Item 7. Management’s Discussion and Analysis
ITEM 7. 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 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. (the “ Adviser ” ). In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Item 1A — “Risk Factors” in this Annual Report on Form 10-K.
Overview
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 Code. We are managed by the Adviser. The Adviser is an affiliate of Benefit Street Partners. Our Adviser is a Delaware limited liability company that is registered as an investment adviser under the Advisers Act. Our Adviser oversees the management of our activities and is responsible for making investment decisions with respect to our portfolio.
Our investment objective is to generate both current income and capital appreciation through debt and equity investments. 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. middle market companies. We define middle market companies as those with EBITDA of between $25 million and $100 million annually, although we may invest in larger or smaller companies. We also may purchase interests in loans or corporate bonds through secondary market transactions. We expect that each investment generally will range between approximately 0.5% and 3.0% of our total assets. As of December 31, 2023, 90.5% 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. Mezzanine debt is subordinated to senior loans and is generally unsecured.
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, 2023, investors had made aggregate Capital Commitments to purchase Common Stock of $375.5 million. At each closing of the private placement, each investor will make a Capital Commitment to purchase shares of Common Stock pursuant to a Subscription Agreement entered into with us. 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 private placement of our Common Stock occurred, from time to time, during the Initial Closing Period which our Board of Directors extended such that it ended December 18, 2023. 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 Preferred Capital Commitments to purchase shares of our Series A Preferred Stock. As of December 31, 2023, total Preferred Capital Commitments of Series A Preferred Stock were $77.5 million.
On January 24, 2024, we consummated the transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Franklin BSP Lending Corporation, a Maryland corporation (“FBLC”), Franklin BSP Merger Sub, Inc., a Maryland corporation and our direct wholly-owned subsidiary (“Merger Sub”), and, solely for the limited purposes set forth therein, the Adviser. In connection therewith, Merger Sub merged with and into FBLC (the “Merger”), with FBLC continuing as the surviving company and as our wholly-owned subsidiary, followed by FBLC merging with and into us (together with the Merger, the “Mergers”), and with us continuing as the surviving company. See “ Recent Developments—Mergers ” for further information regarding the Mergers.
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Financial and Operating Highlights
(Dollars in thousands, except per share amounts)
At December 31, 2023:
Investment Portfolio $ 756,145
Net assets attributable to common stock 388,119
Debt (net of deferred financing costs) 319,918
Secured borrowings 33,344
Net asset value per share attributable to common stock 14.88
Portfolio Activity for the Year Ended December 31, 2023:
Purchases during the year 77,021
Sales, repayments, and other exits during the year 101,707
Number of portfolio companies at end of year 75
Operating Results for the Year Ended December 31, 2023:
Net investment income (loss) per share - basic 2.11
Net increase (decrease) in net assets resulting from operations attributable to common stockholders and participating securities 1.77
Net investment income (loss) 53,575
Net realized and unrealized gain (loss) (8,796)
Net increase (decrease) in net assets resulting from operations attributable to common stockholders 37,147
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. We define middle market companies as those with EBITDA of between $25 million and $100 million annually, although we may invest in larger or smaller companies. We also may purchase interests in loans or corporate bonds through secondary market transactions.
During the year ended December 31, 2023, we made $77.0 million of investments in new portfolio companies and had $101.7 million in aggregate amount of sales and repayments, resulting in net investments of $(24.7) million for the period. The total portfolio of debt investments at fair value consisted of 98.0% bearing variable interest rates and 2.0% bearing fixed interest rates.
Our portfolio composition, based on fair value at December 31, 2023 was as follows:
December 31, 2023
Percentage of
Total Portfolio (1)
Weighted Average Current Yield for Total Portfolio (2)
Senior Secured First Lien Debt 83.6 % 12.1 %
Senior Secured Second Lien Debt 6.9 13.4
Subordinated Debt 4.7 13.2
Debt Subtotal 95.2 % 12.2 %
Equity/Other
4.8 7.8
Total 100.0 % 12.0 %
(1) As of December 31, 2023, we held investments in Post Road Equipment Finance, LLC (“Post Road”) consisting of subordinated debt and equity, which represented 4.7% and 4.3% of our total portfolio, respectively. Post Road’s primary business involves equipment finance transactions secured by mission-critical equipment of middle market companies. If we were to treat the investments in Post Road as senior secured first lien investments, given the underlying business of this portfolio company, then our portfolio composition as of December 31, 2023 would be as follows:
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December 31, 2023
Percentage of
Total Portfolio
Senior Secured First Lien Debt 92.6 %
Senior Secured Second Lien Debt 6.9
Senior Secured - Subtotal 99.5 %
Equity/Other 0.5
Total 100.0 %
(2) Includes the effect of the amortization or accretion of loan premiums or discounts.
During the year ended December 31, 2022, we made $327.9 million of investments in new portfolio companies and had $58.6 million in aggregate amount of sales and repayments, resulting in net investments of $269.3 million for the period. The total portfolio of debt investments at fair value consisted of 98.3% bearing variable interest rates and 1.7% bearing fixed interest rates.
Our portfolio composition, based on fair value at December 31, 2022 was as follows:
December 31, 2022
Percentage of
Total Portfolio (1)
Weighted Average Current Yield for Total Portfolio (2)
Senior Secured First Lien Debt 84.8 % 10.8 %
Senior Secured Second Lien Debt 6.9 12.1
Subordinated Debt 4.0 12.0
Debt Subtotal 95.7 % 11.0 %
Equity/Other
4.3 7.9
Total 100.0 % 10.8 %
(1) As of December 31, 2022, we held investments in Post Road Equipment Finance, LLC (“Post Road”) consisting of subordinated debt and equity, which represented 4.0% and 3.9% of our total portfolio, respectively. Post Road’s primary business involves equipment finance transactions secured by mission-critical equipment of middle market companies. If we were to treat the investments in Post Road as senior secured first lien investments, given the underlying business of this portfolio company, then our portfolio composition as of December 31, 2022 would be as follows:
December 31, 2022
Percentage of
Total Portfolio
Senior Secured First Lien Debt 92.7 %
Senior Secured Second Lien Debt 6.9
Senior Secured - Subtotal 99.6 %
Equity/Other
0.4
Total 100.0 %
(2) Includes the effect of the amortization or accretion of loan premiums or discounts.
