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Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-29 · 266 added, 66 removed, 155 unchanged (68% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Franklin BSP Capital Corporation (including, for periods prior the Conversion, Franklin BSP Capital L.L.C., a Delaware limited liability company, the "Company," "FBCC," "we," “us,” or "our") and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of Franklin BSP Capital Corporation (including, for periods prior the Conversion, Franklin BSP Capital L.L.C., a Delaware limited liability company, the "Company," "FBCC," "we," “us,” or "our") and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.

We are externally managed by our adviser, Franklin BSP Capital Adviser L.L.C.

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• the impact of the COVID-19 pandemic on our business and our portfolio companies, including our and their ability to access capital and liquidity;

• changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including the effect of the current COVID-19 pandemic;

• the impact of geo-political conditions, including revolution, insurgency, terrorism or war, including those arising out of the ongoing conflict between Russia and Ukraine;

• the impact that the discontinuation of LIBOR and the transition to new reference rates could have on the value of any LIBOR-indexed portfolio investments we may hold and the cost of borrowing under any credit facilities we may enter into;

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• the ability of our Adviser and its affiliates to attract and retain highly talented professionals.

Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Item 1A.

Risk Factors” and elsewhere in this Annual Report.

We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC, and intends to be treated for U.S.

federal income tax purposes, and to qualify annually thereafter, as a RIC under the Code.

You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made.

We undertake no obligations to update any forward-looking statement to reflect events or circumstances occurring after the date of this Annual Report on Form 10-K.

We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC, and has elected to be treated for U.S.

federal income tax purposes, as a RIC under the Internal Revenue Code of 1986, as amended (the “Code”).

We are managed by the Adviser.

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We also may purchase interests in loans or corporate bonds through secondary market transactions.

See “ Item 1.

Business — Regulation as a Business Development Company ” for discussion of BDC regulation and other regulatory considerations.

We expect that each investment generally will range between approximately 0.5% and 3.0% of our total assets.

As of December 31, 2021, 89.1% of our portfolio was invested in senior secured loans.

Senior secured loans generally are senior debt instruments that rank ahead of subordinated debt and equity in priority of payments and are generally secured by liens on the operating assets of a borrower which may include inventory, receivables, plant, property and equipment.

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On December 18, 2020, we completed our Initial Closing of Capital Commitments to purchase shares of our Common Stock to investors in a private placement in reliance on exemptions from the registration requirements of the Securities Act.

Since our Initial Closing, we held additional closings and received aggregate Capital Commitments to purchase Common Stock.

As of December 31, 2021, investors had made aggregate Capital Commitments to purchase Common Stock of $573.8 million.

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Investors will be required to fund drawdowns to purchase shares of Common Stock up to the amount of their respective Capital Commitments on an as-needed basis each time we deliver a notice to the investors.

Closings of the Company’s private placement are expected to occur, from time to time, during the Initial Closing Period, provided that the Board of Directors may extend the Initial Closing Period in its sole discretion.

After the Initial Closing Period, the Company may permit one or more additional closings with the approval of the Board of Directors.

See “ Item 1.

Business — Private Placement .”

We intend 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.

Closings of the private placement of our Common Stock are expected to occur, from time to time, during the Initial Closing Period which our Board of Directors has extended such that it currently will end December 18, 2022.

After the Initial Closing Period, we may permit one or more additional closings of the private placement of our Common Stock with the approval of our Board of Directors.

On August 25, 2021, we filed the Certificate of Designation for the Series A Preferred Stock.

On the same day, we entered into the Preferred Subscription Agreements with certain Investors, pursuant to which Investors made new capital commitments to purchase shares of our Series A Preferred Stock.

As of December 31, 2021, total capital commitments of preferred stock were $27.5 million.

