DEFM14A 1 d608072ddefm14a.htm DEFM14A DEFM14A
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒                             Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

  Preliminary Proxy Statement
  Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
  Definitive Proxy Statement
  Definitive Additional Materials
  Soliciting Material Pursuant to Rule 14a-12

CORPORATE CAPITAL TRUST, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

  No fee required.
  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
  1)  

Title of each class of securities to which transaction applies:

 

     

  2)  

Aggregate number of securities to which transaction applies:

 

     

  3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

     

  4)  

Proposed maximum aggregate value of transaction:

 

     

  5)  

Total fee paid:

 

     

  Fee paid previously with preliminary materials:
  Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing.
  1)  

Amount Previously Paid:

 

     

  2)  

Form, Schedule or Registration Statement No.:

 

     

  3)  

Filing Party:

 

     

  4)  

Date Filed:

 

     

 

 

 


Table of Contents

LOGO

FS INVESTMENT CORPORATION

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Stockholders,

You are cordially invited to attend an Annual Meeting of Stockholders of FS Investment Corporation, or “FSIC,” to be held on December 3, 2018 at 2:00 p.m., Eastern Time, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112 (together with any adjournments or postponements thereof, the “FSIC Annual Meeting”).

The Notice of Annual Meeting of Stockholders and joint proxy statement/prospectus accompanying this letter provide an outline of the business to be conducted at the FSIC Annual Meeting. At the FSIC Annual Meeting, you will be asked to consider and vote upon:

 

  (i)

a proposal to approve the issuance of shares of FSIC common stock, $0.001 par value per share, or “FSIC Common Stock,” to be issued pursuant to the Agreement and Plan of Merger dated as of July 22, 2018, or the “Merger Agreement,” by and among FSIC, Corporate Capital Trust, Inc., or “CCT,” IC Acquisition, Inc., a wholly owned subsidiary of FSIC, or “Merger Sub,” and FS/KKR Advisor, LLC, or the “Advisor” (such proposal is referred to herein as the “Merger Stock Issuance Proposal”);

 

  (ii)

a proposal to elect or approve the appointment of the following individuals, in each case subject to the conditions set forth in the joint proxy statement/prospectus accompanying this letter: (a) Todd Builione as a Class B director, who has been nominated for election for a three-year term expiring at the 2021 annual meeting of the stockholders, (b) Richard Goldstein and Brian R. Ford as Class B directors, each of whom has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for a three-year term expiring at the 2021 annual meeting of the stockholders, (c) Barbara Adams, Jerel A. Hopkins and Frederick Arnold as Class C directors, each of whom has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for the remainder of a term expiring at the 2019 annual meeting of the stockholders, and (d) James H. Kropp as a Class A director, who has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for the remainder of a three-year term expiring at the 2020 annual meeting of the stockholders (such proposal is referred to herein as the “FSIC Director Election Proposal”);

 

  (iii)

a proposal to allow FSIC in future offerings to sell its shares below net asset value, or NAV, per share in order to provide flexibility for future sales (such proposal is referred to herein as the “Share Issuance Proposal”); and

 

  (iv)

a proposal to amend the Investment Advisory Agreement, dated April 9, 2018, by and between FSIC and the Advisor (the “Investment Advisory Agreement”) to (a) exclude cash and cash equivalents from the gross assets on which the annual base management fee is calculated, (b) revise the calculation under the Investment Advisory Agreement of the cap on the subordinated incentive fee on income to take into account the historic per share pre-incentive fee return of both FSIC and CCT, together with the historic per share incentive fees paid by both FSIC and CCT, and (c) revise the calculation of incentive fees on capital gains to include historical net realized losses and unrealized depreciation of both FSIC and CCT.

FSIC and CCT are proposing a combination of both companies by a merger and related transactions, or the “Merger,” pursuant to the Merger Agreement in which Merger Sub would merge with and into CCT with CCT continuing as the surviving company. Immediately following the Merger, in a subsequent combination, the surviving company would merge with and into FSIC with FSIC continuing as the surviving company.

Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each holder of CCT common stock, $0.001 par value per share, or “CCT Common Stock,” issued and outstanding immediately


Table of Contents

prior to the effective time of the Merger will have the right to receive, for each share of CCT Common Stock, that number of shares of FSIC Common Stock with a NAV equal to the NAV of a share of CCT Common Stock, in each case calculated as of the same date within two (2) business days prior to the closing of the Merger, or the “Merger Consideration.” Holders of CCT Common Stock will receive cash in lieu of fractional shares.

The market value of the Merger Consideration will fluctuate with changes in the market price of FSIC Common Stock. We urge you to obtain current market quotations of FSIC Common Stock. FSIC Common Stock trades on the New York Stock Exchange (the “NYSE”) under the ticker symbol “FSIC.” The following table shows the closing sale prices of FSIC Common Stock and CCT Common Stock, as reported on the NYSE on December 8, 2017, the last trading day before the public announcement of the joint venture between FS Investments and KKR Credit Advisors (US) LLC, and on July 20, 2018, the last trading day before the public announcement of the Merger.

 

     FSIC
Common
Stock
     CCT
Common
Stock
 

Closing Sales Price at December 8, 2017

   $ 7.80      $ 18.98  

Closing Sales Price at July 20, 2018

   $ 7.90      $ 16.73  

Your vote is extremely important. At the FSIC Annual Meeting, you will be asked to vote on the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal. The approval of each of the Merger Stock Issuance Proposal and the FSIC Director Election Proposal require the affirmative vote of at least a majority of the votes cast by holders of FSIC Common Stock at a meeting at which a quorum is present. The approval of the Share Issuance Proposal requires the affirmative vote of the stockholders of FSIC holding (1) a majority of the outstanding shares of FSIC Common Stock and (2) a majority of outstanding shares of FSIC Common Stock that are not held by affiliated persons of FSIC. The approval of the Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSIC Common Stock. Under the Investment Company Act of 1940, as amended, or the 1940 Act, a majority of the outstanding shares FSIC Common Stock may be the lesser of: (1) 67% of the FSIC Common Stock at the FSIC Annual Meeting if the holders of more than 50% of the outstanding shares of FSIC Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSIC Common Stock.

Abstentions and broker non-votes (which occur when a beneficial owner does not instruct its broker, bank or other institution or nominee holding its shares of FSIC Common Stock on its behalf) will have no effect on the outcome of the Merger Stock Issuance Proposal or the FSIC Director Election Proposal. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

After careful consideration, the board of directors of FSIC unanimously recommends that FSIC stockholders vote “FOR” each of the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

It is important that your shares of FSIC Common Stock be represented at the FSIC Annual Meeting. If you are unable to attend the FSIC Annual Meeting in person, we urge you to complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card. If you do not vote, it may result in FSIC not having a sufficient quorum of one-third of outstanding FSIC Common Stock represented in person or by proxy at the FSIC Annual Meeting and a meeting cannot be held unless a quorum is present.

This joint proxy statement/prospectus concisely describes the FSIC Annual Meeting, the Merger, the documents related to the Merger (including the Merger Agreement) and other related matters that FSIC stockholders ought to know before voting on the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal and


Table of Contents

should be retained for future reference. Please carefully read this entire document, including “Risk Factors” beginning on page 24, for a discussion of the risks relating to the Merger. You also can obtain information about FSIC and CCT from documents that each has filed with the U.S. Securities and Exchange Commission. See “Where You Can Find More Information” for instructions on how to obtain such information.

Sincerely,

Michael C. Forman

Chairman and Chief Executive Officer of FS Investment Corporation

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of the shares of FSIC Common Stock to be issued under this joint proxy statement/prospectus or determined if this joint proxy statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This joint proxy statement/prospectus is dated September 26, 2018 and it is first being mailed or otherwise delivered to FSIC stockholders on or about October 3, 2018.

 

 

FS Investment Corporation

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 

  

 

Corporate Capital Trust, Inc.

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 


Table of Contents

 

 

LOGO

FS INVESTMENT CORPORATION

201 Rouse Boulevard

Philadelphia, PA 19112

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To Be Held On December 3, 2018

To the Stockholders of FS Investment Corporation:

NOTICE IS HEREBY GIVEN THAT an annual meeting of stockholders of FS Investment Corporation, or “FSIC,” will be held at 201 Rouse Boulevard, Philadelphia, PA 19112 on December 3, 2018, at 2:00 p.m., Eastern Time (together with any adjournments or postponements thereof, the “FSIC Annual Meeting”), for the following purpose:

 

1.

To consider and vote upon a proposal to approve the issuance of shares of FSIC common stock, $0.001 par value per share, or “FSIC Common Stock,” to be issued pursuant to the Agreement and Plan of Merger dated as of July 22, 2018, or the “Merger Agreement,” by and among FSIC, Corporate Capital Trust, Inc. and IC Acquisition, Inc., a wholly owned subsidiary of FSIC (such proposal is referred to herein as the “Merger Stock Issuance Proposal”);

 

2.

To consider and vote upon a proposal to elect or approve the appointment of the following individuals, in each case subject to the conditions set forth in the joint proxy statement/prospectus accompanying this notice: (a) Todd Builione as a Class B director, who has been nominated for election for a three-year term expiring at the 2021 annual meeting of the stockholders, (b) Richard Goldstein and Brian R. Ford as Class B directors, each of whom has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for a three-year term expiring at the 2021 annual meeting of the stockholders, (c) Barbara Adams, Jerel A. Hopkins and Frederick Arnold as Class C directors, each of whom has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for the remainder of a term expiring at the 2019 annual meeting of the stockholders, and (d) James H. Kropp as a Class A director, who has been conditionally appointed by the FSIC board of directors to fill a vacancy and serve for the remainder of a three-year term expiring at the 2020 annual meeting of the stockholders (such proposal is referred to herein as the “FSIC Director Election Proposal”);

 

3.

To consider and vote upon a proposal to allow FSIC in future offerings to sell its shares below NAV per share in order to provide flexibility for future sales (such proposal is referred to herein as the “Share Issuance Proposal”); and

 

4.

To consider and vote upon a proposal to amend the Investment Advisory Agreement to (a) exclude cash and cash equivalents from the gross assets on which the annual base management fee is calculated, (b) revise the calculation under the Investment Advisory Agreement of the cap on the subordinated incentive fee on income to take into account the historic per share pre-incentive fee return of both FSIC and CCT, together with the historic per share incentive fees paid by both FSIC and CCT, and (c) revise the calculation of incentive fees on capital gains to include historical net realized losses and unrealized depreciation of both FSIC and CCT (such proposal is referred to herein as the “Advisory Agreement Amendment Proposal”).

The FSIC board of directors has unanimously approved each of (i) the Merger Agreement and related transactions (the “Merger”), (ii) the issuance of shares of FSIC Common Stock pursuant to the Merger Agreement, (iii) the Share Issuance Proposal and (iv) the Advisory Agreement Proposal and unanimously recommends that FSIC stockholders vote “FOR” each of the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.


Table of Contents

It is important that your shares of FSIC Common Stock be represented at the FSIC Annual Meeting. If you are unable to attend the FSIC Annual Meeting in person, please complete, date and sign the enclosed proxy card and promptly return it in the envelope provided. If you prefer, you can save time by voting through the Internet or by telephone as described in this joint proxy statement/prospectus and on the enclosed proxy card.

The Merger and the Merger Agreement are each described in more detail in this joint proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. Attached to this joint proxy statement/prospectus is a copy of the Merger Agreement as Annex A.

The Advisory Agreement Amendment Proposal is described in more detail in this joint proxy statement/prospectus, which you should read carefully and in its entirety before authorizing a proxy to vote. Attached to this joint proxy statement/prospectus is a copy of the Proposed Advisory Agreement as Annex B.

The board of directors of FSIC has fixed the close of business on September 14, 2018 as the record date for the determination of stockholders entitled to notice of, and to vote at, the FSIC Annual Meeting.

Important notice regarding the availability of proxy materials for the FSIC Annual Meeting. FSIC’s joint proxy statement/prospectus and the proxy card are available at www.proxyvote.com.

If you plan on attending the FSIC Annual Meeting and voting your shares of FSIC Common Stock in person, you will need to bring photo identification in order to be admitted to the FSIC Annual Meeting. To obtain directions to the FSIC Annual Meeting, please call FSIC at (877) 628-8575.

By Order of the Board of Directors,

Stephen S. Sypherd

General Counsel and Secretary

September 26, 2018

FSIC stockholders are requested to promptly authorize a proxy over the Internet or by telephone, or execute and return the accompanying proxy card, which is being solicited by the board of directors of FSIC. Instructions are shown on the proxy card. Authorizing a proxy is important to ensure a quorum at the FSIC Annual Meeting. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy, or by attending the FSIC Annual Meeting and voting in person.


Table of Contents

LOGO

CORPORATE CAPITAL TRUST, INC.

201 Rouse Boulevard

Philadelphia, PA 19112

September 26, 2018

Dear Fellow Stockholders:

We invite you to attend the 2018 Annual Meeting of Stockholders (together with any adjournments or postponements thereof, the “CCT Annual Meeting”) of Corporate Capital Trust, Inc., or “CCT,” which will be held at Corporate Capital Trust, Inc., 201 Rouse Boulevard, Philadelphia, PA 19112 on December 3, 2018 at 3:00 p.m., Eastern Time.

The Notice of Annual Meeting of Stockholders and joint proxy statement/prospectus accompanying this letter provide an outline of the business to be conducted at the CCT Annual Meeting. At the CCT Annual Meeting, you will be asked to consider and vote upon:

 

  (i)

a proposal to adopt the Agreement and Plan of Merger dated as of July 22, 2018, or the “Merger Agreement,” by and among FS Investment Corporation, or “FSIC,” CCT, IC Acquisition, Inc., a wholly owned subsidiary of FSIC, or “Merger Sub,” and FS/KKR Advisor, LLC, or the “Advisor” (such proposal is referred to herein as the “Merger Proposal”);

 

  (ii)

a proposal to re-elect Laurie Simon Hodrick as a director for a term expiring upon the earlier of (A) the completion of the Merger (as defined below) and (B) the 2021 annual meeting of stockholders and until her successor is duly elected and qualified (such proposal is referred to herein as the “CCT Class I Director Election Proposal”); and

 

  (iii)

a proposal to ratify the appointment of Deloitte & Touche LLP (“Deloitte”) as CCT’s independent registered public accounting firm for 2018 (such proposal is referred to herein as the “CCT Auditor Proposal”).

The Merger Agreement provides for a combination of CCT and FSIC via a merger and related transactions (the “Merger”). Pursuant to the Merger Agreement, Merger Sub would merge with and into CCT, with each share of Merger Sub being converted into one share of CCT common stock, $0.001 par value per share (“CCT Common Stock”). CCT would then merge with and into FSIC, with FSIC surviving the Merger. Each share of CCT Common Stock (except for shares held by FSIC) would then be converted into the right to receive that number of shares of FSIC common stock, par value $0.01 (“FSIC Common Stock”), with a NAV equal to the NAV of a share of CCT Common Stock, in each case calculated as of the same date within two (2) business days prior to the closing of the Merger (the “Merger Consideration”).

The value of the Merger Consideration will fluctuate with changes in the market price of FSIC Common Stock. We urge you to obtain current market quotations of FSIC Common Stock. FSIC Common Stock trades on the NYSE under the ticker symbol “FSIC.” The following table shows the closing sale prices of FSIC Common Stock and CCT Common Stock, as reported on the NYSE on December 8, 2017, the last trading day before the public announcement of the joint venture between FS Investments and KKR Credit Advisors (US) LLC, and on July 20, 2018, the last trading day before the public announcement of the Merger.

 

     FSIC
Common
Stock
     CCT
Common
Stock
 

Closing Sales Price at December 8, 2017

   $ 7.80      $ 18.98  

Closing Sales Price at July 20, 2018

   $ 7.90      $ 16.73  


Table of Contents

The holders of at least one-third of CCT’s outstanding shares, par value $0.001 per share, must be present at the CCT Annual Meeting in order for the proposals to be voted upon. The approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of CCT Common Stock entitled to vote at the CCT Annual Meeting. The approval of the CCT Class I Director Election Proposal requires the affirmative vote of a majority of the total votes cast for and against the director nominee at the CCT Annual Meeting. The approval of the CCT Auditor Proposal requires the affirmative vote of a majority of the votes cast at the CCT Annual Meeting, provided that a quorum is present.

Abstentions and broker non-votes will have no effect on the outcome of the CCT Class I Director Election Proposal or the CCT Auditor Proposal. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Merger Proposal.

Your vote is very important. Your immediate response will help avoid potential delays.

CCT’s board of directors unanimously recommends that CCT stockholders vote FOR each of (i) the Merger Proposal, (ii) the CCT Class I Director Election Proposal and (iii) the CCT Auditor Proposal. No other business is expected to be presented at the CCT Annual Meeting.

Again, it is important that your shares of CCT Common Stock be represented and voted at the CCT Annual Meeting. Therefore, we urge you to promptly vote and submit your proxy via the Internet or by phone, or by signing, dating and returning the enclosed proxy card or voting instruction form in the enclosed envelope. If you attend the CCT Annual Meeting, you can vote in person, even if you have previously submitted your proxy. Your vote and participation in the governance of CCT are very important to us.

On behalf of CCT’s board of directors, we would like to express our appreciation for your investment in Corporate Capital Trust, Inc. We look forward to greeting as many of you as possible at the CCT Annual Meeting.

 

Sincerely,

Michael C. Forman

Chief Executive Officer of Corporate Capital Trust, Inc.

This joint proxy statement/prospectus is dated September 26, 2018 and it is first being mailed or otherwise delivered to CCT stockholders on or about October 3, 2018.

 

 

Corporate Capital Trust, Inc.

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 

  

 

FS Investment Corporation

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

 

 


Table of Contents

YOUR VOTE IS IMPORTANT

PLEASE SUBMIT YOUR PROXY PROMPTLY

Please help reduce corporate expenses by submitting your vote via the Internet at www.proxyvote.com.

 

 

 

 

LOGO

CORPORATE CAPITAL TRUST, INC.

201 Rouse Boulevard

Philadelphia, PA 19112

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

Date:    December 3, 2018
Time:    3:00 p.m., Eastern Time
Place:    Corporate Capital Trust, Inc., 201 Rouse Boulevard, Philadelphia, PA 19112
CCT Record Date:    September 14, 2018. Only stockholders of record as of the close of business on the CCT Record Date are entitled to notice of, to attend and to vote at the 2018 Annual Meeting of Stockholders of Corporate Capital Trust, Inc., or “CCT” (together with any adjournments or postponements thereof, the “CCT Annual Meeting”).
Items of Business:   

•  To consider and vote upon a proposal to adopt the Agreement and Plan of Merger dated as of July 22, 2018, or the “Merger Agreement,” by and among FS Investment Corporation, or “FSIC,” CCT, IC Acquisition, Inc., a wholly owned subsidiary of FSIC, or “Merger Sub,” and FS/KKR Advisor, LLC, pursuant to which Merger Sub will merge with and into CCT and then with and into FSIC, with FSIC surviving the merger (the “Merger”). Subject to the terms and conditions of the Merger Agreement, if the Merger is completed, each holder of shares of CCT common stock issued and outstanding immediately prior to the effective time of the Merger will have the right to receive, in respect of each share of CCT common stock, that number of shares of FSIC common stock with a net asset value equal to the net asset value of a share of CCT Common Stock, each calculated as an agreed upon date within two (2) business days prior to the closing of the Merger (with a payment of cash in lieu of fractional shares).

 

•  To consider and vote upon a proposal to re-elect Laurie Simon Hodrick as a director for a term expiring upon the earlier to occur of (A) the completion of the Merger and (B) the 2021 annual meeting of stockholders and until her successor is duly elected and qualified.

 

•  To consider and vote upon a proposal to ratify the appointment of Deloitte & Touche LLP as CCT’s independent registered public accounting firm for 2018.


Table of Contents
Proxy Voting:   

Important. Please authorize your proxy to vote your shares promptly to ensure the presence of a quorum at the CCT Annual Meeting. You may execute the proxy card using the methods described in the proxy card. Submitting your proxy now will not prevent you from voting your shares in person at the CCT Annual Meeting, as your proxy is revocable at your option. Proxies may be revoked at any time before they are exercised by submitting a written notice of revocation or a subsequently executed proxy, or by attending the CCT Annual Meeting and voting in person.

 

For Assistance. If you have any questions or need assistance voting, please call CCT’s proxy solicitor, Broadridge Investor Communication Solutions, Inc., at (855) 835-8319.

Enclosed is a copy of the joint proxy statement/prospectus and the proxy card. The joint proxy statement/prospectus, the Notice of Annual Meeting of Stockholders and the proxy card are available at www.proxyvote.com.

If you plan to attend the CCT Annual Meeting and vote your shares of CCT Common stock in person, you will need to bring photo identification in order to be admitted to the CCT Annual Meeting.

To obtain directions to the CCT Annual Meeting, please call CCT at (415) 315-3620.

 

By Order of the Board of Directors,

Philip Davidson

General Counsel and Secretary

Philadelphia, Pennsylvania

September 26, 2018

The use of cameras (for still or video recording) at the CCT Annual Meeting is prohibited and will not be allowed into the meeting or any other adjacent areas, except by credentialed media. We realize that many mobile phones have built-in cameras; while these phones may be brought into the venue, the camera function may not be used at any time.


Table of Contents

TABLE OF CONTENTS

 

     Page  

ABOUT THIS DOCUMENT

     1  

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETINGS AND THE MERGER

     3  

SUMMARY OF THE MERGER

     15  

RISK FACTORS

     24  

COMPARATIVE FEES AND EXPENSES

     95  

SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF FS INVESTMENT CORPORATION

     100  

SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF CORPORATE CAPITAL TRUST, INC.

     103  

UNAUDITED SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA

     106  

UNAUDITED PRO FORMA PER SHARE DATA

     107  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     108  

THE FSIC ANNUAL MEETING

     110  

THE CCT ANNUAL MEETING

     114  

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     119  

CAPITALIZATION

     156  

THE MERGER

     157  

DESCRIPTION OF THE MERGER AGREEMENT

     193  

ACCOUNTING TREATMENT OF THE MERGER

     212  

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     213  

FSIC PROPOSAL 1: APPROVAL OF THE MERGER STOCK ISSUANCE

     226  

FSIC PROPOSAL 2: ELECTION OF DIRECTOR NOMINEES

     227  

FSIC PROPOSAL 3: AUTHORIZATION TO OFFER AND SELL SHARES OF COMMON STOCK BELOW NET ASSET VALUE

     254  

FSIC PROPOSAL 4: APPROVAL OF ADVISORY AGREEMENT AMENDMENT PROPOSAL

     262  

CCT PROPOSAL 1: APPROVAL OF THE MERGER AGREEMENT AND THE MERGER

     270  

CCT PROPOSAL 2: RE-ELECTION OF LAURIE SIMON HODRICK AS DIRECTOR

     271  

CCT PROPOSAL 3: RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR CORPORATE CAPITAL TRUST, INC.

     279  

MARKET PRICE, DIVIDEND AND DISTRIBUTION INFORMATION

     282  

BUSINESS OF FS INVESTMENT CORPORATION

     284  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF FS INVESTMENT CORPORATION

     302  

SENIOR SECURITIES OF FS INVESTMENT CORPORATION

     326  

PORTFOLIO COMPANIES OF FS INVESTMENT CORPORATION

     327  

MANAGEMENT OF FS INVESTMENT CORPORATION

     346  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF FS INVESTMENT CORPORATION

     350  

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS OF FS INVESTMENT CORPORATION

     353  

BUSINESS OF CORPORATE CAPITAL TRUST, INC.

     355  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CORPORATE CAPITAL TRUST, INC.

     364  

SENIOR SECURITIES OF CORPORATE CAPITAL TRUST, INC.

     403  

PORTFOLIO COMPANIES OF CORPORATE CAPITAL TRUST, INC.

     404  

MANAGEMENT OF CORPORATE CAPITAL TRUST, INC.

     420  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF CORPORATE CAPITAL TRUST, INC.

     422  

 

i


Table of Contents

CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS OF CORPORATE CAPITAL TRUST, INC.

     428  

DESCRIPTION OF CAPITAL STOCK OF CORPORATE CAPITAL TRUST, INC.

     429  

DESCRIPTION OF CAPITAL STOCK OF FS INVESTMENT CORPORATION

     437  

FS INVESTMENT CORPORATION DISTRIBUTION REINVESTMENT PLAN

     446  

CORPORATE CAPITAL TRUST, INC. DISTRIBUTION REINVESTMENT PLAN

     448  

COMPARISON OF FSIC AND CCT DISTRIBUTION, PURCHASE AND REDEMPTION PROCEDURES

     449  

COMPARISON OF FSIC AND CCT STOCKHOLDER RIGHTS

     450  

REGULATION OF FS INVESTMENT CORPORATION

     452  

REGULATION OF CORPORATE CAPITAL TRUST, INC.

     457  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR OF FS INVESTMENT CORPORATION

     461  

CUSTODIAN, TRANSFER AND DISTRIBUTION PAYING AGENT AND REGISTRAR OF CORPORATE CAPITAL TRUST, INC.

     462  

BROKERAGE ALLOCATION AND OTHER PRACTICES

     463  

LEGAL MATTERS

     464  

EXPERTS

     465  

OTHER MATTERS

     466  

STOCKHOLDER NOMINATIONS AND PROPOSALS FOR THE 2019 ANNUAL MEETING

     467  

STOCKHOLDERS SHARING AN ADDRESS

     468  

WHERE YOU CAN FIND MORE INFORMATION

     469  

INDEX TO FINANCIAL STATEMENTS

     470  

ANNEX A MERGER AGREEMENT

     A-1  

ANNEX B FORM OF PROPOSED ADVISORY AGREEMENT

     B-1  

ANNEX C OPINION OF THE CCT INDEPENDENT DIRECTOR COMMITTEE’S FINANCIAL ADVISOR

     C-1  

ANNEX D OPINION OF FSIC’S FINANCIAL ADVISOR

     D-1  

 

ii


Table of Contents

ABOUT THIS DOCUMENT

This document, which forms part of a registration statement on Form N-14 filed with the U.S. Securities and Exchange Commission, or the “SEC,” by FSIC (File No. 333-226410), constitutes a prospectus of FSIC under Section 5 of the Securities Act of 1933, as amended, or the “Securities Act,” with respect to the shares of FSIC Common Stock to be issued to CCT stockholders as required by the Merger Agreement.

This document also constitutes joint proxy statements of FSIC and CCT under Section 14(a) of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” It also constitutes a notice of meeting with respect to: (1) the FSIC Annual Meeting, at which FSIC stockholders will be asked to vote upon the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal; and (2) the CCT Annual Meeting, at which CCT stockholders will be asked to vote on the Merger Proposal, the CCT Class I Director Election Proposal and the CCT Auditor Proposal.

You should rely only on the information contained in this joint proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated September 26, 2018. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than that date. Neither the mailing of this joint proxy statement/prospectus to FSIC stockholders or CCT stockholders nor the issuance of FSIC Common Stock in connection with the Merger will create any implication to the contrary.

This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

Except where the context otherwise indicates, information contained in this joint proxy statement/prospectus regarding FSIC has been provided by FSIC and information contained in this joint proxy statement/prospectus regarding CCT has been provided by CCT.

When used in this document, unless otherwise indicated in this document or the context otherwise requires:

 

   

“Administration Agreement” refers to the Administration Agreement, dated April 9, 2018, by and between FSIC and the Advisor;

 

   

“Advisor” refers to FS/KKR Advisor, LLC, FSIC’s and CCT’s investment adviser;

 

   

“BofA Merrill Lynch” refers to Merrill Lynch, Pierce, Fenner & Smith Incorporated, the financial advisor to the independent directors of the CCT Board;

 

   

“CCT” refers to Corporate Capital Trust, Inc. and, where applicable, its consolidated subsidiaries;

 

   

“CCT Current Investment Advisory Agreement” refers to the Investment Advisory Agreement, dated April 9, 2018, by and between CCT and the Advisor;

 

   

“Determination Date” refers to an agreed upon date no more than two (2) business days prior to the closing of the Merger;

 

   

“Effective Time” refers to the effective time of the Merger;

 

   

“FB Advisor” refers to FB Income Advisor, LLC, FSIC’s former investment adviser;

 

   

“FSIC” refers to FS Investment Corporation and, where applicable, its consolidated subsidiaries;

 

   

“Fund Complex” refers to FSIC, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV, CCT and Corporate Capital Trust II;

 

   

“Investment Advisory Agreement” refers to the Investment Advisory Agreement, dated April 9, 2018, by and between FSIC and the Advisor;

 

1


Table of Contents
   

“J.P. Morgan” refers to J.P. Morgan Securities LLC, the financial advisor to the FSIC Board;

 

   

“KKR” refers to KKR Credit Advisors (US) LLC, CCT’s former investment adviser;

 

   

“Merger” refers to the merger of Merger Sub with and into CCT and unless the context otherwise requires, includes the Subsequent Combination;

 

   

“Merger Agreement” refers to the Agreement and Plan of Merger, dated July 22, 2018, by and among FSIC, CCT, Merger Sub and the Advisor;

 

   

“Merger Sub” refers to IC Acquisition, Inc., a wholly owned subsidiary of FSIC;

 

   

“NAV” refers to net asset value; and

 

   

“Subsequent Combination” refers to the merger of the surviving company of the Merger with and into FSIC.

 

2


Table of Contents

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETINGS AND THE MERGER

The questions and answers below highlight only selected information from this joint proxy statement/prospectus. They do not contain all of the information that may be important to you. You should read carefully this entire document to fully understand the Merger Agreement and the transactions contemplated thereby (including the Merger) and the voting procedures for the FSIC Annual Meeting and the CCT Annual Meeting.

Questions and Answers about the Annual Meetings

 

Q:

Why am I receiving these materials?

 

A:

FSIC is furnishing these materials in connection with the solicitation of proxies by FSIC’s board of directors, or the “FSIC Board,” for use at the annual meeting of FSIC stockholders to be held at 2:00 p.m., Eastern Time, on December 3, 2018, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, and any adjournments or postponements thereof, or the “FSIC Annual Meeting.”

CCT is furnishing these materials in connection with the solicitation of proxies by CCT’s board of directors, or the “CCT Board,” for use at the annual meeting of CCT stockholders to be held at 3:00 p.m., Eastern Time, on December 3, 2018, at 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, and any adjournments or postponements thereof, or the “CCT Annual Meeting.”

This joint proxy statement/prospectus and the accompanying materials are being mailed on or about October 3, 2018 to stockholders of record of FSIC and CCT described below and are available at www.proxyvote.com.

 

Q:

What items will be considered and voted on at the FSIC Annual Meeting?

 

A:

At the FSIC Annual Meeting, FSIC stockholders will be asked to approve (i) the issuance of the shares of FSIC Common Stock pursuant to the Merger Agreement (such proposal, the “Merger Stock Issuance Proposal”); (ii) the election or approval of each of Todd Builione, Richard Goldstein, Brian R. Ford, Barbara Adams, Jerel A. Hopkins, Frederick Arnold and James H. Kropp to serve as directors on the FSIC Board, subject to the conditions set forth in this joint proxy statement/prospectus (such proposal, the “FSIC Director Election Proposal”); (iii) FSIC selling its shares in future offerings below NAV per share (such proposal, the “Share Issuance Proposal”); and (iv) an amendment to the Investment Advisory Agreement (such proposal, the “Advisory Agreement Amendment Proposal”).

 

Q:

What items will be considered and voted on at the CCT Annual Meeting?

 

A:

At the CCT Annual Meeting, CCT stockholders will be asked to approve (i) the Merger and the Merger Agreement (such proposal, the “Merger Proposal”), (ii) the re-election of the Class I Director, Laurie Simon Hodrick (such proposal, the “CCT Class I Director Election Proposal”) and (iii) the approval of the appointment Deloitte & Touche LLP (“Deloitte”) as CCT’s registered public accounting firm for 2018 (such proposal, the “CCT Auditor Proposal”).

 

Q:

How does the FSIC Board recommend voting on the proposals at the FSIC Annual Meeting?

 

A:

The FSIC Board has unanimously approved each of the Merger and the related transaction, the Merger Agreement, the nomination or appointment of the persons named for election or approval in this joint proxy statement/prospectus, the Share Issuance Proposal and the Proposed Advisory Agreement, and recommends that FSIC stockholders vote “FOR” each of the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

 

Q:

How does the CCT Board recommend voting on the Merger Proposal, the CCT Class I Director Election Proposal and the CCT Auditor Proposal at the CCT Annual Meeting?

 

A:

The independent directors of CCT, or the “CCT Independent Directors,” have unanimously approved the Merger and the Merger Agreement and recommend that CCT stockholders vote “FOR” the Merger Proposal.

 

3


Table of Contents
  The CCT Board has unanimously approved each of the nomination of the Class I director for re-election and the appointment of Deloitte as CCT’s independent registered public accounting firm for 2018, and recommends that CCT stockholders vote “FOR” each of the CCT Class I Director Election Proposal and the CCT Auditor Proposal.

 

Q:

If I am an FSIC stockholder, what is the “Record Date” and what does it mean?

 

A:

The record date for the FSIC Annual Meeting is September 14, 2018 (the “FSIC Record Date”). The FSIC Record Date is established by the FSIC Board, and only holders of record of shares of FSIC Common Stock at the close of business on the FSIC Record Date are entitled to receive notice of the FSIC Annual Meeting and vote at the FSIC Annual Meeting. As of the FSIC Record Date, there were 239,154,069 shares of FSIC Common Stock outstanding.

 

Q:

If I am a CCT stockholder, what is the “Record Date” and what does it mean?

 

A:

The record date for the CCT Annual Meeting is September 14, 2018 (the “CCT Record Date”). The CCT Record Date is established by the CCT Board, and only holders of record of shares of CCT Common Stock at the close of business on the CCT Record Date are entitled to receive notice of the CCT Annual Meeting and vote at the CCT Annual Meeting. As of the CCT Record Date, there were 124,119,644 shares of CCT Common Stock outstanding.

 

Q:

If I am an FSIC stockholder, how many votes do I have?

 

A:

Each share of FSIC Common Stock held by a holder of record as of the FSIC Record Date has one vote on each matter considered at the FSIC Annual Meeting.

 

Q:

If I am a CCT stockholder, how many votes do I have?

 

A:

Each share of CCT Common Stock held by a holder of record as of the CCT Record Date has one vote on each matter considered at the CCT Annual Meeting.

 

Q:

If I am an FSIC stockholder, how do I vote?

 

A:

An FSIC stockholder may vote in person at the FSIC Annual Meeting or by proxy in accordance with the instructions provided below. An FSIC stockholder may also authorize a proxy by telephone or through the Internet using the toll-free telephone number or web address printed on your proxy card. Authorizing a proxy by telephone or through the Internet requires you to input the control number located on your proxy card. After inputting the control number, you will be prompted to direct your proxy to vote on each proposal. You will have an opportunity to review your directions and make any necessary changes before submitting your directions and terminating the telephone call or Internet link.

 

   

By Internet: www.proxyvote.com

 

   

By telephone: (800) 690-6903

 

   

By mail: You may vote by proxy by indicating your instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for your proxy card to be received on or prior to 5:00 p.m., Eastern Time, on November 30, 2018.

 

   

In person: You may vote in person at the FSIC Annual Meeting by requesting a ballot when you arrive. You will need to bring photo identification in order to be admitted to the FSIC Annual Meeting. To obtain directions to the FSIC Annual Meeting, please call FSIC at (844) 358-7276 and select Option 1. If your shares of FSIC Common Stock are held through a broker and you attend the FSIC Annual

 

4


Table of Contents
 

Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at the FSIC Annual Meeting.

Important notice regarding the availability of proxy materials for the FSIC Annual Meeting. FSIC’s joint proxy statement/prospectus and the proxy card are available at www.proxyvote.com.

 

Q:

If I am a CCT stockholder, how do I vote?

 

A:

A CCT stockholder may vote in person at the CCT Annual Meeting or by proxy in accordance with the instructions provided below. An CCT stockholder may also authorize a proxy by telephone or through the Internet using the toll-free telephone number or web address printed on your proxy card. Authorizing a proxy by telephone or through the Internet requires you to input the control number located on your proxy card. After inputting the control number, you will be prompted to direct your proxy to vote on each proposal. You will have an opportunity to review your directions and make any necessary changes before submitting your directions and terminating the telephone call or Internet link.

 

   

By Internet: www.proxyvote.com

 

   

By telephone: (800) 690-6903

 

   

By mail: You may vote by proxy by indicating your instructions on the enclosed proxy card, dating and signing the proxy card, and promptly returning the proxy card in the envelope provided, which requires no postage if mailed in the United States. Please allow sufficient time for your proxy card to be received on or prior to 5:00 p.m, Eastern Time, on November 30, 2018.

 

   

In person: You may vote in person at the CCT Annual Meeting by requesting a ballot when you arrive. You will need to bring photo identification in order to be admitted to the CCT Annual Meeting. To obtain directions to the CCT Annual Meeting, please call CCT at (844) 358-7276 and select Option 1. If your shares of CCT Common Stock are held through a broker and you attend the CCT Annual Meeting in person, please bring a letter from your broker identifying you as the beneficial owner of the shares and authorizing you to vote your shares at the CCT Annual Meeting.

Important notice regarding the availability of proxy materials for the CCT Annual Meeting. CCT’s joint proxy statement/prospectus and the proxy card are available at www.proxyvote.com.

 

Q:

What if a FSIC stockholder does not specify a choice for a matter when authorizing a proxy?

 

A:

All properly executed proxies representing shares of FSIC Common Stock received prior to the FSIC Annual Meeting will be voted in accordance with the instructions marked thereon. If a proxy card is signed and returned without any instructions marked, the shares of FSIC Common Stock will be voted “FOR” the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

 

Q:

What if a CCT stockholder does not specify a choice for a matter when authorizing a proxy?

 

A:

All properly executed proxies representing shares of CCT Common Stock at the CCT Annual Meeting will be voted in accordance with the directions given. If the enclosed proxy card is signed and returned without any directions given, the shares of CCT Common Stock will be voted “FOR” the Merger Proposal, the CCT Class I Director Election Proposal and the CCT Auditor Proposal.

 

Q:

If I am a FSIC stockholder, how can I change my vote or revoke a proxy?