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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 2.3 and 2.1 a s of December 31, 2023 and 2022, respectively. As of December 31, 2023 and 2022, we had no p ortfolio companies on non-accrual status, respectively. Refer to Note 2 - Summary of Significant Accounting Policies - for additional details regarding our non-accrual policy.
RESULTS OF OPERATIONS
Investments
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 EBITDA of between $25 million and $100 million annually, 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.
Revenues
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.
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Expenses
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 our financial and legal affairs, news and quotation subscriptions, and market or industry research expenses;
• the cost of calculating our NAV; the cost of effecting sales and repurchases of shares of our Common Stock and other securities;
• management and incentive fees payable pursuant to the Investment Advisory Agreement; fees payable to third parties, including agents, consultants and other advisors, relating to, or associated with, making investments, and, if necessary, enforcing its rights, and valuing investments (including third-party valuation firms);
• expenses related to consummated or unconsummated investments, including dead deal or broken deal expenses; rating agency expenses; fees to arrange our debt financings;
• distributions on our shares; administration fees payable under the Administration Agreement;
• the allocated costs incurred by our Administrator in providing managerial assistance to those portfolio companies that request it; transfer agent and custodial fees; fees and expenses associated with marketing efforts (including attendance at investment conferences and similar events); accounting, audit and tax preparation expenses;
• federal and state registration fees; any exchange listing fees; federal, state, local, and other taxes;
• costs and expenses incurred in relation to compliance with applicable laws and regulations and our operation and administration generally;
• independent directors’ fees and expenses;
• brokerage commissions; costs of proxy statements, stockholders’ reports and notices; costs of preparing government filings, including periodic and current reports with the SEC; our fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums; indemnification payments;
• expenses relating to the development and maintenance of our website, if any; other operations and technology costs;
• direct costs and expenses of administration, including printing, mailing, copying, telephone, fees of independent accountants and outside legal costs; and
• all other expenses incurred by us or our Administrator in connection with administering our business, including, but not limited to, payments under the Administration Agreement based upon our allocable portion of our Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, travel and the allocable portion of the cost of our 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 us.
Our operating results for the years ended December 31, 2023, 2022, and 2021 were as follows (dollars in thousands):
For the year ended December 31,
2023 2022 2021
Total investment income $ 94,685 $ 56,744 $ 12,245
Expenses, net of incentive fee waiver 40,776 24,603 8,003
Income tax expense, including excise tax 334 671 99
Net investment income (loss) $ 53,575 $ 31,470 $ 4,143
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Investment Income
Investment income increased from $56.7 million for the year ended December 31, 2022 to $94.7 million for the year ended December 31, 2023. The increase is primarily driven by the increase in rising base rates on our variable debt, which is 98.0% of our portfolio as of December 31, 2023, as well as deployment of $51.0 million of capital commitments slightly offset by a decrease in our portfolio due to repayment activity. As of December 31, 2023, the weighted average yield of our investment portfolio was 15.4% increased from 10.8% as of December 31, 2022. Our investment portfolio at amortized cost decreased to $769.0 million for the year ended December 31, 2023 from $788.2 million for the year ended December 31, 2022. PIK income from investments increased from $2.0 million for the year ended December 31, 2022 to $3.2 million for the year ended December 31, 2023. Fee and other income, included within total investment income, increased from $1.6 million for the year ended December 31, 2022 to $1.8 million for the year ended December 31, 2023, primarily due to an increase in one-time fees earned on certain investments, including commitment, prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns.
Investment income increased from $12.2 million for the year ended December 31, 2021 to $56.7 million for the year ended December 31, 2022. The increase was primarily driven by the increase in rising base rates on our variable debt, which was 98.3% of our portfolio December 31, 2022, as well as increase size of our portfolio due to the deployment of $165.0 million of capital commitments. As of December 31, 2022, the weighted average yield of our investment portfolio was 10.8% increased from 7.3% as of December 31, 2021. Our investment portfolio at amortized cost increased to $788.2 million for the year ended December 31, 2022 from $515.2 million for the year ended December 31, 2021. PIK income from investments increased from $0.1 million for the year ended December 31, 2021 to $2.0 million for the year ended December 31, 2022. Fee and other income, included within total investment income, increased from $0.3 million for the year ended December 31, 2021 to $1.6 million of fee and other income for the year ended December 31, 2022, primarily due to an increase in one-time fees earned on certain investments, including commitment, prepayment fees and accelerated amortization of upfront fees from unscheduled paydowns.
Operating Expenses
The composition of our operating expenses for the years ended December 31, 2023, 2022, and 2021 were as follows (dollars in thousands):
For the year ended December 31,
2023 2022 2021
Management fees $ 4,187 $ 3,378 $ 1,109
Incentive fee on income 7,704 4,720 711
Incentive fee on capital gains — (409) 409
Interest and debt fees 31,149 17,467 3,539
Professional fees 2,050 1,738 1,281
Other general and administrative 2,073 1,205 979
Amortization of common stock offering costs — 16 596
Administrative services 302 226 113
Directors' fees 1,015 573 386
Incentive fee waiver (7,704) (4,311) (1,120)
Expenses, net of incentive fee waiver $ 40,776 $ 24,603 $ 8,003
Interest and debt fees
Interest and debt fees increased from $17.5 million for the year ended December 31, 2022 to $31.1 million for the year ended December 31, 2023. The increase is primarily driven by the increase in debt borrowing and rising base interest rates of our variable rate debt. The average daily debt outstanding for facility borrowings for the year ended December 31, 2022 was $324.3 million compared to $346.1 million for the year ended December 31, 2023. The weighted average annualized interest cost of the facility borrowings for the years ended December 31, 2023 and 2022 were 7.76% and 4.14%, respectively.
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Interest and debt fees increased from $3.5 million for the year ended December 31, 2021 to $17.5 million for the year ended December 31, 2022. The increase was primarily driven by the increase in debt borrowing and rising base interest rates of our variable rate debt. The average daily debt outstanding for facility borrowings for the year ended December 31, 2021 was $106.9 million compared to $324.3 million for the year ended December 31, 2022. The weighted average annualized interest cost of the facility borrowings for the years ended December 31, 2022 and 2021 were 4.14% and 2.32%, respectively.
