FS Energy and Power Fund

05/09/2025 | Press release | Distributed by Public on 05/09/2025 13:31

Quarterly Report for Quarter Ending MARCH 31, 2025 (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
___________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2025
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-00841
___________________________
FS Specialty Lending Fund
(Exact name of registrant as specified in its charter)
___________________________
Delaware
27-6822130
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
201 Rouse Boulevard
Philadelphia, Pennsylvania
19112
(Address of principal executive office)
(Zip Code)
Registrant's telephone number, including area code: (215) 495-1150
___________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
¨
¨
x
¨
¨
If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x.
Securities registered pursuant to Section 12(b) Act: None
Title of each class Trading symbol(s) Name on each exchange on which registered
N/A N/A N/A
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The issuer had 455,506,155 common shares of beneficial interest outstanding as of May 1, 2025.
Table of Contents
TABLE OF CONTENTS
Page
PART I-FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2025 (Unaudited) and December 31, 2024
1
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2025 and 2024
2
Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2025 and 2024
3
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2025 and 2024
4
Consolidated Schedules of Investments as of March 31, 2025 (Unaudited) and December 31, 2024
5
Notes to Unaudited Consolidated Financial Statements
18
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
38
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
51
ITEM 4.
CONTROLS AND PROCEDURES
51
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
52
ITEM 1A.
RISK FACTORS
52
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
52
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
52
ITEM 4.
MINE SAFETY DISCLOSURES
52
ITEM 5.
OTHER INFORMATION
52
ITEM 6.
EXHIBITS
53
SIGNATURES
54
Table of Contents
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements.
FS Specialty Lending Fund
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
March 31, 2025
(Unaudited) 		December 31,
2024
Assets
Investments, at fair value
Non-controlled/unaffiliated investments (amortized cost-$1,718,517 and $1,830,451, respectively)
$ 1,690,461 $ 1,790,694
Non-controlled/affiliated investments (amortized cost-$154,089 and $73,338, respectively)
137,100 51,943
Total investments, at fair value (amortized cost-$1,872,606 and $1,903,789, respectively)
1,827,561 1,842,637
Cash and cash equivalents
95,016 202,091
Restricted cash
13,445 36,945
Foreign currency, at fair value (cost-$251)
249 -
Receivable for investments sold and repaid 501 33,895
Interest receivable 15,840 14,383
Dividends receivable 449 330
Unrealized appreciation on swap contracts - 70
Unrealized appreciation on forward foreign currency exchange contracts
123 -
Swap income receivable 286 773
Prepaid expenses and other assets 8 112
Total assets $ 1,953,478 $ 2,131,236
Liabilities
Payable for investments purchased $ 7,321 $ 82,699
Repurchase facility payable (net of deferred financing costs of $2,975 and $3,486, respectively)(1)
397,025 496,514
Unrealized depreciation on swap contracts 190 -
Swap income payable 180 528
Shareholder distributions payable - 34,335
Management fees payable 8,870 8,672
Administrative services expense payable 433 346
Interest payable 1,233 1,365
Trustees' fees payable 164 164
Other accrued expenses and liabilities 3,272 3,157
Total liabilities 418,688 627,780
Commitments and contingencies(2)
Shareholders' equity
Preferred shares, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding
- -
Common shares, $0.001 par value, 700,000,000 shares authorized, 455,506,155 shares issued and outstanding
456 456
Capital in excess of par value 3,129,574 3,129,574
Accumulated earnings (deficit) (1,595,240) (1,626,574)
Total shareholders' equity 1,534,790 1,503,456
Total liabilities and shareholders' equity $ 1,953,478 $ 2,131,236
Net asset value per common share at period end $ 3.37 $ 3.30
_________________________
(1) See Note 9 for a discussion of the Company's financing arrangements.
(2) See Note 10 for a discussion of the Company's commitments and contingencies.
See notes to unaudited consolidated financial statements.
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Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
Three Months Ended
March 31,
2025 2024
Investment income
From non-controlled/unaffiliated investments:
Interest income $ 40,208 $ 61,799
Paid-in-kind interest income 2,493 1,236
Fee income 1,382 412
Dividend income 2,572 4,350
From non-controlled/affiliated investments:
Interest income 1,013 160
Paid-in-kind interest income 752 352
Dividend income 118 -
From controlled/affiliated investments:
Interest income - 881
Paid-in-kind interest income - 60
Total investment income 48,538 69,250
Operating expenses
Management fees 8,870 9,112
Administrative services expenses 1,253 1,535
Share transfer agent fees 793 919
Accounting and administrative fees 178 125
Interest expense(1)
9,081 9,084
Trustees' fees 164 164
Other general and administrative expenses 1,073 1,098
Total operating expenses 21,412 22,037
Net investment income before taxes
27,126 47,213
Federal and state taxes
3 793
Net investment income 27,123 46,420
Realized and unrealized gain/loss
Net realized gain (loss) on investments:
Non-controlled/unaffiliated (5,383) 4,119
Non-controlled/affiliated (3,664) 71
Net change in realized gain (loss) on foreign currency
(24) -
Net realized gain (loss) on swap contracts 409 2,327
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/unaffiliated 11,701 (21,017)
Non-controlled/affiliated 4,406 842
Controlled/affiliated - (14,838)
Net change in unrealized appreciation (depreciation) on swap contracts (260) 196
Net change in unrealized appreciation (depreciation) on foreign currency - (9)
Net change in unrealized appreciation (depreciation) on forward foreign currency exchange contracts
123 -
Total net realized and unrealized gain (loss) 7,308 (28,309)
Net increase (decrease) in net assets resulting from operations $ 34,431 $ 18,111
Per share information-basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share) $ 0.08 $ 0.04
Weighted average shares outstanding 455,506,155 455,506,155
________________________
(1) See Note 9 for a discussion of the Company's financing arrangements.
(2) See Note 4 for a discussion of the offset by FS/EIG Advisor, LLC, the Company's investment adviser, of certain management fees to which it was otherwise entitled during the applicable period.
See notes to unaudited consolidated financial statements.
2
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FS Specialty Lending Fund
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
Three Months Ended
March 31,
2025 2024
Operations
Net investment income $ 27,123 $ 46,420
Net realized gain (loss) on investments, foreign currency and swap contracts
(8,662) 6,517
Net change in unrealized appreciation (depreciation) on investments 16,107 (35,013)
Net change in unrealized appreciation (depreciation) on swap contracts (260) 196
Net change in unrealized appreciation (depreciation) on foreign currency - (9)
Net change in unrealized appreciation (depreciation) on forward foreign currency exchange contracts
123 -
Net increase (decrease) in net assets resulting from operations 34,431 18,111
Shareholder distributions(1)
Distributions to shareholders (3,097) (1,549)
Net decrease in net assets resulting from shareholder distributions (3,097) (1,549)
Total increase (decrease) in net assets 31,334 16,562
Net assets at beginning of period 1,503,456 1,562,055
Net assets at end of period $ 1,534,790 $ 1,578,617
_________________________
(1)See Note 5 for a discussion of the sources of distributions paid by the Company.
See notes to unaudited consolidated financial statements.
3
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FS Specialty Lending Fund
Unaudited Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended
March 31,
2025 2024
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations $ 34,431 $ 18,111
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of long-term investments
(286,924) (331,694)
Paid-in-kind interest (3,245) (1,648)
Proceeds from sales and repayments of long-term investments
314,927 132,117
Net proceeds from sales (purchases) of short-term investments
- (105,513)
Net realized (gain) loss on investments 9,047 (4,190)
Net change in unrealized (appreciation) depreciation on investments (16,107) 35,013
Net change in unrealized (appreciation) depreciation on swap contracts 260 (196)
Net change in unrealized (appreciation) depreciation on forward foreign currency exchange contracts
(123) -
Accretion of discount (2,622) (2,161)
Amortization of deferred financing costs and discount
511 516
(Increase) decrease in receivable for investments sold and repaid 33,394 (2,010)
(Increase) decrease in interest receivable (1,457) (228)
(Increase) decrease in dividends receivable (119) 9
(Increase) decrease in swap income receivable 487 (1,083)
(Increase) decrease in prepaid expenses and other assets 104 195
Increase (decrease) in payable for investments purchased (75,378) (1,007)
Increase (decrease) in swap income payable (348) (191)
Increase (decrease) in management fees payable 198 696
Increase (decrease) in administrative services expense payable 87 304
Increase (decrease) in interest payable
(132) (11)
Increase (decrease) in other accrued expenses and liabilities 115 (1,360)
Net cash provided by (used in) operating activities 7,106 (264,331)
Cash flows from financing activities
Shareholder distributions paid (37,432) (29,289)
Repayments under repurchase facility
(100,000) -
Net cash provided by (used in) financing activities (137,432) (29,289)
Total increase (decrease) in cash and cash equivalents, restricted cash and foreign currency
(130,326) (293,620)
Cash and cash equivalents and restricted cash at beginning of period
239,036 492,758
Cash and cash equivalents, restricted cash and foreign currency at end of period(1)
$ 108,710 $ 199,138
Supplemental disclosure
Non-cash purchases of investments $ (70,418) $ -
Non-cash sales of investments $ 70,418 $ -
Federal and state taxes paid $ 821 $ 1,245
Interest paid
$ 8,702 $ 8,579
_________________________
(1) As of March 31, 2025 and 2024, the company held cash and cash equivalents and foreign currency of $95,265 and $186,949, respectively, and restricted cash of $13,445 and $12,189, respectively. Restricted cash is the cash collateral required to be posted pursuant to the Company's derivative contracts.
See notes to unaudited consolidated financial statements.
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FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments
As of March 31, 2025
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Senior Secured Loans-First Lien-93.9%
Accupac, LLC (r) Pharmaceuticals, Biotechnology & Life Sciences
S+700
2.0% 12/31/29 $ 41,678 $ 40,876 $ 40,897
Accupac, LLC (r) Pharmaceuticals, Biotechnology & Life Sciences
S+700
2.0% 12/31/29 1,045 919 1,025
Accupac, LLC (e)(r) Pharmaceuticals, Biotechnology & Life Sciences
S+700
2.0% 12/31/29 5,223 5,223 5,125
Alegeus Technologies Holdings Corp. (f)(r) Health Care Equipment & Services
S+675
1.0% 11/5/29 29,888 29,207 29,178
American Auto Auction Group, LLC Commercial & Professional Services
S+450
0.8% 12/30/27 23,680 23,680 23,729
Ansira Partners, Inc. (f)(r) Media & Entertainment
S+675
1.5% 7/1/29 35,538 34,637 33,850
Ansira Partners, Inc. (e)(r) Media & Entertainment
S+675
1.5% 7/1/29 3,927 3,927 3,740
APTIM Corp. (f) Commercial & Professional Services
S+750
5/23/29 27,500 27,500 26,950
Archer Acquisition, LLC (f)(r) Equity Real Estate Investment Trusts (REITs)
S+500
1.0% 10/6/29 19,260 19,074 19,092
Array Midco, Corp. (f)(k)(r) Commercial & Professional Services
S+650
3.0% 12/31/29 25,129 24,565 24,658
Array Midco, Corp. (e)(k)(r) Commercial & Professional Services
S+650
3.0% 12/31/29 7,558 7,558 7,416
Auris Luxembourg III S.a r.l (k) Health Care Equipment & Services
S+375
2/28/29 22,745 22,745 22,745
Aveanna Healthcare LLC (f) Health Care Equipment & Services
S+375
0.5% 7/17/28 20,641 18,915 20,293
BCPE North Star US Holdco 2, Inc. Food, Beverage & Tobacco
S+400
0.8% 6/9/28 13,964 13,866 13,663
Brock Holdings III, LLC (f)(k) Capital Goods
S+600
0.5% 5/2/30 8,458 8,307 8,440
CCS Acquisition, LLC (f)(r) Health Care Equipment & Services
S+550
1.0% 12/30/30 31,429 30,884 30,800
CCS Acquisition, LLC (e)(r) Health Care Equipment & Services
S+550
1.0% 12/30/30 8,571 8,571 8,400
CCS-CMGC Holdings, Inc. (f)(m)(o)(r) Health Care Equipment & Services
S+750
10/1/25 12,484 11,013 2,679
CF Exedra Bidco Ltd. (k)(r) Consumer Services
SA+550
2/19/31 £ 18,800 24,091 23,994
Chinos Intermediate 2, LLC Consumer Discretionary Distribution & Retail
S+600
9/17/31 $ 16,000 15,733 15,953
CircusTrix Holdings, LLC (r) Consumer Services
S+650
1.0% 7/18/25 2,134 2,135 2,180
CircusTrix Holdings, LLC (e)(r) Consumer Services
S+650
1.0% 7/18/25 538 538 549
CircusTrix Holdings, LLC (r) Consumer Services
S+650
1.0% 7/18/28 1,344 1,344 1,358
CircusTrix Holdings, LLC (f)(r) Consumer Services
S+650
1.0% 7/18/28 20,653 20,653 21,092
Claros Mortgage Trust, Inc. (k) Financial Services
S+450
0.5% 8/9/26 9,973 9,261 9,566
Clear Channel Outdoor Holdings, Inc. (f)(k) Media & Entertainment
S+400
8/21/28 12,500 12,327 12,439
Cop Village Green Acquisitions, Inc. (r) Real Estate Management & Development
S+475
1.0% 9/25/30 12,675 12,443 12,532
Cop Village Green Acquisitions, Inc. (e)(r) Real Estate Management & Development
S+475
1.0% 9/25/30 9,761 9,761 9,652
CPM Holdings, Inc. (f) Capital Goods
S+450
0.5% 9/28/28 24,688 24,747 24,317
Crown SubSea Communication Holding, Inc. (f) Capital Goods
S+400
0.8% 1/30/31 5,955 5,903 5,971
Delivery Hero Finco LLC (k) Consumer Services
S+500
0.5% 12/12/29 24,750 24,682 24,833
Digicel International Finance Ltd. (f) Telecommunication Services
S+525 (2.3% PIK, 2.3% Max PIK)
0.5% 5/25/27 20,309 19,745 20,027
Electrical Components International, Inc. (f)(r) Capital Goods
S+650 (0.0% PIK, 2.0% Max PIK)
2.0% 5/10/29 47,045 46,226 47,045
Electrical Components International, Inc. (e)(r) Capital Goods
S+650 (0.0% PIK, 2.0% Max PIK)
2.0% 5/10/29 2,600 2,600 2,600
First Brands Group, LLC (f) Automobiles & Components
S+500
1.0% 3/30/27 24,585 24,393 22,903
See notes to unaudited consolidated financial statements.