 

A:

You may revoke your proxy and change your vote before the proxies are voted at the FSIC Annual Meeting. You may change your vote using the Internet or telephone methods described herein, prior to the applicable cutoff time before the FSIC Annual Meeting, in which case only your latest Internet or telephone proxy will

 

5


Table of Contents
  be counted. Alternatively, you may revoke your proxy and change your vote by signing and returning a new proxy dated as of a later date, or by attending the FSIC Annual Meeting and voting in person. However, your attendance at the FSIC Annual Meeting will not automatically revoke your proxy, unless you properly vote at the FSIC Annual Meeting, or specifically request that your prior proxy be revoked by delivering a written notice of revocation to FSIC prior to the FSIC Annual Meeting at the following address: FS Investment Corporation, 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112, Attention: Stephen S. Sypherd, General Counsel and Secretary.

 

Q:

If I am a CCT stockholder, how can I change my vote or revoke a proxy?

 

A:

You may revoke your proxy and change your vote before the proxies are voted at the CCT Annual Meeting. You may change your vote using the Internet or telephone methods described herein, prior to the applicable cutoff time before the CCT Annual Meeting, in which case only your latest Internet or telephone proxy will be counted. Alternatively, you may revoke your proxy and change your vote by signing and returning a new proxy dated as of a later date, or by attending the CCT Annual Meeting and voting in person. However, your attendance at the CCT Annual Meeting will not automatically revoke your proxy, unless you properly vote at the CCT Annual Meeting, or specifically request that your prior proxy be revoked by delivering a written notice of revocation to CCT prior to the CCT Annual Meeting at the following address: Corporate Capital Trust, Inc., 201 Rouse Boulevard, Philadelphia, PA 19112, Attention: Philip Davidson, General Counsel and Secretary.

 

Q:

If my shares of FSIC Common Stock or CCT Common Stock, as applicable, are held in a broker-controlled account or in “street name,” will my broker vote my shares for me?

 

A:

No. You should follow the instructions provided by your broker on your voting instruction form. It is important to note that your broker will vote your shares only if you provide instructions on how you would like your shares to be voted at the applicable annual meeting.

 

Q:

What constitutes a “quorum” for the FSIC Annual Meeting?

 

A:

Under FSIC’s Second Articles of Amendment and Restatement (the “FSIC Charter”) and Second Amended and Restated Bylaws (the “FSIC Bylaws”), one-third of the number of shares of FSIC Common Stock entitled to be cast, present in person or by proxy, constitutes a quorum for the transaction of business.

Abstentions will be treated as shares of FSIC Common Stock that are present for purposes of determining the presence of a quorum for transacting business at the FSIC Annual Meeting.

A “broker non-vote” with respect to a matter occurs when a broker, bank or other institution or nominee holding shares on behalf of a beneficial owner and present (in person or by proxy) at a meeting for purposes of voting on a routine proposal (or a non-routine proposal for which it has received instructions from the beneficial owner) has not received voting instructions from the beneficial owner of the shares on a particular proposal and does not have, or chooses not to exercise, discretionary authority to vote the shares on such proposal. All of the proposals to be considered at the FSIC Annual Meeting are non-routine matters for FSIC. If a beneficial owner does not instruct its broker, bank or other institution or nominee holding its shares of FSIC Common Stock on its behalf with respect to any of the proposals to be considered at the FSIC Annual Meeting, the shares of FSIC Common Stock will not be treated as present for purposes of determining the presence of a quorum for transacting business at the FSIC Annual Meeting. If a beneficial owner instructs its broker, bank or other institution or nominee holding its shares of FSIC Common Stock on its behalf with respect to any of the proposals to be considered at the FSIC Annual Meeting, the shares of FSIC Common Stock will be treated as present for purposes of determining the presence of a quorum for transacting business at the FSIC Annual Meeting.

In the event that a quorum is not present at the FSIC Annual Meeting, the chairman of the FSIC Annual Meeting shall have the power to adjourn the FSIC Annual Meeting from time to time to a date not more than

 

6


Table of Contents

120 days after the FSIC Record Date originally fixed for the FSIC Annual Meeting without notice, other than the announcement at the FSIC Annual Meeting, to permit further solicitation of proxies. Any business that might have been transacted at the FSIC Annual Meeting originally called may be transacted at any such adjourned session(s) at which a quorum is present.

If it appears that there are not enough votes to approve the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal or the Advisory Agreement Amendment Proposal at the FSIC Annual Meeting, the chairman of the FSIC Annual Meeting may adjourn the FSIC Annual Meeting from time to time to a date not more than 120 days after the FSIC Record Date originally fixed for the FSIC Annual Meeting without notice, other than announcement at the FSIC Annual Meeting, to permit further solicitation of proxies.

If sufficient votes in favor of one proposal have been received at the time of the FSIC Annual Meeting, such proposal will be acted upon and such action will be final, regardless of any subsequent adjournments to consider other proposals.

 

Q:

What constitutes a “quorum” for the CCT Annual Meeting?

 

A:

The presence in person or by proxy of the stockholders of CCT entitled to cast one-third of the votes entitled to be cast at the CCT Annual Meeting will constitute a quorum for the transaction of business. Shares of CCT Common Stock will be counted for purposes of determining if there is a quorum, if the stockholder:

 

   

is entitled to vote and present in person at the CCT Annual Meeting; or

 

   

has properly voted by proxy via the Internet, by telephone or by mail.

Abstentions will be treated as shares of CCT Common Stock that are present for purposes of determining the presence of a quorum for transacting business at the CCT Annual Meeting.

A “broker non-vote” with respect to a matter occurs when a broker, bank or other institution or nominee holding shares on behalf of a beneficial owner and present (in person or by proxy) at a meeting for purposes of voting on a routine proposal (or a non-routine proposal for which it has received instructions from the beneficial owner) has not received voting instructions from the beneficial owner of the shares on a particular proposal and does not have, or chooses not to exercise, discretionary authority to vote the shares on such proposal. Of the proposals to be considered at the CCT Annual Meeting, only the CCT Auditor Proposal is a routine matter for CCT. If a beneficial owner does not instruct its broker, bank or other institution or nominee holding its shares of CCT Common Stock on its behalf with respect to any of the proposals to be considered at the CCT Annual Meeting, the shares of CCT Common Stock will be treated as present for purposes of determining the presence of a quorum for transacting business at the CCT Annual Meeting if a broker non-vote is submitted with respect to the CCT Auditor Proposal. If a beneficial owner instructs its broker, bank or other institution or nominee holding its shares of CCT Common Stock on its behalf with respect to any of the proposals to be considered at the CCT Annual Meeting, the shares of CCT Common Stock will be treated as present for purposes of determining the presence of a quorum for transacting business at the CCT Annual Meeting.

In the event that a quorum is not present at the CCT Annual Meeting, the chairman of the CCT Annual Meeting shall have the power to adjourn the CCT Annual Meeting from time to time to a date not more than 120 days after the CCT Record Date originally fixed for the CCT Annual Meeting without notice, other than the announcement at the CCT Annual Meeting, to permit further solicitation of proxies. Any business that might have been transacted at the CCT Annual Meeting originally called may be transacted at any such adjourned session(s) at which a quorum is present.

If it appears that there are not enough votes to approve the Merger Proposal, the CCT Class I Director Election Proposal or the CCT Auditor Proposal at the CCT Annual Meeting, the chairman of the CCT Annual Meeting may adjourn the CCT Annual Meeting from time to time to a date not more than 120 days after the CCT Record Date originally fixed for the CCT Annual Meeting without notice, other than announcement at the CCT Annual Meeting, to permit further solicitation of proxies.

 

7


Table of Contents

If sufficient votes in favor of one proposal have been received by the time of the CCT Annual Meeting, such proposal will be acted upon and such actions will be final, regardless of any subsequent adjournments to consider other proposals.

 

Q:

What vote is required to approve each of the proposals at the FSIC Annual Meeting?

 

A:

The affirmative vote of at least a majority of all of the votes cast by FSIC stockholders at a meeting at which a quorum is present is necessary for approval of the Merger Stock Issuance Proposal and the FSIC Director Election Proposal.

The affirmative vote of the stockholders of FSIC holding (i) a majority of the outstanding shares of FSIC Common Stock and (ii) a majority of the outstanding shares of FSIC Common Stock that are not held by affiliated persons of FSIC is necessary for approval of the Share Issuance Proposal.

The affirmative vote of a majority of the outstanding shares of FSIC Common Stock is required to approve the Advisory Agreement Amendment Proposal.

Under the Investment Company Act of 1940, as amended, or the 1940 Act, a majority of the outstanding shares FSIC Common Stock may be the lesser of: (1) 67% of the FSIC Common Stock at the FSIC Annual Meeting if the holders of more than 50% of the outstanding shares of FSIC Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSIC Common Stock.

Abstentions and broker non-votes will have no effect on the outcome of the Merger Stock Issuance Proposal or the FSIC Director Election Proposal. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

 

Q:

What vote is required to approve each of the proposals being considered at the CCT Annual Meeting?

 

A:

The affirmative vote of the holders of a majority of the outstanding shares of CCT Common Stock entitled to vote at the CCT Annual Meeting is required to approve the Merger Proposal.

The affirmative vote of a majority of the total votes cast for and against the nominee for director at the CCT Annual Meeting is required to approve the CCT Class I Director Election Proposal.

The affirmative vote of a majority of the votes cast at the CCT Annual Meeting, provided that a quorum is presented, is required to approve the CCT Auditor Proposal.

Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Merger Proposal. Abstentions and broker non-votes will have no effect on the outcome of the CCT Class I Director Election Proposal or the CCT Auditor Proposal.

 

Q:

How will the final voting results be announced?

 

A:

Preliminary voting results will be announced at each annual meeting. Final voting results will be published by FSIC and CCT in a current report on Form 8-K within four business days after the date of the FSIC Annual Meeting and the CCT Annual Meeting, respectively.

 

Q:

Will FSIC and CCT incur expenses in soliciting proxies?

 

A:

The expenses of the solicitation of proxies for the FSIC Annual Meeting and the CCT Annual Meeting, including the cost of preparing, printing and mailing this joint proxy statement/prospectus, the applicable accompanying Notice of Annual Meeting of Stockholders and the proxy card, will be borne equally by FSIC and CCT. FSIC and CCT have requested that brokers, nominees, fiduciaries and other persons holding shares of FSIC Common Stock and CCT Common Stock, as applicable, in their names, or in the name of

 

8


Table of Contents
  their nominees, which are beneficially owned by others, forward the proxy materials to, and obtain proxies from, such beneficial owners. FSIC and CCT will reimburse such persons for their reasonable expenses in so doing.

In addition to the solicitation of proxies by mail, proxies may be solicited in person and by telephone or facsimile transmission by directors, officers or employees of FSIC and CCT and their respective affiliates (without special compensation therefor). FSIC has also retained Broadridge Investor Communication Solutions, Inc. to assist in the solicitation of proxies for an estimated fee of approximately $400,000, plus out-of-pocket expenses. CCT has also retained Broadridge Investor Communication Solutions, Inc. to assist in the solicitation of proxies for an estimated fee of approximately $300,000, plus out-of-pocket expenses.

For more information regarding expenses related to the Merger, see “Questions and Answers about the Merger—‘Who is responsible for paying the expenses relating to completing the Merger?’”

 

Q:

What does it mean if I receive more than one proxy card?

 

A:

Some of your shares of FSIC Common Stock or CCT Common Stock, as applicable, may be registered differently or held in a different account. You should authorize a proxy to vote the shares in each of your accounts by mail, by telephone or via the Internet. If you mail proxy cards, please sign, date and return each proxy card to guarantee that all of your shares are voted.

 

Q:

Are the proxy materials available electronically?

 

A:

In accordance with regulations promulgated by the SEC, FSIC and CCT have made the registration statement (of which this joint proxy statement/prospectus forms a part), the applicable Notice of Annual Meeting of Stockholders and the applicable proxy card available to stockholders of FSIC and CCT on the Internet. Stockholders may (i) access and review the proxy materials of FSIC and CCT, as applicable, (ii) authorize their proxies, as described in “The FSIC Annual Meeting—Vote Required” and “The CCT Annual Meeting—Proxy Voting Procedures” and/or (iii) elect to receive future proxy materials by electronic delivery, via the Internet address provided below.

The registration statement (of which this joint proxy statement/prospectus forms a part), each Notice of Annual Meeting of Stockholders and each proxy card are available at www.proxyvote.com.

Pursuant to the rules adopted by the SEC, FSIC and CCT furnish proxy materials by email to those stockholders who have elected to receive their proxy materials electronically. While each of FSIC and CCT encourage stockholders to take advantage of electronic delivery of proxy materials, which helps to reduce the environmental impact of stockholder meetings and the cost associated with the physical printing and mailing of materials, stockholders who have elected to receive proxy materials electronically by email, as well as beneficial owners of shares of FSIC Common Stock and CCT Common Stock, as applicable, held by a broker or custodian, may request a printed set of proxy materials.

 

Q:

Will my vote make a difference?

 

A:

Yes. Your vote is needed to ensure the proposals can be acted upon. Your vote is very important. Your immediate response will help avoid potential delays and may save significant additional expenses associated with soliciting stockholder votes.

 

Q:

Whom can I contact with any additional questions?

 

A:

If you are a FSIC stockholder or a CCT stockholder, you can contact Broadridge Financial Solutions, Inc. at the below contact information with any additional questions:

Broadridge Financial Solutions, Inc.

51 Mercedes Way

Edgewood, New York 11717

1-833-868-3374.

 

9


Table of Contents
Q:

Where can I find more information about FSIC and CCT?

 

A:

You can find more information about FSIC and CCT in the documents described under the caption “Where You Can Find More Information.”

 

Q:

What do I need to do now?

 

A:

We urge you to read carefully this entire document, including its annexes. You should also review the documents referenced under “Where You Can Find More Information” and consult with your accounting, legal and tax advisors.

Questions and Answers about the Merger

 

Q:

What will happen in the Merger and Subsequent Combination?

 

A:

CCT shall be the surviving company of the merger between CCT and Merger Sub and shall continue its existence as a corporation under the laws of the State of Maryland until the Subsequent Combination. As of the Effective Time, the separate corporate existence of Merger Sub shall cease. Immediately after the Effective Time, pursuant to the Subsequent Combination, the surviving company will merge with and into FSIC, with FSIC as the surviving entity.

 

Q:

What will CCT stockholders receive in the Merger?

 

A:

Each CCT stockholder will be entitled to receive, for each share of CCT Common Stock, that number of shares of FSIC Common Stock equal to the quotient of the NAV per share of CCT Common Stock divided by the NAV per share of FSIC Common Stock, in each case calculated as of an agreed upon date no more than two (2) business days prior to the closing of the Merger, subject to adjustment pursuant to the terms of the Merger Agreement and the payment of cash in lieu of fractional shares.

 

Q:

Is the Exchange Ratio subject to any adjustment?

 

A:

Generally, no. For each share of CCT Common Stock, the number of shares of FSIC Common Stock equal to the quotient of the NAV per share of CCT Common Stock divided by the NAV per share of FSIC Common Stock (the “Exchange Ratio”) will only be adjusted if, between the date the Exchange Ratio is calculated and the Effective Time, the respective outstanding shares of FSIC Common Stock or CCT Common Stock shall have been increased or decreased or changed into or exchanged for a different number or kind of shares or securities as a result of any reclassification, recapitalization, stock split, reverse stock split, split-up, combination or exchange of shares, or if a stock dividend or dividend payable in any other securities shall be declared with a record date within such period.

 

Q:

Who is responsible for paying the expenses relating to completing the Merger?

 

A:

In general, all fees and expenses incurred in connection with the Merger shall be paid by the person incurring such fees and expenses, whether or not the Merger is consummated. However, FSIC and CCT shall equally bear the costs and expenses of printing and mailing this joint proxy statement/prospectus and all filing and other fees paid to the SEC in connection with the Merger and all other filings and fees in connection with any other filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). See “Description of the Merger Agreement—Expenses and Fees.” It is anticipated that FSIC will bear expenses of approximately $7 million in connection with the Merger and CCT will bear expenses of approximately $8 million in connection with the Merger (of which approximately $1 million was expensed during the quarter ended June 30, 2018).

 

10


Table of Contents
Q:

Will I receive dividends after the Merger?

 

A:

Subject to applicable legal restrictions and the sole discretion of the FSIC Board, FSIC intends to declare and pay regular cash distributions to its stockholders on a quarterly basis. For a history of the dividends and distributions paid by FSIC since March 31, 2016, see “Market Price, Dividend and Distribution Information—FSIC.” The amount and timing of past dividends and distributions are not a guarantee of any future dividends or distributions, or the amount thereof, the payment, timing and amount of which will be determined by the FSIC Board and depend on FSIC’s cash requirements, its financial condition and earnings, contractual restrictions, legal and regulatory considerations and other factors. See “FSIC Distribution Reinvestment Plan” for additional information regarding FSIC’s distribution reinvestment plan.

For a history of the dividends and distributions paid by CCT since March 31, 2017, see “Market Price, Dividend and Distribution Information—CCT.”

No dividends or other distributions with respect to the FSIC Common Stock will be paid to the holder of any unsurrendered shares of CCT Common Stock with respect to the shares of the FSIC Common Stock represented thereby, in each case unless such shares are surrendered in accordance with the Merger Agreement. Following surrender of any such shares of CCT Common Stock, the record holders of such shares of CCT Common Stock shall be entitled to receive, without interest, (i) the amount of dividends or other distributions with a record date after the Effective Time theretofore payable with respect to the whole shares of FSIC Common Stock represented by such shares of CCT Common Stock and not paid and/or (ii) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of FSIC Common Stock represented by such shares of CCT Common Stock with a record date after the Effective Time (but before such surrender date) and with a payment date subsequent to the issuance of the FSIC Common Stock issuable with respect to such shares of CCT Common Stock.

 

Q:

Is the Merger subject to any third-party consents?

 

A:

Under the Merger Agreement, each of FSIC and CCT shall use their reasonable best efforts to obtain certain approvals, confirmations and consents from certain agents, lenders, derivative counterparties, noteholders and other parties. As of the date of this joint proxy statement/prospectus, FSIC and CCT believe that, subject to the satisfaction of certain conditions, they have obtained all necessary third-party consents other than stockholder approval and certain lender and derivative counterparty consents.

FSIC and CCT have agreed to cooperate with each other and use their reasonable best efforts to take, or cause to be taken, in good faith, all actions, and to do, or cause to be done, all things necessary, including to obtain as promptly as practicable all consents, approvals, confirmations and authorizations of all third parties, in each case, that are necessary or advisable, to consummate the transactions contemplated by the Merger Agreement, including the Merger, in the most expeditious manner practicable. There can be no assurance that any consents, approvals, confirmations or authorizations will be obtained or that such consents, approvals, confirmations or authorizations will not impose conditions or requirements that, individually or in the aggregate, would or could reasonably be expected to have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following the Merger.

 

Q:

How does FSIC’s investment objective and strategy differ from CCT’s?

 

A:

The following table presents a comparison of FSIC’s and CCT’s investment objectives and strategies. Although historically FSIC and CCT have presented their investment objectives and strategies somewhat differently, they are substantially identical.

 

11


Table of Contents
    

FSIC

  

CCT

Primary Investment Objective    Provide stockholders with current income and, to a lesser extent, long-term capital appreciation    Provide stockholders with current income and, to a lesser extent, long-term capital appreciation
Investment Focus    Senior secured and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies    Senior debt securities and subordinated debt securities of privately owned U.S. companies with a focus on originated transactions sourced through the networks of the Advisor
Target Borrower    Private U.S. companies with annual revenues of between $50 million and $2.5 billion    Private U.S. companies with earnings before interest, taxes, depreciation and amortization, or EBITDAs, greater than $25 million
Equity Investments    FSIC may make select equity investments; may receive equity interests such as warrants or options as additional consideration in connection with debt investments    CCT may make equity investments that accompany debt investments, including warrants, options or other forms of equity participation; may separately purchase common or preferred equity interests in transactions, including non-controlling equity investments

As a result of these commonalities, the Adviser does not anticipate any significant portfolio repositioning in connection with the Merger.

 

Q:

How do the distribution procedures, purchase procedures, redemption procedures and exchange rights of FSIC differ from those of CCT?

 

A:

FSIC and CCT have substantially identical distribution, purchase and redemption procedures. Neither FSIC nor CCT offers exchange rights with respect to its common stock. FSIC anticipates that the combined company will maintain the distribution, purchase and redemption procedures of FSIC following the closing of the Merger. For more information, see “Comparison of FSIC and CCT Distribution, Purchase and Redemption Procedures.”

 

Q:

How will the combined company be managed following the Subsequent Combination?

 

A:

The directors of FSIC immediately prior to the Subsequent Combination shall remain the directors of FSIC and shall hold office until their respective successors are duly elected and qualify, or their earlier death, resignation or removal. Subject to approval of the FSIC Director Election Proposal, Frederick Arnold and James H. Kropp, both of whom currently serves as directors of CCT, and each of Barbara Adams, Brian R. Ford, Richard Goldstein and Jerel A. Hopkins will become directors of FSIC following the Subsequent Combination and each of Gregory P. Chandler, Barry H. Frank, Philip E. Hughes, Jr. and Pedro A. Ramos will resign as directors following the Subsequent Combination. The officers of FSIC immediately prior to the Subsequent Combination shall remain the officers of FSIC and shall hold office until their respective successors are duly appointed and qualify, or their earlier death, resignation or removal. Following the Subsequent Combination, the Advisor shall continue to be the investment adviser of FSIC pursuant to the existing Investment Advisory Agreement by and between FSIC and the Advisor, as it may be amended if the Advisory Agreement Amendment Proposal is approved by the FSIC stockholders.

 

12


Table of Contents
Q:

Are FSIC stockholders able to exercise dissenters’ rights?

 

A:

No. FSIC stockholders will not be entitled to exercise dissenters’ rights with respect to any matter to be voted upon at the FSIC Annual Meeting. Any FSIC stockholder may abstain from voting or vote against any of such matters.

 

Q:

Are CCT stockholders able to exercise dissenters’ rights?

 

A:

No. CCT stockholders will not be entitled to exercise dissenters’ rights with respect to any matter to be voted upon at the CCT Annual Meeting. Any CCT stockholder may abstain from voting or vote against any of such matters.

 

Q:

When do you expect to complete the Merger and Subsequent Combination?

 

A:

While there can be no assurance as to the exact timing, or that the Merger will be completed at all, FSIC and CCT are working to complete the Merger in the fourth quarter of 2018. It is currently expected that the Merger will be completed promptly following receipt of the required stockholder approvals at the FSIC Annual Meeting and the CCT Annual Meeting and satisfaction of the other closing conditions set forth in the Merger Agreement. The Subsequent Combination will occur immediately after the Merger is completed.

 

Q:

Is the Merger expected to be taxable to FSIC stockholders?

 

A:

No. The Merger and Subsequent Combination are not expected to be a taxable event for FSIC stockholders.

 

Q:

Is the Merger expected to be taxable to CCT stockholders?

 

A:

No. The Merger and Subsequent Combination are intended to qualify as a “reorganization,” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”), and it is a condition to FSIC’s and CCT’s respective obligations to complete the Merger that each of them receives a legal opinion to that effect. CCT stockholders are not expected to recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of CCT Common Stock for shares of FSIC Common Stock pursuant to the Merger, except with respect to cash received in lieu of fractional shares of FSIC Common Stock. CCT stockholders should read the section captioned “Certain Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated and the tax consequences of the Merger to a CCT stockholder will depend on the particular tax situation of such stockholder. CCT stockholders should consult with their own tax advisors to determine the tax consequences of the Merger to them.

 

Q:

What happens if the Merger is not consummated?

 

A:

If the Merger is not approved by the requisite vote of CCT’s stockholders, or the issuance of shares of FSIC Common Stock in connection with the Merger is not approved by the requisite vote of FSIC’s stockholders, or if the Merger is not completed for any other reason, CCT’s stockholders will not receive any payment for their shares of CCT Common Stock in connection with the Merger. Instead, CCT will remain an independent company and the CCT Common Stock will continue to be listed and traded on the New York Stock Exchange (the “NYSE”). In addition, under circumstances specified in the Merger Agreement, CCT may be required to pay FSIC a termination fee of $75,177,120 and FSIC may be required to pay CCT a termination fee of $75,177,120. See “Description of the Merger Agreement—Termination of the Merger Agreement.”

 

Q:

Did the board of directors of FSIC receive an opinion from its financial advisor regarding the Exchange Ratio?

 

A:

Yes. For more information, see the section entitled “The Merger—Opinion of FSIC’s Financial Advisor.”

 

13


Table of Contents
Q:

Did the board of directors of CCT receive an opinion from its financial advisor regarding the Exchange Ratio?

 

A:

Yes, the independent directors of the CCT Board received an opinion for their financial advisor. For more information, see the section entitled “The Merger—Opinion of the CCT Independent Director Committee’s Financial Advisor.”

 

Q:

If I am a CCT stockholder, what happens if I sell my shares before the CCT Annual Meeting?

 

A:

The CCT Record Date is earlier than the date that the Merger is expected to be completed. If you transfer your shares of CCT Common Stock after the CCT Record Date but before the CCT Annual Meeting, you will retain your right to vote at the CCT Annual Meeting, but will have transferred the right to receive shares of FSIC Common Stock, subject to the payment of cash instead of fractional shares, for each share of CCT Common Stock owned immediately prior to the Merger. In order to receive shares of FSIC Common Stock for each share of CCT Common Stock owned, subject to the payment of cash instead of fractional shares, you must hold your shares through completion of the Merger.

 

14


Table of Contents

SUMMARY OF THE MERGER

This summary highlights selected information contained elsewhere in this joint proxy statement/prospectus and may not contain all of the information that is important to you. You should carefully read this entire joint proxy statement/prospectus, including the other documents to which this joint proxy statement/prospectus refers for a more complete understanding of the Merger. In particular, you should read the annexes attached to this joint proxy statement/prospectus, including the Merger Agreement, which is attached as Annex A hereto, as it is the legal document that governs the Merger. See “Where You Can Find More Information.” For a discussion of the risk factors you should carefully consider, see the section entitled “Risk Factors” beginning on page 24.

The Parties to the Merger

FS Investment Corporation

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

FSIC was incorporated under the Maryland General Corporation Law (the “MGCL”) on December 21, 2007, and formally commenced investment operations on January 2, 2009. FSIC is an externally managed, non-diversified, closed-end management investment company. FSIC has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or “RIC,” under the Code.

FSIC’s investment objective is to generate both current income and, to a lesser extent, long-term capital appreciation. FSIC’s principal focus is to invest in senior secured and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies.

FSIC’s portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. A portion of FSIC’s portfolio may be comprised of corporate bonds, collateralized loan obligations, or “CLOs,” other debt securities and derivatives, including total return swaps and credit default swaps. FSIC may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from target companies as primary market or directly originated investments.

In connection with its debt investments, FSIC may on occasion receive equity interests such as warrants or options as additional consideration. FSIC may also purchase or otherwise acquire minority interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity, in its target companies, generally in conjunction with one of FSIC’s debt investments, including through the restructuring of such investments, or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm.

Corporate Capital Trust, Inc.

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

CCT was incorporated under the MGCL on June 9, 2010, and formally commenced investment operations on June 17, 2011. CCT is an externally managed, non-diversified, closed-end management investment company.



 

15


Table of Contents

CCT has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under the Code.

CCT’s investment objective is to provide its stockholders with current income and, to a lesser extent, long-term capital appreciation. CCT pursues its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on originated transactions sourced through the networks of KKR and FS Investments.

CCT’s portfolio is comprised primarily of senior debt securities and subordinated debt securities. CCT’s investments may, in some cases, be accompanied by warrants, options or other forms of equity participation. CCT may separately purchase common or preferred equity interests in transactions, including non-controlling equity investments. Additionally, CCT may invest in convertible securities, derivatives and private investment funds. CCT may also co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring jointly controlled or non-controlling interests in certain investments in conjunction with participation by one or more third parties in such investment.

IC Acquisition, Inc.

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

Merger Sub is a Maryland corporation and a newly formed wholly owned subsidiary of FSIC. Merger Sub was formed in connection with and for the sole purpose of the Merger.

FS/KKR Advisor, LLC

201 Rouse Boulevard

Philadelphia, PA 19112

(215) 495-1150

The Advisor is a Delaware limited liability company, located at 201 Rouse Boulevard, Philadelphia, PA 19112, registered as an investment adviser with the SEC under the Advisers Act of 1940, as amended, or the “Advisers Act.” The Advisor is jointly operated by an affiliate of FS Investments and by KKR. FSIC’s chairman and chief executive officer and CCT’s chief exectuive officer, Michael C. Forman, serves as the Advisor’s chairman and chief executive officer, and Todd C. Builione, FSIC and CCT’s president, serves as the Advisor’s president.



 

16


Table of Contents

In addition to managing FSIC’s and CCT’s investments, the Advisor also currently manages the following entities:

 

Name

   Entity   

Investment Focus

   Gross
Assets(1)
 

FS Investment Corporation II

   BDC    Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.    $ 4,773,417  

FS Investment Corporation III

   BDC    Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.    $ 3,710,786  

FS Investment Corporation IV

   BDC    Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.    $ 376,615  

Corporate Capital Trust II

   BDC    Primarily invests in senior secured loans and second lien secured loans, and to a lesser extent, subordinated loans of private U.S. companies.    $ 198,921  

 

(1)

As of June 30, 2018. Gross assets equals total assets set forth on each respective entity’s consolidated balance sheet. Dollar amounts are presented in thousands.

The Advisor’s senior management team has significant experience in private lending and private equity investing, and has developed an expertise in using all levels of a firm’s capital structure to produce income-generating investments, while focusing on risk management. The team also has extensive knowledge of the managerial, operational and regulatory requirements of publicly registered alternative asset entities, such as BDCs.

Merger Structure

Pursuant to the terms of the Merger Agreement, at the Effective Time, Merger Sub will be merged with and into CCT. CCT will be the surviving company and will continue its existence as a corporation under the laws of the State of Maryland. As of the Effective Time, the separate corporate existence of Merger Sub will cease. Immediately after the occurrence of the Effective Time, in the Subsequent Combination, the surviving company will merge with and into FSIC in accordance with the MGCL, with FSIC as the surviving entity.

Based on the number of shares of FSIC Common Stock issued and outstanding and the NAVs of FSIC and CCT as of June 30, 2018, at the closing of the Merger, or the “Closing Date,” it is expected that FSIC stockholders will own approximately 46.8% of the outstanding FSIC Common Stock and former CCT stockholders will own approximately 53.2% of the outstanding FSIC Common Stock. The Exchange Ratio is calculated based on the NAV per share of FSIC Common Stock and the net asset value per share of CCT Common Stock, each as of the Determination Date. Following the Merger, FSIC will continue its operations as conducted before the Merger.

The Merger Agreement is attached as Annex A to this joint proxy statement/prospectus and is incorporated by reference into this joint proxy statement/prospectus. FSIC and CCT encourage their respective stockholders to read the Merger Agreement carefully and in its entirety, as it is the principal legal document governing the Merger.



 

17


Table of Contents

Merger Consideration

If the Merger is consummated, each CCT stockholder will be entitled to receive, for each share of CCT Common Stock, that number of shares of FSIC Common Stock with a NAV equal to the NAV of a share of CCT Common Stock, in each case calculated as of the same date within two (2) business days prior to the closing of the Merger. Holders of CCT Common Stock will receive cash in lieu of fractional shares.

After the Determination Date and until the Merger is completed, the market value of the shares of FSIC Common Stock to be issued in the Merger will continue to fluctuate but the number of shares to be issued to CCT stockholders will remain fixed.

Comparative Market Price of Securities

Shares of FSIC Common Stock trade on the NYSE under the symbol “FSIC.” Shares of CCT Common Stock trade on the NYSE under the symbol “CCT.”

The following table presents the closing prices and most recently determined NAV per share of FSIC Common Stock and CCT Common Stock on the last trading day before public announcement of the Merger.

 

     FSIC
Common
Stock
     CCT
Common
Stock
 

NAV per Share at June 30, 2018

   $ 8.87      $ 19.58  

Closing Sales Price at July 20, 2018

   $ 7.90      $ 16.73  

Risks Relating to the Proposed Merger

The Merger and the other transactions contemplated by the Merger Agreement are subject to, among others, the following risks. FSIC and CCT stockholders should carefully consider these risks before deciding how to vote on the proposals to be voted on at their respective annual meetings.

 

   

Because the market price of FSIC Common Stock will fluctuate, CCT stockholders cannot be sure of the market value of the Merger Consideration they will receive until the Effective Time.

 

   

Sales of shares of FSIC Common Stock after the completion of the Merger may cause the market price of FSIC Common Stock to fall.

 

   

CCT stockholders and FSIC stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Merger.

 

   

FSIC may be unable to realize the benefits anticipated by the Merger, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

 

   

The Merger may trigger certain “change of control” provisions and other restrictions in contracts of FSIC, CCT or their affiliates and the failure to obtain any required consents or waivers could adversely impact the combined company.

 

   

The opinions delivered to the board of directors of FSIC, or the FSIC Board, and the CCT Independent Directors from their respective financial advisors will not reflect changes in circumstances between signing the Merger Agreement and completion of the Merger.

 

   

If the Merger does not close, neither FSIC nor CCT will benefit from the expenses incurred in its pursuit.



 

18


Table of Contents
   

Termination of the Merger Agreement could negatively impact CCT and FSIC.

 

   

Under certain circumstances, CCT and FSIC are obligated to pay each other a termination fee upon termination of the Merger Agreement.

 

   

The Merger Agreement limits the ability of CCT and FSIC to pursue alternatives to the Merger.

 

   

The Merger is subject to closing conditions, including stockholder approvals, that, if not satisfied or waived, will result in the Merger not being completed, which may result in material adverse consequences to CCT’s business and operations.

 

   

FSIC and CCT will be subject to operational uncertainties and contractual restrictions while the Merger is pending.

 

   

FSIC and CCT may waive one or more conditions to the Merger without resoliciting stockholder approval.

 

   

The shares of FSIC Common Stock to be received by CCT stockholders as a result of the Merger will have different rights associated with them than shares of CCT Common Stock currently held by them.

 

   

The market price of FSIC Common Stock after the Merger may be affected by factors different from those affecting FSIC Common Stock currently, including a larger stockholder base, a different portfolio composition and a different capital structure.

See the section captioned “Risk Factors—Risks Relating to the Merger” below for a more detailed discussion of these factors.

Tax Consequences of the Merger

The Merger is intended to qualify as a “reorganization,” within the meaning of Section 368(a) of the Code, and it is a condition to FSIC’s and CCT’s respective obligations to complete the Merger that each of them receives a legal opinion to that effect. Accordingly, the Merger is not expected to be a taxable event for CCT stockholders for U.S. federal income tax purposes as to the shares of FSIC Common Stock they receive in the Merger, except for any gain or loss that may result from the receipt of cash in lieu of fractional shares of FSIC Common Stock.

CCT stockholders should read the section captioned “Certain Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the Merger. Tax matters can be complicated and the tax consequences of the Merger to CCT stockholders will depend on their particular tax situation. Holders of CCT Common Stock should consult with their own tax advisors to determine the tax consequences of the Merger to them.

The Merger is not expected to be a taxable event for FSIC stockholders.

Annual Meeting of FSIC Stockholders

FSIC plans to hold the FSIC Annual Meeting on December 3, 2018, at 2:00 p.m., Eastern Time, at 201 Rouse Boulevard, Philadelphia, PA 19112. At the FSIC Annual Meeting, holders of FSIC Common Stock will be asked to approve (i) Merger Stock Issuance Proposal, (ii) the FSIC Director Election Proposal, (iii) the Share Issuance Proposal and (iv) the Advisory Agreement Amendment Proposal.

A FSIC stockholder can vote at the FSIC Annual Meeting if such stockholder owned shares of FSIC Common Stock at the close of business on the FSIC Record Date. As of that date, there were approximately 239,154,069 shares of FSIC Common Stock outstanding and entitled to vote, approximately 1,455,880 of which, or less than 1%, were owned beneficially or of record by directors and executive officers of FSIC.



 

19


Table of Contents

Annual Meeting of CCT Stockholders

CCT plans to hold the CCT Annual Meeting on December 3, 2018, at 3:00 p.m., Eastern Time, at 201 Rouse Boulevard, Philadelphia, PA 19112. At the CCT Annual Meeting, holders of CCT Common Stock will be asked to approve (i) the Merger Proposal, (ii) the CCT Class I Director Election Proposal and (iii) the CCT Auditor Proposal.

A CCT stockholder can vote at the CCT Annual Meeting if such stockholder owned shares of CCT Common Stock at the close of business on the CCT Record Date. As of that date, there were approximately 124,119,644 shares of CCT Common Stock outstanding and entitled to vote. Approximately 86,189 of such total outstanding shares, or .07%, were owned beneficially or of record by directors and executive officers of CCT.

FSIC Board Recommendation

The FSIC Board has unanimously approved each of the Merger and the related transactions, the Merger Agreement, the nomination of the Class B directors, the Share Issuance Proposal and the Proposed Advisory Agreement, and recommends that FSIC stockholders vote “FOR” each of the Merger Stock Issuance Proposal, the FSIC Director Election Proposal, the Share Issuance Proposal and the Advisory Agreement Amendment Proposal.

CCT Board Recommendation

The CCT Independent Directors have unanimously approved the Merger and the Merger Agreement and recommend that CCT stockholders vote “FOR” the Merger Proposal. The CCT Board has unanimously approved each of the nomination of the Class I director for re-election and the appointment of Deloitte as CCT’s independent registered public accounting firm for 2018, and recommends that CCT stockholders vote “FOR” each of the CCT Class I Director Election Proposal and the CCT Auditor Proposal.

Vote Required—FSIC

Each share of FSIC Common Stock held by a holder of record as of the FSIC Record Date has one vote on each matter considered at the FSIC Annual Meeting.

The Merger Stock Issuance Proposal

The approval of the Merger Stock Issuance Proposal requires the affirmative vote of at least a majority of the votes cast by holders of FSIC Common Stock at a meeting at which a quorum is present. Abstentions and broker non-votes will have no effect on the outcome of the Merger Stock Issuance Proposal.

Under the terms of the Merger Agreement, shares of FSIC Common Stock will be issued in the Merger at a price per share equal to the net asset value per share of FSIC Common Stock as of the Determination Date.

The FSIC Director Election Proposal

The approval of the FSIC Director Election Proposal requires the affirmative vote of at least a majority of the votes cast by holders of FSIC Common Stock at a meeting at which a quorum is present. Abstentions and broker non-votes will have no effect on the outcome of the FSIC Director Election Proposal.

The Share Issuance Proposal

The approval of the Share Issuance Proposal requires the affirmative vote of the stockholders of FSIC holding (1) a majority of the outstanding shares of FSIC Common Stock and (2) a majority of outstanding shares



 

20


Table of Contents

of FSIC Common Stock that are not held by affiliated persons of FSIC. Under the 1940 Act, a majority of the outstanding shares FSIC Common Stock may be the lesser of: (1) 67% of the FSIC Common Stock at the FSIC Annual Meeting if the holders of more than 50% of the outstanding shares of FSIC Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSIC Common Stock. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Share Issuance Proposal.