Management Fees
Management Fees increased from $3.4 million for the year ended December 31, 2022 to $4.2 million for the year ended December 31, 2023. The increase in management fees from December 31, 2022 to December 31, 2023 was driven by an increase in the size of total assets. Total assets increased from $816.2 million as of December 31, 2022 to $831.6 million as of December 31, 2023.
Management Fees increased from $1.1 million for the year ended December 31, 2021 to $3.4 million for the year ended December 31, 2022. The increase in management fees from December 31, 2021 to December 31, 2022 was driven by an increase in the size of total assets. Total assets increased from $541.3 million as of December 31, 2021 to $816.2 million as of December 31, 2022.
Professional Fees and Other General and Administrative Expenses
Professional fees and other general and administrative expenses increased from $2.9 million for the year ended December 31, 2022 to $4.1 million for the year ended December 31, 2023. The increase in professional fees and other general and administrative expenses from December 31, 2022 to December 31, 2023 was primarily driven by an increase in costs associated with servicing a larger investment portfolio.
Professional fees and other general and administrative expenses increased from $2.3 million for the year ended December 31, 2021 to $2.9 million for the year ended December 31, 2022. The increase in professional fees and other general and administrative expenses from December 31, 2021 to December 31, 2022 was primarily driven by 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 years ended December 31, 2023, 2022, and 2021 were as follows (dollars in thousands):
For the year ended December 31,
2023 2022 2021
Net realized gain (loss)
Affiliate Investments $ — $ — $ 567
Non-affiliate investments 496 467 51
Net realized loss on extinguishment of debt (1,483) — —
Total net realized gain (loss) $ (987) $ 467 $ 618
Net change in unrealized appreciation (depreciation) on investments
Control investments $ 8 $ 43 $ —
Affiliate Investments — — 103
Non-affiliate investments (7,049) (8,000) 2,005
Net change in deferred taxes (768) (780) —
Total net change in unrealized appreciation (depreciation) on investments $ (7,809) $ (8,737) $ 2,108
Net realized and unrealized gain (loss) $ (8,796) $ (8,270) $ 2,726
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Net Realized Gain (Loss) on Investments
Realized gains or losses are measured using the specific identification method whereby we measure the gain or loss by the difference between the net proceeds from repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized.
For the year ended December 31, 2023, we recorded a net realized loss of $1.0 million. The net realized loss was primarily driven by an October 2023 refinancing of our MS Credit Facility with our JPM Credit Facility. The refinancing led to a $1.5 million realized loss on the extinguishment of debt. The loss on the extinguishment of debt was partially offset by net realized gains on the portfolio of $0.5 million.
For the year ended December 31, 2022, we recorded a net realized gain of $0.5 million. The net realized gain was primarily driven by two investments. In December 2022, we partially exited our first lien debt position of Monumental RSN LLC, which led to a realized gain of $0.1 million. In July 2022, we fully exited our first lien debt position of Chudy Group LLC, which also led to a realized gain of $0.1 million.
For the year ended December 31, 2021, we recorded a net realized gain of $0.6 million. The net realized gain was primarily driven by the exit of our subordinated debt position of Jakks Pacific, Inc. in July 2021, which lead to a realized gain of $0.6 million.
Net Change in Unrealized Appreciation (Depreciation) on Investments
Net change in unrealized appreciation or depreciation is 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.
For the year ended December 31, 2023, we recorded unrealized appreciation of $5.8 million on 81 portfolio company investments, which was offset by $12.8 million of unrealized depreciation on 84 portfolio company investments. The unrealized appreciation primarily resulted from improved performance of certain portfolio companies and the reversal of unrealized depreciation. The unrealized depreciation was primarily due to isolated deterioration in the credit performance of a small number of portfolio companies. Additionally, $0.8 million of the net unrealized loss was driven by a change in deferred taxes. The overall unrealized net depreciation on our portfolio was primarily driven by market volatility during 2023.
For the year ended December 31, 2022, we recorded an unrealized appreciation of $2.0 million on 51 portfolio company investments which was offset by $10.0 million of unrealized depreciation on 77 portfolio company investments. The unrealized appreciation primarily resulted from improved performance of certain portfolio companies and the reversal of previously recorded unrealized depreciation. The unrealized depreciation primarily resulted from overall price declines across our portfolio and the reversal of unrealized appreciation in 2021. Additionally, $0.8 million of the net unrealized loss was driven by a change in deferred taxes. The overall unrealized net depreciation on our portfolio was primarily driven by market volatility during 2022.
For the year ended December 31, 2021, we recorded an unrealized appreciation of $2.4 million on 55 portfolio company investments which was offset by $0.3 million of unrealized depreciation on 27 portfolio company investments. The appreciation was primarily driven by an overall improvement of the market from the pandemic and high credit performance of certain portfolio company investments. The unrealized depreciation primarily resulted from isolated deterioration in the credit performance of a small number of portfolio companies.
Recent Developments
Mergers
On January 24, 2024, we completed our previously announced acquisition of FBLC. Pursuant to the Merger Agreement, Merger Sub was first merged with and into FBLC, with FBLC continuing as the surviving company, and, immediately following the Merger, FBLC was then merged with and into us, with us continuing as the surviving company. In accordance with the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of FBLC's common stock was converted into the right to receive 0.4647 shares of our Common Stock. As a result of the Mergers, we issued an aggregate of 110.0 million shares of our Common Stock to FBLC stockholders.
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The Mergers will be accounted for as an asset acquisition of FBLC by us in accordance with the asset acquisition method of accounting as detailed in ASC 805-50, Business Combinations – Related Issues , with the fair value of total consideration paid in conjunction with the Mergers allocated to the assets acquired and liabilities assumed based on their relative fair values as of the date of the Mergers. Generally, under asset acquisition accounting, acquiring assets in groups not only requires ascertaining the cost of the asset (or net assets), but also allocating that cost to the individual assets (or individual assets and liabilities) that make up the group. The cost of the group of assets acquired in an asset acquisition is allocated to the individual assets acquired or liabilities assumed based on their relative fair values of net identifiable assets acquired other than certain “non-qualifying” assets (for example cash) and does not give rise to goodwill. We will be the accounting survivor of the Mergers.
Appointment of Officers
On January 23, 2024, our Board of Directors appointed George Talarico as our Chief Compliance Officer, effective January 23, 2024, upon the resignation of Colleen Corwell from such position. Ms. Corwell’s resignation is not a result of any disagreement with us on any matter relating to our operations, policies, practices or accounting matters.
