FS KKR Capital Corp (FSK) 2015 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the FS Investment Corporation's fourth-quarter and full-year 2015 earnings conference call.

(Operator Instructions)

Please note that this conference call is being recorded. At this time JIm Ballan, Senior Vice President of Investor Relations and Capital Markets, will proceed with the introduction. Mr. Ballan, you may begin.

Thanks, Karen. Good morning and welcome to the FS Investment Corporation's fourth-quarter and full-year 2015 earnings conference call. Please note that FS Investment Corporation may be referred to as FSIC, the Fund, or the Company throughout the call. Today's conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in the press release that FSIC issued February 29, 2016. In addition, FSIC has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter and year ended December 31, 2015.

A link to today's webcast and the presentation is available on the Investor Relations section of the Company's website at www.FSInvestmentCorp.com under presentations and reports. Please note that this call is the property of FSIC. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

I would like to call your attention to the customary disclosure in FSIC's filings with the SEC regarding forward-looking statements. Today's conference call includes forward-looking statements and we ask that you refer to FSIC's most recent filings with the SEC for important factors that could cause actual results or outcomes to differ materially from these statements. FSIC does not undertake to update its forward-looking statements unless required to do so by law.

In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSIC's fourth-quarter earnings release that was filed with the SEC on February 29, 2016. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the Company's latest SEC filings, please visit FSIC's website.

Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer of FSIC; Brad Marshall, Senior Portfolio Manager of FSIC and the Senior Managing Director at GSO/Blackstone, FSIC's investment sub-advisor; and Jerry Stahlecker, President of FSIC. We will then open the call for questions. I will now turn the call over to Michael.

Thanks, Jim, and welcome, everyone, to the FS Investment Corporation fourth-quarter and full-year 2015 earnings conference call. We appreciate your interest in FSIC. On today's call I'll provide a summary of FSIC's key highlights and strategies, after which Brad will provide an overview of our investment activity. Then Jerry will discuss our financial results in greater detail.

Our fourth-quarter results reflect our high-quality portfolio, differentiated model, strong partnership with GSO/Blackstone and the scale of our platform. Net investment income for the fourth quarter 2015 was $0.23 per share compared to $0.26 per share for the third quarter of 2015 and $0.28 per share for the fourth quarter of 2014. Adjusted net investment income for the fourth quarter was $0.24 per share compared to $0.21 per share for the third quarter of 2015 and $0.24 per share in the fourth quarter of 2014.

Continued financial market volatility in the fourth quarter contributed to meaningfully weaker secondary prices and wider clearing yields across the corporate credit markets. This impacted FSIC's net asset value which, as of December 31, 2015, was $9.10 per share, down from $9.64 per share as of September 30, 2015, and $9.83 per share as of December 31, 2014. It is important to note that we, along with our Board of Directors, work with independent third-party valuation service providers to mark 100% of the investment portfolio market each quarter. In periods of market volatility such as today, NAV volatility should be expected given the frequency and depth of the valuations.

While secondary market volatility may place downward pressure on asset values, we believe credit quality remains strong and are pleased with the overall health of the portfolio. As of December 31, 2015, no investments were nonaccrual. Our core investment strategies include direct originations and opportunistic investments, which at December 31, 2015, made up approximately 97% of the fair value of the investment portfolio, with direct originations representing 85% of the fair value of the portfolio and opportunistic investments representing 12% of the fair value of the portfolio.

During the fourth quarter we continued to grow our investment and specialty finance operating companies, including Global Jet Capital. Since the fourth quarter of last year, Global Jet Capital announced the completion of its acquisition of GE Capital's $2.3 billion fixed-wing corporate aircraft financing portfolio in the Americas, with a portion of the financing being provided by FSIC and other BDCs managed by affiliates of Franklin Square. We view this transaction as a significant step forward in our specialty finance platform strategy and we are pleased that the scale of our BDC platform enabled us to support an acquisition of this size for our portfolio company. I will now turn the call over to Brad.