The Advisory Agreement Amendment Proposal

The approval of the Advisory Agreement Amendment Proposal requires the approval of a majority of the outstanding shares of FSIC Common Stock. Under the 1940 Act, a majority of the outstanding shares FSIC Common Stock may be the lesser of: (1) 67% of the FSIC Common Stock at the FSIC Annual Meeting if the holders of more than 50% of the outstanding shares of FSIC Common Stock are present or represented by proxy or (2) more than 50% of the outstanding shares of FSIC Common Stock. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Advisory Agreement Amendment Proposal.

Vote Required—CCT

Each share of CCT Common Stock held by a holder of record as of the CCT Record Date has one vote on each matter considered at the CCT Annual Meeting.

The Merger Proposal

The approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the outstanding shares of CCT Common Stock entitled to vote at the CCT Annual Meeting. Abstentions and broker non-votes will not count as affirmative votes cast and will therefore have the same effect as votes against the Merger Proposal.

CCT Class I Director Election Proposal

The affirmative vote of a majority of the total votes cast for and against the CCT director nominee at the CCT Annual Meeting is required to approve the CCT Class I Director Election Proposal.

CCT Auditor Proposal

The affirmative vote of a majority of the votes cast at the CCT Annual Meeting, provided that a quorum is presented, is required to approve the CCT Auditor Proposal. Abstentions and broker non-votes will have no effect on the outcome of the CCT Auditor Proposal.

Completion of the Merger

As more fully described in this joint proxy statement/prospectus and in the Merger Agreement, the completion of the Merger depends on a number of conditions being satisfied or, where legally permissible, waived. For information on the conditions that must be satisfied or waived for the Merger to occur, see “Description of the Merger—Conditions to the Closing of the Merger.” While there can be no assurances as to the exact timing, or that the Merger will be completed at all, FSIC and CCT are working to complete the Merger in the fourth quarter of 2018. It is currently expected that the Merger will be completed promptly following receipt of the required stockholder approvals at the FSIC Annual Meeting and the CCT Annual Meeting and satisfaction of the other closing conditions set forth in the Merger Agreement. The Subsequent Combination will occur immediately after the Merger is completed.



 

21


Table of Contents

Termination of the Merger and Termination Fee

The Merger Agreement contains certain termination rights for FSIC and CCT, each of which is discussed below in “Description of the Merger—Termination of the Merger Agreement.” The Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances and subject to applicable law, CCT may be required to pay a termination fee of $75,177,120 to FSIC and FSIC may be required to pay a termination fee of $75,177,120 to CCT. See “Description of the Merger Agreement—Termination of the Merger Agreement” for a discussion of the circumstances that could result in the payment of the termination fees. FSIC or CCT, as applicable, will be the entities entitled to receive any termination fees under the Merger Agreement. The CCT Board and FSIC Board have approved the amount of the termination fees.

Reasons for the Merger

FSIC

FSIC’s Board consulted with FSIC’s management, its investment adviser, as well as its legal and other advisors and considered numerous factors and, as a result, the FSIC Board, including its independent directors, determined that the Merger is in FSIC’s best interests and the best interests of FSIC’s stockholders, and that FSIC stockholders will not suffer any economic dilution as a result of the Merger.

Certain material factors considered by the FSIC Board, including its independent directors, that favored the conclusion of the FSIC Board that the Merger is in FSIC’s best interests and the best interests of FSIC’s stockholders included, among others:

 

   

the investment strategies and risks of FSIC and CCT;

 

   

the continuity of the Advisor and management team;

 

   

an expected reduction in general and administrative expenses;

 

   

the impact on FSIC’s earnings yield and quality and distributions;

 

   

that there would be no economic dilution to FSIC stockholders and the opinion of FSIC’s financial advisor;

 

   

the combined company’s increased market capitalization and additional market coverage;

 

   

the combined company’s improved access to lower cost leverage;

 

   

the combined company’s quality of holdings, enhanced portfolio diversification and potential to increase portfolio yield; and

 

   

the tax consequences of the Merger.

The foregoing list does not include all the factors that the FSIC Board considered in approving the proposed Merger and the Merger Agreement and recommending that FSIC stockholders approve the issuance of shares of FSIC Common Stock necessary to effectuate the Merger. For a further discussion of the material factors considered by the FSIC Board, see “The Merger—Reasons for the Merger.”

CCT

The CCT Independent Director Committee is a standing committee of the CCT Board and is comprised solely of those directors who are not “interested persons” of CCT or the Advisor within the meaning of the 1940 Act. Under the CCT Independent Director Committee’s charter, the CCT Board delegated to the CCT Independent Director Committee the responsibility to oversee conflict of interest matters with respect to CCT, including approval and oversight of transactions between CCT and affiliates. The CCT Independent Director



 

22


Table of Contents

Committee’s charter also grants the committee authority to retain special counsel and other experts or consultants. Pursuant to the authority delegated to the CCT Independent Director Committee under its charter, the CCT Independent Director Committee retained Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) to serve as its “independent legal counsel” with the meaning of Rule 0-1(a)(6)(i) of the 1940 Act. The CCT Independent Director Committee also retained Bank of America Merrill Lynch (“BofA Merrill Lynch”) and Keefe, Bruyette & Woods, Inc. (“KBW”) as financial advisers in connection with the CCT Independent Director Committee’s consideration of the Merger.

Certain material factors considered by the CCT Independent Director Committee and the CCT Board that favored the conclusions reached by the CCT Independent Director Committee and the CCT Board that the Merger is in the best interests of CCT included, among others:

 

   

the potential to increase earnings yield and distributions to stockholders;

 

   

the combined company’s increased market capitalization and additional market coverage;

 

   

the expected reduction in fund expenses;

 

   

the combined company’s improved access to lower cost leverage;

 

   

the compatibility of CCT and FSIC’s investment objectives, investment policies, and related risks and related risk profiles;

 

   

the diversification benefits of the Merger;

 

   

the tax consequences of the Merger;

 

   

that there would be no economic dilution to CCT stockholders; and

 

   

the opinion of BofA Merrill Lynch, the CCT Independent Director Committee’s financial advisor.

The foregoing list does not include all the factors that the CCT Board considered in approving the Merger and the Merger Agreement and recommending that CCT stockholders approve the Merger and the Merger Agreement.

For a further discussion of the material factors considered by the CCT Board, see “The Merger—Reasons for the Merger.”

CCT and FSIC Stockholders Do Not Have Dissenters’ Rights

Neither CCT stockholders nor FSIC stockholders will be entitled to exercise dissenters’ rights in connection with the Merger under the laws of the State of Maryland.



 

23


Table of Contents

RISK FACTORS

In addition to the other information included in this document, stockholders should carefully consider the matters described below in determining whether to approve (i) in the case of CCT stockholders, the Merger Proposal and (ii) in the case of FSIC stockholders, the Merger Stock Issuance Proposal. Although FSIC and CCT have historically described their risk factors somewhat differently, the risks associated with an investment in FSIC and CCT are substantially identical because FSIC and CCT have the same investment adviser and portfolio managers, are members of the same fund complex, co-invest in transactions together and with affiliates of the Adviser and have the same investment objectives and substantially similar investment strategies. The risks set out below are not the only risks FSIC and CCT and, following the Merger, the combined company, face. Additional risks and uncertainties not currently known to FSIC or CCT or that they currently deem to be immaterial also may materially adversely affect their or, following the Merger, the combined company’s, business, financial condition or operating results. If any of the following events occur, FSIC or CCT or, following the Merger, the combined company’s, business, financial condition or results of operations could be materially adversely affected.

Risks Relating to the Merger

Because the market price of FSIC Common Stock will fluctuate, CCT common stockholders cannot be sure of the market value of the Merger Consideration they will receive until the Closing Date.

The market value of the Merger Consideration may vary from the closing price of FSIC Common Stock and CCT Common Stock, respectively, on the date the Merger was announced, on the date that this joint proxy statement/prospectus was mailed to stockholders, on the date of the CCT Annual Meeting or the date of the FSIC Annual Meeting and on the date the Merger is completed and thereafter. Any change in the market price of FSIC Common Stock prior to completion of the Merger will affect the market value of the Merger Consideration that CCT stockholders will receive upon completion of the Merger.

Accordingly, at the time of the CCT Annual Meeting, CCT stockholders will not know or be able to calculate the market value of the Merger Consideration they would receive upon completion of the Merger. Neither CCT nor FSIC is permitted to terminate the Merger Agreement or resolicit the vote of their respective stockholders solely because of changes in the market price of shares of FSIC Common Stock. There will be no adjustment to the Merger Consideration for changes in the market price of shares of FSIC Common Stock. Changes in the market price of FSIC Common Stock may result from a variety of factors, including, among other things:

 

   

changes in the business, operations or prospects of FSIC;

 

   

the financial condition of current or prospective portfolio companies of FSIC;

 

   

interest rates or general market or economic conditions;

 

   

market assessments of the likelihood that the Merger will be completed and the timing of completion of the Merger; and

 

   

market perception of the future profitability of the combined company.

See “Special Note Regarding Forward-Looking Statements” for other factors that could cause the market price of FSIC Common Stock to change.

These factors are generally beyond the control of FSIC. It should be noted that the range of high and low closing sales prices of FSIC Common Stock as reported on the NYSE for the six months ended June 30, 2018, was a low of $7.05 to a high of $7.90. However, historical trading prices are not necessarily indicative of future performance. You should obtain current market quotations for shares of FSIC Common Stock prior to the annual meetings.

 

24


Table of Contents

Sales of shares of FSIC Common Stock after the completion of the Merger may cause the market price of FSIC Common Stock to decline.

Based on the number of outstanding shares of CCT Common Stock as of June 30, 2018, the net asset value per share of FSIC Common Stock and the net asset value per share of CCT Common Stock on such date, FSIC would issue approximately 273.2 million shares of FSIC Common Stock pursuant to the Merger Agreement. Former CCT stockholders may decide not to hold the shares of FSIC Common Stock that they will receive pursuant to the Merger Agreement. Certain CCT stockholders, such as funds with limitations on their permitted holdings of stock in individual issuers, may be required to sell the shares of FSIC Common Stock that they receive pursuant to the Merger Agreement. In addition, FSIC stockholders may decide not to hold their shares of FSIC Common Stock after completion of the Merger. In each case, such sales of FSIC Common Stock could have the effect of depressing the market price for FSIC Common Stock and may take place promptly following the completion of the Merger.

CCT stockholders and FSIC stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Merger.

CCT stockholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective percentage ownership interests in CCT prior to the Merger. Consequently, CCT stockholders should expect to exercise less influence over the management and policies of the combined company following the Merger than they currently exercise over the management and policies of CCT. FSIC stockholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective ownership interests in FSIC prior to the Merger. Consequently, FSIC stockholders should expect to exercise less influence over the management and policies of the combined company following the Merger than they currently exercise over the management and policies of FSIC.

If the Merger is consummated, based on the number of shares of FSIC Common Stock issued and outstanding on the Closing Date, the net asset value per share of FSIC Common Stock and the net asset value per share of CCT Common Stock, each as of June 30, 2018, it is expected FSIC stockholders will own approximately 46.8% of the outstanding FSIC Common Stock and CCT stockholders will own approximately 53.2% of the outstanding FSIC Common Stock. In addition, both prior to and after completion of the Merger, subject to certain restrictions in the Merger Agreement and stockholder approval, FSIC may issue additional shares of FSIC Common Stock (including, subject to certain restrictions under the 1940 Act, at prices below FSIC Common Stock’s then current net asset value per share), all of which would further reduce the percentage ownership of the combined company held by former CCT stockholders and current FSIC stockholders. In addition, the issuance or sale by FSIC of shares of FSIC Common Stock at a discount to net asset value poses a risk of dilution to stockholders.

FSIC may be unable to realize the benefits anticipated by the Merger, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

The realization of certain benefits anticipated as a result of the Merger will depend in part on the integration of CCT’s investment portfolio with FSIC’s and the integration of CCT’s business with FSIC’s. There can be no assurance that CCT’s investment portfolio or business can be operated profitably or integrated successfully into FSIC’s operations in a timely fashion or at all. The dedication of management resources to such integration may detract attention from the day-to-day business of the combined company and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including, but not limited to, incurring unexpected costs or delays in connection with such integration and failure of CCT’s investment portfolio to perform as expected, could have a material adverse effect on the financial results of the combined company.

 

25


Table of Contents

FSIC also expects to achieve certain cost savings from the Merger when the two companies have fully integrated their portfolios. It is possible that the estimates of the potential cost savings could ultimately be incorrect. The cost savings estimates also assume FSIC will be able to combine the operations of FSIC and CCT in a manner that permits those cost savings to be fully realized. If the estimates turn out to be incorrect or if FSIC is not able to successfully combine CCT’s investment portfolio or business with the operations of FSIC, the anticipated cost savings may not be fully realized or realized at all or may take longer to realize than expected.

The Merger may trigger certain “change of control” provisions and other restrictions in contracts of FSIC, CCT or their affiliates and the failure to obtain any required consents or waivers could adversely impact the combined company.

Certain agreements of FSIC and CCT or their affiliates will or may require the consent or waiver of one or more counterparties in connection with the Merger. The failure to obtain any such consent or waiver may permit such counterparties to terminate, or otherwise increase their rights or FSIC’s or CCT’s obligations under, any such agreement because the Merger or other transactions contemplated by the Merger Agreement may violate an anti-assignment, change of control or similar provision relating to any of such transactions. If this occurs, FSIC may have to seek to replace that agreement with a new agreement or seek an amendment to such agreement. FSIC and CCT cannot assure you that FSIC will be able to replace or amend any such agreement on comparable terms or at all.

If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of the combined company following the Merger, including preventing FSIC from operating a material part of CCT’s business.

In addition, the consummation of the Merger may violate, conflict with, result in a breach of provisions of, or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under, certain agreements of FSIC or CCT. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Merger.

The opinions delivered to the FSIC Board and the independent directors of the CCT Board from their respective financial advisors will not reflect changes in circumstances between signing the Merger Agreement and completion of the Merger.

Neither CCT nor FSIC has obtained an updated opinion as of the date of this joint proxy statement/prospectus from their respective financial advisors and neither anticipates obtaining an updated opinion prior to the Closing Date. Changes in the operations and prospects of CCT or FSIC, general market and economic conditions and other factors that may be beyond the control of CCT or FSIC, and on which their respective financial advisors’ opinions were based, may significantly alter the value of CCT or the prices of shares of FSIC Common Stock by the time the Merger is completed. The opinions do not speak as of the time the Merger will be completed or as of any date other than the date of such opinions. Because neither FSIC nor CCT currently anticipates asking their respective financial advisors to update their opinions, the opinions will not address the fairness of the Exchange Ratio from a financial point of view at the time the Merger is completed. The recommendations of the boards of directors of CCT and FSIC that their respective stockholders vote “FOR” approval of the matters described in this joint proxy statement/prospectus are made as of the date of this joint proxy statement/prospectus. For a description of the opinion that the independent directors of the CCT Board received from their financial advisor, see “The Merger—Opinion of the CCT Independent Director Committee’s Financial Advisor.” For a description of the opinion that FSIC received from its financial advisor, see “The Merger—Opinion of FSIC’s Financial Advisor.”

 

26


Table of Contents

If the Merger does not close, neither FSIC nor CCT will benefit from the expenses incurred in its pursuit.

The Merger may not be completed. If the Merger is not completed, FSIC and CCT will have incurred substantial expenses for which no ultimate benefit will have been received. Both companies have incurred out-of-pocket expenses in connection with the Merger for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Merger is not completed.

The termination of the Merger Agreement could negatively impact CCT and FSIC.

If the Merger Agreement is terminated, there may be various consequences, including:

 

   

CCT’s and FSIC’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger;

 

   

the market price of FSIC Common Stock might decline to the extent that the market price prior to termination reflects a market assumption that the Merger will be completed;

 

   

in the case of CCT, it may not be able to find a party willing to pay an equivalent or more attractive price than the price FSIC agreed to pay in the Merger; and

 

   

the payment of any termination fee, if required under the circumstances, could adversely affect the financial condition and liquidity of CCT or FSIC.

Under certain circumstances, CCT and FSIC are obligated to pay each other a termination fee upon termination of the Merger Agreement.

No assurance can be given that the Merger will be completed. The Merger Agreement provides for the payment, subject to applicable law, by CCT or FSIC, as applicable, of a termination fee of $75,177,120 to FSIC or CCT, as applicable if the Merger Agreement is terminated by CCT or FSIC, as applicable, under certain circumstances, including if (i) the CCT Board or the FSIC Board, as applicable, has changed its recommendation in favor of the Merger Proposal or the Merger Stock Issuance Proposal, as applicable and/or has approved an alternative takeover proposal; CCT or FSIC, as applicable, fails to recommend that its stockholders vote in favor of the Merger Proposal or the Merger Stock Issuance Proposal, as applicable; a takeover proposal by a third-party is announced and the FSIC Board or CCT Board, as applicable, fails to reaffirm its recommendation that its stockholders vote in favor of the Merger Proposal or the Merger Stock Issuance Proposal, as applicable; or a tender or exchange offer for FSIC Common Stock or CCT Common Stock, as applicable, is initiated by a third-party and the FSIC Board or CCT Board, as applicable, does not recommend rejection of such tender or exchange offer; (ii) CCT or FSIC, as applicable, materially breaches any of its obligations relating to the solicitation and administration of takeover proposals from third parties; or (iii) (1) the Merger is not completed by July 22, 2019, the FSIC stockholders or CCT stockholders, as applicable, do not approve the Merger Proposal or the Merger Stock Issuance Proposal, as applicable, at its Annual Meeting, or CCT or FSIC, as applicable, willfully or intentionally breaches its representations, warranties, covenants or agreements in the Merger Agreement, (2) an alternative takeover proposal of CCT or FSIC, as applicable, is disclosed after the date of the Merger Agreement and (3) CCT or FSIC, as applicable, enters into an agreement with respect to such takeover proposal within twelve (12) months after the Merger Agreement is terminated and such takeover is subsequently completed, subject to applicable law. See “Description of the Merger Agreement—Termination of the Merger Agreement” for a discussion of the circumstances that could result in the payment of a termination fee. FSIC or CCT, as applicable, will be the entities entitled to receive any termination fees under the Merger Agreement. Each of the FSIC Board and CCT Board have approved the amount of the termination fee which may be paid.

The Merger Agreement limits CCT’s ability to pursue alternatives to the Merger.

The Merger Agreement contains provisions that limit CCT’s ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of CCT. These provisions, which are typical

 

27


Table of Contents

for transactions of this type, and include a $75,177,120 termination fee payable under certain circumstances, might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of CCT from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than that proposed in the Merger or might result in a potential competing acquiror proposing to pay a lower per share price to acquire CCT than it might otherwise have proposed to pay.

The Merger is subject to closing conditions, including stockholder approvals, that, if not satisfied or waived, will result in the Merger not being completed, which may result in material adverse consequences to CCT’s and FSIC’s business and operations.

The Merger is subject to closing conditions, including certain approvals of CCT’s and FSIC’s respective stockholders that, if not satisfied, will prevent the Merger from being completed. The closing condition that CCT’s stockholders approve the Merger and the Merger Agreement may not be waived under applicable law and must be satisfied for the Merger to be completed. CCT currently expects that all directors and executive officers of CCT will vote their shares of CCT Common Stock in favor of the proposals presented at the CCT Annual Meeting. If CCT’s stockholders do not approve the Merger and the Merger Agreement and the Merger is not completed, the resulting failure of the Merger could have a material adverse impact on CCT’s business and operations. The closing condition that FSIC’s stockholders approve the issuance of shares of FSIC Common Stock to be issued in connection with the Merger may not be waived and must be satisfied for the Merger to be completed. FSIC currently expects that all directors and executive officers of FSIC will vote their shares of FSIC Common Stock in favor of the proposals presented at the FSIC Annual Meeting. If FSIC’s stockholders do not approve the issuance of shares of FSIC Common Stock in connection with the Merger and the Merger is not completed, the resulting failure of the Merger could have a material adverse impact on FSIC’s business and operations. In addition to the required approvals of CCT’s and FSIC’s stockholders, the Merger is subject to a number of other conditions beyond CCT’s and FSIC’s control that may prevent, delay or otherwise materially adversely affect its completion. Neither CCT nor FSIC can predict whether and when these other conditions will be satisfied.

FSIC and CCT will be subject to operational uncertainties and contractual restrictions while the Merger is pending.

Uncertainty about the effect of the Merger may have an adverse effect on FSIC and CCT and, consequently, on the combined company following completion of the Merger. These uncertainties may impair FSIC’s and CCT’s abilities to motivate key personnel until the Merger is consummated and could cause those that deal with FSIC and CCT to seek to change their existing business relationships with FSIC and CCT, respectively. In addition, the Merger Agreement restricts FSIC and CCT from taking actions that they might otherwise consider to be in their best interests. These restrictions may prevent FSIC and CCT from pursuing certain business opportunities that may arise prior to the completion of the Merger. Please see the section entitled “Description of the Merger Agreement—Conduct of Business Pending Completion of the Merger” for a description of the restrictive covenants to which CCT is subject.

FSIC and CCT may waive one or more conditions to the Merger without resoliciting stockholder approval.

Certain conditions to FSIC’s and CCT’s obligations to complete the Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of FSIC and CCT. In the event that any such waiver does not require resolicitation of stockholders, the parties to the Merger Agreement will have the discretion to complete the Merger without seeking further stockholder approval. The conditions requiring the approval of FSIC’s and CCT’s stockholders, however, cannot be waived.

The shares of FSIC Common Stock to be received by CCT stockholders as a result of the Merger will have different rights associated with them than shares of CCT Common Stock currently held by them.

The rights associated with CCT Common Stock are different from the rights associated with FSIC Common Stock. See “Comparison of FSIC and CCT Stockholder Rights.”

 

28


Table of Contents

The market price of FSIC Common Stock after the Merger may be affected by factors different from those affecting FSIC Common Stock currently.

The businesses of FSIC and CCT differ in some respects and, accordingly, the results of operations of the combined company and the market price of FSIC Common Stock after the Merger may be affected by factors different from those currently affecting the independent results of operations of each of FSIC and CCT. These factors include:

 

   

a larger stockholder base;

 

   

a different portfolio composition; and

 

   

a different capital structure.

Accordingly, the historical trading prices and financial results of FSIC may not be indicative of these matters for the combined company following the Merger. For a discussion of the business of FSIC and of certain factors to consider in connection with its business, see “Business of FS Investment Corporation.” For a discussion of the business of CCT and of certain factors to consider in connection with its business, see “Business of Corporate Capital Trust, Inc.” As described elsewhere in the joint proxy statement/prospectus, the risks associated with an investment in FSIC and CCT are substantially identical.

Risks Relating to FSIC

Risks Related to Economic Conditions

Future disruptions or instability in capital markets could negatively impact the valuation of FSIC’s investments and FSIC’s ability to raise capital.

From time to time, the global capital markets may experience periods of disruption and instability, which could be prolonged and which could materially and adversely impact the broader financial and credit markets, have a negative impact on the valuations of FSIC’s investments and reduce the availability to FSIC of debt and equity capital. For example, between 2008 and 2009, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major domestic and international financial institutions. In particular, the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and invest. More recently, the macroeconomic environment, including recent social and political tensions in the U.S. and around the world (e.g., the United Kingdom referendum to leave the European Union), concerns regarding the Chinese economy and declines in commodity prices, has led to, and may continue to lead to, volatility in the broadly syndicated credit market as investors re-price credit risk.

While most of FSIC’s investments are not publicly traded, applicable accounting standards require FSIC to assume as part of FSIC’s valuation process that FSIC’s investments are sold in a principal market to market participants (even if FSIC plans on holding an investment through its maturity) and impairments of the market values or fair market values of FSIC’s investments, even if unrealized, must be reflected in FSIC’s financial statements for the applicable period, which could result in significant reductions to FSIC’s net asset value for the period. With certain limited exceptions, FSIC is only allowed to borrow amounts or issue debt securities if FSIC’s asset coverage, as calculated pursuant to the 1940 Act, equals at least 200% immediately after such borrowing. Equity capital may also be difficult to raise during periods of adverse or volatile market conditions because, subject to some limited exceptions, as a BDC, FSIC is generally not able to issue additional shares of FSIC’s Common Stock at a price less than net asset value without first obtaining approval for such issuance from FSIC’s stockholders and FSIC’s independent directors. If FSIC is unable to raise capital or refinance existing debt on acceptable terms, then FSIC may be limited in FSIC’s ability to make new commitments or to fund existing commitments to FSIC’s portfolio companies. Significant changes in the capital markets may also affect

 

29


Table of Contents

the pace of FSIC’s investment activity and the potential for liquidity events involving FSIC’s investments. Thus, the illiquidity of FSIC’s investments may make it difficult for FSIC to sell such investments to access capital if required, and as a result, FSIC could realize significantly less than the value at which FSIC has recorded its investments if FSIC was required to sell them for liquidity purposes.

Uncertainty with respect to the financial stability of the United States and several countries in the European Union (EU) could have a significant adverse effect on FSIC’s business, financial condition and results of operations.

In August 2011, Standard & Poor’s Ratings Services (“S&P”) lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+,” which was last affirmed by S&P in November 2016. Moody’s and Fitch Ratings, Inc. have also warned that they may downgrade the U.S. federal government’s credit rating. In addition, the economic downturn and the significant government interventions into the financial markets and fiscal stimulus spending over the last several years have contributed to significantly increased U.S. budget deficits. The U.S. government has on several occasions adopted legislation to suspend the federal debt ceiling to allow the U.S. Treasury Department to issue additional debt. Further downgrades or warnings by S&P or other rating agencies, and the U.S. government’s credit and deficit concerns in general, including issues around the federal debt ceiling, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with FSIC’s debt portfolio and FSIC’s ability to access the debt markets on favorable terms. Furthermore, in February 2014, the Federal Reserve began scaling back its bond-buying program, or quantitative easing, which it ended in October 2014. Quantitative easing was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities until key economic indicators, such as the unemployment rate, showed signs of improvement. The Federal Reserve also raised interest rates several times since the fourth quarter of 2015. To the extent the Federal Reserve continues to raise rates, and without quantitative easing by the Federal Reserve, there is a risk that the debt markets may experience increased volatility and that the liquidity of certain of FSIC’s investments may be reduced. It is unclear what other effects, if any, the end of quantitative easing, future interest rate raises, if any, and the pace of any such raises will have on the value of FSIC’s investments or FSIC’s ability to access the debt markets on favorable terms.

In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these nations to continue to service their sovereign debt obligations. In January 2012, S&P lowered its long-term sovereign credit rating for France, Italy, Spain and six other European countries, which has negatively impacted global markets and economic conditions. In addition, in April 2012, S&P further lowered its long-term sovereign credit rating for Spain. While the financial stability of such countries has improved, risks resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of U.S. and European financial institutions. Furthermore, following the United Kingdom’s referendum to leave the European Union, S&P lowered its long-term sovereign credit rating. In addition the terms of the United Kingdom’s exit and any future referendums in other European countries may disrupt the global market. Market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, could negatively impact the global economy, and there can be no assurance that assistance packages will be available, or if available, will be sufficient to stabilize countries and markets in Europe. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, or other credit factors, FSIC’s business, financial condition and results of operations could be significantly and adversely affected.

Future economic recessions or downturns could impair FSIC’s portfolio companies and harm FSIC’s operating results.

Many of FSIC’s portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay FSIC’s debt investments during these periods. Therefore, FSIC’s non-performing assets are

 

30


Table of Contents

likely to increase, and the value of FSIC’s portfolio is likely to decrease during these periods. Adverse economic conditions may also decrease the value of any collateral securing FSIC’s debt investments. A prolonged recession may further decrease the value of such collateral and result in losses of value in FSIC’s portfolio and a decrease in FSIC’s revenues, net income and net asset value. Unfavorable economic conditions also could increase FSIC’s funding costs, limit FSIC’s access to the capital markets or result in a decision by lenders not to extend credit to FSIC on terms FSIC deems acceptable. These events could prevent FSIC from increasing investments and harm FSIC’s operating results. Economic downturns or recessions may also result in a portfolio company’s failure to satisfy financial or operating covenants imposed by FSIC or other lenders, which could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its assets representing collateral for its obligations, which could trigger cross defaults under other agreements and jeopardize FSIC’s portfolio company’s ability to meet its obligations under the debt that FSIC holds and the value of any equity securities FSIC owns. FSIC may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company.

A prolonged continuation of depressed oil and natural gas prices could negatively impact the energy and power industry and energy-related investments within FSIC’s investment portfolio.

Prices for oil and natural gas, which historically have been volatile and may continue to be volatile, may be subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and natural gas. A prolonged continuation of depressed oil and natural gas prices would adversely affect the credit quality and performance of certain of FSIC’s debt and equity investments in energy and power and related companies. A decrease in credit quality and performance would, in turn, negatively affect the fair value of these investments, which would consequently negatively affect FSIC’s net asset value. Should a prolonged period of depressed oil and natural gas prices occur, the ability of certain of FSIC’s portfolio companies in the energy and power and related industries to satisfy financial or operating covenants imposed by FSIC or other lenders may be adversely affected, which could, in turn, negatively impact their financial condition and their ability to satisfy their debt service and other obligations. Likewise, should a prolonged period of depressed oil and natural gas prices occur, it is possible that the cash flow and profit generating capacity of these portfolio companies could also be adversely affected thereby negatively impacting their ability to pay FSIC dividends or distributions on FSIC’s investments.

Risks Related to FSIC’s Business and Structure

FSIC’s ability to achieve its investment objectives depends on the Advisor’s ability to manage and support FSIC’s investment process and if FSIC’s agreement with the Advisor were to be terminated, or if the Advisor loses any members of its senior management team, FSIC’s ability to achieve its investment objectives could be significantly harmed.

Because FSIC has no employees, it depends on the investment expertise, skill and network of business contacts of the Advisor. The Advisor evaluates, negotiates, structures, executes, monitors and services FSIC’s investments. FSIC’s future success depends to a significant extent on the continued service of the Advisor, as well as its senior management team. The departure of any members of the Advisor’s senior management team could have a material adverse effect on FSIC’s ability to achieve its investment objectives.

FSIC’s ability to achieve its investment objectives depends on the Advisor’s ability to identify, analyze, invest in, finance and monitor companies that meet FSIC’s investment criteria. The Advisor’s capabilities in structuring the investment process, providing competent, attentive and efficient services to FSIC, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve FSIC’s investment objectives, the Advisor may need to hire, train, supervise and manage new investment professionals to participate in FSIC’s investment selection and monitoring process. The Advisor may not be able to find investment professionals in a timely manner or at all. Failure to support FSIC’s investment process could have a material adverse effect on FSIC’s business, financial condition and results of operations.

 

31


Table of Contents

In addition, each of the Investment Advisory Agreement and Administration Agreement that the Advisor has entered into with FSIC, has termination provisions that allow the parties to terminate the agreements without penalty. The Investment Advisory Agreement and Administration Agreement may each be terminated at any time, without penalty, by the Advisor, upon 60 days’ notice to FSIC. If the Investment Advisory Agreement is terminated, it may adversely affect the quality of FSIC’s investment opportunities. In addition, in the event such agreements are terminated, it may be difficult for FSIC to replace the Advisor. Furthermore, the termination of either of these agreements may adversely impact the terms of any financing arrangement into which FSIC may enter, which could have a material adverse effect on FSIC’s business and financial condition.

The Advisor is a newly-formed investment adviser without a track record of acting as an investment adviser to a BDC, and any failure by the Advisor to manage and support FSIC’s investment process may hinder the achievement of FSIC’s investment objectives.

Because the Advisor is a newly-formed investment adviser jointly operated by an affiliate of Franklin Square Holdings, L.P., or FS Investments, and by KKR, the Advisor has no prior experience acting as an investment adviser to a BDC. The 1940 Act and the Code impose numerous constraints on the operations of BDCs that do not apply to other investment vehicles. While KKR and affiliates of FS Investments have individually acted as investment advisers to BDCs previously, the Advisor’s lack of experience in managing a portfolio of assets under the constraints of the 1940 Act and the Code may hinder the Advisor’s ability to take advantage of attractive investment opportunities and, as a result, may adversely affect FSIC’s ability to achieve its investment objectives. FS Investments’ and KKR’s individual track records and achievements are not necessarily indicative of the future results they will achieve as a joint investment adviser. Accordingly, FSIC can offer no assurance that it will replicate the historical performance of other investment companies with which FS Investments and KKR have been affiliated, and FSIC cautions that its investment returns could be lower than the returns achieved by such other companies.

Because FSIC’s business model depends to a significant extent upon relationships with private equity sponsors, investment banks and commercial banks, the inability of the Advisor to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect FSIC’s business.

If the Advisor fails to maintain its existing relationships with private equity sponsors, investment banks and commercial banks on which it relies to provide FSIC with potential investment opportunities, or develop new relationships with other sponsors or sources of investment opportunities, FSIC may not be able to grow its investment portfolio. In addition, individuals with whom the Advisor has relationships generally are not obligated to provide FSIC with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for FSIC.

FSIC may face increasing competition for investment opportunities, which could delay deployment of its capital, reduce returns and result in losses.

FSIC competes for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and CLO funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, have begun to invest in areas in which they have not traditionally invested, including making investments in middle market private U.S. companies. Furthermore, the potentially changing regulatory landscape as a result of the presidential administration may increase the number of middle market investors. As a result of these new entrants, competition for investment opportunities in middle market private U.S. companies may intensify. Many of FSIC’s competitors are substantially larger and have considerably greater financial, technical and marketing resources than FSIC does. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to FSIC. In addition, some of FSIC’s competitors may have higher risk tolerances or different risk assessments than FSIC has. These characteristics could allow FSIC’s competitors to consider a

 

32


Table of Contents

wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than FSIC is able to do. FSIC may lose investment opportunities if it does not match its competitors’ pricing, terms and structure. If FSIC is forced to match its competitors’ pricing, terms and structure, it may not be able to achieve acceptable returns on its investments or may bear substantial risk of capital loss. A significant part of FSIC’s competitive advantage stems from the fact that the market for investments in middle market private U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of FSIC’s competitors in this target market could force FSIC to accept less attractive investment terms. Furthermore, many of FSIC’s competitors have greater experience operating under, or are not subject to, the regulatory restrictions that the 1940 Act imposes on FSIC as a BDC.

FSIC’s Board may change FSIC’s operating policies and strategies without prior notice or stockholder approval.

FSIC’s Board has the authority to modify or waive FSIC’s current operating policies, investment criteria and strategies without prior notice and without stockholder approval. Moreover, FSIC has significant investment flexibility within its investment strategies. Therefore, FSIC may invest its assets in ways with which investors may not agree. FSIC also cannot predict the effect any changes to its current operating policies, investment criteria and strategies would have on its business, net asset value, operating results and the value of its stock. However, the effects might be adverse, which could negatively impact FSIC’s ability to pay stockholders distributions and cause them to lose all or part of their investment.

Changes in laws or regulations governing FSIC’s operations or the operations of its business partners may adversely affect FSIC’s business or cause FSIC to alter its business strategy.

FSIC, its portfolio companies and its business partners are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments FSIC is permitted to make and the deductibility of interest expense by its portfolio companies, potentially with retroactive effect. In particular, over the last several years there has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. New or repealed legislation, interpretations, rulings or regulations could require changes to certain business practices of FSIC or its portfolio companies, negatively impact the operations, cash flows or financial condition of FSIC or its portfolio companies, impose additional costs on FSIC or its portfolio companies or otherwise adversely affect FSIC’s business or the business of its portfolio companies. In addition, any changes to the laws and regulations governing FSIC’s operations, including with respect to permitted investments, may cause FSIC to alter its investment strategy to avail itself of new or different opportunities or make other changes to its business. Such changes could result in material differences to FSIC’s strategies and plans as set forth in this joint proxy statement/prospectus and may result in its investment focus shifting from the areas of expertise of the Advisor to other types of investments in which the Advisor may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on FSIC’s results of operations and the value of a stockholder’s investment.

The impact on FSIC of recent financial reform legislation, including the Dodd-Frank Act, is uncertain.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, or the “Dodd-Frank Act,” institutes a wide range of reforms that will have an impact on financial institutions. Many of the requirements called for in the Dodd-Frank Act are expected to be implemented over time, most of which will likely be subject to implementing regulations over the course of several years. However, the presidential administration has announced its intention to repeal, amend or replace certain portions of the Dodd-Frank Act and the regulations implemented thereunder. Given the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed, amended or replaced, the full impact such requirements will have on FSIC’s business, results of operations or financial condition is unclear. The changes resulting from

 

33


Table of Contents

the Dodd-Frank Act or any changes to the regulations already implemented thereunder may require FSIC to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact FSIC’s business, results of operations and financial condition. While FSIC cannot predict what effect any changes in the laws or regulations or their interpretations would have on FSIC as a result of recent financial reform legislation, these changes could be materially adverse to FSIC and its stockholders.

The SBCA Act allows FSIC to incur additional leverage.

On March 23, 2018, the Small Business Credit Availability Act (the “SBCA Act”) became law. The SBCA Act, among other things, amends Section 61(a) of the 1940 Act to add a new Section 61(a)(2) which reduces the asset coverage requirements for senior securities applicable to BDCs from 200% to 150% provided that certain disclosure and approval requirements are met. Before the reduced asset coverage requirements under Section 61(a)(2) are effective with respect to FSIC, the application of that section of the 1940 Act must be approved by either (1) a “required majority,” as defined in the Section 57(o) of the 1940 Act, of the FSIC Board or (2) a majority of votes cast at a special or annual meeting of FSIC’s stockholders.

Future legislation or rules could modify how FSIC treats derivatives and other financial arrangements for purposes of its compliance with the leverage limitations of the 1940 Act.

Future legislation or rules may modify how FSIC treats derivatives and other financial arrangements for purposes of its compliance with the leverage limitations of the 1940 Act. For example, the SEC proposed a new rule in December 2015 that is designed to enhance the regulation of the use of derivatives by registered investments companies and BDCs. While the adoption of the December 2015 rule is currently uncertain, the proposed rule, if adopted, or any future legislation or rules, may modify how leverage is calculated under the 1940 Act and, therefore, may increase or decrease the amount of leverage currently available to FSIC under the 1940 Act, which may be materially adverse to FSIC and its stockholders.

As a public company, FSIC is subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect FSIC.