On March 13, 2024, our Board of Directors appointed Blair Faulstich as our President, effective March 13, 2024. Mr. Faulstich is a senior managing director with BSP. Prior to joining BSP in 2011, Mr. Faulstich was a managing director and co-head of media and communications investment banking at Citadel Securities. Previously, he was a managing director in the media and communications investment banking group at Merrill Lynch. Mr. Faulstich has also held various positions at Deutsche Bank Alex. Brown and Arthur Andersen. Mr. Faulstich received a Master of Business Administration from Cornell University and a Bachelor of Arts from Principia College.
Effective as of March 13, 2024, Richard Byrne transitioned his responsibilities as the President of the Company to Mr. Faulstich. Mr. Byrne will continue to serve as the Company's Chief Executive Officer and the Chairman of our Board of Directors.
Neither Mr. Talarico nor Mr. Faulstich have any family relationships with any director or executive officer of the Company, and none of which is a party to any transaction that is required to be reported pursuant to Item 404(a) of Regulation S-K.
Distribution Declarations
On January 9, 2024, our Board of Directors declared a distribution of $0.43 per share of Common Stock, which we paid on January 11, 2024 to stockholders of record as of January 10, 2024.
On January 9, 2024, our Board of Directors declared a distribution of $28.35 per share of Series A Preferred Stock, which we paid on January 11, 2024 to stockholders of record as of January 10, 2024.
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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, 2023, we had issued 26.1 million shares of our Common Stock for net proceeds of $395.9 million, including shares issued pursuant to the DRIP. We had also issued 77,500 shares of Series A Preferred Stock for gross proceeds of $77.4 million. As of December 31, 2022, we had issued 24.6 million shares of our Common Stock for net proceeds of $373.7 million, including shares issued pursuant to the DRIP. We had also issued 36,147 shares of Series A Preferred Stock for gross proceeds of $36.1 million.
As of December 31, 2023, we had $55.2 million of cash. For the year ended December 31, 2023, net cash provided by operating activities was $66.1 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, 2023 was primarily a result of purchases of investments of $77.0 million, offset by sales and repayments of investments of $101.7 million. As of December 31, 2022, we had $26.2 million of cash. For the year ended December 31, 2022, net cash used in operating activities was $259.5 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, 2022 was primarily a result of purchases of investments of $327.9 million, offset by sales and repayments of investments of $58.6 million.
Net cash used in financing activities of $37.1 million during the year ended December 31, 2023 primarily related to payments on debt of $443.9 million, repayments on short-term borrowings of $89.4 million, common stockholder distributions of $31.2 million, and preferred stockholder distributions of $7.6 million partially offset by proceeds from debt of $384.0 million, proceeds from issuance of common stock of $9.9 million, proceeds from issuance of preferred stock of $41.4 million, proceeds from short-term borrowings of $68.6 million, and proceeds from secured borrowings of $33.3 million. Net cash provided by financing activities of $272.9 million during the year ended December 31, 2022 primarily related to proceeds from debt of $242.5 million, proceeds from issuance of common stock of $142.0 million, proceeds from issuance of preferred stock of $31.1 million, and proceeds from short-term borrowings of $189.1 million partially offset by payments on debt of $100.5 million, repayments on short-term borrowings of $209.6 million, and common stockholder distributions of $19.2 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, 2023, we are party to the JPM Credit Facility, which is defined in and described in more detail in Note 5 - Borrowings . 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. As of December 31, 2023, our asset coverage ratio was 197%.
As of December 31, 2023, we had $78.0 million of availability under the JPM Credit Facility (subject to borrowing base availability), and had approximately $0.9 million of uncalled capital commitments to purchase shares of our Common Stock. As of December 31, 2022, we had $43.5 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 $262.6 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 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. federal income taxes on any income that we distribute as dividends for U.S. federal income tax purposes to our stockholders. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to maintain RIC tax treatment, we must distribute to our stockholders, for each tax year, an amount equal to at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss and determined without regard to any deduction for dividends paid, or the annual distribution requirement. Even if we qualify as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to state, local, and foreign taxes.
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Additionally, in order to avoid the imposition of a U.S. federal excise tax, we are required to distribute, in respect of each calendar year, dividends to our stockholders of an amount at least equal to the sum of 98% of our calendar year net ordinary income (taking into account certain deferrals and elections); 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one year period ending on December 31 of such calendar year; and any net ordinary income and capital gain net income for preceding calendar years that were not distributed during such calendar years and on which we previously did not incur any U.S. federal income tax. If we fail to qualify as a RIC for any reason and become subject to U.S federal income corporate tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on us and our stockholders. In addition, we could be required to recognize unrealized gains, incur substantial taxes and interest and make substantial distributions in order to re-qualify as a RIC. We cannot assure stockholders that they will receive any distributions. See “ Item 1. Business – Certain U.S. Federal Income Tax Considerations .”
Distributions
The amount of each distribution is subject to the discretion of our Board of Directors and applicable legal restrictions related to the payment of distributions. We calculate each stockholder’s specific distribution amount for the quarter using record and declaration dates.
The table shows the components of the distributions we have declared and/or paid to common stockholders for the years ended December 31, 2023, 2022, and 2021 (dollars in thousands):
For the years ended December 31,
2023 2022 2021
Distributions declared $ 43,574 $ 27,309 $ 2,293
Distributions paid $ 43,594 $ 27,276 $ 2,293
Portion of distributions paid in cash $ 31,155 $ 19,203 $ 1,503
Portion of distributions paid in DRIP shares $ 12,439 $ 8,073 $ 790
The table shows the components of the distributions we have declared and/or paid to preferred stockholders during the years ended December 31, 2023, 2022, and 2021 (dollars in thousands):
For the years ended December 31,
2023 2022 2021
Distributions declared $ 7,615 $ 1,367 $ —
Distributions paid $ 7,615 $ 1,367 $ —
Portion of distributions paid in cash $ 7,615 $ 1,367 $ —
Portion of distributions paid in DRIP shares $ — $ — $ —
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 years ended December 31, 2023, 2022, and 2021, 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, 2023 will be reported to stockholders shortly after the end of the calendar year 2023 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.
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Related Party Transactions and Agreements
Investment Advisory Agreement
We entered into an amendment and restatement of the Investment Advisory Agreement (the “Amended and Restated Investment Advisory Agreement”), dated as of January 24, 2024, which was approved by our Board of Directors and our stockholders in connection with the consummation of the Mergers, 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. 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. 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.