Financial and Operating Highlights

(Dollars in thousands, except per share amounts)

At December 31, 2021:

Investment Portfolio $ 517,300

Net assets attributable to common stock 235,973

Debt (net of deferred financing costs) 237,540

Short-term borrowings 41,302

Net asset value per share attributable to common stock 15.46

Portfolio Activity for the year ended December 31, 2021:

Purchases during the year 522,821

Sales, repayments, and other exits during the year 8,723

Number of portfolio companies at end of year 61

Operating Results for the year ended December 31, 2021:

Net investment income per share - basic 0.78

Net increase in net assets resulting from operations attributable to common stockholders 1.30

Net investment income 4,143

Net realized and unrealized gain 2,726

Net increase in net assets resulting from operations attributable to common stockholders 6,869

Portfolio and Investment Activity

We 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.

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We also may purchase interests in loans or corporate bonds through secondary market transactions.

As of December 31, 2020, we had not yet commenced investment operations and did not hold any investments in portfolio companies.

During the year ended December 31, 2021, we made $522.8 million of investments in new portfolio companies and had $8.7 million in aggregate amount of sales and repayments, resulting in net investments of $514.1 million for the period.

The total portfolio of debt investments at fair value consisted of 97.5% bearing variable interest rates and 2.5% bearing fixed interest rates.

We commenced our investment operations on January 7, 2021.

During the period from January 29, 2020 (inception) to December 31, 2020, we had no investment activities.

Our portfolio composition, based on fair value at December 31, 2021 was as follows:

December 31, 2021

Percentage of

Total Portfolio Weighted Average Current Yield for Total Portfolio (1)

Senior Secured First Lien Debt 78.7 % 7.0 %

Senior Secured Second Lien Debt 10.4 7.6

Subordinated Debt 4.7 9.1

Debt Subtotal 93.8 % 7.2 %

Total 100.0 % 7.3 %

(1) Includes the effect of the amortization or accretion of loan premiums or discounts.

Portfolio Asset Quality

Our Adviser employs an investment rating system to categorize our investments.

In addition to various risk management and monitoring tools, our Adviser grades the credit risk of all debt investments on a scale of 1 to 5 no less frequently than quarterly.

This system is intended primarily to reflect the underlying risk of a portfolio debt investment relative to the inherent risk at the time the original debt investment was made (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company's business, the collateral coverage of the investment and other relevant factors.

Loan Rating Summary Description

1 Debt investment exceeding fundamental performance expectations and/or capital gain expected.

Trends and risk factors since the time of investment are favorable.

2 Performing consistent with expectations and a full return of principal and interest expected.

Trends and risk factors are neutral to favorable.

All investments are initially rated a “2”.

3 Performing debt investment requiring closer monitoring.

Trends and risk factors show some deterioration.

4 Underperforming debt investment.

Some loss of interest or dividend expected, but still expecting a positive return on investment.

Trends and risk factors are negative.

5 Underperforming debt investment with expected loss of interest and some principal.

The weighted average risk rating of our investments based on fair value was 2.00 as of December 31, 2021.

As of December 31, 2021, the Company had no portfolio companies on non-accrual status.

Refer to Note 2 - Summary of Significant Accounting Policies - for additional details regarding the Company’s non-accrual policy.

We commenced our investment operations on January 7, 2021.

As a result, during the period from January 29, 2020 (inception) to December 31, 2020, we had no investment activities.

RESULTS OF OPERATIONS

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity for such companies, the general economic environment, the amount of capital we have available to us and the competitive environment for the type of investments we make.

Our investment objective is to generate both current income and capital appreciation through debt and equity investments.

We 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.

We define middle market companies as those with annual revenues up to $1 billion, although we may invest in larger or smaller companies.

We also may purchase interests in loans or corporate bonds through secondary market transactions, which refers to acquisitions from secondary market participants rather than from the portfolio company directly.

As a BDC, we are generally required to invest at least 70% of our total assets primarily in securities of private and certain U.S.

public companies (other than certain financial institutions), cash, cash equivalents and U.S.

government securities and other limited float high quality debt investments that mature in one year or less.

We generate revenues primarily in the form of interest income on debt investments we hold, and to a lesser extent, capital gains and distributions, if any, on equity securities that we may acquire in portfolio companies.

Some of our investments may provide for deferred interest payments or PIK income.

