Franklin BSP Capital Corp 10-K

ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were (a) designed to ensure that the information we are required to disclose in our reports under the Exchange Act is recorded, processed, and reported in an accurate manner and on a timely basis and the information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management to permit timely decisions with respect to required disclosure and (b) operating in an effective manner. Management's Annual Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that: 1. Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and our dispositions of assets; 63 2. Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and 3. Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In connection with the preparation of our Form 10-K, our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making that assessment, management used the criteria based on the framework set forth in Internal Control-Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective. The rules of the SEC do not require, and this Annual Report does not include, an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Change in Internal Control Over Financial Reporting No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the period ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. 64 Part III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days following the end of our fiscal year. We have adopted a Code of Business Conduct and Ethics which contains a Statement on the Prohibition of Insider Trading that applies to directors, officers, and employees. The Code of Business Conduct and Ethics is attached as an exhibit to this Annual Report on Form 10-K. We will report any amendments to or waivers of a required provision of the Code of Business Conduct and Ethics in a Form 8-K. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days following the end of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days following the end of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days following the end of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days following the end of our fiscal year. 65 Part IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following exhibits are included, or incorporated by reference, in this Annual Report on Form 10-K for the year ended December 31, 2020 (and are numbered in accordance with Item 601 of Regulation S-K). a. Financial Statements See the Index to the Financial Statements at page F-1 of this report. b. Exhibits Exhibit No. Description 3.1 Form of Certificate of Incorporation (previously filed as Exhibit 3.1 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 3.2 Amended and Restated Bylaws (filed herewith). 4.1 Description of Securities (filed herewith). 10.1 Form of Investment Advisory Agreement (previously filed as Exhibit 10.1 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 10.2 Form of Waiver Letter Agreement to the Investment Advisory Agreement (previously filed as Exhibit 10.2 the Company’s Pre-Effective Amendment No. 1 to Registration Statement on Form 10 (File No. 000-56205) filed on November 18, 2020 and incorporated herein by reference). 10.3 Form of Administration Agreement (previously filed as Exhibit 10.3 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 10.4 Form of Custody Agreement (previously filed as Exhibit 10.4 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 10.5 Form of Indemnification Agreement (previously filed as Exhibit 10.5 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 10.6 Form of Distribution Reinvestment Plan (previously filed as Exhibit 10.6 the Company’s Pre-Effective Amendment No. 1 to Registration Statement on Form 10 (File No. 000-56205) filed on November 18, 2020 and incorporated herein by reference). 10.7 Form of Subscription Agreement (previously filed as Exhibit 10.7 to the Company’s Registration Statement on Form 10 (File No. 000-56205) filed on September 23, 2020 and incorporated herein by reference). 14.1 Code of Business Conduct and Ethics (filed herewith). 31.1 Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32 Written statement of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 66 ITEM 16. FORM 10-K SUMMARY None. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 29th day of March 2021. FRANKLIN BSP CAPITAL CORPORATION By: /s/ Richard J. Byrne Name: Richard J. Byrne Title: Chief Executive Officer, President and Chairman of the Board of Directors * * * * * Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Richard J. Byrne Richard J. Byrne Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer) March 29, 2021 /s/ Nina Kang Baryski Nina Kang Baryski Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) March 29, 2021 /s/ Lee S. Hillman Lee S. Hillman Independent Director March 29, 2021 /s/ Ronald J. Kramer Ronald J. Kramer Independent Director March 29, 2021 /s/ Leslie D. Michelson Leslie D. Michelson Independent Director March 29, 2021 /s/ Edward G. Rendell Edward G. Rendell Independent Director March 29, 2021 /s/ Dennis M. Schaney Dennis M. Schaney Independent Director March 29, 2021 68 Franklin BSP Capital Corporation INDEX TO FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F-1 Audited Financial Statements: Statement of Assets and Liabilities as of December 31, 2020 F-2 Statement of Operations for the period from January 29, 2020 (date of inception) to December 31, 2020 F-3 Statement of Changes in Net Assets for the period from January 29, 2020 (date of inception) to December 31, 2020 F-4 Notes to Financial Statements F-5 69 Report of Independent Registered Public Accounting Firm To the Shareholder and the Board of Directors of Franklin BSP Capital Corporation Opinion on the Financial Statements We have audited the accompanying statement of assets and liabilities of Franklin BSP Capital Corporation (the “Company”), as of December 31, 2020, and the related statements of operations and changes in net assets for the period from January 29, 2020 (date of inception) to December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020, and the results of its operations and changes in its net assets for the period from January 29, 2020 (date of inception) to December 31, 2020, in conformity with U.S. generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2020. New York, NY March 29, 