Administration Agreement
On September 23, 2020, we entered into the Administration Agreement with BSP, pursuant to which BSP provides us with office facilities and administrative services. We reimburse BSP quarterly for all administrative costs and expenses incurred by our Adviser in performing our obligations under the Administration Agreement and annually for overhead expenses incurred in the course of performing our obligations under the Administration Agreement, including rent, travel and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs, including operations and tax professionals, and administrative staff providing support services in respect of us. The Administration Agreement may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. For the years ended December 31, 2023, 2022, and 2021, we incurred $1.2 million, $0.8 million, and $0.7 million, 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
The 1940 Act generally prohibits BDCs from entering into negotiated co-investments with affiliates absent an order from the SEC. The SEC has granted exemptive relief to affiliates of the Adviser that allows us to enter into certain negotiated co-investment transactions alongside other funds managed by Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with the Order. 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.
Borrowings
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. As of December 31, 2023, the aggregate principal amount outstanding of the senior securities issued by us was $399.5 million and our asset coverage was 197%. We are continually exploring forms of debt financing which could include new or expanded credit facilities or the issuance of senior securities that are debt or stock. 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 JPMorgan.
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JPM Credit Facility
On October 4, 2023, we refinanced the MS Credit Facility with a $400.0 million credit facility with FBCC Jupiter Funding, LLC, a wholly-owned, consolidated special purpose financing subsidiary of us, as borrower (“Jupiter Funding”), the Adviser, as portfolio manager, the lenders party thereto, U.S. Bank National Association, as securities intermediary, U.S. Bank Trust Company, National Association as collateral administrator and collateral agent, and JPMorgan Chase Bank, National Association, as administrative agent (the “JPM Credit Facility”). The JPM Credit Facility provides for borrowings through October 4, 2026, and any amounts borrowed under the JPM Credit Facility will mature on October 4, 2027. Borrowings under the JPM Credit Facility will bear interest at a benchmark rate, currently SOFR, plus a margin of 2.75% per annum, which is inclusive of an administrative agent fee. Interest is payable quarterly in arrears. Jupiter Funding will be subject to a non-usage fee of 0.75%, which is inclusive of the administrative agent fee, to the extent the commitments available under the JPM Credit Facility have not been borrowed. Jupiter Funding paid an upfront fee and incurred other customary costs and expenses in connection with the JPM Credit Facility.
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, 2023 and 2022, we had short-term borrowings outstanding of $0 and $20.8 million, respectively. For the years ended December 31, 2023, 2022, and 2021, we recorded interest expense of $1.7 million, $2.2 million, and $0.1 million, respectively, in connection with short-term borrowings. For the period January 1, 2023 through August 14, 2023 (period for which we had short-term borrowings), we had an average outstanding balance of short-term borrowings of $32.7 million and bore interest at a weighted average rate of 0.02%. For the year ended December 31, 2022, we had an average outstanding balance of short-term borrowings of $44.0 million and bore interest at a weighted average rate of 0.01%.
Secured Borrowings
On August 21, 2023, we entered into a total return swap (“TRS”) with Nomura. A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. We pay interest to Nomura for each loan at a rate equal to three-month SOFR plus 3.60% per annum. Upon the termination or repayment of any loan under the TRS, we will either receive from Nomura the appreciation in the value of such loan or pay to Nomura any depreciation in the value of such loan. The scheduled termination date for the TRS is February 17, 2025. We may terminate the TRS prior to February 17, 2025 upon the occurrence of certain events but in certain circumstances may be required to pay certain termination fees.
As of December 31, 2023, all total return swaps on the Nomura TRS were entered into contemporaneously with our sale of their reference assets. Due to our continuing involvement in these assets, these assets are not derecognized under ASC Topic 860 -- Transfers and Servicing , and are presented on our consolidated schedule of investments. Financing amounts related to these assets are presented as secured borrowings on our consolidated statement of assets and liabilities. Any margin paid to the counterparty under the terms of the TRS agreement is included in the “Due from broker” on our consolidated statements of assets and liabilities.
The TRS is subject to the SEC rule related to the use of derivatives, reverse repurchase agreements and certain other transactions by registered investment companies. The rule requires that we trade derivatives and other transactions that create future payment or delivery obligations subject to a value-at-risk leverage limit and certain derivatives risk management program and reporting requirements. Generally, these requirements apply unless we qualify as a “limited derivatives user,” as defined in the rule, in which case certain exceptions to these conditions would apply. We may qualify as a limited derivatives user if it adopts and implements written policies and procedures reasonably designed to manage our derivatives risk and our derivatives exposure does not exceed 10 percent of our net assets as calculated in accordance with the rule.
As of December 31, 2023 and December 31, 2022, we had secured borrowings outstanding of $33.3 million and $0, respectively. For the years ended December 31, 2023, 2022, and 2021 we recorded interest expense of $0.8 million, $0, and $0, respectively, in connection with secured borrowings. For the period August 21, 2023 through December 31, 2023, we had an average outstanding balance of secured borrowings of $30.5 million and bore interest at a weighted average rate of 8.98%.
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FBLC Borrowing Assumptions
The following is FBLC’s debt assumed by us as a result of the Mergers:
Wells Fargo Credit Facility
On August 28, 2020, FBLC entered into a $300.0 million revolving credit facility with FBLC, as collateral manager, Funding I, a wholly owned, consolidated special purpose financing subsidiary, as borrower, the lenders party thereto, Wells Fargo, as administrative agent, and U.S. Bank Trust Company, National Association, as collateral agent and collateral custodian (the “Wells Fargo Credit Facility”).
Pursuant to an amendment entered into on August 25, 2023 (the "Third Amendment"), the Wells Fargo Credit Facility provides for borrowings through August 25, 2026, and any amounts borrowed under the Wells Fargo Credit Facility will mature on August 25, 2028. Effective with the Third Amendment, the Wells Fargo Credit Facility has an interest rate of daily simple SOFR (with a daily simple SOFR floor of zero), plus a spread of 2.75% per annum. Interest is payable quarterly in arrears. Funding I will be subject to a non-usage fee to the extent the commitments available under the Wells Fargo Credit Facility have not been borrowed. The non-usage fee per annum is 0.50% for the first 25% of the unused balance and increases to 2.00% for any remaining unused balance.
