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Edited Transcript of FSIC earnings conference call or presentation 8-Nov-18 3:00pm GMT

Q3 2018 FS Investment Corp Earnings Call

Philadelphia Dec 5, 2018 (Thomson StreetEvents) -- Edited Transcript of FS Investment Corp earnings conference call or presentation Thursday, November 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Gerson

FS Investment Corporation - Head of Private Credit - FS Investments

* Daniel Ryan Pietrzak

KKR Credit Advisors (US) LLC - MD

* Marc Yaklofsky

FS Investment Corporation - SVP, Head of Communications & IR

* Michael Craig Forman

FS Investment Corporation - Chairman and CEO

* Michael John Kelly

FS Investment Corporation - President & CIO of FS Investments

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Terry Ma

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to FS Investment Corporation's Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. At this time, Marc Yaklofsky, Senior Vice President of FS Investments will proceed with the introduction. Mr. Yaklofsky, you may begin.

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Marc Yaklofsky, FS Investment Corporation - SVP, Head of Communications & IR [2]

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Good morning, and welcome to FS Investment Corporation's Third Quarter 2018 Earnings Conference Call. Please note that the FS Investment Corporation may be referred to as FSIC, the fund or the company throughout the call.

Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSIC issued on November 7, 2018. In addition, FSIC has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30, 2018. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website at www.fsinvestmentcorp.com under Presentations and Reports. Please note that this call is a property of FSIC. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I would also like to call your attention to the customary disclosure in FSIC's filings with the SEC regarding forward-looking statements. Today's conference call includes forward-looking statements, and we ask that you refer to FSIC's most recent filings with the SEC for important factors that could cause actual results or outcomes to differ materially from these statements. FSIC does not undertake to update its forward-looking statements, unless required to do so by law.

In addition, this call will contain certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSIC's third quarter earnings release that was filed with the SEC on November 7, 2018. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSIC's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer of FSIC; Dan Pietrzak, Chief Investment Officer of FSIC; and Mike Kelly, President and Chief Investment Officer of FS Investments. We're also joined by Brian Gerson, Head of Private Credit of FS Investments.

I will now turn the call over to Michael.

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [3]

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Thank you, Marc, and welcome, everyone, to FS Investment Corporation's Third Quarter 2018 Earnings Conference Call. On today's call I'll provide updates on the FS/KKR partnership, the merger with CCT and strategic actions we're taking to address portfolio performance challenges and our stock price. Following my remarks, Dan Pietrzak will provide perspective on the current lending environment and discuss our investment activity for the quarter. Mike Kelly will then discuss our financial results for the third quarter.

I want to start by saying we're disappointed with the company's recent performance and the effect that it's having on the stock price. The vast majority of our NAV volatility has been driven by certain older vintage investments that are weighing on our funds' performance. We're diligently working on addressing the impact these investments are having on our broader portfolio with the goal of reducing NAV volatility. We expect this process will take some time before we fully turn the corner, but we're making good progress. Going forward, and especially in the current environment, we will be focused on the upper end of the capital structure and secured risks, and we are pleased with the origination opportunities the FS/KKR partnership has produced and the credit discipline we've exhibited in this lending environment. Dan will provide more comments on some of the specific investment in his personal -- in his prepared remarks, but we accept full responsibility for these issues and we're taking several actions to improve overall performance.

First, we are focused on improving the outcomes for the credits where problem areas have surfaced. We've isolated the drivers of the recent underperformance to certain older vintage assets, mainly subordinated debt and equity largely originated in 2013 and prior. We are actively working with the companies and their sponsors to maximize recoveries and are confident that the FS/KKR partnership is uniquely positioned to help navigate through these issues. Going forward, we believe that co-investment across KKR's private credit business provides greater portfolio diversification and should prevent any one investment from having an outsized impact on the portfolio, as has been the case with ThermaSys.

Second, we remain committed to aggressively rotating out of nonincome-producing equity investments, including the sale of our interest in PSAV in the third quarter, an $18 million realized gain. By reducing our equity exposure, we can minimize mark-to-market volatility and downside risk of the portfolio while also freeing capital to redeploy it to new income-producing securities.