2021 F - 1 Franklin BSP Capital Corporation Statement of Assets and Liabilities December 31, 2020 Assets: Cash and cash equivalents $ 1,500 Deferred offering costs (See Note 2) 603,128 Total assets $ 604,628 Liabilities: Due to affiliate (See Note 3) 1,016,643 Total liabilities 1,016,643 Commitments and contingencies (See Note 4) Net Assets: Preferred stock, $0.001 par value, 50,000,000 shares authorized; none issued and outstanding — Common stock, $0.001 par value, 450,000,000 shares authorized; 100 shares issued and outstanding 0 (1) Additional paid in capital 1,500 Accumulated net loss (413,515) Total net assets (412,015) Total liabilities and net assets $ 604,628 Net asset value per share $ (4,120) (1) Less than $1. The accompanying notes are an integral part of these financial statements. F - 2 Franklin BSP Capital Corporation Statement of Operations For the period from January 29, 2020 (date of inception) to December 31, 2020 Income: $ — Total income — Expenses: Organization costs (See Note 2) 296,678 Professional services fees 116,837 Total expenses 413,515 Net loss (413,515) Net decrease in net assets resulting from operations $ (413,515) The accompanying notes are an integral part of these financial statements. F - 3 Franklin BSP Capital Corporation Statement of Changes in Net Assets For the period from January 29, 2020 (date of inception) to December 31, 2020 Operations: Net loss $ (413,515) Net decrease in net assets resulting from operations (413,515) Capital Share Transactions: Issuance of common stock 1,500 Net increase in net assets from capital share transactions 1,500 Total decrease in net assets (412,015) Net assets at beginning of period — Net assets at end of period $ (412,015) Net asset value per common share attributable to Franklin BSP Capital Corporation $ (4,120) Common shares outstanding at end of period 100 The accompanying notes are an integral part of these financial statements. F - 4 Franklin BSP Capital Corporation Notes to Financial Statements For the period ended December 31, 2020 Note 1 - Organization Franklin BSP Capital Corporation (the “Company”) is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) and intends to elect to be treated for U.S. federal income tax purposes, and to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company was formed as a Delaware limited liability company on January 29, 2020 and converted to a Delaware corporation on September 23, 2020 pursuant to which Franklin BSP Capital Corporation succeeded to the business of Franklin BSP Capital L.L.C. The Company is managed by Franklin BSP Capital Adviser L.L.C. (the “Adviser”), a Delaware limited liability company and an affiliate of Benefit Street Partners L.L.C. (“Benefit Street Partners”). The Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended. The Adviser oversees the management of the Company’s activities and is responsible for making investment decisions with respect to the Company’s portfolio. The Company’s investment objective is to generate both current income capital and capital appreciation through debt and equity investments. The Company intends to invest primarily in first and second lien senior secured loans, and to a lesser extent, mezzanine loans, unsecured loans and equity of predominantly private U.S. middle market companies. The Company defines middle market companies as those with annual revenues up to $1 billion, although the Company may invest in larger or smaller companies. The Company also may purchase interests in loans or corporate bonds through secondary market transactions. On October 1, 2020, BSP Fund Holdco (Debt Strategy) L.P., a wholly-owned subsidiary of Benefit Street Partners, purchased 100 shares of common stock, par value $0.001 per share, of the Company (the “Common Stock”), which represented all of the issued and outstanding shares of Common Stock, for an aggregate purchase price of $1,500. The shares of Common Stock were sold in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). Note 2 - Summary of Significant Accounting Policies Basis of Presentation The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is an investment company and accordingly applies specific accounting and financial reporting requirements under Financial Accounting Standards Board (“FASB”) Accounting Standards Topic 946, Financial Services-Investment Companies . Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash held in banks and short-term, liquid investments in a money market deposit account. Cash and cash equivalents are carried at cost which approximates fair value. Organization and Offering Costs Organization costs consist of costs incurred to establish the Company and enable it legally to do business. Organization costs are expensed as incurred. Offering costs consist of costs incurred in connection with the offering of common shares of the Company. Offering costs are capitalized as a deferred charge and amortized to expense on a straight-line basis over 12 months from the commencement of operations, which has not yet occurred. F - 5 The Company will bear the organization and offering expenses incurred in connection with the formation of the Company and the offering of shares of its Common Stock, including the out-of-pocket expenses of the Adviser and its agents and affiliates. In addition, the Company will reimburse the Adviser for the organization and offering costs it incurs on the Company’s behalf. If actual organization and offering costs incurred exceed the greater of $1 million or 0.10% of the Company’s total capital commitments, the Adviser or its affiliate will bear the excess costs. To the extent the Company’s capital commitments later increase, the Adviser or its affiliates may be reimbursed for past payments of excess organization and offering costs made on the Company’s behalf provided that the total organization and offering costs borne by the Company do not exceed 0.10% of total capital commitments and provided further that the Adviser or its affiliates may not be reimbursed for payment of excess organization and offering expenses that were incurred more than three years prior to the proposed reimbursement. From the period January 29, 2020 (date of inception) to December 31, 2020, there have been no reimbursements from the Adviser. Income Taxes The Company intends