494 | $ | 29,506 | March 27, 2016 | |||||||
Wissahickon Creek Credit Facility |
Revolving | L + 1.50% to 2.50% | $ | 100,000 | $ | 150,000 | February 19, 2019 | |||||||
Darby Creek Credit Facility |
Revolving | L + 2.75% | $ | 130,500 | $ | 119,500 | February 20, 2018 | |||||||
Dunning Creek Credit Facility |
Revolving | L + 1.55% | $ | 113,000 | $ | 137,000 | May 14, 2015 |
For additional information regarding our outstanding financing facilities as of June 30, 2014, see Note 8 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.
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In March 2014, we closed our continuous public offering of shares of common stock to new investors. We sold 302,266,066 shares of common stock for gross proceeds of $3,112,692 in our continuous public offering, including shares issued pursuant to our distribution reinvestment plan. Following the closing of our continuous public offering, we have continued to issue shares pursuant to our distribution reinvestment plan. As of August 12, 2014, we had sold a total of 309,614,338 shares of common stock and raised total gross proceeds of $3,181,690, including $200 of seed capital contributed by the principals of FSIC II Advisor in December 2011 and $18,395 in proceeds raised from the principals of FSIC II Advisor, other individuals and entities affiliated with FSIC II Advisor, certain members of our board of directors and certain individuals and entities affiliated with GDFM in a private placement completed in June 2012.
During the six months ended June 30, 2014, we sold 52,613,215 shares of our common stock for gross proceeds of $543,271 at an average price per share of $10.33. The gross proceeds received during the six months ended June 30, 2014 include reinvested stockholder distributions of $56,392 for which we issued 5,933,163 shares of common stock. During the six months ended June 30, 2014, we also incurred offering costs of $1,686 in connection with the sale of our common stock, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common stock were $44,484 for the six months ended June 30, 2014. These sales commissions and fees include $8,821 retained by FS2, which served as the dealer manager for our continuous public offering.
We generate cash primarily from the issuance of shares under our distribution reinvestment plan 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.
Prior to investing in securities of portfolio companies, we invest the net proceeds from the issuance of shares of our common stock under our distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
To provide our stockholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.
The following table provides information concerning our repurchases of shares of common stock pursuant to our share repurchase program during the six months ended June 30, 2014 and 2013:
For the Three Months Ended |
Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
|||||||||||||
Fiscal 2013 |
||||||||||||||||||
December 31, 2012(1) |
January 2, 2013 | | | $ | 9.225 | | ||||||||||||
March 31, 2013 |
April 1, 2013 | 76,086 | 100 | % | $ | 9.360 | $ | 712 | ||||||||||
Fiscal 2014 |
||||||||||||||||||
December 31, 2013 |
January 2, 2013 | 135,094 | 100 | % | $ | 9.450 | $ | 1,277 | ||||||||||
March 31, 2014 |
April 1, 2014 | 372,394 | 100 | % | $ | 9.540 | $ | 3,553 |
(1) | No shares were tendered for repurchase in connection with the quarterly tender offer. |
On July 1, 2014, we repurchased 642,524 shares of common stock (representing 100% of the shares of common stock tendered for repurchase) at $9.64 per share for aggregate consideration totaling $6,194.
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Capital Contribution by FSIC II Advisor and GDFM
In December 2011, Michael C. Forman and David J. Adelman, the principals of FSIC II Advisor, contributed an aggregate of $200 to purchase 22,222 shares of common stock at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser.
