SEC Company Response from FS KKR Capital Corp (FSK) (CIK 0001422183) (FSK) — Jul 29, 2011
FS KKR Capital Corp (FSK) (CIK 0001422183)
Date: July 29, 2011 · CIK: 0001422183 · Accession: 0001193125-11-202971
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-174784, 814-00757
Referenced dates: July 8, 2011
Letter
VIA EDGAR Division of Investment Management Securities and Exchange Commission Division of Investment Management Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: FS Investment Corporation Registration Statement on Form N-2 (File Nos. 333-174784 and 814-00757)
Dear Mr. O’Connor and Ms. DiAngelo:
On behalf of FS Investment Corporation (the “Company”), set forth below is the Company’s response to the comment letter provided by the staff of the Division of Investment Management (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to the Company in a letter dated July 8, 2011, regarding the Company’s Registration Statement on Form N-2 (File Nos. 333-174784 and 814-00757) (the “Registration Statement”) and the prospectus included therein (the “Prospectus”).
We also describe below the changes that we have made in response to the Staff’s comments in Pre-Effective Amendment No. 1 (“PEA 1”) to the Registration Statement that the Company filed on July 29, 2011. Where the Company’s responses contemplate changes in the text of the Registration Statement, the Company will conform its future periodic filings with the Commission to reflect such changes. For your convenience, the Staff’s comments are numbered
US Austin Boston Charlotte Hartford Los Angeles New York Orange County Philadelphia Princeton San Francisco
Silicon Valley Washington DC EUROPE Brussels Dublin London Luxembourg Moscow Munich Paris ASIA Beijing Hong Kong
James O’Connor, Esq.
Christina DiAngelo
July 29, 2011
Page
and presented in italicized text below, and each comment is followed by the Company’s proposed response. The Company will also provide the Staff courtesy copies of PEA 1 as-filed and marked to reflect the changes from the Registration Statement.
PROSPECTUS:
Cover Pages
1. Please explain to us why FS2 Capital Partners, LLC is referred to as a “dealer manager,” rather than as a principal underwriter or an underwriter.
The Company respectfully submits that FS2 Capital Partners, LLC (“FS2”) is not, and should not be considered, an “underwriter” under Section 2(a)(11) of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the offer and sale of the Company’s securities. Section 2(11) of the Securities Act defines the term “underwriter” as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security. . . .” As described in the Prospectus, however, FS2 is responsible for establishing, operating and maintaining a network of licensed securities broker-dealers and other agents to sell the Company’s shares. Contrary to the role of an underwriter as set forth in the Securities Act, FS2 has no agreement or understanding with the Company or any other person to purchase the Company’s securities, nor is FS2 responsible for offering or selling any of the Company’s securities to the public on an agency basis. While FS2 may negotiate and arrange for third-party broker-dealers to sell the Company’s shares, FS2 has no control or influence over the timing, nature or volume of any such third-party broker-dealers’ sales of the Company’s common stock, and it does not act as an intermediary for investors making an investment decision.
FS2 enters into selling agreements with each of the third-party broker-dealers wherein the broker-dealers agree to offer and sell on a best-efforts basis the Company’s securities to the public. In accordance with such agreements, the broker-dealers are responsible for performing their own due diligence of the Company. These broker-dealers do, in fact, conduct due diligence with respect to the Company and its securities and obtain representations from the Company and third party legal opinions with respect to the securities. As disclosed in the Prospectus, FS2 is an affiliate of the Company, and therefore does not perform an independent due-diligence review of the Company in connection with the distribution of the Company’s shares in the offering.
Accordingly, FS2 is not performing the customary role of an underwriter, but rather acting as an organizer and go-between for the Company and third-party broker-dealers. The Company respectfully submits that any reference to FS2 as an underwriter in the Prospectus may be
James O’Connor, Esq.
Christina DiAngelo
July 29, 2011
Page
misleading to investors regarding the role and responsibility of FS2 in connection with the Company’s continuous offering.
