FS Investment Corporation Form 8-K Summary
Business Context and Reporting Period
FS Investment Corporation (the "Company") filed this Current Report on Form 8-K on May 16, 2013. The filing details an "Other Event" (Item 8.01) regarding the execution of an Amended and Restated Expense Support and Conditional Reimbursement Agreement with its affiliate, Franklin Square Holdings, L.P. ("Franklin Square Holdings"). Franklin Square Holdings is controlled by the Company's Chairman and CEO, Michael C. Forman, and Vice-Chairman, David J. Adelman.
Key Financial Metrics
This filing does not report revenue, profit, cash flow, margins, debt, or liquidity metrics. It focuses exclusively on the terms of an expense support arrangement. As of March 31, 2013, the filing states there were no unreimbursed expense support payments subject to future reimbursement by the Company.
Material Changes and Agreement Terms
The Company amended its original March 13, 2012 agreement with Franklin Square Holdings. Key terms include:
- Expense Reimbursement: Franklin Square Holdings will reimburse the Company for expenses to ensure distributions to stockholders are not paid from offering proceeds or borrowings.
- Tax Treatment: Reimbursements will not cover portions of distributions deemed a "return of capital" for tax purposes.
- Calculation: Reimbursement equals the difference between cumulative distributions paid to stockholders and the sum of net investment income, net capital gains, and qualifying dividends/distributions from portfolio companies.
- Conditional Reimbursement Obligation: The Company must reimburse Franklin Square Holdings within three years if its income and gains exceed distributions paid to stockholders.
- Expense Cap: Reimbursements for quarters beginning on or after July 1, 2013, are capped so that "other operating expenses" do not exceed the lesser of 1.75% of average net assets or the percentage of average net assets represented by such expenses in the fiscal year the support was made.
- Termination: Either party may terminate the agreement at any time. Upon termination, Franklin Square Holdings must fund accrued amounts, and the Company's obligation to reimburse survives termination.
Outlook, Risks, and Management Commentary
Franklin Square Holdings expects to continue reimbursements until the Company achieves economies of scale sufficient to bear a reasonable level of expenses relative to its income. The filing explicitly states there can be no assurance that the agreement will remain in effect or that future reimbursements will occur. The specific amount of expenses reimbursed is determined at the end of each quarter.
Investor Verification Checklist
- Verify the specific dollar amount of expense support provided in the most recent quarterly report.
- Confirm the Company's current "other operating expenses" as a percentage of average net assets to assess proximity to the 1.75% cap.
- Review the Company's net investment income and capital gains to determine if the conditional reimbursement obligation to Franklin Square Holdings has been triggered.
- Monitor future filings for any notice of termination of the Expense Reimbursement Agreement.