In June 2012, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 222,222 additional shares of common stock at $9.00 per share. The principals have agreed not to tender these shares of common stock for repurchase as long as FSIC II Advisor remains our investment adviser. In connection with the same private placement, certain members of our board of directors and other individuals and entities affiliated with FSIC II Advisor agreed to purchase 1,247,267 shares of common stock, and certain individuals and entities affiliated with GDFM agreed to purchase 574,444 shares of common stock, in each case at a price of $9.00 per share. In connection with the private placement, we issued an aggregate of 2,043,933 shares of common stock for aggregate proceeds of $18,395 upon satisfaction of the minimum offering requirement on June 18, 2012. As of August 12, 2014, we had sold an aggregate of 3,311,040 shares of common stock for aggregate gross proceeds of $30,280 to members of our board of directors and individuals and entities affiliated with FSIC II Advisor and GDFM, including shares of common stock sold to Messrs. Forman and Adelman in December 2011 and shares sold in the private placement completed in June 2012.
RIC Status and Distributions
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our investment company taxable income, as defined by the Code, each year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes.
We declared our first distribution on June 20, 2012. Prior to the closing of our continuous public offering in March 2014, we authorized and declared ordinary cash distributions on a weekly or semi-monthly basis and paid such distributions on a monthly basis. Following the closing of our continuous public offering, we expect to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on either a monthly or quarterly basis, in each case subject to our board of directors discretion and applicable legal restrictions. We will calculate each stockholders specific distribution amount for the period using record and declaration dates and each stockholders distributions will begin to accrue on the date 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 common stock at the 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 will represent a return of capital. A return of capital generally is a return of an investors investment rather than a return of earnings or gains derived from our investment activities, and will be made after the deduction of fees and expenses, including any fees payable to FSIC II Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the six months ended June 30, 2014 and 2013 represented a return of capital.
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We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless stockholders elect to receive their distributions in additional shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.
The following table reflects the cash distributions per share that we have declared and paid on our common stock during the six months ended June 30, 2014 and 2013:
Distribution | ||||||||
For the Three Months Ended |
Per Share | Amount | ||||||
Fiscal 2013 |
||||||||
March 31, 2013 |
$ | 0.1871 | $ | 14,791 | ||||
June 30, 2013 |
$ | 0.1883 | $ | 22,647 | ||||
Fiscal 2014 |
||||||||
March 31, 2014 |
$ | 0.1740 | $ | 49,274 | ||||
June 30, 2014 |
$ | 0.1885 | $ | 57,604 |
On June 30, 2014, our board of directors declared a regular monthly cash distribution of $0.06283 per share, which was paid on July 31, 2014 to stockholders of record on July 30, 2014. On August 5, 2014, our board of directors declared a regular monthly cash distribution of $0.06283 per share, which will be paid on August 29, 2014 to stockholders of record on August 28, 2014. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
We have adopted an opt in distribution reinvestment plan for our stockholders. As a result, if we make a distribution, our stockholders will receive distributions in cash unless they specifically opt in to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholders ability to participate in the distribution reinvestment plan.
We may fund our cash distributions to stockholders from any sources of funds legally available to us, including proceeds from the sale of shares of our common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
For a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FSIC II Advisor, that were subject to repayment by us within three years. The purpose of this arrangement was to ensure that no portion of our distributions to stockholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the six months ended June 30, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that stockholders may otherwise have received during the six months ended June 30, 2013. During the six months ended June 30, 2014, we did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.
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The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, | ||||||||||||||||
2014 | 2013 | |||||||||||||||
Source of Distribution |
Distribution Amount |
Percentage | Distribution Amount |
Percentage | ||||||||||||
Offering proceeds |
$ | | | $ | | | ||||||||||
Borrowings |
| | | | ||||||||||||
Net investment income(1) |
106,878 | 100 | % | 26,613 | 71 | % | ||||||||||
Short-term capital gains proceeds from the sale of assets |
| | 10,825 | 29 | % | |||||||||||
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 |
$ | 106,878 | 100 | % | $ | 37,438 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
(1) | During the six months ended June 30, 2014 and 2013, 94.0% and 92.3%, respectively, of our gross investment income was attributable to cash interest earned, 3.9% and 7.6%, respectively, was attributable to non-cash accretion of discount and 2.1% and 0.1%, respectively, was attributable to PIK interest. |
Our net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $110,880 and $33,900, respectively. As of June 30, 2014 and December 31, 2013, we had $13,877 and $7,638, respectively, of undistributed net investment income and realized gains on a tax basis.