Thank you, Michael. In the fourth quarter we continued to leverage the capital base of the Franklin Square BDC platform, the sourcing and credit expertise of GSO's direct-lending platform and the broad and deep knowledge and resources of Blackstone to identify structure and fund investments with attractive return profiles. During the fourth quarter, total investment activity, including unfunded commitments, was $604 million, all of which was committed to direct originations. Total sales and repayments of $511 million resulted in net investment activity of approximately $93 million during the fourth quarter of 2015. Direct originations exited during the fourth quarter were approximately $319 million, driven primarily by the prepayment of our junior debt investments in FullBeauty brands and [Coda] Distributions.

The gross portfolio yield prior to leverage of new direct originations funded during the quarter was 10.6% compared to the gross portfolio yield prior to leverage of direct originations exited during the quarter of 9.9%, both based on amortized costs. We are taking advantage of the recent credit market sell off to improve FSIC's overall credit profile while maintaining or improving the overall yield of the investment portfolio by moving up the capital structure. We've been rotating out of second lien and subordinated debt positions into first lien senior secured debt investments. As of December 31, 2015, first lien senior secured debt represented 54% of the fair value of our total portfolio, up from 47% as of September 30, 2015, while the percentage of second lien and subordinated debt investments based on fair value declined from 33% as of September 30, 2015, to 26% as of December 31, 2015.

Due to spread widening and the advantages of having a large pool of capital from which to provide solutions, we were able to maintain the gross portfolio yield of all income producing assets prior to leverage of 10.4% from the prior quarter while de-risking the portfolio by moving up the capital structure. The gross portfolio yield prior to leverage of new funded direct originations during the fourth quarter of 2015 was 12.3% based on amortized costs and excluding non-income-producing assets, up from 9.3% during the prior quarter. The gross portfolio yield prior to leverage of all funded income-producing direct originations based on amortized costs was 10.4% as of December 31, 2015, compared to 10.1% as of September 30, 2015.

As of December 31, 2015, the average leverage of our direct originations through the respective tranche in which we invested, excluding equity and collateralized securities, was 4.9 times, up from 4.7 as of September 30, 2015. The increase was driven primarily by a decline in EBITDA of our existing energy positions and other select portfolio companies. All of our directly originated portfolio companies have access to Blackstone's group purchasing organization program, which leverages the collective buying power of Blackstone's portfolio companies to reduce operating expenses. This potentially leads to improved EBITDA margins to the participants and ultimately better credit metrics for our portfolio companies and stronger performance for FSIC.

As of February 12, 2016, FSIC portfolio companies that participated in the program had an average savings on addressed spend of 16.7%, increasing EBITDA for those companies by an average of 3.4%. GSO also has operating expertise which we have been able to utilize in restructurings where we partner with both portfolio companies to help them achieve their financial goals. In this way, we can be a catalyst for positive change and value creation to enhance returns for FSIC stockholders.

Examples of this include Allen Systems, Sorenson Communications and Kodak, which have all seen significant improvements in earnings since we took a more active role in management. While we tend to avoid stressed or distressed investments, when credits under perform we welcome the opportunity to employ our significant operating and restructuring expertise, which enables us to partner with portfolio companies to create additional operational efficiencies in an effort to mitigate losses, create above-average recovery rate and maximize returns.

The fourth quarter was especially impactful for the energy investments in our portfolio. Energy-related investments as of December 31, 2015, comprised approximately 9% of FSIC's investment portfolio based on fair value, compared to 10% in the prior quarter. As of December 31, 2015, 87% of our energy investments were based on fair value or in three direct originations, FourPoint, Plains Offshore and Ascent Resources. In these direct originations, we are generally at the top of the capital structure and benefit from very strong asset coverage.