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Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2025
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Future Pak, LLC (r) Materials
S+600
2.0% 3/21/30 $ 31,840 $ 31,203 $ 31,203
GasLog Ltd. (k)(r) Energy
7.8%
3/31/29 7,523 7,490 7,382
Gen4 Dental Partners Opco, LLC (f)(r) Health Care Equipment & Services
S+550
1.0% 5/13/30 23,395 22,867 22,050
Gen4 Dental Partners Opco, LLC (e)(r) Health Care Equipment & Services
S+550
1.0% 5/13/30 9,429 9,429 8,886
Gold Rush Amusements, Inc. (f)(r) Consumer Services
S+750
2.0% 10/12/28 30,288 29,811 30,061
HMN Acquirer Corp. (r) Media & Entertainment
S+475
1.0% 11/5/31 15,701 15,502 15,505
HMN Acquirer Corp. (e)(r) Media & Entertainment
S+475
1.0% 11/5/31 9,259 9,259 9,144
IXS Holdings, Inc. Materials
S+425
0.8% 3/5/27 19,797 19,340 19,413
Knowlton Development Corporation, Inc. Household & Personal Products
S+400
8/15/28 35,365 35,365 35,406
LABL, Inc. (f) Commercial & Professional Services
S+500
0.5% 10/30/28 24,547 23,980 20,476
LaserShip, Inc. (q) Transportation
S+625
0.8% 1/2/29 24,792 24,994 24,637
LR Orion Bidco Ltd. (k)(r) Software & Services
S+550
11/22/31 36,290 36,585 35,565
LR Orion Bidco Ltd. (e)(k)(r) Software & Services
S+550
11/22/31 4,839 4,839 4,742
LR Orion Bidco Ltd. (e)(k)(r) Software & Services
SA+300
5/22/31 £ 3,468 4,343 4,381
LSCS Holdings, Inc. Health Care Equipment & Services
S+450
3/4/32 $ 11,625 11,567 11,621
M2S Group Intermediate Holdings, Inc. Materials
S+475
0.5% 8/25/31 29,310 27,381 28,239
Magnera Corp. (k) Materials
S+425
11/4/31 9,975 9,915 9,956
Mannington Mills, Inc. (r) Capital Goods
S+475
3/10/32 43,000 42,570 42,570
NES Hercules Class B Member, LLC (p)(r) Energy
S+178
1/31/28 23,361 21,492 21,726
Olibre Borrower, LLC (r) Consumer Durables & Apparel
S+575
1.0% 1/3/30 39,900 39,146 39,102
OmniMax International, LLC (r) Capital Goods
S+575
1.0% 12/6/30 40,000 39,338 39,200
Onbe, Inc. (f)(r) Financial Services
S+550
1.0% 7/25/31 37,905 37,205 37,194
Peloton Interactive, Inc. (f)(k) Consumer Durables & Apparel
S+550
5/30/29 24,813 24,597 25,086
Permian Production Holdings, LLC (r)(v) Energy
7.0%, 2.0% PIK (2.0% Max PIK)
11/23/25 2,911 2,834 2,908
Plainfield Renewable Energy Holdings LLC (m)(o)(r) Energy
6.0%, 9.5% PIK (9.5% Max PIK)
8/22/25 15,980 11,238 4,689
Plainfield Renewable Energy Holdings LLC (m)(o)(r) Energy
10.0% PIK (10.0% Max PIK)
8/22/25 4,648 3,827 -
Plainfield Renewable Energy Holdings LLC (e)(r) Energy
10.0%
8/22/25 2,344 2,344 -
PODS, LLC (f) Transportation
S+300
0.8% 3/31/28 19,795 18,918 17,971
Pretium PKG Holdings, Inc. (f) Materials
S+375, 1.3% PIK (1.3% Max PIK)
1.0% 10/2/28 33,072 32,653 33,413
Proampac PG Borrower LLC (f) Materials
S+400
0.8% 9/15/28 22,713 22,724 22,618
Project Granite Buyer, Inc. (f)(r) Insurance
S+575
0.8% 12/31/31 16,010 15,631 15,690
Project Granite Buyer, Inc. (e)(r) Insurance
S+575
0.8% 12/31/31 2,470 2,470 2,424
Project Granite Buyer, Inc. (e)(r) Insurance
S+575
0.8% 12/31/30 1,480 1,480 1,450
RealTruck Group, Inc (f) Automobiles & Components
S+350
0.8% 1/31/28 24,628 23,989 23,585
Recovery Solutions Parent, LLC (r)(v) Health Care Equipment & Services
S+850 (S+850 Max PIK)
2.0% 1/27/30 9,501 9,501 9,501
Revlon Intermediate Holdings IV LLC (f) Household & Personal Products
S+688
1.0% 5/2/28 15,000 15,032 14,588
See notes to unaudited consolidated financial statements.
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Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2025
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
RPC TopCo Inc. (r) Consumer Durables & Apparel
S+500
1.0% 8/30/31 $ 21,860 $ 21,507 $ 21,614
RPC TopCo Inc. (e)(r) Consumer Durables & Apparel
S+550
1.0% 8/30/31 3,030 3,030 2,996
Speedway Buyer, Inc. (f)(r) Commercial & Professional Services
S+525
0.8% 1/27/32 21,370 21,797 21,264
Speedway Buyer, Inc. (e)(r) Commercial & Professional Services
S+525
0.8% 1/27/32 5,745 5,745 5,716
Stryten Energy Resources LLC (r) Capital Goods
S+550
1.0% 12/18/29 32,794 32,153 32,179
SupplyOne, Inc. Materials
S+375
4/19/31 8,910 8,910 8,935
TKC Holdings, Inc. (f) Consumer Staples Distribution & Retail
S+500
1.0% 5/15/28 24,082 23,263 23,956
TruGreen, LP (f) Commercial & Professional Services
S+400
0.8% 11/2/27 24,589 23,581 23,216
United Natural Foods, Inc. (f)(k) Consumer Staples Distribution & Retail
S+475
5/1/31 20,843 20,464 21,142
Weber-Stephen Products LLC (f) Consumer Durables & Apparel
S+325
0.8% 10/30/27 25,953 24,198 25,196
WildBrain Ltd. (f)(k)(r) Media & Entertainment
S+600
1.0% 7/23/29 31,091 30,540 30,819
WildBrain Ltd. (k)(r) Media & Entertainment
S+600
1.0% 7/23/29 169 103 167
WildBrain Ltd. (e)(k)(r) Media & Entertainment
S+600
1.0% 7/23/29 3,205 3,205 3,177
WMK, LLC (f)(r) Consumer Discretionary Distribution & Retail
S+650
3.0% 1/25/28 31,013 30,152 30,315
WMK, LLC (e)(r) Consumer Discretionary Distribution & Retail
S+650
3.0% 1/25/28 3,250 3,250 3,177
Wok Holdings, Inc. Consumer Services
S+625
9/3/29 22,381 21,516 21,721
Total Senior Secured Loans-First Lien 1,552,322 1,527,663
Unfunded Loan Commitments (87,572) (87,572)
Net Senior Secured Loans-First Lien 1,464,750 1,440,091
Senior Secured Loans-Second Lien-3.3%
MBS Services Holdings, LLC (r) Commercial & Professional Services
15.0% PIK (15.0% Max PIK)
9/20/30 33,179 32,290 30,151
Tenrgys, LLC (f)(r) Energy
S+750 (S+950 Max PIK)
1.0% 3/17/27 20,537 20,537 20,126
Total Senior Secured Loans-Second Lien 52,827 50,277
Senior Secured Bonds-5.8%
Full House Resorts, Inc. (f) Consumer Services
8.3%
2/15/28 25,742 23,925 25,463
Guitar Center, Inc. (f) Consumer Discretionary Distribution & Retail
8.5%
1/15/26 23,568 22,511 19,135
ST EIP Holdings, Inc. (f)(r) Energy
6.3%
1/10/30 10,087 9,755 9,091
Universal Entertainment Corp. (k) Consumer Durables & Apparel
9.9%
8/1/29 9,625 9,541 9,526
Warren Resources, Inc. (r) Energy
4.0%
11/30/26 30,745 28,191 26,364
Total Senior Secured Bonds 93,923 89,579
Unsecured Debt-2.6%
Leia Acquisition Ltd. (fka AirSwift Holdings, Ltd.) (r) Commercial & Professional Services
10.0% PIK (10.0% Max PIK)
7/1/29 376 376 376
Pioneer Midco, LLC (f)(r) Consumer Services
11.6% PIK (11.6% Max PIK)
11/18/30 39,486 39,501 39,733
Total Unsecured Debt
39,877 40,109
See notes to unaudited consolidated financial statements.
7
Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2025
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized Cost
Fair
Value(d)
Asset Based Finance-4.0%
Bridge Street CLO IV Ltd., Subordinated Notes (g)(k)(r)(s)(v) Financial Services
17.2%
4/20/37 $ 23,700 $ 23,677 $ 19,065
Bridge Street Warehouse CLO V Ltd. (k)(r)(t)(v) Financial Services
1.8%
8/1/25 40,000 40,514 40,514
Bridge Street Warehouse CLO VI Ltd. (k)(r)(t)(v) Financial Services
1.5%
8/1/25 2,000 2,015 2,015
Total Asset Based Finance
66,206 61,594
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Number of Shares/Units
Cost
Fair
Value(d)
Equity/Other-9.5%(l)
Ascent Resources Utica Holdings, LLC, Common Equity (n)(o)(r) Energy 1,197,206 $ 33,344 $ 37,689
Diversified Energy Company, PLC, Common Equity (n)(r)(u)(v) Energy 3,682,450 44,005 46,325
Diversified Energy Company, PLC, Common Equity (n)(r)(u)(v) Energy 407,204 5,420 5,184
Global Jet Capital Holdings, LP, Preferred Equity (o)(r) Commercial & Professional Services 17,183 9,806 7,045
Harvest Oil & Gas Corp., Common Equity (o)(r)(v) Energy 135,062 14,418 419
MBS Services Holdings, LLC, A-3 Units (n)(o)(r) Commercial & Professional Services 522,382 522 366
Permian Production Holdings, LLC, Common Equity (n)(o)(r)(v) Energy 1,968,861 5 -
Recovery Solutions Parent, LLC, Common Equity (o)(r)(v) Health Care Equipment & Services 519,979 11,700 11,169
Telpico, LLC, Common Equity (n)(o)(r)(v) Energy 50 - -
Tenrgys, LLC, Common Equity (n)(o)(r) Energy 50 7,571 798
USA Compression Partners, LP, Preferred Equity (f)(k)(r) Energy
9.8%
4/3/28 28,561 28,232 36,916
Total Equity/Other 155,023 145,911
TOTAL INVESTMENTS-119.1%
$ 1,872,606 1,827,561
Cash and Cash Equivalents and Foreign Currency-6.2%
(i) 95,265
Liabilities in Excess of Other Assets-(25.3%)
(j) (388,036)
NET ASSETS-100.0% $ 1,534,790
See notes to unaudited consolidated financial statements.
8
Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2025
(in thousands, except share amounts)
Forward Foreign Currency Exchange Contracts
Counterparty
Contract Settlement Date
Currency and Amount to be Received
Currency and Amount to be Delivered
Unrealized Appreciation
Unrealized Depreciation
Nomura Global Financial Products Inc. 5/27/25 USD 24,100 GBP 18,600 $ 123 $ -
Total Return Swap
Counterparty
Pay/Receive(h)
Underlying Reference
Type
Interest Rate(b)
Payment Frequency
Maturity
Notional Amount
Unrealized Appreciation
(Depreciation)
BNP Paribas
Receive Aretec Group, Inc.
Loan
S+350
Monthly
12/12/25 $ 14,208 $ (133)
Receive
Allied Universal Holdco LLC
Loan S+375 Monthly 12/12/25 22,827 (196)
Receive
Cirque Du Soleil Holding USA Newco, Inc.
Loan S+375 Monthly 12/12/25 8,116 109
Receive Clear Channel Outdoor Holdings, Inc. Loan S+400 Monthly 12/12/25 7,406 30
Total
$ (190)
__________________
(a) Security may be an obligation of one or more entities affiliated with the named company.
(b) Certain variable rate securities in the Company's portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2025, the three-month Sterling Overnight Index Average, or SONIA, or SA was 4.36%, the one-month and three-month Secured Overnight Financing Rate, or SOFR, or S, was 4.32% and 4.29%, respectively, and the Overnight Bank Funding Rate, or OBFR, was 4.33%. SOFR based contracts may include a credit spread adjustment that is charged in addition to the base rate and basis point spread. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment. Variable rate securities with no floor rate use the respective benchmark rate in all cases.
(c) Denominated in U.S. dollars, unless otherwise noted.
(d) See Note 8 for additional information regarding the fair value of the Company's financial instruments.
(e) Security is an unfunded commitment. The stated rate reflects the spread disclosed at the time of commitment and may not indicate the actual rate received upon funding.
(f) Security or portion thereof held within FSSL Finance BB AssetCo LLC, a wholly-owned subsidiary of the Company, and is pledged as collateral supporting the obligations outstanding under the repurchase facility with Barclays Bank PLC (see Note 9).
(g) Exempt from registration under Rule 144A of the Securities Act of 1933, as amended. Such securities may be deemed liquid by the investment adviser and may be resold, normally to qualified institutional buyers in transactions exempt from registration. As of March 31, 2025, the total market value of Rule 144A securities amounted to $19,065, which represented approximately 1.2% of net assets.