See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the six months ended June 30, 2014 and 2013.
Critical Accounting Policies
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of managements most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of directors. In connection with that determination, FSIC II
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Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
| our quarterly valuation process begins with FSIC II Advisors management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable; |
| preliminary valuation conclusions are then documented and discussed with our valuation committee; |
| our valuation committee reviews the preliminary valuation and FSIC II Advisors management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and |
| our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FSIC II Advisor, the valuation committee and any third-party valuation firm, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of directors may use independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FSIC II Advisor or any independent third-party valuation or pricing service, that it deems to be reliable in determining fair value under the circumstances. Below is a description of factors that our board of directors may consider when valuing our debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of directors may consider include the borrowers ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
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Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
Our board of directors may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of directors may also consider the size and 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 size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with any third-party valuation firm, 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 will subsequently value these warrants or other equity securities received at fair value.
The fair values of our investments are determined in good faith by our board of directors. Our board of directors is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.
Our investments as of June 30, 2014 consisted primarily of debt securities that were either traded on a private over-the-counter market for institutional investors or acquired directly from the issuer. Nineteen senior secured loan investments, one senior secured bond investment, one subordinated debt investment and one collateralized security were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Four equity/other investments, which were traded on active public markets, were valued at their closing price as of June 30, 2014. One senior secured loan investment, which was newly-issued and purchased near June 30, 2014, was valued at cost, as our board of directors determined that the cost of such investment was the best indication of its fair value. Except as described above, we valued our other investments, including two equity/other investments, by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services.
Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Thirteen senior secured loan investments and one collateralized security, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrowers ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated prepayments, and other relevant terms of the debt.
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Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One equity investment which is traded on an active public market was valued at its closing price as of December 31, 2013.
We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of such other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with our valuation process.
Revenue Recognition
Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.
Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency
Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized and the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Capital Gains Incentive Fee
Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
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While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC II Advisor if our entire portfolio were liquidated at its fair value as of the balance sheet date even though FSIC II Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
In addition, we historically treated all net settlement payments received by us pursuant to our TRS (which was terminated on June 13, 2013) as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the Staff informed us that it is their interpretation of the applicable language in the Advisers Act that we should look through the TRS in calculating our capital gains incentive fee. Under this look through methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FSIC II Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FSIC II Advisor with respect to realized gains. FSIC II Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a look through basis under which we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FSIC II Advisor with respect to the portion of the net settlement payments received by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a look through basis.
Subordinated Income Incentive Fee
Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. As a result, FSIC II Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC II Advisor will be entitled to a catch-up fee equal to the amount of pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC II Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.
Uncertainty in Income Taxes
We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is more likely than not to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended June 30, 2014 and 2013, we did not incur any interest or penalties.
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Contractual Obligations
We have entered into an agreement with FSIC II Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FSIC II Advisor and, to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. For the three months ended June 30, 2014 and 2013, we incurred $19,849 and $7,595, respectively, in base management fees and $1,216 and $644, respectively, in administrative services expenses under the investment advisory and administrative services agreement. For the six months ended June 30, 2014 and 2013, we incurred $37,490 and $12,580, respectively, in base management fees and $2,590 and $1,105, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FSIC II Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three and six months ended June 30, 2014, we accrued a subordinated incentive fee on income of $9,679 based upon the performance of our portfolio. We did not accrue any subordinated incentive fee on income during the three and six months ended June 30, 2013. No amounts were paid to FSIC II Advisor in respect of the subordinated incentive fee on income during the six months ended June 30, 2014. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $6,387 and during the three months ended June 30, 2013, we reversed $2,839 of capital gains incentive fees previously accrued. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $12,321 and $1,020, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. As of December 31, 2013, we had accrued capital gains incentive fees payable to FSIC II Advisor of $9,234 based on the performance of our portfolio, all of which was based on unrealized gains. We did not pay any capital gains incentive fees to FSIC II Advisor during the six months ended June 30, 2014. As of June 30, 2014, we had accrued capital gains incentive fees of $21,555, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor.
