Home News FS/KKR Plans to Merge Four Non-Traded BDCs in $9 Billion Combination

FS/KKR Plans to Merge Four Non-Traded BDCs in $9 Billion Combination

FS/KKR Advisor LLC, a partnership between FS Investments and KKR Credit Advisors LLC, have agreed to merge four non-traded business development companies under its advisement.

FS/KKR Advisor LLC, a partnership between FS Investments and KKR Credit Advisors LLC, have agreed to merge four non-traded business development companies under its advisement. The programs include 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).

FS/KKR Advisor said that the combined company will become the second largest BDC by assets under management, with more than $9 billion in assets as of March 31, 2019, with 208 portfolio companies across 20 industries.

The common equity of the combined company is currently expected to be listed on the New York Stock Exchange in the fourth quarter of 2019, subject to final board approval and market conditions. The combined company will remain advised by FS/KKR.

“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,” said Michael Forman, chairman and CEO of FS Investments.

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, as determined shortly before closing.

The combined company currently intends to issue approximately $1 billion of 5.50 percent perpetual preferred equity pro rata to holders of the combined company’s common equity prior to any public listing of the common equity.

Todd Builione, president of KKR Credit and Markets, added, “We expect this combination to enhance portfolio diversification and reduce operating expenses, as well as provide the combined company with a more flexible capital structure that will position it well to deliver strong investment performance.”

The company claims the NAV-for-NAV merger could provide the following benefits:

Provides certainty around transaction pricing and ensures shareholders receive equal value in FSIC II common equity, subject to merger-related expenses and other adjustments.

Reduces portfolio concentration in the top 10 investments and lowers single name exposure, while maintaining a focus on senior secured debt and floating rate debt.

Eliminates duplicative operating expenses such as legal, audit, regulatory and administrative costs. The combined company will benefit from leveraging its enhanced scale to reduce borrowing costs and potentially access debt capital markets as a publicly traded company.

The preferred equity provides current income (5.50 percent), ranks senior to the combined company’s common equity and enhances the expected dividend coverage, dividend yield and return on equity of the combined company’s common shares.

The transaction structure allows the combined company to select the optimal path to liquidity following the merger, based on market conditions and other considerations, and the single transaction eliminates the uncertainty of timing and the impact of future mergers on shareholder value.

Timing and Approvals

The boards of FSIC II, FSIC III, FSIC IV and CCT II have approved the transaction, and the mergers are expected to close in the fourth quarter of 2019, subject to shareholder approval and other customary closing conditions.

The issuance of the 5.50 percent perpetual preferred equity to the holders of the combined company’s common equity and the listing of the combined company’s common equity on the New York Stock Exchange are also expected to occur in the fourth quarter of 2019, subject to board approval and market conditions.

The proposed transaction does not include FS KKR Capital Corp. (NYSE: FSK), which will continue to be advised by FS/KKR and trade independently of the combined company on the New York Stock Exchange.

FS/KKR Advisor serves as the investment adviser to BDCs with approximately $17 billion in assets under management as of March 31, 2019. The BDCs managed by FS/KKR include FS KKR Capital Corp. (NYSE: FSK), FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and Corporate Capital Trust II.

KKR Credit is a subsidiary of KKR & Co. Inc., a global investment firm that manages multiple alternative asset classes, including private equity, energy, infrastructure, real estate and credit, with strategic manager partnerships that manage hedge funds.

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