(h) Receive represents that the Company receives payments for any positive net return and makes payments for any negative net return on the underlying reference. Pay represents that the Company receives payments for any negative net return and makes payments for any positive net return on the underlying reference.
(i) Includes $36,522 held in Allspring Government Money Market Fund with a 7-day yield of 4.3% as of March 31, 2025.
(j) Includes the effect of swap contracts and forward foreign currency exchange contracts.
(k) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of March 31, 2025, 80.5% of the Company's total assets represented qualifying assets.
(l) Listed investments may be treated as debt for U.S. generally accepted accounting principles, or GAAP, or tax purposes.
(m) Security was on non-accrual status as of March 31, 2025.
(n) Security held within FSEP Investments, Inc., a wholly-owned subsidiary of the Company.
(o) Security is non-income producing.
(p) Security or portion thereof held within Sustainable Infrastructure Investments, LLC, a wholly-owned subsidiary of the Company.
(q) Security or portion thereof unsettled as of March 31, 2025.
See notes to unaudited consolidated financial statements.
9
Table of Contents
FS Specialty Lending Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2025
(in thousands, except share amounts)
(r) Security is classified as Level 3 in the Company's fair value hierarchy (see Note 8).
(s) Securities of a collateralized loan obligation ("CLO") where an affiliate of the Company's investment adviser serves as collateral manager and administrator (see Note 4). The fair value of the investment is inclusive of the present value of future senior management fee and subordinated management fee cash flows from the collateral manager and administrator of the CLOs to the Company. The stated rate on these securities represents the annualized yield as of March 31, 2025.
(t) Security is a related party investment where an affiliate of the Company's investment adviser serves as collateral manager and administrator (see Note 4). The stated rate on these securities represents the annualized yield as of March 31, 2025.
(u) Restricted as to resale as of March 31, 2025. Share amounts of 407,204 and 3,682,450 will be registered on April 29, 2025 and during the third quarter of 2025, respectively. Total market value of such securities amounts to $51,509, which represents approximately 3.4% of net assets as of March 31, 2025.
(v) Under the 1940 Act, the Company generally is deemed to be an "affiliated person" of a portfolio company if it owns 5% or more of the portfolio company's voting securities and generally is deemed to "control" a portfolio company if it owns more than 25% of the portfolio company's voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of March 31, 2025, the Company held investments in portfolio companies of which it is deemed to be an "affiliated person" but is not deemed to "control". The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person as of March 31, 2025:
Portfolio Company
Fair Value at
December 31, 2024
Gross Additions(1)
Gross Reductions(2)
Net Realized Gain (Loss) Net Change in Unrealized Appreciation (Depreciation)
Fair Value at
March 31, 2025
Interest Income(3)
PIK Income(3)
Dividend Income(3)
Senior Secured Loans-First Lien
Permian Production Holdings, LLC $ 2,879 $ 37 $ - $ - $ (8) $ 2,908 $ 98 $ 15 $ -
Recovery Solutions Parent, LLC
- 9,501 - - - 9,501 3 208 -
Asset Based Finance
Bridge Street CLO IV Ltd., Subordinated Notes
20,679 - (268) - (1,346) 19,065 912 - -
Bridge Street Warehouse CLO V Ltd.
25,492 20,514 (5,492) - - 40,514 - 514 -
Bridge Street Warehouse CLO VI Ltd.
- 2,015 - - - 2,015 - 15 -
Equity/Other
Diversified Energy Company, PLC, Common Equity - 44,005 - - 2,320 46,325 - - -
Diversified Energy Company, PLC, Common Equity - 5,420 - - (236) 5,184 - - 118
GWP Midstream Holdco, LLC, Common Equity 2,518 - (3,017) (3,664) 4,163 - - - -
Harvest Oil & Gas Corp., Common Equity 375 - - - 44 419 - - -
Permian Production Holdings, LLC, Common Equity - - - - - - - - -
Recovery Solutions Parent, LLC, Common Equity
- 11,700 - - (531) 11,169 - - -
Telpico, LLC, Common Equity - - - - - - - - -
$ 51,943 $ 93,192 $ (8,777) $ (3,664) $ 4,406 $ 137,100 $ 1,013 $ 752 $ 118
_____________
(1) Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company into this category from a different category.
(2) Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company out of this category into a different category.
(3) Interest, PIK and dividend income presented for the three months ended March 31, 2025.
See notes to unaudited consolidated financial statements.
10
Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments
As of December 31, 2024
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Senior Secured Loans-First Lien-96.1%
Accupac, LLC (r) Pharmaceuticals, Biotechnology & Life Sciences
S+700
2.0% 12/31/29 $ 41,783 $ 40,822 $ 40,947
Accupac, LLC (e)(r) Pharmaceuticals, Biotechnology & Life Sciences
S+700
2.0% 12/31/29 6,267 6,267 6,142
Acrisure, LLC (q) Insurance
S+300
11/6/30 18,849 18,849 18,904
AI Aqua Merger Sub, Inc. (f) Capital Goods
S+350
0.5% 7/31/28 19,900 19,775 19,942
Alegeus Technologies Holdings Corp. (r) Health Care Equipment & Services
S+675
1.0% 11/5/29 30,000 29,281 29,288
American Auto Auction Group, LLC Commercial & Professional Services
S+450
0.8% 12/30/27 23,739 23,739 23,927
Amerit Fleet Solutions, Inc. (r) Commercial & Professional Services
S+525
0.8% 12/17/31 30,250 30,032 30,023
Amerit Fleet Solutions, Inc. (r) Commercial & Professional Services
S+525
0.8% 12/17/29 1,507 1,486 1,496
Amerit Fleet Solutions, Inc. (e)(r) Commercial & Professional Services
S+525
0.8% 12/17/29 1,243 1,243 1,234
Ansira Partners, Inc. (f)(r) Media & Entertainment
S+675
1.5% 7/1/29 35,538 34,601 34,694
Ansira Partners, Inc. (e)(r) Media & Entertainment
S+675
1.5% 7/1/29 3,927 3,927 3,834
APTIM Corp. (f) Commercial & Professional Services
S+750
5/23/29 27,500 27,500 27,431
Archer Acquisition, LLC (r) Equity Real Estate Investment Trusts (REITs)
S+500
1.0% 10/6/29 19,309 19,115 19,115
Array Midco, Corp. (k)(r) Commercial & Professional Services
S+650
3.0% 12/31/29 25,192 24,613 24,688
Array Midco, Corp. (e)(k)(r) Commercial & Professional Services
S+650
3.0% 12/31/29 7,558 7,558 7,482
Auris Luxembourg III S.a r.l (k) Health Care Equipment & Services
S+375
2/28/29 22,802 22,802 23,102
Aveanna Healthcare LLC (f) Health Care Equipment & Services
S+375
0.5% 7/17/28 20,695 18,864 20,556
Brock Holdings III, LLC (f)(k) Capital Goods
S+600
0.5% 5/2/30 8,479 8,322 8,542
CCS Acquisition, LLC (r) Health Care Equipment & Services
S+550
1.0% 12/30/30 31,429 30,872 30,800
CCS Acquisition, LLC (e)(r) Health Care Equipment & Services
S+550
1.0% 12/30/30 8,571 8,571 8,400
CCS-CMGC Holdings, Inc. (f)(m)(o)(r) Health Care Equipment & Services
S+693
2.0% 6/9/25 13,430 11,849 6,751
CCS-CMGC Holdings, Inc. (m)(o)(q) Health Care Equipment & Services
S+725
2.0% 6/9/25 3,162 2,551 3,194
CCS-CMGC Holdings, Inc. (m)(o) Health Care Equipment & Services
S+725
2.0% 6/9/25 2,752 2,621 2,780
CCS-CMGC Holdings, Inc. (f)(m)(o)(r) Health Care Equipment & Services
S+750
10/1/25 14,319 12,645 3,231
Charlotte Buyer, Inc. (f) Health Care Equipment & Services
S+475
0.5% 2/11/28 17,710 17,792 17,840
Chinos Intermediate 2, LLC Consumer Discretionary Distribution & Retail
S+600
9/17/31 16,000 15,726 16,240
CircusTrix Holdings, LLC (r) Consumer Services
S+650
1.0% 7/18/25 2,140 2,140 2,167
CircusTrix Holdings, LLC (f)(r) Consumer Services
S+650
1.0% 7/18/28 20,706 20,705 20,964
CircusTrix Holdings, LLC (r) Consumer Services
S+650
1.0% 7/18/28 1,344 1,344 1,354
CircusTrix Holdings, LLC (e)(r) Consumer Services
S+650
1.0% 7/18/25 538 538 544
Clear Channel Outdoor Holdings, Inc. (f)(k) Media & Entertainment
S+400
8/21/28 12,500 12,317 12,599
Cop Village Green Acquisitions, Inc. (r) Real Estate Management & Development
S+475
1.0% 9/25/30 12,707 12,469 12,453
Cop Village Green Acquisitions, Inc. (e)(r) Real Estate Management & Development
S+475
1.0% 9/25/30 3,661 3,661 3,661
See notes to unaudited consolidated financial statements.
11
Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Cop Village Green Acquisitions, Inc. (e)(r) Real Estate Management & Development
S+475
1.0% 9/25/30 $ 6,101 $ 6,101 $ 6,101
CPM Holdings, Inc. (f) Capital Goods
S+450
0.5% 9/28/28 24,750 24,813 24,066
Crown SubSea Communications Holding, Inc. (f) Capital Goods
S+400
0.8% 1/30/31 5,970 5,916 6,074
Delivery Hero Finco LLC (k) Consumer Services
S+500
0.5% 12/12/29 24,813 24,742 24,988
Digicel International Finance Ltd. (f) Telecommunication Services
S+515, 1.5% PIK (1.5% Max PIK)
0.5% 5/25/27 20,231 19,614 19,703
Electrical Components International, Inc. (f)(r) Capital Goods
S+650, 0.0% PIK (2.0% Max PIK)
2.0% 5/10/29 47,163 46,308 47,163
Electrical Components International, Inc. (e)(r) Capital Goods
S+650, 0.0% PIK (2.0% Max PIK)
2.0% 5/10/29 2,600 2,600 2,600
Engineered Machinery Holdings, Inc. (f) Capital Goods
S+375
0.8% 5/19/28 24,669 24,613 24,893
First Brands Group, LLC (f) Automobiles & Components
S+500
1.0% 3/30/27 24,649 24,435 23,212
FLNG Liquefaction 2, LLC (p)(r) Energy
S+150
12/31/26 24,931 23,684 23,684
GasLog Ltd. (k)(r) Energy
7.8%
3/31/29 7,523 7,488 7,420
Gen4 Dental Partners Opco, LLC (f)(r) Health Care Equipment & Services
S+550
1.0% 5/13/30 23,454 22,911 22,750
Gen4 Dental Partners Opco, LLC (e)(r) Health Care Equipment & Services
S+550
1.0% 5/13/30 9,429 9,429 9,146
Gold Rush Amusements, Inc. (f)(r) Consumer Services
S+750
2.0% 10/12/28 30,365 29,863 30,365
Guardian US Holdco, LLC (f) Software & Services
S+350
0.5% 1/31/30 21,683 21,709 21,755
HMN Acquirer Corp. (r) Media & Entertainment
S+475
1.0% 11/5/31 15,741 15,537 15,505
HMN Acquirer Corp. (e)(r) Media & Entertainment
S+475
1.0% 11/5/31 9,259 9,259 9,120
IXS Holdings, Inc. (q) Materials
S+425
0.8% 3/5/27 19,850 19,341 19,219
Knowlton Development Corporation Inc. (q) Household & Personal Products
S+400
8/15/28 35,365 35,365 35,647
LABL, Inc. (f) Commercial & Professional Services
S+500
0.5% 10/29/28 24,610 24,014 23,857
Learning Care Group No. 2 Inc. (f) Consumer Services
S+400
0.5% 8/11/28 21,731 21,844 21,975
Level 3 Financing, Inc. (f)(k) Telecommunication Services
S+656
2.0% 4/15/29 19,291 18,912 19,703
LR Orion Bidco Ltd. (k)(r) Software & Services
S+550
11/22/31 36,290 36,562 35,927
LR Orion Bidco Ltd. (e)(k)(r) Software & Services
SA+300
5/22/31 £ 3,468 4,342 4,342
LR Orion Bidco Ltd. (e)(k)(r) Software & Services
S+550
11/22/31 $ 4,839 4,839 4,815
M2S Group Intermediate Holdings, Inc. Materials
S+475
0.5% 8/25/31 29,310 27,355 28,358
Magnera Corp. (k) Materials
S+425
11/4/31 10,000 9,938 10,035
Mavis Tire Express Services TopCo, L.P. (f) Consumer Discretionary Distribution & Retail
S+350
0.8% 5/4/28 12,232 12,254 12,329
MedImpact Healthcare Systems, Inc. (f) Health Care Equipment & Services
S+725
3/31/28 24,367 22,096 24,601
NES Hercules Class B Member, LLC (p)(r) Energy
S+178
1/31/28 23,546 21,662 21,662
OmniMax International, LLC (r) Capital Goods
S+575
1.0% 12/6/30 30,561 29,879 29,950
OmniMax International, LLC (e)(r) Capital Goods
S+575
1.0% 12/6/30 9,439 9,439 9,250
Onbe, Inc. (f)(r) Financial Services
S+550
1.0% 7/25/31 38,000 37,280 37,288
Peloton Interactive, Inc. (f)(k) Consumer Durables & Apparel
S+600
5/30/29 24,875 24,649 25,507
Permian Production Holdings, LLC (r)(u) Energy
7.0%, 2.0% PIK (2.0% Max PIK)
11/23/25 2,897 2,797 2,879
Plainfield Renewable Energy Holdings LLC (m)(o)(r) Energy
6.0%, 9.5% PIK (9.5% Max PIK)
8/22/25 15,384 11,237 5,050
See notes to unaudited consolidated financial statements.