Before I discuss our direct originations, I wanted to spend a moment on the market. The current downturn in energy began in the late summer of 2014. For much of 2015, the market was active and many companies were able to access the debt and equity capital markets in order to protect liquidity, de-lever and maintain budgets. In the fourth quarter of 2015 and through the first quarter of 2016, declining commodity prices have placed further downward pressure on energy asset prices.

We are highly confident in the credit worthiness of our energy-related direct originations. Our valuations reflect the impact of spread widening in the secondary market during the quarter as well as company-specific considerations including, among other factors, asset quality, liquidity and cost of capital. For FourPoint, the company has strong asset base in the Mid-Continent region and what we believe to be an excellent management team. FourPoint has reduced capital spending to protect its liquidity position while continuing to produce from profitable wells. Our exposure is primarily in the senior debt of the company and there is only a small amount of debt above us in the capital structure.

Importantly, Chesapeake Energy announced on February 24 that it reached an agreement to sell certain assets in the Mid-Continent to FourPoint for approximately $385 million. This pending transaction, which FourPoint plans to fund with equity, would provide further cash flow and asset protection to our debt position upon closing and would position the company as one of the largest in the western Anadarko Basin. As of December 31, 2015, our debt investment in FourPoint was marked at approximately 77.8% of par and our equity investment was marked at approximately 74% of costs. As evidenced by our comments, we believe the company is taking appropriate and deliberate steps to strengthen its business and balance sheet.

For Plains Offshore, the company-required CapEx going forward is expected to be minimal and we believe the company's profitable down to $20 per barrel of oil. There is significant common equity in the business below us, which we believe provides FSIC strong asset coverage in our preferred equity position, which is junior to only a small reserve base revolver in the capital structure. As of December 31, 2015, our warrant positions were out of the money in a preferred equity investments in Plains, having a cost basis of $65.8 million, was marked at 112.5% of par. We see similar value in a coverage in this asset we see in FourPoint.

Finally, for Ascent, we discussed last quarter of our intention to work closely with the company during this challenging environment. To that end, the company recently announced a successful exchange with its convertible debt holders and raised $177 million of equity. The exchange position of the company could further exchange its convertible debt into a combination of debt and equity contingent upon the company raising at least $500 million in additional equity capital. If successful, these transactions will significantly de-lever the company and provide it with significant liquidity to develop what we believe to be an attractive acreage in the Utica Basin. As of December 31, 2015, our debt and common equity investments in Ascent were marked at 89.5% of par and 21% of cost, respectively. We believe the recently closed and potential transactions will further strengthen our secured debt investment, which sits at the top of the capital structure in Ascent.

Since the end of the fourth quarter, SandRidge Energy deferred interest payments due to -- on its unsecured bonds and announced that the company has hired advisers to review financial alternatives. Given these events, we have placed our investment in SandRidge on nonaccrual, which as of December 31, 2015, represented 0.1% of our investment portfolio based on fair value. We are actively working with the company and other second lien holders and continue to believe that the company's proved reserves hold significant value.

We recognize that the energy markets present unique challenges relative to the broader market. However, we will continue to work with and support our portfolio companies as we have demonstrated with FourPoint and Ascent and continue to view certain areas of the energy markets as interesting. Given GSO's experience and expertise in this sector, we remain confident that FSIC is well positioned to capitalize on these opportunities.

I also want to provide an update on significant progress we have made in expanding the breadth of our relationship with our specialty finance operating companies in the fourth quarter. FSIC and other BDCs managed by affiliates of Franklin Square originated over $460 million in uni-tranche investments in partnership with NewStar in the quarter. Since the origination of our relationship with NewStar, Franklin Square's BDCs have provided approximately $2 billion in financing across 11 deals, of which FSIC's participation was $340 million as of year end.