Previously, pursuant to an amendment entered into on May 27, 2022 (the "Second Amendment"), the benchmark rate was transitioned from LIBOR to SOFR. Effective with the Second Amendment, the Wells Fargo Credit Facility had an interest rate of daily simple SOFR (with a daily simple SOFR floor of zero), plus a spread calculated based upon the composition of loans in the collateral pool, not to exceed 2.60% per annum. Prior to the Second Amendment, the Wells Fargo Credit Facility had an interest rate of three-month LIBOR (with a LIBOR floor of zero) plus a spread calculated based upon the composition of loans in the collateral pool, not to exceed 2.75% per annum. Funding I paid a structuring fee and incurred other customary costs and expenses in connection with the Wells Fargo Credit Facility and the amendments thereto. Pursuant to an amendment entered into on April 6, 2021(the "First Amendment"), the non-usage fee for any unused portion of the Wells Fargo Credit Facility was temporarily reduced until September 30, 2021. Additionally, the maximum spread was reduced from 2.75% to 2.50% as a result of this amendment. The other terms of the Wells Fargo Credit Facility were unchanged.
Funding I’s obligations under the Wells Fargo Credit Facility are secured by a first priority security interest in substantially all of the assets of Funding I, including its portfolio of investments and FBLC’s equity interest in Funding I. The obligations of Funding I under the Wells Fargo Credit Facility are non-recourse to FBLC.
In connection with the Wells Fargo Credit Facility, FBLC and Funding I have made certain representations and warranties and are required to comply with various covenants and other customary requirements. The Wells Fargo Credit Facility contains customary default provisions pursuant to which the administrative agent and the lenders under the Wells Fargo Credit Facility may terminate FBLC in its capacity as collateral manager/portfolio manager under the Wells Fargo Credit Facility. Upon the occurrence of an event of default under the Wells Fargo Credit Facility, the administrative agent or the lenders may declare the outstanding advances and all other obligations under the Wells Fargo Credit Facility immediately due and payable.
Following the Mergers, the Wells Fargo Credit Facility was assumed by the Company.
FBLC JPM Credit Facility
On August 28, 2020, FBLC, through a wholly-owned, consolidated special purpose financing subsidiary, 57th Street, entered into a $300.0 million revolving credit facility (subsequently amended to $400.0 million, as described below) with JPMorgan, and U.S. Bank Trust Company, National Association, as collateral agent, collateral administrator and securities intermediary (the “FBLC JPM Credit Facility”).
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Pursuant to an amendment entered into on September 15, 2023 (the "FBLC JPM 2023 Amendment"), the FBLC JPM Credit Facility provides for borrowings through September 15, 2026, and any amounts borrowed under the FBLC JPM Credit Facility will mature on September 15, 2027. In addition to extending the reinvestment period and maturity date of the FBLC JPM Credit Facility, the FBLC JPM 2023 Amendment, among other things, (1) changed the interest rate to SOFR plus 2.80% (subject to further increases consistent with the terms of the FBLC JPM Credit Facility), which is inclusive of an administrative agent fee, (2) increased the financing amount for which FBLC and 57th Street are permitted to submit a commitment increase request to up to $800.0 million, and (3) amended the non-usage fee to be 0.75%, inclusive of an administrative agent fee. The non-usage fee of 0.75% (inclusive of an administrative agent fee) applies to the first 20% of the unused balance and increases to 3.00% for any remaining unused balance. 57th Street paid an upfront fee and incurred other customary costs and expenses in connection with the FBLC JPM 2023 Amendment. Interest is payable quarterly in arrears.
Previously, on December 9, 2022, FBLC and 57th Street entered into an amendment (the "FBLC JPM 2022 Amendment") to the FBLC JPM Credit Facility. The FBLC JPM 2022 Amendment, among other things, (1) extended the maturity date of the FBLC JPM Credit Facility to August 28, 2024, (2) extended the maturity date, upon the exercise of the Extension Options (as defined in the FBLC JPM Credit Facility), of the FBLC JPM Credit Facility to August 28, 2025, and (3) changed the benchmark rate and applicable interest rate under the FBLC JPM Credit Facility to three-month Term SOFR plus 3.00% per annum (subject to further increases consistent with the terms of the FBLC JPM Credit Facility). Pursuant to the FBLC JPM 2022 Amendment, the non-usage fee per annum was 0.75% for the first 20% of the unused balance and increased to 3.00% for any remaining unused balance. 57th Street paid an upfront fee and incurred other customary costs and expenses in connection with the FBLC JPM 2022 Amendment.
Prior to the FBLC JPM 2022 Amendment, the FBLC JPM Credit Facility had an interest rate of three-month LIBOR (with a LIBOR floor of zero), plus a spread of 2.75% per annum. For the period from August 28, 2021 to December 8, 2022, the non-usage fee per annum was 0.75% for the first 20% of the unused balance and increased to 2.75% for any remaining unused balance. For the period from January 21, 2021 to August 27, 2021, the non-usage fee per annum was 0.50% for the first 20% of the unused balance and increased to 2.75% for any remaining unused balance. 57th Street paid a structuring fee and incurred other customary costs and expenses in connection with the FBLC JPM Credit Facility.
Previously, on January 21, 2021, FBLC entered into an amendment (the “FBLC JPM Amendment”) to the FBLC JPM Credit Facility. The FBLC JPM Amendment, among other things, increased the amount that 57th Street is permitted to borrow under the FBLC JPM Credit Agreement from $300.0 million to $400.0 million. On April 12, 2021, FBLC, through 57th Street, amended and restated the FBLC JPM Credit Facility. The amendment and restatement temporarily reduced the previous minimum funding amount until October 13, 2021. The other material terms of the FBLC JPM Credit Facility were unchanged.
57th Street’s obligations under the FBLC JPM Credit Facility are secured by a first priority security interest in substantially all of the assets of 57th Street, including its portfolio of investments and FBLC’s equity interest in 57th Street. The obligations of 57th Street under the FBLC JPM Credit Facility are non-recourse to FBLC.