12
Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Plainfield Renewable Energy Holdings LLC (m)(o)(r) Energy
10.0% PIK (10.0% Max PIK)
8/22/25 $ 4,648 $ 3,827 $ -
Plainfield Renewable Energy Holdings LLC, Letter of Credit (e)(r) Energy
10.0%
8/22/25 2,344 2,344 -
PODS, LLC (f) Transportation
S+300
0.8% 3/31/28 19,846 18,905 18,624
Pretium PKG Holdings, Inc. (f) Materials
S+250 2.5% PIK (2.5% Max PIK)
1.0% 10/2/28 32,965 32,524 34,077
Proampac PG Borrower LLC (f) Materials
S+400
0.8% 9/15/28 22,770 22,781 22,870
Project Granite Buyer, Inc. (r) Insurance
S+575
0.8% 12/31/31 16,050 15,665 15,729
Project Granite Buyer, Inc. (e)(r) Insurance
S+575
0.8% 12/31/31 1,480 1,480 1,465
Project Granite Buyer, Inc. (e)(r) Insurance
S+575
0.8% 12/31/30 2,470 2,470 2,421
Realtruck Group, Inc. (f) Automobiles & Components
S+350
0.8% 1/31/28 24,692 24,006 24,003
Revlon Intermediate Holdings IV LLC (f) Household & Personal Products
S+688
1.0% 5/2/28 15,000 15,034 14,912
RPC TopCo Inc. (r) Consumer Durables & Apparel
S+500
1.0% 8/30/31 21,915 21,553 21,915
RPC TopCo Inc. (e)(r) Consumer Durables & Apparel
S+550
1.0% 8/30/31 3,030 3,030 3,030
Ryan, LLC (f) Commercial & Professional Services
S+350
0.5% 11/14/30 8,809 8,828 8,844
SupplyOne, Inc. Materials
S+375
4/19/31 8,933 8,932 9,018
TKC Holdings, Inc. (f) Consumer Staples Distribution & Retail
S+500
1.0% 5/15/28 24,195 23,320 24,513
TruGreen, LP (f) Commercial & Professional Services
S+400
0.8% 11/2/27 24,653 23,565 24,068
United Natural Foods, Inc. (f)(k) Consumer Staples Distribution & Retail
S+475
5/1/31 20,895 20,505 21,276
Weber-Stephen Products LLC (f) Consumer Durables & Apparel
S+325
0.8% 10/30/27 26,036 24,144 25,995
WildBrain Ltd. (k)(r) Media & Entertainment
S+600
1.0% 7/23/29 506 440 502
WildBrain Ltd. (f)(k)(r) Media & Entertainment
S+600
1.0% 7/23/29 31,468 30,887 31,193
WildBrain Ltd. (e)(k)(r) Media & Entertainment
S+600
1.0% 7/23/29 2,867 2,867 2,842
WMK, LLC (f)(r) Consumer Discretionary Distribution & Retail
S+650
3.0% 1/25/28 31,698 30,780 31,104
WMK, LLC (e)(r) Consumer Discretionary Distribution & Retail
S+650
3.0% 1/25/28 2,750 2,750 2,698
Wok Holdings, Inc. (q) Consumer Services
S+625
9/1/29 22,440 21,543 21,703
Total Senior Secured Loans-First Lien 1,549,604 1,538,066
Unfunded Loan Commitments (92,715) (92,715)
Net Senior Secured Loans-First Lien 1,456,889 1,445,351
Senior Secured Loans-Second Lien-3.3%
MBS Services Holdings, LLC (r) Commercial & Professional Services
15.0% PIK (15.0% Max PIK)
9/20/30 31,996 31,067 29,116
Tenrgys, LLC (f)(r) Energy
S+750 (S+950 Max PIK)
1.0% 3/17/27 20,537 20,537 20,075
Total Senior Secured Loans-Second Lien 51,604 49,191
Senior Secured Bonds-6.9%
Allegiant Travel Co. (k) Transportation
7.3%
8/15/27 12,271 11,427 12,347
See notes to unaudited consolidated financial statements.
13
Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Principal
Amount(c)
Amortized
Cost
Fair
Value(d)
Full House Resorts, Inc. (f) Consumer Services
8.3%
2/15/28 $ 25,742 $ 23,793 $ 25,671
Guitar Center, Inc. (f) Consumer Discretionary Distribution & Retail
8.5%
1/15/26 23,568 22,210 20,160
ST EIP Holdings Inc. (f)(r) Energy
6.3%
1/10/30 10,143 9,794 9,192
Universal Entertainment Corp. (k) Consumer Durables & Apparel
9.9%
8/1/29 9,625 9,538 9,608
Warren Resources, Inc. (r) Energy
4.0%
11/30/26 30,745 27,534 26,748
Total Senior Secured Bonds 104,296 103,726
Unsecured Debt-2.6%
Leia Acquisition Ltd. (fka AirSwift Holdings, Ltd.) (r) Commercial & Professional Services
10.0% PIK (10.0% Max PIK)
7/15/29 399 399 399
Pioneer Midco, LLC (f)(r) Consumer Services
11.6% PIK (11.6% Max PIK)
11/18/30 38,371 38,386 38,563
Total Unsecured Debt
38,785 38,962
Asset Based Finance-3.1%
Bridge Street CLO IV Ltd., Subordinated Notes (g)(k)(r)(s)(u) Financial Services 17.9% 4/20/37 23,700 23,945 20,679
Bridge Street Warehouse CLO V Ltd. (k)(r)(t)(u) Financial Services 1.8% 8/1/25 25,000 25,492 25,492
Total Asset Based Finance
49,437 46,171
Portfolio Company(a)
Footnotes Industry
Rate(b)
Floor(b)
Maturity
Number of
Shares/Units
Cost
Fair
Value(d)
Equity/Other-10.6%(l)
Arena Energy, LP, Contingent Value Rights (r) Energy 126,632,117 $ 351 $ 269
Ascent Resources Utica Holdings, LLC, Common Equity (n)(o)(r) Energy 1,486,929 42,169 42,047
Global Jet Capital Holdings, LP, Preferred Equity (o)(r) Commercial & Professional Services 17,183 9,806 7,066
GWP Midstream Holdco, LLC, Common Equity (n)(o)(r)(u) Energy 105,785 6,681 2,518
Harvest Oil & Gas Corp., Common Equity (o)(u) Energy 135,062 14,418 375
Maverick Natural Resources, LLC, Common Equity (n)(r) Energy 503,176 93,044 72,622
MBS Services Holdings, LLC, A-3 Units (n)(o)(r) Commercial & Professional Services 522,382 522 669
Permian Production Holdings, LLC, Common Equity (n)(o)(r)(u) Energy 1,968,861 5 -
Telpico, LLC, Common Equity (n)(o)(r)(u) Energy 50 - -
Tenrgys, LLC, Common Equity (n)(o)(r) Energy 50 7,571 830
USA Compression Partners, LP, Preferred Equity (f)(k)(r) Energy
9.8%
4/3/28 28,561 28,211 32,840
Total Equity/Other 202,778 159,236
TOTAL INVESTMENTS-122.6%
$ 1,903,789 1,842,637
Cash and Cash Equivalents-13.4%
(i) 202,091
Liabilities in Excess of Other Assets-(36.0%)
(j) (541,272)
NET ASSETS-100.0% $ 1,503,456
See notes to unaudited consolidated financial statements.
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Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
Total Return Swaps
Counterparty
Pay/Receive(h)
Underlying Reference
Type
Number of Shares
Interest Rate(b)
Payment Frequency Maturity Notional Amount Unrealized Appreciation (Depreciation)
Nomura Global Financial Products Inc. Receive FS Credit Opportunities Corp. Common Stock
Equity
2,875,868 OBFR+1.15% Monthly 9/21/26 $ 19,613 $ -
BNP Paribas
Receive
Aretec Group, Inc.
Loan
S+350
Monthly
9/12/25 14,244 11
Receive
Clear Channel Outdoor Holdings, Inc.
Loan
S+400
Monthly 9/12/25 7,500 128
Receive
BCPE Empire Holdings, Inc.
Loan
S+350
Monthly 9/12/25 29,750 2
Receive
Charlotte Buyer, Inc.
Loan
S+475
Monthly 9/12/25 7,443 39
Receive
Pro Mach Group, Inc.
Loan
S+350
Monthly 9/12/25 24,799 (27)
Receive Cirque Du Soleil Holding USA Newco, Inc. Loan
S+375
Monthly 9/12/25 8,303 21
Receive Allied Universal Holdco LLC Loan
S+375
Monthly 9/12/25 22,727 (104)
Total
$ 70
__________________
(a) Security may be an obligation of one or more entities affiliated with the named company.
(b) Certain variable rate securities in the Company's portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2024, the three-month Sterling Overnight Index Average, or SONIA, or SA was 4.62%, the one-month and three-month Secured Overnight Financing Rate, or SOFR, or S, was 4.33% and 4.31%, respectively, and the Overnight Bank Funding Rate, or OBFR, was 4.33%. SOFR based contracts may include a credit spread adjustment that is charged in addition to the base rate and basis point spread. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment. Variable rate securities with no floor rate use the respective benchmark rate in all cases.
(c) Denominated in U.S. dollars, unless otherwise noted.
(d) See Note 8 for additional information regarding the fair value of the Company's financial instruments.
(e) Security is an unfunded commitment. The stated rate reflects the spread disclosed at the time of commitment and may not indicate the actual rate received upon funding.
(f) Security or portion thereof held within FSSL Finance BB AssetCo LLC, a wholly-owned subsidiary of the Company, and is pledged as collateral supporting the obligations outstanding under the repurchase facility with Barclays Bank PLC (see Note 9).
(g) Exempt from registration under Rule 144A of the Securities Act of 1933, as amended. Such securities may be deemed liquid by the investment adviser and may be resold, normally to qualified institutional buyers in transactions exempt from registration. As of December 31, 2024,the total market value of Rule 144A securities amounted to $20,679, which represented approximately 1.4% of net assets.
(h) Receive represents that the Company receives payments for any positive net return and makes payments for any negative net return on the underlying reference. Pay represents that the Company receives payments for any negative net return and makes payments for any positive net return on the underlying reference.
(i) Includes cash equivalents held in the Allspring Government Money Market Fund with a cost and fair market value of $19,699 and a 7-day yield of 4.4% as of December 31, 2024.
(j) Includes the effect of swap contracts.
(k) The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of December 31, 2024, 83.0% of the Company's total assets represented qualifying assets.
(l) Listed investments may be treated as debt for U.S. generally accepted accounting principles, or GAAP, or tax purposes.
(m) Security was on non-accrual status as of December 31, 2024.
(n) Security held within FSEP Investments, Inc., a wholly-owned subsidiary of the Company.
(o) Security is non-income producing.
(p) Security or portion thereof held within Sustainable Infrastructure Investments, LLC, a wholly-owned subsidiary of the Company.
See notes to unaudited consolidated financial statements.
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Table of Contents
FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
(q) Security or portion thereof unsettled as of December 31, 2024.
(r) Security is classified as Level 3 in the Company's fair value hierarchy (see Note 8).
(s) Securities of a collateralized loan obligation ("CLO") where an affiliate of the Company's investment adviser serves as collateral manager and administrator (see Note 4). The fair value of the investment is inclusive of the present value of future senior management fee and subordinated management fee cash flows from the collateral manager and administrator of the CLOs to the Company. The stated rate on these securities represents the annualized yield as of December 31, 2024.
(t) Security is a related party investment where an affiliate of the Company's investment adviser serves as collateral manager and administrator (see Note 4). The stated rate on these securities represents the annualized yield as of December 31, 2024.
(u) Under the 1940 Act, the Company generally is deemed to be an "affiliated person" of a portfolio company if it owns 5% or more of the portfolio company's voting securities and generally is deemed to "control" a portfolio company if it owns more than 25% of the portfolio company's voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of December 31, 2024, the Company held investments in portfolio companies of which it is deemed to be an "affiliated person" but is not deemed to "control". The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person as of December 31, 2024:
Portfolio Company
Fair Value at
December 31, 2023
Gross Additions(1)
Gross Reductions(2)
Net Realized Gain (Loss) Net Change in Unrealized Appreciation (Depreciation)
Fair Value at
December 31, 2024
Interest Income(3)
PIK Income(3)
Senior Secured Loans-First Lien
Permian Production Holdings, LLC $ 4,816 $ 197 $ (2,045) $ 148 $ (237) $ 2,879 $ 432 $ 78
Asset Based Finance
Bridge Street CLO IV Ltd., Subordinated Notes - 23,945 - - (3,266) 20,679 2,766 -
Bridge Street Warehouse CLO IV Ltd. - 22,729 (22,729) - - - - 729
Bridge Street Warehouse CLO V Ltd. - 25,492 - - - 25,492 - 492
Equity/Other
GWP Midstream Holdco, LLC, Common Equity 1,661 - - - 857 2,518 - -
Harvest Oil & Gas Corp., Common Equity 271 - - - 104 375 - -
Permian Production Holdings, LLC, Common Equity 748 - - - (748) - - -
Telpico, LLC, Common Equity - - - - - - - -
$ 7,496 $ 72,363 $ (24,774) $ 148 $ (3,290) $ 51,943 $ 3,198 $ 1,299
_____________
(1) Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company into this category from a different category.
(2) Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company out of this category into a different category.
(3) Interest and PIK income presented for the year ended December 31, 2024.
See notes to unaudited consolidated financial statements.
