FS Investment increases debt financing arrangement to $700 million

By Angela McDaniels

Tacoma, Wash., Oct. 1 - FS Investment Corp. amended its debt financing agreement with JPMorgan Chase Bank, NA, London Branch to increase the amount of debt financing available under the arrangement to $700 million from $400 million, according to an 8-K filing with the Securities and Exchange Commission.

The company has the arrangement through two special-purpose, bankruptcy-remote subsidiaries, Locust Street Funding LLC and Race Street Funding LLC.

Locust Street

In connection with the increase, FS Investment may sell from time to time additional loans in its portfolio with a market value of about $500 million to Locust Street.

The amendment closed on Wednesday. On that day, Locust Street paid about $380 million to buy some loans from FS Investment.

Once the financing arrangement is fully ramped, the total amount of loans held by Locust Street is expected to be about $1.3 billion.

The loans held by Locust Street will secure the obligations of Locust Street under class A floating-rate notes due Oct. 15, 2023 issued and to be issued by Locust Street from time to time to Race Street at par.

The total principal amount of class A notes to be issued by Locust Street from time to time was increased to $840 million from $560 million.

From time to time, JPMorgan will purchase class A notes held by Race Street at 83% of par. Subject to certain conditions, the maximum principal amount of class A notes that may be purchased by JPMorgan is $840 million. Accordingly, the maximum amount payable at any time to Race Street will not exceed $700 million.

On a quarterly basis, Race Street will repurchase the class A notes sold to JPMorgan and subsequently resell those notes to JPMorgan. The final repurchase transaction must occur no later than Oct. 15, 2016. The repurchase price paid by Race Street to JPMorgan will be equal to the price paid by JPMorgan plus 3.25% interest.

Beginning Oct. 15, 2014, Race Street is allowed to reduce (based on certain thresholds) the principal amount of class A notes subject to the JPMorgan agreement. Such reductions, and any other reductions of the principal amount of class A notes, will be subject to breakage fees equal to the present value of 1.25% per year over the remaining term of the JPMorgan agreement applied to the amount of the reduction.

If the market value of the loans held by Locust Street securing the class A notes declines by an amount greater than 27% of their initial aggregate purchase price (the "margin threshold"), Race Street will have to post cash collateral with JPMorgan in an amount at least equal to the amount by which the market value of the loans at that time is less than the margin threshold. If this happens, Race Street plans to borrow funds from FS Investment to satisfy the collateral requirement.

Borrowings under the revolver will be one-month Libor plus 75 basis points.

Race Street

In connection with the increase to the debt financing amount, FS Investment may sell from time to time additional loans in its portfolio with a market value of about $600 million to Race Street. The loans purchased by Race Street will secure its obligations under the JPMorgan facility.

On Wednesday, FS Investment sold loans to Race Street for a purchase price of about $535 million.

In connection with the amendments, on Wednesday, Locust Street issued $66 million principal amount of class A notes to Race Street. Including this issuance, Race Street has purchased $626 million of class A notes from Locust Street and subsequently sold them to JPMorgan for $521.7 million of proceeds.

FS Investment is a business development company based in Philadelphia.

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