As a public company, FSIC incurs legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act,” and other rules implemented by the SEC and the listing standards of the NYSE. FSIC’s management is required to report on FSIC’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. In particular, FSIC’s management is required to review on an annual basis FSIC’s internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in FSIC’s internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from FSIC’s independent registered public accounting firm on the effectiveness of FSIC’s internal control over financial reporting.

FSIC incurs significant expenses in connection with its compliance with the Sarbanes-Oxley Act and other regulations applicable to public companies, which may negatively impact its financial performance and its ability to make distributions. Compliance with such regulations also requires a significant amount of FSIC’s management’s time and attention. For example, FSIC cannot be certain as to the timing of the completion of its Sarbanes-Oxley mandated evaluations, testings and remediation actions, if any, or the impact of the same on its operations, and FSIC may not be able to ensure that the process is effective or that its internal control over financial reporting is or will be deemed effective in the future. In the event that FSIC is unable to maintain an effective system of internal control and maintain compliance with the Sarbanes-Oxley Act and related rules, FSIC may be adversely affected.

 

34


Table of Contents

FSIC may experience fluctuations in its quarterly results.

FSIC could experience fluctuations in its quarterly operating results due to a number of factors, including its ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities it acquires, the level of its expenses, variations in and the timing of fee income and the recognition of realized and unrealized gains or losses, the degree to which it encounters competition in the markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.

If FSIC, its affiliates and its and their respective third-party service providers are unable to maintain the availability of electronic data systems and safeguard the security of data, FSIC’s ability to conduct business may be compromised, which could impair FSIC’s liquidity, disrupt its business, damage its reputation or otherwise adversely affect its business.

Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology systems and data from unauthorized access, attack, or damage. FSIC, its affiliates and its and their respective third-party service providers are subject to cybersecurity risks. Cybersecurity risks have significantly increased in recent years and, while FSIC has not experienced any material losses relating to cyber attacks or other information security breaches, FSIC could suffer such losses in the future. FSIC’s, its affiliates and its and their respective third-party service providers’ computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic personal information and sensitive business data, processed and stored in, and transmitted through, computer systems and networks, or otherwise cause interruptions or malfunctions in FSIC’s operations or the operations of its affiliates and its and their respective third-party service providers. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or otherwise adversely affect FSIC’s business, financial condition or results of operations. Privacy and information security laws and regulation changes, and compliance with those changes, may result in cost increases due to system changes and the development of new administrative processes. In addition, FSIC may be required to expend significant additional resources to modify its protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.

FSIC’s business and operations could be negatively affected if FSIC becomes subject to stockholder activism, which could cause FSIC to incur significant expense, hinder the execution of its investment strategy or impact its stock price.

Stockholder activism, which could take many forms, including making public demands that FSIC consider certain strategic alternatives for FSIC, engaging in public campaigns to attempt to influence FSIC’s corporate governance and/or its management, and commencing proxy contests to attempt to elect the activists’ representatives or others to the FSIC Board, or arise in a variety of situations, has been increasing in the BDC space recently. While FSIC is currently not subject to any stockholder activism, due to the potential volatility of FSIC’s stock price and for a variety of other reasons, FSIC may in the future become the target of stockholder activism. Stockholder activism could result in substantial costs and divert management’s and FSIC’s board of directors’ attention and resources from FSIC’s business. Additionally, such stockholder activism could give rise to perceived uncertainties as to FSIC’s future and adversely affect FSIC’s relationships with service providers and FSIC’s portfolio companies. Also, FSIC may be required to incur significant legal and other expenses related to any activist stockholder matters. Further, FSIC’s stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.

 

35


Table of Contents

Risks Related to the Advisor and Its Affiliates

The Advisor and its affiliates, including FSIC’s officers and some of its directors, face conflicts of interest as a result of compensation arrangements between FSIC and the Advisor, which could result in actions that are not in the best interests of FSIC’s stockholders.

The Advisor and its affiliates receive substantial fees from FSIC in return for their services, and these fees could influence the advice provided to FSIC. FSIC pays to the Advisor an incentive fee that is based on the performance of FSIC’s portfolio and an annual base management fee that is based on the average weekly value of FSIC’s gross assets. Because the incentive fee is based on the performance of FSIC’s portfolio, the Advisor may be incentivized to make investments on FSIC’s behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee is determined may also encourage the Advisor to use leverage to increase the return on FSIC’s investments. In addition, because the base management fee is based upon the average weekly value of FSIC’s gross assets, which includes any borrowings for investment purposes, the Advisor may be incentivized to recommend the use of leverage or the issuance of additional equity to make additional investments and increase the average weekly value of FSIC’s gross assets. Under certain circumstances, the use of leverage may increase the likelihood of default, which could disfavor holders of FSIC Common Stock. FSIC’s compensation arrangements could therefore result in FSIC making riskier or more speculative investments, or relying more on leverage to make investments, than would otherwise be the case. This could result in higher investment losses, particularly during cyclical economic downturns.

FSIC may be obligated to pay the Advisor incentive compensation on income that FSIC has not received.

Any incentive fee payable by FSIC that relates to its net investment income may be computed and paid on income that may include interest that has been accrued but not yet received. If a portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become uncollectible. the Advisor is not under any obligation to reimburse FSIC for any part of the incentive fee it received that was based on accrued income that FSIC never received as a result of a default by an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in FSIC paying an incentive fee on income FSIC never received.

For U.S. federal income tax purposes, FSIC is required to recognize taxable income (such as deferred interest that is accrued as original issue discount) in some circumstances in which FSIC does not receive a corresponding payment in cash. Under such circumstances, FSIC may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that FSIC is required to pay an incentive fee with respect to such accrued income. As a result, FSIC may have to sell some of its investments at times and/or at prices FSIC would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities for this purpose. If FSIC is not able to obtain cash from other sources, FSIC may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

There may be conflicts of interest related to obligations the Advisor’s senior management and investment teams have to FSIC’s affiliates and to other clients.

The members of the senior management and investment teams of the Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as FSIC does, or of investment vehicles managed by the same personnel. For example, the Advisor is the investment adviser to the other BDCs in the Fund Complex, and the officers, managers and other personnel of the Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in FSIC’s best interests or in the best interest of

 

36


Table of Contents

FSIC’s stockholders. FSIC’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, FSIC relies on the Advisor to manage FSIC’s day-to-day activities and to implement its investment strategy. The Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to FSIC. As a result of these activities, the Advisor, its employees and certain of its affiliates will have conflicts of interest in allocating their time between FSIC and other activities in which they are or may become involved, including the management of other entities affiliated with FS Investments or KKR. The Advisor and its employees will devote only as much of its or their time to FSIC’s business as the Advisor and its employees, in their judgment, determine is reasonably required, which may be substantially less than their full time.

The time and resources that individuals employed by the Advisor devote to FSIC may be diverted and FSIC may face additional competition due to the fact that individuals employed by the Advisor are not prohibited from raising money for or managing another entity that makes the same types of investments that FSIC targets.

Neither the Advisor, nor individuals employed by the Advisor, are prohibited from raising money for and managing another investment entity that makes the same types of investments as those FSIC targets. As a result, the time and resources that these individuals may devote to FSIC may be diverted. In addition, FSIC may compete with any such investment entity for the same investors and investment opportunities.

The Advisor’s liability is limited under each of the Investment Advisory Agreement and the Administration Agreement, and FSIC is required to indemnify it against certain liabilities, which may lead it to act in a riskier manner on FSIC’s behalf than it would when acting for its own account.

Pursuant to each of the Investment Advisory Agreement and the Administration Agreement, the Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of, the Advisor will not be liable to FSIC for their acts under the Investment Advisory Agreement or the Administration Agreement, as applicable, absent willful misfeasance, bad faith or gross negligence in the performance of their duties. FSIC has agreed to indemnify, defend and protect the Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of, the Advisor with respect to all damages, liabilities, costs and expenses resulting from acts of the Advisor not arising out of willful misfeasance, bad faith or gross negligence in the performance of their duties under the Investment Advisory Agreement or the Administration Agreement, as applicable. These protections may lead the Advisor to act in a riskier manner when acting on FSIC’s behalf than it would when acting for its own account.

Risks Related to Business Development Companies

Failure to maintain FSIC’s status as a BDC would reduce FSIC’s operating flexibility.

If FSIC does not remain a BDC, FSIC might be regulated as a closed-end investment company under the 1940 Act, which would subject FSIC to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease FSIC’s operating flexibility.

FSIC is uncertain of its sources for funding its future capital needs and if FSIC cannot obtain debt or equity financing on acceptable terms, or at all, FSIC’s ability to acquire investments and to expand its operations will be adversely affected.

Any working capital reserves FSIC maintains may not be sufficient for investment purposes, and FSIC may require debt or equity financing to operate. FSIC may also need to access the capital markets to refinance existing debt obligations to the extent maturing obligations are not repaid with cash flows from operations. In

 

37


Table of Contents

order to maintain RIC tax treatment, FSIC must distribute distributions to its stockholders each tax year on a timely basis generally of an amount at least equal to 90% of FSIC’s investment company taxable income, determined without regard to any deduction for distributions paid, and the amounts of such distributions will therefore not be available to fund investment originations or to repay maturing debt. In addition, with certain limited exceptions, FSIC is only allowed to borrow amounts or issue debt securities or preferred stock, which is referred to collectively as “senior securities,” such that FSIC’s asset coverage, as calculated pursuant to the 1940 Act, equals at least 200% immediately after such borrowing, which, in certain circumstances, may restrict FSIC’s ability to borrow or issue debt securities or preferred stock. In the event that FSIC develops a need for additional capital in the future for investments or for any other reason, and FSIC cannot obtain debt or equity financing on acceptable terms, or at all, FSIC’s ability to acquire investments and to expand its operations will be adversely affected. As a result, FSIC would be less able to allocate its portfolio among various issuers and industries and achieve its investment objectives, which may negatively impact FSIC’s results of operations and reduce its ability to make distributions to its stockholders.

The requirement that FSIC invests a sufficient portion of its assets in qualifying assets could preclude it from investing in accordance with its current business strategy; conversely, the failure to invest a sufficient portion of its assets in qualifying assets could result in FSIC’s failure to maintain its status as a BDC.

As a BDC, FSIC may not acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of FSIC’s total assets are qualifying assets. Therefore, FSIC may be precluded from investing in what FSIC believes are attractive investments if such investments are not qualifying assets. Similarly, these rules could prevent FSIC from making additional investments in existing portfolio companies, which could result in the dilution of FSIC’s position, or could require FSIC to dispose of investments at an inopportune time to comply with the 1940 Act. If FSIC were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments. Conversely, if FSIC fails to invest a sufficient portion of its assets in qualifying assets, FSIC could lose its status as a BDC, which would subject it to substantially more regulatory restrictions and significantly decrease FSIC’s operating flexibility.

Regulations governing FSIC’s operation as a BDC and a RIC will affect its ability to raise, and the way in which it raises, additional capital or borrow for investment purposes, which may have a negative effect on its growth.

As a result of FSIC’s need to satisfy the annual distribution requirement in order to maintain RIC tax treatment under Subchapter M of the Code, FSIC may need to periodically access the capital markets to raise cash to fund new investments. FSIC may issue “senior securities,” as defined in the 1940 Act, including issuing preferred stock, borrowing money from banks or other financial institutions, or issuing debt securities only in amounts such that FSIC’s asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. FSIC’s ability to issue certain other types of securities is also limited. Under the 1940 Act, FSIC is also generally prohibited from issuing or selling its common stock at a price per share, after deducting underwriting commissions, that is below its net asset value per share, without first obtaining approval for such issuance from FSIC’s stockholders and independent directors. Compliance with these limitations on FSIC’s ability to raise capital may unfavorably limit FSIC’s investment opportunities. These limitations may also reduce FSIC’s ability in comparison to other companies to profit from favorable spreads between the rates at which FSIC can borrow and the rates at which FSIC can lend.

In addition, because FSIC incurs indebtedness for investment purposes, if the value of FSIC’s assets declines, FSIC may be unable to satisfy the asset coverage test under the 1940 Act, which would prohibit FSIC from paying distributions and, as a result, could cause FSIC to be subject to corporate-level tax on FSIC’s income and capital gains, regardless of the amount of distributions paid. If FSIC cannot satisfy the asset coverage test, FSIC may be required to sell a portion of its investments and, depending on the nature of its debt financing, repay a portion of its indebtedness at a time when such sales may be disadvantageous.

 

38


Table of Contents

FSIC’s ability to enter into transactions with its affiliates is restricted.

FSIC is prohibited under the 1940 Act from participating in certain transactions with certain of its affiliates without the prior approval of a majority of the independent members of its board of directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of FSIC’s outstanding voting securities will be FSIC’s affiliate for purposes of the 1940 Act, and FSIC will generally be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of the FSIC Board. The 1940 Act also prohibits certain “joint” transactions with certain of FSIC’s affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of the FSIC Board and, in some cases, the SEC. In an order dated April 3, 2018, the SEC granted exemptive relief permitting FSIC, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by the Advisor or KKR, with FSIC’s co-investment affiliates. If a person acquires more than 25% of FSIC’s voting securities, FSIC will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons to the extent not covered by the exemptive relief, absent the prior approval of the SEC. Similar restrictions limit FSIC’s ability to transact business with FSIC’s officers or directors or their respective affiliates. As a result of these restrictions, FSIC may be prohibited from buying or selling any security from or to any portfolio company of a fund managed by the Advisor without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to FSIC.

Risks Related to FSIC’s Investments

FSIC’s investments in prospective portfolio companies may be risky, and FSIC could lose all or part of its investment.

FSIC’s investments in senior secured loans, second lien secured loans, senior secured bonds, subordinated debt and equity of private U.S. companies, including middle market companies, may be risky and there is no limit on the amount of any such investments in which FSIC may invest.

Senior Secured Loans, Second Lien Secured Loans and Senior Secured Bonds. There is a risk that any collateral pledged by portfolio companies in which FSIC has taken a security interest may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. To the extent FSIC’s debt investment is collateralized by the securities of a portfolio company’s subsidiaries, such securities may lose some or all of their value in the event of the bankruptcy or insolvency of the portfolio company. Also, in some circumstances, FSIC’s security interest may be contractually or structurally subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the debt. Secured debt that is under-collateralized involves a greater risk of loss. In addition, second lien secured debt is granted a second priority security interest in collateral, which means that any realization of collateral will generally be applied to pay senior secured debt in full before second lien secured debt is paid. Consequently, the fact that debt is secured does not guarantee that FSIC will receive principal and interest payments according to the debt’s terms, or at all, or that FSIC will be able to collect on the debt should FSIC be forced to enforce its remedies.

Subordinated Debt. FSIC’s subordinated debt investments will generally rank junior in priority of payment to senior debt and will generally be unsecured. This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks that could adversely affect FSIC’s investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject FSIC and its stockholders to non-cash income. Because FSIC will not receive any principal repayments prior to the maturity of some of its subordinated debt investments, such investments will be of greater risk than amortizing loans.

 

39


Table of Contents

Equity Investments. FSIC may make select equity investments. In addition, in connection with its debt investments, FSIC on occasion receives equity interests such as warrants or options as additional consideration. The equity interests FSIC receives may not appreciate in value and, in fact, may decline in value. Accordingly, FSIC may not be able to realize gains from its equity interests, and any gains that FSIC does realize on the disposition of any equity interests may not be sufficient to offset any other losses FSIC experiences.

Non-U.S. Securities. FSIC may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies and securities of companies in emerging markets, to the extent permitted by the 1940 Act. Because evidences of ownership of such securities usually are held outside the United States, FSIC would be subject to additional risks if it invested in non-U.S. securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or restrict the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether from currency blockage or otherwise.

Because non-U.S. securities may be purchased with and payable in foreign currencies, the value of these assets as measured in U.S. dollars may be affected unfavorably by changes in currency rates and exchange control regulations. In addition, investing in securities of companies in emerging markets involves many risks, including potential inflationary economic environments, regulation by foreign governments, different accounting standards, political uncertainties and economic, social, political, financial, tax and security conditions in the applicable emerging market, any of which could negatively affect the value of companies in emerging markets or investments in their securities.

Below Investment Grade Risk. In addition, FSIC invests in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. They may also be difficult to value and illiquid.

Investing in middle market companies involves a number of significant risks, any one of which could have a material adverse effect on FSIC’s operating results.

Investments in middle market companies involve some of the same risks that apply generally to investments in larger, more established companies. However, such investments have more pronounced risks in that they:

 

   

may have limited financial resources and may be unable to meet their obligations under their debt securities that FSIC holds, which may be accompanied by a deterioration in the value of any collateral pledged under such securities and a reduction in the likelihood of FSIC realizing any guarantees it may have obtained in connection with its investment;

 

   

have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tends to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;

 

   

are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on FSIC’s portfolio company and, in turn, on FSIC;

 

   

generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, FSIC’s executive officers and directors and members of the Advisor may, in the ordinary course of business, may be named as defendants in litigation arising from FSIC’s investments in the portfolio companies; and

 

40


Table of Contents
   

may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity.

FSIC’s portfolio companies may incur debt that ranks equally with, or senior to, FSIC’s investments in such companies.

FSIC’s portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which FSIC invests. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which FSIC is entitled to receive payments with respect to the debt instruments in which FSIC invests. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to FSIC’s investment in that portfolio company would typically be entitled to receive payment in full before FSIC receives any proceeds. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to FSIC. In the case of debt ranking equally with debt instruments in which FSIC invests, FSIC would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

There may be circumstances where FSIC’s debt investments could be subordinated to claims of other creditors or FSIC could be subject to lender liability claims.

If one of FSIC’s portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which FSIC actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize FSIC’s debt investment and subordinate all or a portion of FSIC’s claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, FSIC’s legal rights may be subordinated to other creditors. FSIC may also be subject to lender liability claims for actions taken by it with respect to a borrower’s business or in instances where FSIC exercises control over the borrower or renders significant managerial assistance.

Second priority liens on collateral securing debt investments that FSIC makes to its portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and FSIC.

Certain debt investments that FSIC makes in portfolio companies may be secured on a second priority basis by the same collateral securing first priority debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by such company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before FSIC. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then FSIC, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against such company’s remaining assets, if any.

The rights FSIC may have with respect to the collateral securing the debt investments it makes in its portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that FSIC enters into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the

 

41


Table of Contents

obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. FSIC may not have the ability to control or direct such actions, even if its rights are adversely affected.

FSIC’s investments in CLOs may be riskier than a direct investment in the debt or other securities of the underlying companies.

When investing in CLOs, FSIC may invest in any level of a CLO’s subordination chain, including subordinated (lower-rated) tranches and residual interests (the lowest tranche). CLOs are typically highly levered and therefore, the junior debt and equity tranches that FSIC may invest in are subject to a higher risk of total loss and deferral or nonpayment of interest than the more senior tranches to which they are subordinated. In addition, FSIC will generally have the right to receive payments only from the CLOs, and will generally not have direct rights against the underlying borrowers or entities that sponsored the CLOs. Furthermore, the investments FSIC makes in CLOs are at times thinly traded or have only a limited trading market. As a result, investments in such CLOs may be characterized as illiquid securities.

FSIC generally will not control its portfolio companies.

FSIC does not expect to control most of its portfolio companies, even though it may have board representation or board observation rights, and FSIC’s debt agreements with such portfolio companies may contain certain restrictive covenants. As a result, FSIC is subject to the risk that a portfolio company in which it invests may make business decisions with which FSIC disagrees and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve FSIC’s interests as debt investors. Due to the lack of liquidity for FSIC’s investments in non-traded companies, FSIC may not be able to dispose of its interests in its portfolio companies as readily as FSIC would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of FSIC’s portfolio holdings.

Declines in market values or fair market values of FSIC’s investments could result in significant net unrealized depreciation of FSIC’s portfolio, which in turn would reduce FSIC’s net asset value.

Under the 1940 Act, FSIC is required to carry its investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of the FSIC Board. While most of FSIC’s investments are not publicly traded, applicable accounting standards require FSIC to assume as part of its valuation process that its investments are sold in a principal market to market participants (even if FSIC plans on holding an investment through its maturity) and impairments of the market values or fair market values of FSIC’s investments, even if unrealized, must be reflected in its financial statements for the applicable period as unrealized depreciation, which could result in a significant reduction to FSIC’s net asset value for a given period.

A significant portion of FSIC’s investment portfolio is and will be recorded at fair value as determined in good faith by the FSIC Board and, as a result, there is and will be uncertainty as to the value of FSIC’s portfolio investments.

Under the 1940 Act, FSIC is required to carry its portfolio investments at market value or, if there is no readily available market value, at fair value, as determined by the FSIC Board. There is not a public market for the securities of the privately held companies in which FSIC invests. Most of FSIC’s investments are not publicly traded or actively traded on a secondary market but are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors or are not traded at all. As a result, FSIC values these securities quarterly at fair value as determined in good faith by the FSIC Board.

Certain factors that may be considered in determining the fair value of FSIC’s investments include dealer quotes for securities traded on the secondary market for institutional investors, the nature and realizable value of

 

42


Table of Contents

any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly traded companies, discounted cash flows and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, FSIC’s determinations of fair value may differ materially from the values that would have been used if a ready market for these non-traded securities existed. Due to this uncertainty, FSIC’s fair value determinations may cause its net asset value on a given date to materially understate or overstate the value that FSIC may ultimately realize upon the sale of one or more of its investments.

FSIC is exposed to risks associated with changes in interest rates.

FSIC is subject to financial market risks, including changes in interest rates. General interest rate fluctuations may have a substantial negative impact on FSIC’s investments, investment opportunities and cost of capital and, accordingly, may have a material adverse effect on FSIC’s investment objectives, its rate of return on invested capital and its ability to service its debt and make distributions to its stockholders. In addition, an increase in interest rates would make it more expensive for FSIC to use debt for its financing needs, if any.

FSIC’s investment portfolio primarily consists of senior secured debt with maturities typically ranging from three to seven years. The longer the duration of these securities, generally, the more susceptible they are to changes in market interest rates. As market interest rates increase, those securities with a lower yield-at-cost can experience a mark-to-market unrealized loss. An impairment of the fair market value of FSIC’s investments, even if unrealized, must be reflected in FSIC’s financial statements for the applicable period and may therefore have a material adverse effect on its results of operations for that period.

Because FSIC incurs indebtedness to make investments, its net investment income is dependent, in part, upon the difference between the rate at which it borrows funds or pays interest on outstanding debt securities and the rate at which it invests these funds. An increase in interest rates would make it more expensive to use debt to finance FSIC’s investments or to refinance its current financing arrangements. In addition, certain of FSIC’s financing arrangements provide for adjustments in the loan interest rate along with changes in market interest rates. Therefore, in periods of rising interest rates, FSIC’s cost of funds will increase, which could materially reduce its net investment income. Any reduction in the level of interest rates on new investments relative to interest rates on FSIC’s current investments could also adversely impact its net investment income.

FSIC has and may continue to structure the majority of its debt investments with floating interest rates to position its portfolio for rate increases. However, there can be no assurance that this will successfully mitigate FSIC’s exposure to interest rate risk. For example, in the event of a rising interest rate environment, payments under floating rate debt instruments generally would rise and there may be a significant number of issuers of such floating rate debt instruments that would be unable or unwilling to pay such increased interest costs and may otherwise be unable to repay their loans. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. Investments in floating rate debt instruments may also decline in value in response to rising interest rates if the interest rates of such investments do not rise as much, or as quickly, as market interest rates in general. Similarly, during periods of rising interest rates, FSIC’s fixed rate investments may decline in value because the fixed rate of interest paid thereunder may be below market interest rates.

In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of the London Interbank Offered Rate, or LIBOR, by the end of 2021. Because the statements made by the head of the United Kingdom Financial Conduct Authority are recent in nature, there is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on FSIC’s cost of capital and net investment income cannot yet be determined.

 

43


Table of Contents

FSIC may use interest rate risk management techniques in an effort to limit its exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

However, these activities may limit FSIC’s ability to participate in the benefits of lower interest rates with respect to the hedged portion of its portfolio. FSIC also has limited experience in entering into hedging transactions, and it will initially have to develop such expertise or arrange for such expertise to be provided. Adverse developments resulting from hedging transactions could have a material adverse effect on FSIC’s business, financial condition, results of operations and cash flows.

Furthermore, because a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to FSIC’s debt investments, an increase in interest rates would make it easier for FSIC to meet or exceed the incentive fee hurdle rate in the Investment Advisory Agreement and may result in a substantial increase of the amount of incentive fees payable to the Advisor with respect to pre-incentive fee net investment income.

A covenant breach by FSIC’s portfolio companies may harm its operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by FSIC or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that FSIC holds. FSIC may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.

FSIC’s portfolio companies may be highly leveraged.

Some of FSIC’s portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to FSIC as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

FSIC may not realize gains from its equity investments.

Certain investments that FSIC may make may include equity related securities, such as rights and warrants that may be converted into or exchanged for common stock or the cash value of the common stock. In addition, FSIC may make direct equity investments in portfolio companies. The equity interests FSIC receives may not appreciate in value and, in fact, may decline in value. Accordingly, FSIC may not be able to realize gains from its equity interests and any gains that FSIC does realize on the disposition of any equity interests may not be sufficient to offset any other losses it experiences. FSIC may also be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow FSIC to sell the underlying equity interests. FSIC may be unable to exercise any put rights it acquires, which grants FSIC the right to sell its equity securities back to the portfolio company, for the consideration provided in its investment documents if the issuer is in financial distress.

An investment strategy focused primarily on privately-held companies presents certain challenges, including the lack of available information about these companies.

FSIC’s investments are primarily in privately held companies. Investments in private companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to

 

44


Table of Contents

the capital markets, resulting in diminished capital resources and the ability to withstand financial distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet the obligations under their debt securities that FSIC holds. Second, the investments themselves often may be illiquid. The securities of most of the companies in which FSIC invests are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. In addition, such securities may be subject to legal and other restrictions on resale. As such, FSIC may have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. In addition, in a restructuring, FSIC may receive substantially different securities than FSIC’s original investment in a portfolio company, including securities in a different part of the capital structure. These investments may also be difficult to value because little public information generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies often may not have third-party debt ratings or audited financial statements. FSIC must therefore rely on the ability of the Advisor to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules and regulations that govern public companies. If FSIC is unable to uncover all material information about these companies, FSIC may not make a fully informed investment decision, and FSIC may lose money on its investments. See “Business of FS Investments—Characteristics of and Risks Related to Investments in Private Companies.”

A lack of liquidity in certain of FSIC’s investments may adversely affect FSIC’s business.

FSIC invests in certain companies whose securities are not publicly-traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly-traded securities. The illiquidity of certain of FSIC’s investments may make it difficult for FSIC to sell these investments when desired. In addition, if FSIC is required to liquidate all or a portion of its portfolio quickly, FSIC may realize significantly less than the value at which FSIC had previously recorded these investments. The reduced liquidity of FSIC’s investments may make it difficult for FSIC to dispose of them at a favorable price or at all, and, as a result, FSIC may suffer losses.

FSIC may not have the funds or ability to make additional investments in its portfolio companies.

FSIC may not have the funds or ability to make additional investments in its portfolio companies. After FSIC’s initial investment in a portfolio company, FSIC may be called upon from time to time to provide additional funds to such company or have the opportunity to increase its investment through the exercise of a warrant to purchase common stock. There is no assurance that FSIC will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on FSIC’s part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for FSIC to increase its participation in a successful operation or may reduce the expected return on the investment.

Prepayments of FSIC’s debt investments by its portfolio companies could adversely impact FSIC’s results of operations and reduce its return on equity.

FSIC is subject to the risk that the investments it make in its portfolio companies may be repaid prior to maturity. When this occurs, FSIC will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and FSIC could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, FSIC’s results of operations could be materially adversely affected if one or more of its portfolio companies elect to prepay amounts owed to FSIC. Additionally, prepayments, net of prepayment fees, could negatively impact FSIC’s return on equity.

 

45


Table of Contents

FSIC’s investments may include original issue discount and payment-in-kind instruments.

To the extent that FSIC invests in original issue discount or PIK instruments and the accretion of original issue discount or PIK interest income constitutes a portion of FSIC’s income, FSIC will be exposed to risks associated with the requirement to include such non-cash income in taxable and accounting income prior to receipt of cash, including the following:

 

   

the higher interest rates on PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and PIK instruments generally represent a significantly higher credit risk than coupon loans;

 

   

original issue discount and PIK instruments may have unreliable valuations because the accruals require judgments about collectability of the deferred payments and the value of any associated collateral;

 

   

an election to defer PIK interest payments by adding them to the principal on such instruments increases FSIC’s future investment income which increases FSIC’s gross assets and, as such, increases the Advisor’s future base management fees which, thus, increases the Advisor’s future income incentive fees at a compounding rate;

 

   

market prices of PIK instruments and other zero coupon instruments are affected to a greater extent by interest rate changes, and may be more volatile than instruments that pay interest periodically in cash. While PIK instruments are usually less volatile than zero coupon debt instruments, PIK instruments are generally more volatile than cash pay securities;

 

   

the deferral of PIK interest on an instrument increases the loan-to-value ratio, which is a measure of the riskiness of a loan, with respect to such instrument;

 

   

even if the conditions for income accrual under Generally Accepted Accounting Principles (“GAAP”) are satisfied, a borrower could still default when actual payment is due upon the maturity of such loan;

 

   

for accounting purposes, cash distributions to investors representing original issue discount income are not derived from paid-in capital, although they may be paid from the offering proceeds. Thus, although a distribution of original issue discount income may come from the cash invested by investors, the 1940 Act does not require that investors be given notice of this fact;

 

   

recent tax legislation requires that income be recognized for tax purposes no later than when recognized for financial reporting purposes;

 

   

the required recognition of PIK interest for U.S. federal income tax purposes may have a negative impact on liquidity, as it represents a non-cash component of FSIC’s investment company taxable income that may require cash distributions to stockholders in order to maintain FSIC’s ability to be subject to tax as a RIC; and

 

   

original issue discount may create a risk of non-refundable cash payments to the Advisor based on non-cash accruals that may never be realized.

FSIC may from time to time enter into total return swaps, credit default swaps or other derivative transactions which expose FSIC to certain risks, including credit risk, market risk, liquidity risk and other risks similar to those associated with the use of leverage.

FSIC may from time to time enter into total return swaps, credit default swaps or other derivative transactions that seek to modify or replace the investment performance of a particular reference security or other asset. These transactions are typically individually negotiated, non-standardized agreements between two parties to exchange payments, with payments generally calculated by reference to a notional amount or quantity. Swap contracts and similar derivative contracts are not traded on exchanges; rather, banks and dealers act as principals

 

46


Table of Contents

in these markets. These investments may present risks in excess of those resulting from the reference security or other asset. Because these transactions are not an acquisition of the reference security or other asset itself, the investor has no right directly to enforce compliance with the terms of the reference security or other asset and has no voting or other consensual rights of ownership with respect to the reference security or other asset. In the event of insolvency of a counterparty, FSIC will be treated as a general creditor of the counterparty and will have no claim of title with respect to the reference security or other asset.

A total return swap 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 reference security or other assets underlying the total return swap during a specified period, in return for periodic payments based on a fixed or variable interest rate. A total return swap is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the total return swap and the debt obligations underlying the total return swap. In addition, FSIC may incur certain costs in connection with a total return swap that could in the aggregate be significant.

A credit default swap is a contract in which one party buys or sells protection against a credit event with respect to an issuer, such as an issuer’s failure to make timely payments of interest or principal on its debt obligations, bankruptcy or restructuring during a specified period. Generally, if FSIC sells credit protection using a credit default swap, FSIC will receive fixed payments from the swap counterparty and if a credit event occurs with respect to the applicable issuer, FSIC will pay the swap counterparty par for the issuer’s defaulted debt securities and the swap counterparty will deliver the defaulted debt securities to FSIC. Generally, if FSIC buys credit protection using a credit default swap, FSIC will make fixed payments to the counterparty and if a credit event occurs with respect to the applicable issuer, FSIC will deliver the issuer’s defaulted securities underlying the swap to the swap counterparty and the counterparty will pay FSIC par for the defaulted securities. Alternatively, a credit default swap may be cash settled and the buyer of protection would receive the difference between the par value and the market value of the issuer’s defaulted debt securities from the seller of protection. Credit default swaps are subject to the credit risk of the underlying issuer. If FSIC is selling credit protection, there is a risk that FSIC will not properly assess the risk of the underlying issuer, a credit event will occur and FSIC will have to pay the counterparty. If FSIC is buying credit protection, there is a risk that FSIC will not properly assess the risk of the underlying issuer, no credit event will occur and FSIC will receive no benefit for the premium paid.

A derivative transaction is also subject to the risk that a counterparty will default on its payment obligations thereunder or that FSIC will not be able to meet its obligations to the counterparty. In some cases, FSIC may post collateral to secure its obligations to the counterparty, and FSIC may be required to post additional collateral upon the occurrence of certain events such as a decrease in the value of the reference security or other asset. In some cases, the counterparty may not collateralize any of its obligations to FSIC. Derivative investments effectively add leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. In addition to the risks described above, such arrangements are subject to risks similar to those associated with the use of leverage.

Risks Related to Debt Financing

FSIC currently incurs indebtedness to make investments, which magnifies the potential for gain or loss on amounts invested in FSIC Common Stock and may increase the risk of investing in FSIC Common Stock.

The use of borrowings and other types of financing, also known as leverage, magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in FSIC Common Stock. When FSIC uses leverage to partially finance FSIC’s investments, through borrowing from banks and other lenders or issuing debt securities, FSIC, and therefore its stockholders, will experience increased risks of investing in FSIC Common Stock. Any lenders and debt holders would have fixed dollar claims on FSIC’s assets that are senior to the claims of FSIC’s stockholders. If the value of FSIC’s assets increases, then leverage would cause the net asset value attributable to FSIC Common Stock to increase more sharply than it would have had

 

47


Table of Contents

FSIC not utilized leverage. Conversely, if the value of FSIC’s assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had FSIC not utilized leverage. Similarly, any increase in FSIC’s income in excess of interest payable on FSIC’s indebtedness would cause FSIC’s net investment income to increase more than it would without leverage, while any decrease in FSIC’s income would cause net investment income to decline more sharply than it would have had FSIC not utilized leverage. Such a decline could negatively affect FSIC’s ability to make distributions to stockholders. Leverage is generally considered a speculative investment technique.

In addition, the decision to utilize leverage will increase FSIC’s assets and, as a result, will increase the amount of base management fees payable to the Advisor. See “Risks Related to the Advisor and its Affiliates—the Advisor, and its affiliates, including FSIC’s officers and some of FSIC’s directors, face conflicts of interest as a result of compensation arrangements between FSIC and the Advisor, which could result in actions that are not in the best interests of FSIC’s stockholders.”

Illustration. The following table illustrates the effect of leverage on returns from an investment in shares of FSIC Common Stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $3.9 billion in total assets, (ii) a weighted average cost of funds of 4.64%, (iii) $2.0 billion in debt outstanding (i.e., assumes that the full $2.0 billion available to FSIC as of June 30, 2018 under FSIC’s financing arrangements as of such date is outstanding) and (iv) $2.1 billion in stockholders’ equity. In order to compute the “Corresponding return to stockholders,” the “Assumed Return on FSIC’s Portfolio (net of expenses)” is multiplied by the assumed total assets to obtain an assumed return to FSIC. From this amount, the interest expense is calculated by multiplying the assumed weighted average cost of funds times the assumed debt outstanding, and the product is subtracted from the assumed return to FSIC in order to determine the return available to stockholders. The return available to stockholders is then divided by FSIC’s stockholders’ equity to determine the “Corresponding return to stockholders.” Actual interest payments may be different.

 

Assumed Return on FSIC’s Portfolio (net of expenses)    -10%      -5%      0%      5%      10%  

Corresponding return to stockholders

     (22.50)      (13.40)      (4.31)      4.78      13.88

Similarly, assuming (i) $3.9 billion in total assets, (ii) a weighted average cost of funds of 4.64% and (iii) $2.0 billion in debt outstanding (i.e., assuming that the full $2.0 billion available to FSIC as of June 30, 2018 under the financing arrangements as of such date is outstanding), FSIC’s assets would need to yield an annual return (net of expenses) of approximately 2.37% in order to cover the annual interest payments on FSIC’s outstanding debt.

The agreements governing FSIC’s debt financing arrangements contain, and agreements governing future debt financing arrangements may contain, various covenants which, if not complied with, could have a material adverse effect on FSIC’s ability to meet its investment obligations and to pay distributions to its stockholders.

The agreements governing certain of FSIC’s debt financing arrangements contain, and agreements governing future debt financing arrangements may contain, certain financial and operational covenants. These covenants require FSIC and FSIC’s subsidiaries to, among other things, maintain certain financial ratios, including asset coverage and minimum stockholders’ equity. Compliance with these covenants depends on many factors, some of which are beyond FSIC’s and their control. In the event of deterioration in the capital markets and pricing levels subsequent to this period, net unrealized depreciation in FSIC’s and FSIC’s subsidiaries’ portfolios may increase in the future and could result in non-compliance with certain covenants, or FSIC’s taking actions which could disrupt FSIC’s business and impact FSIC’s ability to meet FSIC’s investment objectives.

There can be no assurance that FSIC and FSIC’s subsidiaries will continue to comply with the covenants under FSIC’s financing arrangements. Failure to comply with these covenants could result in a default which, if FSIC and FSIC’s subsidiaries were unable to obtain a waiver, consent or amendment from the debt holders, could

 

48


Table of Contents

accelerate repayment under any or all of FSIC’s and their debt instruments and thereby force FSIC to liquidate investments at a disadvantageous time and/or at a price which could result in losses, or allow FSIC’s lenders to sell assets pledged as collateral under FSIC’s financing arrangements in order to satisfy amounts due thereunder. These occurrences could have a material adverse impact on FSIC’s liquidity, financial condition, results of operations and ability to pay distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of FS Investment Corporation—Financial Condition, Liquidity and Capital Resources” for a more detailed discussion of the terms of FSIC’s debt financings.

Risks Related to an Investment in FSIC Common Stock

There is a risk that investors in FSIC Common Stock may not receive distributions.

FSIC cannot assure stockholders that it will achieve investment results that will allow it to make a specified level of cash distributions. All distributions will be paid at the discretion of the FSIC Board and will depend on FSIC’s earnings, its net investment income, its financial condition, maintenance of its RIC status, compliance with applicable BDC regulations and such other factors as the FSIC Board may deem relevant from time to time. Furthermore, FSIC is permitted to issue senior securities, including multiple classes of debt and one class of stock senior to shares of FSIC Common Stock. If any such senior securities are outstanding, FSIC is prohibited from paying distributions to holders of shares of FSIC Common Stock unless it meets the applicable asset coverage ratios at the time of distribution. As a result, FSIC may be limited in its ability to make distributions. See “Regulation of FS Investments—Senior Securities.”

