FS KKR Capital Corp (FS Investment Corporation) - 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K was filed by FS Investment Corporation (FSIC) on August 31, 2012, reporting events that occurred on August 29, 2012. FSIC is a business development company. The filing details a significant restructuring of financing arrangements involving its wholly-owned special purpose financing subsidiary, Arch Street Funding LLC ("Arch Street"), and Citibank, N.A.
Key Financial Metrics and Transactions
- New Credit Facility: Arch Street entered into a committed revolving credit facility with an aggregate principal amount of up to $550 million.
- Interest Rate: LIBOR plus 1.75% per annum for the first two years, increasing to 2.00% per annum thereafter.
- Maturity: The facility matures on August 29, 2015, with amortization beginning nine months prior to maturity.
- Asset Acquisition: Arch Street acquired a portfolio of debt securities from Citibank affiliates (Benjamin Funding Entities) for approximately $549.3 million.
- Funding Sources: The acquisition was funded using approximately $447.7 million in borrowings under the new Credit Facility, cash on hand, and a contribution of debt securities from FSIC with a fair market value of approximately $132.4 million.
- TRS Termination Gain: Upon terminating a prior Total Return Swap (TRS) agreement, Arch Street recognized a gain of approximately $5.51 million.
- Debt Structure: Borrowings are non-recourse to FSIC and secured by a first priority security interest in substantially all of Arch Street's assets.
Material Changes Versus Prior Period
The filing marks a transition from a Total Return Swap (TRS) arrangement to a direct revolving credit facility. The prior TRS agreement, which had a maximum notional amount of $615 million and was set to mature on March 18, 2013, was terminated immediately. This change extends the maturity of the financing arrangement by approximately two and a half years (to August 2015) and allows Arch Street to obtain financing on a broader range of debt securities than was permitted under the TRS terms.
Outlook, Risks, and Contingencies
- Covenants: The Credit Facility is subject to an equity coverage ratio regarding the current value of Arch Street's portfolio and a loan compliance test for each debt security acquisition.
- Non-Usage Fee: Beginning November 27, 2012, Arch Street must pay a non-usage fee if the full $550 million facility is not borrowed.
- Events of Default: Includes failure to make payments, insolvency of Arch Street or FSIC, loss of beneficial ownership by FSIC, resignation of FSIC as investment manager, or removal of GSO / Blackstone Debt Funds Management LLC as investment sub-adviser.
- Forward-Looking Statements: The filing includes standard disclaimers that future performance is subject to uncertainties and actual results may differ materially from projections.
Investor Verification Checklist
- Verify the specific terms of the equity coverage ratio and loan compliance tests in the attached Loan Agreement (Exhibit 10.1).
- Confirm the composition and credit quality of the $549.3 million debt securities portfolio acquired from the Benjamin Funding Entities.
- Review the Amended and Restated Investment Management Agreement (Exhibit 10.5) to understand fee structures and management responsibilities.
- Assess the impact of the $5.51 million gain on the company's current period earnings and tax liabilities.
- Monitor the utilization rate of the $550 million facility to determine exposure to the non-usage fee starting November 27, 2012.