In addition, we may generate revenue in the form of fee income such as structuring fees, origination, closing, amendment fees, commitment, termination, and other upfront fees.

We do not expect to receive material fee income as it is not our principal investment strategy.

Upon the re-payment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment, and other upfront fees are recorded as income.

We will bear all out-of-pocket costs and expenses of our operations and transactions, including, but not limited to:

• expenses incurred by the Adviser and payable to third parties, including agents, consultants and other advisors, in monitoring the financial and legal affairs of the Company, news and quotation subscriptions, and market or industry research expenses;

• the cost of calculating the Company’s net asset value;

• the cost of calculating the Company’s NAV;

the cost of effecting sales and repurchases of shares of our Common Stock and other securities;

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• all other expenses incurred by the Company or the Administrator in connection with administering the Company’s business, including, but not limited to, payments under the Administration Agreement based upon the Company’s allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, travel and the allocable portion of the cost of the Company’s chief compliance officer and chief financial officer and their respective staffs, including operations and tax professionals and administrative staff who provide support services in respect of the Company.

Financial Condition, Liquidity and Capital Resources

We intend to generate cash primarily from the net proceeds of any offering of shares of our Common Stock and from cash flows from interest and fees earned from our investments and principal repayments and proceeds from sales of our investments.

We may also fund a portion of our investments through borrowings from banks and issuances of senior securities, including before we have fully invested the proceeds of the private placement.

Our primary use of cash will be investments in portfolio companies, payments of our expenses and payment of cash distributions to our stockholders.

Our operating results for the year ended December 31, 2021 and for the period ended December 31, 2020 were as follows (dollars in thousands):

For the year ended December 31, 2021 For the period from January 29, 2020 (date of inception) through December 31, 2020

Total investment income $ 12,245 $ —

Expenses, net of incentive fee waiver 8,003 414

Income tax expense, including excise tax 99 —

Net investment income (loss) $ 4,143 $ (414)

Investment Income

For the year ended December 31, 2021, total investment income was $12.2 million and was primarily attributable to interest income from investments in portfolio companies with an average portfolio fair value of $252.0 million and a weighted average current yield of 7.3%.

Included within total investment income was $0.3 million of fee income for the year ended December 31, 2021.

Fee income consists primarily of commitment fees.

We commenced our investment operations on January 7, 2021;

therefore, during the period from January 29, 2020 (inception) to December 31, 2020, we had no investment income.

The increase in investment income was primarily driven by our deployment of capital and increasing invested balance.

Operating Expenses

The composition of our operating expenses for the year ended December 31, 2021 and for the period ended December 31, 2020 were as follows (dollars in thousands):

For the year ended December 31, For the period from January 29, 2020 (date of inception) through December 31, 2020

Management fees $ 1,109 $ —

Organization costs — 297

Incentive fee on income 711 —

Incentive fee on capital gains 409 —

Interest and debt fees 3,539 —

Professional fees 1,281 117

Other general and administrative 979 —

Amortization of offering costs 596 —

Administrative services 113 —

Directors' fees 386 —

Incentive fee waiver (1,120) —

Expenses, net of incentive fee waiver $ 8,003 $ 414

Interest and debt fees

Interest and debt fees increased from $0 for the period ended December 31, 2020 to $3.5 million for the year ended December 31, 2021.

This was primarily driven by the establishment of our credit facilities, and the subsequent increase in our average daily borrowings.

Management Fees

Management fees increased from $0 for the period ended December 31, 2020 to $1.1 million for the year ended December 31, 2021.

This was primarily driven by an increase in the size of our portfolio.

Professional Fees and Other General and Administrative Expenses

Professional fees and other general and administrative expenses increased from $0.1 million for the period ended December 31, 2020 to $2.3 million for the year ended December 31, 2021, primarily driven by an increase in the size of the portfolio and an increase in costs associated with servicing a larger investment portfolio.

