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FSIC Reports An Almost Good Q1/17

|Includes: FS Investment Corporation (FSIC)

If Franklin Square Investment Corporation (NYSE:FSIC) had dividend coverage and a better NII/TII ratio, then I would like FSIC. It has a fair amount of good attributes. And the yield (four times 0.22275 divided by 9.45) of 9.43% is above the PWAY. Based on that metric, FSIC was priced for some bad news. And it had some bad news.

NII was above projections - but it was once again below the dividend. Based on the fee income number, the NII was up based on an typical amount of good one time events. Run rate NII may actually be down.

Out of the last 17 quarters, FSIC has had gains in 9. That is better than sector average. LTM NAV is up. The long term NAV trend is acceptable - even if it is lightly negative.

This was a "glass is half full" quarter. The market's reaction should be a yawn. The uncovered dividend is a straw. But eventually, the collection of a lot of straws will break something. This is not a good time for the news to be "nebulous" - because there is more fear in the BDC sector than usual.

Earnings Estimate

  Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year (2017) Next Year (2018)
No. of Analysts 6 6 6 6
Avg. Estimate 0.20 0.21 0.83 0.85
Low Estimate 0.19 0.19 0.79 0.83
High Estimate 0.22 0.22 0.87 0.88
Year Ago EPS -0.05 0.58 1.21 0.83
Revenue Estimate Current Qtr. (Mar 2017) Next Qtr. (Jun 2017) Current Year (2017) Next Year (2018)
No. of Analysts 4 4 4 5
Avg. Estimate 99.10M 103.02M 408.94M 423.36M
Low Estimate 96.43M 97.35M 392.63M 403.72M
High Estimate 101.60M 106.91M 422.74M 441.58M
Year Ago Sales 103.06M 110.21M 422.81M 408.94M
  Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13 Q2-13 Q1-13
Realized & Unrealized Gains 10.803 0.320 65.366 83.317 -62.035 -134.619 -69.045 -41.818 18.777 -78.244 -4.504 11.338 24.183 24.388 -8.155 -27.116 31.747
Realized & Unrealized Gains/share 0.0442 0.0013 0.2683 0.3423 -0.2554 -0.5544 -0.2850 -0.1730 0.0779 -0.3254 -0.0188 0.0444 0.0937 0.0944 -0.0318 -0.1067 0.1256
  Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13
Interest income 86.505 91.782 96.343 94.243 101.197 101.654 100.378 116.491 103.939 107.119 104.823 102.096 104.711 109.907 109.886
Fee income 19.559 14.469 4.214 15.968 1.642 9.685 3.290 25.721 4.696 5.820 10.606 18.450 10.085 6.903 11.975
Dividend income 0 2.727 0.000 0.000 0.224 0.980   5.519   .446 .488 .175   .056 1.446
Total investment income 106.064 108.978 100.557 110.211 103.063 114.763 103.668 147.731 108.939 113.385 115.917 120.721 114.796 116.866 123.307
Net expenses and excise taxes 53.474 57.436 51.554 53.371 53.125 58.612 39.902 54.207 56.986 45.330 55.814 62.748 58.919 64.446 55.535
Net investment income 52.590 51.862 49.003 56.840 49.938 56.151 63.766 93.524 51.649 68.055 60.103 57.973 55.877 52.420 67.772
Investments @ fair value 3.924 3.727 3.938 3.935 3.867 4.029 4.100 4.007 4.162 4.183 4.138 4.227 4.078 4.137 4.201
Wt Av Share Count 244.555 244.016 243.489 243.436 242.847 242.800 242.228 241.653 241.084 240.480 239.549 255.301 260.186 258.263 256.108
TII/share $0.4337 $0.4466 $0.4130 $0.4527 $0.4244 $0.4727 $0.4280 $0.6113 $0.4519 $0.4715 $0.4839 $0.4729 $0.4412 $0.4525 $0.4815
Reported NII/share $0.22 $0.21 $0.20 $0.23 $0.21 $0.23 $0.26 $0.39 $0.21 $0.28 $0.25 $0.23 $0.22 $0.20 $0.26
NII/share my calculation $0.2150 $0.2125 $0.2013 $0.2335 $0.2056 $0.2313 $0.2632 $0.3870 $0.2142 $0.2830 $0.2509 $0.2270 $0.2228 $0.2030 $0.2646
