OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Rating (IDR), secured debt rating, and unsecured debt rating for FS Investment Corp (FSIC) at 'BBB-'. The Rating Outlook is Stable.

These actions are being taken in conjunction with a broader industry review, which includes 10 business development companies (BDCs). For more commentary on the broader sector review, please see the release, Fitch Takes Several Negative Rating Actions Following BDC Peer Review, available at www.fitchratings.com.

KEY RATING DRIVERS

The rating affirmations reflect the strength of FSIC's relationships with Franklin Square Capital Partners and GSO Capital Partners (a subsidiary of The Blackstone Group; Long-term IDR 'A+'), low leverage, modest portfolio concentrations, strong asset quality, consistent operating performance, investment portfolio liquidity, improved funding flexibility as a result of the recent public unsecured debt issuances and strong dividend coverage.

Rating constraints reflect the company's relatively limited performance track record, given its inception since the onset of the financial crisis, which makes it difficult to assess management's middle market underwriting acumen through a credit cycle. This is mitigated, in part, by the stable performance of the BDC since its inception, as well as GSO's strong and established track record in credit. Other rating constraints include FSIC's outsized historical growth and elevated repayment activity, which creates vintage concentration to periods of aggressive credit conditions, the valuation impact on balance sheet leverage, unproven access to the equity markets, and an inability to retain capital due to distribution requirements.

Leverage, as measured by debt to equity, amounted to 0.79(x) at Dec. 31, 2014, which is modestly above the firm's targeted range of 0.70x - 0.75x, due largely to the completion of its tender offer for \$250 million of stock following its public listing. Fitch expects leverage levels to decline over the near-term, as proceeds from portfolio realizations are used to repay a portion of outstanding borrowings. That said; BDC leverage ratios could be inflated by realized or unrealized valuation marks, resulting from yield spread movements or asset quality deterioration, particularly as access to the equity markets may continue to be uncertain, with many firms trading below net asset value.

Asset quality trends have been strong since inception, supported, in part, by market conditions. FSIC had their first non-accrual in 2Q14, which amounted to 0.3% of the portfolio at value at year-end 2014, but Fitch believes credit metrics are at unsustainably low levels longer-term.

The company continues to focus on the senior part of the capital structure, with first and second lien senior debt and senior bonds accounting for 78.3% of the investment portfolio at YE14. Exposure to equity investments, which can experience meaningful valuation volatility, was 7.7% at Dec. 31, 2014, which was well-below the peer average. Still, this metric may tick-up in coming quarters, given recent preferred equity commitments to aircraft leasing and solar financing businesses. Fitch would expect a material increase in equity exposures to be counterbalanced with a decline in the leverage target.

The investment portfolio is generally in-line with the peer average in terms of diversity. Top ten investments accounted for 35.2% of assets and 64.7% of equity at Dec. 31, 2014. Portfolio concentrations have risen in recent years, while the overall size of the investment portfolio has remained static and leverage has increased. Fitch believes concentrations will remain near current levels going forward.

FSIC's exposure to energy accounted for approximately 9.8% of its portfolio at Sept. 30, 2014, according to Fitch's calculations, which was slightly below the peer average. However, Fitch conservatively estimates its exposure to oil & gas more specifically was 8.3% of its portfolio, which was slightly above the peer average, although FSIC disclosed direct exposure of less than 4% at Dec. 31, 2014. American Energy was its largest exposure, accounting for 3.4% of its assets, at year-end 2014. Fitch conducted a stress test on the firm's exposure along with the rest of the peer group, and views the impact of valuation declines on the firm's leverage as manageable.

FSIC's core earnings declined modestly in 2014 as the firm managed a relatively stable asset base and dealt with tough underwriting conditions and some non-recurring costs associated with its public offering. Net investment income (NII) declined 1.3% in 2014, or 7.2% adjusting for incentive accruals not currently payable in cash and the management fee waiver. Net income declined 26.7% year over year, given a decline in realized gains and an increase in unrealized portfolio depreciation, particularly in 4Q14, given loan spread widening and declines in oil prices. NII yields are below the peer average, given the firm's senior focus and exposure to lower-yielding liquid market assets, but total returns are peer-superior, as FSIC has generated \$174.4 million of cumulative net realized gains since inception.

FSIC's funding profile improved meaningfully in 2014, with the issuance of two public unsecured term debt issuances. The firm issued \$400 million of five-year notes in July, with a 4.0% coupon and another \$325 million of five-year notes in December with a 4.25% coupon. Unsecured debt accounted for 38.9% of FSIC's debt at year-end 2014. Fitch views the firm's access to the unsecured debt markets favorably and expects the company to seek to extend debt maturities opportunistically over time. At year-end 2014, FSIC had no debt maturities until December 2015, when the Broad Street facility comes due. The facility had \$59.2 million of borrowings available at year-end 2014. Fitch believes FSIC will extend the maturity of the facility or refinance the borrowings with term issuance or availability on the corporate revolver.

FSIC's liquidity profile is considered sound with \$96.8 million of balance sheet cash, and \$236.2 million of availability on various secured funding facilities, subject to borrowing base requirements, at Dec. 31, 2014. Additionally, cash flows from investment repayments and exits were significant in 2014, amounting to \$2.1 billion. Additionally, a portion of the portfolio is considered relatively liquid, with 6% of the portfolio being invested in broadly syndicated deals at YE14.

Cash earnings coverage of regular dividends, which adjusts for non-cash incentive payment accruals, was approximately 89.5% in 2014 or 103.2% when realized gains are included. Dividend coverage would have been higher adjusting for cash realizations of non-cash income accruals, non-recurring fees associated with the public listing, and the termination of the Arch Street and Walnut Street financing facilities. The dividend is further supported by the presence of spillover income, amounting to approximately \$0.63 per share, or 70.7% of annualized dividends, which Fitch believes provides stability to the dividend over the medium-term, particularly in a challenging operating environment.

The Stable Outlook reflects Fitch's expectations for relative operating consistency, improved earnings yields, given the continued shift into less-liquid direct originations and the absence of non-recurring expenses, and the maintenance of good asset quality, modest leverage, and strong dividend coverage.

RATING SENSITIVITIES

Negative rating action for FSIC 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 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 over the outlook horizon of 12 - 24 months, particularly given the challenging market backdrop, but could develop over time with increased funding flexibility, including continued extension of the debt maturity profile and the ability to opportunistically issue public equity for growth capital. Other positive rating factors could include a continuation of solid asset quality performance, particularly given the competitive market environment.

FSIC is an externally managed business development company, organized in December 2007 and commencing investment operations in January 2009. As of Dec. 31, 2014, the company had investments in 118 portfolio companies amounting to approximately \$4.2 billion.

Fitch has affirmed the following ratings with a Stable Outlook:

FS Investment Corporation
--Long-term Issuer Default Rating at 'BBB-';
--Secured Debt Rating at 'BBB-'; and
--Unsecured Debt Rating at 'BBB-'.