Third, we are identifying attractive new origination opportunities through our partnership with KKR. During the third quarter, commitments to new direct originations were $250 million, up 53% from second quarter commitments, evidence that our partnership continues to build momentum. We acknowledge the competitive lending landscape we are faced with today, however, we are finding that we -- what we believe are strong opportunities with new and existing borrowers and loans with attractive coupons and structural protections. It is important to stay disciplined in this environment, and we're doing just that by turning away deals that don't meet our credit standards. We believe this discipline and new originations will help create stability and returns over the long term.

Fourth, we're focused on the successful completion of the merger of FSIC and CCT. We continue to believe that merging these 2 vehicles will provide business and operational synergies in the near term as well as longer term that'll expand shareholder value. Specifically, we expect the combination to reduce administrative costs, further expand and diversify the investment portfolio, improve trading liquidity and optimize our capital structure with lower borrowing costs. The merger remains on track, and we expect to close by the end of the year, subject to shareholder approval, and of course, with the satisfaction of other closing conditions. In addition, with our shares trading at a meaningful discount to NAV, the question of share repurchases comes up. Until the close of the merger between FSIC and CCT, we're not permitted to discuss any plans with respect to share repurchases due to regulatory reasons. I will notice that historically, we have announced share repurchase programs when our shares were trading at a meaningful discount to NAV. And when we've announced the program, we fulfilled the entire amount and done so aggressively, as you saw with our $50 million authorization. Our philosophy has not changed.

Finally, we have historically stated that the strategy was to consolidate all the funds on the platform into one publicly traded entity as the means to create values for both of our public and non-traded shareholders. Given recent trading performance of both FSIC and CCT, we do not believe current conditions support such a consolidation. And even when these conditions improve, let me be clear by saying that consolidation of these non-traded BDCs with our listed BDC will need to be accretive to FSIC shareholders, position the publicly traded vehicle for success and be in the best interest of all shareholders.

In summary, while we're disappointed with the company's recent performance, we accept responsibility for these challenges and are focused on managing the underperforming credits, executing upon the FSIC-CCT merger, underwriting high-quality new originations and exploring all options for the non-traded funds to determine the best outcome for all our shareholders. We look forward to updating you on our progress on future calls.

With that, I'll turn it over to Dan to discuss our portfolio activity during the quarter. Dan?

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [4]

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Thank you, Michael. Over the past several quarters, we have commented on the tight conditions that continue to prevail in both the direct lending and syndicated credit markets. During the past quarter, these conditions did not abate, and investor appetite for floating-rate loan products continues to be elevated. The overall market remains competitive and we are being disciplined in our credit selections. And we are executing transactions where we believe there is appropriate risk reward. We continue to focus on structural protections, such as cash flow sweeps, covenants and equity cushions, often rejecting deals that do not afford us appropriate downside protection.

We do spend a lot of time focusing on how we differentiate ourselves on a market like this. For us, it's the size and scale that we are able to bring to sponsors and borrowers, as well as certainty around execution and firm closing time lines. We have also been focused on the size of our origination footprint. In this market where upper-middle market borrowers have access to the capital markets and there is strong competition in the lower part of the middle market, we believe it is critically important to have broad origination capabilities, to be highly selective and have the ability to provide a wide range of creative solutions to sponsors and their portfolio companies. To drive such origination, we have and we continue to hire talented people with a strong track record in this space.

To give you a sense of the deal volume we are seeing, through the end of Q3, KKR Credit reviewed approximately 990 private credit investment opportunities year-to-date, which is meaningfully up year-over-year. Of these opportunities, only 3% were closed, which is lower than our long-term average of 5%. Despite this high degree of selectivity, our total BDC franchise deployed approximately $2.1 billion and originated strategy investments the past 2 quarters versus $1.9 billion in sales and paydowns. For FSIC specifically, we have committed to over $400 million in our originated strategies over the past 2 quarters, offsetting sales and paydowns. With this, FSIC portfolio at the end of the third quarter was over 90% deployed in originated strategies.

While deal flow could be lumpy quarter-over-quarter, we believe our continued investment and origination has resulted in a meaningful uptick in deal flow. We recognize that volume alone doesn't translate into higher future returns. However, it does allow us to be selective in the current environment, which we believe is critical to maintaining our underwriting discipline and serves as a competitive advantage.