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the JPM facility, the Cooper River facility, the Wissahickon Creek facility, the Darby Creek facility and the Dunning Creek facility at June 30, 2014 is as follows:
Payments Due By Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Borrowings of Cobbs Creek(1) |
$ | 550,000 | $ | 550,000 | | | | |||||||||||||
Borrowings of Cooper River(2) |
$ | 170,494 | | $ | 170,494 | | | |||||||||||||
Borrowings of Wissahickon Creek(3) |
$ | 100,000 | | | $ | 100,000 | | |||||||||||||
Borrowings of Darby Creek(4) |
$ | 130,500 | | | $ | 130,500 | | |||||||||||||
Borrowings of Dunning Creek(5) |
$ | 113,000 | $ | 113,000 | | | |
(1) | At June 30, 2014, no amounts remained unused under the JPM facility. Cobbs Creek will, on a quarterly basis, repurchase the Class A Notes sold to JPM under the JPM facility and subsequently resell such Class A Notes to JPM. The final repurchase transaction is scheduled to occur no later than May 20, 2017. |
(2) | At June 30, 2014, $29,506 remained unused under the Cooper River facility. All amounts under the Cooper River facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 27, 2016. |
(3) | At June 30, 2014, $150,000 remained unused under the Wissahickon Creek facility. All amounts under the Wissahickon Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 19, 2019. |
(4) | At June 30, 2014, $119,500 remained unused under the Darby Creek facility. All amounts under the Darby Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on February 20, 2018. |
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(5) | At June 30, 2014, $137,000 remained unused under the Dunning Creek facility. All amounts under the Dunning Creek facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 14, 2015. |
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Recently Issued Accounting Standards
None.
Related Party Transactions
Compensation of the Investment Adviser and Dealer Manager
Pursuant to the investment advisory and administrative services agreement, FSIC II Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on June 18, 2012, upon commencement of our investment operations. Management fees are paid on a quarterly basis in arrears.
The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of our pre-incentive fee net investment income for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC II Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.
We reimburse FSIC II Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FSIC II Advisors actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FSIC II Advisor is required to allocate the cost of such services to us based on factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board of directors then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party 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 FSIC II Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.
Franklin Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FSIC II Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FSIC II Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On June 18, 2012, we satisfied the minimum
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offering requirement. During the six months ended June 30, 2014 and 2013, Franklin Square Holdings did not fund any of our offering and organization costs, and we did not pay any reimbursements to FSIC II Advisor and its affiliates for offering and organization costs previously funded.
The dealer manager for our continuous public offering was FS2, which is one of our affiliates. Under the dealer manager agreement among us, FSIC II Advisor and FS2, FS2 was entitled to receive sales commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which were re-allowed to selected broker-dealers.