to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. Generally, a RIC is not subject to federal income taxes in respect of each taxable year if it distributes dividends for federal income tax purposes to stockholders of an amount generally equal to at least 90% of “investment company taxable income,” as defined in the Code, and determined without regard to any deduction for dividends paid. Distributions declared prior to the filing of the previous year's tax return and paid up to twelve months after the previous tax year can be carried back to the prior tax year in determining the distributions paid in such tax year. The Company intends to make sufficient distributions to maintain its ability to be subject to be taxed as a RIC each year. The Company may be subject to federal excise tax imposed at a rate of 4% on certain undistributed amounts. The Company evaluates tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether it is “more-likely-than-not” (i.e., greater than 50-percent) that each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. The Company did not record any tax provision in the current period. However, management’s conclusions regarding tax positions taken may be subject to review and adjustment at a later date based on factors including, but not limited to, examination by tax authorities on-going analysis of and changes to tax laws, regulations and interpretations thereof. Note 3 - Related Party Transactions Investment Advisory Agreement The Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with the Adviser in which the Adviser, subject to the overall supervision of the Company’s board of directors (the “Board of Directors”), manages the day-to-day operations of, and provides investment advisory services to the Company. The Company entered into an administration agreement with Benefit Street Partners (the “Administration Agreement”), pursuant to which Benefit Street Partners (in such capacity, the “Administrator”) provides the Company with office facilities and certain administrative services necessary for the Company to conduct its business. Pursuant to the Investment Advisory Agreement, the Company will pay the Adviser a fee for investment advisory and management services consisting of two components - a base management fee (the “Management Fee”) and an incentive fee, which will consist of two components (together, the “Incentive Fee”). There were no management fees or incentive fees incurred during the period from January 29, 2020 (date of inception) to December 31, 2020. Due to Related Party During the period from January 29, 2020 (date of inception) to December 31, 2020, the Company’s expenses were paid by a related party of the Adviser and will be reimbursed by the Company after the commencement of investment operations. This payable is included as a “Due to affiliate” on the Statement of Assets and Liabilities. F - 6 Note 4 - Commitments and Contingencies Litigation and Regulatory Matters In the ordinary course of business, the Company may become subject to litigation, claims, and regulatory matters. The Company has no knowledge of material legal or regulatory proceedings pending or known to be contemplated against the Company at this time. Indemnifications In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of these provisions against the Company. Based on its history and experience, management feels that the likelihood of such an event is remote. Note 5 - Capital Investor Commitments As of December 31, 2020, the Company had $136.0 million in total capital commitments from investors, all of which was unfunded. On December 22, 2020, the Company delivered its first Drawdown Notice to investors for an aggregate amount of $20.0 million in exchange for 1,333,333 shares of the Company’s common stock. The shares were issued on January 7, 2021. On February 25, 2021, the Company delivered an additional Drawdown Notice to investors for an aggregate amount of $20.0 million in exchange for 1,333,333 shares of the Company’s common stock. The shares were issued on March 11, 2021. Note 6 - Common Stock The following table reflects the net assets activity for the period from January 29 (date of inception) to December 31, 2020: Common stock - shares Common stock - par Additional paid in capital Accumulated net loss Total net assets Balance as of January 29, 2020 (date of inception) $ — $ — $ — $ — $ — Net loss — — — (413,515) (413,515) Issuance of common stock, net of issuance costs 100 0 (1) 1,500 — 1,500 Balance as of December 31, 2020 100 0 (1) 1,500 (413,515) (412,015) (1) Less than $1. F - 7 Note 7 - Subsequent Events In preparing these financial statements, the Company’s management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. On March 15, 2021, the Company, FBCC Lending I, LLC, a wholly-owned, special purpose financing subsidiary of the Company (“FBCC Lending”), and the Adviser, as the servicer, entered into a loan and servicing agreement (together with the other documents executed in connection therewith, the “MS Credit Facility”) with Morgan Stanley Asset Funding, Inc. as administrative agent and U.S. Bank National Association as collateral agent, account bank and collateral custodian, that provides for borrowings of up to $100 million on a committed basis. Obligations under the MS Credit Facility are secured by a first priority security interest in substantially all of the assets of FBCC Lending, including its portfolio of investments and the Company’s equity interest in FBCC Lending. The obligations of FBCC Lending under the MS Credit Facility are nonrecourse to the Company. Any amounts borrowed under the Credit Facility will mature, and will be due and payable, on the maturity date, which is March 15, 2025. Borrowings under the MS Credit Facility bear interest at three-month maturity London Interbank Offered Rate (“LIBOR”), with a LIBOR floor of 0.00%, plus a spread of 2.25%. Interest is payable quarterly in arrears. FBCC Lending is subject to a non-usage fee of 0.50% on the difference between total commitments and the greater of the (i) drawn amounts and (ii) minimum utilization requirement, and, in addition, after the ramp-up period, FBCC Lending would pay interest on undrawn amounts up to the minimum utilization requirement under the MS Credit Facility if drawn amounts are less than such minimum utilization requirement. F - 8