Fitch Expects to Rate FS Investment Corp's Senior Unsecured Notes 'BBB-'

NEW YORK--()--Fitch Ratings expects to assign a rating of 'BBB-' to FS Investment Corporation's (FSIC) senior unsecured institutional debt issuance. Fitch does not expect there to be a material impact on the company's leverage levels as a result of the issuance, as proceeds will be used largely to repay borrowings on secured credit facilities.

Fitch views the firm's ability to access the institutional bond market favorably, as it provides FSIC with enhanced funding flexibility.

KEY RATING DRIVERS

The expected rating is equalized with the ratings assigned to FSIC's existing senior unsecured debt as the new notes are expected to rank equally in the capital structure. The equalization of the unsecured ratings with the secured debt rating reflects FSIC's relatively low leverage, its focus on senior debt investments, and Fitch's expectation that proceeds from the issuance will be used to repay a portion of secured debt outstanding, thus increasing the amount of unsecured funding in the capital structure.

FSIC's existing ratings reflect the strength of its relationships with Franklin Square Capital Partners and GSO Capital Partners (a subsidiary of The Blackstone Group; long-term Issuer Default Rating [IDR] 'A+'), acceptable leverage, relatively low portfolio concentrations, strong asset quality, limited exposure to equity investments, consistent operating performance, investment portfolio liquidity, improved access to equity markets as a result of the recent public offering and strong dividend coverage.

At Sept. 30, 2014, approximately 20.9% of the company's debt was considered by Fitch to be unsecured and the debt to equity ratio was 0.78x. While leverage is modestly above the firm's articulated target, given the equity tender offer in May 2014, Fitch believes the metric will decline over the near term with portfolio repayments.

RATING SENSITIVITIES

The ratings expected to be assigned to the unsecured notes are equalized with FSIC's IDR, and therefore would be expected to be sensitive to any changes in FSIC's IDR.

FSIC's Rating Outlook is Stable, but Fitch has a negative outlook on the business development company (BDC) sector as industry underwriting conditions remain competitive, as evidenced by tight yield spreads, higher leverage, and weaker covenants. Origination volume in the industry has remained strong, which means FSIC, and other BDCs, have meaningful exposure to 2013 and 2014 vintages, which Fitch believes could lead to asset quality deterioration down the road.

For FSIC, negative rating actions could be driven by an extended increase in leverage above the targeted range of approximately 0.70x-0.75x, resulting from increased borrowings or material realized or unrealized depreciation, and/or a meaningful increase in the proportion of equity holdings without a commensurate decline in leverage. A spike in non-accrual levels, an inability to refinance near-term debt maturities, or weaker cash income dividend coverage would also be viewed unfavorably from a ratings perspective.

Positive rating momentum for FSIC is viewed as limited in the near term given Fitch's negative sector outlook. Longer term, positive rating momentum could develop with increased funding flexibility, including an extension of the debt maturity profile, continued access to the public unsecured debt markets, and the ability to opportunistically issue public equity for growth capital. Other positive rating factors would include a continuation of solid asset quality performance, particularly given the competitive market environment.

FSIC is an externally managed BDC, organized in December 2007 and commencing investment operations in January 2009. As of Sept. 30, 2014, the company had investments in 148 portfolio companies amounting to approximately $4.3 billion, at fair value.

Fitch assigns the following expected rating:

FS Investment Corp

--Unsecured debt at 'BBB-(EXP)'.

Fitch currently rates FSIC as follows:

FS Investment Corp

--Long-term IDR 'BBB-'; and

--Secured debt 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Investment Manager and Alternative Funds Criteria' (December 2013).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=933995

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Contacts

Fitch Ratings
Primary Analyst Meghan Neenan, CFA Senior Director
+1-212-908-9121 Fitch Ratings, Inc.
33 Whitehall Street New York, NY 10004
or
Secondary Analyst
Johann Juan
Director
+1-312-368-3339
or
Committee Chairperson
Tara Kriss
Senior Director
+1-212-908-0369
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst Meghan Neenan, CFA Senior Director
+1-212-908-9121 Fitch Ratings, Inc.
33 Whitehall Street New York, NY 10004
or
Secondary Analyst
Johann Juan
Director
+1-312-368-3339
or
Committee Chairperson
Tara Kriss
Senior Director
+1-212-908-0369
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com