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FS Specialty Lending Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2024
(in thousands, except share amounts)
(v) Under the 1940 Act, the Company generally is deemed to "control" a portfolio company if it owns more than 25% of the portfolio company's voting securities or it has the power to exercise control over the management or policies of such portfolio company. As of December 31, 2024, the Company held investments in portfolio companies of which it is deemed to be an "affiliated person" of and deemed to "control." The following table presents certain information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person and deemed to control as of December 31, 2024:
Portfolio Company
Fair Value at
December 31, 2023
Gross Additions(1)
Gross Reductions(2)
Net Realized Gain (Loss) Net Change in Unrealized Appreciation (Depreciation)
Fair Value at
December 31, 2024
Interest Income(3)
PIK Income(3)
Dividend Income(3)
Senior Secured Loans-First Lien
Allied Wireline Services, LLC $ 22,200 $ - $ (19,282) $ (50,995) $ 48,077 $ - $ - $ - $ -
Warren Resources, Inc. 23,823 60 (20,357) (3,526) - - 1,493 60 -
Sustainable Infrastructure Investments, LLC
Sustainable Infrastructure Investments, LLC(4)
39,427 5,793 (46,607) (2,336) 3,723 - - - 3,499
Equity/Other
Allied Wireline Services, LLC, Common Equity - - - (1,527) 1,527 - - -
Allied Wireline Services, LLC, Warrants - - - - - - - - -
Warren Resources, Inc., Common Equity 15,566 127 (13,578) (7,303) 5,188 - - - -
$ 101,016 $ 5,980 $ (99,824) $ (65,687) $ 58,515 $ - $ 1,493 $ 60 $ 3,499
_____________
(1) Gross additions may include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company into this category from a different category.
(2) Gross reductions may include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and/or the movement of an existing portfolio company out of this category into a different category.
(3) Interest, PIK and dividend income presented for the year ended December 31, 2024.
(4) On December 18, 2024, the Company purchased Imperial Sustainable Infrastructure Investments, LLC's remaining 12.5% interest in Sustainable Infrastructure Investments, LLC, or SIIJV, and SIIJV became a wholly-owned subsidiary of the Company.
See notes to unaudited consolidated financial statements.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Specialty Lending Fund, or the Company, was formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced investment operations on July 18, 2011. Prior to September 29, 2023, the Company's name was FS Energy and Power Fund. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. The Company has various wholly-owned financing subsidiaries, including special-purpose financing subsidiaries and subsidiaries through which it holds or expects to hold interests in certain portfolio companies. One of the wholly-owned financing subsidiaries is Sustainable Infrastructure Investments, LLC, or SIIJV, which prior to December 18, 2024, was a joint venture between the Company and Imperial Sustainable Infrastructure Investments, LLC. On December 18, 2024, the Company purchased Imperial Sustainable Infrastructure Investments, LLC's remaining 12.5% interest in SIIJV and SIIJV became a wholly-owned subsidiary of the Company. The unaudited consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2025. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company's consolidated subsidiaries are subject to U.S. federal and state income taxes.
In May 2023, the Company announced that its board of trustees approved the Company's transition from an investment policy of investing primarily in energy companies to a diversified credit investment policy of investing across private and public credit in a broader set of industries, sectors and sub-sectors. The new policy became effective on September 29, 2023.
The Company's investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation by investing primarily in private and public credit in a broad set of industries, sectors and sub-sectors. The Company's investment policy is to invest primarily in a portfolio of secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments, which, under normal circumstances, will represent at least 80% of the Company's total assets.
Prior to September 29, 2023, the Company's investment objectives were to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry. Prior to September 29, 2023, the Company's investment policy was to invest, under normal circumstances, at least 80% of its total assets in securities of energy and power related, or Energy, companies. The Company considers Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power, including those companies that provide equipment or services to companies engaged in any of the foregoing.
The Company's allocation to Energy investments has declined and the Company expects it to further decline over time, in each case, through the natural course of maturities, repayments and sales activity and by growing the total size of the portfolio through leverage facilities. The pace of the portfolio rotation remains dependent upon a number of factors, including the turnover of concentrated illiquid Energy investments, performance of underlying portfolio companies, high yield and energy market conditions, the Company's access to borrowings and the amount and pace of the payment of enhanced distributions to shareholders, among others.
The Company is managed by FS/EIG Advisor, LLC, or FS/EIG Advisor, pursuant to an investment advisory and administrative services agreement, dated as of April 9, 2018, or the FS/EIG investment advisory agreement. FS/EIG Advisor oversees the management of the Company's operations and is responsible for making investment decisions with respect to the Company's portfolio. FS/EIG Advisor is jointly operated by an affiliate of Franklin Square Holdings, L.P. (which does business as FS Investments) and EIG Asset Management, LLC, or EIG.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation:The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2024 included in the Company's annual report on Form 10-K. Operating results for the three months ended March 31, 2025 are not necessarily indicative of the results that may be expected for the year ending December 31, 2025. The December 31, 2024 consolidated balance sheet and consolidated schedule of investments are derived from the Company's audited consolidated financial statements as of and for the year ended December 31, 2024. The Company is considered an investment company under GAAP and follows the accounting and
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
reporting guidance applicable to investment companies under Accounting Standards Codification Topic 946, Financial Services-Investment Companies.The Company has evaluated the impact of subsequent events through the date the unaudited consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
Use of Estimates:The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.
Capital Gains Incentive Fee:Pursuant to the terms of the FS/EIG investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee equals 20.0% of the Company's "incentive fee capital gains," which are the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid incentive fees on capital gains. The Company will accrue for the incentive fee on capital gains, which, if earned, will be paid annually. The Company will accrue the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to FS/EIG Advisor will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. For the three months ended March 31, 2025 and 2024, the Company did not accrue any amount of capital gains incentive fee.
Subordinated Income Incentive Fee:Pursuant to the terms of the FS/EIG investment advisory agreement, FS/EIG Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the FS/EIG investment advisory agreement is calculated and payable quarterly in arrears and equals 20.0% of the Company's "pre-incentive fee net investment income" for the immediately preceding quarter subject to a hurdle rate, expressed as a rate of return on adjusted capital, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS/EIG Advisor will not earn this incentive fee for any quarter until the Company's pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. For purposes of this fee, "adjusted capital" means cumulative gross proceeds generated from sales of the Company's common shares (including proceeds from its distribution reinvestment plan) reduced for distributions from non-liquidating dispositions of the Company's investments paid to shareholders and amounts paid for share repurchases pursuant to the Company's share repurchase program. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS/EIG Advisor will be entitled to a "catch-up" fee equal to the amount of the Company's pre-incentive fee net investment income in excess of the hurdle rate, until the Company's pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. This "catch-up" feature will allow FS/EIG Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FS/EIG Advisor will be entitled to receive 20.0% of the Company's pre-incentive fee net investment income. For the three months ended March 31, 2025 and 2024, the Company did not accrue any amount of subordinated incentive fee on income.
Reclassifications:Certain amounts in the unaudited consolidated financial statements for the three months ended March 31, 2024 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three months ended March 31, 2025.
Revenue Recognition: Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that it expects to collect such amounts. The Company records dividend income on the ex-dividend date. Distributions received from limited liability company, or LLC, and limited partnership, or LP, investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. The Company's policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. The Company considers many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that the Company will receive any previously accrued interest, then the accrued interest will be written-off. Payments received on non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on the Company's judgment.
Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and other non-recurring upfront fees are recorded as fee income when earned. The Company records prepayment premiums on loans and securities as fee income when it earns
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
such amounts. For the three months ended March 31, 2025 and 2024, the Company recognized no structuring or other upfront fee revenue.
The Company invests in Collateralized Loan Obligations, or CLOs. Interest income from investments in the "equity" class of the CLO (in the Company's case, subordinated notes) is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with Accounting Standards Codification Topic 325-40-35, Beneficial Interests in Securitized Financial Assets, or ASC Topic 325. The Company monitors the expected cash inflows from its equity investments in the CLO, including the expected principal repayments. The effective yield is determined and updated quarterly.
Derivative Instruments: The Company's derivative instruments may include forward foreign currency exchange contracts and equity total return swaps. The Company recognizes all derivative instruments as assets or liabilities at fair value in its unaudited consolidated financial statements. Derivative contracts entered into by the Company are not designated as hedging instruments for accounting purposes, and as a result, the Company presents changes in fair value through net change in unrealized appreciation (depreciation) on swap contracts in the unaudited consolidated statements of operations. Realized gains and losses of the derivative instruments are included in net realized gain (loss) on swap contracts in the unaudited consolidated statements of operations.
Collateralized Loan Obligation - Warehouses:A Collateralized Loan Obligation Warehouse, or CLO Warehouse, is an entity organized for the purpose of holding syndicated bank loans, also known as leveraged loans, prior to the issuance of securities from that same vehicle. During the warehouse period, a CLO Warehouse will secure investments and build a portfolio of primarily leveraged loans and other debt obligations. The warehouse period terminates when the collateralized loan obligation vehicle issues various tranches of securities to the market. At this time, financing through the issuance of debt securities and subordinated notes is used to repay the bank financing.
The fair value of the Company's investment in the CLO Warehouse is determined by adding the excess spread (accrued interest plus interest received less financing cost) to the Company's initial investment in the CLO Warehouse. Consistent with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, or the FASB, the excess spread represents the price that would be received from the sale of the CLO Warehouse investment in an orderly transaction between market participants. CLO warehouses can be exposed to credit events, mark to market changes, rating agency downgrades and financing cost changes.
Segment Reporting: The Company operates through a single operating and reporting segment with an investment objective to generate current income and, to a lesser extent, long-term capital appreciation. The chief operating decision maker, or CODM, is the Company's chief executive officer. The CODM assesses the performance and makes operating decisions of the Company on a consolidated basis primarily based on the Company's change in shareholders' equity resulting from operations. In addition to numerous other factors and metrics, the CODM utilizes net investment income as a key metric in determining the amount of dividends to be distributed to the Company's shareholders. As the Company's operations comprise of a single reporting segment, the segment assets are reflected on the accompanying unaudited consolidated balance sheets as "total assets" and the significant segment expenses are listed on the accompanying unaudited consolidated statements of operations.
Note 3. Share Transactions
There were no transactions with respect to the Company's common shares during the three months ended March 31, 2025 and 2024.
On July 19, 2023, the Company's board of trustees, including the independent trustees, approved the termination of the Company's second amended and restated distribution reinvestment plan with respect to distributions declared by the Company's board of trustees on the Company's common shares, effective as of September 15, 2023. After this date, all shareholders will receive any subsequent distributions in cash.
On February 25, 2020, the Company received exemptive relief from the SEC permitting it to offer multiple classes of common shares. While the Company has no present intention to recommence a public offering of its common shares, the Company could do so in the future.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
Share Repurchase Program
In March 2020, the Company's board of trustees determined to suspend for an indefinite period of time the Company's share repurchase program and will reassess the Company's ability to recommence such program in future periods.
Prior to its suspension, the Company intended to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares and under what terms:
• the effect of such repurchases on the Company's qualification as a RIC (including the consequences of any necessary asset sales);
• the liquidity of the Company's assets (including fees and costs associated with disposing of assets);
• the Company's investment plans and working capital requirements;
• the relative economies of scale with respect to the Company's size;
• the Company's history in repurchasing common shares or portions thereof; and
• the condition of the securities markets.
On May 5, 2017, the board of trustees of the Company amended the share repurchase program. As amended, the Company limited the maximum number of common shares to be repurchased for any repurchase offer to the greater of (A) the number of common shares that the Company can repurchase with the proceeds it has received from the sale of common shares under its distribution reinvestment plan during the twelve-month period ending on the date the applicable repurchase offer expires (less the amount of proceeds used to repurchase common shares on each previous repurchase date for repurchase offers conducted during such twelve-month period) (this limitation is referred to as the twelve-month repurchase limitation) and (B) the number of common shares that the Company can repurchase with the proceeds the Company receives from the sale of common shares under its distribution reinvestment plan during the three-month period ending on the date the applicable repurchase offer expires (this limitation is referred to as the three-month repurchase limitation). In addition to this limitation, the maximum number of common shares to be repurchased for any repurchase offer has also been limited to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each calendar quarter. As a result, the maximum number of common shares to be repurchased for any repurchase offer would not exceed the lesser of (i) 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each calendar quarter, and (ii) whichever is greater of the twelve-month repurchase limitation described in clause (A) above and the three-month repurchase limitation described in clause (B) above.
Historically, pursuant to the Company's share repurchase program, the Company offered to repurchase common shares at a price equal to the price at which common shares were issued pursuant to the Company's distribution reinvestment plan on the distribution date coinciding with the applicable share repurchase date. The price at which common shares were issued under the Company's distribution reinvestment plan was determined by the Company's board of trustees or a committee thereof, in its sole discretion, and was (i) not less than the net asset value per common share as determined in good faith by the Company's board of trustees or a committee thereof, in its sole discretion, immediately prior to the payment date of the distribution and (ii) not more than 2.5% greater than the net asset value per common share as of such date. The Company's board of trustees may amend, suspend or terminate the share repurchase program at any time, upon 30 days' notice. The Company did not repurchase any shares pursuant to its share repurchase program during the three months ended March 31, 2025 and 2024. The Company's distribution reinvestment plan was terminated effective September 15, 2023.
In order to minimize the expense of supporting small accounts and provide additional liquidity to shareholders of the Company holding small accounts after completion of a regular quarterly share repurchase offer, the Company reserves the right to repurchase the shares of and liquidate any investor's account if the balance of such account is less than the Company's $5 minimum initial investment, unless the account balance has fallen below the minimum solely as a result of a decline in the Company's net asset value per share. The Company will provide or will cause to be provided 30 days' prior written notice to potentially affected investors, which notice may be included in regular quarterly repurchase offer materials, of any such repurchase. Historically, any such repurchases were made at the Company's most recent price at which the Company's shares were issued pursuant to its distribution reinvestment plan. There were no de minimis account liquidations during the three months ended March 31, 2025 and 2024.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions
Compensation of the Investment Adviser
Pursuant to the FS/EIG investment advisory agreement, FS/EIG Advisor is entitled to an annual base management fee based on the average weekly value of the Company's gross assets (gross assets equals total assets as set forth on the Company's consolidated balance sheets) during the most recently completed calendar quarter and an incentive fee based on the Company's performance. The base management fee is payable quarterly in arrears, and is calculated at an annual rate of 1.75% of the average weekly value of the Company's gross assets. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that FS/EIG Advisor may be entitled to under the FS/EIG investment advisory agreement.
FS/EIG Advisor has received structuring or other upfront fees from portfolio companies in which FS/EIG Advisor has caused the Company to invest. FS/EIG Advisor has agreed to offset the amount of any structuring, upfront or certain other fees received by FS/EIG Advisor or its members against the management fees payable by the Company under the FS/EIG investment advisory agreement. FS/EIG Advisor may agree to discontinue offsetting such fees in the future. During the three months ended March 31, 2025 and 2024, no structuring, upfront or certain other fees received by FS/EIG Advisor or its members were offset against management fees.