In connection with the FBLC JPM Credit Facility, FBLC and 57th Street have made certain representations and warranties and are required to comply with various covenants and other customary requirements. The FBLC JPM Credit Facility contains customary default provisions pursuant to which the administrative agent and the lenders under the FBLC JPM Credit Facility may terminate FBLC in its capacity as collateral manager/portfolio manager under the FBLC JPM Credit Facility. Upon the occurrence of an event of default under the FBLC JPM Credit Facility, the administrative agent or the lenders may declare the outstanding advances and all other obligations under the FBLC JPM Credit Facility immediately due and payable.
Following the Mergers, the FBLC JPM Credit Facility was assumed by the Company.
FBLC JPM Revolver Facility
On June 10, 2022, FBLC entered into a $495.0 million revolving credit facility with JPMorgan, as administrative agent and as collateral agent, MUFG Union Bank, N.A., Sumitomo Mitsui Banking Corporation, and Wells Fargo Bank, National Association as syndication agents, as well as other Lender parties (the “FBLC JPM Revolver Facility”).
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The FBLC JPM Revolver Facility provides for borrowings through June 10, 2026, and any amounts borrowed under the FBLC JPM Revolver Facility will mature on June 10, 2027. The FBLC JPM Revolver Facility is priced at three-month Term SOFR, plus a spread calculated based upon the composition of loans in the collateral pool, which will not exceed 1.98% per annum. Interest is payable quarterly in arrears. FBLC will be subject to a non-usage fee of 0.38% to the extent the commitments available under the FBLC JPM Revolver Facility have not been borrowed. FBLC paid a structuring fee and incurred other customary costs and expenses in connection with the FBLC JPM Revolver Facility.
In connection with the FBLC JPM Revolver Facility, FBLC has made certain customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. The FBLC JPM Revolver Facility contains customary events of default for similar financing transactions. Upon the occurrence and during the continuation of an event of default, JPM may declare the outstanding advances and all other obligations under the FBLC JPM Revolver Facility immediately due and payable.
On December 8, 2023, FBLC amended and restated the FBLC JPM Revolver Facility (the “A&R FBLC JPM Revolver Facility”). The A&R FBLC JPM Revolver Facility, among other things, increases the aggregate amount of the lenders’ commitments to $505.0 million, extends the period for borrowings through December 8, 2027 and extends the maturity date for any amounts borrowed to December 8, 2028. The other material terms of the FBLC JPM Revolver Facility were unchanged. FBLC agreed to pay administrative agent fees and incurred other customary costs and expenses in connection with the A&R FBLC JPM Revolver Facility.
Following the Mergers, the A&R FBLC JPM Revolver Facility was assumed by the Company.
2024 Notes
On December 3, 2019, FBLC entered into a Purchase Agreement (the “2024 Notes Purchase Agreement”) with Sandler O’Neill & Partners, L.P (the “Initial Purchaser”) relating to FBLC’s sale of $100.0 million aggregate principal amount of its 4.85% fixed rate notes due 2024 (the “2024 Notes”) to the Initial Purchaser in a private placement in reliance on Section 4(a)(2) of the Securities Act, and for initial resale by the Initial Purchaser to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A promulgated under the Securities Act and to institutional accredited investors under Rule 501 (a)(1), (2), (3), or (7) under the Securities Act. FBLC relied upon these exemptions from registration based in part on representations made by the Initial Purchaser. The 2024 Notes Purchase Agreement also includes customary representations, warranties, and covenants by FBLC. Under the terms of the 2024 Notes Purchase Agreement, FBLC has agreed to indemnify the Initial Purchaser against certain liabilities under the Securities Act. The 2024 Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration. The net proceeds from the sale of the 2024 Notes were approximately $98.4 million, after deducting the Initial Purchaser’s discounts and commissions of approximately $1.2 million and estimated offering expenses of approximately $0.4 million, each payable by FBLC. FBLC used the net proceeds to repay outstanding indebtedness, to make investments in portfolio companies in accordance with its investment objectives, and for general corporate purposes. The 2024 Notes were issued pursuant to the Indenture dated as of December 19, 2017 (the “2017 Indenture”) between FBLC and U.S. Bank Trust Company, National Association, and a Third Supplemental Indenture, dated as of December 5, 2019, between FBLC and U.S. Bank Trust Company, National Association. The 2024 Notes will mature on December 15, 2024, unless repurchased or redeemed in accordance with their terms prior to such date. The 2024 Notes bear interest at a rate of 4.85% per year payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2020. The 2024 Notes are general unsecured obligations of FBLC that rank senior in right of payment to all of FBLC’s existing and future indebtedness that is expressly subordinated in right of payment to the 2024 Notes. The 2024 Notes will rank equally in right of payment with all of FBLC’s existing and future senior liabilities that are not so subordinated, effectively junior to any of FBLC’s secured indebtedness (including unsecured indebtedness that FBLC later secures) to the extent of the value of the assets securing such indebtedness, and structurally junior to all existing and future indebtedness incurred by FBLC’s subsidiaries, financing vehicles, or similar facilities, including credit facilities entered into by FBLC’s wholly owned, special purpose financing subsidiaries. The 2017 Indenture contains certain covenants, including covenants requiring FBLC to (i) comply with the asset coverage requirements of the 1940 Act, whether or not it is subject to those requirements, and (ii) provide financial information to the holders of the 2024 Notes and U.S. Bank Trust Company, National Association if FBLC is no longer subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. These covenants are subject to important limitations and exceptions that are described in the 2017 Indenture. In addition, if a change of control repurchase event, as defined in the 2017 Indenture, occurs prior to maturity, holders of the 2024 Notes will have the right, at their option, to require FBLC to repurchase for cash some or all of the 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes being repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.
Following the Mergers, the 2024 Notes were assumed by the Company.
