10-K: Franklin BSP Capital Corporation Releases 2024 Annual Report

Franklin BSP Capital Corporation's 10-K filing reveals its 2024 financial performance and investment strategy, highlighting a focus on senior secured loans and middle-market companies.

Summary

• Franklin BSP Capital Corporation (FBCC) is an externally managed, non-diversified, closed-end management investment company regulated as a BDC and intending to qualify as a RIC.
• FBCC's investment objective is to generate both current income and capital appreciation through debt and equity investments, primarily in U.S. middle market companies.
• The company primarily invests in first and second lien senior secured loans, with a smaller allocation to mezzanine loans, unsecured loans, and equity.
• As of December 31, 2024, investors had made aggregate Capital Commitments to purchase Common Stock of $375.5 million.
• On January 24, 2024, FBCC consummated the Mergers with Franklin BSP Lending Corporation (FBLC).
• The Management Fee payable under the Amended and Restated Investment Advisory Agreement, is calculated at an annual rate of 1.50% of average gross assets, provided, that the Management Fee will be calculated at an annual rate of 1.00% of average gross assets purchased with borrowed funds above 1.0x debt-to-equity.
• The incentive fee on income with respect to our Pre-Incentive Fee Net Investment Income is calculated as follows: No incentive fee on income in any calendar quarter in which our Pre-Incentive Fee Net Investment Income does not exceed the preferred return rate of 1.50%, or 6.00% annualized (the Preferred Return), on net assets; 100% of Pre-Incentive Fee Net Investment Income, if any, that exceeds the Preferred Return but is less than or equal to 1.8175% in any calendar quarter (7.27% annualized); and For any quarter in which Pre-Incentive Fee Net Investment Income exceeds 1.8175% (7.27% annualized), the incentive fee on income equals 17.5% of the amount of Pre-Incentive Fee Net Investment Income, as the Preferred Return and catch-up will have been achieved.
• As of December 31, 2024, FBCC's asset coverage calculated in accordance with the 1940 Act was 189%.
• The company will not make any investment, directly or indirectly, in coal-related companies, oil or gas reserves or invest in portfolio companies primarily engaged in directly investing in the exploration for, or the production of, coal, oil and gas reserves.

Sentiment

Score: 6

Explanation: The document is factual and informative, presenting both positive and negative aspects of the company's performance and risks. The sentiment is neutral overall.

Positives

• FBCC's investment strategy focuses on sourcing private debt opportunities, prioritizing non-competitive capital, optimizing risk/return profiles, and maintaining downside protection.
• The company has a diversified portfolio across various industries, including Business Services, Healthcare, and Industrials.
• The company has access to a large pool of uninvested private equity capital likely to seek additional capital to support private investments.
• The company has access to refinancing activities that will provide continued opportunities to extend capital to middle market companies.
• The company has lower default rates and higher recovery rates in the middle market.
• The company has a favorable pricing environment in the loan market.

Negatives

• FBCC may be obligated to pay its Adviser incentive compensation even if it incurs a net loss due to a decline in the value of its portfolio.
• The time and resources that individuals and the executive officers of our Adviser devote to us may be diverted and we may face additional competition due to the fact that neither our Adviser nor its affiliates is prohibited from raising money for or managing another entity that makes the same types of investments that we target.
• A significant portion of our investment portfolio is recorded at fair value as determined in good faith by our Adviser and, as a result, there is uncertainty as to the value of our portfolio investments.
• Shares of our Common Stock will not be listed on an exchange or quoted through a quotation system for the foreseeable future, if ever. Therefore, stockholders will have limited liquidity and may not receive a full return of their invested capital if they tender shares of our Common Stock.
• The amount of any distributions we pay is uncertain. Our distributions to our stockholders may exceed our earnings. Therefore, portions of the distributions that we pay may represent a return of capital which will lower a stockholders tax basis in its shares and reduce the amount of funds we have for investment in targeted assets.