Since the close of the fourth quarter, Global Jet Capital announced the completion of its acquisition of GE Capital's $2.3 billion fixed-wing corporate aircraft financing portfolio in the Americas. This acquisition helped solidify Global Jet Capital's position as one of the leading global corporate aircraft leasing businesses. As of December 31, 2015, FSIC's investment in Global Jet was over $100 million. We believe this transaction demonstrates how the scale of our overall platform and the sourcing scales and investment expertise of GSO creates the potential for FSIC stockholders to obtain strong risk-adjusted returns. I will now turn the call over to Jerry to provide additional details on our results.

Thanks, Brad. Net investment income for the fourth quarter of 2015 was $0.23 per share compared to $0.26 per share in the third quarter of 2015 and $0.28 per share for the fourth quarter of 2014. More importantly, adjusted net investment income for the fourth quarter was $0.24 per share compared to $0.21 per share in the third quarter of 2015 and $0.24 per share in the same period of last year. The adjustments to net investment income reflect the accrual of local and excise taxes and the reversal of the accrual for the capital gains incentive fee. Adjusted NII exceeded distributions during the quarter by approximately $0.018 per share and by $0.14 per share in the full year 2015.

In the fourth quarter of 2015, we declared a regular quarterly distribution of approximately $0.22 per share, which was paid on January 5, 2016. After taking that distribution into account, FSIC's total accumulated undistributed net investment income on a tax basis was approximately $0.64 per share as of December 31, 2015. For the first quarter of 2016, we declared a regular quarterly distribution of approximately $0.22 per share to be paid on or about April 4, 2016, to stockholders of record on March 23, 2016.

NAV was $9.10 per share as of December 31, 2015, down from $9.64 per share as of September 30, 2015. Unrealized depreciation during the fourth quarter totaled approximately $114.3 million, or $0.47 per share. Realized losses of $0.08 per share during the fourth quarter were driven primarily by the termination of our preferred equity position in Milagro and the restructurings of our debt investments in Logan's Roadhouse and JW Aluminum. As of December 31, 2015, we had approximately $1.8 billion in total debt outstanding with a weighted average effective interest rate of 3.96%.

At quarter end, FSIC's debt-to-equity ratio was 83%, up from 78% as of September 30, 2015. The increase in leverage was driven primarily by mark-to-market unrealized depreciation on the investment portfolio as total debt outstanding as of December 31, 2015, was unchanged compared to the third quarter of 2015. While this is above our target range, we are managing our investment pipeline with an eye toward directing a portion of our capital from repayments to reduce borrowings and return FSIC's leverage ratio to within our targeted range. Especially given recent spread widening in the secondary market, the timing and volume of repayments and refinancings are difficult to predict on a quarterly basis. We do expect our reduction in borrowings to be in line with the pace of repayments over the next two months.

In recent weeks, our stock price has declined meaningfully below our NAV as of December 31, 2015, and many investors have inquired about the possibility of stock repurchases. When considering stock repurchases, we must take into account not only our stock price but also our investment grade rating, leverage and liquidity. At this time, we believe we are best able to create long-term value for our investors by taking advantage of investment opportunities and minimizing our cost of debt capital to ensure the safety and our investment grade rate. We will continue to assess the most efficient use of capital for our stockholders going forward.

In the fourth quarter, Franklin Square and directors and officers of FSIC purchased approximately $2.4 million in shares of the Company's common stock. Since the close of the fourth quarter, Franklin Square and directors and officers of FSIC have purchased approximately an additional $4.3 million in shares, bringing the total purchased since the beginning of 2015 to almost $11.3 million. In addition, Franklin Square and members of FSIC's management continue to have 10b5-1 trading plans in place.

Looking to the first quarter, given our commitment to reduced leverage, we expect fee income in the first quarter to be lower than more recent quarters. Because fee income is generally driven by investment and prepayment activity, it can be less predictable quarter over quarter and therefore should be evaluated on a multi-quarter basis. I'll now turn the call back to Michael for closing remarks.