Net Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) on Investments

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments for the year ended December 31, 2021 and for the period ended December 31, 2020 were as follows (dollars in thousands):

For the year ended December 31, 2021 For the period from January 29, 2020 (date of inception) through December 31, 2020

Net realized gain

Affiliate investments $ 567 $ —

Non-affiliate investments 51 —

Total net realized gain 618 —

Net change in unrealized appreciation on investments

Affiliate investments 103 —

Non-affiliate investments 2,005 —

Total net change in unrealized appreciation on investments 2,108 —

Net realized and unrealized gain $ 2,726 $ —

Impact of COVID-19 Pandemic

The COVID-19 pandemic has resulted in governments around the world implementing a broad suite of measures to help control the spread of the virus, including quarantines, travel restrictions and business curtailments and others.

The emergence of COVID-19 created economic and financial disruptions that may affect our business, financial condition, liquidity, and certain of our portfolio companies' results of operations and liquidity.

The extent to which the COVID-19 pandemic will affect our business, financial condition, liquidity and certain of our portfolio companies’ results of operations and liquidity will depend on future developments, which are highly uncertain and cannot be predicted.

Given the unprecedented nature of the COVID-19 exigency and the fiscal and monetary response designed to mitigate strain to businesses and the economy, the operating environment of certain of our portfolio companies is evolving rapidly.

We have been in frequent communication with management, as well as the private equity sponsors, of our portfolio companies in order to understand the impact of the COVID-19 pandemic on their particular businesses and assess their ability to meet their obligations.

We closely monitor our investment portfolio in order to be positioned to respond appropriately.

Recent Developments

On December 22, 2020, the Company delivered a Drawdown Notice to investors relating to the sale of 1,333,333 shares of Common Stock for an aggregate offering price of $20.0 million.

The shares of Common Stock were issued on January 7, 2021.

On February 25, 2021, the Company delivered an additional Drawdown Notice to investors relating to the sale of 1,333,333 shares of Common Stock for an aggregate offering price of $20.0 million.

The shares of Common Stock were issued on March 11, 2021.

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.

On January 31, 2022, we entered into a third amendment to the loan and servicing agreement (together with the other documents executed in connection therewith, the “MS Credit Facility”) to, among other things, increase the maximum permissible borrowings from $250.0 million to $300.0 million on a committed basis, transition the benchmark rate to Adjusted Term SOFR and included the Canadian Imperial Bank of Commerce (“CIBC”) as a lender.

On February 4, 2022, the Board of Directors declared a distribution of $0.30 per share of Common Stock, which is payable on February 22, 2022 to stockholders of record as of January 31, 2022.

On February 4, 2022, the Board of Directors declared a distribution of $19.49 per share of Series A Preferred Stock, which is payable on February 22, 2022 to stockholders of record as of January 31, 2022.

On March 8, 2022, we entered into Preferred Subscription Agreements with certain Investors, pursuant to which the Investors made new capital commitments to purchase shares of our Series A Preferred Stock, in a total aggregate amount of approximately $50.0 million.

Pursuant to their respective Preferred Subscription Agreements, each Investor is required to fund drawdowns to purchase shares of the Series A Preferred Stock up to the amount of their respective capital commitments on an as-needed basis, upon a minimum of 10 business days’ prior notice at a per-share price equal to the Liquidation Preference.

The sale and issuance of shares of Series A Preferred Stock is exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and Regulation D thereunder.

We shall rely, in part, upon representations from the Investors in the relevant Preferred Subscription Agreements that each Investor is an “accredited investor,” as defined in Regulation D under the Securities Act.

Liquidity and Capital Resources

We generate cash primarily from the net proceeds of the purchase of shares of our Common Stock and Series A Preferred Stock via drawdowns on our investors’ Capital Commitments, cash flows from interest and fees earned from our investments and principal repayments and proceeds from sales of our investments.

As of December 31, 2021, we had issued 15.3 million shares of our Common Stock for net proceeds of $231.8 million, including shares issued pursuant to the DRIP.

We had also issued 5,000 shares of Series A Preferred Stock for gross proceeds of $5.0 million.

As of December 31, 2021, we had $12.9 million of cash.

