FRANKLIN BSP LENDING CORPORATION The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements ofFranklin BSP Lending Corporation (the "Company," "FBLC," "we," or "our") and the notes thereto and other financial information included elsewhere in this Quarterly Report on Form 10-Q. We are externally managed by our adviser,Franklin BSP Lending Adviser, L.L.C. (the "Adviser"). Forward Looking Statements This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies, or expectations. Forward-looking statements are typically identified by words or phrases such as "trend," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "potential," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve," and similar expressions, or future conditional verbs such as "will," "would," "should," "could," "may," or similar expressions. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. In addition to factors previously disclosed in ourU.S. Securities and Exchange Commission ("SEC") reports and those identified elsewhere in this report, including the "Risk Factors" section, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
•our future operating results;
•changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including the effect of the COVID-19 pandemic and recent supply chain disruptions;
•the impact of geopolitical conditions, including revolution, insurgency,
terrorism or war, including those arising out of the ongoing conflict between
•the impact that the discontinuation of LIBOR and the transition to new reference rates could have on the value of our LIBOR-indexed portfolio investments and the cost of borrowing under our credit facilities;
•the impact of the investments that we expect to make;
•the ability of our portfolio companies to achieve their objectives;
•our contractual arrangements and relationships with third parties;
•our expected financings and investments;
•the adequacy of our cash resources and working capital;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•our repurchase of shares;
•actual and potential conflicts of interest with our Adviser and its affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we invest;
•the ability to qualify and maintain our qualifications as a regulated investment company ("RIC") and a business development company ("BDC");
•the timing, form, and amount of any distributions;
•the impact of fluctuations in interest rates on our business;
•the valuation of any investments in portfolio companies, particularly those having no liquid trading market;
•the impact of changes to generally accepted accounting principles, and the impact to FBLC; and
•the impact of changes to tax legislation and, generally, our tax position.
Our actual results could differ materially from those implied or expressed in
the forward-looking statements for any reason, including the factors set forth
in "Item 1A. Risk Factors" and elsewhere in this Quarterly Report.
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--------------------------------------------------------------------------------Overview
We are an externally managed, non-diversified closed-end management investment company incorporated inMaryland inMay 2010 that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended ("the 1940 Act"). In addition, we have elected to be treated for tax purposes as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Our investment activities are managed by the Adviser, a subsidiary ofBenefit Street Partners L.L.C. ("BSP") and supervised by our Board of Directors, a majority of whom are independent of the Adviser and its affiliates. As a BDC, we are required to comply with certain regulatory requirements. Our investment objective is to generate both current income and to a lesser extent long-term capital appreciation through debt and equity investments. We invest primarily in senior secured loans, and to a lesser extent, mezzanine loans, unsecured loans, and equity of predominantly privateU.S. middle-market companies. We define middle market companies as those with annual revenues of less than$1 billion , although we may invest in larger or smaller companies. We may also purchase interests in loans or corporate bonds through secondary market transactions. We expect that each investment generally will range between approximately 0.5% and 3.0% of our total assets. As ofSeptember 30, 2022 , 75.5% of our portfolio was invested in senior secured loans. Senior secured loans generally are senior debt instruments that rank ahead of subordinated debt and equity in priority of payments and are generally secured by liens on the operating assets of a borrower which may include inventory, receivables, plant, property, and equipment. Mezzanine debt is subordinated to senior loans and is generally unsecured. We may also invest in the equity and junior debt tranches of collateralized loan obligation investment vehicles ("Collateralized Securities " or "CLO's"). EffectiveApril 1, 2022 , we have elected to not invest, directly or indirectly, in coal-related companies, or invest in portfolio companies primarily engaged in directly investing in the exploration for, or the production of, coal at the discretion of the Adviser; provided, however, we shall be considered in compliance with this investment restriction if, from this date forward, we do not invest in any portfolio company that has a Global Industry Classification Standard designation of "coal and consumable fuels."