As Michael mentioned earlier, we are disappointed by the results of certain portfolio companies. Let me assure you, we are taking all necessary actions to maximize recoveries on these troubled investments by taking an active role and engaging with sponsors, management and restructuring advisers. We believe KKR and FS bring significant expertise to the table. And we are leaning on our full resources to realize the best outcomes we can achieve.

Many of the underperforming names are those that were originated in 2013 and prior, with some exhibiting either cyclical or commodity risks or dependent business models, which we seek to avoid today, especially if not in senior secured risks. As of September 30, 2018, we had 5 companies on nonaccrual, which in aggregate, represented 2.7% of the portfolio on fair value.

During the third quarter, our subordinated debt investment in ThermaSys was placed on nonaccrual as well as 2 other smaller investments. The position in ThermaSys totals approximately $72.4 million based on fair value and $150.8 million based upon amortized costs. The investment was originated in 2012 and continues to have an outsized negative impact on the fund's performance. Going forward, investing in subordinated debt of a cyclical business would not be viewed as an attractive opportunity for FSIC. We are in discussions with the company, its financial sponsor, the senior lenders and a variety of financial and legal advisers regarding a comprehensive restructuring of ThermaSys' balance sheet. We are focused on trying to protect our investment as best possible and this will continue to play out over the fourth quarter.

In terms of deployment, commitments to direct originations during the quarter were $250.6 million compared to $163.3 million in the second quarter. In Q3, we had 3 new direct originations: Rise Baking Company, Reliant Rehabilitation and Ammeraal Beltech, as well as 6 new add-ons, including 5 Arch, Trace3, Bellatrix, Kodiak, All Systems and Staples Canada. All 9 of these new investments are senior secured debt investments. We believe that by solely investing in secured debt during the quarter, we continue to enhance the quality and downside protection of the portfolio. And I note here as well, which is something you've heard us say before, incumbency lender positions are important and a strong risk-adjusted way to deploy capital in this market, as evidenced by these 6 add-ons, which totaled $180 million of commitments. Direct origination exits of $125 million during the third quarter were driven by both repayments and the sale of an equity investment. Similar to the second quarter, repayments of loan positions were driven by either company sales or capital markets refinancings as opposed to any competitor refinancings.

As Michael highlighted earlier, we continue to focus on reducing our equity exposure. And as we disclosed last quarter, we fully exited our position in PSAV in the third quarter at a gain, generating total proceeds of approximately $25 million and an $18.4 million realized gain. This follows total proceeds of approximately $73 million during the second quarter related to 3 fully exited equity positions.

Equity investments comprised approximately 10% of the portfolio based on fair value as of September 30, 2018, or $370 million, down from 11% as of the end of the second quarter or $386 million. This is also down from $468 million at the end of the first quarter of 2018. Over the coming quarters, we will remain focused on rotating our equity positions into income-producing investments on an opportunistic basis. In terms of the portfolio return profile. The growth portfolio yield prior to leverage and excluding non-income producing assets was 11.1% at quarters-ends. This was relatively unchanged from the 2 prior quarters.

I'll now turn the call over to Mike to discuss our financial results during the quarter.

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Michael John Kelly, FS Investment Corporation - President & CIO of FS Investments [5]

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Thanks, Dan. Net investment income for the third quarter was $0.23 per share, which more than covered the distribution of $0.19 per share. This compares to net investment income of $0.19 per share for the second quarter of 2018 and $0.21 per share for the quarter ended September 30, 2017. The increase in net investment income quarter-over-quarter was largely driven by the lookback provisions impact on incentive fees. Adjusted net investment income for the third quarter was $0.24 per share compared to $0.19 per share for the second quarter of 2018 and $0.21 per share for the quarter ended September 30, 2017.

Fee and dividend income totaled $4.7 million in the third quarter of 2018 compared to $3 million in the second quarter of 2018 and $5 million in the third quarter of 2017. The increase in fee and dividend income quarter-over-quarter was primarily due to higher origination activity in the third quarter as compared to the second quarter.

The fund's NAV was $8.64 per share as of September 30, 2018, compared to $8.87 per share as of June 30, 2018. The $0.23 per share decline from June 30, 2018, was driven primarily by mark-to-market unrealized losses in our investments in ThermaSys and Global Jet, partially offset by realized gains on our equity investment in PSAV. As Michael and Dan mentioned, we have isolated the drivers of the recent underperformance to certain older vintage assets. And we are confident that the FS/KKR partnership is uniquely positioned to help navigate through these losses.

