FS/KKR Announce Plan of Merger for Non-Traded BDCs
June 4, 2019 | Luke Schmidt | Blue Vault
FS/KKR Advisor, LLC, a partnership between FS Investments and KKR Credit Advisors, LLC, announced on June 3, 2019, a definitive agreement to merge four non-traded BDCs under its advisement: FS Investment Corporation II (“FSIC II”), FS Investment Corporation III (“FSIC III”), FS Investment Corporation IV (“FSIC IV”), and Corporate Capital Trust II (“CCT II”). Subject to final board approval, the combined company is expected to be listed on the NYSE in the fourth quarter of 2019. This move comes approximately six months after FS closed the merger of its first publicly traded fund with Corporate Capital Trust to create FS KKR Capital Corp. The move doubled the fund in size to over $8 billion in assets.
Under the terms of the agreement, shareholders of FSIC III, FSIC IV, and CCT II will receive a number of FSIC II shares with a net asset value equal to the NAV of the shares they hold in each respective fund. After the merger closes, the company also intends to issue approximately $1 billion of 5.50% perpetual preferred equity pro rata to holders of the combined company’s common equity prior to any public listing of the common equity. This would provide an additional incentive to investors to vote in favor of this merger, as it would provide them with additional ongoing income. In connection with this merger, the boards of each BDC suspended their respective existing share repurchase programs, effective May 31, 2019.
The combined entity will become the second largest BDC by assets under management, with over $9 billion in assets on a pro forma basis as of March 31, 2019. When the proposed deal closes, FS/KKR will co-manage two of the three largest BDCs, trailing only Ares Capital Corp., which has approximately $14 billion in assets under management as of March 31, 2019.
“Today’s announcement is an important next step as we continue to deliver on our commitment to create liquidity for our shareholders in these non-traded funds and maximize their value,” said Michael Forman, Chairman and CEO of FS Investments. “We believe the transaction and staged liquidity plan, as it is structured, is in the best interest of shareholders of each fund and positions the combined company for long-term success.”
According to FS Investments, the merger provides several compelling strategic and financial benefits. The combined entity will benefit from enhanced portfolio diversification across asset classes and industries, with 208 companies across 20 industries, while also maintaining a focus on senior secured debt and floating rate debt. It will lower operating costs by more than one-third through the elimination of duplicative operating expenses. The preferred equity provides current income (5.50%), ranks senior to the common equity and enhances the expected dividend coverage, dividend yield, and return on equity. Finally, the transaction structure allows the combined company to select the optimal path to liquidity following the merger, and the single transaction eliminates the uncertainty of timing and impact of future mergers on shareholder value.
The boards of FSIC II, FSIC III, FSIC IV, and CCT II have approved the transaction with participation and unanimous support of their respective independent directors and trustees. Subject to approval by shareholders of each respective fund, the merger is expected to close in the fourth quarter of 2019. The issuance of the 5.50% perpetual preferred equity and the listing of the company’s common equity on the NYSE are also expected to occur in the fourth quarter of 2019, subject to board approval and market conditions.
Sources: SEC, Newswire, Blue Vault
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