2. Please provide the disclosure required by Instruction 5 to Item 1.1.g. of Form N-2.
The Company respectfully submits that its continuous offering does not have a termination date, and, in contrast to the offering format established in connection with the Company’s initial offering and sale of securities, the Company does not have any commitment or other arrangement to place funds received by it from the offering in an escrow, trust or similar segregated account. In connection with the initial offering of securities, the Company was required to satisfy a minimum offering requirement and, prior to meeting such condition, all subscription payments were placed in an account held by an escrow agent in trust for each of the subscriber’s benefit. However, following satisfaction of that condition, all funds received by the Company in connection with sales of its securities are paid directly to an account established for the benefit of the Company, which will remain the case in the offering contemplated by the Registration Statement. Accordingly, the Company respectfully submits that it has provided the necessary disclosure required by Item 1.1.g of Form N-2.
3. Please revise the bolded paragraph on the cover consistently with the revisions below:
You should not expect to be able to sell your shares regardless of how we perform. If you are able to sell your shares, you will likely receive less than your purchase price. We do not intend to list our shares on any securities exchange during the offering period, and we do not expect a secondary market in the shares to develop. We have implemented a share repurchase program, but only a limited number of shares are eligible for repurchase by us. Accordingly, you should consider that you may not have access to the money you invest for an indefinite period of time at least five years, or until we complete a liquidity event. Although we may complete a liquidity event five to seven years after we stop following the completion of the offering shares, the offering will continue for an indefinite period. or at such earlier time as our board of directors may determine, taking into consideration market conditions and other factors. Moreover, tThere is no assurance that we will complete a liquidity event within such timeframe or at all. As a result of the foregoing, an
James O’Connor, Esq.
Christina DiAngelo
July 29, 2011
Page
investment in our shares is not suitable for investors that require short term liquidity if you may need access to the money you invest.
As requested, the Company has revised the relevant disclosure on the cover page of the Prospectus substantially in the form requested by the Staff. However, the Company expects to terminate its offering of securities at some time in the future. As discussed with the Staff on July 13, 2011, the Company expects to terminate its continuous offering and list its shares of common stock on a national securities exchange as soon as commercially practicable. The Company takes these intentions seriously and has spent a great deal of time considering its liquidity strategy and listing in particular. The Company currently expects that listing will be the preferred liquidity path of its board of directors, not only because of the potential benefit to investors in the form of increased liquidity through secondary market trading and a reduced “liquidity discount,” but also the ease of execution, from a legal perspective, relative to other liquidity events. The Company also believes that its business model minimizes issues that have prevented many non-traded REITs from effectively listing, such as over-sized multi-billion dollar initial offerings, distributions to investors in excess of cash income and a general lack of transparency, particularly when it comes to the valuation of assets. The Company, on the other hand, seeks to differentiate itself from these non-traded REITs through a commitment to transparency and excellent corporate governance, including a commitment to the payment of distributions that do not represent a return of capital to stockholders for tax purposes and mark-to-market pricing, which the Company believes will allow it to execute its listing strategy more effectively.
To that end, the Company is involved in ongoing discussions with a number of underwriting firms regarding a potential listing of its common stock. Before listing, however, and in an effort to keep a product with substantially similar investment objectives as the Company available to interested investors at all times, the Company’s sponsor intends to launch a successor fund, FS Investment Corporation II (“FSIC II”), for which a registration statement on Form N-2 was filed with the Commission on July 19, 2011. The Registration Statement for the Company and the shares registered thereby are intended to ensure that the Company’s shares are available for sale through its established distribution channels prior to the time that FSIC II commences operations. Based on the current and projected demand for the Company’s shares and its expectations regarding the timing of qualification of FSIC II for offers and sales, the Company has determined to register an additional 50 million shares (100 million total additional shares) pursuant to the Registration Statement, which is reflected in PEA 1. This increase in the number of shares should serve to ensure that the Company is not “out of the market” prior to commencement of FSIC II’s operations. The Company’s intentions remain unchanged: it will not, under any circumstance, register for sale more shares than those covered by the Registration Statement prior to the completion of a listing on a national securities exchange; and 90 to 180 days after FSIC II
James O’Connor, Esq.
