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FS Investment : Re-Schedules Shareholders Meeting For Second Time

BDCs:
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On July 12, 2017 FS Investment (FSIC) filed an 8-K regarding the status of its shareholder meeting, and vote on the issue of whether to allow the Investment Advisor and Board, to issue stock below Net Asset Value. Here are the details,  a very brief analysis and the BDC Reporter’s view about how this is likely to play out. However, we also mention an alternative outcome that might cause some drama where FSIC’s stock price might be concerned.

DETAILS

FSIC initially scheduled a vote by shareholders on the subject of authorizing below NAV issuance for June 14, 2017. Insufficient votes appear to have been cast, so the meeting was adjourned and re-scheduled for July 12. However, on the new meeting date, FSIC still did not have sufficient votes to call the election, and a second re-convened shareholders meeting has now been set for July 27, 2017.


ANALYSIS

The huge BDC, managed by an even larger asset management organization, appears to be having the problem many BDCs face when seeking shareholder approval of a measure: getting enough investors to pay attention.

FSIC shareholders should expect a barrage of emails, phone calls and smoke signals in the days ahead to allow their Investment Advisor to close out this process.


OUR VIEW

Unlike TICC Capital (TICC), which recently lost the vote to issue stock below NAV, the BDC Reporter expects shareholders – when they can be dragged away from their beach reading – to approve the proposed measure.

As we’ve pointed out before, the winners here are the Proxy Solicitation organizations BDCs use and the losers FSIC shareholders themselves who have to pay for all the unwanted solicitations.

Inaction

We still don’t expect FSIC will take the risk of annoying its shareholder base by actually taking advantage of the proposed “blank cheque” (as the BDC Reporter unerringly calls these shareholder approvals).

The FS Investment organization (previously known as Franklin Square) is so busy, with fingers in so many capital raising pies, why bother getting a bad mark with investors at FSIC ?

As a result, the Investment Advisor will have wasted management time and shareholders some dollars on an essentially pointless exercise.

What If ?

However, if the proposal does get approved AND FSIC raises new equity below book value shareholders should expect a big drop in FSIC’s stock price.

We believe the market would wonder why FSIC – which has not even yet cut its distribution as everyone has been anticipating – needed to engage in emergency maneuvers.

FSIC’s stock is at just over $9.0 a share, while the latest reported NAV is at $9.45.

Common sense would suggest that if FSIC came to market today, the price would be somewhere between $8.6-$8.75, or a discount of nearly 10% to NAV at worst.

The price drop that might ensue could be greater: to $8.0 a share or so.

It’s a long shot risk/opportunity but investors will want to keep an eye on what happens on July 27th and thereafter, including the upcoming earnings release.

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