FSIC’s distribution proceeds may exceed its earnings. Therefore, portions of the distributions that FSIC makes may represent a return of capital to stockholders, which will lower their tax basis in their shares of common stock.

The tax treatment and characterization of FSIC’s distributions may vary significantly from time to time due to the nature of FSIC’s investments. The ultimate tax characterization of FSIC’s distributions made during a tax year may not finally be determined until after the end of that tax year. FSIC may make distributions during a tax year that exceed its investment company taxable income and net capital gains for that tax year. In such a situation, the amount by which FSIC’s total distributions exceed investment company taxable income and net capital gains generally would be treated as a return of capital up to the amount of a stockholder’s tax basis in the shares, with any amounts exceeding such tax basis treated as a gain from the sale or exchange of such shares. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from FSIC’s investment activities. Moreover, FSIC may pay all or a substantial portion of its distributions from the proceeds of the sale of shares of FSIC Common Stock or from borrowings in anticipation of future cash flow, which could constitute a return of stockholders’ capital and will lower such stockholders’ tax basis in FSIC’s shares, which may result in increased tax liability to stockholders when they sell such shares.

FSIC’s shares of common stock may trade at a discount to net asset value, and such discount may be significant.

Shares of closed-end investment companies, including BDCs, may trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that FSIC’s net asset value per share may decline. It is not possible to predict whether shares of FSIC Common Stock will trade at, above, or below net asset value. In the recent past, including during much of 2009, the stocks of BDCs as an industry traded below net asset value and at near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. If FSIC Common Stock is trading at a price below its net asset value per share, FSIC will generally not be able to issue additional shares of FSIC Common Stock at their market price without first obtaining approval for such issuance from its stockholders and its independent directors. In past years, FSIC obtained the approval of its stockholders to issue shares of FSIC Common Stock at prices below the then-current net asset value of FSIC Common Stock,

 

49


Table of Contents

subject to certain conditions, during the twelve-month periods beginning on the dates of such approvals. The current authorization expires on July 27, 2018. FSIC is again seeking the approval of its stockholders pursuant to the Share Issuance Proposal to issue shares of FSIC Common Stock at prices below the then-current net asset value per share for a twelve-month period following stockholder approval. However, FSIC may not obtain the necessary approvals to sell shares of FSIC Common Stock below net asset value after July 27, 2018. In addition, FSIC will not sell shares of FSIC Common Stock at a price below the then-current net asset value per share pursuant to stockholder approval under this joint proxy statement/prospectus or an accompanying prospectus supplement without first filing a new post-effective amendment to the registration statement of which this joint proxy statement/prospectus forms a part, if such offering will result in greater than 15% dilution in the aggregate to existing stockholder net asset value. For additional information regarding this limitation, see “FSIC Proposal 3: Authorization to Offer and Sell Shares of Common Stock Below Net Asset Value.”

FSIC may pay distributions from offering proceeds, borrowings or the sale of assets to the extent FSIC’s cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions.

FSIC may fund distributions from the uninvested proceeds of a securities offering and borrowings, and FSIC has not established limits on the amount of funds FSIC may use from such proceeds or borrowings to make any such distributions. FSIC has paid and may continue to pay distributions from the sale of assets to the extent distributions exceed its earnings or cash flows from operations. Distributions from offering proceeds or from borrowings could reduce the amount of capital FSIC ultimately invest in its portfolio companies.

A stockholder’s interest in FSIC will be diluted if FSIC issues additional shares, which could reduce the overall value of an investment in FSIC.

FSIC’s investors do not have preemptive rights to any shares FSIC issues in the future. The FSIC Charter authorizes FSIC to issue 450,000,000 shares of FSIC Common Stock. Pursuant to the FSIC Charter, a majority of the FSIC Board may amend the FSIC Charter to increase the number of authorized shares of stock without stockholder approval. After an investor purchases shares, the FSIC Board may elect to sell additional shares in the future, issue equity interests in private offerings or issue share-based awards to FSIC’s independent directors or employees of the Advisor. To the extent FSIC issues additional equity interests after an investor purchases its shares, an investor’s percentage ownership interest in FSIC will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of FSIC’s investments, an investor may also experience dilution in the book value and fair value of his or her shares.

Stockholders may experience dilution in their ownership percentage if they do not participate in FSIC’s distribution reinvestment plan.

Stockholders who do not participate in FSIC’s distribution reinvestment plan may experience accretion to the net asset value of their shares if FSIC’s shares are trading at a premium to net asset value and dilution if FSIC’s shares are trading at a discount to net asset value. The level of accretion or discount would depend on various factors, including the proportion of FSIC’s stockholders who participate in the plan, the level of premium or discount at which FSIC’s shares are trading and the amount of the distribution payable to a stockholder.

Certain provisions of the FSIC Charter and bylaws as well as provisions of the Maryland General Corporation Law could deter takeover attempts and have an adverse impact on the value of FSIC Common Stock.

The Maryland General Corporation Law, or the MGCL, and the FSIC Charter and bylaws contain certain provisions that may have the effect of discouraging, delaying or making difficult a change in control of FSIC or the removal of its incumbent directors. Under the Business Combination Act of the MGCL, certain business combinations between FSIC and an “interested stockholder” (defined generally to include any person who beneficially owns 10% or more of the voting power of FSIC’s outstanding shares) or an affiliate thereof is prohibited for five years and thereafter is subject to special stockholder voting requirements, to the extent that such statute is not superseded by applicable

 

50


Table of Contents

requirements of the 1940 Act. However, the FSIC Board has adopted a resolution exempting from the Business Combination Act any business combination between FSIC and any person to the extent that such business combination receives the prior approval of the FSIC Board, including a majority of the directors who are not interested persons as defined in the 1940 Act. Under the Control Share Acquisition Act of the MGCL, “control shares” acquired in a “control share acquisition” have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer, by officers or by directors who are employees of the corporation. FSIC’s bylaws contain a provision exempting from the Control Share Acquisition Act any and all acquisitions by any person of shares of FSIC Common Stock, but such provision may be repealed at any time (before or after a control share acquisition). However, FSIC will amend its bylaws to repeal such provision (so as to be subject to the Control Share Acquisition Act) only if the FSIC Board determines that it would be in FSIC’s best interests and if the staff of the SEC does not object to FSIC’s determination that it being subject to the Control Share Acquisition Act does not conflict with the 1940 Act. The Business Combination Act (if the FSIC Board should repeal the resolution) and the Control Share Acquisition Act (if FSIC amends its bylaws to be subject to that Act) may discourage others from trying to acquire control of FSIC and increase the difficulty of consummating any offer.

FSIC has also adopted measures that may make it difficult for a third-party to obtain control of it, including provisions of its charter: (a) classifying the FSIC Board into three classes serving staggered three-year terms, (b) providing that a director may be removed only for cause and only by vote of at least two-thirds of the votes entitled to be cast, and (c) authorizing the FSIC Board to (i) classify or reclassify shares of FSIC stock into one or more classes or series, (ii) cause the issuance of additional shares of FSIC stock, and (iii) amend the FSIC Charter from time to time, without stockholder approval, to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that FSIC has authority to issue. These provisions, as well as other provisions of the FSIC Charter and bylaws, may discourage, delay, defer, make more difficult or prevent a transaction or a change in control that might otherwise be in the best interest of FSIC’s stockholders.

The net asset value of FSIC Common Stock may fluctuate significantly.

The net asset value and liquidity, if any, of the market for shares of FSIC Common Stock may be significantly affected by numerous factors, some of which are beyond FSIC’s control and may not be directly related to FSIC’s operating performance. These factors include: (i) changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs; (ii) loss of RIC or BDC status; (iii) changes in earnings or variations in operating results; (iv) changes in the value of FSIC’s portfolio of investments; (v) changes in accounting guidelines governing valuation of FSIC’s investments; (vi) any shortfall in revenue or net income or any increase in losses from levels expected by investors; (vii) departure of FSIC’s investment adviser or certain of its key personnel; (viii) general economic trends and other external factors; and (ix) loss of a major funding source.

The market price of FSIC Common Stock may fluctuate significantly.

The market price and liquidity of the market for shares of FSIC Common Stock may be significantly affected by numerous factors, some of which are beyond FSIC’s control and may not be directly related to its operating performance. These factors include:

 

   

significant volatility in the market price and trading volume of securities of publicly traded RICs, BDCs or other companies in FSIC’s sector, which are not necessarily related to the operating performance of these companies;

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to RICs or BDCs;

 

   

loss of FSIC’s BDC or RIC status;

 

   

changes in FSIC’s earnings or variations in its operating results;

 

51


Table of Contents
   

changes in the value of FSIC’s portfolio of investments;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

   

departure of the Advisor’s key personnel;

 

   

operating performance of companies comparable to FSIC;

 

   

short-selling pressure with respect to shares of FSIC Common Stock or BDCs generally;

 

   

future sales of FSIC’s securities convertible into or exchangeable or exercisable for shares of FSIC Common Stock or the conversion of such securities;

 

   

uncertainty surrounding the strength of the economy;

 

   

general economic trends and other external factors; and

 

   

loss of a major funding source.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If the market price of FSIC Common Stock fluctuates significantly, FSIC may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from FSIC’s business.

If FSIC issues preferred stock, debt securities or convertible debt securities, the net asset value and market value of FSIC Common Stock may become more volatile.

FSIC cannot assure you that the issuance of preferred stock, debt securities or convertible debt securities would result in a higher yield or return to the holders of FSIC Common Stock. The issuance of preferred stock, debt securities or convertible debt securities would likely cause the net asset value and market value of FSIC Common Stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on FSIC’s investment portfolio, the benefit of leverage to the holders of FSIC Common Stock would be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on FSIC’s portfolio, the use of leverage would result in a lower rate of return to the holders of FSIC Common Stock than if FSIC had not issued the preferred stock or debt securities. Any decline in the net asset value of FSIC’s investment would be borne entirely by the holders of FSIC Common Stock. Therefore, if the market value of FSIC’s portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of FSIC Common Stock than if FSIC was not leveraged through the issuance of preferred stock. This decline in net asset value would also tend to cause a greater decline in the market price for FSIC Common Stock.

There is also a risk that, in the event of a sharp decline in the value of FSIC’s net assets, FSIC would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or units or of a downgrade in the ratings of the preferred stock, debt securities, convertible debt or units or its current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, FSIC might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, FSIC would pay (and the holders of FSIC Common Stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of FSIC Common Stock and may at times have disproportionate influence over FSIC’s affairs.

 

52


Table of Contents

Holders of any preferred stock that FSIC may issue will have the right to elect members of the board of directors and have class voting rights on certain matters.

The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of FSIC Common Stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair FSIC’s ability to maintain its qualification as a RIC for U.S. federal income tax purposes.

FSIC may again obtain the approval of its stockholders to issue shares of FSIC Common Stock at prices below the then-current net asset value per share of FSIC Common Stock, and any such issuance could materially dilute FSIC’s stockholders’ interest in FSIC Common Stock and reduce FSIC’s net asset value per share.

In past years, FSIC obtained the approval of its stockholders to issue shares of FSIC Common Stock at prices below the then-current net asset value of FSIC Common Stock, subject to certain conditions, during the twelve-month periods beginning on the dates of such approvals. The current authorization expires on July 27, 2018. FSIC is again seeking the approval of its stockholders pursuant to the Share Issuance Proposal to issue shares of FSIC Common Stock at prices below the then-current net asset value per share for a twelve-month period following stockholder approval. If such approval is obtained, it may allow FSIC to access the capital markets in a way that FSIC is typically unable to do as a result of restrictions that, absent stockholder approval, apply to BDCs under the 1940 Act.

Any sale or other issuance of shares of FSIC Common Stock at a price below net asset value per share would result in an immediate dilution to FSIC Common Stock and a reduction of FSIC’s net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest in FSIC’s earnings and assets and voting interest in FSIC than the increase in FSIC’s assets resulting from such issuance. Because the number of future shares of FSIC Common Stock that may be issued below FSIC’s net asset value per share and the price and timing of such issuances are not currently known, FSIC cannot predict the actual dilutive effect of any such issuance nor can FSIC predict the resulting reduction in FSIC’s net asset value per share, however, such effects may be material. FSIC undertake to describe the material risks and dilutive effects of any offering that FSIC make at a price below FSIC’s then-current net asset value in the future in a prospectus supplement issued in connection with any such offering.

Risks Related to U.S. Federal Income Tax

FSIC will be subject to corporate-level income tax if it is unable to qualify as a RIC under Subchapter M of the Code or to satisfy the RIC annual distribution requirements.

Besides maintaining FSIC’s election to be treated as a BDC under the 1940 Act, in order for FSIC to qualify as a RIC under Subchapter M of the Code, FSIC must meet the following income source and asset diversification requirements. See “Certain Material U.S. Federal Income Tax Considerations of the Merger—U.S. Federal Income Taxation of an Investment in FSIC Common Stock—Taxation as a RIC.”

 

   

The 90% income test will be satisfied if FSIC earns at least 90% of its gross income for each tax year from dividends, interest, gains from the sale of securities or similar sources.

 

   

The Diversification Tests (as defined later in this joint proxy statement/prospectus) will be satisfied if FSIC meets certain asset diversification requirements at the end of each quarter of its

 

53


Table of Contents
 

tax year. To satisfy these requirements, at least 50% of the value of FSIC’s assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such securities of any one issuer do not represent more than 5% of the value of FSIC’s assets or more than 10% of the outstanding voting securities of such issuer; and no more than 25% of the value of FSIC’s assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by FSIC and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly-traded partnerships.” Failure to meet these requirements may result in FSIC having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of FSIC’s investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

 

   

In any tax year in which FSIC qualifies as a RIC, in order for FSIC to be able to be subject to tax as a RIC, FSIC is required to meet an annual distribution requirement. The annual distribution requirement for RIC tax treatment will be satisfied if FSIC distributes to its stockholders, for each tax year, dividends of an amount generally at least equal to the sum of 90% of its investment company taxable income, which is generally the sum of FSIC’s ordinary net income and realized net short-term capital gains in excess of realized net long-term capital losses, without regard to any deduction for dividends paid. Because FSIC may use debt financing, FSIC is subject to an asset coverage ratio requirement under the 1940 Act and may in the future become subject to certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict FSIC from making distributions necessary to satisfy the annual distribution requirement. If FSIC is unable to obtain cash from other sources, FSIC could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

FSIC must satisfy these tests on an ongoing basis in order to maintain RIC tax treatment, and may be required to make distributions to stockholders at times when it would be more advantageous to invest cash in its existing or other investments, or when FSIC does not have funds readily available for distribution. Compliance with the RIC tax requirements may hinder FSIC’s ability to operate solely on the basis of maximizing profits and the value of its stockholders’ investments. Also, the rules applicable to FSIC’s qualification as a RIC are complex, with many areas of uncertainty. If FSIC fails to qualify for or maintain RIC tax treatment for any reason and is subject to corporate income tax, the resulting corporate taxes could substantially reduce FSIC’s net assets, the amount of income available for distribution and the amount of FSIC’s distributions. Such a failure may have a material adverse effect on FSIC and on any investment in FSIC. The Code provides certain forms of relief from RIC disqualification due to failures of the 90% income test or any of the Diversification Tests, although there may be additional taxes due in such cases. FSIC cannot assure you that it would qualify for any such relief should it fail either the 90% income test or any of the Diversification Tests.

Some of FSIC’s investments may be subject to corporate-level income tax.

FSIC may invest in certain debt and equity investments through taxable subsidiaries and the taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes. FSIC may invest in certain foreign debt and equity investments which could be subject to foreign taxes (such as income tax, withholding and value added taxes).

FSIC may have difficulty paying its required distributions if it recognizes income before or without receiving cash representing such income.

For U.S. federal income tax purposes, FSIC may be required to recognize taxable income in circumstances in which FSIC does not receive a corresponding payment in cash. For example, FSIC’s investments may include debt instruments that are treated under applicable tax rules as having original issue discount (such as debt

 

54


Table of Contents

instruments with PIK interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants). To the extent original issue discount or PIK interest constitutes a portion of FSIC’s income, FSIC must include in taxable income each tax year a portion of the original issue discount or PIK interest that accrues over the life of the instrument, regardless of whether cash representing such income is received by FSIC in the same tax year. FSIC may also have to include in income other amounts that it has not yet received in cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. FSIC anticipates that a portion of its income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Also, recent tax legislation requires that income be recognized for tax purposes no later than when recognized for financial reporting purposes, which may require, pending further regulatory guidance, that FSIC amortizes market discount currently. Further, FSIC may elect to amortize market discount and include such amounts in FSIC’s taxable income in the current tax year, instead of upon disposition, as not making the election would limit FSIC’s ability to deduct interest expenses for tax purposes.

Because any original issue discount or other amounts accrued will be included in FSIC’s investment company taxable income for the tax year of the accrual, FSIC may be required to make a distribution to its stockholders in order to satisfy the annual distribution requirement, even though FSIC will not have received any corresponding cash amount. As a result, FSIC may have difficulty meeting the annual distribution requirement necessary to qualify for and maintain RIC tax treatment under Subchapter M of the Code. FSIC may have to sell some of its investments at times and/or at prices FSIC would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If FSIC is not able to obtain cash from other sources, FSIC may fail to qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax. For additional discussion regarding the tax implications of a RIC, see “Certain Material U.S. Federal Income Tax Considerations of the Merger—U.S. Federal Income Taxation of an Investment in FSIC Common Stock—Taxation as a RIC.”

Furthermore, FSIC may invest in the equity securities of non-U.S. corporations (or other non-U.S. entities classified as corporations for U.S. federal income tax purposes) that could be treated under the Code and U.S. Treasury regulations as “passive foreign investment companies” and/or “controlled foreign corporations.” The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in effect, taxed currently (or on an accelerated basis with respect to corporate level events) or taxed at increased tax rates at distribution or disposition. In certain circumstances, these rules also could require FSIC to recognize taxable income or gains where FSIC does not receive a corresponding payment in cash and, under recently proposed U.S. federal income tax regulations, all or a portion of such taxable income and gains may not be considered qualifying income for purposes of the 90% income test.

FSIC’s portfolio investments may present special tax issues.

Investments in below-investment grade debt instruments and certain equity securities may present special tax issues for FSIC. U.S. federal income tax rules are not entirely clear about issues such as when FSIC may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or worthless debt in equity securities, how payments received on obligations in default should be allocated between principal and interest income, as well as whether exchanges of debt instruments in a bankruptcy or workout context are taxable. Such matters could cause FSIC to recognize taxable income for U.S. federal income tax purposes, even in the absence of cash or economic gain, and require FSIC to make taxable distributions to its stockholders to maintain FSIC’s RIC status or preclude the imposition of either U.S. federal corporate income or excise taxation. Additionally, because such taxable income may not be matched by corresponding cash received by FSIC, FSIC may be required to borrow money or dispose of other investments to be able to make distributions to its stockholders.

These and other issues will be considered by FSIC, to the extent determined necessary, in order that FSIC minimize the level of any U.S. federal income or excise tax that FSIC would otherwise incur. See “Certain

 

55


Table of Contents

Material U.S. Federal Income Tax Considerations of the Merger—U.S. Federal Income Taxation of an Investment in FSIC Common Stock—Election to be Taxed as a Regulated Investment Company.”

If FSIC does not qualify as a “publicly offered regulated investment company,” as defined in the Code, you will be taxed as though you received a distribution of some of FSIC’s expenses.

A “publicly offered regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market or (iii) held by at least 500 persons at all times during the tax year. If FSIC does not qualify as a publicly offered regulated investment company for any tax year, a noncorporate stockholder’s allocable portion of FSIC’s affected expenses, including FSIC’s management fees, will be treated as an additional distribution to the stockholder and will be deductible by such stockholder only to the extent permitted under the limitations described below. For noncorporate stockholders, including individuals, trusts, and estates, significant limitations generally apply to the deductibility of certain expenses of a non-publicly offered regulated investment company, including management fees. In particular, these expenses, referred to as miscellaneous itemized deductions, are deductible to an individual only to the extent they exceed 2% of such a stockholder’s adjusted gross income, are not deductible for alternative minimum tax purposes and are subject to the overall limitation on itemized deductions imposed by the Code. Although FSIC believes that it is currently considered a publicly offered regulated investment company, as defined in the Code, there can be no assurance, however, that FSIC will be considered a publicly offered regulated investment company in the future.

Legislative or regulatory tax changes could adversely affect investors.

At any time, the federal income tax laws governing RICs or the administrative interpretations of those laws or regulations may be amended. Any of those new laws, regulations or interpretations may take effect retroactively and could adversely affect the taxation of FSIC or its stockholders. Therefore, changes in tax laws, regulations or administrative interpretations or any amendments thereto could diminish the value of an investment in FSIC’s shares or the value or the resale potential of FSIC’s investments. In particular, on December 22, 2017, the Tax Cuts and Jobs Act was signed into law. This tax legislation lowers the general corporate income tax rate from 35 percent to 21 percent, makes changes regarding the use of net operating losses, repeals the corporate alternative minimum tax and makes significant changes with respect to the U.S. international tax rules. In addition, the legislation generally requires a holder that uses the accrual method of accounting for U.S. tax purposes to include certain amounts in income no later than the time such amounts are reflected on certain financial statements, which therefore if applicable would require FSIC to accrue income earlier than under prior law, although the precise application of this rule is unclear at this time. The legislation also limits the amount or value of interest deductions of borrowers and in that way may potentially affect the loan market and FSIC and its portfolio companies’ use of leverage. For individual taxpayers, the legislation reduces the maximum individual income tax rate and eliminates the deductibility of miscellaneous itemized deductions for taxable years 2018 through 2025. The impact of this new legislation is uncertain.

Risks Related to CCT

Risks Related to CCT’s Business

The lack of liquidity in CCT’s investments may adversely affect its business.

CCT acquires a significant percentage of their portfolio company investments from privately held companies in directly negotiated transactions. Substantially all of these securities are subject to legal and other restrictions on resale or are otherwise less liquid than exchange-listed securities. CCT typically would be unable to exit these investments unless and until the portfolio company has a liquidity event such as a sale, refinancing, or initial public offering.

The illiquidity of CCT’s investments may make it difficult or impossible for CCT to sell such investments if the need arises. In addition, if CCT is required to liquidate all or a portion of its portfolio quickly, CCT may

 

56


Table of Contents

realize significantly less than the value at which it has previously recorded its investments, which could have a material adverse effect on CCT’s business, financial condition and results of operations.

Moreover, securities purchased by CCT that are liquid at the time of purchase may subsequently become illiquid due to events relating to the issuer of the securities, market events, economic conditions or investor perceptions, or the absence of active investment market participants.

Price declines in the corporate leveraged loan market may adversely affect the fair value of CCT’s portfolio, reducing its net asset value through increased net unrealized depreciation and the incurrence of realized losses.

Conditions in the U.S. corporate debt market may experience disruption or deterioration in the future, which may cause pricing levels to decline or be volatile. As a result, CCT’s net asset value could decline through an increase in unrealized depreciation and incurrence of realized losses in connection with the sale of its investments, which could have a material adverse impact on CCT’s business, financial condition and results of operations.

CCT’s ability to achieve its investment objective depends on the Advisor’s ability to manage and support CCT’s investment process. If the Advisor were to lose a significant number of its key professionals, or terminate the CCT Current Investment Advisory Agreement, CCT’s ability to sustain its investment objective could be significantly harmed.

CCT does not have employees. Additionally, CCT has no internal management capacity other than its appointed executive officers and are dependent upon the investment expertise, skill and network of business contacts of the Advisor to achieve its investment objective. The Advisor evaluates, negotiates, structures, executes, monitors and services CCT’s investments. CCT’s success depends to a significant extent on the continued service and coordination of the Advisor, including its key professionals. The departure of a significant number of key professionals from the Advisor could have a material adverse effect on CCTs ability to sustain its investment objective.

CCT’s ability to sustain its investment objective also depends on the ability of the Advisor to identify, analyze, invest in, finance, and monitor companies that meet its investment criteria. The Advisor’s capabilities in structuring the investment process, providing competent, attentive and efficient services to CCT, and facilitating access to financing on acceptable terms depend on the involvement of investment professionals of adequate number and sophistication to match the corresponding flow of transactions. To sustain CCT’s investment objective, the Advisor may need to retain, hire, train, supervise, and manage new investment professionals to participate in CCT’s investment selection and monitoring process. The Advisor may not be able to find qualified investment professionals in a timely manner or at all. Any failure to do so could have a material adverse effect on CCT’s business, financial condition and results of operations.

In addition, the CCT Current Investment Advisory Agreement has termination provisions that allow the agreement to be terminated by CCT on 60 days’ notice without penalty and by the Advisor upon 120 days’ notice to CCT without penalty. The termination of the CCT Current Investment Advisory Agreement may adversely affect the quality of CCT’s investment opportunities. In addition, in the event that the CCT Current Investment Advisory Agreement is terminated, it may be difficult for CCT to replace the Advisor as its investment adviser, and CCT would no longer have the ability to co-invest in privately negotiated transactions unless it filed a new SEC Exemptive Order and obtained the required exemptive relief.

The amount of any distributions CCT may make on its common stock is uncertain. CCT may not be able to pay its stockholders distributions, or be able to sustain distributions at any particular level, and CCT’s distributions per share, if any, may not grow over time, and CCT’s distributions per share may be reduced.

CCT pays distributions out of assets legally available for distribution. However, CCT cannot assure you that it will achieve investment results that will allow it to sustain a consistent targeted level of cash distributions or

 

57


Table of Contents

year-to-year increases in cash distributions. CCT’s ability to pay distributions might be adversely affected by the impact of the risks described in this joint proxy statement/prospectus. In addition, the inability to satisfy the asset coverage test applicable to CCT as a business development company and certain covenants in CCT’s credit facilities can limit its ability to pay distributions. CCT cannot assure you that it will continue to pay distributions to its stockholders in the future.

Distributions on CCT’s common stock may exceed its taxable earnings and profits; therefore, portions of the distributions that CCT pays may represent a return of capital to you, which will (i) lower your tax basis in your shares and thereby increase the amount of capital gain (or decrease the amount of capital loss) realized upon a subsequent sale or redemption of such shares, and (ii) reduce the amount of funds CCT has for investment in portfolio companies. CCT has not established any limit on the extent to which it may use borrowings, if any, or offering proceeds to fund distributions (which may reduce the amount of capital CCT ultimately invests in portfolio companies).

CCT may pay its distributions from offering proceeds or from borrowings in anticipation of future cash flow, which may constitute a return of your capital and will lower your tax basis in your shares, thereby increasing the amount of capital gain (or decreasing the amount of capital loss) realized upon a subsequent sale or redemption of such shares, even if such shares have not increased in value or have, in fact, lost value. Distributions from offering proceeds or from borrowings also could reduce the amount of capital CCT ultimately has available to invest in debt or equity securities of portfolio companies.

The Advisor is a newly-formed investment adviser without a track record of acting as an investment adviser to a BDC, and any failure by the Advisor to manage and support CCT’s investment process may hinder the achievement of CCT’s investment objectives.

Because the Advisor is a newly-formed investment adviser jointly operated by an affiliate of FS Investments and KKR, the Advisor has no prior experience acting as an investment adviser to a BDC. The 1940 Act and the Code impose numerous constraints on the operations of BDCs that do not apply to other investment vehicles. While KKR and affiliates of FS Investments have individually acted as investment advisers to BDCs previously, the Advisor’s lack of experience in managing a portfolio of assets under the constraints of the 1940 Act and the Code may hinder the Advisor’s ability to take advantage of attractive investment opportunities and, as a result, may adversely affect CCT’s ability to achieve its investment objectives. FS Investments’ and KKR’s individual track records and achievements are not necessarily indicative of the future results they will achieve as a joint investment adviser. Accordingly, CCT can offer no assurance that it will replicate the historical performance of other investment companies with which FS Investments and KKR have been affiliated, and CCT cautions that its investment returns could be lower than the returns achieved by such other companies.

Because CCT’s business model depends to a significant extent upon relationships with corporations, financial institutions and investment firms, the inability of the Advisor to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect CCT’s business.

CCT expects that the Advisor will depend on its relationships with corporations, financial institutions and investment firms in providing investment advisory services to CCT, and CCT relies to a significant extent upon these relationships to provide it with potential investment opportunities. If the Advisor fails to maintain its existing relationships or develop new relationships or sources of investment opportunities, CCT may not be able to grow its investment portfolio. In addition, individuals with whom the Advisor has relationships are not obligated to provide CCT with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for CCT.

CCT may face increasing competition for investment opportunities, which could delay further deployment of its capital, reduce returns and result in losses.

CCT competes for investments with other business development companies and investment funds (including registered investment companies, private equity funds and mezzanine funds), as well as traditional financial

 

58


Table of Contents

services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge funds, continue to increase their investment focus in CCT’s target market of privately owned U.S. companies. CCT has experienced, and may continue to experience, increased competition from banks and investment vehicles who may continue to lend to the middle market. Additionally, the Federal Reserve and other bank regulators may periodically provide incentives to U.S. commercial banks to originate more loans in the middle market of private companies. As a result of these market participants and regulatory incentives, competition for investment opportunities in privately owned U.S. companies is strong and may intensify. Many of CCT’s competitors are larger and have considerably greater financial, technical, and marketing resources than CCT does. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to CCT. In addition, some competitors may have higher risk tolerances or different risk assessments than CCT. These characteristics could allow CCT’s competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than CCT is able to do.

CCT may lose investment opportunities if it does not match its competitors’ pricing, terms, and investment structure criteria. If CCT is forced to match these competitors’ investment terms criteria, it may not be able to achieve acceptable returns on its investments or may bear substantial risk of capital loss. A significant increase in the number and/or the size of CCT’s competitors in this target market could force CCT to accept less attractive investment terms. Furthermore, many competitors are not subject to the regulatory restrictions that the 1940 Act imposes on CCT as a business development company or the source of income, asset diversification and distribution requirements CCT must satisfy to maintain its RIC status. The competitive pressures CCT faces, and the manner in which CCT reacts or adjusts to competitive pressures, may have a material adverse effect on its business, financial condition, results of operations, effective yield on investments, investment returns, leverage ratio, and cash flows. As a result of this competition, CCT may not be able to take advantage of attractive investment opportunities from time to time. Also, CCT may not be able to identify and make investments that are consistent with its investment objective.

Investment in CCT involves a considerable amount of risk.

An investment in CCT involves a considerable amount of risk. Before making an investment decision, a prospective investor should (i) consider the suitability of this investment with respect to his or her investment objectives and personal situation and (ii) consider factors such as his or her personal net worth, income, age, risk tolerance and liquidity needs. An investment in CCT’s common stock represents an indirect investment in the portfolio of loans and fixed-income instruments, short positions and other securities and derivative instruments owned by CCT, and the value of these securities and instruments may fluctuate, sometimes rapidly and unpredictably, and such investment is subject to investment risk, including the possible loss of the entire principal amount invested. At any point in time, an investment in CCT’s common stock may be worth less than the original amount invested, even after taking into account distributions paid by CCT and the ability of CCT’s stockholders to reinvest distributions. CCT may also use leverage, which would magnify its investment, market and certain other risks.

CCT may be materially affected by market, economic and political conditions globally and in the jurisdictions and sectors in which it invests or operates, including factors affecting interest rates, the availability of credit, currency exchange rates and trade barriers. These factors are outside CCT’s control and could adversely affect the liquidity and value of its investments, and may reduce its ability to make attractive new investments.

CCT may be subject to risk arising from a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution may cause a series of defaults by the other institutions. This is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges, with which CCT interacts on a daily basis.

 

59


Table of Contents

A majority of CCT’s investment portfolio is recorded at fair value as determined in good faith in accordance with procedures established by the CCT Board and, as a result, there is and will be uncertainty as to the value of CCT’s portfolio investments.

A majority of CCT’s investment portfolio is comprised of investments that are negotiated and originated directly with portfolio companies. Such investments should be considered illiquid or requiring a lengthy time to sell. Additionally, such investments feature more uncertainty as to the precise accuracy of their fair market value since these investments are not positioned in any active securities exchange or secondary market that would otherwise enable informed market participants and dealers to submit bid prices.

Under the 1940 Act, CCT is required to carry its portfolio investments at market value or, if there is no readily available market value, at fair value as determined in accordance with procedures established by CCT’s Board. There is not a public market or active secondary market for many of the securities of the privately held companies in which CCT invests. The majority of CCT’s investments are not publicly traded or actively traded on a secondary market but, instead, may be traded on a privately negotiated over-the-counter secondary market for institutional investors. As a result, CCT values a majority of its securities quarterly at fair value as determined in good faith in accordance with valuation policy and procedures approved by CCT’s Board.

The determination of fair value, and thus the amount of unrealized gains or losses CCT may recognize in any reporting period, is to a degree subjective, and the Advisor has a conflict of interest in making recommendations of fair value. CCT values its investments quarterly at fair value as determined in good faith in accordance with procedures established by CCT’s Board based on input from the Advisor. CCT’s Board utilizes the services of an independent third-party valuation firm to aid CCT in determining the fair value of certain securities. The types of factors that may be considered in determining the fair values of CCT’s investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow, current market interest rates and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate significantly over short periods of time due to changes in current market conditions. The determinations of fair value in accordance with procedures established by CCT’s Board may differ materially from the values that would have been used if an active market and market quotations existed for such investments. CCT’s net asset value could be adversely affected if the determinations regarding the fair value of the investments were materially higher than the values that CCT ultimately realizes upon the disposal of such investments.

CCT’s Board may change CCT’s operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to stockholders.

CCT’s Board has the authority to modify or waive current operating policies, investment criteria and strategies without prior notice and without stockholder approval. CCT cannot predict the effect any changes to current operating policies, investment criteria and strategies would have on its business, net asset value, operating results and the value of its securities. However, the effects might be adverse, which could negatively impact CCT’s ability to pay you distributions and cause you to lose all or part of your investment. Moreover, CCT will have significant flexibility in managing its portfolio of assets, including investing in ways with which investors may not agree.

CCT may experience fluctuations in its operating results.

CCT could experience fluctuations in its operating results due to a number of factors, including its ability or inability to make investments in companies that meet the investment criteria, interest rates and default rates on the debt securities it acquires, the level of its expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which it encounters competition in its markets, and general economic conditions. These occurrences could have a material adverse effect on CCT’s results of operations, the value of your investment in CCT and CCT’s ability to pay distributions to you and its other stockholders.

 

60


Table of Contents

Any unrealized losses CCT experiences on its portfolio may be an indication of future realized losses, which could reduce income available for distribution.

As a business development company, CCT is required to carry its investments at market value or, if no market value is ascertainable, at the fair value as determined in good faith in accordance with procedures established by CCT’s Board. Decreases in the market values or fair values of CCT’s investments relative to amortized cost will be recorded as unrealized depreciation. Any unrealized losses in CCT’s loan portfolio could be an indication of a portfolio company’s inability to meet its repayment obligations to CCT with respect to the affected loans. This could result in realized losses in the future and ultimately in reductions of CCT’s income available for distribution in future periods. In addition, decreases in the market value or fair value of CCT’s investments will reduce its net asset value.

CCT is a non-diversified investment company within the meaning of the 1940 Act, and therefore it is not limited with respect to the proportion of CCT’s assets that may be invested in securities of a single issuer.

CCT is classified as a non-diversified investment company within the meaning of the 1940 Act, which means that CCT is not limited by the 1940 Act with respect to the proportion of its assets that it may invest in securities of a single issuer. To the extent that CCT holds large positions in the securities of a small number of issuers, or within a particular industry, CCT’s net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in a single issuer’s financial condition or the market’s assessment of the issuer. CCT may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. However, CCT is subject to the diversification requirements applicable to RICs under Subchapter M of the Code.

CCT is dependent on information systems and systems failures could significantly disrupt its business, which may, in turn, negatively affect CCT’s liquidity, financial condition or results of operations.

CCT’s business is dependent on its and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in CCT’s activities. CCT’s financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond CCT’s control. There could be:

 

   

sudden electrical or telecommunications outages;

 

   

natural disasters such as earthquakes, tornadoes and hurricanes;

 

   

disease pandemics;

 

   

events arising from local or larger scale political or social matters, including terrorist acts; and

 

   

cyber-attacks.

These events, in turn, could have a material adverse effect on CCT’s operating results and negatively affect the net asset value of CCT’s common stock and its ability to pay distributions to its stockholders.

In addition, increased reliance on internet-based programs and applications to conduct transactions and store data creates growing operational and security risks. Targeted cyber-attacks or accidental events can lead to breaches in computer and data systems security, and subsequent unauthorized access to sensitive transactional and personal information held or maintained by CCT, its affiliates, and third party service providers or counterparties. Any breaches that occur could result in a failure to maintain the security, confidentiality, or privacy of sensitive data, including personal information relating to investors and the beneficial owners of investors, and may lead to theft, data corruption, or overall disruption in operational systems. Criminals may use

 

61


Table of Contents

data taken in breaches in identity theft, obtaining loans or payments under false identities and other crimes that have the potential to affect the value of assets in which CCT invests. These risks have the potential to disrupt CCT’s ability to engage in transactions, cause direct financial loss and reputational damage or lead to violations of applicable laws related to data and privacy protection and consumer protection. Cybersecurity risks also necessitate ongoing prevention and compliance costs.

CCT, its affiliates, and their respective third-party service providers could be negatively impacted by cybersecurity attacks which could have a material adverse impact on CCT’s financial condition, business or results of operations.

CCT, its affiliates, and their respective third-party service providers may use a variety of information technology systems in the ordinary course of business, which are potentially vulnerable to unauthorized access, computer viruses and cyber-attacks, including attacks to CCT’s information technology infrastructure and attempts by others to gain access to CCT’s propriety or sensitive information, and ranging from individual attempts to advanced persistent threats. The procedures and controls CCT uses to monitor these threats and mitigate its exposure may not be sufficient to prevent cybersecurity incidents. The results of these incidents could include misstated financial data, theft of trade secrets or other intellectual property, liability for disclosure of confidential information, increased costs arising from the implementation of additional protective measures, litigation and reputational damage, which could have a material adverse impact on CCT’s financial condition, business or results of operations.

CCT is exposed to risks resulting from the current low interest rate environment.