Christina DiAngelo
July 29, 2011
Page
becomes operational (which is the amount of time after effectiveness that the Company believes is necessary to allow broker-dealer clients to complete their due diligence efforts regarding the new offering and to allow the states to substantially complete their blue sky review), the Company intends to terminate its offering and pursue its liquidity strategy.
As a result of the foregoing, the Company believes that the requested statement to the effect that its offering “will continue for an indefinite period” is misleading to investors. Accordingly, the Company has revised one sentence of the Staff’s requested revisions as follows:
“Although we may complete a liquidity event within five to seven years after we stop offering shares or at such earlier time as our board of directors may determine, taking into consideration market conditions and other factors, the offering will may continue for an indefinite period.”
The Company believes that this statement, as revised, more accurately reflects its current intention and that the offering may, but not necessarily will, continue for an indefinite period. Because the Company currently intends to list its shares of common stock on a national securities exchange as soon as commercially practicable after termination of its continuous offering (and perhaps as soon as one year from the effectiveness of this registration), the Company believes that it would be misleading for the Company not to indicate to investors the possibility that a liquidity event may occur sooner than five to seven years after completion of the offering.
4. Please disclose the following information on the front cover: (1) the securities in which the Fund invests will generally not be rated by any rating agency; (2) if they were rated, they would be below investment grade or “junk;” (3) indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.
As discussed with the Staff on July 13, 2011, the Company respectfully submits that many of the assets held by it are above investment grade quality and would be rated as such if its investments were rated by a national rating agency. The Company believes that the proposed disclosure does not accurately characterize the Company’s offering and the historical performance of the securities and other instruments in which the Company typically invests.
A substantial portion of the Company’s investment portfolio is rated at an average of B3 on the Moody’s scale. Credit ratings, however, are intended to reflect the probability of default, rather than the expected recovery and ultimate rate of loss (which is equal to (x) the probability of default, multiplied by (y) (1 minus the expected recovery rate)). The Company primarily invests in senior secured loans (both first and second lien) issued by private U.S. companies. These loans, which are positioned at the top of the capital structure of the respective borrowers, are
James O’Connor, Esq.
Christina DiAngelo
July 29, 2011
Page
secured by substantially all of the assets of the issuing companies. The Company respectfully submits that the historical recovery rates for senior secured loans of these kinds are typically substantial and the loss rates have historically been correspondingly low.
The Credit Suisse Leveraged Loan Index (the “CSLLI”), which tracks the performance of senior secured loans, illustrates the relative stability of this asset class. The CSLLI has shown an average annual default rate for senior secured loans over the past 12 years of 3%, with a recovery rate on such defaults of 65%, which has resulted in an annual loss rate of 1.05% during the period covered by such index, which is consistent with the historical return characteristics of an investment grade portfolio of debt securities (GSO / Blackstone Debt Funds Management LLC (“GDFM”), over the same period, has had a default rate of 0.99%, with a recovery rate of 67%, which has resulted in an annual loss rate of 0.33%). Bonds, on the other hand, historically have exhibited a 5% default rate, a 30-40% recovery rate and a 3.0-3.5% annual loss rate over the same 12-year period. Over a longer period, recovery rates for this asset class have been even more favorable relative to asset classes lower in the capital structure. From 1987 through 2010, the ultimate recovery rate for senior secured loans was 80%, as compared to 49% for senior unsecured bonds and 29% for senior subordinated bonds over the same period.