The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six months ended June 30, 2014 and 2013:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||
Related Party |
Source Agreement |
Description |
2014 | 2013 | 2014 | 2013 | ||||||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) | $ | 19,849 | $ | 7,595 | $ | 37,490 | $ | 12,580 | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) | $ | 6,387 | $ | (2,839 | ) | $ | 12,321 | $ | 1,020 | |||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Subordinated Incentive Fee on Income(3) | $ | 9,679 | $ | | $ | 9,679 | $ | | ||||||||||
FSIC II Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(4) | $ | 1,216 | $ | 644 | $ | 2,590 | $ | 1,105 | ||||||||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(5) | $ | | $ | 7,863 | $ | 8,821 | $ | 14,680 |
(1) | During the six months ended June 30, 2014 and 2013, $32,654 and $7,452, respectively, in base management fees were paid to FSIC II Advisor. As of June 30, 2014, $19,849 in base management fees were payable to FSIC II Advisor. |
(2) | During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $12,321 and $1,020, respectively, based on the performance of our portfolio, all of which was based on unrealized gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See Critical Accounting PoliciesCapital Gains Incentive Fee for a discussion of the methodology employed by us in calculating the capital gains incentive fee. Effective as of March 31, 2013, FSIC II Advisor voluntarily agreed to waive any capital gains incentive fees calculated in accordance with GAAP to the extent such fees exceeded those which would be payable in accordance with the look through methodology described more fully in Critical Accounting PoliciesCapital Gains Incentive Fee. This waiver resulted in a reduction of $441 to the amount of capital gains incentive fees payable to FSIC II Advisor with respect to realized gains. Accordingly, we reduced the amount of accrued capital gains incentive fees payable to FSIC II Advisor by $441 effective as of March 31, 2013. We did not pay any capital gains incentive fees to FSIC II Advisor during the six months ended June 30, 2014 or 2013. As of June 30, 2014, we had accrued capital gains incentive fees of $21,555 based on the performance of our portfolio, all of which was based on unrealized gains and none of which is currently payable to FSIC II Advisor. |
(3) | During the six months ended June 30, 2014, no amounts were paid to FSIC II Advisor in respect of the subordinated incentive fee on income. As of June 30, 2014, a subordinated incentive fee on income of $9,679 was payable to FSIC II Advisor. |
(4) | During the six months ended June 30, 2014 and 2013, $2,396 and $932, respectively, of the administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FSIC II Advisor and the remainder related to other reimbursable expenses. We paid $1,273 and $718 in administrative services expenses to FSIC II Advisor during the six months ended June 30, 2014 and 2013, respectively. |
(5) | Represents aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers. |
See Note 4 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our related party transactions and relationships, including potential conflicts of interest, our exemptive relief order and our expense reimbursement arrangement with Franklin Square Holdings.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
We are subject to financial market risks, including changes in interest rates. As of June 30, 2014, 77.5% of our portfolio investments (based on fair value) paid variable interest rates, 19.8% paid fixed interest rates, 2.5% were non-income producing equity or other investments and the remainder (0.2%) were income-producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FSIC II Advisor with respect to our increased pre-incentive fee net investment income.
Pursuant to the terms of the Cooper River facility, the Wissahickon Creek facility, the Darby Creek facility and the Dunning Creek facility, Cooper River, Wissahickon Creek, Darby Creek and Dunning Creek, respectively, borrow at a floating rate based on LIBOR. Under the terms of the JPM facility, Cobbs Creek pays interest to JPM at a fixed rate. To the extent that any present or future credit facilities 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 borrowing arrangements in effect as of June 30, 2014 (dollar amounts are presented in thousands):
Basis Point Change in Interest Rate |
Increase (Decrease) in Interest Income |
Increase (Decrease) in Interest Expense |
Increase (Decrease) in Net Interest Income |
Percentage Change in Net Interest Income |
||||||||||||
Down 25 basis points |
$ | (247 | ) | $ | (1,221 | ) | $ | 974 | 0.3 | % | ||||||
No change |
| | | | ||||||||||||
Up 100 basis points |
3,757 | 4,883 | (1,126 | ) | (0.4 | )% | ||||||||||
Up 300 basis points |
58,566 | 14,648 | 43,918 | 13.8 | % | |||||||||||
Up 500 basis points |
115,900 | 24,413 | 91,487 | 28.8 | % |
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, 2014 and 2013, we did not engage in interest rate hedging activities.
In addition, we may have risk regarding portfolio valuation. See Item 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting PoliciesValuation of Portfolio Investments.
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Item 4. | Controls and Procedures. |
As required by Rule 13a-15(b) 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, 2014. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the three-month period ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART IIOTHER INFORMATION
Item 1. | Legal Proceedings. |
We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are 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 any such proceedings will have a material adverse effect upon our financial condition or results of operations.
