FS KKR Capital Corp (FS Investment Corporation) - Form 8-K Summary
Business Context and Reporting Period
Date of Report: July 21, 2011
Registrant: FS Investment Corporation (FSIC)
Event: Entry into a Material Definitive Agreement and creation of a direct financial obligation.
On July 21, 2011, FSIC established a complex debt financing structure involving two newly formed, special-purpose bankruptcy-remote subsidiaries (Locust Street Funding LLC and Race Street Funding LLC) to secure funding for new securities investments and general corporate purposes.
Key Financial Metrics and Transaction Details
- Financing Facility Size: Up to $300,000,000 available via a repurchase agreement with JPMorgan Chase Bank, N.A., London Branch (JPM).
- Initial Funding: $45,000,000 received on July 21, 2011, against $63,000,000 in principal of Class A Notes.
- Collateral Capacity: Up to $600,000,000 in loans may be sold to the special-purpose subsidiary to secure the facility.
- Initial Asset Transfer: FSIC sold loans with an aggregate market value of approximately $365,396,352 to Locust Street Funding LLC.
- Cost of Borrowing (JPM Facility): Three-month LIBOR plus 3.25% per annum.
- Internal Revolving Credit Rate: One-month LIBOR plus 0.75% per annum (used for margin calls).
- Note Maturity: Class A Notes mature on July 15, 2021; final repurchase transaction due by July 15, 2015.
Material Changes and Transaction Structure
The filing details a multi-step securitization and repurchase structure:
- Asset Transfer: FSIC transferred loans to Locust Street Funding LLC in exchange for equity interests.
- Note Issuance: Locust Street issued Class A Floating Rate Notes (up to $420,000,000 principal) secured by the transferred loans.
- Internal Purchase: Race Street Funding LLC purchased the Class A Notes from Locust Street at par value.
- Repurchase Facility: Race Street entered a repurchase agreement with JPM, selling Class A Notes for approximately 71% of their principal value (haircut), effectively creating the $300 million credit facility.
FSIC elected this structure to obtain financing at a lower cost than alternate arrangements.
Outlook, Risks, and Contingencies
- Future Drawdowns: Race Street intends to enter into additional repurchase transactions within 180 days for an additional $357,000,000 in principal amount of Class A Notes.
- Margin Requirements: If the market value of underlying loans declines by more than 27% of their initial aggregate purchase price, Race Street must post cash collateral to JPM.
- Liquidity Support: To satisfy margin requirements, Race Street may borrow from FSIC under a Revolving Credit Agreement.
- Early Termination: Commencing January 2013, Race Street may reduce the principal amount subject to the facility, subject to breakage fees calculated as the present value of 1.25% per annum.
- Events of Default: Include failure to make payments, failure of loan collateral to maintain 130% of outstanding note principal, or cessation of the sub-advisor (GSO / Blackstone Debt Funds Management LLC).
Investor Verification Checklist
- Verify the specific composition and credit quality of the $365.4 million in loans initially transferred to Locust Street.
- Confirm the current market value of the collateral pool relative to the 27% margin threshold to assess immediate collateral posting risks.
- Review the terms of the Revolving Credit Agreement between FSIC and Race Street to understand internal liquidity support limits.
- Monitor the status of GSO / Blackstone Debt Funds Management LLC as the sub-advisor, as its departure constitutes an event of default.
- Assess the impact of the 3.25% LIBOR spread on the company's overall cost of capital compared to prior financing arrangements.