We also believe it is important to recognize that the Company has made investments in approximately 250 portfolio companies since commencing operations in January 2009 and has experienced only one default through June 30, 2011 (a position which the Company later sold at a profit). The S&P / LSTA Leveraged Loan Index, which tracks a broad cross section of leveraged loans syndicated in the United States, reported average default rates of 9.61%, 1.78% and 0.09% for 2009, 2010 and 2011 (through May 31, 2011), respectively. In comparison, FSIC experienced default rates of 0.0%, 0.0
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CORRESP 1 filename1.htm Letter to the SEC 1775 I Street, N.W. Washington, DC 20006-2401 +1 202 261 3300 Main +1 202 261 3333 Fax www.dechert.com THOMAS FRIEDMANN thomas.friedmann@dechert.com +1 202 261 3313 Direct +1 202 261 3016 Fax July 29, 2011 VIA EDGAR James O’Connor, Esq. Attorney/Advisor Division of Investment Management Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 Ms. Christina DiAngelo Staff Accountant Division of Investment Management Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: FS Investment Corporation Registration Statement on Form N-2 (File Nos. 333-174784 and 814-00757) Dear Mr. O’Connor and Ms. DiAngelo: On behalf of FS Investment Corporation (the “Company”), set forth below is the Company’s response to the comment letter provided by the staff of the Division of Investment Management (the “Staff”) of the Securities and Exchange Commission (the “Commission”) to the Company in a letter dated July 8, 2011, regarding the Company’s Registration Statement on Form N-2 (File Nos. 333-174784 and 814-00757) (the “Registration Statement”) and the prospectus included therein (the “Prospectus”). We also describe below the changes that we have made in response to the Staff’s comments in Pre-Effective Amendment No. 1 (“PEA 1”) to the Registration Statement that the Company filed on July 29, 2011. Where the Company’s responses contemplate changes in the text of the Registration Statement, the Company will conform its future periodic filings with the Commission to reflect such changes. For your convenience, the Staff’s comments are numbered US Austin Boston Charlotte Hartford Los Angeles New York Orange County Philadelphia Princeton San Francisco Silicon Valley Washington DC EUROPE Brussels Dublin London Luxembourg Moscow Munich Paris ASIA Beijing Hong Kong James O’Connor, Esq. Christina DiAngelo July 29, 2011 Page 2 and presented in italicized text below, and each comment is followed by the Company’s proposed response. The Company will also provide the Staff courtesy copies of PEA 1 as-filed and marked to reflect the changes from the Registration Statement. PROSPECTUS: Cover Pages 1. Please explain to us why FS2 Capital Partners, LLC is referred to as a “dealer manager,” rather than as a principal underwriter or an underwriter. The Company respectfully submits that FS2 Capital Partners, LLC (“FS2”) is not, and should not be considered, an “underwriter” under Section 2(a)(11) of the Securities Act of 1933, as amended (the “Securities Act”), with respect to the offer and sale of the Company’s securities. Section 2(11) of the Securities Act defines the term “underwriter” as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security. . . .” As described in the Prospectus, however, FS2 is responsible for establishing, operating and maintaining a network of licensed securities broker-dealers and other agents to sell the Company’s shares. Contrary to the role of an underwriter as set forth in the Securities Act, FS2 has no agreement or understanding with the Company or any other person to purchase the Company’s securities, nor is FS2 responsible for offering or selling any of the Company’s securities to the public on an agency basis. While FS2 may negotiate and arrange for third-party broker-dealers to sell the Company’s shares, FS2 has no control or influence over the timing, nature or volume of any such third-party broker-dealers’ sales of the Company’s common stock, and it does not act as an intermediary for investors making an investment decision. FS2 enters into selling agreements with each of the third-party broker-dealers wherein the broker-dealers agree to offer and sell on a best-efforts basis the Company’s securities to the public. In accordance with such agreements, the broker-dealers are responsible for performing their own due diligence of the Company. These broker-dealers do, in fact, conduct due diligence with respect to the Company and its securities and obtain representations from the Company and third party legal opinions with respect to the securities. As disclosed in the Prospectus, FS2 is an affiliate of the Company, and therefore does not perform an independent due-diligence review of the Company in connection with the distribution of the Company’s shares in the offering. Accordingly, FS2 is not performing the customary role of an underwriter, but rather acting as an organizer and go-between for the Company and third-party broker-dealers. The Company respectfully submits that any reference to FS2 as an underwriter in the Prospectus may be James O’Connor, Esq. Christina DiAngelo July 29, 2011 Page 3 misleading to investors regarding the role and responsibility of FS2 in connection with the Company’s continuous offering. 