For the year ended December 31, 2021, net cash used in operating activities was $491.4 million.

The level of cash flows used in or provided by operating activities is affected by the timing of purchases, redemptions, and sales of portfolio investments.

The cash flows used in operating activities for the year ended December 31, 2021 was primarily a result of purchases of investments of $522.8 million, offset by sales and repayments of investments of $8.7 million.

Net cash provided by financing activities of $504.3 million during the year ended December 31, 2021 primarily related to proceeds from debt of $239.9 million, proceeds from issuance of common stock of $222.6 million and proceeds from short-term borrowings of $41.3 million partially offset by payments on financing costs of $3.0 million and stockholder distributions of $1.5 million.

We also fund a portion of our investments through borrowings from banks.

Our primary use of cash will be investments in portfolio companies, payments of our expenses and payment of cash distributions to our stockholders.

As of December 31, 2021, we are party to the MS Credit Facility and MS Subscription Facility, each of which is defined in and described in more detail in Note 5 - Borrowings.

As of December 31, 2021, we had $60.0 million of availability under the MS Credit Facility (subject to borrowing base availability), $0.1 million of availability under the MS Subscription Facility and had approximately $365.2 million of uncalled Capital Commitments to purchase shares of our Common Stock and Series A Preferred Stock.

We expect to have sufficient liquidity for our investing activities and to conduct our operations in the near term.

Taxation as a RIC

We intend to elect to be treated as a RIC under Subchapter M of the Code.

We have elected to be treated as a RIC under Subchapter M of the Code.

As a RIC, we generally will not be subject to corporate-level U.S.

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We cannot assure stockholders that they will receive any distributions.

See “ Item 1.

Business – Certain U.S.

Federal Income Tax Considerations .”

Distributions

On October 28, 2021, our Board of Directors declared a cash dividend of $0.30 per share of Common Stock, payable on November 15, 2021 to stockholders of record as of October 28, 2021.

The amount of each such distribution is subject to the discretion of the Board of Directors and applicable legal restrictions related to the payment of distributions.

The Company calculates each stockholder’s specific distribution amount for the quarter using record and declaration dates.

The distributions are payable by the fifth day following each record date.

The table shows the components of the distributions we have declared and/or paid to common stockholders for the year ended December 31, 2021 and for the period ended December 31, 2020 (dollars in thousands):

For the year ended December 31, 2021 For the period from January 29, 2020 (date of inception) through December 31, 2020

Distributions declared $ 2,293 $ —

Distributions paid $ 2,293 $ —

Portion of distributions paid in cash $ 1,503 $ —

Portion of distributions paid in DRIP shares $ 790 $ —

We may fund our cash distributions to stockholders from any sources of funds available to us, including advances from the Adviser that are subject to reimbursement, as well as offering proceeds, borrowings, net investment income from operations, capital gain proceeds from the sale of assets, and non-capital gain proceeds from the sale of assets.

We have not established limits on the amount of funds we may use from available sources to make distributions.

We may have distributions which could be characterized as a return of capital for tax purposes.

During the year ended December 31, 2021, and for the period ended December 31, 2020, no portion of our distributions was characterized as return of capital for tax purposes.

The specific tax characteristics of our distributions made in respect of our anticipated fiscal year ending December 31, 2021 will be reported to stockholders shortly after the end of the calendar year 2021 as well as in our periodic reports with the SEC.

Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gain.

Moreover, you should understand that any such distributions were not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or our Adviser continues to make such reimbursements.

There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at all.

Related Party Transactions and Agreements

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We entered into an Investment Advisory Agreement, dated as of September 23, 2020, which was approved by our Board of Directors and our sole stockholder for a two year term, under which the Adviser, subject to the overall supervision of our Board of Directors manages the day-to-day operations of, and provides investment advisory services to us.

The Adviser and its affiliates also provide investment advisory services to other funds that have investment mandates that are similar, in whole and in part, with ours, including Business Development Corporation of America, a business development company advised by an affiliate of the Adviser.