Since CCT will borrow money to make investments, its net investment income depends, in part, upon the difference between the rate at which it borrows funds and the rate at which it invests those funds. The current low interest rate environment can, depending on CCT’s cost of capital, depress its net investment income, even though the terms of CCT’s investments generally will include a minimum interest rate. In addition, any reduction in the level of interest rates on new investments relative to interest rates on CCT’s current investments could adversely impact its net investment income, reducing its ability to service the interest obligations on, and to repay the principal of, its indebtedness, as well as its capacity to pay distributions. Any such developments would result in a decline in CCT’s net asset value and in net asset value per share. Floating interest rate investments tied to certain indices that tend to lag behind the market may perform better in a falling interest rate environment, while floating interest rate investments tied to other indices, such as LIBOR, may do better in a rising rate environment. Not all investments perform alike under different interest rate scenarios. Generally, CCT’s variable interest rate debt investments provide for interest payments based on three-month LIBOR (the base rate) and typically, every three months, the base rates are reset to then prevailing three-month LIBOR.

CCT’s investments expose it to interest rate risks.

CCT’s investments expose it to interest rate risks, meaning that changes in prevailing market interest rates could negatively affect the value of such investments. Factors that may affect market interest rates include, without limitation, inflation, slow or stagnant economic growth or recession, unemployment, money supply, governmental monetary policies, international disorders and instability in U.S. and non-U.S. financial markets. CCT expects that it will periodically experience imbalances in the interest rate sensitivities of its assets and liabilities and the relationships of various interest rates to each other. In a changing interest rate environment, CCT may not be able to manage this risk effectively. If CCT is unable to manage interest rate risk effectively, its performance could be adversely affected.

Uncertainty with respect to the financial stability of the United States and several countries in the European Union (EU) could have a significant adverse effect on CCT’s business, financial condition and results of operations.

In August 2011, Standard & Poor’s Rating Services (“S&P”) lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+,” which was last affirmed by S&P in November 2016. Moody’s and Fitch

 

62


Table of Contents

Ratings, Inc. have also warned that they may downgrade the U.S. federal government’s credit rating. In addition, the economic downturn and the significant government interventions into the financial markets and fiscal stimulus spending over the last several years have contributed to significantly increased U.S. budget deficits. The U.S. government has on several occasions adopted legislation to suspend the federal debt ceiling to allow the U.S. Treasury Department to issue additional debt. Further downgrades or warnings by S&P or other rating agencies, and the U.S. government’s credit and deficit concerns in general, including issues around the federal debt ceiling, could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with CCT’s debt portfolio and CCT’s ability to access the debt markets on favorable terms. Furthermore, in February 2014, the Federal Reserve began scaling back its bond-buying program, or quantitative easing, which it ended in October 2014. Quantitative easing was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities until key economic indicators, such as the unemployment rate, showed signs of improvement. The Federal Reserve also raised interest rates during the fourth quarter of 2015, the fourth quarter of 2016 and three times during 2017. It is unclear what effect, if any, the end of quantitative easing, future interest rate raises, if any, and the pace of any such raises will have on the value of CCT’s investments or CCT’s ability to access the debt markets on favorable terms.

In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these nations to continue to service their sovereign debt obligations. In January 2012, S&P lowered its long-term sovereign credit rating for France, Italy, Spain and six other European countries, which has negatively impacted global markets and economic conditions. In addition, in April 2012, S&P further lowered its long-term sovereign credit rating for Spain. While the financial stability of such countries has improved, risks resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of U.S. and European financial institutions. Furthermore, following the United Kingdom’s referendum to leave the European Union, S&P lowered its long-term sovereign credit rating. In addition, the terms of the United Kingdom’s exit and any future referendums in other European countries may disrupt the global market. Market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, could negatively impact the global economy, and there can be no assurance that assistance packages will be available, or if available, will be sufficient to stabilize countries and markets in Europe. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, or other credit factors, CCT’s business, financial condition and results of operations could be significantly and adversely affected.

Future disruptions or instability in capital markets could have a material adverse effect on CCT’s business, financial condition and results of operations.

From time to time, the global capital markets may experience periods of disruption and instability, which could materially and adversely impact the broader financial and credit markets and reduce the availability to CCT of debt and equity capital. For example, between 2008 and 2009, instability in the global capital markets resulted in disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the repricing of credit risk in the broadly syndicated credit market, the failure of major domestic and international financial institutions and a response from the U.S. Federal Reserve of lowering interest rates and quantitative easing. While market conditions have experienced relative stability and substantial growth in recent years, there have been continuing periods of volatility and there can be no assurance that adverse market conditions will not repeat themselves in the future which may require similar, or more experimental action by the U.S. Federal Reserve, such as negative interest rates. Global capital markets are sensitive to U.S. domestic and international economic conditions, social and political tensions, military conflict, and terrorism, including the financial stability of EU countries, perceived or actual downturns in China’s economy, further and sustained depreciation in the price of oil, and political and social unrest and military conflict in the Middle East.

 

63


Table of Contents

CCT monitors U.S. and global developments and seeks to manage its investments in a manner consistent with achieving its investment objectives, however, there can be no assurance that CCT will be successful in doing so. The re-appearance of market conditions similar to those experienced from 2008 through 2009 for any substantial length of time could lead to increased market volatility and tighter credit markets, which could make it difficult to extend the maturity of or refinance CCT’s existing indebtedness or obtain new indebtedness with similar terms. Significant changes or volatility in the capital markets may also have a negative effect on the valuations of CCT’s investments. While most of CCT’s investments will not be publicly traded, applicable accounting standards require CCT to assume as part of its valuation process that its investments are sold in a principal market to market participants (even if CCT plans on holding an investment through maturity) and impairments of the market values or fair market values of CCT’s investments, even if unrealized, must be reflected in its financial statements for the applicable period, which could result in significant reductions to its net asset value for the period. With certain limited exceptions, CCT is only allowed to borrow amounts or issue debt securities if its asset coverage, as calculated pursuant to the 1940 Act, equals at least 200% immediately after such borrowing. Equity capital may also be difficult to raise during periods of adverse or volatile market conditions because, subject to some limited exceptions, as a business development company, CCT is generally not able to issue additional shares of its common stock at a price less than net asset value without first obtaining approval for such issuance from its stockholders and its independent directors. If CCT is unable to raise capital or refinance existing debt on acceptable terms, then it may be limited in its ability to make new commitments or to fund existing commitments to its portfolio companies. Significant changes in the capital markets may also affect the pace of CCT’s investment activity and the potential for liquidity events involving its investments. Thus, the illiquidity of CCT’s investments may make it difficult for CCT to sell such investments to access capital if required, and as a result, CCT could realize significantly less than the value at which it has recorded its investments if it were required to sell them for liquidity purposes.

Changes in laws or regulations governing CCT’s operations may adversely affect CCT’s business or cause CCT to alter its business strategy.

CCT and its portfolio companies are subject to regulation at the local, state, and federal levels. Changes to the laws and regulations governing CCT’s permitted investments may require a change in investment strategy. Such changes could differ materially from CCT’s previously disclosed strategies and plans and may shift CCT’s investment focus from the areas of expertise of the Advisor. Thus, any such changes, if they occur, could have a material adverse effect on CCT’s results of operations and the value of your investment in CCT.

The SBCA Act allows CCT to incur additional leverage.

On March 23, 2018, the SBCA Act became law. The SBCA Act, among other things, amends Section 61(a) of the 1940 Act to add a new Section 61(a)(2) which reduces the asset coverage requirements for senior securities applicable to BDCs from 200% to 150% provided that certain disclosure and approval requirements are met. Before the reduced asset coverage requirements under Section 61(a)(2) are effective with respect to CCT, the application of that section of the 1940 Act must be approved by either (1) a “required majority,” as defined in the Section 57(o) of the 1940 Act, of the CCT Board or (2) a majority of votes cast at a special or annual meeting of CCT’s stockholders.

CCT may invest in European companies and companies that have operations that may be affected by the Eurozone economy.

CCT may invest in European companies and companies that have operations that may be affected by the Eurozone economy. For example, concerns regarding the sovereign debt of various Eurozone countries and proposals for investors to incur substantial write-downs and reductions in the face value of certain countries’ sovereign debt have given rise to new concerns about sovereign defaults, following the vote by the United Kingdom to leave the EU and the possibility that one or more further countries might leave the EU or the Eurozone and various proposals (still under consideration and unclear in material respects) for support of

 

64


Table of Contents

affected countries and the Euro as a currency. The outcome of this situation cannot yet be predicted. Sovereign debt defaults and EU and/or Eurozone exits, could have material adverse effects on CCT’s investments in European companies, including but not limited to the availability of credit to support such companies’ financing needs, uncertainty and disruption in relation to financing, customer and supply contracts denominated in the Euro and wider economic disruption in markets served by those companies, while austerity and other measures introduced in order to limit or contain these issues may themselves lead to economic contraction and resulting adverse effects for CCT. It is possible that a number of CCT’s securities will be denominated in the Euro. Greece, Ireland and Portugal received one or more “bailouts” from other members of the EU. Although several countries in the Eurozone have agreed to multi-year bailout loans with the European Central Bank and the International Monetary Fund, it is unclear how much additional funding these countries, or other Eurozone countries, will require. Legal uncertainty about the funding of Euro denominated obligations following any breakup or exits from the Eurozone (particularly in the case of investments in companies in affected countries) could also have material adverse effects on CCT.

On June 23, 2016, the United Kingdom voted, via referendum, to exit from the EU, triggering political, economic and legal uncertainty. While such uncertainty most directly affects the United Kingdom and the EU, global markets suffered immediate and significant disruption. On March 29, 2017, the United Kingdom made a formal notification to the European Council under Article 50 of the Treaty on EU, which triggers a two year period during which the terms of an exit will be negotiated. The United Kingdom and the EU are therefore entering a period of legal, regulatory and political uncertainty. The United Kingdom’s exit from the EU will impact CCT and its investments (and their underlying issuers) in a variety of ways, not all of which are currently readily apparent immediately following the exit vote. CCT may invest in portfolio companies and other issuers with significant operations and/or assets in the United Kingdom, any of which could be adversely impacted by any new legal, tax and regulatory environment, whether by increased costs or impediments to the implementation of their business plan. Further, the vote by the United Kingdom to leave the EU may increase the likelihood of similar referenda in other member states of the EU, which could result in additional departures from the EU and may trigger steps by countries within the United Kingdom to leave the United Kingdom. The uncertainty resulting from any such developments, or the possibility of such developments, would also be likely to cause significant market disruption in the EU and the United Kingdom and more broadly across the global economy, as well as introduce further legal, tax and regulatory uncertainty in the EU and the United Kingdom.

Economic sanction laws in the United States and other jurisdictions may prohibit CCT and its affiliates from transacting with certain countries, individuals and companies.

Economic sanction laws in the United States and other jurisdictions may prohibit CCT or its affiliates from transacting with certain countries, individuals and companies. In the United States, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) administers and enforces laws, executive orders and regulations establishing U.S. economic and trade sanctions, which prohibit, among other things, transactions with, and the provision of services to, certain non-U.S. countries, territories, entities and individuals. These types of sanctions may significantly restrict or completely prohibit investment activities in certain jurisdictions, and if CCT, its portfolio companies or other issuers in which CCT invests were to violate any such laws or regulations, CCT may face significant legal and monetary penalties.

The FCPA and other anti-corruption laws and regulations, as well as anti-boycott regulations, may also apply to and restrict CCT’s activities, its portfolio companies and other issuers of their investments. If an issuer or CCT were to violate any such laws or regulations, such issuer or CCT may face significant legal and monetary penalties. The U.S. government has indicated that it is particularly focused on FCPA enforcement, which may increase the risk that an issuer or CCT becomes the subject of such actual or threatened enforcement. In addition, certain commentators have suggested that private investment firms and the funds that they manage may face increased scrutiny and/or liability with respect to the activities of their underlying portfolio companies. As such, a violation of the FCPA or other applicable regulations by CCT or an issuer of CCT’s portfolio investments could have a material adverse effect on CCT. CCT is committed to complying with the FCPA and other anti-

 

65


Table of Contents

corruption laws and regulations, as well as anti-boycott regulations, to which it is subject. As a result, CCT may be adversely affected because of its unwillingness to enter into transactions that violate any such laws or regulations.

Future legislation or rules could modify how CCT treats derivatives and other financial arrangements for purposes of compliance with the leverage limitations of the 1940 Act.

Future legislation or rules may modify how CCT treats derivatives and other financial arrangements for purposes of its compliance with the leverage limitations of the 1940 Act. For example, the SEC proposed a new rule in December 2015 that was designed to enhance the regulation of the use of derivatives by registered investments companies and business development companies. While the adoption of the proposed rule is currently uncertain, the proposed rule, if adopted, or any future legislation or rules, may modify how leverage is calculated under the 1940 Act and, therefore, may increase or decrease the amount of leverage currently available to CCT under the 1940 Act, which may be materially adverse to CCT and its stockholders.

As a public company, CCT is subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations involve significant expenditures, and non-compliance with such regulations may adversely affect CCT.

As a public company, CCT incurs legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC and the listing standards of the NYSE. CCT’s management is required to report on its internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and rules and regulations of the SEC thereunder. In particular, CCT’s management is required to review on an annual basis its internal control over financial reporting, and on a quarterly and annual basis to evaluate and disclose changes in its internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from CCT’s independent registered public accounting firm on the effectiveness of CCT’s internal control over financial reporting.

CCT incurs significant expenses in connection with its compliance with the Sarbanes-Oxley Act and other regulations applicable to public companies, which may negatively impact financial performance and CCT’s ability to make distributions. Compliance with such regulations also requires a significant amount of CCT’s management’s time and attention. For example, CCT cannot be certain as to the timing of the completion of its Sarbanes-Oxley mandated evaluations, testings and remediation actions, if any, or the impact of the same on its operations, and CCT may not be able to ensure that the process is effective or that its internal control over financial reporting are or will be deemed effective in the future. In the event that CCT is unable to maintain an effective system of internal control and maintain compliance with the Sarbanes-Oxley Act and related rules, it may be adversely affected.

CCT’s business and operations could be negatively affected if it becomes subject to stockholder activism, which could cause it to incur significant expense, hinder the execution of the investment strategy or impact the stock price.

Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing in the business development company space recently. While CCT is currently not subject to any stockholder activism, due to the potential volatility of its stock price and for a variety of other reasons, it may in the future become the target of stockholder activism. Stockholder activism could result in substantial costs and divert management’s and the CCT Board’s attention and resources from CCT’s business. Additionally, such stockholder activism could give rise to perceived uncertainties as to CCT’s future and adversely affect its relationships with service providers and its portfolio companies. Also, CCT may be required to incur significant legal and other expenses related to any activist stockholder matters. Further, CCT’s stock price could be subject

 

66


Table of Contents

to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any stockholder activism.

If CCT can no longer satisfy the conditions of Letter 12-40 (as defined below) issued by the Commodities Futures Trading Commission (the “CFTC”), then CCT and KKR could be subject to additional regulatory requirements.

CCT has claimed relief available under a no-action letter (“Letter 12-40”) issued by the staff of the CFTC. Letter 12-40 relieves KKR from registering with the CFTC as the commodity pool operator (“CPO”) of CCT, provided that CCT (i) continues to be regulated by the SEC as a BDC, (ii) allocates no more than specified amounts of its assets to futures contracts, certain swap contracts and certain other derivative instruments that are within the jurisdiction of the Commodity Exchange Act (collectively, “CEA-regulated products”), and (iii) is not marketed to the public as a commodity pool or as a vehicle for trading in CEA-regulated products. If CCT is unable to satisfy the conditions of Letter 12-40, KKR may become subject to the CFTC’s CPO registration requirements, and the disclosure and operations of CCT would need to comply with all applicable regulations governing commodity pools and CPOs.

If KKR were required to register as a CPO, it would also be required to become a member of the National Futures Association (“NFA”) and be subject to the NFA’s rules and bylaws. Compliance with these additional registration and regulatory requirements may increase KKR’s operating expenses, which, in turn, could result in the CCT’s investors being charged additional fees.

Risks Related to the Advisor and its Affiliates

The Advisor and its affiliates have limited experience managing a business development company.

The Advisor and its affiliates have less than one year of experience serving as the sole investment adviser of a business development company and may not be able to continue to operate CCT’s business successfully or achieve CCT’s investment objective. As a result, an investment in CCT’s securities may entail more risk than the securities of a comparable company with a substantial operating history.

The 1940 Act and the Code impose numerous constraints on the operations of business development companies and RICs that do not apply to the other types of investment vehicles previously managed by the Advisor and/or its affiliates. For example, under the 1940 Act, business development companies are generally required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly traded companies. Moreover, qualification for RIC tax treatment under subchapter M of the Code requires satisfaction of source-of-income, asset diversification and other requirements. Any failure by CCT to comply with these provisions could prevent it from maintaining its qualification as a business development company or RIC or could force it to pay unexpected taxes and penalties, which could be material. The Advisor’s and its affiliates’ limited experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve CCT’s investment objective.

The Advisor and its affiliates, including CCT’s officers and some of CCT’s directors, may face conflicts of interest caused by compensation arrangements with CCT and its affiliates, which could result in increased risk-taking by CCT.

The Advisor and its affiliates will receive substantial fees from CCT in return for their services, including certain incentive fees based on the amount of appreciation of CCT’s investments. These fees could influence the advice provided to CCT. Generally, the more equity CCT sells in public offerings and the greater the risk assumed by CCT with respect to its investments, the greater the potential for growth in its assets and profits (and, correlatively, the fees payable by it to the Advisor). These compensation arrangements could affect the Advisor’s or its affiliates’ judgment with respect to public offerings of equity and investments made by CCT, which allow the Advisor to earn increased asset management fees.

 

67


Table of Contents

The time and resources that individuals associated with the Advisor devote to CCT may be diverted, and CCT may face additional competition due to the fact that the Advisor is not prohibited from raising money for or managing other entities that make the same types of investments that CCT targets.

The Advisor, nor individuals employed by the Advisor, are not prohibited from raising money for and managing future investment entities that make the same types of investments as those CCT targets. As a result, the time and resources that the Advisor devotes to CCT may be diverted, and during times of intense activity in other programs it may devote less time and resources to CCT’s business than is necessary or appropriate. In addition, CCT may compete with any such investment entity for the same investors and investment opportunities.

The Advisor will experience conflicts of interest in connection with the management of CCT’s business affairs.

The Advisor will experience conflicts of interest in connection with the management of CCT’s business affairs, including relating to the allocation of investment opportunities by the Advisor and its affiliates; compensation to the Advisor; services that may be provided by the Advisor and its affiliates to issuers in which CCT invests; investments by CCT and other clients of the Advisor, subject to the limitations of the 1940 Act; the formation of additional investment funds by the Advisor; differing recommendations given by the Advisor to CCT versus other clients; the Advisor’s use of information gained from issuers in CCT’s portfolio for investments by other clients, subject to applicable law; and restrictions on the Advisor’s use of “inside information” with respect to potential investments by CCT.

The Advisor and its affiliates may experience conflicts of interest in connection with the negotiation of arranging and other transaction-related fees paid by CCT’s portfolio companies.

In negotiating originated loans and certain other originated credit investments on CCT’s behalf, the Advisor and its affiliates may have the ability to negotiate the payment of arranging and other transaction-related fees by the relevant counterparty to the Advisor and its affiliates and/or an original issue discount (“OID”). In such circumstances, the Advisor will face a conflict of interest to the extent that a portion of any arranging or transaction-related fees payable to the Advisor and its affiliates may be retained by the Advisor and its affiliates, whereas any OID provided by the relevant counterparty would solely benefit CCT.

The Advisor may face conflicts of interest with respect to services performed for issuers in which CCT invests.

The Advisor and its affiliates may provide a broad range of financial services to companies in which CCT invests, in compliance with applicable law, and will generally be paid fees for such services. In addition, affiliates of the Advisor may act as underwriters or placement agents in connection with an offering of securities by one of the companies in CCT’s portfolio. Any compensation received by the Advisor for providing these services will not be shared with CCT and may be received before CCT realizes a return on its investment. The Advisor may face conflicts of interest with respect to services performed for these companies, on the one hand, and investments recommended to CCT, on the other hand. Depending on the nature and magnitude of the fees, CCT could perform these services through a taxable subsidiary.

The Advisor has incentives to favor its other accounts and clients over CCT, which may result in conflicts of interest that could be harmful to CCT.

Because the Advisor and/or its affiliates manage assets for other investment companies, pooled investment vehicles and/or other accounts (including institutional clients, pension plans and certain high net worth individuals), certain conflicts of interest are present. For instance, the Advisor and its affiliates may receive fees from certain accounts that are higher than the fees received by the Advisor from CCT, or receive a performance-based fee on certain accounts. In those instances, a portfolio manager of the Advisor has an incentive to favor the higher fee and/or performance-based fee accounts over CCT. In addition, a conflict of interest exists to the extent

 

68


Table of Contents

the Advisor has proprietary investments in certain accounts, where its portfolio managers or other employees have personal investments in certain accounts, or when certain accounts are investment options in the Advisor’s employee benefit plans. The Advisor has an incentive to favor these accounts over CCT. The CCT Board monitors these conflicts.

Misconduct by employees of the Advisor or by third-party service providers could cause significant losses to CCT.

Misconduct by employees of the Advisor or by third-party service providers could cause significant losses to CCT. Employee misconduct may include binding CCT to transactions that exceed authorized limits or present unacceptable risks and unauthorized investment activities or concealing unsuccessful investment activities (which, in either case, may result in unknown and unmanaged risks or losses). Losses could also result from actions by third-party service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and third-party service providers may improperly use or disclose confidential information, which could result in litigation or serious financial harm, including limiting CCT’s business prospects or future marketing activities. No assurances can be given that the due diligence performed by the Advisor will identify or prevent any such misconduct.

The Advisor’s actions on behalf of its other accounts and clients may be adverse to CCT and CCT’s investments and harmful to CCT.

The Advisor and its affiliates manage assets for accounts other than CCT, including private funds (for purposes of this section, “Advisor Funds”). Actions taken by the Advisor on behalf of its Advisor Funds may be adverse to CCT and CCT’s investments which could harm CCT’s performance. For example, CCT may invest in the same credit obligations as other Advisor Funds, although, to the extent permitted under the 1940 Act, CCT’s investments may include different obligations of the same issuer. Decisions made with respect to the securities held by one Advisor Fund may cause (or have the potential to cause) harm to a different class of securities of the issuer held by other Advisor Funds (including CCT). As a further example, the Advisor may manage accounts that engage in short sales of (or otherwise take short positions in) securities or other instruments of the type in which CCT invests, which could harm CCT’s performance for the benefit of the accounts taking short positions, if such short positions cause the market value of the securities to fall.

CCT’s access to confidential information may restrict its ability to take action with respect to some investments, which, in turn, may negatively affect CCT’s results of operations.

CCT, directly or through the Advisor, may obtain confidential information about the companies in which CCT has invested or may invest. If CCT possesses confidential information about such companies, there may be restrictions on its ability to make, dispose of, increase the amount of, or otherwise take action with respect to, an investment in those companies. The impact of these restrictions on CCT’s ability to take action with respect to its investments could have an adverse effect on its results of operations.

The Advisor currently serves as an investment sub-adviser to two other business development companies with substantially the same investment objectives and strategies as CCT’s and the Advisor and its affiliates may in the future serve as an adviser to other business development companies with substantially the same investment objective and strategies, thereby subjecting the Advisor and its affiliates to actual and potential conflicts of interests in connection with the management of CCT’s business affairs.

The members of the senior management and investment teams of the Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to CCT, including serving as officers, directors or principals of entities that operate in the same or a related line of business as CCT. For example, the Advisor’s senior management and investment teams and other personnel of the Advisor also serve in similar capacities for Corporate Capital Trust II. By serving in these multiple capacities, the senior

 

69


Table of Contents

management and investment teams may have obligations to Corporate Capital Trust II and/or other entities, and to the investors of such entities, which may conflict with CCT’s best interests or the best interest of CCT’s stockholders. For instance, CCT relies on the Advisor to manage its day-to-day activities and to implement its investment strategy. As a result of these activities, the Advisor, its senior management, investment team and other personnel, and certain of the Advisor’s affiliates may have conflicts of interest in allocating their time between CCT and the other activities in which they are or may become involved, including the management of Corporate Capital Trust II and other entities affiliated with the Advisor.

Furthermore, CCT’s investment objectives overlap with those of Corporate Capital Trust II, and may overlap with the investment objectives of other clients and affiliates of the Advisor, subjecting the Advisor to additional conflicts of interest. For example, CCT may compete for investments with Corporate Capital Trust II, thereby subjecting the Advisor and its affiliates to certain conflicts of interest with respect to evaluating the suitability of investment opportunities and making or recommending acquisitions on CCT’s behalf. To mitigate these conflicts, the Advisor will seek to execute such transactions for all of the participating investment accounts, including CCT, on a fair and equitable basis and in accordance with its allocation policies, taking into account such factors as the relative amounts of capital available for new investments, the investment programs and portfolio positions of the participating investment accounts, the clients for which participation is appropriate, and any other factors deemed appropriate.

The Advisor has adopted restrictions on its use of inside information about existing or potential investments that its personnel acquires through their relationships with other advisory clients, and those restrictions may limit the freedom of the Advisor to enter into or exit from investments for CCT, which could have an adverse effect on CCT’s results of operations.

In the course of their respective duties, the members, officers, directors, employees, principals or affiliates of the Advisor may come into possession of material, non-public information. The possession of such information may, to CCT’s detriment, limit the ability of the Advisor to buy or sell a security or otherwise to participate in an investment opportunity for CCT. In certain circumstances, employees of the Advisor may serve as board members or in other capacities for portfolio or potential portfolio companies, which could restrict CCT’s ability to trade in the securities of such companies. For example, if personnel of the Advisor come into possession of material non-public information with respect to the Advisor’s investments, such personnel will be restricted by the Advisor’s information-sharing policies and procedures or by law or contract from sharing such information with CCT’s management team, even where the disclosure of such information would be in CCT’s best interests or would otherwise influence decisions taken by the members of the management team with respect to that investment. This conflict and these procedures and practices may limit the freedom of the Advisor to enter into or exit from potentially profitable investments for CCT which could have an adverse effect on CCT’s results of operations. Accordingly, there can be no assurance that CCT will be able to fully leverage the resources and industry expertise of the Advisor’s other businesses. Additionally, there may be circumstances in which one or more individuals associated with the Advisor will be precluded from providing services to CCT because of certain confidential information available to those individuals or to other parts of the Advisor.

CCT may be obligated to pay the Advisor incentive fees even if CCT incurs a net decrease in net assets resulting from operations due to a decline in the value of its portfolio and even if its earned interest income is not payable in cash.

CCT’s Current Investment Advisory Agreement entitles the Advisor to receive an incentive fee based on CCT’s pre-incentive fee net investment income regardless of any capital losses. In such case, CCT may be required to pay the Advisor an incentive fee for a fiscal quarter even if there is a decline in the value of CCT’s portfolio or if CCT incurs a net decrease in net assets resulting from operations for that quarter.

Any incentive fee payable by CCT that relates to its pre-incentive fee net investment income may be computed and paid on income that may include interest that has been accrued but not yet received or interest in the form of securities received rather than cash (“payment-in-kind,” or “PIK,” income). If a portfolio company

 

70


Table of Contents

defaults on a loan that is structured to provide accrued interest income, it is possible that accrued interest income previously included in the calculation of the incentive fee will become uncollectible. The Advisor is not obligated to reimburse CCT for any part of the incentive fee it received that was based on accrued interest income that CCT never received as a result of a subsequent default. PIK income will be included in the pre-incentive fee net investment income used to calculate the incentive fee to the Advisor even though CCT does not receive the income in the form of cash.

The quarterly incentive fee on income is recognized and paid without regard to: (i) the trend of pre-incentive fee net investment income as a percent of adjusted capital over multiple quarters in arrears which may in fact be consistently less than the preference return, or (ii) the net income or net loss in the current calendar quarter, the current year or any combination of prior periods.

For federal income tax purposes, CCT may be required to recognize taxable income in some circumstances in which it does not receive a corresponding payment in cash and to make distributions with respect to such income to maintain its status as a RIC and/or minimize excise tax. Under such circumstances, CCT may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that CCT is required to pay a subordinated incentive fee on income with respect to such accrued income. As a result, CCT may have to sell some of its investments at times and/or at prices it would not consider advantageous, raise additional debt or equity capital, or forgo new investment opportunities for this purpose. If CCT is not able to obtain cash from other sources, it may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

CCT’s incentive fee may induce the Advisor to make speculative investments.

The incentive fee payable by CCT to the Advisor may create an incentive for the Advisor to make investments on CCT’s behalf that are risky or more speculative than would be the case in the absence of such compensation arrangements. The way in which the incentive fee is determined may encourage the Advisor to use leverage to increase the leveraged return on CCT’s investment portfolio.

In addition, the fact that CCT’s base management fee is payable based upon its average gross assets (which includes any borrowings for investment purposes or any unrealized depreciation) may encourage the Advisor to use leverage to make additional investments. Such a practice could result in CCT investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during cyclical economic downturns. Under certain circumstances, the use of substantial leverage may increase the likelihood of CCT defaulting on its borrowings, which would be detrimental to holders of its securities.

CCT’s ability to enter into transactions with its affiliates is restricted.

CCT is prohibited under the 1940 Act from participating in certain transactions with certain of its affiliates without the prior approval of a majority of CCT’s independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of CCT’s outstanding voting securities will be its affiliate for purposes of the 1940 Act, and CCT will generally be prohibited from buying or selling any securities from or to such affiliate on a principal basis, absent the prior approval of CCT’s Board and, in some cases, the SEC. The 1940 Act also prohibits certain “joint” transactions with certain of CCT’s affiliates, which in certain circumstances could include investments in the same portfolio company (whether at the same or different times to the extent the transaction involves a joint investment), without prior approval of CCT’s Board and, in some cases, the SEC. If a person acquires more than 25% of CCT’s voting securities, CCT will be prohibited from buying or selling any security from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit CCT’s ability to transact business with its officers or directors or their affiliates. The SEC has interpreted the business development company regulations governing transactions with affiliates to prohibit certain joint transactions involving entities that share a common investment adviser. As a result of these restrictions, CCT may be prohibited from buying or selling any security from or to any portfolio company that is controlled by a

 

71


Table of Contents

fund managed by the Advisor or its affiliates without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to CCT.

CCT may, however, invest alongside the Advisor’s and its affiliates’ other clients, including other entities it manages, which CCT refers to as affiliates’ other clients, in certain circumstances when doing so is consistent with applicable law and SEC staff interpretations and guidance. CCT may also invest alongside the other clients of the Advisor, as otherwise permissible under regulatory guidance, applicable regulations and the Advisor’s allocation policies. It is CCT’s policy to base its Board’s determinations as to the amount of capital available for investment on such factors as: the amount of cash on-hand, existing commitments and reserves, the targeted leverage level, the targeted asset mix and diversification requirements and other investment policies and restrictions set by CCT’s Board or imposed by applicable laws, rules, regulations or interpretations. However, there can be no assurance that investment opportunities will be allocated to CCT fairly or equitably in the short-term or over time.

The SEC Exemptive Order granted by the SEC to CCT, the Advisor and certain of its affiliates, permits CCT to participate in certain transactions originated by the Advisor or its affiliates. However, affiliates of the Advisor whose primary business includes the origination of investments may engage in investment advisory businesses with client accounts that compete with CCT, and those affiliates have no obligation to make their originated investment opportunities available to the Advisor or to CCT.

In situations when co-investment with affiliates’ other clients is not permitted under the 1940 Act and related rules, existing or future staff guidance, or the terms and conditions of exemptive relief granted to CCT by the SEC (as discussed above), the Advisor will need to decide which client or clients will proceed with the investment. Generally, CCT will not have an entitlement to make a co-investment in these circumstances and, to the extent that another client elects to proceed with the investment, CCT will not be permitted to participate. Moreover, except in certain circumstances, CCT are unable to invest in any issuer in whom an affiliate’s other client holds a controlling interest.

CCT may make investments that could give rise to a conflict of interest.

CCT does not expect to invest in, or hold securities of, companies that are controlled by affiliates’ other clients. However, an affiliates’ other clients may invest in, and gain control over, one of CCT’s portfolio companies. If an affiliates’ other client, or clients, gains control over one of CCT’s portfolio companies, it may create conflicts of interest and may subject CCT to certain restrictions under the 1940 Act. As a result of these conflicts and restrictions, the Advisor may be unable to implement CCT’s investment strategies as effectively as it could have in the absence of such conflicts or restrictions. For example, as a result of a conflict or restriction, the Advisor may be unable to engage in certain transactions that it would otherwise pursue. In order to avoid these conflicts and restrictions, the Advisor may choose to exit such investments prematurely and, as a result, CCT would forego any positive returns associated with such investments. In addition, to the extent that an affiliates’ other client holds a different class of securities than CCT as a result of such transactions, CCT’s interests may not be aligned.

The recommendations given to CCT by the Advisor may differ from those rendered by the Advisor to its other clients.

The Advisor and its affiliates may give advice and recommend securities to other clients which may differ from advice given to, or securities recommended or bought for, CCT even though such other clients’ investment objectives may be similar to CCT’s.

CCT is not managed by KKR & Co. or FS Investments, but rather affiliates of those entities and may not replicate the success of those entities.

CCT is managed by the Advisor and not by KKR & Co. or FS Investments. CCT’s performance may be lower or higher than the performance of other entities managed by KKR & Co. and/or FS Investments or their respective affiliates and their past performance is no guarantee of CCT’s future results.

 

72


Table of Contents

The Advisor’s liability is limited under the CCT Current Investment Advisory Agreement, and CCT is required to indemnify the Advisor against certain liabilities, which may lead the Advisor to act in a riskier manner on its behalf than it would when acting for its own account.

The Advisor has not assumed any responsibility to CCT other than to render the services described in the CCT Current Investment Advisory Agreement, and it will not be responsible for any action of CCT’s Board in declining to follow the Advisor’s advice or recommendations. Pursuant to the CCT Current Investment Advisory Agreement, the Advisor and its directors, officers, stockholders, members, agents, employees, controlling persons, and any other person or entity affiliated with, or acting on behalf of the Advisor will not be liable to CCT for their acts under the CCT Current Investment Advisory Agreement, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. CCT has also agreed to indemnify, defend and protect the Advisor and its directors, officers, stockholders, members, agents, employees, controlling persons and any other person or entity affiliated with, or acting on behalf of KKR with respect to all damages, liabilities, costs and expenses resulting from acts of KKR not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. These protections may lead KKR to act in a riskier manner when acting on CCT’s behalf than it would when acting for its own account.

Risks Related to Business Development Companies

The requirement that CCT invests a sufficient portion of its assets in qualifying assets could preclude CCT from investing in accordance with its current business strategy; conversely, the failure to invest a sufficient portion of assets in qualifying assets could result in CCT’s failure to maintain its status as a business development company.

As a business development company, the 1940 Act prohibits CCT from acquiring any assets other than certain qualifying assets unless, at the time of and after giving effect to such acquisition, at least 70% of its total assets are qualifying assets. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes U.S. operating companies whose securities are not listed on a national securities exchange (i.e., private companies), and certain U.S. public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. Therefore, CCT may be precluded from investing in what it believes are attractive investments if such investments are not qualifying assets. Conversely, if CCT fails to invest a sufficient portion of its assets in qualifying assets, it could lose CCT’s status as a business development company, which would have a material adverse effect on its business, financial condition, and results of operations. Similarly, these rules could prevent CCT from making additional investments in existing portfolio companies, which could result in the dilution of its position, or could require it to dispose of investments at an inopportune time to comply with the 1940 Act. If CCT were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale could be significantly less than the current value of such investments.

CCT’s failure to maintain its status as a business development company would reduce its operating flexibility.

If CCT does not remain a business development company, it might be regulated as a closed-end investment company under the 1940 Act, which would subject it to substantially more regulatory restrictions and correspondingly decrease operating flexibility.

Regulations governing CCT’s operation as a business development company and RIC affect its ability to raise capital and the way in which it raises additional capital or borrows for investment purposes, which may have a negative effect on its growth. As a business development company, the necessity of raising additional capital may expose CCT to risks, including risks associated with leverage.

As a result of the annual distribution requirement to qualify as a RIC, CCT may need to access the capital markets periodically to raise cash to fund new investments in portfolio companies. CCT may continue to issue

 

73


Table of Contents

“senior securities,” including borrowing money from banks or other financial institutions only in amounts such that its asset coverage, as defined in the 1940 Act, equals at least 200% after such incurrence or issuance. The senior securities CCT has issued, as well as senior securities it may issue in the future, expose it to risks associated with leverage, including an increased risk of loss. CCT’s ability to issue different types of securities is also limited. Compliance with these distribution requirements may unfavorably limit CCT’s investment opportunities and reduce its ability in comparison to other companies to profit from favorable spreads between the rates at which it can borrow and the rates at which it can lend.

CCT has and may continue to borrow for investment purposes. If the value of CCT’s assets declines, it may be unable to satisfy the asset coverage test, which would prohibit it from paying distributions and could prevent it from qualifying as a RIC, which would generally result in a corporate-level tax on any income and net gains. If CCT cannot satisfy the asset coverage test, it may be required to sell a portion of its investments and, depending on the nature of its debt financing, repay a portion of its indebtedness at a time when such sales may be disadvantageous. Also, any amounts that CCT uses to service its indebtedness would not be available for distributions to its stockholders.

In addition, CCT anticipates that as market conditions permit, it may securitize its loans to generate cash for funding new investments. To securitize loans, CCT may create a wholly owned subsidiary, contribute a pool of loans to the subsidiary and have the subsidiary issue primarily investment grade debt securities to purchasers who CCT would expect to be willing to accept a substantially lower interest rate than the loans earn. CCT would retain all or a portion of the equity in the securitized pool of loans. CCT’s retained equity would be exposed to any losses on the portfolio of loans before any of the debt securities would be exposed to such losses. Accordingly, if the pool of loans experienced a low level of losses due to defaults, CCT would earn an incremental amount of income on its retained equity but it would be exposed, up to the amount of equity retained, to that proportion of any losses it would have experienced if it had continued to hold the loans in its portfolio.

Risks Related to CCT’s Investments

CCT’s investments in portfolio companies may be risky, and it could lose all or part of its indirect investment.

CCT pursues a strategy focused on investing primarily in the debt of privately owned U.S. companies with a focus on originated transactions sourced through the networks of the Advisor. Short transaction closing timeframes associated with originated transactions coupled with added tax or accounting structuring complexity and international transactions may result in a higher risk in comparison to non-originated transactions.