Item 1A. | Risk Factors. |
Investing in our common stock involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q, investors should consider carefully the risk factors set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our additional filings with the SEC before making an investment in our common stock.
Risks Related to Our Business and Structure
Pending legislation may allow us to incur additional leverage.
As a BDC, we are generally not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if passed, would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the percentage from 200% to 150%. Even if this legislation does not pass, similar legislation may pass that permits us to incur additional leverage under the 1940 Act. As a result, we may be able to incur additional indebtedness in the future, and, therefore, the risk of an investment in our common stock may increase.
Risks Related to Our Investments
We may from time to time enter into total return swaps, credit default swaps or other derivative transactions which expose us to certain risks, including credit risk, market risk, liquidity risk and other risks similar to those associated with the use of leverage.
We may from time to time enter into total return swaps, credit default swaps or other derivative transactions that seek to modify or replace the investment performance of a particular reference security or other asset. These transactions are typically individually negotiated, non-standardized agreements between two parties to exchange payments, with payments generally calculated by reference to a notional amount or quantity. Swap contracts and similar derivative contracts are not traded on exchanges; rather, banks and dealers act as principals in these markets. These investments may present risks in excess of those resulting from the referenced security or other asset. Because these transactions are not an acquisition of the referenced security or other asset itself, the investor has no right directly to enforce compliance with the terms of the referenced security or other asset and has no voting or other consensual rights of ownership with respect to the referenced security or other asset. In the event of insolvency of a counterparty, we will be treated as a general creditor of the counterparty and will have no claim of title with respect to the referenced security or other asset.
A total return swap 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 referenced security or other assets underlying the total return swap during a specified period, in return for periodic payments based on a fixed or variable interest rate.
A total return swap is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the total return swap and the debt obligations underlying the total return swap. In addition, we may incur certain costs in connection with a total return swap that could in the aggregate be significant.
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A credit default swap is a contract in which one party buys or sells protection against a credit event with respect to an issuer, such as an issuers failure to make timely payments of interest or principal on its debt obligations, bankruptcy or restructuring during a specified period. Generally, if we sell credit protection using a credit default swap, we will receive fixed payments from the swap counterparty and if a credit event occurs with respect to the applicable issuer, we will pay the swap counterparty par for the issuers defaulted debt securities and the swap counterparty will deliver the defaulted debt securities to us. Generally, if we buy credit protection using a credit default swap, we will make fixed payments to the counterparty and if a credit event occurs with respect to the applicable issuer, we will deliver the issuers defaulted securities underlying the swap to the swap counterparty and the counterparty will pay us par for the defaulted securities. Alternatively, a credit default swap may be cash settled and the buyer of protection would receive the difference between the par value and the market value of the issuers defaulted debt securities from the seller of protection.
Credit default swaps are subject to the credit risk of the underlying issuer. If we are selling credit protection, there is a risk that we will not properly assess the risk of the underlying issuer, a credit event will occur and we will have to pay the counterparty. If we are buying credit protection, there is a risk that we will not properly assess the risk of the underlying issuer, no credit event will occur and we will receive no benefit for the premium paid.
A derivative transaction is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In some cases, we may post collateral to secure our obligations to the counterparty, and we may be required to post additional collateral upon the occurrence of certain events such as a decrease in the value of the reference security or other asset. In some cases, the counterparty may not collateralize any of its obligations to us.
Derivative investments effectively add leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. In addition to the risks described above, such arrangements are subject to risks similar to those associated with the use of leverage. See Item 1A. Risk FactorsRisks Related to Debt Financing in our annual report on Form 10-K for the fiscal year ended December 31, 2013.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The table below provides information concerning our repurchases of shares of our common stock during the three months ended June 30, 2014 pursuant to our share repurchase program.
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
April 1 to April 30, 2014 |
372,394 | $ | 9.54 | 372,394 | (1) | |||||||||||
May 1 to May 31, 2014 |
| | | | ||||||||||||
June 1 to June 30, 2014 |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
372,394 | $ | 9.54 | 372,394 | (1) | |||||||||||
|
|
|
|
|
|
|
|
(1) | A description of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements 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.