Pursuant to the FS/EIG investment advisory agreement, FS/EIG Advisor oversees the Company's day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities and other administrative services. FS/EIG Advisor also performs, or oversees the performance of, the Company's corporate operations and required administrative services, which includes being responsible for the financial records that the Company is required to maintain and preparing reports for the Company's shareholders and reports filed with the SEC.
The Company reimburses FS/EIG Advisor for expenses necessary to perform services related to the Company's administration and operations, including FS/EIG Advisor's allocable portion of the compensation and/or related expenses of certain personnel of FS Investments and EIG providing administrative services to the Company on behalf of FS/EIG Advisor, and for transactional expenses for prospective investments, such as fees and expenses associated with performing due diligence reviews of investments that do not close, often referred to as "broken deal" costs. The Company reimburses FS/EIG Advisor no less than quarterly for expenses necessary to perform services related to the Company's administration and operations. The amount of this reimbursement is set at the lesser of (1) FS/EIG Advisor's actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FS/EIG Advisor allocates the cost of such services to the Company based on factors such as time allocations and other reasonable metrics. The Company's board of trustees reviews the methodology employed in determining how the expenses are allocated to the Company and assesses the reasonableness of such reimbursements for expenses allocated to the Company based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company's board of trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company's board of trustees, among other things, compares the total amount paid to FS/EIG Advisor for such services as a percentage of the Company's net assets to the same ratio as reported by other comparable BDCs. The Company does not reimburse FS/EIG Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FS/EIG Advisor.
The following table describes the fees and expenses accrued under the FS/EIG investment advisory agreement during the three months ended March 31, 2025 and 2024:
Three Months Ended
March 31,
Related Party
Source Agreement
Description
2025 2024
FS/EIG Advisor FS/EIG investment advisory agreement
Base Management Fee(1)
$ 8,870 $ 9,112
FS/EIG Advisor FS/EIG investment advisory agreement
Administrative Services Expenses(2)
$ 1,253 $ 1,535
_________________________
(1) During the three months ended March 31, 2025 and 2024, $8,672 and $8,416, respectively, in base management fees were paid to FS/EIG Advisor. As of March 31, 2025 and December 31, 2024, $8,870 and $8,672, respectively, in base management fees were payable to FS/EIG Advisor.
(2) During the three months ended March 31, 2025 and 2024, $691 and $733, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FS/EIG Advisor and the remainder related to other reimbursable expenses. The Company paid $997 and $1,149 in administrative services expenses to FS/EIG Advisor, or its affiliates, during the three months ended March 31, 2025 and 2024, respectively.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Potential Conflicts of Interest
The members of the senior management and investment teams of FS/EIG Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Company does, or of investment vehicles managed by the same personnel. The officers, managers and other personnel of FS/EIG Advisor serve and may serve in the future in similar or other capacities for the investment advisers to the other funds managed or advised by FS Investments or EIG, and may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or EIG. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the Company's best interests or in the best interest of the Company's shareholders. The Company's investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. In addition, members of the senior management and investment teams and other employees of FS/EIG Advisor or its members or their respective affiliates may from time to time invest in portfolio companies in which the Company also invests. Subject to applicable law, the Company may periodically sell loans that it previously acquired after a short period of time to earn fees or other revenue, including from purchasers that do not participate in loan originations. FS/EIG Advisor or its affiliates may receive asset-based fees from purchasers that are advisory clients, resulting in a conflict of interest for FS/EIG Advisor. In some cases, FS/EIG Advisor (or an affiliate) will receive a fee from a third-party investor for making excess investment opportunities available, and such fee creates an incentive to recommend such opportunities to the Company and to allocate opportunities to such a third-party investor.
FS/EIG Advisor's affiliates and its personnel are simultaneously providing investment advisory services to other affiliated entities. FS/EIG Advisor may determine that it is appropriate for the Company and one or more other investment accounts managed by FS/EIG Advisor's affiliates to participate in an investment opportunity. To the extent the Company is able to make co-investments with investment accounts managed by FS/EIG Advisor or its affiliates, these co-investment opportunities may give rise to conflicts of interest or perceived conflicts of interest among the Company and the other participating accounts. In addition, conflicts of interest or perceived conflicts of interest may also arise in determining which investment opportunities should be presented to the Company and other participating accounts. To mitigate these conflicts, FS/EIG Advisor will seek to execute such transactions on a fair and equitable basis and in accordance with its allocation policies, taking into account various factors, which may include: the source of origination of the investment opportunity; investment objectives and strategies; tax considerations; risk, diversification or investment concentration parameters; characteristics of the security; size of available investment; available liquidity and liquidity requirements; regulatory restrictions; and/or such other factors as may be relevant to a particular transaction. As affiliates of FS Investments and EIG currently serve as the investment adviser to other entities and accounts, it is possible that some investment opportunities will be provided to such other entities and accounts rather than to the Company.
Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, simultaneously co-invest in transactions where price is the only negotiated term. In addition, the Company has received exemptive relief from the SEC permitting it to co-invest, subject to the satisfaction of certain conditions, in certain privately negotiated investment transactions with certain affiliates. This exemptive relief includes: an order dated June 4, 2013, that permits certain follow-on and disposition transactions related to past co-investments with certain affiliates of the Company's former investment adviser, including FS KKR Capital Corp.; an order dated April 10, 2018, that permits certain follow-on and disposition transactions related to past co-investments with certain EIG-advised funds; and an order dated November 13, 2024, that permits certain co-investments with certain affiliates of FS/EIG Advisor, including FS Credit Opportunities Corp. and FS Credit Income Fund, among others. On April 29, 2025, the SEC granted an exemptive order that will supersede the November 13, 2024, order subject to final board approval of relevant affiliates of reliance on the new order. The new order will similarly permit co-investments with certain affiliates but will simplify certain of the conditions under the current order and provide more flexibility than the current order.
Bridge Street CLO IV Ltd.
The collateral manager and administrator of Bridge Street CLO IV Ltd., or Bridge Street CLO IV, or CLO issuer, FS Structured Products Advisor, LLC, or FSSPA, is an affiliate of FS/EIG Advisor. In accordance with an agreement between FSSPA and the Company, as long as the Company owns more than 4.99% of the CLO issuer's equity, FSSPA will reimburse the Company on a quarterly basis in an amount equal to a portion of the compensation received by FSSPA from the CLO issuer, equal to the Company's percentage ownership of the CLO issuer's subordinated notes, for FSSPA's collateral management and collateral administrator services less certain administrative costs borne by FSSPA during the relevant quarter as defined in the expense reimbursement agreement.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
Bridge Street Warehouse CLO IV Ltd., or Bridge Street Warehouse CLO IV, was a CLO Warehouse that commenced operations on January 26, 2024. During the warehouse phase and through April 26, 2024, Bridge Street Warehouse CLO IV financed its loan purchases using its warehouse financing facility (including a subordinated loan facility provided by the Company). On April 26, 2024, the CLO Warehouse phase terminated when the collateralized loan obligation vehicle, Bridge Street CLO IV, issued to the market various tranches of notes in the amount of $354,700, including $23,700 principal amount for subordinated notes and rights to receive cash flows from collateral management fees. On such date, Bridge Street CLO IV, following a merger with Bridge Street Warehouse CLO IV, used the proceeds from its note issuance to repay the warehouse financing facility.
Bridge Street Warehouse CLO V Ltd.
Bridge Street Warehouse CLO V Ltd., or Bridge Street Warehouse CLO V, is a CLO Warehouse in which the Company contributes capital by subscribing for the preference shares issued by Bridge Street Warehouse CLO V, which is accounted for as a financial instrument at fair value as of March 31, 2025. Bridge Street Warehouse CLO V commenced operations on August 1, 2024 and was in the warehouse phase as of March 31, 2025. As of March 31, 2025, the Company contributed $40,000 to Bridge Street Warehouse CLO V. The Company had an investment of $40,514 in Bridge Street Warehouse CLO V, at fair value, as of March 31, 2025. Bridge Street Warehouse CLO V financed the majority of its loan purchases using its warehouse financing facility. The amount of paid-in-kind interest income from the Bridge Street Warehouse CLO V recorded on the Company's unaudited consolidated statement of operations for the three months ended March 31, 2025 was approximately $514.
On April 3, 2025, the CLO Warehouse phase terminated when Bridge Street Warehouse CLO V merged with and into the collateralized loan obligation vehicle, Bridge Street CLO V Ltd., or Bridge Street CLO V, and substantially simultaneously therewith, Bridge Street CLO V issued to the market various tranches of debt (including notes and loans) in the aggregate principal amount of $288,750, including $20,500 principal amount of subordinated notes to the Company. Bridge Street CLO V's collateral manager also has agreed to reimburse the Company for collateral management fees. Proceeds from the CLO debt issuance were used to repay the warehouse financing facility.
Bridge Street Warehouse CLO VI Ltd.
Bridge Street Warehouse CLO VI Ltd., or Bridge Street Warehouse CLO VI, is a CLO Warehouse in which the Company contributes capital by subscribing for the preference shares issued by Bridge Street Warehouse CLO VI, which is accounted for as a financial instrument at fair value as of March 31, 2025. Bridge Street Warehouse CLO VI commenced operations on January 10, 2025 and was in the warehouse phase as of March 31, 2025. As of March 31, 2025, the Company contributed $2,000 to Bridge Street Warehouse CLO VI. The Company had an investment of $2,015 in Bridge Street Warehouse CLO VI, at fair value, as of March 31, 2025. Bridge Street Warehouse CLO VI financed the majority of its loan purchases using its warehouse financing facility. The amount of paid-in-kind interest income from the Bridge Street Warehouse CLO VI recorded on the Company's unaudited consolidated statement of operations for the three months ended March 31, 2025 was approximately $15.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company declared on its common shares during the three months ended March 31, 2025 and 2024:
Distribution
For the Three Months Ended
Per Share
Amount
Fiscal 2024
March 31, 2024(1)
$ 0.0034 $ 1,549
Fiscal 2025
March 31, 2025(1)
$ 0.0068 $ 3,097
_________________________
(1) For the quarter ended December 31, 2024, the distribution amount per share was $0.0821, comprised of an initial distribution per share of $0.0753 declared in December 2024 and the remaining distribution per share of $0.0068 declared in January 2025, collectively representing an annualized distribution rate to shareholders of approximately 10.0%. For the quarter ended December 31, 2023, the distribution amount per share was $0.0643, comprised of an initial distribution per share of $0.0609 declared in December 2023 and the remaining distribution per share of $0.0034 declared in January 2024, collectively representing an annualized distribution rate to shareholders of approximately 7.5%.
Subject to applicable legal restrictions and the sole discretion of the Company's board of trustees, the Company expects to provide enhanced quarterly distributions to shareholders until the achievement of a long-term liquidity event. On April 22, 2025, the Company's board of trustees declared an enhanced cash distribution of $0.1053 per share for the first quarter of 2025, representing an annualized distribution rate to shareholders of 12.5% based on the estimated net asset value of $3.37 per share as of March 31, 2025. The enhanced distributions are expected to be paid quarterly and increase in subsequent years until the achievement of a long-term
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
liquidity event, subject to a maximum cap of 15.0% of the Company's then-current estimated net asset value beyond 2026. The Company expects a portion of the distributions may represent a return of investor capital, helping to accelerate liquidity for shareholders in the near-term. There can be no assurance that the Company will be able to pay distributions in the future. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.
Historically, the Company had an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company made a cash distribution, its shareholders would receive distributions in cash unless they specifically "opted in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares. However, certain state authorities or regulators may have imposed restrictions from time to time that may have prevented or limited a shareholder's ability to participate in the distribution reinvestment plan. The Company's distribution reinvestment plan was terminated effective as of September 15, 2023.
Under the prior distribution reinvestment plan, cash distributions to participating shareholders would be reinvested in additional common shares at a purchase price determined by the Company's board of trustees, or a committee thereof, in its sole discretion, that was (i) not less than the net asset value per common share as determined in good faith by the Company's board of trustees or a committee thereof, in its sole discretion, immediately prior to the payment of the distribution and (ii) not more than 2.5% greater than the net asset value per common share as of such date. Any distributions reinvested under the plan would remain taxable to a U.S. shareholder.
The Company may fund its cash distributions to shareholders from any sources of funds legally available to it, including proceeds from the sale of the Company's common shares, borrowings, net investment income from operations, capital gains proceeds from the sale of assets and non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies. The Company has not established limits on the amount of funds it may use from available sources to make distributions. The Company's distribution proceeds have exceeded and in the future may exceed its earnings. Therefore, portions of the distributions that the Company has made represented, and may make in the future may represent, a return of capital to shareholders, which lowers their tax basis in their common shares. A return of capital generally is a return of a shareholder's investment rather than a return of earnings or gains derived from the Company's investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, which is a nontaxable distribution) will be mailed to the Company's shareholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.
The following table reflects the sources of the cash distributions on a tax basis that the Company declared on its common shares during the three months ended March 31, 2025 and 2024:
Three Months Ended
March 31,
2025 2024
Source of Distribution Distribution Amount Percentage Distribution Amount Percentage
Net investment income(1)
$ 3,097 100 % $ 1,549 100 %
Short-term capital gains proceeds from the sale of assets - - - -
Long-term capital gains proceeds from the sale of assets - - - -
Total $ 3,097 100 % $ 1,549 100 %
_________________________
(1) During the three months ended March 31, 2025 and 2024, 87.9% and 94.5%, respectively, of the Company's gross investment income was attributable to cash income earned, 6.7% and 2.4%, respectively, was attributable to paid-in-kind, or PIK, interest and 5.4% and 3.1%, respectively, was attributable to non-cash accretion of discount.
The determination of the tax attributes of the Company's distributions is made annually as of the end of the Company's fiscal year based upon the Company's taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company's distributions for a full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV.
