Business Context and Reporting Period
Company: FS Investment Corporation (filing under the name FS KKR Capital Corp in metadata)
Filing Type: Form 8-K (Current Report)
Date of Report: April 9, 2018
Event: The Company entered into new material definitive agreements to transition its investment advisory and administrative services to a newly formed joint advisor, FS/KKR Advisor, LLC ("Joint Advisor"), jointly operated by an affiliate of Franklin Square Holdings, L.P. and KKR Credit Advisors (US) LLC. Concurrently, the Company terminated its previous agreements with FB Income Advisor, LLC and GSO / Blackstone Debt Funds Management LLC ("GDFM").
Key Financial Metrics and Fee Structures
This filing details the terms of the new advisory agreement rather than reporting period-specific financial results (e.g., revenue, profit, cash flow). The following fee structures are established under the new agreement:
- Base Management Fee: 1.5% annually of the average weekly value of the Company's gross assets, payable quarterly in arrears. The Joint Advisor may defer all or part of this fee without interest.
- Incentive Fee on Income: 20.0% of "pre-incentive fee net investment income" subject to a quarterly hurdle rate of 1.75% (7.0% annualized). A "catch-up" provision applies until the return reaches 2.1875% (8.75% annualized).
- Incentive Fee on Capital Gains: 20.0% of cumulative realized capital gains net of losses and unrealized depreciation, payable annually.
- Administration Fees: No separate fee; the Company reimburses the Joint Advisor for costs and expenses incurred.
Note: The filing text does not provide specific values for the Company's current revenue, profit, cash flow, margins, debt, or liquidity.
Material Changes Versus Prior Period
The filing outlines significant structural changes to the Company's advisory relationships effective April 9, 2018:
- Advisory Transition: Replaced FB Income Advisor, LLC with the Joint Advisor (FS/KKR Advisor, LLC).
- Sub-Advisory Termination: GDFM resigned as investment sub-adviser, terminating the Previous Investment Sub-Advisory Agreement.
- Fee Structure Adjustment:
- Base Fee Reduction: Decreased from 1.75% (under the previous agreement) to 1.5%.
- Hurdle Rate Reduction: The quarterly hurdle rate for the income incentive fee decreased from 1.875% to 1.75%.
- Catch-up Threshold: The catch-up feature now begins at 2.1875% (previously 2.34375%).
- Termination Penalties: No early termination penalties were payable to the previous advisors (FB Income Advisor or GDFM).
Guidance, Outlook, and Risks
Management Commentary and Outlook: The transition is part of a strategy to create a "premier alternative lending platform" for certain Business Development Companies (BDCs) advised by the Joint Advisor. The new agreements are initially effective for two years and automatically renew annually subject to Board and independent director approval.
Risks and Contingencies:
- Termination Rights: Either the Company or the Joint Advisor may terminate the agreements at any time without penalty upon 60 days' written notice.
- Automatic Termination: The Investment Advisory Agreement automatically terminates in the event of an "assignment" as defined under the Investment Company Act of 1940.
- Fee Deferral: The Joint Advisor has discretion to defer the base management fee, which could impact cash flow timing.
Important Facts for Investor Verification
- Verify the impact of the reduced base management fee (1.5% vs. 1.75%) on the Company's net investment income.
- Confirm the operational integration status between Franklin Square and KKR Credit under the new Joint Advisor structure.
- Review the Company's most recent Form 10-K (filed March 1, 2018) for detailed financial metrics and related party transaction disclosures referenced in this filing.
- Monitor future quarterly reports to assess if the Joint Advisor exercises its right to defer base management fees.
- Check for any subsequent filings regarding the performance of the Joint Advisor relative to the new hurdle rates.