The Adviser and its affiliates also serve as investment adviser or sub-adviser to private funds and registered open-end funds, and serves as an investment adviser to a public real estate investment trust.

The Adviser’s policies are designed to manage and mitigate the conflicts of interest associated with the allocation of investment opportunities.

Affiliates of the Adviser also provide investment advisory services to other funds that have investment mandates that are similar, in whole and in part, with ours, including Franklin BSP Lending Corporation (formerly, Business Development Corporation of America), a BDC advised by an affiliate of the Adviser.

Affiliates of the Adviser also serve as investment adviser or sub-adviser to private funds and registered open-end funds, and as an investment adviser to a public real estate investment trust.

The Adviser has adopted policies designed to manage and mitigate the conflicts of interest associated with the allocation of investment opportunities.

In addition, any affiliated fund currently formed or formed in the future and managed by the Adviser or its affiliates may have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us.

However, in certain instances due to regulatory, tax, investment, or other restrictions, certain investment opportunities may not be appropriate for either us or other funds managed by the Adviser or its affiliates.

For the period ended December 31, 2020, no management fee or incentive fees were accrued or paid to the Adviser.

Administration Agreement

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The Administration Agreement may be terminated by either party without penalty upon not less than 60 days’ written notice to the other.

For the period ended December 31, 2020, the Company did not incur any administrative service fees under the Administration Agreement.

For the year ended December 31, 2021 and the period ended December 31, 2020, the Company incurred $0.7 million and $0, respectively, in administrative service fees under the administrative agreement, which are included in other general and administrative on the consolidated statements of operations in the accompanying consolidated financial statements.

Co-Investment Relief

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Pursuant to the Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our eligible directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.

Due to Related Party

Included within other liabilities on the consolidated statement of assets and liabilities as of December 31, 2021, and December 31, 2020, are $1.7 million and $1.0 million of payables to Affiliated Funds or the Adviser, respectively.

We are only allowed to borrow money such that our asset coverage, which, as defined in the 1940 Act, measures the ratio of total assets less total liabilities not represented by senior securities to total borrowings, equals at least 150% after such borrowing, with certain limited exceptions.

We are continually exploring forms of debt financing which could include credit facilities or the issuance of debt securities.

We are continually exploring forms of debt financing which could include new or expanded credit facilities or the issuance of debt securities.

We may use borrowed funds, known as “leverage,” to make investments and to attempt to increase returns to our stockholders by reducing our overall cost of capital.

We currently have credit facilities with Morgan Stanley.

MS Credit Facility

On March 15, 2021, 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, Morgan Stanley Bank, N.A., as the lender, and U.S.

Bank National Association as collateral agent, account bank and collateral custodian, that provides for borrowings of up to $100.0 million on a committed basis.

The obligations of FBCC Lending under the MS Credit Facility are nonrecourse to us.

Any amounts borrowed under the MS 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 LIBOR, with a LIBOR floor of zero, 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, at three-month LIBOR floor of zero, plus spread of 1.125%, if drawn amounts are less than such minimum utilization requirement.

On July 1, 2021, FBCC Lending, amended the MS Credit Facility to, among other things, increase the maximum permissible borrowings under the MS Credit Facility from $100.0 million to $200.0 million on a committed basis.

On December 15, 2021, FBCC Lending, amended the MS Credit Facility to, among other things, increase the maximum permissible borrowings under the MS Credit Facility from $200.0 million to $250.0 million on a committed basis.

MS Subscription Facility

On April 22, 2021, we entered into a revolving credit agreement (the “MS Subscription Facility”) with Morgan Stanley Asset Funding, Inc., as administrative agent and sole lead arranger, and Morgan Stanley Bank, N.A., as the letter of credit issuer and lender.

The MS Subscription Facility allows the Company to borrow up to $50.0 million, subject to certain restrictions, including availability under the borrowing base, which is based on unused capital commitments.

The amount of permissible borrowings under the MS Subscription Facility may be increased up to an aggregate of $150.0 million with the consent of the lenders.