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2026 Notes
On March 24, 2021, FBLC entered into a Purchase Agreement (the “2026 Notes Purchase Agreement”) with the initial purchaser listed therein relating to FBLC’s sale of $300.0 million aggregate principal amount of its 3.25% fixed rate notes due 2026 (the “Restricted 2026 Notes”) to the Initial Purchaser in a private placement in reliance on Section 4(a)(2) of the Securities Act, and for initial resale by the Initial Purchaser to qualified institutional buyers pursuant to the exemption from registration provided by Rule 144A promulgated under the Securities Act and to certain non-U.S. persons outside the United States pursuant to Regulation S under the Securities Act. FBLC relied upon these exemptions from registration based in part on representations made by the Initial Purchaser. The 2026 Notes Purchase Agreement also includes customary representations, warranties, and covenants by FBLC. Under the terms of the 2026 Notes Purchase Agreement, FBLC has agreed to indemnify the Initial Purchaser against certain liabilities under the Securities Act. The Restricted 2026 Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration. The net proceeds from the sale of the 2026 Notes were approximately $296.0 million, after deducting the Initial Purchaser’s discounts and commissions and estimated offering expenses. FBLC used the net proceeds to repay outstanding indebtedness, to make investments in portfolio companies in accordance with its investment objectives, and for general corporate purposes. The Restricted 2026 Notes were issued pursuant to the Indenture dated as of March 29, 2021 (the “2021 Indenture”), between FBLC and U.S. Bank Trust Company, National Association, and a Supplemental Indenture, dated as of March 29, 2021 (the “First Supplemental Indenture”), between FBLC and U.S. Bank Trust Company, National Association. The 2026 Notes (as defined below) will mature on March 30, 2026, unless repurchased or redeemed in accordance with their terms prior to such date. The 2026 Notes bear interest at a rate of 3.25% per year payable semi-annually on March 30 and September 30 of each year, commencing on September 30, 2021. The 2026 Notes are general unsecured obligations of FBLC that rank senior in right of payment to all of FBLC’s existing and future indebtedness that is expressly subordinated in right of payment to the 2026 Notes. The 2026 Notes will rank equally in right of payment with all of FBLC’s existing and future senior liabilities that are not so subordinated, effectively junior to any of FBLC’s secured indebtedness (including unsecured indebtedness that FBLC later secures) to the extent of the value of the assets securing such indebtedness, and structurally junior to all existing and future indebtedness incurred by FBLC’s subsidiaries, financing vehicles, or similar facilities, including credit facilities entered into by FBLC’s wholly owned, special purpose financing subsidiaries. The 2021 Indenture contains certain covenants, including covenants requiring FBLC to (i) comply with the asset coverage requirements of the 1940 Act, whether or not it is subject to those requirements, and (ii) provide financial information to the holders of the 2026 Notes and U.S. Bank Trust Company, National Association if FBLC is no longer subject to the reporting requirements under the Securities Exchange Act of 1934, as amended. These covenants are subject to important limitations and exceptions that are described in the 2021 Indenture. In addition, if a change of control repurchase event, as defined in the 2021 Indenture, occurs prior to maturity, holders of the 2026 Notes will have the right, at their option, to require FBLC to repurchase for cash some or all of the 2026 Notes at a repurchase price equal to 100% of the principal amount of the 2026 Notes being repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. Pursuant to a Registration Statement on Form N-14 (File No. 333-257321), on September 22, 2021, FBLC closed an exchange offer in which holders of the Restricted 2026 Notes were offered the opportunity to exchange their Restricted 2026 Notes for new registered notes with substantially identical terms (the “Unrestricted 2026 Notes” and, together with the Restricted 2026 Notes, the “2026 Notes”), through which holders representing 99.88% of the outstanding principal of the then Restricted 2026 Notes obtained Unrestricted 2026 Notes.
Following the Mergers, the 2026 Notes were assumed by the Company.
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Contractual Obligations
The following table shows our payment obligations for repayment of debt and other contractual obligations as of December 31, 2023 (dollars in thousands):
Payment Due by Period
Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years
JPM Facility (1)
$ 322,000 $ — $ — $ 322,000 $ —
Secured borrowings $ 33,344 — 33,344 — —
Total $ — $ 33,344 $ 322,000 $ —
—–—–—–—–—–
(1) As of December 31, 2023, we had $78.0 million in unused borrowing capacity under the JPM Facility, subject to borrowing base limits.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Commitments
In the ordinary course of business, we may enter into future funding commitments. As of December 31, 2023, we had unfunded commitments on delayed draw term loans of $34.3 million and unfunded commitments on revolver term loans of $42.2 million. As of December 31, 2022, we had unfunded commitments on delayed draw term loans of $56.1 million and unfunded commitments on revolver term loans of $47.5 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 consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we will evaluate our estimates, including those related to the matters described below. Actual results could differ from those estimates.
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. The critical accounting estimates should be read in conjunction with our risk factors as disclosed in “ Item 1A. Risk Factors .”
Valuation of Portfolio Investments
We are required to report our investments, including those for which current market values are not readily available, at fair value in accordance with ASC 820, Fair Value Measurements (“ASC 820”), which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the applicable measurement date, and Rule 2a-5 under the 1940 Act.
Investments for which market quotations are readily available are typically valued at those market quotations. All investments that are not publicly traded or whose market prices are not readily available, as is the case for substantially all of our investments, are valued at fair value as determined in good faith by our Valuation Designee, subject to oversight from our Board of Directors.
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As part of the valuation process, our Valuation Designee takes into account relevant factors in determining the fair value of our investments, including and in combination of:
• the estimated enterprise value of a portfolio company;
• indicative dealer quotes;
• the nature and realizable value of any collateral;
• the portfolio company’s ability to make payments based on its earnings and cash flow;
• the markets in which the portfolio company does business;
• a comparison of the portfolio company’s securities to any similar publicly traded securities; and
• overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future.
Our Valuation Designee, subject to oversight from our Board of Directors, undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments for which reliable market quotations are not readily available, or are available but deemed not reflective of the fair value of an investment, which includes, among other procedures, the following:
• Each portfolio company or investment will be valued by our Valuation Designee, with assistance from one or more independent valuation firms engaged by our Board of Directors;
• The independent valuation firm(s) conduct independent appraisals and make an independent assessment of the value of each investment; and
• Our Valuation Designee, under the supervision of our Board of Directors determines the fair value of each investment, in good faith, based on the input of independent valuation firms (to the extent applicable) and our Valuation Designee’s own analysis. Our Valuation Designee also has established the Valuation Committee to assist our Valuation Designee in carrying out its designated responsibilities, subject to oversight of our Board of Directors.
Our Valuation Designee, subject to oversight from our Board of Directors, has and will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of our portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, and our Valuation Designee may reasonably rely on that assistance. However, our Valuation Designee, subject to oversight from our Board of Directors, is responsible for the ultimate valuation of the portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.
Our accounting policy on the fair value of our investments is critical because the determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of these valuations, and any change in these valuations, on the consolidated financial statements.
See Note 2 - Summary of Significant Accounting Policies for a description of other accounting policies and recently issued accounting pronouncements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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