NEUTRAL (FSIC, $9.82)
Strong Origination Platform with Good Asset Quality but Limited Growth Prospects - Initiating With A NEUTRAL Rating And $11 Price Target.
November 3, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of FS Investment Corporation (FSIC) with a NEUTRAL rating and $11 price target. FSIC is the public BDC of the Franklin Square family, which includes three BDCs that are non-traded. FSIC has $4.0 billion of investments and the entire platform has $15.4 billion in assets under management (AUM). This is advantageous for FSIC as the company has SEC exemptive relief to co-invest among all four BDCs. FSIC is sub-advised by GSO, the credit platform of Blackstone (NYSE: BX-NR-$34.59). GSO, with $81 billion in AUM, is one of the largest alternative asset managers in the world. GSO has its own independent underwriting process usually done simultaneously with FSIC’s own underwriting process. Under the GPO (Group Purchasing Organization), which all of FSIC’s portfolio companies receiving direct originations are eligible to enroll in, Blackstone will assist the portfolio companies in bundling supply orders together and assist them in realizing cost savings. This further augments the pipeline for direct originations and is a differentiating factor from FSIC’s peers. While the company is only 46.3% first lien by fair value, attachment point leverage is reasonable at 4.8x, which has risen from 4.0x as the company has continued to increase its direct originations relative to broadly syndicated loans. FSIC’s nonaccruals have not breached 50 bps of fair value going back to 2012 although the company’s large energy exposure (12% of portfolio fair value as of 6/30/15) is something that we think will test the ability of the portfolio to withstand significant stress. Our $11 price target implies an estimated 2016 P/NII (Price/NII) of 11.1x, dividend yield of 8.1%, and P/NAV (Price/NAV) of 1.09x compared to the BDC sector averages of 8.4x, 11.8%, and 0.84x, respectively.
* Adjusted NII = NII + capital gains incentive fee + excise taxes + other one-time items
Source: S&P Capital IQ, National Securities Corporation Estimates
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