Thanks, Jerry. We at Franklin Square believe our experience, scale and partnership with GSO/Blackstone will continue to benefit FSIC investors. We're the largest manager of BDCs, with more than $15.7 billion in BDC assets under management. We believe our continued personal investment in FSIC serves to further align our interest with our stockholders. I would like to thank you all for joining us today. With that, we will now open the call for questions.

(Operator Instructions)

Your first question comes from the line of Jonathan Bock of Wells Fargo.

Morning, and thank you for taking my questions.

Jerry, when you wrapped, you were talking a bit about fee income. And curious -- the repayment activity was meaningful in the quarter, and that allowed a very nice fee driver in your earnings. Walk us through how you would view dividend coverage going forward.

And while you say fees are recurring, a lot of the questions that institutional investors will ask is: As you approach the higher end of leverage and are likely limited to churn, we've seen fee income stagnate. So, how do you think of dividend coverage in light of what would likely be lower fee income going forward, generally speaking?

I think, for the first quarter, Jon, given the pace of repayments, we do expect fee income to be on the lighter side of what has historically been our quarterly range. But I think we've consistently said that we expect, on an annualized basis, fee income to look pretty similar to what it's historically been, in the $30 million to $40 million per year of fee income that we have historically seen.

We can only talk about publicly announced repayments, but we've got $250 million of investments where the companies have publicly announced that they are being sold, and we expect repayments over the next couple of months. And we expect other opportunities or other repayments as well that may not have been publicly announced.

We'll use some of that to bring our leverage back in line with our targeted range. And then the other amounts will be available to fund new investments.

So, for each of those repayments, we expect to generate some fee income from that. And then to the extent that we recycle that into new investments, we will see fee income on those new deals as well.

Fair enough. Then another question -- it ties to energy exposure and leverage. Right now, you mentioned that you are focused on defending the investment grade rating, and folks can likely see through that's also a reason not to repurchase shares as a result of the impact that it has on leverage. How do you view new investment activity in light of potential stresses that you are seeing in energy?

You explained it well, but what we are interested in is, if we're going to see additional pressures to those markets going forward, and that likely drives leverage higher, would it be safe to say that you're going to pull back the reins on new investment activity in order to make sure that you don't get sideways with the rating agencies?

Jonathan, it's Brad; I'll tackle that one.

First of all, as it relates to our energy positions in both Ascent and FourPoint, which is the majority of our exposure on a mark-to-market basis, both companies have announced meaningful equity contributions into those businesses that should accrue to the benefit of our debt position. And I think there will be more announcements in the future, but I think we are very optimistic about directionally how we should think about the valuation of those securities.

As it relates to investment activity, Jerry touched on this a little bit, but we do see a lot of recycling of capital happening into the latter part of this quarter, into the early part of next quarter, which will allow us to partly de-lever the portfolio to be in line with our investment grade rating, but also allow us to put additional capital to work and continue to generate good investment opportunities. So, I take a little bit of an opposite view to what you are suggesting, and I think we're going to have a decent amount of activity going into the second quarter.

Okay. Great. Thank you for taking my questions.

Your next question comes from the line of Rick Shane of JPMorgan.

Good morning, guys. Can you hear me?

Yes.

You guys talk a little bit about Plains Offshore being profitable down to about $20 a barrel. I'm curious if that is dependent upon any hedges that might be expiring? And really, more generally, can you lead that into a conversation about any hedges within the energy portfolio that we need to consider rolling off over the next 12 to 18 months?

Thanks, Rick. On Plains, I would think about that as they have a cost basis of about $7.50 per barrel of oil for producing a barrel. So, it's a very low cost basis.

All the capital goes in on the front end to develop the resource, and then once it's flowing it's a very low cost basis. There is no hedges in place at Plains, so the profitability, which we outlined, is not contingent on hedges rolling off. So, we feel very good about that position.

On Ascent -- Ascent has some of the lowest-cost wells in the US in the Utica, and are not dependent on hedges being in place or rolling off.