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Item 3. | Defaults upon Senior Securities. |
Not applicable.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
Not applicable.
Item 6. | Exhibits. |
3.1 | Articles of Amendment and Restatement of the Company. (Incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed on June 14, 2012.) | |
3.2 | Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit (b) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
4.1 | Distribution Reinvestment Plan of the Company. (Incorporated by reference to Exhibit (e) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
4.2 | Amended and Restated Distribution Reinvestment Plan of the Company, effective as of January 1, 2013. (Incorporated by reference to Exhibit 4.3 to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 filed on November 14, 2012.) | |
4.3 | Amended and Restated Distribution Reinvestment Plan of the Company, effective as of March 26, 2014. (Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on February 24, 2014.) | |
10.1 | Investment Advisory and Administrative Services Agreement, dated as of February 8, 2012, by and between the Company and FSIC II Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.2 | Investment Sub-Advisory Agreement, dated as of February 8, 2012, by and between FSIC II Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.3 | Dealer Manager Agreement, dated as of February 8, 2012, by and among the Company, FSIC II Advisor, LLC and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.4 | Form of Follow-On Dealer Manager Agreement. (Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.) | |
10.5 | Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.6 | Form of Follow-On Selected Dealer Agreement (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-184474) filed on May 10, 2013.) |
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10.7 | Custodian Agreement, dated as of February 8, 2012, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit (j) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.8 | Escrow Agreement, dated as of January 23, 2012, by and among the Company, UMB Bank, N.A. and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (k) to Pre-Effective Amendment No. 3 to the Companys registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.) | |
10.9 | ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 3, 2012.) | |
10.10 | Confirmation Letter Agreement, dated as of July 2, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on July 3, 2012.) | |
10.11 | Amended and Restated Confirmation Letter Agreement, dated as of September 12, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 12, 2012.) | |
10.12 | Amended and Restated Confirmation Letter Agreement, dated as of September 27, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on October 1, 2012.) | |
10.13 | Amended and Restated Confirmation Letter Agreement, dated as of November 15, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on November 15, 2012.) | |
10.14 | Amended and Restated Confirmation Letter Agreement, dated as of December 13, 2012, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on December 17, 2012.) | |
10.15 | Termination Acknowledgment (TRS), dated as of June 13, 2013, by and between Del River LLC (formerly known as IC-II Investments LLC) and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 17, 2013.) | |
10.16 | Investment Management Agreement, dated as of July 2, 2012, by and between the Company and Del River LLC (formerly known as IC-II Investments LLC). (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on July 3, 2012.) | |
10.17 | Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Lehigh River LLC. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.18 | Indenture, dated as of October 26, 2012, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.19 | Amended and Restated Indenture, dated as of February 6, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 7, 2013.) |
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10.20 | Supplemental Indenture No. 1, dated as of April 23, 2013, by and between Lehigh River LLC and Citibank, N.A., as trustee. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.21 | Lehigh River LLC Class A Floating Rate Secured Note, due 2023. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.22 | Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on February 7, 2013.) | |
10.23 | Lehigh River LLC Class A Floating Rate Secured Note, due 2024. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.24 | TBMA/ISMA 2000 Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Confirmation thereto, each dated as of October 26, 2012. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.25 | TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of February 6, 2013. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on February 7, 2013.) | |
10.26 | TBMA/ISMA 2000 Amended and Restated Global Master Repurchase Agreement, by and between JPMorgan Chase Bank, N.A., London Branch, and Cobbs Creek LLC, together with the related Annex and Amended and Restated Confirmation thereto, each dated as of April 23, 2013. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on April 26, 2013.) | |