With respect to the special distribution that we announced last year, net investment income earned from the fourth quarter of 2017 through the end of the third quarter of 2018 did, in fact, exceed the current annualized distribution amount of $0.76 per share. As a result, the board has declared a special distribution of $0.09 per share to shareholders of record on November 19, 2018, payable on December 3, 2018.

Now before I turn the call back to Michael for closing remarks, we recognize that the portfolio markdowns have been elevated during the past few quarters, driven by certain older vintage names. In fact, 4 of the top 5 worst performing investments in 2018 were originated either in 2011 or 2012. We are working to improve the past outcomes and maximize recoveries on these troubled assets. These underperforming assets were mainly subordinated debt or equity positions, which are not core to our current investment strategy. And we are seeking ways to accelerate the monetization of our equity portfolio. However, with our stock trading around 75% of our third quarter's net asset value of $8.64, we believe the market is pricing in an overly draconian view of the expected credit performance of the portfolio.

With that, I'll now turn the call back over to Michael.

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [6]

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Thanks, Mike. We appreciate everyone's time this morning. Our recent performance is clearly not where we want it to be, but we remain focused on managing our underperforming credits, executing the merger of FSIC and CCT, maintaining underwriting discipline on new originations and further expanding our investment pipeline.

The total BDC franchise has deployed over $2 billion in originated investments since the partnership began in April, while FSIC's third quarter commitments to new direct originations increased over 50% from Q2, evidence that we are seeing strong momentum across the platform.

With that, we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Fin O'Shea of Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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Just -- first one is couple of portfolio names to start on ThermaSys. You talked a little bit about it, but there's been a couple of rather deep sequential marks. Is this implicating at all that you're perhaps near restructuring? Or is this sort of a real drop-off in some fundamental aspects there?

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Brian Gerson, FS Investment Corporation - Head of Private Credit - FS Investments [3]

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Fin, it's Brian. Just to give a little bit of background on the investment. I think as Dan mentioned, we invested it -- in it in 2012. And stepping back, the company make heat exchangers, which were used to cool fluids in industrial processes and prevent heat damage, so think of a radiator as a good example of the heat exchanger. In terms of the dynamics of the capital structure, our sub debts sits behind the large term loan facilities that matures in 2019. And the company was unable to refinance this loan despite efforts over the past summer. So on top of that, performance was also projected to improve in Q3 and Q4, but in fact, it's trended down materially, really due to some specific operating issues at the company, which has also negatively impacted the company's liquidity. Clearly, restructuring is in the works. The company missed its Q3 interest payment. We put it on nonaccrual. And we're actively involved in discussions with the company, its sponsor and its advisers. So we are in the throes of restructuring conversations, but it'll certainly take some time to play out.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [4]

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Sure. And then on Global Jet. Just a reminder of that business. Is that more of a -- is that enterprise value more so on the asset basis? Or is that on the operating performance of the business? Is that -- is there a line of product slowing because other -- go ahead, sorry.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [5]

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No, it's Dan, and thanks for the questions. I mean if you recall, that is a really finance company in the business jet space as they do leases and loans secured by the underlying metal. The company's performance in many ways has been good. They've grown their book meaningfully. We're very impressed with management there. They have struggled from what I'll call competition in that market. The ROAs they were able to obtain have been driven down due to the competition. That's put stress on the marks as you've seen go through here, but the credit quality of the book itself is good. The dynamics around the space themselves are good. And we're working kind of heavily with our partners there as well as the company to look to either change the dynamic on the ROA side or change the dynamic on their liability side.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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Sure. And then just a small one. On the balance sheet, there's a small deferred merger cost there. Is that the total approximation for what you expect on the FS side? And if -- and otherwise, is this something that will hit the income statement next quarter?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [7]

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Yes, this is through 9/30 in terms of what we have so far. We're going through the proxy right now and expect additional costs for that. So we would expect through 9 -- through 12/31 would be the additional probably 2x that amount, so $6 million to $7 million.