The MS Subscription Facility has a maturity date of April 22, 2022, which may be extended for an additional two terms of not more than 12 months each with the consent of the administrative agent and lenders.

The MS Subscription Facility bears interest at a rate of:

(i) with respect LIBOR Rate Loans, Adjusted LIBOR (as defined in the MS Subscription Facility) for the applicable interest period plus 2.00% per annum and (ii) with respect to Base Rate Loans, the greatest of (a) the Prime Rate in effect on such day plus 1.00% per annum, (b) the Federal Funds Rate in effect on such day plus 0.50%, plus 1.00% per annum and (c) except during any period of time during which LIBOR is unavailable, one-month Adjusted LIBOR plus, without duplication, 100 basis points per annum.

The Company paid an upfront fee and incurred other customary costs and expenses in connection with the MS Subscription Facility.

In addition, the Company will be subject to an unused commitment fee of 0.30%.

Short-Term Borrowings

From time to time, we finance the purchase of certain investments through repurchase agreements.

In the repurchase agreements, we enter into a trade to sell an investment and contemporaneously enter into a trade to buy the same investment back on a specified date in the future with the same counterparty.

Investments sold under repurchase agreements are accounted for as collateralized borrowings as the sale of the investment does not qualify for sale accounting under ASC Topic 860—Transfers and Servicing and remains as an investment on the consolidated statements of assets and liabilities.

We use repurchase agreements as a short-term financing alternative.

As of December 31, 2021 and 2020, we had short-term borrowings outstanding of $41.3 million and $0, respectively.

For the year ended December 31, 2021 and for the period ended December 31, 2020, we recorded interest expense of $0.1 million and $0, respectively, in connection with short-term borrowings.

For the period October 29, 2021 through December 31, 2021 (period for which the Company had short-term borrowings), we had an average outstanding balance of short-term borrowings of $19.3 million and bore interest at a weighted average rate of 0.01%.

Contractual Obligations

As of December 31, 2020, we did not have any long-term contractual obligations to disclose.

The following table shows our payment obligations for repayment of debt and other contractual obligations as of December 31, 2021 (dollars in thousands):

Payment Due by Period

Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years

MS Credit Facility (1)

$ 190,000 $ — $ — $ 190,000 $ —

MS Subscription Facility (2)

49,900 49,900 — — —

Short-term borrowings 41,302 41,302 — — —

Total $ 91,202 $ — $ 190,000 $ —

(1) As of December 31, 2021, we had $60.0 million in unused borrowing capacity under the MS Credit Facility, subject to borrowing base limits.

(2) As of December 31, 2021, we had $0.1 million in unused borrowing capacity under the MS Subscription Facility.

As of December 31, 2020, we had not commenced investing operations and did not have any significant contractual payment obligations.

Off-Balance Sheet Arrangements

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In the ordinary course of business, we may enter into future funding commitments.

As of December 31, 2020, the Company did not have any unfunded commitments as it had not yet commenced investing operations.

We intend to maintain sufficient cash on hand and available borrowing capacity to fund any unfunded commitments.

As of December 31, 2021, we had unfunded commitments on delayed draw term loans of $63.0 million and unfunded commitments on revolver term loans of $27.8 million.

We maintain sufficient cash on hand, unfunded commitments to purchase our Common Stock, and available borrowings to fund such unfunded commitments.

Please refer to Note 6 - Commitments and Contingencies in the notes to our consolidated financial statements for further detail of these unfunded commitments.

Significant Accounting Estimates and Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S.

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.

The preparation of financial statements in conformity with U.S.

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Actual results could differ from those estimates.

While our significant accounting policies are also described in Note 2 of notes to our financial statements appearing elsewhere in this report, we believe the following accounting policies require the most significant judgment in the preparation of our financial statements.

While our significant accounting policies are also described in Note 2 - Summary of Significant Accounting Policies of our notes to our consolidated financial statements appearing elsewhere in this report, we believe the following accounting policies require the most significant judgment in the preparation of our consolidated financial statements.

Valuation of Portfolio Investments

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When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process.