 

   

Senior Debt. When CCT invests in senior debt, it generally seeks to take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. These investments will generally take the form of senior secured first lien loans, senior secured second lien loans, or senior secured bonds. There is a risk that the collateral securing CCT’s investments may decrease in value over time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions, including as a result of the inability of the portfolio company to raise additional capital. Also, in some circumstances, CCT’s lien could be subordinated to claims of other creditors. In addition, deterioration in a portfolio company’s financial condition and prospects, including its inability to raise additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Consequently, the fact that a loan is secured does not guarantee that CCT will receive principal and interest payments according to the loan’s terms, or at all, or that CCT will be able to collect on the loan should it decide to enforce its remedies.

 

   

Subordinated Debt. CCT’s subordinated debt investments are generally subordinated to senior debt and are generally unsecured, which may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may

 

74


Table of Contents
 

involve additional risks that could adversely affect CCT’s investment returns as compared to its senior debt investments. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such debt could subject CCT and its stockholders to non-cash income. Since CCT will not receive any principal repayments prior to the maturity of some of its subordinated debt investments, such investments will be of greater risk than amortizing loans.

 

   

Equity Investments. Certain investments that CCT may make may include equity related securities, such as rights and warrants, that may be converted into or exchanged for common stock or the cash value of the common stock. In addition, CCT may make direct equity investments in portfolio companies. The equity interests CCT receives may not appreciate in value and, in fact, may decline in value. In addition, when CCT invests in senior and subordinated debt, it may acquire warrants or options to purchase equity securities or benefit from other types of equity participation. CCT’s goal is ultimately to dispose of these equity interests and realize gains upon its disposition of such interests. Accordingly, CCT may not be able to realize gains from its equity interests and any gains that it does realize on the disposition of any equity interests may not be sufficient to offset any other losses it experiences. Depending on the nature of the equity investment, CCT could invest through a taxable subsidiary which could impact the return on investment. CCT may also be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow CCT to sell the underlying equity interests. CCT may be unable to exercise any put rights it acquires, which grants it the right to sell its equity securities back to the portfolio company, for the consideration provided in CCT’s investment documents if the issuer is in financial distress However, the equity interests CCT receives may not appreciate in value and, in fact, may decline in value.

 

   

Convertible Securities. CCT may invest in convertible securities, such as bonds, debentures, notes, preferred stocks or other securities that may be converted into, or exchanged for, a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by CCT is called for redemption, it will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Any of these actions could have an adverse effect on CCT’s ability to achieve its investment objective.

 

   

Investments in Private Investment Funds. CCT may invest in, or wholly own, private investment funds, including hedge funds, private equity funds, limited liability companies, real estate investment trusts (“REITs”), and other business entities. In valuing its investments in private investment funds, CCT relies primarily on information provided by managers of such funds. Valuations of illiquid securities, such as interests in certain private investment funds, involve various judgments and consideration of factors that may be subjective. There is a risk that inaccurate valuations provided by managers of private investment funds could adversely affect the value of CCT’s common stock. CCT may not be able to withdraw its investment in certain private investment funds promptly after it has made a decision to do so, which may result in a loss to it and adversely affect its investment returns.

 

   

Derivatives. Derivative investments have risks, including: the imperfect correlation between the value of such instruments and CCT’s underlying assets, which creates the possibility that the loss on such instruments may be greater than the gain in the value of the underlying assets in CCT’s portfolio; the loss of principal; the possible default of the other party to the transaction; and illiquidity of the derivative investments. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, CCT may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding, or may not recover at all. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative contract would

 

75


Table of Contents
 

typically be terminated at its fair market value. If CCT is owed this fair market value in the termination of the derivative contract and its claim is unsecured, CCT will be treated as a general creditor of such counterparty and will not have any claim with respect to the underlying security. Certain of the derivative investments in which CCT may invest may, in certain circumstances, give rise to a form of financial leverage, which may magnify the risk of owning such instruments. The ability to successfully use derivative investments depends on the ability of KKR to predict pertinent market movements, which cannot be assured. In addition, amounts paid by CCT as premiums and cash or other assets held in margin accounts with respect to its derivative investments would not be available to it for other investment purposes, which may result in lost opportunities for gain.

The Dodd-Frank Act could, depending on future rulemaking by regulatory agencies, impact the use of derivatives. The Dodd-Frank Act is intended to regulate the over-the-counter (“OTC”) derivatives market by requiring many derivative transactions to be cleared and traded on an exchange, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether. Future rulemaking to implement these requirements could potentially limit or completely restrict CCT’s ability to use these instruments as a part of its investment strategy, increase the costs of using these instruments or make them less effective. Limits or restrictions applicable to the counterparties with which CCT engages in derivative transactions could also prevent it from using these instruments or affect the pricing or other factors relating to these instruments, or may change availability of certain investments. The SEC has also indicated that it may adopt new policies on the use of derivatives by registered investment companies. Such policies could affect the nature and extent of CCT’s use of derivatives.

Most debt securities in which CCT invests will not be rated by any rating agency and, if they were rated, they would be rated as below investment grade quality. Debt securities rated below investment grade, which are often referred to as “junk” securities, are generally regarded as having predominantly speculative characteristics and may carry a greater risk with respect to a borrower’s capacity to pay interest and repay principal.

The credit ratings of certain of CCT’s investments may not be indicative of the actual credit risk of such rated instruments.

Rating agencies rate debt securities based upon their assessment of the likelihood of the receipt of principal and interest payments. Rating agencies do not consider the risks of fluctuations in market value or other factors that may influence the value of debt securities. Therefore, the credit rating assigned to a particular instrument may not fully reflect the true risks of an investment in such instrument. Credit rating agencies may change their methods of evaluating credit risk and determining ratings. These changes may occur quickly and often. While CCT may give some consideration to ratings, ratings may not be indicative of the actual credit risk of CCT’s investments in rated instruments.

A redemption of convertible securities held by CCT could have an adverse effect on its ability to achieve its investment objective.

A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by CCT is called for redemption, CCT will be required to permit the issuer to redeem the security, convert it into the underlying common stock or sell it to a third party. Any of these actions could have an adverse effect on CCT’s ability to achieve its investment objective.

 

76


Table of Contents

To the extent OID and PIK interest income constitute a portion of CCT’s income, CCT will be exposed to risks associated with the deferred receipt of cash representing such income.

CCT’s investments may include OID and PIK instruments. To the extent OID and PIK constitute a portion of CCT’s income, CCT will be exposed to risks associated with such income being required to be included in income for financial reporting purposes in accordance with GAAP and taxable income prior to receipt of cash, including the following:

 

   

OID and PIK instruments may have unreliable valuations because the accruals require judgments about collectability;

 

   

OID and PIK instruments may create heightened credit risks because the inducement to the borrower to accept higher interest rates in exchange for the deferral of cash payments typically represents, to some extent, speculation on the part of the borrower;

 

   

For GAAP purposes, cash distributions to stockholders that include a component of OID or PIK income are not considered a return of capital, although they may be paid from the offering proceeds. Thus, although a distribution of OID or PIK income may be funded from the cash invested by the stockholders, the 1940 Act does not require that stockholders be given notice of this fact;

 

   

The presence of OID and PIK creates the risk of non-refundable cash payments to the Advisor in the form of subordinated incentive fees on income based on non-cash OID and PIK income accruals that may never be realized; and

 

   

In the case of PIK “toggle” debt, the PIK election has the simultaneous effects of increasing the investment income, thus increasing the potential for realizing incentive fees.

CCT’s portfolio companies may incur debt that ranks equally with, or senior to, CCT’s investments in such companies.

CCT pursues a strategy focused on investing primarily in the debt of privately owned U.S. companies with a focus on originated transactions sourced through the networks of the Advisor. CCT’s portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which CCT’s invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which CCT is entitled to receive payments with respect to the debt instruments in which it invests. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to CCT’s investment in that portfolio company would typically be entitled to receive payment in full before CCT receives any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to CCT. In the case of debt ranking equally with debt instruments in which CCT invests, CCT would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

If CCT cannot obtain debt financing or equity capital on acceptable terms, its ability to acquire investments and to expand operations will be adversely affected.

Any working capital reserves CCT maintains may not be sufficient for investment purposes, and CCT may require additional debt financing or equity capital to operate. Pursuant to tax rules that apply to CCT, CCT is required to distribute at least 90% of its net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to its stockholders to maintain its RIC status. Accordingly, in the event that CCT needs additional capital in the future for investments or for any other reason CCT may need to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. These sources of funding may not be available to CCT due to unfavorable economic conditions, which could increase CCT’s funding costs, limit its access to the capital markets or result in a decision by lenders not to extend credit to CCT. Consequently, if CCT cannot obtain further debt or equity

 

77


Table of Contents

financing on acceptable terms, its ability to acquire additional investments and to expand its operations will be adversely affected. As a result, CCT would be less able to achieve portfolio diversification and its investment objective, which may negatively impact it results of operations and reduce its ability to make distributions to CCT’s stockholders.

Subordinated liens on collateral securing debt investments that CCT may make to portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and CCT.

Certain debt investments that CCT will make in portfolio companies will be secured on a second priority basis by the same collateral securing senior debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the debt. In the event of a default, the holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before CCT. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then CCT, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.

CCT may also make unsecured debt investments in portfolio companies, meaning that such investments will not benefit from any interest in collateral of such companies. Liens on any such portfolio company’s collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured debt agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before CCT. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy CCT’s unsecured debt obligations after payment in full of all secured debt obligations. If such proceeds were not sufficient to repay the outstanding secured debt obligations, then CCT’s unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.

The rights CCT may have with respect to the collateral securing the debt investments CCT makes in its portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more inter-creditor agreements that CCT enters into with the holders of senior debt. Under such an inter-creditor agreement, at any time obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. CCT may not have the ability to control or direct such actions, even if its rights are adversely affected.

Certain of CCT’s investments may be adversely affected by laws relating to fraudulent conveyance or voidable preferences.

Certain of CCT’s investments could be subject to federal bankruptcy law and state fraudulent transfer laws, which vary from state to state, if the debt obligations relating to such investments were issued with the intent of hindering, delaying or defrauding creditors or, in certain circumstances, if the issuer receives less than reasonably equivalent value or fair consideration in return for issuing such debt obligations. If the debt is used for a buyout

 

78


Table of Contents

of stockholders, this risk is greater than if the debt proceeds are used for day-to-day operations or organic growth. If a court were to find that the issuance of the debt obligations was a fraudulent transfer or conveyance, the court could void or otherwise refuse to recognize the payment obligations under the debt obligations or the collateral supporting such obligations, further subordinate the debt obligations or the liens supporting such obligations to other existing and future indebtedness of the issuer or require CCT to repay any amounts received by it with respect to the debt obligations or collateral. In the event of a finding that a fraudulent transfer or conveyance occurred, CCT may not receive any repayment on the debt obligations.

Under certain circumstances, payments to CCT and distributions by CCT to its stockholders may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, investments in restructurings may be adversely affected by statutes relating to, among other things, fraudulent conveyances, voidable preferences, lender liability and the court’s discretionary power to disallow, subordinate or disenfranchise particular claims or recharacterize investments made in the form of debt as equity contributions.

Most of CCT’s mezzanine securities and other investments (if any) are expected to be unsecured and made in companies whose capital structures have significant indebtedness ranking ahead of the investments, all or a significant portion of which may be secured.

Mezzanine debt is typically junior to the obligations of a company to senior creditors, trade creditors and employees. Most of CCT’s mezzanine securities and other investments (if any) are expected to be unsecured and made in companies whose capital structures have significant indebtedness ranking ahead of the investments, all or a significant portion of which may be secured. While the securities and other investments may benefit from the same or similar financial and other covenants as those enjoyed by the indebtedness ranking ahead of the investments and may benefit from cross-default provisions and security over the portfolio company’s assets, some or all of such terms may not be part of particular investments. Default rates for mezzanine debt securities have historically been higher than for investment grade securities. Mezzanine securities and other investments generally are subject to various risks including, without limitation: (i) a subsequent characterization of an investment as a “fraudulent conveyance”; (ii) the recovery as a “preference” of liens perfected or payments made on account of a debt in the 90 days before a bankruptcy filing; (iii) equitable subordination claims by other creditors; (iv) so-called “lender liability” claims by the issuer of the obligations; and (v) environmental liabilities that may arise with respect to collateral securing the obligations. Mezzanine debt investments may also be subject to early redemption features, refinancing options, prepayment options or similar provisions which, in each case, could result in the issuer repaying the principal on an obligation earlier than expected. In addition, mezzanine debt investments may include enhanced information rights or other involvement with a company’s board or management that could result in limiting CCT’s ability to liquidate positions in the company.

CCT may invest in debt securities and instruments that are rated below investment grade by recognized rating agencies or will be unrated and face ongoing uncertainties and exposure to adverse business, financial or economic conditions and the issuer’s failure to make timely interest and principal payments.

CCT may invest in debt securities and instruments that are rated below investment grade by recognized rating agencies or will be unrated and face ongoing uncertainties and exposure to adverse business, financial or economic conditions and the issuer’s failure to make timely interest and principal payments. Such securities and instruments are generally not exchange-traded and, as a result, trade in the OTC marketplace, which is less transparent than the exchange-traded marketplace. In addition, CCT may invest in bonds of issuers that do not have publicly traded equity securities, making it more difficult to hedge the risks associated with such investments. CCT’s investments in below investment grade instruments exposes it to a substantial degree of credit risk and interest rate risk. The market for high yield securities has recently experienced periods of significant volatility and reduced liquidity. The market values of certain of these lower-rated and unrated debt investments may reflect individual corporate developments to a greater extent and tend to be more sensitive to economic conditions than those of higher-rated investments, which react primarily to fluctuations in the general

 

79


Table of Contents

level of interest rates. Companies that issue such securities are often highly leveraged and may not have available to them more traditional methods of financing. General economic recession or a major decline in the demand for products and services in which the borrower operates would likely have a materially adverse impact on the value of such securities and the ability of the issuers of such securities to repay principal and interest thereon, thereby increasing the incidence of default of such securities. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the value and liquidity of these high yield debt investments.

Certain of CCT’s investments are exposed to the credit risk of the counterparties with which, or the dealers, brokers and exchanges through which, CCT deals, whether in exchange-traded or OTC transactions.

Certain of CCT’s investments are exposed to the credit risk of the counterparties with which, or the dealers, brokers and exchanges through which, CCT deals, whether in exchange-traded or OTC transactions. If there is a default by the counterparty to such a transaction, CCT will, under most normal circumstances, have contractual remedies pursuant to the agreements related to the transaction. However, exercising such contractual rights may involve delays or costs which could result in losses to CCT. CCT may be subject to the risk of loss of CCT’s assets on deposit or being settled or cleared with a broker in the event of the broker’s bankruptcy, the bankruptcy of any clearing broker through which the broker executes and clears transactions on behalf of CCT, the bankruptcy of an exchange clearing house or the bankruptcy of any other counterparty. In the case of any such bankruptcy, CCT might recover, even in respect of property specifically traceable to it, only a pro rata share of all property available for distribution to all of the counterparty’s customers and counterparties. Such an amount may be less than the amounts owed to CCT. Such events would have an adverse effect on the net asset value of CCT’s funds. Certain counterparties may have general custody of, or title to, CCT’s assets. The failure of any such counterparty may result in adverse consequences to the net asset value of CCT’s fund.

In addition, CCT may from time to time use counterparties located in jurisdictions outside the U.S. Such counterparties usually are subject to laws and regulations in non-U.S. jurisdictions that are designed to protect customers in the event of their insolvency. However, the practical effect of these laws and their application to CCT’s assets may be subject to substantial limitations and uncertainties. Because of the range of possible factual scenarios involving the insolvency of a counterparty and the potential number of entities and jurisdictions that may be involved, it is impossible to generalize about the effect of such an insolvency on CCT and its assets. Investors should assume that the insolvency of any such counterparty would result in significant delays in recovering CCT’s financial instruments from or the payment of claims therefor by such counterparty and a loss to CCT, which could be material.

CCT’s investments may be structured through the use of OTC options and swaps or other indirect investment transactions. Such transactions may be entered into with a small number of counterparties resulting in a concentration of counterparty risk. The exercise of counterparty rights under such arrangements, including forced sales of securities, may have a significant adverse impact on CCT and its fund’s net asset value.

There may be circumstances where CCT’s debt investments could be subordinated to claims of other creditors or CCT could be subject to lender liability claims.

Although CCT generally structures certain of its investments as senior debt, if one of CCT’s portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which it provided managerial assistance to that portfolio company or whether a representative of it or the Advisor sat on the Board of such portfolio company, a bankruptcy court might re-characterize CCT’s debt investment and subordinate all or a portion of CCT’s claim to that of other creditors. In situations where a bankruptcy carries a high degree of political significance, CCT’s legal rights may be subordinated to other creditors.

In addition, a number of U.S. judicial decisions have upheld judgments obtained by borrowers against lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or

 

80


Table of Contents

contractual) of good faith, commercial reasonableness and fair dealing, or a similar duty owed to the borrower or has assumed an excessive degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. Because of the nature of its investments in portfolio companies (including that, as a business development company, CCT may be required to provide managerial assistance to those portfolio companies), CCT may be subject to allegations of lender liability.

CCT generally will not control the business operations of its portfolio companies and, due to the illiquid nature of CCT’s holdings in its portfolio companies, CCT may not be able to dispose of its interest in its portfolio companies.

CCT does not expect to control most of its portfolio companies, even though it may have board representation or board observation rights, and its debt agreements may impose certain restrictive covenants on its borrowers. As a result, CCT is subject to the risk that a portfolio company in which it invests may make business decisions with which CCT disagrees and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve CCT’s interests as a debt investor. Due to the lack of liquidity for CCT’s investments in private companies, CCT may not be able to dispose of its interests in its portfolio companies as readily as it would like or at an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of CCT’s portfolio holdings.

CCT is exposed to risks associated with changes in interest rates.

General interest rate fluctuations may have a substantial negative impact on CCT’s investments and investment opportunities and, accordingly, may have a material adverse effect on CCT’s ability to achieve its investment objective and the rate of return on invested capital. Because CCT may borrow money and may issue debt securities to make investments, CCT’s net investment income will depend, in part, upon the difference between the rate at which it borrows funds or pays interest on such debt securities and the rate at which it invests these funds. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on CCT’s net investment income.

Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed-rate securities that have longer maturities. CCT may enter into certain hedging transactions, such as interest rate swap agreements, to mitigate exposure to adverse fluctuations in interest rates and CCT may increase its floating rate investments to position the portfolio for rate increases. However, CCT cannot assure you that such transactions will be successful in mitigating exposure to interest rate risk or if CCT will enter into such interest rate hedges. Hedging transactions may also limit CCT’s ability to participate in the benefits of lower interest rates with respect to its portfolio investments.

CCT does not have a policy governing the maturities of its investments. This means that CCT is subject to greater risk (other things being equal) than a fund invested solely in shorter-term securities. A decline in the prices of the debt CCT owns could adversely affect its net asset value. Also, an increase in interest rates available to investors could make an investment in CCT’s common stock less attractive if CCT is not able to increase its distribution rate.

International investments create additional risks.

CCT expects to make, investments in portfolio companies that are domiciled outside of the United States. CCT anticipate that up to 30% of its investments may be in these types of assets. CCT’s investments in foreign portfolio companies are deemed “non-qualifying assets,” which means, as required by the 1940 Act, they, along with other non-qualifying assets, may not constitute more than 30% of CCT’s total assets at the time of CCT’s acquisition of any asset, after giving effect to the acquisition. Notwithstanding the limitation on CCT’s ownership of foreign portfolio companies, such investments subject CCT to many of the same risks as its domestic investments, as well as certain additional risks, including the following:

 

   

foreign governmental laws, rules and policies, including those restricting the ownership of assets in the foreign country or the repatriation of profits from the foreign country to the United States;

 

81


Table of Contents
   

foreign currency devaluations that reduce the value of and returns on CCT’s foreign investments;

 

   

adverse changes in the availability, cost and terms of investments due to the varying economic policies of a foreign country in which CCT invests;

 

   

adverse changes in tax rates, the tax treatment of transaction structures and other changes in operating expenses of a particular foreign country in which CCT invests;

 

   

the assessment of foreign-country taxes (including withholding taxes, transfer taxes and value added taxes, any or all of which could be significant) on income or gains from CCT’s investments in the foreign country;

 

   

adverse changes in foreign-country laws, including those relating to taxation, bankruptcy and ownership of assets;

 

   

changes that adversely affect the social, political and/or economic stability of a foreign country in which CCT invests;

 

   

high inflation in the foreign countries in which CCT invests, which could increase the costs to CCT of investing in those countries;

 

   

deflationary periods in the foreign countries in which CCT invests, which could reduce demand for CCT’s assets in those countries and diminish the value of such investments and the related investment returns to CCT; and

 

   

legal and logistical barriers in the foreign countries in which CCT invests that materially and adversely limit CCT’s ability to enforce its contractual rights with respect to those investments.

In addition, CCT may make investments in countries whose governments or economies may prove unstable. Certain of the countries in which CCT may invest may have political, economic and legal systems that are unpredictable, unreliable or otherwise inadequate with respect to the implementation, interpretation and enforcement of laws protecting asset ownership and economic interests. In some of the countries in which CCT may invest, there may be a risk of nationalization, expropriation or confiscatory taxation, which may have an adverse effect on CCT’s portfolio companies in those countries and the rates of return that CCT is able to achieve on such investments. CCT may also lose the total value of any investment which is nationalized, expropriated or confiscated. The financial results and investment opportunities available to CCT, particularly in developing countries and emerging markets, may be materially and adversely affected by any or all of these political, economic and legal risks.

CCT investments in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities, subject CCT indirectly to the underlying risks of such private investment funds and additional fees and expenses.

CCT may invest in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities which would be required to register as investment companies but for an exemption under Sections 3(c)(1) and 3(c)(7) of the 1940 Act. CCT’s investments in private funds are subject to substantial risks. CCT’s investments in such private investment funds expose it to the risks associated with the businesses of such funds or entities as well as such private investment funds’ portfolio companies. These private investment funds may or may not be registered investment companies and, thus, may not be subject to protections afforded by the 1940 Act, covering, among other areas, liquidity requirements, governance by an independent board, affiliated transaction restrictions, leverage limitations, public disclosure requirements and custody requirements.

CCT relies primarily on information provided by managers of private investment funds in valuing its investments in such funds. There is a risk that inaccurate valuations provided by managers of private investment funds could adversely affect the value of CCT’s common stock. In addition, there can be no assurance that a

 

82


Table of Contents

manager of a private investment fund will provide advance notice of any material change in such private investment fund’s investment program or policies and thus, CCT’s investment portfolio may be subject to additional risks which may not be promptly identified by the Advisor. Moreover, CCT may not be able to withdraw its investments in certain private investment funds promptly after its makes a decision to do so, which may result in a loss to CCT and adversely affect CCT’s investment returns.

Before investing in any private investment fund, the Advisor, under the oversight of CCT’s Board, will conduct a due diligence review of the valuation methodology utilized by the private investment fund, which as a general matter, the Advisor expects would utilize market values when available, and otherwise utilize principles of fair value that the Advisor reasonably believes to be consistent with those used by CCT for valuing its own investments. After investing in a private investment fund, the Advisor will monitor the valuation methodology used by the asset manager and/or issuer of the private investment fund. Following procedures adopted by CCT’s Board, in the absence of specific transaction activity in a particular private investment fund, CCT’s Board will consider whether it is appropriate, in light of all relevant circumstances, to value CCT’s investment at the net asset value reported by the private investment fund at the time of valuation or to adjust the value to reflect a premium or discount.

The Advisor will provide CCT’s Board with periodic reports, no less frequently than quarterly, that discuss the functioning of the valuation process, if applicable to that period, and that identify issues and valuations problems that have arisen, if any. To the extent deemed necessary by the Advisor, CCT’s Board will review any securities valued by the Advisor in accordance with CCT’s valuation policies.

CCT’s Board—with the assistance of the Advisor, officers and, through them, independent valuation agents—is responsible for determining in good faith the fair value of CCT’s portfolio investments for which market quotations are not readily available (as is the case of private investment funds). CCT’s Board will make this determination on a quarterly basis and any other time when a decision is required regarding the fair value of CCT’s investments in private investment funds or other portfolio investments for which market quotations are not available. A determination of fair value involves subjective judgments and estimates, and it is possible that the fair value determined for a security may differ materially from the value that could be realized upon the sale of the security.

Investments in the securities of private investment funds may also involve duplication of advisory fees and certain other expenses. By investing in private investment funds indirectly through CCT, you bear a pro rata portion of CCT’s advisory fees and other expenses, and also indirectly bear a pro rata portion of the advisory fees, performance-based allocations and other expenses borne by CCT as an investor in the private investment funds. In addition, the purchase of the shares of some private investment funds requires the payment of sales loads and (in the case of closed-end investment companies) sometimes substantial premiums above the value of such investment companies’ portfolio securities.

In addition, certain private investment funds may not provide CCT with the liquidity it requires and would thus subject it to liquidity risk. Further, even if an investment in a private investment fund is deemed liquid at the time of investment, the private investment fund may, in the future, alter the nature of CCT’s investments and cease to be a liquid investment fund, subjecting CCT to liquidity risk.

CCT may acquire various structured financial instruments for purposes of “hedging” or reducing its risks, which may be costly and ineffective and could reduce the cash available to service debt or for distribution to stockholders.

CCT may seek to hedge against interest rate and currency exchange rate fluctuations and credit risk by using structured financial instruments such as futures, options, swaps and forward contracts, subject to the requirements of the 1940 Act. Use of structured financial instruments for hedging purposes may present significant risks, including the risk of loss of the amounts invested. Defaults by the other party to a hedging

 

83


Table of Contents

transaction can result in losses in the hedging transaction. Hedging activities also involve the risk of an imperfect correlation between the hedging instrument and the asset being hedged, which could result in losses both on the hedging transaction and on the instrument being hedged. Use of hedging activities may not prevent significant losses and could increase CCT’s losses. Further, hedging transactions may reduce cash available to service CCT’s debt or pay distributions to CCT’s stockholders.

Derivative transactions which CCT may enter into may expose it to certain risks, including market risk, liquidity risk and other risks associated with the use of leverage.

Certain derivative transactions, such as a total return swap arrangement, or TRS, effectively add leverage to CCT’s portfolio by providing CCT investment and economic exposure to a security or portfolio of securities without CCT owning, investing directly in, or taking physical custody of such security or portfolio of securities.

Such derivative transactions are subject to market risks, liquidity risks and risks of imperfect correlation between the value of the transaction and the assets underlying the transaction. In addition, because such transactions are forms of synthetic leverage, they are subject to risks associated with the use of leverage. Moreover, CCT may incur certain costs in connection with such transactions that could in the aggregate be significant.

Such transactions are subject to the risk that the counterparty will default on its payment obligations or that one party will otherwise not be able to meet its contractual obligations to the other. Additionally, if the counterparty chooses to exercise its termination rights under such transactions, it is possible that, because of adverse market conditions existing at the time of such termination, CCT will owe more to the counterparty (or will be entitled to receive less from the counterparty) than it would otherwise have if it controlled the timing of such termination.

Defaults by CCT’s portfolio companies will harm operating results.

A portfolio company’s failure to satisfy financial or operating covenants imposed by CCT or other lenders could lead to defaults and, potentially, termination of its debt financing and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that CCT holds. CCT may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.

An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.

CCT invests primarily in privately held companies. Investments in private companies pose certain incremental risks as compared to investments in public companies including that they:

 

   

have reduced access to the capital markets, resulting in diminished capital resources and ability to withstand financial distress;

 

   

may have limited financial resources and may be unable to meet their obligations under their debt securities that CCT holds, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of CCT realizing any guarantees it may have obtained in connection with its investment;

 

   

may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and changing market conditions, as well as general economic downturns;

 

84


Table of Contents
   

are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on a privately held company and, in turn, on CCT; and

 

   

generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, CCT’s executive officers, directors and members of the Advisor’s management may, in the ordinary course of business, be named as defendants in litigation arising from CCT’s investments in the portfolio companies.

In addition, investments in private companies tend to be less liquid. The securities of private companies are not publicly traded or actively traded on the secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. These over-the-counter secondary markets may be inactive during an economic downturn or a credit crisis. In addition, the securities in these companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. If there is no readily available market for these investments, CCT is required to carry these investments at fair value as determined by its Board. As a result, if CCT is required to liquidate all or a portion of its portfolio quickly, it may realize significantly less than the value at which it had previously recorded these investments. CCT may also face other restrictions on its ability to liquidate an investment in a portfolio company to the extent that it, the Advisor or any of KKR’s affiliates have material nonpublic information regarding such portfolio company or where the sale would be an impermissible joint transaction. The reduced liquidity of CCT’s investments may make it difficult for CCT to dispose of them at a favorable price, and, as a result, CCT may suffer losses.

Finally, little public information generally exists about private companies and these companies may not have third-party credit ratings or audited financial statements. CCT must therefore rely on the ability of the Advisor to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. Additionally, these companies and their financial information will not generally be subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If CCT is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and it may lose money on its investments.

Certain investment analyses and decisions by the Advisor may be required to be undertaken on an expedited basis.

Investment analyses and decisions by the Advisor may be required to be undertaken on an expedited basis to take advantage of investment opportunities. While CCT generally will not seek to make an investment until the Advisor has conducted sufficient due diligence to make a determination as to the acceptability of the credit quality of the investment and the underlying issuer, in such cases, the information available to the Advisor at the time of making an investment decision may be limited. Therefore, no assurance can be given that the Advisor will have knowledge of all circumstances that may adversely affect an investment. In addition, The Advisor expects often to rely upon independent consultants in connection with its evaluation of proposed investments. No assurance can be given as to the accuracy or completeness of the information provided by such independent consultants and CCT may incur liability as a result of such consultants’ actions.

CCT may not have the funds or ability to make additional investments in its portfolio companies or to fund its unfunded commitments.

After CCT’s initial investment in a portfolio company, it may be called upon from time to time to provide additional funds to such company or have the opportunity to increase its investment through the exercise of a warrant or other right to purchase common stock. There is no assurance that CCT will make, or will have sufficient funds to make, follow-on investments. Even if CCT does have sufficient capital to make a desired

 

85


Table of Contents

follow-on investment, it may elect not to make a follow-on investment because it may not want to increase its level of risk, it prefers other opportunities, it is limited in its ability to do so by compliance with business development company requirements, or it desires to maintain CCT’s RIC status. CCT’s ability to make follow-on investments may also be limited by the Advisor’s allocation policies. Any decisions not to make a follow-on investment or any inability on CCT’s part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for CCT to increase CCT’s participation in a successful operation or may reduce the expected return on the investment.

Prepayments of CCT’s debt investments by its portfolio companies could adversely impact CCT’s results of operations and reduce CCT’s return on equity.

CCT is subject to the risk that the investments it makes in its portfolio companies may be repaid prior to maturity. When this occurs, CCT will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower yields than the debt being prepaid and CCT could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt that was repaid. As a result, CCT’s results of operations could be materially adversely affected if one or more of its portfolio companies elect to prepay amounts owed to it. Additionally, prepayments, net of prepayment fees, could negatively impact CCT’s return on equity.

Risks Related to Leverage

The agreements governing each of CCT’s revolving credit facilities and CCT’s senior secured term loan contain various covenants which, if not complied with, could accelerate repayment under the relevant facility, thereby materially and adversely affecting CCT’s liquidity, financial condition, results of operations and CCT’s ability to service its debt or pay distributions to its stockholders.

CCT and each of its wholly owned, special purpose financing subsidiaries are party to revolving or term credit facilities with one or more lenders. CCT or CCT’s special purpose financing subsidiaries may become party to additional such facilities in the future. The agreements governing these facilities currently, and are likely to continue to, contain default provisions such as:

 

   

the failure to make principal payments when due or interest payments within three business days of when due;

 

   

borrowings under the facility exceeding the applicable advance rates;

 

   

the purchase by CCT or the relevant financing subsidiary, as applicable, of certain ineligible assets;

 

   

the insolvency or bankruptcy of CCT or the relevant financing subsidiary;

 

   

the decline of CCT’s or the relevant financing subsidiary’s, as applicable, net asset value below a specified threshold; and

 

   

fraud or other illicit acts by CCT or the Advisor in CCT’s or its investment advisory capacities.

An event of default under any one credit facility may result, among other things, in the termination of the availability of further funds under that facility and other unrelated credit facilities, and an accelerated maturity date for all amounts outstanding under the credit facility or facilities. This could disrupt CCT’s business, reduce its revenues and, by delaying any distributions allowed to CCT under the facility until the lender has been paid in full, reduce CCT’s liquidity and cash flow and impair its ability to grow its business, service its debt, make distribution payments to its stockholders and maintain its status as a RIC.

The agreements governing each credit facility would require CCT or the relevant financing subsidiary, as applicable, to comply with certain operational covenants. These covenants may, for example, require CCT or the

 

86


Table of Contents

relevant financing subsidiary, as applicable, to, among other things, maintain eligible assets with an aggregate equity value, net of borrowing balance, equal to or exceeding specified amounts under the facility. In addition, under the relevant facility, the occurrence of certain “Super-Collateralization Events” may result in an increase of the collateral equity value that CCT or the relevant financing subsidiary, as applicable, is required to maintain. Super-Collateralization Events would include, among other things:

 

   

certain key employees ceasing to be directors, principals, officers or investment managers of the Advisor;

 

   

the bankruptcy or insolvency of the Advisor;

 

   

the Advisor ceasing to act as adviser for CCT or the relevant financing subsidiary;

 

   

CCT ceasing to act as the relevant financing subsidiary’s investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and

 

   

fraud or other illicit acts by CCT or the Advisor in CCT’s or its investment advisory capacities.

A decline in the value of assets owned by CCT or the relevant financing subsidiary, as applicable or the occurrence of a Super-Collateralization Event under the relevant facility could result in CCT being required to retain, acquire or contribute to the relevant financing subsidiary, as applicable, additional assets, which would likely disrupt CCT’s business and impact its ability to meet its investment objectives, service its debt and pay distributions to its stockholders.

The failure to meet collateral requirements under the relevant facility or the occurrence of any other event of default that results in the termination of such facility may force CCT to liquidate positions at a time and/or at a price that is disadvantageous to CCT and could result in losses. In addition, upon the occurrence of an event of default under the relevant facility, the related lender would have the right to the assets pledged as collateral supporting the amounts outstanding under the facility and could sell such assets in order to satisfy amounts due under the facility.

Each borrowing under any credit facility will be subject to the satisfaction of certain conditions. CCT cannot assure you that it or the relevant financing subsidiary, as applicable, will be able to borrow funds under the relevant facility at any particular time or at all.

To the extent that CCT borrows money, the potential for gain or loss on amounts invested in it will be magnified and may increase the risk of investing in CCT. Borrowed money may also adversely affect the return on CCT’s assets, reduce cash available to service CCT’s debt or for distribution to CCT’s stockholders, and result in losses.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. Since CCT uses leverage to partially finance its investments, through borrowing from banks and other lenders, you will experience increased risks of investing in CCT’s securities. If the value of CCT’s assets decreases, leveraging would cause CCT’s net asset value to decline more sharply than it otherwise would if it had not borrowed and employed leverage. Similarly, any decrease in CCT’s income would cause its net income to decline more sharply than it would have if it had not borrowed and employed leverage. Such a decline could negatively affect CCT’s ability to service CCT’s debt or make distributions to its stockholders. In addition, CCT’s stockholders will bear the burden of any increase in CCT’s expenses as a result of its use of leverage, including interest expenses and any increase in the management or incentive fees payable to the Advisor.

The amount of leverage that CCT employs depends on the Advisor’s and CCT Board’s assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that additional

 

87


Table of Contents

leveraged financing will be available to CCT on favorable terms or at all. However, to the extent that CCT uses leverage to finance its assets, its financing costs will reduce cash available for servicing its debt or distributions to stockholders. Moreover, CCT may not be able to meet its financing obligations and, to the extent that it cannot, it risks the loss of some or all of its assets to liquidation or sale to satisfy the obligations. In such an event, CCT may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.

As a business development company, CCT is required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of its borrowings and any preferred stock that it may issue in the future, of at least 200%. If this ratio declines below 200%, CCT cannot incur additional debt and could be required to sell a portion of its investments to repay some debt when it is disadvantageous to do so. This could have a material adverse effect on CCT’s operations, and it may not be able to service its debt or make distributions.

Investments in which CCT has a non-controlling interest may involve risks specific to third-party management of those investments.

CCT may also co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring jointly-controlled or non-controlling interests in certain investments in conjunction with participation by one or more third parties in such investment. Such joint venture partners or third party managers may include former personnel of the Advisor or associated persons. As co-investors, CCT may have interests or objectives that are inconsistent with those of the third-party partners or co-venturers. Although CCT may not have full control over these investments and therefore, may have a limited ability to protect its position therein, it expects that it will negotiate appropriate rights to protect CCT’s interests. Nevertheless, such investments may involve risks not present in investments where a third party is not involved, including the possibility that a third-party partner or co-venturer may have financial difficulties, resulting in a negative impact on such investment, may have economic or business interests or goals which are inconsistent with CCT’s, or may be in a position to take (or block) action in a manner contrary to the CCT’s investment objectives or the increased possibility of default by, diminished liquidity or insolvency of, the third party, due to a sustained or general economic downturn. Third-party partners or co-venturers may opt to liquidate an investment at a time during which such liquidation is not optimal for CCT. In addition, CCT may in certain circumstances be liable for the actions of its third-party partners or co-venturers. In those circumstances where such third parties involve a management group, such third parties may receive compensation arrangements relating to such investments, including incentive compensation arrangements.

Risks Related to an Investment in CCT’s Common Stock

A stockholder’s interest in CCT will be diluted if CCT issues additional shares, which could reduce the overall value of an investment in CCT.

CCT’s stockholders do not have preemptive rights to any shares it issues in the future. CCT’s charter, which is referred to herein as the articles of incorporation, authorizes CCT to issue up to 1,000,000,000 shares of common stock. Pursuant to CCT’s articles of incorporation, a majority of CCT’s entire Board may amend CCT’s articles of incorporation to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series without stockholder approval. CCT’s board may elect to sell additional shares in the future or issue equity interests in private offerings. To the extent CCT issues additional equity interests at or below net asset value, your percentage ownership interest in CCT may be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of CCT’s investments, you may also experience dilution in the book value and fair value of your shares.