2. Please provide the disclosure required by Instruction 5 to Item 1.1.g. of Form N-2. The Company respectfully submits that its continuous offering does not have a termination date, and, in contrast to the offering format established in connection with the Company’s initial offering and sale of securities, the Company does not have any commitment or other arrangement to place funds received by it from the offering in an escrow, trust or similar segregated account. In connection with the initial offering of securities, the Company was required to satisfy a minimum offering requirement and, prior to meeting such condition, all subscription payments were placed in an account held by an escrow agent in trust for each of the subscriber’s benefit. However, following satisfaction of that condition, all funds received by the Company in connection with sales of its securities are paid directly to an account established for the benefit of the Company, which will remain the case in the offering contemplated by the Registration Statement. Accordingly, the Company respectfully submits that it has provided the necessary disclosure required by Item 1.1.g of Form N-2. 3. Please revise the bolded paragraph on the cover consistently with the revisions below: You should not expect to be able to sell your shares regardless of how we perform. If you are able to sell your shares, you will likely receive less than your purchase price. We do not intend to list our shares on any securities exchange during the offering period, and we do not expect a secondary market in the shares to develop. We have implemented a share repurchase program, but only a limited number of shares are eligible for repurchase by us. Accordingly, you should consider that you may not have access to the money you invest for an indefinite period of time at least five years, or until we complete a liquidity event. Although we may complete a liquidity event five to seven years after we stop following the completion of the offering shares, the offering will continue for an indefinite period. or at such earlier time as our board of directors may determine, taking into consideration market conditions and other factors. Moreover, tThere is no assurance that we will complete a liquidity event within such timeframe or at all. As a result of the foregoing, an James O’Connor, Esq. Christina DiAngelo July 29, 2011 Page 4 investment in our shares is not suitable for investors that require short term liquidity if you may need access to the money you invest. As requested, the Company has revised the relevant disclosure on the cover page of the Prospectus substantially in the form requested by the Staff. However, the Company expects to terminate its offering of securities at some time in the future. As discussed with the Staff on July 13, 2011, the Company expects to terminate its continuous offering and list its shares of common stock on a national securities exchange as soon as commercially practicable. The Company takes these intentions seriously and has spent a great deal of time considering its liquidity strategy and listing in particular. The Company currently expects that listing will be the preferred liquidity path of its board of directors, not only because of the potential benefit to investors in the form of increased liquidity through secondary market trading and a reduced “liquidity discount,” but also the ease of execution, from a legal perspective, relative to other liquidity events. The Company also believes that its business model minimizes issues that have prevented many non-traded REITs from effectively listing, such as over-sized multi-billion dollar initial offerings, distributions to investors in excess of cash income and a general lack of transparency, particularly when it comes to the valuation of assets. The Company, on the other hand, seeks to differentiate itself from these non-traded REITs through a commitment to transparency and excellent corporate governance, including a commitment to the payment of distributions that do not represent a return of capital to stockholders for tax purposes and mark-to-market pricing, which the Company believes will allow it to execute its listing strategy more effectively. To that end, the Company is involved in ongoing discussions with a number of underwriting firms regarding a potential listing of its common stock. Before listing, however, and in an effort to keep a product with substantially similar investment objectives as the Company available to interested investors at all times, the Company’s sponsor intends to launch a successor fund, FS Investment Corporation II (“FSIC II”), for which a registration statement on Form N-2 was filed with the Commission on July 19, 2011. The Registration Statement for the Company and the shares registered thereby are intended to ensure that the Company’s shares are available for sale through its established distribution channels prior to the time that FSIC II commences operations. Based on the current and projected demand for the Company’s shares and its expectations regarding the timing of qualification of FSIC II for offers and sales, the Company has determined to register an additional 50 million shares (100 million total additional shares) pursuant to the Registration Statement, which is reflected in PEA 1. This increase in the number of shares should serve to ensure that the Company is not “out of the market” prior to commencement of FSIC II’s