For an investment in an investment fund that does not have a readily determinable fair value, we measure the fair value of the investment predominately based on the net asset value per share of the investment fund if the net asset value of the investment fund is calculated in a manner consistent with the measurement principles of ASC 946, as of our measurement date.

As part of our quarterly valuation process the Adviser may be assisted by one or more independent valuation firms engaged by us.

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• The Board of Directors determines the fair value of each investment, in good faith, based on the input of the Adviser and independent valuation firm (to the extent applicable) and the audit committee of the Board of Directors.

Because there is not a readily available market value for most of the investments in its portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our Board of Directors, as described herein.

Because there is not a readily available market value for most of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by our Board of Directors, as described herein.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period.

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If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Gains or losses on the sale of investments are calculated using the specific identification method.

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized.

Net change in unrealized appreciation or depreciation will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Revenue Recognition

Interest Income

Investment transactions are accounted for on the trade date.

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The amortized cost of investments represents the original cost adjusted for the accretion of discount and amortization of premium on investments.

Fee income, such as structuring fees, origination, closing, amendment fees, commitment and other upfront fees are generally non-recurring and are recognized as revenue when earned, either upfront or amortized into income.

Upon the payment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as income.

Fee income, such as structuring fees, origination, closing, amendment fees, commitment, termination, and other upfront fees are generally non-recurring and are recognized as income when earned, either upon receipt or amortized into income.

Upon the re-payment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment, and other upfront fees are recorded as income.

Payment-in-Kind Interest

The Company may hold debt investments in its portfolio that contain PIK interest and dividend provisions.

PIK interest, which represents contractually deferred interest that add to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected.

Non-accrual Income

Investments may be placed on non-accrual status when principal or interest payments are past due and/or when there is reasonable doubt that principal or interest will be collected.

Accrued interest, which may include un-capitalized PIK interest is generally reversed when an investment is placed on non-accrual status.

Previously capitalized PIK interest is not reversed when an investment is placed on non-accrual status.

Interest payments received on non-accrual investments may be recognized as income or applied to principal depending upon management's judgment of the ultimate outcome.

Non-accrual investments are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Gains or losses on the sale of investments are calculated using the specific identification method.

See Note 2 - Summary of Significant Accounting Policies for a description of other accounting policies and recently issued accounting pronouncements.

Organization and Offering Expenses

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.

We will bear the organization and offering expenses incurred in connection with the formation of the Company and the offering of shares of our Common Stock, including the out-of-pocket expenses of the Adviser and its agents and affiliates.

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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.

In general, we may not deduct organizational expenses, and an election may be made by us to amortize organizational expenses over at least a 180-month period for tax purposes.

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.

Federal Income Taxes

The Company intends to elect to be treated for U.S.

federal income tax purposes as a RIC under Subchapter M of the Code, and to qualify annually as a RIC.

See “ Item 1.

Business – Certain U.S.

Federal Income Tax Considerations .”

Contractual Obligations

As of December 31, 2020, we had not commenced investing operations and did not have any significant contractual payment obligations.

On September 3, 2020, we entered into a placement agent agreement (the “Placement Agent Agreement”) with Foreside Fund Services, LLC (the “Placement Agent”).

Under the terms of the Placement Agent Agreement, the Placement Agent will assist in the placement of shares of our Common Stock offered in accordance with a sub-placement agent agreement.

The Adviser and the Placement Agent have entered into a services agreement pursuant to which the Adviser compensates the Placement Agent for certain services provided by the Placement Agent.

We are not liable for any payments to the Placement Agent pursuant to the Placement Agent Agreement.

In general, we may not deduct organizational expenses, and instead amortize organizational expenses over at least a 180-month period for tax purposes.

In connection with the our private placement of shares of it’s preferred stock designated as Series A Preferred Stock, the we incurred various offering costs.

These costs are capitalized as a deferred cost and included within redeemable convertible preferred stock Series A on the consolidated statement of assets and liabilities as the preferred shares are issued.

The costs are not subject to reimbursement from the Adviser.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis