8-K: Franklin BSP Capital Corporation Completes Merger and Amends Advisory Agreement

Franklin BSP Capital Corporation finalized its merger with Franklin BSP Lending Corporation and amended its investment advisory agreement, effective January 24, 2024.

Summary

• Franklin BSP Capital Corporation (FBCC) has completed its merger with Franklin BSP Lending Corporation (FBLC) on January 24, 2024.
• The combined company has over $3.8 billion in total assets and approximately $2.1 billion in total net assets based on pro forma September 30, 2023 financials.
• FBCC's stockholders approved an amended and restated investment advisory agreement with Franklin BSP Capital Adviser L.L.C. (FBCA), which also became effective on January 24, 2024.
• The amended agreement includes an increase in the base management fee to 1.50% of average gross assets, with a reduced rate of 1.00% for assets purchased with borrowed funds above 1.0x debt-to-equity.
• The incentive fee on income was increased to a catch-up of 1.8175% (7.27% annualized), with 17.5% of pre-incentive fee net investment income above the catch-up, and a preferred return rate of 1.50% per quarter (6.00% annualized) on net assets.
• The incentive fee on capital gains was increased to 17.5% for periods ending after the date of the amended agreement.
• Former FBLC stockholders received 0.4647 shares of FBCC common stock for each share of FBLC common stock.
• Legacy FBCC stockholders and former FBLC stockholders now own approximately 19.3% and 80.7%, respectively, of the combined company.

Sentiment

Score: 8

Explanation: The document conveys a positive sentiment due to the completion of a strategic merger and the expectation of accretive benefits for shareholders. The amended advisory agreement also provides clarity on management fees and incentives.

Positives

• The merger is expected to be immediately accretive to stockholders.
• The merger unlocks nearly $700 million of capital for deployment into an attractive origination environment.
• The combined company is expected to capitalize on synergies.
• The amended advisory agreement provides a clear structure for management fees and incentives.

Risks

• The document contains forward-looking statements that involve risks and uncertainties.
• The company assumes no obligation to update any forward-looking statements.

Future Outlook

The company expects the merger to be immediately accretive to stockholders and unlock capital for deployment. They anticipate capitalizing on the combined company's synergies to deliver strong growth and long-term value.

Management Comments

• Richard Byrne, President of BSP and CEO & Chairman of FBCC, stated that the merger will be immediately accretive to stockholders and unlock nearly $700 million of capital.
• He also mentioned that they look forward to capitalizing on the combined company's synergies and will continue to deliver strong growth and long-term value for stockholders.

Industry Context

This merger is part of a trend of consolidation within the business development company (BDC) sector, aiming to create larger, more efficient entities with greater access to capital and deal flow. The increased scale may allow the combined company to pursue larger investment opportunities and achieve operational efficiencies.

Comparison to Industry Standards

• The base management fee of 1.50% is within the typical range for externally managed BDCs, although the tiered structure with a lower rate for assets purchased with leverage is less common.
• The incentive fee structure, with a hurdle rate and catch-up, is a standard approach in the BDC industry, designed to align the interests of the adviser with those of the shareholders.
• The merger itself is similar to other BDC mergers, such as the merger between TPG Specialty Lending and TCP Capital Corp, which aimed to create a larger, more diversified entity.
• The pro forma asset size of $3.8 billion places the combined company among the larger BDCs, comparable to companies like Ares Capital Corporation and Main Street Capital Corporation.

Stakeholder Impact

• Shareholders of both FBCC and FBLC are impacted by the merger, with former FBLC shareholders receiving FBCC stock.
• The merger is expected to be accretive to stockholders, potentially increasing the value of their holdings.
• The amended advisory agreement impacts the fees paid to the adviser, which could affect the company's profitability.
• The merger creates a larger entity, which may provide more stability and access to capital.

Next Steps

• The combined company will focus on deploying the unlocked capital into an attractive origination environment.
• The company will work to capitalize on the synergies of the merger.
• The company will continue to deliver strong growth and long-term value for stockholders.

Key Dates

Keywords

merger, investment advisory agreement, business development company, BDC, management fee, incentive fee, capital gains, net assets, gross assets, Franklin BSP Capital Corporation, Franklin BSP Lending Corporation, Benefit Street Partners