Financial and Operating Highlights
(Dollars in millions, except per share amounts) AtSeptember 30, 2022 : Investment Portfolio$ 2,782.2 Net assets 1,621.4 Debt (net of deferred financing costs) 1,174.0 Net asset value per share 7.38
Portfolio Activity for the Nine Months Ended
Purchases during the period 335.8
Sales, repayments, and other exits during the period 328.9
Number of portfolio companies at end of period 149
Operating results for the Nine Months Ended
Net investment income per share 0.43
Distributions declared per share 0.45
Net increase in net assets resulting from operations per share 0.34
Net investment income 88,466
Net realized and unrealized loss, net of change in deferred taxes (32,333)
Net increase in net assets resulting from operations 69,659
Portfolio and Investment Activity
During the nine months endedSeptember 30, 2022 , we made$335.8 million of investments in new and existing portfolio companies and had$328.9 million in aggregate amount of sales and repayments, resulting in a net increase in investments of$6.9 million for the period. The total portfolio of debt investments at fair value consisted of 93.5% bearing variable interest rates and 6.5% bearing fixed interest rates. 91 -------------------------------------------------------------------------------- Our portfolio composition, based on fair value atSeptember 30, 2022 was as follows: September 30, 2022 Weighted Average Percentage of Current Yield for Total Total Portfolio Portfolio (1) Senior Secured First Lien Debt 67.6 % 9.5 % Senior Secured Second Lien Debt 7.9 11.2 Subordinated Debt 4.5 12.5 Debt Subtotal 80.0 9.8 Collateralized Securities (2) 1.1 18.1 Equity/Other (3) 7.9 16.1 FBLC Senior Loan Fund, LLC (3)(4) 11.0 8.0 Total 100.0 % 10.2 % ______________
(1) Includes the effect of the amortization or accretion of loan premiums or discounts.
(2) Weighted average current yield forCollateralized Securities is based on the estimation of effective yield to expected maturity for each security as calculated in accordance with Accounting Standards Codification ("ASC") Topic 325-40-35, Beneficial Interests in Securitized Financial Assets (see Note 2 - Summary of Significant Accounting Policies).
(3) Weighted average current yield for Equity/Other may be based on actual or annualized income, where applicable.
(4) As ofSeptember 30, 2022 ,FBLC Senior Loan Fund, LLC's holdings consisted of 91.4% senior secured debt, of which 88.4% represented senior secured first lien debt. On a look-through basis toFBLC Senior Loan Fund, LLC , our portfolio is comprised of approximately 86.2% senior secured debt as ofSeptember 30, 2022 , of which 78.6% represented senior secured first lien debt. During the year endedDecember 31, 2021 , we made$1,932.8 million of investments in new and existing portfolio companies and had$1,898.1 million in aggregate amount of sales and repayments, resulting in net investments of$34.7 million for the period. The total portfolio of debt investments at fair value consisted of 91.5% bearing variable interest rates and 8.5% bearing fixed interest rates. Our portfolio composition, based on fair value atDecember 31, 2021 was as follows: December 31, 2021 Weighted Average Percentage of Current Yield for Total Total Portfolio Portfolio (1) Senior Secured First Lien Debt 65.9 % 7.6 % Senior Secured Second Lien Debt 8.8 9.1 Subordinated Debt 4.2 11.0 Debt Subtotal 78.9 7.9 Collateralized Securities (2) 1.3 15.0 Equity/Other (3) 8.8 17.1 FBLC Senior Loan Fund, LLC (3)(4) 11.0 8.0 Total 100.0 % 8.8 % ______________
(1) Includes the effect of the amortization or accretion of loan premiums or discounts.
(2) Weighted average current yield forCollateralized Securities is based on the estimation of effective yield to expected maturity for each security as calculated in accordance with Accounting Standards Codification ("ASC") Topic 325-40-35, Beneficial Interests in Securitized Financial Assets (see Note 2 - Summary of Significant Accounting Policies).
(3) Weighted average current yield for Equity/Other may be based on actual or annualized income, where applicable.
(4) As ofDecember 31, 2021 ,FBLC Senior Loan Fund, LLC holdings consisted of 92.7% senior secured debt. On a look-through basis toFBLC Senior Loan Fund, LLC , our portfolio is comprised of approximately 86.2% senior secured debt as ofDecember 31, 2021 . 92
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Portfolio Asset Quality
Our Adviser employs an investment rating system to categorize our investments.
In addition to various risk management and monitoring tools, our Adviser grades
the credit risk of all debt investments on a scale of 1 to 5 no less frequently
than quarterly. This system is intended primarily to reflect the underlying risk
of a portfolio debt investment relative to the inherent risk at the time the
original debt investment was made (i.e., at the time of acquisition), although
it may also take into account under certain circumstances the performance of the
portfolio company's business, the collateral coverage of the investment and
other relevant factors.
Loan Rating Summary Description
Debt investment exceeding fundamental performance expectations and/or
1 capital gain expected. Trends and risk factors since the time of
investment are favorable.
2 Performing consistent with expectations and afull return of principal and
interest expected. Trends and risk factors are neutral to favorable. All
investments are initially rated a "2".
3 Performing debt investment requiring closer monitoring. Trends and risk
factors show some deterioration.
4 Underperforming debt investment. Some loss of interest or dividend
expected, but still expecting a positivereturn on investment. Trends and
risk factors are negative.