On FourPoint, they have a few hedges in place, but remember, this company is deciding to use their liquidity for acquisitions as opposed to developing their reserves. They think prices will invariably rise, and that is what the equity is coming in to effectuate. I think that's the short answer.

In some of the -- in the rest of the portfolio, which makes up, I think, a maximum of $30 million of fair value right now, they're smaller positions. They all have different hedging profiles, and I would say they are probably more challenged, but it's a very small portion of the portfolio.

Got it, that helps. Obviously, we were really focused on the big three, so that's all we need. Thank you.

Your next question comes from the line of Henry Coffey of Sterne, Agee.

Good morning, and thank you for taking my question.

When we look at the 12/31 marks, and then we look at where, quote, the market is today, what percentage of your unrealized losses in the fourth quarter were really, in general terms, were really tied to adverse credit conditions, and how much was driven just by market factors? And then if we roll forward to today, what would be the impact today, given where, quote, spreads and the high-yield loan index has gone and other factors?

I would say 50% of the marks taken in the fourth quarter were market related and 50% were credit related. Rolling into this quarter I would say it would be more like 75% market related and 25% credit related. We haven't finished our -- the quarter -- but that's generally what I would say at this point.

And just maybe as a segue into the how we are looking at overall performance in the markets generally, we see a -- fourth quarter obviously had some challenges. The US economy clearly has slowed a little bit. But as we look across various industries outside of energy and utilities, metals and mining, and some other subsectors, we don't see a lot of weakness. We see deceleration, but we don't see declines.

Maybe just to give you an example, we track about 1,000 portfolio companies at GSO. If you look at tech, for instance, they had 10% year-over-year growth. But in the quarter over quarter, it was only 3%. So, you don't see declines, but you do see some deceleration, which would be a broad theme across the portfolio.

Just shifting gears, there's been a lot of talk about capital ratios and buybacks. Assuming that you can continue to sustain enough net operating income at your current dividend level, it's not a universal given that you should buy back your stock whenever it is below tangible book value. What kind of dialogue are you having with the institutions on that front? I know what retail investors prefer, but -- ?

I think our preference now is obviously to utilize the capital that we have within our portfolio, whether it is to manage the leverage and look at new opportunities, which we believe are significantly accretive in this marketplace. I think we all know now that the risk-adjusted returns are much different than they were 12 or 18 months ago.

So, we see accretive opportunities in the markets generally. And what we've done, and what we will continue to do, is look to the executive team and our Directors at FSIC to purchase shares pursuant to plans or otherwise, and continue to be in the market that way.

We'll reevaluate that as the market changes, as our book value changes. We've traded within a range, although a little bit down recently. So, we'll monitor it, but now we think the best use of our capital is to continue to take advantage of opportunities in the market, manage our leverage, and use our capital outside the fund to make purchases, as we've done quarter to quarter, and will continue to do.

This is an unfair question, so you can duck around it a little bit, but -- and I'll use corporate-speak. There is a very large BDC out there with a lot of assets for sale. Is there a way, if you deem that an opportunity, that you or the Franklin Square family could actually fund those assets? Towards that end, what are your thoughts on putting the two funds together?

There's certainly a lot of opportunities out there in the marketplace. And we and GSO are active in looking at those with the increase of activism, with the need for folks to perhaps exit into a different kind of market today than we've seen over the last couple of years. We are approached, I think, with every opportunity based upon the size and scale of our BDCs, and the position that GSO plays generally in credit markets. We will be opportunistic.

We will look at everything that's in the marketplace, but we don't need to reach. We are a little different than some of the other folks, in that we have scale. We continue to raise capital in the private markets.

We don't need to grow in the public market, either by equity issuances or acquisitions, so we can be very opportunistic. And if the right opportunity comes along, we would certainly look to that opportunity.

