8-K: FS Specialty Lending Fund Plans NYSE Listing Through Closed-End Fund Conversion

FS Specialty Lending Fund announces plans to list its common shares on the NYSE by converting to a closed-end fund, pending shareholder approval.

Summary

• FS Specialty Lending Fund's Board has approved a plan to list common shares on the NYSE before the end of 2025.
• The Fund will convert from a business development company (BDC) to a closed-end fund registered under the Investment Company Act of 1940.
• This conversion will occur through a merger with New FS Specialty Lending Fund, a newly organized Delaware statutory trust.
• Shareholders will vote on the reorganization at a special meeting expected later this year.
• A reverse share split of 6-for-1 will be implemented around May 15, 2025, to meet NYSE listing requirements.
• FS Investments will acquire EIG's interest in the investment adviser, FS/EIG Advisor, LLC, which will be renamed FS Specialty Lending Advisor, LLC.
• The base management fee will be reduced from 1.75% to 1.50% of gross assets upon listing, with an additional waiver of 0.15%, resulting in an effective fee of 1.35%.
• The adviser will waive a portion of the income incentive fee, reducing it from 20% to 10% subject to an annualized hurdle rate of 6.0% upon listing.
• Enhanced quarterly distributions are expected for Q1 and Q2 2025, based on an annualized rate of 12.5% of the Fund's NAV.
• Following the listing, the fund expects to target a monthly or quarterly distribution, representing an annualized distribution rate of 9.0% to 9.5% of FSSL's NAV.
• Beginning in January 2026, FSSL expects to declare and pay distributions monthly, subject to a listing occurring in 2025 and board approval.

Sentiment

Score: 7

Explanation: The document is generally positive, outlining a plan to enhance shareholder liquidity and reduce fees. However, there are inherent risks and uncertainties associated with the listing process and market conditions.

Positives

• Listing on the NYSE provides shareholders with potential liquidity.
• Reduction in base management fee from 1.75% to an effective 1.35% of gross assets upon listing.
• Reduction in income incentive fee from 20% to 10% subject to an annualized hurdle rate of 6.0% upon listing.
• The fund will maintain the same investment objectives and strategy, except for BDC-specific requirements.
• The fund is targeting a competitive annualized distribution rate of 9.0% to 9.5% of NAV post-listing.
• The fund is transitioning to a diversified credit strategy, reducing reliance on energy sector investments.
• FS Investments Global Credit Team will continue to manage the fund, bringing their expertise and experience.

Negatives

• Shareholder approval is required for the reorganization and listing.
• The listing is subject to market conditions and final board approval, creating uncertainty.
• The fund may trade at a discount to its net asset value after listing.
• Enhanced quarterly distributions will cease following the listing.
• The reverse share split, while necessary for listing requirements, may be perceived negatively by some investors.
• The fund is undergoing a transition, which may introduce short-term volatility.

Risks

• Changes in the economy due to geo-political risks could impact performance.
• Disruptions to the Fund's operations or the economy due to hostilities, terrorism, natural disasters, or pandemics could affect results.
• Future changes in laws or regulations could impact the Fund.
• Unexpected costs could arise during the reorganization and listing process.
• The Fund may not be able to complete the reorganization or list on the NYSE.
• The common shares may trade at a lower price than anticipated on the NYSE.
• Failure to list the common shares on a national securities exchange is a risk.

Future Outlook

The Fund anticipates listing on the NYSE before the end of Q4 2025, subject to market conditions, shareholder approval, and final Board approval, and expects to transition to monthly distributions beginning in January 2026, contingent on a successful listing and board approval.

Management Comments

• Management believes that listing the shares of the Fund as a registered closed-end fund will be in the best interest of Fund shareholders.
• Management believes a public listing offers a well-balanced liquidity solution providing current shareholders with near-term access to liquidity, while preserving the opportunity for long-term value appreciation for those who choose to remain invested.

Industry Context

The move to a diversified credit strategy and a public listing aligns with a broader trend of investment funds seeking to enhance liquidity and broaden their investor base. The fund's management team has experience managing similar closed-end funds, such as FS Credit Opportunities Corp. (NYSE: FSCO).

Comparison to Industry Standards

• The fund's targeted annualized distribution rate of 9.0% to 9.5% is competitive with large, credit-focused closed-end fund peers.
• The fund's expected level of borrowings (debt-to-equity of 0.25x-0.4x) is consistent with closed-end fund peers and below the regulatory limit applicable to closed-end funds (0.5x debt-to-equity).
• FS Credit Opportunities Corp. (NYSE: FSCO) is a comparable fund managed by the same team that has delivered strong returns since its listing on the NYSE in November 2022.
• The fund's asset size of $2.1 billion would rank it as one of the largest listed credit-focused closed-end funds, providing significant visibility in the public market.

Stakeholder Impact

• Shareholders: Potential for increased liquidity and reduced fees, but also risk of trading at a discount to NAV.
• Management: Continued management by FS Investments Global Credit Team.
• Adviser: FS Investments will acquire full ownership of the investment adviser.
• Employees: No significant changes expected.

Next Steps

• File a registration statement containing a proxy statement/prospectus with the SEC.
• Conduct a 6-for-1 reverse share split in mid-May 2025.
• Commence shareholder proxy solicitation in late June 2025.
• Hold a special shareholder meeting in the third quarter of 2025 to vote on the reorganization.
• Complete the listing on the NYSE in late Q3 or early Q4 2025, subject to various approvals and conditions.

Key Dates

Keywords

listing, closed-end fund, reverse share split, NYSE, reorganization, distributions, FS Specialty Lending Fund, BDC, investment company act, management fees