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Operator [8]

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And our next question comes from Ryan Lynch of KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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The first one, truly just since the merger in April once KKR really took over for GSO of managing the portfolio, FSIC has kind of had 2 of its worst quarters ever. And so I'm just wondering when KKR -- when you guys came in and started kind of working through understanding, reunderwriting investment portfolio, were there some sort of like negative items discovered during that process or these companies just fundamentally started to underperform since kind of the recently over the last couple of quarters? Because I'm just trying to understand what's really driving the recent credit underperformance. Just giving the timing of the credit underperformance is -- really coincides with the timing of the adviser change. So it just feels like there's something more there than rather than just being a coincidence.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [10]

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Yes. Thanks for the question. It's Dan Pietrzak. You're right about the time lines and the dates. And then we did become sort of actively involved or formally involved in the portfolio. As of the beginning of April, we are disappointed by some of the performance that we've seen here. I think we've been working very hard across the partnership to be identifying these problem credits. We've got a lot of resources allocated to that. ThermaSys has clearly been a big driver of that. There's -- that is a position that is probably larger than we would like future positions to be. From a concentration perspective, it's probably not in the part of the capital structure where we would like to focus on, especially with a business of that size. And it's had some real challenges over the past few quarters that got exacerbated with those concentration points and with that part in the capital structure. So they're -- I think it's why we're, I think, clear on what those names are and we're trying to work through to maximize value and maximize recoveries.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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Okay. And then, Michael, you mentioned the merger with the private BDCs. I think you said that given the current market conditions, you don't think that it really makes sense to do that at this time. I know you said -- going forward, you'll kind of look at make sure it's accretive for public shareholders, position the BDC for success and be in the best interest of all shareholders. I just want to get your thoughts on it. It seems like the only thing that's really changed, because you guys have looked at them, how to potentially merge this and the accretion of the private guys in the past. It seems like the biggest driver of that has just been the decline in FSIC's stock price. So are there any other really major considerations that you guys are reviewing, that's kind of pushing off those mergers? Or is it mainly driven by FSIC's current stock price?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [12]

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Ryan, I think you articulated our view exactly. I think, given the performance of the share price for FSIC and CCT, we don't think it's feasible at this time. And we'll act going forward with those 3 principles in mind: it needs to be accretive to the FSIC shareholders; it needs to position the public vehicle for success; and it needs to be in the best interest of all shareholders. And that's the lens we'll analyze this through going forward. And we wanted to be very clear on this call and with our investors how we'll be looking at the mergers going forward.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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I mean, just to drill that a little further. Is there a specific stock price that you think that it does make sense to move forward at this, FSIC need to be trading at book value or higher? Or could a merger potentially take place with the private BDCs while FSIC is below book value?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [14]

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We have not articulated a specific stock price. Certainly, where we're trading today, we're clear that it does not make sense. And we're going to wait and see how the market reacts over time and do it at a time where we think it's in the best interest of all the shareholders and that it's accretive to the FS -- to the public vehicles.

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Operator [15]

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And our next question comes from Terry Ma of Barclays.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [16]

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So you guys mentioned you identified the kind of like the problem assets. Can you maybe just quantify the dollar amount that you have identified? And maybe just talk about a time line for working all these out.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [17]

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Yes. It's Dan Pietrzak. I think we've been thinking about it probably little bit differently, right, because we -- we're focused on the risk management of every line item in the portfolio constantly. And we have formal portfolio reviews where we review the entire book quarterly. So I think we've spoken about what we see as some of the key challenges in the portfolio. I think you could see some of the key movers over this quarter or, say, the last several. I think we feel in a good position as it relates to our review of the rest of the book. Everybody in the partnership is very focused on containing the risk management exercises. So I think more of the focus has been on the names that you've seen and the movers you've seen over the past several quarters.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [18]

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Okay. And can you maybe just give us a sense of when you're working these out, how much of that is actually under your control?

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [19]

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Our control being the partnership? Or our control being KKR?

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [20]

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As in the partnership.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [21]

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Yes. I mean, obviously, it's situational-specific. We've been pretty darn focused over the past several quarters and really, since -- for the past 1 year plus on building out the strength and bench of the team, really getting prepared for what I would view as an inevitable sort of downturn in the market. Almost specifically, we've added 10-plus professionals focused on portfolio monitoring and work out in governance. I think when it's a first lien position, we obviously have a lot of that in our control, right? We're focused on doing deals that have covenants. Those covenants allow us to come to the table. And when we're in that control position, we could exercise a lot of influence and we've got a defense to do that. We've got the resources of the entire firm to do that. As we mentioned on an example like ThermaSys, where we're subordinates and we have less control and less ability to do that, then we have to work with a broader set of stakeholders to try to get to an outcome.