5 Underperforming debt investment with expected loss of interest and some
principal.
The weighted average risk rating of our investments based on fair value was
2.1 and 2.1 as of September 30, 2022 and December 31, 2021 , respectively. As of
September 30, 2022 , we had five portfolio companies on non-accrual with a total
amortized cost of $44.8 million and fair value of $10.2 million , which
represented 1.6% and 0.4% of the investment portfolio's total amortized cost and
fair value, respectively. As of December 31, 2021 , we had six portfolio
companies on non-accrual with a total amortized cost of $42.5 million and fair
value of $12.2 million , which represented 1.5%, and 0.4% of the investment
portfolio's total amortized cost and fair value, respectively. Refer to Note 2 -
Summary of Significant Accounting Policies - in our consolidated financial
statements included in this report for additional details regarding our
non-accrual policy.
OnJanuary 20, 2021 ,FBLC and Cliffwater Corporate Lending Fund ("CCLF") formed a joint venture,FBLC Senior Loan Fund, LLC (the "SLF"), that invests primarily in senior secured loans, and to a lesser extent may invest in mezzanine loans, unsecured loans and equity of predominantly privateU.S. middle-market companies. SLF was formed as aDelaware limited liability company and is not consolidated by FBLC for financial reporting purposes. FBLC provides capital to SLF in the form of LLC equity interests. At formation, FBLC and CCLF owned 87.5% and 12.5%, respectively, of the LLC equity interests of SLF. For both, quarter and year ended,September 30, 2022 andDecember 31, 2021 , FBLC and CCLF owned 79.8% and 20.2%, respectively, of the LLC equity interests of SLF. Profit and loss are allocated based on each members' ownership percentage of the joint venture's net asset value. SLF has an Administrative and Loan Services Agreement with BSP, an affiliate of the Company, pursuant to which BSP provides certain operational and valuation services for SLF's investments; as well as certain agreements with third-party service providers. FBLC and CCLF each appoint two members to SLF's four-person board of members. All material decisions with respect to SLF, including those involving its investment portfolio, require unanimous approval of a quorum of the board of members. Quorum is defined as (i) the presence of two members of the board of members; provided that at least one individual is present that was elected, designated or appointed by each member; (ii) the presence of three members of the board of members; provided that the individual that was elected, designated or appointed by the member with only one individual present shall be entitled to cast two votes on each matter; and (iii) the presence of four members of the board of members; provided that two individuals are present that were elected, designated or appointed by each member. As part of the initial contribution to SLF, FBLC contributed$751.8 million of assets including$664.2 million of investments and$42.4 million of cash as well as$446.9 million worth of liabilities including the Citi Credit Facility (as defined in Note 5) debt of$344.4 million in exchange for$304.9 million of equity in SLF. As ofSeptember 30, 2022 andDecember 31, 2021 , FBLC's investment in SLF consisted of equity contributions of$304.9 million . Below is a summary of SLF's portfolio as ofSeptember 30, 2022 andDecember 31, 2021 . A listing of the individual investments in SLF's portfolio as of such dates can be found in "Note 3 - Fair Value of Investments" in the notes to the accompanying consolidated financial statements (dollars in thousands): 93 --------------------------------------------------------------------------------
September 30, 2022 December 31, 2021
(Unaudited)
Total assets $ 993,561 $ 1,195,960
Total investments (1) $ 873,144 $ 1,088,337
Weighted Average Current Yield for Total Portfolio (2) 8.7 % 5.4 %
Number of Portfolio companies in SLF 163 172
Largest portfolio company investment (1) $ 18,943 $ 27,965
Total of five largest portfolio company investments (1) $ 86,032 $ 113,297
_____________________
(1) At fair value
(2) Includes the effect of the amortization or accretion of loan premiums or discounts.
Below is certain summarized financial information for SLF as of
Selected Statement of Assets and Liabilities
Information September 30, December 31,
2022 2021
(Unaudited)
ASSETS
Investments, at fair value (amortized cost of
$943,942 and $1,085,170 , respectively) $ 873,144 $ 1,088,337
Cash and other assets 120,417 107,623
Total assets $ 993,561 $ 1,195,960
LIABILITIES
Revolving credit facilities (net of deferred
financing costs of $1,737 and $2,488 , respectively) $ 576,813 $ 631,562
Secured borrowings 65,302 94,737
Other liabilities 21,076 71,008
Total liabilities $ 663,191 $ 797,307
MEMBERS' CAPITAL
Total members' capital $ 330,370 $ 398,653
Total liabilities and members' capital $ 993,561 $ 1,195,960
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