Risks

• The time and resources that individuals and the executive officers of our Adviser devote to us may be diverted, and we may face additional competition due to the fact that neither our Adviser nor its affiliates is prohibited from raising money for or managing another entity that makes the same types of investments that we target.
• Our fee structure may induce our Adviser to make speculative investments or incur debt.
• Our Adviser can resign on 60 days notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business, and results of operations.
• Our ability to achieve our investment objective depends on our Advisers and its affiliates ability to manage and support our investment process. If our Adviser were to lose any members of its senior management team, our ability to achieve our investment objective could be significantly harmed.
• Because our business model depends to a significant extent upon relationships with investment banks, business brokers, loan syndication and trading desks, and commercial banks, the inability of our Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
• Our failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a BDC.
• Regulations governing our operation as a BDC and RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have an effect on our growth.
• Our ability to enter into transactions with our affiliates is restricted.
• Our investments in portfolio companies may be risky, and we could lose all or part of our investment.
• The lack of liquidity in our investments may adversely affect our business.
• Price declines in the large corporate leveraged loan market may adversely affect the fair value of debt securities we hold, reducing our net asset value (NAV) through increased net unrealized depreciation.
• Our investments are subject to interest rate risk.
• Our debt investments are subject to prepayment or refinancing risk.
• We may from time to time incur contingent liabilities in connection with an investment that may adversely affect us.
• We generally will not control our portfolio companies and may co-invest with third parties.
• The effect of global climate change may impact the operations of our portfolio companies.
• We have entered into revolving credit facilities that contain various covenants which, if not complied with, could accelerate repayment under such credit facilities, thereby materially and adversely affecting our liquidity, financial condition, results of operations and our ability to pay distributions to our stockholders.
• Because we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us.
• Shares of our Common Stock will not be listed on an exchange or quoted through a quotation system for the foreseeable future, if ever. Therefore, stockholders will have limited liquidity and may not receive a full return of their invested capital if they tender shares of our Common Stock.
• We are not obligated to complete a liquidity event by a specified date; therefore, it will be difficult to sell shares of our Common Stock.
• Our stockholders may experience dilution in their ownership percentage, which could reduce the overall value of their investment.
• A significant portion of our investment portfolio is recorded at fair value as determined in good faith by our Adviser, and, as a result, there is uncertainty as to the value of our portfolio investments.
• The amount of any distributions we pay is uncertain. Our distributions to our stockholders may exceed our earnings. Therefore, portions of the distributions that we pay may represent a return of capital which will lower a stockholders tax basis in its shares and reduce the amount of funds we have for investment in targeted assets. A return of capital is a return of the initial investment in the Company rather than earnings or gains derived from our investment activities. We may not be able to pay distributions, and our distributions may not grow over time.
• Our Board of Directors may change our operating polices and strategies without prior notice or stockholder approval, the effects of which may be adverse.
• We may be subject to corporate-level U.S. federal taxes if we fail to maintain our qualification as a RIC.
• We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
• You may have current tax liability on distributions you elect to reinvest in our Common Stock but would not receive cash from such distributions to pay such tax liability.
• The capital markets are currently in a period of disruption and economic uncertainty. Such market conditions have adversely affected debt and equity capital markets, which have had, and may continue to have, an impact on our business and operations.
• Inflation and supply chain risk could adversely impact our portfolio companies and our results of our operations.
• Efforts to comply with the Sarbanes-Oxley Act will involve significant expenditures, and non-compliance with the Sarbanes-Oxley Act may adversely affect us.
• Terrorist attacks, acts of war, global or regional conflicts (such as those in the Middle East and Eastern Europe), natural disasters, disease outbreaks or pandemics may impact our portfolio companies and harm our business, operating results and financial condition.
• We are highly dependent on information systems and systems failures or interruption could significantly disrupt our business, which may, in turn, affect our ability to pay dividends and other distributions; and
• Our business could suffer in the event our Adviser or any other party that provides us with services essential to our operations experiences system failures or cyber-incidents or a deficiency in cybersecurity.

Future Outlook

The company intends to seek a liquidity event for its stockholders within four years following the end of the Initial Closing Period, which has been extended by two one-year extensions by the Board of Directors.

Industry Context

The document provides insight into the competitive landscape for BDCs investing in middle-market companies, noting increased competition from other BDCs, investment funds, and traditional financial services companies.

Related Party Transactions

• The company has entered into an investment advisory agreement with Franklin BSP Capital Adviser L.L.C., an affiliate of Benefit Street Partners L.L.C.
• The company has entered into an administration agreement with Benefit Street Partners, pursuant to which Benefit Street Partners provides the company with office facilities and administrative services.

Stakeholder Impact

• The document provides information relevant to shareholders regarding the company's performance, investment strategy, and risks.
• The document provides information relevant to employees regarding the company's code of ethics and compliance policies.

Next Steps

• The company intends to declare and pay distributions on a quarterly basis.
• The company intends to seek a liquidity event for its stockholders within four years following the end of the Initial Closing Period, which has been extended by two one-year extensions by the Board of Directors.

Key Dates