Net capital losses may be carried forward indefinitely, and their character is retained as short-term or long-term. As of March 31, 2025, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $70,770 and $1,503,303, respectively.
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Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
As of March 31, 2025 and December 31, 2024, for federal income tax purposes, the gross unrealized appreciation on the Company's investments was $66,095 and $67,490, respectively, and the gross unrealized depreciation on the Company's investments was $123,243 and $138,467, respectively.
The aggregate cost of the Company's investments for federal income tax purposes totaled $1,884,603 and $1,913,645 as of March 31, 2025 and December 31, 2024, respectively. The aggregate net unrealized appreciation (depreciation) of the Company's investments on a tax basis was $(57,042) and $(71,008) as of March 31, 2025 and December 31, 2024, respectively.
As of March 31, 2025 and December 31, 2024, the Company had deferred tax assets of $151,644 and $150,870, respectively, particularly resulting from interest expense disallowance, net operating losses and capital losses of the Company's wholly-owned taxable subsidiaries. As of March 31, 2025, the Company had a deferred tax liability of $5,462, resulting from unrealized appreciation on investments held by the Company's wholly-owned taxable subsidiaries. As of December 31, 2024, the Company had no deferred tax liability. As of March 31, 2025 and December 31, 2024, certain wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their deferred tax assets, therefore the deferred tax assets were offset by valuation allowances of $146,182 and $150,870, respectively.
Note 6. Financial Instruments
The Company may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include forward foreign currency exchange contracts and swap contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the Company has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
The Company is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Company may enter into forward foreign currency exchange contracts to gain or reduce exposure, to foreign currencies. A forward foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a specified date. These contracts help to manage the overall exposure to the currencies in which some of the investments and borrowings held by the Company are denominated and in some cases, may be used to obtain exposure to a particular market.
Each forward foreign currency exchange contract is marked-to-market daily and the change in market value is recorded as unrealized appreciation (depreciation) in the unaudited consolidated balance sheets. When a contract is closed, a realized gain or loss is recorded in the unaudited consolidated statement of operations equal to the difference between the value at the time it was opened and the value at the time it was closed. Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in cash without the delivery of foreign currency. The use of forward foreign currency exchange contracts contains the risk that the value of a forward foreign currency exchange contract changes unfavorably due to movements in the value of the referenced foreign currencies. The average notional amount of forward foreign currency exchange contracts during the three months ended March 31, 2025, which are indicative of the volumes of these derivative types was $6,025.
Total Return Swaps
The Company utilizes total return swaps to obtain exposure to securities without owning such securities. A total return swap, or TRS, is a contract in which there is an exchange of cash flows whereby one party agrees to make periodic payments based on the total return (distributions or periodic interest payments plus capital gains/losses) of an underlying instrument in exchange for fixed or floating rate interest payments. If the total return of the instrument or index underlying the transaction exceeds or falls short of the offsetting fixed or floating interest rate obligation, the Company receives payment from or makes a payment to the counterparty. Total return swaps are entered into to obtain exposure to a security or market without owning such security or investing directly in such market or to exchange the risk/return of one market with another market.
Nomura Total Return Swap
The Company entered into an equity total return swap with Nomura Global Financial Products Inc., or Nomura. Under the Nomura TRS, the Company obtained the economic benefit of owning shares of FS Credit Opportunities Corp., or FSCO, an investment company registered under the 1940 Act, without actually owning them, and Nomura received an interest-type payment in return. The investment adviser to FSCO is wholly-owned by Franklin Square Holdings, L.P., which is also the majority owner of FS/EIG Advisor.
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Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Financial Instruments (continued)
The Nomura TRS was marked-to-market daily and the change in market value was recorded as unrealized appreciation or depreciation on swap contracts in the consolidated balance sheets. Pursuant to its terms, the Nomura TRS settled monthly and a realized gain or loss was recorded in the consolidated statements of operations equal to the difference between the value of the shares underlying the Nomura TRS at the time the swap was entered into or the previous settlement date and the value as of the then current settlement date, plus dividends received and less accrued interest. Any dividends received by Nomura as holder of the FSCO shares were paid to the Company. The Nomura TRS had a term of three years, but it could be terminated earlier in whole or in part following the occurrence of certain prescribed events agreed to between Nomura and the Company. The primary underlying risk exposure through the use of equity total return swaps was equity market risk. The Nomura TRS terminated in March 2025.
BNP Paribas Total Return Swap
On February 15, 2024, FSSL Finance BNPP TRS LLC, or FSSL Finance BNPP TRS, a wholly-owned financing subsidiary of the Company, entered into a TRS for a portfolio of senior secured floating rate loans with BNP Paribas, or BNPP. The BNPP TRS enables the Company, through its ownership of FSSL Finance BNPP TRS, to obtain the economic benefit of owning the broadly syndicated loans subject to the TRS, without actually owning them, in return for an interest-type payment to BNPP. As such, the BNPP TRS is analogous to the Company borrowing funds to acquire loans and incurring interest expense to a lender.
The terms of the BNPP TRS include, among other things, (a) payment by BNPP to FSSL Finance BNPP TRS of all interest and fees (less applicable withholding taxes) on the underlying loans, (b) payment by FSSL Finance BNPP TRS to BNPP of (i) a financing fee on the outstanding notional amount of the TRS at a rate equal to USD-SOFR Compounded Index plus 1.65% per annum, and (ii) a utilization fee of 0.85% per annum on the difference between any lesser usage amount and a $100,000 minimum usage threshold, (c) upon the termination or repayment of any loan subject to the TRS, FSSL Finance BNPP TRS either will receive from BNPP the appreciation in the value of such loan or will pay to BNPP any depreciation in the value of such loan and (d) guarantee by the Company of all obligations of FSSL Finance BNPP TRS.
The monthly average notional amounts of the Nomura TRS and the BNPP TRS were $6,349 and $97,414, respectively, during the three months ended March 31, 2025 and $38,984 and $52,462, respectively, during the three months ended March 31, 2024.
The following table presents the fair value of open derivative contracts (which are not considered to be hedging instruments for accounting purposes) as of March 31, 2025 and December 31, 2024:
March 31, 2025
(Unaudited) 		December 31, 2024
Instrument Derivative Assets
Derivative Liabilities
Derivative Assets
Derivative Liabilities
Total Return Swaps
BNP Paribas
$ -
$ (190)(1)
$ 70(2)
$ -
Foreign Currency Risk
Forward foreign currency exchange contracts
$ 123(3)
$ - $ - $ -
______________
(1) Reflected on the Company's unaudited consolidated balance sheets as: Unrealized depreciation on swap contracts.
(2) Reflected on the Company's consolidated balance sheets as: Unrealized appreciation on swap contracts.
(3) Reflected on the Company's unaudited consolidated balance sheets as: Unrealized appreciation on forward foreign currency exchange contracts.
The effect of derivative contracts (which are not considered to be hedging instruments for accounting purposes) on the Company's statements of operations for the three months ended March 31, 2025 and 2024 were as follows:
Net Realized Gains (Losses)
Net Change in Unrealized
Appreciation (Depreciation)
Three Months Ended
March 31, 		Three Months Ended
March 31,
Instrument 2025 2024 2025 2024
Total Return Swaps
Nomura Total Return Swap
$ 261(1)
$ 2,302(1)
$ - $ -
BNP Paribas Total Return Swap
$ 148(1)
$ 25(1)
$ (260)(2)
$ 196(2)
Foreign Currency Risk
Forward foreign currency exchange contracts $ - $ -
$ 123(3)
$ -
______________
(1) Reflected on the Company's unaudited consolidated statements of operations as: Net realized gain (loss) on swap contracts.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Financial Instruments (continued)
(2) Reflected on the Company's unaudited consolidated statements of operations as: Net change in unrealized appreciation (depreciation) on swap contracts
(3) Reflected on the Company's unaudited consolidated statements of operations as: Net change in unrealized appreciation (depreciation) on forward foreign currency exchange contracts.
Offsetting of Derivative Instruments
The Company has derivative instruments that are subject to master netting agreements. These agreements include provisions to offset positions with the same counterparty in the event of default by one of the parties. The Company's unrealized appreciation and depreciation on derivative instruments are reported as gross assets and liabilities, respectively, in the consolidated balance sheets.
The following table presents the Company's derivative assets and liabilities by counterparty, net of amounts available for offset under a master netting agreement and net of any collateral received or pledged by the Company for such assets and liabilities as of March 31, 2025 and 2024:
As of March 31, 2025
(Unaudited)
Counterparty Derivative Assets Derivative Liabilities Net Value of Derivatives
Non-Cash Collateral
(Received) Pledged(1)
Cash Collateral
(Received) Pledged(1)
Net Amount of Derivative
Assets (Liabilities)(2)
BNP Paribas
-
$ (190) $ (190) - $ 190 -
Nomura
$ 123
- $ 123 - - $ 123
As of December 31, 2024
Counterparty Derivative Assets Derivative Liabilities Net Value of Derivatives
Non-Cash Collateral
(Received) Pledged(1)
Cash Collateral
(Received) Pledged(1)
Net Amount of Derivative
Assets (Liabilities)(2)
BNP Paribas
$ 70
- $ 70 - - $ 70
______________
(1) In some instances, the actual amount of the collateral received and/or pledged may be more than the amount shown due to overcollateralization.
(2) Net amount of derivative assets and liabilities represents the net amount due from the counterparty to the Company and the net amount due from the Company to the counterparty, respectively, in the event of default.
Note 7. Investment Portfolio
The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of March 31, 2025 and December 31, 2024:
March 31, 2025
(Unaudited) 		December 31, 2024
Amortized
Cost(1)
Fair Value
Percentage
of Portfolio
Amortized
Cost(1)
Fair Value
Percentage
of Portfolio
Senior Secured Loans-First Lien $ 1,464,750 $ 1,440,091 79 % $ 1,456,889 $ 1,445,351 78 %
Senior Secured Loans-Second Lien 52,827 50,277 3 % 51,604 49,191 3 %
Senior Secured Bonds 93,923 89,579 5 % 104,296 103,726 6 %
Unsecured Debt
39,877 40,109 2 % 38,785 38,962 2 %
Asset Based Finance
66,206 61,594 3 % 49,437 46,171 2 %
Equity/Other 155,023 145,911 8 % 202,778 159,236 9 %
Total
$ 1,872,606 $ 1,827,561 100 % $ 1,903,789 $ 1,842,637 100 %
______________
(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
In general, under the 1940 Act, the Company would be presumed to "control" a portfolio company if it owned more than 25% of its voting securities or it had the power to exercise control over the management or policies of a portfolio company, and would be an "affiliated person" of a portfolio company if it owned 5% or more of its voting securities.
As of March 31, 2025, the Company held investments in eight portfolio companies of which it is deemed to be an "affiliated person" but is not deemed to "control". For additional information with respect to such portfolio companies, see footnote (v) to the unaudited consolidated schedule of investments as of March 31, 2025 in this quarterly report on Form 10-Q.
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Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Investment Portfolio (continued)
As of December 31, 2024, the Company held investments in six portfolio companies of which it is deemed to be an "affiliated person" but is not deemed to "control" and the Company did not hold any portfolio companies of which it is deemed to "control." For additional information with respect to such portfolio companies, see footnotes (u) and (v) to the consolidated schedule of investments as of December 31, 2024 in this quarterly report on Form 10-Q.
The Company's investment portfolio may contain loans or bonds that are in the form of lines of credit or revolving credit facilities, or other investments, pursuant to which the Company may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2025, the Company had eighteen senior secured loan investments with aggregate unfunded commitments of $87,572. As of December 31, 2024, the Company had twenty senior secured loan investments with aggregate unfunded commitments of $92,715. The Company maintains sufficient cash on hand, available borrowings and/or liquid securities to fund such unfunded commitments should the need arise.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2025 and December 31, 2024:
March 31, 2025
(Unaudited) 		December 31, 2024
Industry Classification
Fair Value
Percentage
of Portfolio
Fair Value
Percentage
of Portfolio
Energy
$ 217,273 12 % $ 265,867 14 %
Capital Goods 199,722 11 % 160,441 9 %
Consumer Services 190,446 10 % 187,756 10 %
Commercial & Professional Services
178,060 10 % 201,499 11 %
Health Care Equipment & Services 159,322 9 % 184,439 10 %
Materials 153,777 8 % 123,577 7 %
Consumer Durables & Apparel
120,490 7 % 83,025 4 %
Financial Services
108,354 6 % 83,459 5 %
Media & Entertainment
92,450 5 % 94,236 5 %
Consumer Discretionary Distribution & Retail 65,330 3 % 79,781 4 %
Household & Personal Products 49,994 3 % 50,559 3 %
Automobiles & Components 46,488 3 % 47,215 3 %
Consumer Staples Distribution & Retail 45,098 2 % 45,789 2 %
Transportation 42,608 2 % 30,971 2 %
Pharmaceuticals, Biotechnology & Life Sciences 41,824 2 % 40,822 2 %
Software & Services
35,506 2 % 57,658 3 %
Telecommunication Services
20,027 1 % 39,406 2 %
Equity Real Estate Investment Trusts (REITs)
19,092 1 % 19,115 1 %
Insurance 15,614 1 % 34,569 2 %
Food, Beverage & Tobacco
13,663 1 % - -
Real Estate Management & Development 12,423 1 % 12,453 1 %
Total $ 1,827,561 100 % $ 1,842,637 100 %
Note 8. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
29
Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
Level 1:Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3:Inputs that are unobservable for an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of March 31, 2025 and December 31, 2024, the Company's investments were categorized as follows in the fair value hierarchy:
Valuation Inputs
March 31, 2025
(Unaudited) 		December 31, 2024
Level 1-Price quotations in active markets $ - $ -
Level 2-Significant other observable inputs 717,128 879,043
Level 3-Significant unobservable inputs 1,110,433 963,594
Total
$ 1,827,561 $ 1,842,637
In addition, the Company had forward foreign currency exchange contracts and equity total return swaps, as described in Note 6, which were categorized as Level 2 in the fair value hierarchy as of March 31, 2025 and December 31, 2024.