10.27 | Revolving Credit Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.28 | Asset Transfer Agreement, dated as of October 26, 2012, by and between the Company and Cobbs Creek LLC. (Incorporated by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.29 | Collateral Management Agreement, dated as of October 26, 2012, by and between Lehigh River LLC and the Company. (Incorporated by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.30 | Collateral Administration Agreement, dated as of October 26, 2012, by and among Lehigh River LLC, the Company and Virtus Group, LP. (Incorporated by reference to Exhibit 10.8 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.31 | Collateral Management Agreement, dated as of October 26, 2012, by and between Cobbs Creek LLC and the Company. (Incorporated by reference to Exhibit 10.9 to the Companys Current Report on Form 8-K filed on October 30, 2012.) | |
10.32 | Loan Agreement, dated as of March 27, 2013, by and between Cooper River LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.33 | Account Control Agreement, dated as of March 27, 2013, by and between Cooper River LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.34 | Security Agreement, dated as of March 27, 2013, by and between Cooper River LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on March 28, 2013.) |
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10.35 | Agreement and Plan of Merger, dated as of March 27, 2013, by and among Cooper River LLC, Cooper River CBNA Loan Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.36 | Investment Management Agreement, dated as of March 27, 2013, by and between the Company and Cooper River LLC. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on March 28, 2013.) | |
10.37 | Loan and Servicing Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as borrower, Wells Fargo Securities, LLC, as administrative agent, Wells Fargo Bank, National Association, as collateral agent, account bank and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.38 | Purchase and Sale Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.39 | Collateral Management Agreement, dated as of February 19, 2014, by and between Wissahickon Creek LLC and the Company, as collateral manager. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.40 | Securities Account Control Agreement, dated as of February 19, 2014, by and among Wissahickon Creek LLC, as pledgor, Wells Fargo Bank, National Association, as collateral agent, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.41 | Loan Financing and Servicing Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.42 | Sale and Contribution Agreement, dated as of February 20, 2014, by and between Darby Creek LLC, as purchaser, and the Company, as seller. (Incorporated by reference to Exhibit 10.6 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.43 | Investment Management Agreement, dated as of February 20, 2014, by and between Darby Creek LLC and the Company, as investment manager. (Incorporated by reference to Exhibit 10.7 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.44 | Securities Account Control Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as pledgor, Wells Fargo Bank, National Association, as secured party, and Wells Fargo Bank, National Association, as securities intermediary. (Incorporated by reference to Exhibit 10.8 to the Companys Current Report on Form 8-K filed on February 25, 2014.) | |
10.45 | Credit Agreement, dated as of May 14, 2014, by and among Dunning Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent and lender, and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on May 19, 2014.) | |
10.46 | Custodial Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC, as borrower, FS Investment Corporation II, as manager, Deutsche Bank AG, New York Branch, as administrative agent, and Deutsche Bank Trust Company Americas, as custodian. (Incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed on May 19, 2014.) | |
10.47 | Security Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Companys Current Report on Form 8-K filed on May 19, 2014.) |
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10.48 | Sale and Contribution Agreement, dated as of May 14, 2014, by and between FS Investment Corporation II, as seller, and Dunning Creek LLC, as purchaser. (Incorporated by reference to Exhibit 10.4 to the Companys Current Report on Form 8-K filed on May 19, 2014.) | |
10.49 | Investment Management Agreement, dated as of May 14, 2014, by and between Dunning Creek LLC and FS Investment Corporation II, as investment manager. (Incorporated by reference to Exhibit 10.5 to the Companys Current Report on Form 8-K filed on May 19, 2014.) | |
10.50 | First Amendment to Credit Agreement, dated as of June 4, 2014, between Dunning Creek LLC and Deutsche Bank AG, New York Branch, as administrative agent and lender. (Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on June 6, 2014.) | |
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |
31.2* | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. | |
32.1* | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 14, 2014.
FS INVESTMENT CORPORATION II | ||
By: | /s/ MICHAEL C. FORMAN | |
Michael C. Forman | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
By: | /s/ WILLIAM GOEBEL | |
William Goebel | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
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