So, if something like that dropped in your lap, you'd be able to fund it inside the family, but not in the public?

If something dropped in our lap that we thought was accretive, we would look for opportunities to take advantage of that. And if it is in our shareholders' best interest, we'll do that.

Great, thank you.

Sure, thank you.

Your next question comes from Christopher Testa of National Securities Corporation.

Hi, good morning. Thanks for taking my questions.

Just with the average EBITDA being down a bit quarter over quarter -- pretty significantly actually -- is that a function of just more direct originations or were you seeing more opportunities in smaller companies during the quarter?

It's actually neither. For our new funded direct originations, the leverage was actually lower because, as Brad mentioned on the call, we were taking proceeds of second lien repayments and moving up the capital structure, and deploying that in first lien investments that had similar yields to the second lien positions we were rolling out of.

The overall change in portfolio leverage, I think, incrementally moved from 4.7 to 4.9. Really it's just in some declining EBITDA from just some operational issues with a few portfolio companies that caused the overall metric to widen out.

On the attachment point leverage, are you seeing -- what are you seeing in terms of structure right now in the market? I know that obviously spreads have widened and you are seeing better opportunities pricing-wise. What are you seeing with the structures on the first and the second liens that you are issuing now, currently?

I would say that if I was to generalize, attachment points are probably down 0.5 turns. Certain structures, certain covenants are back on the table, as a broad overview of what we're seeing in the market. And typically the bigger the deal, the harder it is to execute in the market. So, we are probably seeing most stress in the market for those types of deals.

Is there any appetite to sell down the more liquid holdings that you have -- the senior secured bonds and whatnot -- in order to fund more first lien credits to de-risk the portfolio when to be able to do so while spreads remain wide?

Yes, we look at the portfolio every day, and weigh that against our opportunity set. And where we can see good swap opportunities, we execute those trades. It's part of our active management philosophy, and we'll continue to do that to find ways to de-risk the portfolio.

Okay. I know that you get a lot of questions, obviously, on the energy exposure, which you gave great color on. What are you seeing in terms of capital goods and the EBITDA trends at those companies? Is it, I guess, sensible to look at these companies and compare them to industry bellwethers like Joy Global, Caterpillar, et cetera?

Capital goods is a fairly broad category, which is why it is such a big percentage of the portfolio. It captures aerospace and defense; it captures building products and many industrial type businesses.

I would say, if I kind of lump all those together and I look broadly across FSIC and if I look broadly across GSO generally, I would say that sector is up quarter over quarter and year over year. And we are seeing actually some transactions in that category. Flanders is being sold to a Japanese company called Daikin, and we are seeing some other transactions that haven't been publicly announced in that sector. So, I would say flat to up.

Consumer services, which is our next biggest category, I would say would be flat. And then software and services, I think I highlighted an example early on that, that is also still up but decelerating. Generally, across the portfolio, as I mentioned, we are seeing, outside the energy and utilities, and metals and mining, and some subsectors of retail, we're seeing the portfolio in pretty good shape.

Great. Thank you for taking my questions.

Your next question comes from the line of David Chiaverini of Cantor Fitzgerald.

Thanks, good morning. I have a three-part question on Ascent Resources.

The first part -- the mark at December 31 -- so, at 90% of par, does that incorporate the anticipated $500 million equity infusion? The second part is, if the equity infusion doesn't happen, for whatever reason, how much would the mark come down? Thirdly, what is the likelihood of the $500 million equity infusion occurring?

Okay, what I would say, David, is that the 89.5% mark on the debt factors in the equity capital that's being announced and as part of the debt restructuring. The additional equity that's coming into the business, potentially coming into the business, has yet to be announced, is kind of uncertain in its total quantum, and so it's not fully marked into the current trading price or quoted price of the -- the marked price of the debt security.

Your second question, I've already forgotten.

It was if -- ?