Reported Adjusted NII/share $0.22 $0.23 $0.20 $0.24 $0.21 $0.24 $0.21 $0.35 $0.23 $0.24 $0.25 $0.26 $0.23 $0.24 $0.25
NII/TII ratio 49.58% 47.59% 48.73% 51.57% 49.34% 48.93% 61.51% 63.31% 47.41% 60.02% 51.85% 48.02% 48.68% 44.85% 54.96%
Distributions/share $0.22275 $0.22275 $0.22275 $0.22275 $0.22275 $0.22275 $0.22275 $0.22275 $0.22275 $0.32275 $0.32275 $0.22275 $0.2160 $0.2137
NAV/share $9.45 $9.41 $9.42 $9.18 $8.82 $9.10 $9.64 $9.89 $9.90 $9.83 $10.19 $10.28 $10.28 $10.18 $10.10
Weighted Average Yield 9.2% 9.1% 9.2% 9.3% 9.6% 9.8% 9.9% 9.9% 10.0% 10.0% 10.3% 10.3% 10.3% 10.2% 10.4%
Portfolio Co Leverage New Inv 4.5x 4.8x 4.8x 5.4x 5.0x 4.9x 4.7x 4.8x 4.8x 4.6x 4.6x 4.1x   4.0x
Q4-16 had $5.554 million in excise taxes, which significantly raised expenses that quarter. Q4-15 had $6.056 million. Q4-14 had $5.400 million.
Q4-14 had a $15.662 million reversal in capital gains incentive fees, which significantly lowered expenses that quarter
Q2-15 had a $8.355 million reversal in capital gains incentive fees, lowering expenses, due to a $41.818 million write-down in investments
Q3-15 had a $13.811 million reversal in capital gains incentive fees, lowering expenses, due to a $69.045 million write-down in investments
Adjusted NII excludes the accrual for the capital gains incentive fee, excise taxes; and certain non-recurring operating expenses
  Q1-17 Q4-16 Q3-16 Q2-16 Q1-16 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14
Repurchase agreement none none 650.000 650.000 725.000 800.000 800.000 800.000 950.000 950.000 950.000 950.000 950.000
Unsecured notes 1,071.263 1,070.701 990.333 989.642 988.958 988.274 989.159 1,000.000 725.000 725.000 400.000    
Credit Facility 755.128 619.932 81.286 57.854 32.728 34.625 31.812 32.624 174.000 188.827 564.294 965.686 738.482
Debt 1,829.282 1,693.513 1,721.619 1,697.496 1,746.686 1,822.899 1,820.971 1,832.624 1,849.000 1,863.827 1,914.294 1,915.686 1,688.482
Debt/share 7.4800 6.9402 7.0706 6.9731 7.1925 7.5078 7.5176 7.5837 7.6695 7.7504 7.9912 7.5036 6.4895
Debt/share to NAV 79.15% 73.75% 75.05% 75.96% 81.55% 82.50% 77.98% 76.68% 77.47% 78.84% 78.42% 72.99% 63.13%
Interest expense 19.439 18.817 18.283 18.064 18.894 19.428 19.352 19.048 17.299 19.035 18.940 14.129 12.700
Interest expense/share 0.0795 0.0771 0.0751 0.0742 0.0778 0.0800 0.0799 0.0788 0.0718 0.0792 0.0791 0.0553 0.0488
Interest expense/TII 18.33% 17.27% 18.18% 16.39% 18.33% 16.93% 18.67% 12.89% 15.88% 16.79% 16.34% 11.70% 11.06%
Annualized Int exp/Debt 4.25% 4.44% 4.25% 4.26% 4.33% 4.26% 4.25% 4.16% 3.74% 4.09% 3.96% 2.95% 3.01%
PWAY - Int exp/Debt 495 bps 466 bps 495 bps 504 bps 527 bps 554 bps 565 bps 574 bps 626 bps 591 bps 634 bps 735 bps 729 bps
Effective Rate on borrowings 4.01% 4.2% 4.0% 3.82% 3.76% 3.75% 3.71% 3.60% 3.50% 3.16% 3.06%    
Average Rate on Borrowings       3.98% 3.96% 3.96% 3.96% 3.96% 3.60% 3.53% 3.30%    
FSIC had an ING credit facility @ LIBOR + 2.50; a JPM repurchase agreement @ 3.25%; 2019 notes @ 4.00%; 2020 notes @ 4.25% and 2022 notes @ 4.75%
At 6-30-16, the ING balance was 57.854; JPM at 650.000 2019 at 400.000; 2020 at 325.000 and 2022 at 275.000 million
The ING credit facility matures on 4-03-18. It was initiated on 4-03-14 and cost $3.406 million - amortized over the life of the facility
The 2020 Notes were issued 12-03-14 and the 2022 Notes were issued 4-30-15 - with the percentage expense increased with each issuance
Effective rate and Avrate rate numbers were found in recent 10-Q's - they are all year to date calculations

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.