Under the 1940 Act, CCT generally is prohibited from issuing or selling its common stock at a price below net asset value per share, which may be a disadvantage as compared with certain public companies. CCT may,

 

88


Table of Contents

however, sell its common stock, or warrants, options, or rights to acquire its common stock, at a price below the current net asset value of its common stock if its Board and independent directors determine that such sale is in CCT’s best interests and the best interests of its stockholders, and CCT’s stockholders, including a majority of those stockholders that are not affiliated with CCT, approve such sale. In any such case, the price at which CCT’s securities are to be issued and sold may not be less than a price that, in the determination of CCT’s Board, closely approximates the fair value of such securities (less any distributing commission or discount). If CCT raises additional funds by issuing common stock or senior securities convertible into, or exchangeable for, CCT common stock, then the percentage ownership of CCT’s stockholders at that time will decrease and you will experience dilution.

Any sale or other issuance of shares of CCT’s common stock at a price below net asset value per share would result in an immediate dilution to CCT common stock and a reduction of its net asset value per share. This dilution would occur as a result of a proportionately greater decrease in a stockholder’s interest in CCT’s earnings and assets and voting interest in CCT than the increase in CCT’s assets resulting from such issuance. Because the number of future shares of common stock that may be issued below CCT’s net asset value per share and the price and timing of such issuances are not currently known, CCT cannot predict the actual dilutive effect of any such issuance nor can it predict the resulting reduction in its net asset value per share, however, such effects may be material. If CCT’s shares of common stock are trading at a price below its net asset value per share, it will generally not be able to issue additional shares of its common stock at their market price without first obtaining approval for such issuance from CCT’s stockholders and independent directors. CCT may not be able to obtain the necessary approvals to sell shares of common stock below net asset value. CCT undertakes to describe the material risks and dilutive effects of any offering that it makes at a price below its then-current net asset value in the future in a prospectus supplement issued in connection with any such offering.

Preferred stock could be issued with rights and preferences that would adversely affect holders of CCT common stock.

Under the terms of CCT’s articles of incorporation, CCT’s Board is authorized to issue shares of preferred stock in one or more series without stockholder approval, which could potentially adversely affect the interests of existing stockholders.

Sales of substantial amounts of CCT common stock in the public market may have an adverse effect on the market price of CCT common stock.

Sales of substantial amounts of CCT’s common stock, or the availability of such common stock for sale, could adversely affect the prevailing market prices for CCT common stock. If this occurs and continues for a sustained period of time, it could impair CCT’s ability to raise additional capital through the sale of securities should it desire to do so.

Investing in CCT’s common stock involves a high degree of risk.

The investments CCT makes in accordance with its investment objective may result in a higher amount of risk than alternative investment options and includes volatility or loss of principal. CCT’s investments in portfolio companies may be highly speculative and aggressive and, therefore, an investment in CCT common stock may not be suitable for someone with lower risk tolerance.

 

89


Table of Contents

The net asset value of CCT’s common stock may fluctuate significantly.

The net asset value and liquidity of the market for shares of CCT’s common stock may be significantly affected by numerous factors, some of which are beyond CCT’s control and may not be directly related to its operating performance. These factors include:

 

   

changes in the value of CCT’s portfolio of investments and derivative instruments as a result of changes in market factors, such as interest rate shifts, and also portfolio specific performance, such as portfolio company defaults, among other reasons;

 

   

changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;

 

   

de-listing from the NYSE;

 

   

loss of RIC or business development company status;

 

   

distributions that exceed CCT’s net investment income and net income as reported according to GAAP;

 

   

changes in earnings or variations in operating results;

 

   

changes in accounting guidelines governing valuation of CCT’s investments;

 

   

any shortfall in revenue or net income or any increase in losses from levels expected by investors;

 

   

departure of the Advisor or certain of its key personnel;

 

   

general economic trends and other external factors; and

 

   

loss of a major funding source.

Certain provisions of the Maryland General Corporation Law could deter takeover attempts.

CCT’s bylaws exempt it from the Maryland Control Share Acquisition Act, which significantly restricts the voting rights of control shares of a Maryland corporation acquired in a control share acquisition. If CCT’s bylaws were amended to repeal this exemption from the Maryland Control Share Acquisition Act, that statute may make it more difficult for a third party to obtain control of CCT and increase the difficulty of consummating such a transaction. Although CCT does not presently intend to adopt such an amendment to its bylaws, there can be no assurance that it will not so amend its bylaws at some time in the future. CCT will not, however, amend its bylaws to make it subject to the Maryland Control Share Acquisition Act without its Board determining that doing so would not conflict with the 1940 Act and obtaining confirmation from the SEC that it does not object to that determination.

Additionally, CCT’s Board may, without stockholder action, authorize the issuance of shares of stock in one or more classes or series, including preferred stock. CCT’s Board may also, without stockholder action, amend CCT’s articles of incorporation to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that CCT has authority to issue. These provisions may inhibit a change of control in circumstances that could give the holders of CCT’s common stock the opportunity to realize a premium over the value of CCT’s common stock.

CCT may pay distributions from offering proceeds, borrowings or the sale of assets to the extent its cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions.

CCT may fund distributions from the uninvested proceeds of an offering and borrowings, and CCT has not established limits on the amount of funds it may use from such proceeds or borrowings to make any such distributions. CCT has paid and may continue to pay distributions from the sale of assets to the extent distributions exceed CCT’s earnings or cash flows from operations. Distributions from offering proceeds or from borrowings could reduce the amount of capital CCT ultimately invests in its investment portfolio.

 

90


Table of Contents

CCT stockholders may experience dilution in their ownership percentage if they do not participate in CCT’s distribution reinvestment plan.

All distributions declared in cash payable to stockholders that are participants in CCT’s distribution reinvestment plan will generally be automatically reinvested in shares of CCT’s common stock. As a result, stockholders that do not participate in CCT’s distribution reinvestment plan may experience dilution over time. Stockholders who do not participate in CCT’s distribution reinvestment plan may experience accretion to the net asset value of their shares if CCT’s shares are trading at a premium to net asset value and dilution if CCT’s shares are trading at a discount to net asset value. The level of accretion or discount would depend on various factors, including the proportion of CCT’s stockholders who participate in the plan, the level of premium or discount at which CCT’s shares are trading and the amount of the distribution payable to stockholders.

Your interest in CCT may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than CCT’s net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.

In the event CCT issues subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to CCT’s prospectus, own a smaller proportional interest in CCT than would otherwise be the case if they fully exercised their rights. CCT cannot state precisely the amount of any such dilution in share ownership because it does not know at this time what proportion of the shares will be purchased as a result of such rights offering.

In addition, if the subscription price is less than the net asset value per share of CCT’s common stock, then CCT’s stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.

These dilutive effects may be exacerbated if CCT were to conduct multiple subscription rights offerings, particularly if such offerings were to occur over a short period of time. In addition, subscription rights offerings and the prospect of future subscription rights offerings may create downward pressure on the secondary market price of CCT’s common stock due to the potential for the issuance of shares at a price below CCT’s net asset value, without a corresponding change to CCT’s net asset value.

If CCT issues preferred stock, debt securities or convertible debt securities, the net asset value of CCT common stock may become more volatile.

CCT cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the holders of CCT’s common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the net asset value of CCT’s common stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on CCT’s investment portfolio, the benefit of leverage to the holders of CCT’s common stock would be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on CCT’s portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if CCT had not issued the preferred stock or debt securities. Any decline in the net asset value of CCT’s investment would be borne entirely by the holders of CCT’s common stock. Therefore, if the market value of CCT’s portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of CCT’s common stock than if CCT were not leveraged through the issuance of preferred stock. This decline in net asset value would also tend to cause a greater decline in the market price for CCT’s common stock.

 

91


Table of Contents

There is also a risk that, in the event of a sharp decline in the value of CCT’s net assets, CCT would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities or convertible debt or CCT’s current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. In order to counteract such an event, CCT might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, CCT would pay (and the holders of its common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt, any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of common stock and may at times have disproportionate influence over CCT’s affairs.

Holders of any preferred stock that CCT may issue will have the right to elect members of the CCT Board and have class voting rights on certain matters.

The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if distributions on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of distributions or other distributions to the holders of CCT’s common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair CCT’s ability to maintain its qualification as a RIC for U.S. federal income tax purposes.

Federal Income Tax Risks

CCT will be subject to corporate-level income tax if it is unable to maintain its qualification as a RIC under Subchapter M of the Code or if it makes investments through taxable subsidiaries.

To maintain RIC tax treatment under the Code, CCT must meet the following minimum annual distribution, income source and asset diversification requirements.

The minimum annual distribution requirement for a RIC will be satisfied if CCT distributes to its stockholders on an annual basis at least 90% of its investment company taxable income. In addition, a RIC may, in certain cases, satisfy the 90% distribution requirement by distributing distributions relating to a taxable year after the close of such taxable year under the “spillback dividend” provisions of subchapter M. CCT would be taxed, at regular corporate rates, on retained income and/or gains, including any short-term capital gains or long-term capital gains. CCT must also satisfy an additional annual distribution requirement with respect to each calendar year in order to avoid a 4% excise tax on the amount of the under-distribution. Because CCT uses debt financing, it is subject to (i) an asset coverage ratio requirement under the 1940 Act and (ii) certain financial covenants under loan and credit agreements that could, under certain circumstances, restrict CCT from making distributions necessary to satisfy the distribution requirements. If CCT is unable to obtain cash from other sources, or chose or be required to retain a portion of its taxable income or gains, it could (1) be required to pay excise tax and (2) fail to qualify for RIC tax treatment, and thus become subject to corporate-level income tax on its taxable income (including gains).

The income source requirement will be satisfied if CCT obtains at least 90% of its annual income from dividends, interest, gains from the sale of stock or securities, or other income derived from the business of investing in stock or securities.

The asset diversification requirement will be satisfied if CCT meets certain asset diversification requirements at the end of each quarter of its taxable year. To satisfy this requirement, at least 50% of the value

 

92


Table of Contents

of CCT’s assets must consist of cash, cash equivalents (including receivables), U.S. Government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of CCT’s assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by CCT and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in CCT having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of CCT’s investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

If CCT fails to qualify for or maintain RIC tax treatment for any reason and is subject to corporate income tax, the resulting corporate taxes could substantially reduce CCT’s net assets, the amount of income available for distribution, and the amount of CCT’s distributions.

CCT may invest in certain debt and equity investments through taxable subsidiaries and the net taxable income of these taxable subsidiaries will be subject to federal and state corporate income taxes. CCT may invest in certain foreign debt and equity investments which could be subject to foreign taxes (such as income tax, withholding, and value added taxes).

CCT may have difficulty paying its required distributions if it recognizes income before or without receiving cash representing such income.

For federal income tax purposes, CCT may be required to recognize taxable income in circumstances in which it does not receive a corresponding payment in cash. For example, since CCT will likely hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK, secondary market purchases of debt securities at a discount to par, interest or, in certain cases, increasing interest rates or debt instruments that were issued with warrants), CCT must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by it in the same taxable year. CCT may also have to include in income other amounts that it has not yet received in cash, such as unrealized appreciation for foreign currency forward contracts and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Furthermore, CCT may invest in non-U.S. corporations (or other non-U.S. entities treated as corporations for U.S. federal income tax purposes) that could be treated under the Code and U.S. Treasury regulations as “passive foreign investment companies” and/or “controlled foreign corporations.” The rules relating to investment in these types of non-U.S. entities are designed to ensure that U.S. taxpayers are either, in effect, taxed currently (or on an accelerated basis with respect to corporate level events) or taxed at increased tax rates at distribution or disposition. In certain circumstances this could require CCT to recognize income where it does not receive a corresponding payment in cash.

Unrealized appreciation on derivatives, such as foreign currency forward contracts, may be included in taxable income while the receipt of cash may occur in a subsequent period when the related contract expires. Any unrealized depreciation on investments that the foreign currency forward contracts are designed to hedge is not currently deductible for tax purposes. This can result in increased taxable income whereby CCT may not have sufficient cash to pay distributions or it may opt to retain such taxable income and pay a 4% excise tax. In such case, CCT could still rely upon the “spillback provisions” to maintain RIC qualification.

A portion of CCT’s income may constitute original issue discount or other income required to be included in taxable income prior to receipt of cash. Further, CCT may elect to amortize market discounts with respect to debt securities acquired in the secondary market and include such amounts in its taxable income in the current year, instead of upon disposition, as an election not to do so would limit its ability to deduct interest expenses for tax purposes. Because any original issue discount or other amounts accrued will be included in CCT’s investment company taxable income for the year of the accrual, CCT may be required to make a distribution to its

 

93


Table of Contents

stockholders in order to satisfy the annual distribution requirement, even if it will not have received any corresponding cash amount. As a result, CCT may have difficulty meeting the annual distribution requirement necessary to maintain RIC tax treatment under the Code. CCT may have to sell some of its investments at times and/or at prices it would not consider advantageous, raise additional debt or equity capital, make a partial share distribution, or forgo new investment opportunities for this purpose. If CCT is not able to obtain cash from other sources, and chooses not to make a qualifying share distribution, it may fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.

Impact of recently enacted federal tax legislation

Significant U.S. federal tax reform legislation was recently enacted which, among other things, permanently reduces the maximum federal corporate income tax rate, reduces the maximum individual income tax rate (effective for taxable years 2018 through 2025), restricts the deductibility of business interest expense, changes the rules regarding the calculation of net operating loss deductions which may be used to offset taxable income, expands the circumstances in which a foreign corporation will be treated as a “controlled foreign corporation” and, under certain circumstances, requires accrual method taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement. The impact of this new legislation on CCT, its stockholders and entities in which CCT may invest is uncertain. Prospective investors are urged to consult their tax advisors regarding the effects of the new legislation on an investment in CCT.

 

94


Table of Contents

COMPARATIVE FEES AND EXPENSES

Comparative Fees and Expenses Relating to the Merger

The following tables are intended to assist you in understanding the costs and expenses that an investor in the common stock of FSIC or CCT bears directly or indirectly, and based on the assumptions set forth below, the pro forma costs and expenses estimated to be incurred by the combined company in the first year following the Merger. FSIC and CCT caution you that some of the percentages indicated in the table below are estimates and may vary. Except where the context suggests otherwise, whenever this document contains a reference to fees or expenses paid or to be paid by “you,” “FSIC” or “CCT,” stockholders will indirectly bear such fees or expenses as investors in FSIC or CCT, as applicable.

 

     Actual        
     FSIC     CCT     Pro Forma  

Stockholder transaction expenses (as a percentage of offering price)

      

Sales load paid by FSIC and CCT

     None (1)       None (1)       None (1)  

Offering expenses borne by FSIC and CCT

     None (1)       None (1)       None (1)  

Distribution reinvestment plan expenses

     None (2)       None (2)       None (1)  
  

 

 

   

 

 

   

 

 

 

Total stockholder transaction expenses paid by FSIC and CCT

     None       None       None  
  

 

 

   

 

 

   

 

 

 

 

     Actual        
     FSIC     CCT     Pro Forma  

Estimated annual expenses (as a percentage of consolidated net assets attributable to common stock):(3)

      

Base management fees(4)

     2.69     2.48     2.60

Incentive fees(5)

     2.03     1.94     2.07

Interest payments on borrowed funds(6)

     4.20     4.34     4.33

Other expenses(7)

     0.53     0.64     0.52

Acquired Fund Fees and Expenses(8)

     None       0.21     0.11
  

 

 

   

 

 

   

 

 

 

Total annual expenses (estimated)(9)

     9.45     9.61     9.63
  

 

 

   

 

 

   

 

 

 

 

(1)

Purchases of shares of common stock of FSIC or CCT on the secondary market are not subject to sales charges, but may be subject to brokerage commissions or other charges. The table does not include any sales load (underwriting discount or commission) that stockholders may have paid in connection with their purchase of shares of FSIC Common Stock or CCT Common Stock.

 

(2)

The estimated expenses associated with the respective distribution reinvestment plans are included in “Other expenses.”

 

(3)

“Consolidated net assets attributable to common stock” equals net assets at June 30, 2018. For the pro forma columns, the net assets of FSIC on a pro forma basis as of June 30, 2018, were used. See “Unaudited Selected Pro Forma Consolidated Financial Data” for more information.

 

(4)

FSIC is externally managed by its investment adviser, the Advisor. FSIC’s base management fee is calculated at an annual rate of 1.50% of the average weekly value of its gross assets (equal to total assets set forth on FSIC’s consolidated balance sheet), which are assumed to equal 177.80% of FSIC’s average net assets of $2.3 billion for the six months ended June 30, 2018. The base management fee of FSIC shown in the table above is higher than 1.50% because the base management fee in the table is required to be calculated as a percentage of FSIC’s average net assets, rather than gross assets. CCT is externally managed by its investment adviser, the Advisor. CCT’s base management fee is calculated at an annual rate of 1.50% of its average gross assets (equal to total assets set forth on CCT’s consolidated balance sheet, less cash and

 

95


Table of Contents
  cash equivalents). The base management fee is payable monthly in arrears and is calculated based on the simple average of CCT’s gross assets at the end of the two most recently completed calendar months, which differs from FSIC in that FSIC’s base management fee is calculated based on the average weekly value of its gross assets and includes cash and cash equivalents. The base management fee of CCT shown in the table above is higher than 1.50% because the base management fee in the table is required to be calculated as a percentage of CCT’s average net assets, rather than gross assets. Following completion of the Merger, the combined company will be externally managed by the Advisor. Following the effective date of the Investment Advisory Agreement, the pro forma base management fee has been calculated in a manner consistent with the terms and conditions of the Investment Advisory Agreement and assuming that the Advisory Agreement Amendment Proposal is approved by FSIC stockholders.

 

(5)

The incentive fee in the FSIC Investment Advisory Agreement consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of FSIC’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on its net assets, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, the Advisor will not earn this incentive fee for any quarter until FSIC’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once FSIC’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled to a “catch-up” fee equal to the amount of FSIC’s pre-incentive fee net investment income in excess of the hurdle rate, until FSIC’s pre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of the value of FSIC’s net assets. Thereafter, the Advisor will be entitled to receive 20.0% of FSIC’s pre-incentive fee net investment income.

The subordinated incentive fee on income is subject to a cap equal to (i) 20.0% of the per share pre-incentive fee return for the then-current and eleven preceding calendar quarters minus the cumulative per share incentive fees accrued and/or payable for the eleven preceding calendar quarters multiplied by (ii) the weighted average number of shares outstanding during the calendar quarter for which the subordinated incentive fee on income is being calculated. For the foregoing purpose, the “per share pre-incentive fee return” for any calendar quarter is equal to (i) the sum of FSIC’s pre-incentive fee net investment income for the calendar quarter, realized gains and losses for the calendar quarter and unrealized appreciation and depreciation of FSIC’s investments for the calendar quarter and, for any calendar quarter ending prior to January 1, 2018, and base management fees for the calendar quarter, divided by (ii) the weighted average number of shares outstanding during such calendar quarter. In addition, the “per share incentive fee” for any calendar quarter is equal to (i) the incentive fee accrued and/or payable for such calendar quarter divided by (ii) the weighted average number of shares outstanding during such calendar quarter. The amount in the table above for FSIC assumes that the subordinated incentive fee on income will be 2.03% of average net assets. This figure is based on the actual subordinated incentive fees on income accrued for the six months ended June 30, 2018, and assumes that such amount represents the subordinated incentive fees on income that will be payable over the twelve months following June 30, 2018. The actual subordinated incentive fee on income as a percentage of FSIC’s average net assets for the twelve months following June 30, 2018 may be higher than this amount.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of FSIC’s incentive fee capital gains, which equals its realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. FSIC accrues for the capital gains incentive fee, which, if earned, is paid annually. FSIC accrues the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to the Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The amount in the table for FSIC assumes that there is no incentive fee on capital gains and is based on the net unrealized depreciation as of June 30, 2018. Such amounts are expressed as a percentage of the average net assets as of such date.

 

96


Table of Contents

The incentive fee in the CCT Current Investment Advisory Agreement is comprised of two parts: (i) a subordinated incentive fee and (ii) an incentive fee on capital gains.

The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of CCT’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on average net assets, equal to 1.75% per quarter, or an annualized hurdle rate of 7.0%. As a result, the Advisor will not earn this incentive fee for any quarter until CCT’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.75%. Once CCT’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled to a “catch-up” fee equal to the amount of CCT’s pre-incentive fee net investment income in excess of the hurdle rate, until CCT’s pre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually, of average net assets. This “catch-up” feature allows the Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, the Advisor will be entitled to receive 20.0% of CCT’s pre-incentive fee net investment income.

The subordinated incentive fee is subject to a total return requirement that is calculated based on CCT’s reported income per share over the most recently completed quarter and the 11 preceding calendar quarters (the “look-back period”). The subordinated incentive fee on income will not exceed (i) the aggregate sum of, for each calendar quarter of the look-back period, (a) (x) 20.0% of the cumulative net increase in net assets resulting from operations for such quarter less (y) the subordinated incentive fees on income accrued by CCT for such quarter (not including for the current quarter for which the subordinated incentive fees on income is being calculated), divided by (b) the weighted average number of CCT’s shares of common stock outstanding during such calendar quarter, multiplied by (ii) the weighted average number of CCT’s shares of common stock outstanding during the calendar quarter for which the subordinated incentive fee on income is being calculated. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of CCT’s pre-incentive fee net investment income, management fees payable with respect to the periods prior to November 14, 2017, realized gains and losses and unrealized appreciation and depreciation

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the CCT Current Investment Advisory Agreement). The fee equals 20.0% of CCT’s “incentive fee capital gains” (i.e., CCT’s realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid incentive fees on capital gains. CCT accrues for the incentive fee on capital gains, which, if earned, is paid annually. CCT accrues the incentive fee on capital gains based on net realized and unrealized gains; however, under the terms of the CCT Current Investment Advisory Agreement, the fee payable to the Advisor is based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. The incentive fee may or may not be taken in whole or in part at the discretion of the Advisor. All or any part of the incentive fee not taken as to any quarter is deferred without interest and may be taken in such other quarter as the Advisor shall determine.

Following completion of the Merger, the combined company will be externally managed by the Advisor. The pro forma Merger incentive fees have been calculated in a manner consistent with the terms and conditions of FSIC’s Investment Advisory Agreement and assuming that the Advisory Agreement Amendment Proposal is approved by FSIC stockholders.

For a description of the amendments to the Investment Advisory Agreement contemplated by the Advisory Agreement Amendment Proposal, see “FSIC Proposal 4—Approval of Advisory Agreement Amendment Proposal.”

 

(6)

The figure in the table for FSIC assumes it borrows the full amount available under each financing facility as of June 30, 2018 and that the annualized weighted average borrowing costs under the financing facilities,

 

97


Table of Contents
  including amortized costs and expenses, is 4.79%. Because the total assumed borrowing ($2.0 billion) represents 87.79% of its average net assets for the six months ended June 30, 2018 ($2.3 billion), the borrowing cost as a percentage of net assets set forth in the table above is 4.20% (or 87.79% of 4.79%). See “Management’s Discussion and Analysis of Financial Condition and Results of Operation of FS Investment Corporation—Financial Condition, Liquidity and Capital Resources—Financing Arrangements” for a discussion of FSIC’s financing arrangements.

The figure in the table for CCT assumes it borrows the full amount available under each financing facility as of June 30, 2018 and that the annualized weighted average borrowing costs under the financing facilities, including amortized costs and expenses, is 4.92%. Because the total assumed borrowing ($2.2 billion) represents 88.24% of its average net assets for the six months ended June 30, 2018 ($2.5 billion), the borrowing cost as a percentage of net assets set forth in the table above is 4.34% (or 88.24% of 4.92%). See “Management’s Discussion and Analysis of Financial Condition and Results of Operation of Corporate Capital Trust, Inc.—Financial Condition, Liquidity and Capital Resources—Borrowings” for a discussion of CCT’s financing arrangements.

 

(7)

In the case of FSIC, other expenses include accounting, legal and auditing fees and excise and state taxes, as well as the reimbursement of the compensation of administrative personnel and fees payable to FSIC’s directors who do not also serve in an executive officer capacity for FSIC or the Advisor. The amount presented in the table reflects actual amounts incurred during the six months ended June 30, 2018.

In the case of CCT, other expenses include accounting, legal and auditing fees and excise and state taxes, as well as the reimbursement of the compensation of administrative personnel and fees payable to CCT’s independent directors. The amount presented in the table reflects actual amounts incurred during the six months ended June 30, 2018.

 

(8)

“Total annual expenses” as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses percentage would be for a company that is not leveraged. FSIC and CCT borrow money to leverage and increase their total assets. The SEC requires that the “Total annual expenses” percentage be calculated as a percentage of net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period), rather than the total assets, including assets that have been funded with borrowed monies. CCT invests in the securities or other investment instruments of public investment companies or BDCs that have fees and expenses. CCT estimates that the expenses of these acquired funds are 0.21%. On a pro forma basis, such expenses are estimated to be 0.11%.

 

(9)

This is based on the assumption that borrowings and interest costs after the Merger will remain the same as those costs prior to the Merger. FSIC expects over time that as a result of additional investment purchases, and in turn, additional borrowings on the financing facilities after the Merger, the combined company’s interest payments on borrowed funds may be more than the amounts estimated in the Unaudited Pro Forma Combined Statement of Operations of the Merger and, accordingly, that estimated total expenses may be different than as reflected in the Unaudited Pro Forma Combined Statement of Operations of the Merger for the six months ended June 30, 2018. However, the actual amount of leverage employed at any given time cannot be predicted.

 

98


Table of Contents

Example

The following example demonstrates the projected dollar amount of total cumulative expenses over various periods with respect to a hypothetical investment in FSIC, CCT or the combined company’s common stock following the Merger. In calculating the following expense amounts, each of FSIC and CCT has assumed that it would have no additional leverage and that its annual operating expenses would remain at the levels set forth in the tables above. Transaction expenses related to the Merger are not included in the following examples.

 

     1 year      3 years      5 years      10 years  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (none of which is subject to the incentive fee on capital gains):

           

FSIC

   $ 73      $ 215      $ 349      $ 658  

CCT

   $ 76      $ 221      $ 359      $ 672  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (all of which is subject to the incentive fee on capital gains, which was estimated at 1.0% of net assets):

           

FSIC

   $ 83      $ 240      $ 387      $ 711  

CCT

   $ 85      $ 246      $ 395      $ 723  

 

     1 year      3 years      5 years      10 years  

Pro forma combined company following the Merger

           

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (none of which is subject to the incentive fee on capital gains):

   $ 75      $ 218      $ 355      $ 666  

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (all of which is subject to the incentive fee on capital gains, which was estimated at 1.0% of net assets):

   $ 84      $ 243      $ 392      $ 718  

The above table is to assist you in understanding the various costs and expenses that an investor in FSIC, CCT or, following the Merger, the combined company’s, common stock will bear directly or indirectly. Because the example assumes, as required by the SEC, no subordinated incentive fee on income would be accrued and payable in any of the indicated time periods. Performance will vary and may result in a return greater or less than 5%. If FSIC or CCT were to achieve sufficient returns on its investments, including through the realization of capital gains, to trigger an incentive fee of a material amount, its expenses, and returns to its investors, would be higher. In addition, while the example assumes reinvestment of all distributions at net asset value, reinvestment of distributions under the distribution reinvestment plans may occur at a price per share that differs from the then-current net asset value per share of common stock of the respective company. See “FS Investment Corporation Distribution Reinvestment Plan” and “Corporate Capital Trust, Inc. Distribution Reinvestment Plan” for additional information regarding FSIC’s and CCT’s distribution reinvestment plan, respectively.

The example and the expenses in the table above should not be considered a representation of FSIC’s, CCT’s, or, following the Merger, the combined company’s, future expenses, and actual expenses may be greater or less than those shown.

 

99


Table of Contents

SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF FS INVESTMENT CORPORATION

You should read this selected consolidated financial data in conjunction with FSIC’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations of FS Investment Corporation” and the consolidated financial statements and notes thereto included elsewhere in this joint proxy statement/prospectus. The selected financial data as of the six months ended June 30, 2018 and 2017 have been derived from FSIC’s unaudited financial statements and the selected financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 has been derived from FSIC’s audited consolidated financial statements.

Dollar amounts are presented in thousands, except for per share data.

 

    Six Months Ended
June 30,
(Unaudited)
    Year Ended December 31,  
    2018     2017     2017     2016     2015     2014     2013  

Statements of operations data:

             

Investment income

  $ 196,593     $ 204,759     $ 419,311     $ 422,809     $ 474,797     $ 464,819     $ 474,566  

Operating expenses

             

Total expenses and excise taxes

    102,867       105,709       218,127       215,486       209,707       225,648       229,590  

Less: Management fee waiver

    (2,776     —         (2,575     —         —         (2,837     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses and excise taxes

    100,091       105,709       215,552       215,486       209,707       222,811       229,590  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

  $ 96,502     $ 99,050       203,759       207,323       265,090       242,008       244,976  

Total net realized and unrealized gain (loss)

  $ (114,915   $ (17,215     (21,772     86,968       (226,705     (47,227     20,864  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ (18,413   $ 81,835     $ 181,987     $ 294,291     $ 38,385     $ 194,781     $ 265,840  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per share data:

             

Net investment income (loss)—basic and diluted(1)

  $ 0.40     $ 0.40     $ 0.83     $ 0.85     $ 1.10     $ 0.97     $ 0.96  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations—basic and diluted(1)

  $ (0.08   $ 0.33     $ 0.74     $ 1.21     $ 0.16     $ 0.78     $ 1.04  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared(2)

  $ 0.38     $ 0.45     $ 0.86     $ 0.89     $ 0.89     $ 1.08     $ 0.83  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance sheet data:

             

Total assets

  $ 3,882,958     $ 4,110,120     $ 4,104,275     $ 4,110,071     $ 4,148,173     $ 4,354,886     $ 4,444,577  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit facilities, notes, secured borrowing and repurchase agreement payable

  $ 1,628,539     $ 1,709,790     $ 1,712,016     $ 1,693,513     $ 1,822,899     $ 1,863,827     $ 1,673,682  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net assets

  $ 2,134,778     $ 2,280,704     $ 2,284,723     $ 2,297,377     $ 2,208,928     $ 2,366,986     $ 2,640,992  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other data:

             

Total return based on net asset value(3)

    (0.54 )%      3.61     7.97     13.19     1.63     7.17     10.43

Total return based on market value(4)

    5.03     (6.90 )%      (21.39 )%      25.91     (0.78 )%      5.52     —    

Number of portfolio company investments at period end

    109       107       100       102       114       118       165  

Total portfolio investments for the period

  $ 356,433     $ 838,371     $ 1,284,317     $ 1,157,827     $ 1,647,620     $ 2,178,075     $ 2,641,733  

Proceeds from sales and prepayments of investments

  $ 566,198     $ 674,877     $ 1,134,998     $ 1,588,498     $ 1,625,520     $ 2,121,939     $ 2,510,887  

 

(1)

The per share data was derived by using the weighted average shares outstanding during the applicable period.

 

100


Table of Contents
(2)

The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.

 

(3)

The total return based on net asset value for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return based on net asset value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of our future total return based on net asset value, which may be greater or less than the return shown in the table due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rates payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on our investment portfolio during the applicable period and do not represent an actual return to stockholders.

 

(4)

The total return based on market value for each period presented was calculated based on the change in market price during the applicable period, including the impact of distributions reinvested in accordance with FSIC’s distribution reinvestment plan. The total return based on market value for the year ended December 31, 2014 was calculated based on the period from April 16, 2014, the first day the shares began trading on the NYSE at a closing price of $10.25, to December 31, 2014. Total return based on market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of our common stock. The historical calculation of total return based on market value in the table should not be considered a representation of our future total return based on market value, which may be greater or less than the return shown in the table due to a number of factors, including our ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets, general economic conditions and fluctuations in per share market value. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods.

 

101


Table of Contents

SELECTED QUARTERLY DATA OF FS INVESTMENT CORPORATION (Unaudited) (dollar amounts in thousands, except per share data)

 

                 2018  
                 Q2     Q1  

Total investment income

       $ 95,575     $ 101,018  

Net investment income

       $ 45,955     $ 50,547  

Total net realized and unrealized gain (loss) on investments

       $ (77,293   $ (37,622

Net increase (decrease) in net assets resulting from operations

       $ (31,338   $ 12,925  

Net increase (decrease) in net assets resulting from operations (Earnings per share)

       $ (0.13   $ 0.05  

NAV per share at the end of the quarter

       $ 8.87     $ 9.16  

Market value per share at the end of the quarter

       $ 7.35     $ 7.25  
     2017  
     Q4     Q3     Q2     Q1  

Total investment income

   $ 110,861     $ 103,691     $ 98,695     $ 106,064  

Net investment income

   $ 54,061     $ 50,648     $ 46,460     $ 52,590  

Total net realized and unrealized gain (loss) on investments

   $ (39,307   $ 34,750     $ (28,018   $ 10,803  

Net increase (decrease) in net assets resulting from operations

   $ 14,754     $ 85,398     $ 18,422     $ 63,393  

Net increase (decrease) in net assets resulting from operations (Earnings per share)

   $ 0.06     $ 0.35     $ 0.08     $ 0.26  

NAV per share at the end of the quarter

   $ 9.30     $ 9.43     $ 9.30     $ 9.45  

Market value per share at the end of the quarter

   $ 7.35     $ 8.45     $ 9.15     $ 9.80  
     2016  
     Q4     Q3     Q2     Q1  

Total investment income

   $ 108,978     $ 100,557     $ 110,211     $ 103,063  

Net investment income

   $ 51,542     $ 49,003     $ 56,840     $ 49,938  

Total net realized and unrealized gain (loss) on investments

   $ 320     $ 65,366     $ 83,317     $ (62,035

Net increase (decrease) in net assets resulting from operations

   $ 51,862     $ 114,369     $ 140,157     $ (12,097

Net increase (decrease) in net assets resulting from operations (Earnings per share)

   $ 0.21     $ 0.47     $ 0.58     $ (0.05

NAV per share at the end of the quarter

   $ 9.41     $ 9.42     $ 9.18     $ 8.82  

Market value per share at the end of the quarter

   $ 10.30     $ 9.47     $ 9.05     $ 9.17  
     2015  
     Q4     Q3     Q2     Q1  

Total investment income

   $ 114,763     $ 103,668     $ 147,731     $ 108,635  

Net investment income

   $ 56,151     $ 63,766     $ 93,524     $ 51,649  

Total net realized and unrealized gain (loss) on investments

   $ (134,619   $ (69,045   $ (41,818   $ 18,777  

Net increase (decrease) in net assets resulting from operations

   $ (78,468   $ (5,279   $ 51,706     $ 70,426  

Net increase (decrease) in net assets resulting from operations (Earnings per share)

   $ (0.32   $ (0.02   $ 0.21     $ 0.29  

NAV per share at the end of the quarter

   $ 9.10     $ 9.64     $ 9.89     $ 9.90  

Market value per share at the end of the quarter

   $ 8.99     $ 9.32     $ 9.84     $ 10.14  

The sum of quarterly per share amounts does not necessarily equal per share amounts reported for the years ended December 31, 2017, 2016 and 2015. This is due to changes in the number of weighted-average shares outstanding and the effects of rounding for each period.

 

102


Table of Contents

SELECTED CONDENSED CONSOLIDATED FINANCIAL DATA OF CORPORATE

CAPITAL TRUST, INC.

You should read this selected consolidated financial statements data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Corporate Capital Trust, Inc.” and CCT’s consolidated financial statements and notes thereto included elsewhere in this joint proxy statement/prospectus. The selected financial data as of and for the six months ended June 30, 2018 and 2017 has been derived from CCT’s unaudited financial statements and the selected financial data as of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 has been derived from CCT’s audited consolidated financial statements.

 

($ in thousands, except per share
amounts)

  Six Months Ended
June  30,
(Unaudited)
    Year Ended December 31,  
    2018     2017     2017     2016     2015     2014     2013  

Statement of operations data:

             

Investment income

  $ 203,406     $ 193,322     $ 397,709     $ 386,468     $ 311,097     $ 230,712     $ 119,573  

Operating expenses

             

Total expenses

    104,865       87,544       186,752       173,061       131,443       99,194       68,502  

Reimbursement of expense support

    —         —         —         —         —         —         1,136  

Net expenses

    104,865       87,544       186,752       173,061       131,443       99,194       69,638  

Net investment income before taxes

    98,541       105,778       210,957       213,407       179,654       131,518       49,935  

Income tax expense, including excise tax

    (375     321       658       3,311       2,966       1,392       —    

Net investment income

    98,916       105,457       210,299       210,096       176,688       130,126       49,935  

Net realized and unrealized gains (losses)(4)

    12,061       16,225       (36,169     33,019       (214,895     (45,809     55,022  

Net (decrease) increase in net assets resulting from operations

  $ 110,977     $ 121,682     $ 174,130     $ 243,115     $ (38,207   $ 84,317     $ 104,957  

Per share data:

             

Net investment income—basic and diluted

  $ 0.78     $ 0.77     $ 1.54     $ 1.55     $ 1.56     $ 1.65     $ 1.08  

Net (decrease) increase in net assets resulting from operations—basic and diluted

    0.88       0.89       1.27       1.80       (0.34    
1.08
 
    2.25  

Distributions declared

    0.90       0.90       1.81       1.81       1.81       1.80       1.86  

Other data:

             

Total investment return-net asset value(1)

    5.66     4.40     6.4     9.4     (0.9 )%      5.9     11.4

Total investment return-market value(2)

    3.26     —         (7.1 )%      —         —         —         —    

Number of portfolio companies at period end(3)

    132       128       113       129       124       112       94  

Total portfolio investments for the period(3)

  $ 952,928     $ 819,207     $ 1,582,962     $ 1,669,095     $ 2,068,738     $ 1,899,447     $ 2,090,370  

Investment sales and prepayments for the period(3)

  $ 847,227     $ 762,906     $ 1,697,701     $ 1,378,020     $ 842,372     $ 1,058,221     $ 925,095  

Balance sheet data:

             

Total assets

  $ 4,375,046     $ 4,387,621     $ 4,221,500     $ 4,430,696     $ 4,045,125     $ 2,971,720     $ 2,281,186  

Borrowings, net

  $ 1,797,603     $ 1,480,179     $ 1,588,380     $ 1,627,657     $ 1,418,657     $ 772,678     $ 707,389  

Total net assets

  $ 2,440,916     $ 2,749,898     $ 2,485,102     $ 2,759,332     $ 2,594,022     $ 2,145,821     $ 1,430,434  

 

(1)

Total investment return-net asset value is a measure of the change in total value for stockholders who held CCT’s common stock at the beginning and end of the period, including distributions declared during the

 

103


Table of Contents
  period. Total investment return-net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with CCT’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. CCT’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by stockholders in the purchase of CCT’s shares of common stock.

 

(2)

Tota