Fee income falls at FSIC due to delayed deployment

Franklin Square’s public BDC posted weaker earnings in Q3 after several closings were delayed.  

Franklin Square Investment Corporation (FSIC) saw falling investment income during the third quarter following delays in deploying deals, management said.

Adjusted net investment income (NII) for the third quarter was 21 cents per share, down from 35 cents in the previous period and 25 cents this time last year.

“Adjusted NII was lower than expected primarily due to lower fee income as the number of closings of direct originations expected during the third quarter were pushed into the fourth quarter,” said chairman and chief executive Michael Forman (pictured) during FSIC’s earnings call.

“Looking ahead to the fourth quarter of 2015, we foresee a stronger quarter for direct originations and fee income.”

He added that market turbulence had an impact on the business development company’s (BDC) financials. “Increased financial market volatility in the third quarter contributed to weaker secondary prices and wider clearing yields across the corporate credit markets,” he said.

As a result, FSIC net asset value (NAV) fell to $9.64 per share at 30 September from $9.89 per share at 30 June. “The majority of the decline in NAV was driven by unrealised depreciation as a result of mark-to-market volatility in the investment portfolio,” Forman said.

He also reiterated a commitment to more directly-originated investments, rather than broadly-syndicated loans. At quarter-end, the BDC had two-thirds of its investments in originated loans.

“We believe directly-originated loans typically provide higher risk-adjusted returns than those available in the broadly-syndicated loans market due to higher yields and the ability to generate fee income,” Forman said.

One of the deals pushed into the fourth quarter was the acquisition of a $2.5 billion portfolio in aircraft loans and lease assets from GE Capital. The deal was announced in early October.

FSIC has also been working on more deals through a partnership with NewStar Financial. The two firms have so far completed $1.5 billion-worth of unitranche transactions. Both firms source deals, with NewStar usually taking a small first-out piece and FSIC and its sub-advisor GSO Capital Partners keeping the larger slice and usually the last-out piece, Forman said.

The BDC’s new investments amounted to about $284 million in the quarter, down from $608.8 million in the previous period and $432 million this time last year.

“The sequential decline was largely due to timing issues as several expected closings were pushed into the fourth quarter,” said Brad Marshall, senior portfolio manager at GSO.

Marshall outlined FSIC’s energy exposure, which amounted to 10 percent at 30 September. He said the BDC is comfortable keeping it at that level for the foreseeable future.

Most of FSIC’s investments are direct originations, at the top of the capital stack and in companies that the BDC’s management believes have strong positions in their industries, so the firm was not worried about energy exposure.

“We are highly confident in the credit worthiness of our energy-related direct originations. And we continue to view certain areas of the energy market as interesting,” Marshall said.

FSIC declared a dividend of $0.22. The BDC, which is among only a few trading at a premium to book value, has no plans for equity raises at the moment, but president Gerald Stahlecker said the company was keeping its options open.

Troy Ward, an analyst with KBW, said equity raises had not been positive for the industry recently. “There are two basic issues that we have seen with the BDC sector with regard to equity issuance. The first is equity that’s raised below book value which we believe is just a non-starter. The second is equity raised above book value but doesn’t provide any economic benefit to shareholders,” Ward said.

Forman replied: “I think there is two components to performance, book value and income, and we would look at it with a fairly high standard for both of those and what impact the capital raises would have.”

The BDC’s assets were at $4.26 billion at quarter end, compared with $4.36 billion at 30 June.