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Operator [22]

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And our next question comes from Christopher Testa of National Securities.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [23]

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Michael, I appreciate your commentary on the private fund roll ups. Some of the feedback we've gotten has kind of been -- an overhang is that if you guys do get to NAV where it's kind of feasible for you to roll up these private funds, that it could be of major liquidity event for the private fund shareholders, who would then be selling the stock, so why would basically anybody kind of bid you guys to NAV. Kind of looking at it from that lens, is there a potential for you guys to maybe put a moratorium, like we will not seek to do this for 3 years and put like kind of a hard time line on this?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [24]

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No. I think we articulated our principles, and we'll be true to those principles. Let's be mindful that in 2014, we listed FSIC. We had the same kind of dynamic, and the listing was very favorable. So it is something we've done previously. We're mindful of the overhang issue and appropriate time. In the event that we would go forward with the mergers, we'll address that in a way that we think it's in the best interest of the shareholders.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [25]

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Okay. That's fair. And your nonaccruals are roughly $96 million of fair value with the investments ranked 5 at about $123 million. What investment or investments is kind of the difference there? What's non or nonaccrual but ranked 5?

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [26]

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I mean, obviously, the process we run to risk grade assets and the process we run for nonaccruals is slightly different one. One is a bit of an accounting standard. We're kind of digging through our notes here to get specific names and maybe we'll follow up with some of the specifics offline. But I think, we are using investment ratings a bit as a watch list tool and a monitoring tool and could very well include certain non-income producing or equity positions which would be irrelevant to nonaccrual.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [27]

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Okay. Got it. That's fair. And how much in your pre-23 vintages are left that are currently not on nonaccrual? Just a rough estimate. I don't mean an exact number.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [28]

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Pre 2013?

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [29]

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Yes.

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Daniel Ryan Pietrzak, KKR Credit Advisors (US) LLC - MD [30]

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The majority are not on nonaccrual. The majority of what was originated in 2013 prior is not on nonaccrual. I think especially might have been represented to the book is 2013 into the prior, about 1/3.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [31]

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About 1/3? Okay. Got it. And I know you guys said you're prohibited from discussing stock repurchase with the merger pending. With the merger pending, are insiders also prohibited from purchasing stock in the open market?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [32]

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That is correct.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [33]

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Okay. Got it. And when I look at ThermaSys, you guys had mentioned in one of the other questions earlier that this is something where there's a large term loan in front of you and it's effectively unable to be refinanced. And obviously, you guys are in the subordinated position. So I know you market from 76 to 48 quarter-over-quarter. The 48% of cost mark, what kind of scenario I guess does that reflect for the restructuring playing out to the extent you can provide some detail on that?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [34]

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Sure. I mean, when we look at that mark, I mean, that was really based upon where we were at quarter-end. I think we're looking at different variety of scenarios where the company may require some new capital, that new capital will be put in. That would factor into our valuation though. There could be incremental capital required in the business, which could reflect -- which could impact the future mark. I think there's a number of ways this thing could play out, but we're actively involved in negotiations with the senior lenders. So we have to be careful in terms of what we say on a public call.

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Operator [35]

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(Operator Instructions) And our next question comes from Casey Alexander of Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [36]

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Appreciate your comments regarding merging or not merging in the non-traded at the current valuations. As an alternative to that, does it make any sense to merge up the non-traded and list them separately at least for the time being and allow them to establish their own valuation in the market before heading forward with a completely merged entity?

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [37]

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Thank you for the question, Casey. We're exploring all of the options and we'll be guided by the principles I articulated earlier. We're not in a rush to do anything. And we're mindful of our best -- our duty to our shareholders in doing what's best for our investors.

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Operator [38]

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And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Michael Forman for closing remarks.

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Michael Craig Forman, FS Investment Corporation - Chairman and CEO [39]

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Great. Thank you all for attending this morning. We appreciate the engagement and look forward to our next call.

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Operator [40]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.