FSIC defends its energy exposure

The BDC, which has about 9 percent of its portfolio in energy, detailed its largest positions and mark-downs in the fourth quarter of last year. Management argued that the companies have cut spending and sourced equity infusions to remain on a sound footing.  

Franklin Square Investment Corporation (FSIC) revealed realized and unrealised losses stemming from energy investments in its fourth quarter earnings report.

The business development company (BDC), which is sponsored by Franklin Square Capital Partners and sub-advised by Blackstone-owned GSO Capital Partners, reported $20 million in net realized losses and $114 million in net unrealised credit losses over the last quarter of 2015.

Most of FSIC’s energy exposure is in three directly originated investments: FourPoint, Plains Offshore and Ascent Resources. “We are highly confident in the credit worthiness of our energy related direct originations. Our valuations reflect the impact of spread widening in the secondary market during the quarter, as well as company specific considerations, including asset quality liquidity and cost of capital,” said senior portfolio manager Brad Marshall, speaking on the BDC’s earnings call.

FourPoint was valued at about 77.8 percent of par and FSIC’s equity investment was marked at approximately 74 percent of cost.

Plains Offshore has slashed capital expenditure, Marshall said, and can be profitable even at $20 per barrel. “There is significant common equity in the business below us, which we believe provides FSIC strong asset coverage in our preferred equity position, which is junior to only a small reserve-based revolver in the capital structure,” Marshall said.

Ascent, meanwhile, recently announced a successful convertible bond exchange raising $177 million in equity. Marshall said that Ascent could exchange more of its convertible debt if it raised $500 million in equity, noting that this would significantly de-lever its balance sheet and give it the liquidity necessary to invest in new production.

A report by Wells Fargo’s BDC analyst Jonathan Bock agreed that the losses on those particular names are expected to be minimal. “The fact that two of its largest energy investments continue to raise equity capital subordinate to FSIC’s debt stake is a very interesting point,” said Bock in his report.

Management said the BDC continues to focus on first lien senior secured debt, rotating out of more junior exposures. First lien senior debt made up 54 percent of the portfolio at the end of the year, compared to 47 percent in the third quarter last year. Second lien and subordinated debt dropped to 26 percent from 33 percent over the same time-frame.

FSIC has also been building up its specialty finance exposure. FSIC and the non-traded Franklin Square BDCs financed Global Jet Capital, a business jet financing company backed by GSO, Carlyle and AE Industry Partners and bought a $2.3 billion aircraft leasing portfolio from GE Capital last year.

Most of FSIC’s financials were down in the quarter because of energy-related mark-downs and broader market volatility. “Continued financial market volatility in the fourth quarter contributed to meaningfully weaker secondary prices and wider clearing yields across the corporate credit markets,” said chief executive Michael Forman.

FSIC’s net asset value (NAV) dropped to $9.10 per share from 9.64 quarter-over-quarter. Net investment income fell to $0.23 per share in Q4 2015 from $0.28 per share in the same quarter in 2014.

Total assets declined to $4.1 billion from $4.3 billion year-on-year.