The likelihood that that other money comes in, I think, was -- David, it's Jerry. I think that we feel -- I'd be careful because we are insiders and we are restricted. But I think that we are confident in the Company's plans.

Okay, thanks for that.

My other question is just going back to the comment about growing your specialty finance platform strategy. I'm just curious what you may be considering outside of aviation?

We've looked at some real estate platforms, more kind of structured real estate, and we've looked at some other type of leasing type businesses similar to Global Jet. Without going into too much detail, I think, given the state of the capital markets for these types of businesses, it seems like a very interesting time to expand into some of these strategies, but probably not worth going into too much detail at this point.

Got it. That's it for me. Thanks very much.

Thanks, David.

(Operator Instructions)

You have a follow-up question from the line of Jonathan Bock of Wells Fargo.

I was curious, as it relates to 15-02, clearly, guys, you have a large private business that is also impacted by fiduciary rule and a number of things on the non-traded side of the spectrum. I wanted to know how you're prepping and likely preparing for the eventual enactment of this on client statements where people see no longer a stock price but the actual NAV less the fees at which they've purchased, and how you think that impacts the Business going forward, and indirectly impacts the public BDC?

Thank you, Jon. First, this does not affect FSIC where we are fully funded and in the markets. FSIC II has closed as well, and FSIC III is limited in its fundraising.

It's really FSIC IV -- and by way of background, 15-02 is a FINRA regulation often called the Account Statement Regulation. Under this regulation, which is effective on April 11 of this year, the purchase price will reflect the commission. So, instead of -- if someone spent $100, the opening account statement would not say $100; it would be $100 less certain expenses paid.

We think generally it is a positive development, Jon. We think that it will enhance transparency. We've always focused on transparency. It will bring commissions down, which we also think is a positive development for the industry.

We have launched FSIC IV with a trail commission structure. We've brought the commission down below 9%; so, we think it's good for the markets. We've continued to raise capital, and expect that we will continue to raise capital.

We do think it's going to be much more difficult for new entrants to enter the market. We think with our brand, with our reach, with the number of advisors that we have done business with, we'll be able to maintain our sales. We think it is going to be much harder for new folks to enter.

Department of Labor regulation, also called the Fiduciary Standard, will also impact the industry. Again, we are prepared for that, and think that we can sell through it. We'll make it -- we do believe it provides a bit of a competitive advantage for the folks that are already in the markets.

Any follow-up on that, Jon?

No. I think we are good. Thank you again.

Thank you, Jon.

Your next question comes from the line of Mike Connors of Ensign Peak Advisors.

Hey, guys, can you hear me?

Yes. Hey, Mike, how are you?

I apologize for beating a dead horse here, but I had a couple nuance questions about the FourPoint position. First, and you guys may not be able to comment on this, but could you talk about the pref equity raise that they are doing? Number one, are you planning to participate pro rata with your equity there, and how dilutive that will be to the equity? Number two, did I hear you correctly that you have that equity marked at $0.75?

I believe it's [74%] as of year end, but I will double check that number for you.

While Jerry's looking up that, I think what we can say on the FourPoint acquisition of the Chesapeake assets is that they will fund that most likely with equity capital, and they are currently going through the process of putting that capital in place. Probably not much more I can say about it on that, based that it's a private company.

Where we have the position marked today --

It is currently marked -- the equity is marked at 74% of par. The equity investment is obviously much smaller and much less significant in relation to our debt investment.

And so, while we would expect to suffer dilution in the equity investment regardless of whether we participate, just because the new equity will dilute the existing equity, we do think it is credit enhancing for our debt position, which is significantly larger than the equity. And we would expect overall to benefit from the transaction.

During the fourth quarter, we marked down our equity 42%.

Okay, understood, thank you very much. Appreciate it.

There are no further questions at this time.

Great, thank you all for your time this morning. Look forward to our next quarterly call, and appreciate your support and loyalty.

This concludes today's conference call. All participants may now disconnect.