operations. The Company’s intentions remain unchanged: it will not, under any circumstance, register for sale more shares than those covered by the Registration Statement prior to the completion of a listing on a national securities exchange; and 90 to 180 days after FSIC II James O’Connor, Esq. Christina DiAngelo July 29, 2011 Page 5 becomes operational (which is the amount of time after effectiveness that the Company believes is necessary to allow broker-dealer clients to complete their due diligence efforts regarding the new offering and to allow the states to substantially complete their blue sky review), the Company intends to terminate its offering and pursue its liquidity strategy. As a result of the foregoing, the Company believes that the requested statement to the effect that its offering “will continue for an indefinite period” is misleading to investors. Accordingly, the Company has revised one sentence of the Staff’s requested revisions as follows: “Although we may complete a liquidity event within five to seven years after we stop offering shares or at such earlier time as our board of directors may determine, taking into consideration market conditions and other factors, the offering will may continue for an indefinite period.” The Company believes that this statement, as revised, more accurately reflects its current intention and that the offering may, but not necessarily will, continue for an indefinite period. Because the Company currently intends to list its shares of common stock on a national securities exchange as soon as commercially practicable after termination of its continuous offering (and perhaps as soon as one year from the effectiveness of this registration), the Company believes that it would be misleading for the Company not to indicate to investors the possibility that a liquidity event may occur sooner than five to seven years after completion of the offering. 4. Please disclose the following information on the front cover: (1) the securities in which the Fund invests will generally not be rated by any rating agency; (2) if they were rated, they would be below investment grade or “junk;” (3) indebtedness of below investment grade quality is regarded as having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. As discussed with the Staff on July 13, 2011, the Company respectfully submits that many of the assets held by it are above investment grade quality and would be rated as such if its investments were rated by a national rating agency. The Company believes that the proposed disclosure does not accurately characterize the Company’s offering and the historical performance of the securities and other instruments in which the Company typically invests. A substantial portion of the Company’s investment portfolio is rated at an average of B3 on the Moody’s scale. Credit ratings, however, are intended to reflect the probability of default, rather than the expected recovery and ultimate rate of loss (which is equal to (x) the probability of default, multiplied by (y) (1 minus the expected recovery rate)). The Company primarily invests in senior secured loans (both first and second lien) issued by private U.S. companies. These loans, which are positioned at the top of the capital structure of the respective borrowers, are James O’Connor, Esq. Christina DiAngelo July 29, 2011 Page 6 secured by substantially all of the assets of the issuing companies. The Company respectfully submits that the historical recovery rates for senior secured loans of these kinds are typically substantial and the loss rates have historically been correspondingly low. The Credit Suisse Leveraged Loan Index (the “CSLLI”), which tracks the performance of senior secured loans, illustrates the relative stability of this asset class. The CSLLI has shown an average annual default rate for senior secured loans over the past 12 years of 3%, with a recovery rate on such defaults of 65%, which has resulted in an annual loss rate of 1.05% during the period covered by such index, which is consistent with the historical return characteristics of an investment grade portfolio of debt securities (GSO / Blackstone Debt Funds Management LLC (“GDFM”), over the same period, has had a default rate of 0.99%, with a recovery rate of 67%, which has resulted in an annual loss rate of 0.33%). Bonds, on the other hand, historically have exhibited a 5% default rate, a 30-40% recovery rate and a 3.0-3.5% annual loss rate over the same 12-year period. Over a longer period, recovery rates for this asset class have been even more favorable relative to asset classes lower in the capital structure. From 1987 through 2010, the ultimate recovery rate for senior secured loans was 80%, as compared to 49% for senior unsecured bonds and 29% for senior subordinated bonds over the same period. We also believe it is important to recognize that the Company has made investments in approximately 250 portfolio companies since commencing operations in January 2009 and has experienced only one default through June 30, 2011 (a position which the Company later sold at a profit). The S&P / LSTA Leveraged Loan Index, which tracks a broad cross section of leveraged loans syndicated in the United States, reported average default rates of 9.61%, 1.78% and 0.09% for 2009, 2010 and 2011 (through May 31, 2011), respectively. In comparison, FSIC experienced default rates of 0.0%, 0.0