The Company's board of trustees is responsible for overseeing the valuation of the Company's portfolio investments at fair value as determined in good faith pursuant to FS/EIG Advisor's valuation policy. The Company's board of trustees has designated FS/EIG Advisor with day-to-day responsibility for implementing the portfolio valuation process set forth in FS/EIG Advisor's valuation policy.
The Company's investments consist primarily of investments that were acquired directly from the issuer. Debt investments, for which broker quotes or pricing information from third-party pricing services are not generally available, are valued by FS/EIG Advisor with the assistance of independent valuation firms, which determine a valuation range of fair value for such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the investments. Except as described below, all of the Company's equity/other investments are valued by independent valuation firms, which determine the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value, PV-10 multiples or liquidation value. An investment that is newly issued and purchased near the date of the financial statements is valued at cost if FS/EIG Advisor determines that the cost of such investment is the best indication of its fair value. Such investments described above are typically classified as Level 3 within the fair value hierarchy. Investments that are traded on an active public market are typically valued at their closing price as of the date of the financial statements and are classified as Level 1 within the fair value hierarchy. Except as described above, FS/EIG Advisor typically values the Company's other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which are provided by an independent third-party pricing service and screened for validity by such service and are typically classified as Level 2 within the fair value hierarchy. Forward foreign currency exchange contracts are valued at their quoted daily prices obtained from an independent third party. The fair value of the loan total return swaps is determined daily based on the bid price of the underlying asset provided by the counterparty. These assumptions are observable in the marketplace or can be corroborated by active markets or broker quotes and are typically classified as Level 2 within the fair value hierarchy.
FS/EIG Advisor periodically benchmarks the bid and ask prices it receives from the third-party pricing service and/or dealers and independent valuation firms, as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company's management in purchasing and selling these investments, FS/EIG Advisor believes that these prices are reliable indicators of fair value. FS/EIG Advisor reviewed the valuation determinations made with respect to these investments in a manner consistent with FS/EIG Advisor's valuation policy.
30
Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
The following is a reconciliation for the three months ended March 31, 2025 and 2024 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Three Months Ended March 31, 2025
Senior Secured Loans-First Lien
Senior Secured Loans-Second Lien
Senior Secured Bonds
Unsecured Debt
Asset Based Finance
Equity/Other
Total
Fair value at beginning of period $ 634,469 $ 49,191 $ 35,940 $ 38,962 $ 46,171 $ 158,861 $ 963,594
Accretion of discount (amortization of premium) 678 40 672 - - 21 1,411
Net realized gain (loss) (839) - 2 (31) - (15,994) (16,862)
Net change in unrealized appreciation (depreciation) 2,393 (137) (1,103) 55 (1,346) 34,430 34,292
Purchases 214,486 - - - 22,000 61,125 297,611
Paid-in-kind interest 223 1,183 - 1,124 529 - 3,059
Sales and repayments (74,323) - (56) (1) (5,760) (92,907) (173,047)
Transfers into Level 3(1)
- - - - - 375 375
Transfers out of Level 3(1)
- - - - - - -
Fair value at end of period $ 777,087 $ 50,277 $ 35,455 $ 40,109 $ 61,594 $ 145,911 $ 1,110,433
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date
$ (2,699) $ (137) $ (1,103) $ 55 $ (1,346) $ 9,763 $ 4,533
For the Three Months Ended March 31, 2024
Senior Secured Loans-First Lien
Senior Secured Loans-Second Lien
Senior Secured Bonds
Asset Based Finance
Sustainable Infrastructure
Investments, LLC
Equity/Other(2)
Total
Fair value at beginning of period $ 237,307 $ 54,424 $ 9,874 $ - $ 39,427 $ 498,448 $ 839,480
Accretion of discount (amortization of premium) 363 13 14 - - 100 490
Net realized gain (loss) 942 - 2 - - 1,016 1,960
Net change in unrealized appreciation (depreciation) (18,394) 930 (66) - 1,403 (22,351) (38,478)
Purchases 28,839 26,540 - 20,000 - 731 76,110
Paid-in-kind interest 291 1,029 - 329 - - 1,649
Sales and repayments (28,252) (1,000) (53) - - (7,962) (37,267)
Transfers into Level 3(1)
- - - - - 271 271
Transfers out of Level 3(1)
- - - - - - -
Fair value at end of period $ 221,096 $ 81,936 $ 9,771 $ 20,329 $ 40,830 $ 470,253 $ 844,215
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date
$ (17,988) $ 930 $ (66) $ - $ 1,403 $ (22,351) $ (38,072)
______________
(1) Transfers into and out of Level 3 are deemed to have occurred as a result of, among other factors, changes in liquidity, the depth and consistency of prices from third-party pricing services and the existence of observable trades in the market. Transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period. For the three months ended March 31, 2025 and 2024, transfers into or out of Level 3 were due to increased or decreased price transparency.
(2) The Company determined to reclassify investments in the schedule of investments from preferred equity to equity/other. Preferred equity amounts for the three months ended March 31, 2024 have been reclassified to equity/other to conform to the classifications used to prepare the reconciliation for the three months ended March 31, 2025.
31
Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of March 31, 2025 and December 31, 2024 were as follows:
Type of Investment
Fair Value at
March 31, 2025
(Unaudited)
Valuation Technique(1)
Unobservable Input
Range
Weighted
Average
Senior Secured Loans-First Lien $ 677,980 Market Comparables Market Yield (%)
6.9%-13.9%
10.1%
EBITDA Multiples (x)
2.4x-6.9x
5.8x
97,767 Cost
1,340
Other(2)
Senior Secured Loans-Second Lien 50,277 Market Comparables Market Yield (%)
12.2%-17.1%
15.1%
Senior Secured Bonds 35,455 Market Comparables Market Yield (%)
8.7%-14.0%
12.4%
Unsecured Debt
39,733 Market Comparables Market Yield (%)
11.0%-11.5%
11.3%
376 Cost
Asset Based Finance
19,065 Discounted Cash Flow Discount Rate (%)
16.4%-17.4%
16.9%
42,529
Income(3)
Excess Spread(3)
1.5%-1.8%
1.8%
Equity/Other 93,983 Market Comparables Market Yield (%)
13.2%-14.2%
13.7%
EBITDA Multiples (x)
2.5x-9.3x
6.5x
Production Multiples (MMcfe/d)
$3,100.0-$3,500.0
$3,300.0
Proved Reserves Multiples (Bcfe)
0.8x-0.8x
0.8x
PV-10 Multiples (x)
3.1x-3.3x
3.2x
Net Aircraft Book Value Multiple (x)
1.0x-1.1x
1.0x
51,509
Other(5)
Discount for Lack of Marketability (%)
3.0%-5.0%
4.3%
419
Other(2)
Total $ 1,110,433
Type of Investment
Fair Value at
December 31, 2024
Valuation Technique(1)
Unobservable Input
Range
Weighted
Average
Senior Secured Loans-First Lien $ 387,753 Market Comparables Market Yield (%)
7.9%-13.9%
10.1%
EBITDA Multiples (x)
2.4x-3.0x
2.7x
179,141
Cost
Discount Rate (%)
67,575
Other(2)
Senior Secured Loans-Second Lien 49,191 Market Comparables Market Yield (%)
12.4%-17.0%
15.0%
Senior Secured Bonds 35,940 Market Comparables Market Yield (%)
8.5%-12.1%
10.8%
Unsecured Debt
38,563 Market Comparables Market Yield (%)
11.2%-11.7%
11.4%
399
Cost
Asset Based Finance
20,679 Discounted Cash Flow Discount Rate (%)
17.3%-18.3%
17.8%
25,492
Income(3)
Excess Spread(3)
1.8%-1.8%
1.8%
Equity/Other 85,970 Market Comparables Market Yield (%)
13.3%-14.3%
13.8%
EBITDA Multiples (x)
2.6x-9.5x
5.6x
Production Multiples (MMcfe/d)
$3,050.0-$3,450.0
$3,250.0
Proved Reserves Multiples (Bcfe)
0.7x-0.8x
0.8x
PV-10 Multiples (x)
1.7x-1.9x
1.8x
Net Aircraft Book Value Multiple (x)
1.0x-1.1x
1.0x
36,580 Discounted Cash Flow Discount Rate (%)
8.0%-12.0%
10.0%
36,311
Other(4)
Discount for Lack of Marketability (%)
8.5%-52.5%
31.0%
Total $ 963,594
______________
(1) For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.
(2) Fair valued based on expected outcome of proposed corporate transactions, the expected value of the liquidation preference of the investment or other factors.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
(3) Fair value of the CLO Warehouse is based on cost plus the excess spread (accrued interest plus interest received less financing cost).
(4) Fair valued based on expected outcome of proposed corporate transactions. This valuation technique also includes a discount for lack of marketability.
(5) Fair valued based on the market price of the security with a discount for lack of marketability until the shares are registered.
Note 9. Financing Arrangements
The following tables present a summary of information with respect to the Company's outstanding financing arrangement as of March 31, 2025 and December 31, 2024. For additional information regarding the financing arrangement, see the notes to the Company's audited consolidated financial statements contained in its annual report on Form 10-K for the year ended December 31, 2024. Any significant changes to the Company's financing arrangement during the three months ended March 31, 2025 are discussed below.
As of March 31, 2025
(Unaudited)
Arrangement(1)
Type of
Arrangement
Rate(2)
Amount
Outstanding 		Amount
Available 		Maturity Date
Barclays Facility Repurchase Term SOFR+3.00% $ 400,000 $ 100,000 September 6, 2026
As of December 31, 2024
Arrangement(1)
Type of
Arrangement
Rate(2)
Amount
Outstanding 		Amount
Available 		Maturity Date
Barclays Facility
Repurchase Term SOFR+3.00% $ 500,000 $ - September 6, 2026
______________________
(1) The carrying amount outstanding under the facility approximates its fair value, unless otherwise noted.
(2) The financing fee under the Barclays Facility is based on three-month term SOFR (with a floor of 0.00%) plus a facility margin calculated monthly as the weighted average of the individual margin of the collateral obligations (subject to a floor, in the aggregate, of 3.00%).
For the three months ended March 31, 2025 and 2024, the components of total interest expense for the Company's financing arrangements were as follows:
Three Months Ended
March 31,
2025 2024
Arrangement(1)
Direct Interest Expense(2)
Amortization of Deferred Financing Costs
Total Interest Expense
Direct Interest Expense(2)
Amortization of Deferred Financing Costs and Discount Total Interest Expense
Barclays Facility $ 8,570 $ 511 $ 9,081 $ 8,568 $ 516 $ 9,084
___________________
(1) Borrowings of each of the Company's wholly-owned special-purpose financing subsidiaries are considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.
(2) Direct interest expense includes the effect of non-usage fees, administration fees and make-whole fees, if any.
The Company's average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2025, were $464,444 and 7.38%, respectively. As of March 31, 2025, the Company's effective interest rate on borrowings, including the effect of non-usage fees, was 7.70%.
The Company's average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2024, were $400,546 and 8.30%, respectively. As of December 31, 2024, the Company's effective interest rate on borrowings, including the effect of non-usage fees, was 7.76%.
Under its financing arrangements, the Company made certain representations and warranties and was required to comply with various covenants, reporting requirements and other customary requirements for similar financing arrangements. The Company was in compliance with all covenants required by its financing arrangements as of March 31, 2025 and December 31, 2024.
Barclays Facility
On September 6, 2023, the Company, through two wholly-owned, special purpose financing subsidiaries, FSSL Finance BB AssetCo LLC, or FSSL Finance BB AssetCo, and FSSL Finance BB Seller LLC, or FSSL Finance BB Seller, entered into a financing arrangement with Barclays Bank PLC, or Barclays, pursuant to which up to $500,000 will be made available to fund investments in
33
Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financing Arrangements (continued)
loans and other corporate securities, or together, the Collateral Obligations, and for other general corporate purposes, or the Barclays Facility.
The financing fee under the Barclays Facility is based on three-month term SOFR (with a floor of 0.00%) plus a facility margin calculated monthly as the weighted average of the individual margin of the Collateral Obligations (such individual margins ranging from 1.90% to 4.20%, depending on the type of Collateral Obligations; subject to a floor, in the aggregate, of 3.00%).
Pursuant to the financing arrangement, the Company may contribute Collateral Obligations from time to time to FSSL Finance BB AssetCo, pursuant to a Sale and Contribution Agreement, dated as of September 6, 2023, between the Company and FSSL Finance BB AssetCo, or the Sale and Contribution Agreement. The assets held by FSSL Finance BB AssetCo secure the obligations of FSSL Finance BB AssetCo under the notes, or the Notes, issued by FSSL Finance BB AssetCo to FSSL Finance BB Seller, pursuant to an indenture, dated as of September 6, 2023, with Computershare Trust Company, N.A., or Computershare, as trustee, or the Indenture.
Principal on the Notes will be due and payable on the stated maturity date of July 1, 2033, and the Notes do not bear interest. Pursuant to the Indenture, FSSL Finance BB AssetCo has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. The Indenture contains events of default customary for similar transactions, including, without limitation: (a) failure to make principal payments on the Notes at their stated maturity or any earlier redemption date or to make interest payments on the Notes; (b) failure to disburse amounts in accordance with the priority of payments; (c) occurrence of certain bankruptcy and insolvency events with respect to FSSL Finance BB AssetCo; and (d) occurrence of a Repurchase Date under the Repurchase Agreement (defined below) as a result of an event of default with respect to FSSL Finance BB Seller. FSSL Finance BB Seller acquired and subscribed for the Notes pursuant to a Subscription Agreement, dated as of September 6, 2023, between FSSL Finance BB AssetCo and FSSL Finance BB Seller as the investor.
On September 6, 2023, FSSL Finance BB Seller entered into a Master Confirmation in respect of Repurchase Transactions with Barclays, or the Confirmation, which supplements and is subject to the Master Repurchase Agreement, dated as of September 6, 2023, between FSSL Finance BB Seller and Barclays, or the Master Repurchase Agreement, and such Master Repurchase Agreement, as supplemented and evidenced by the Confirmation, or the Repurchase Agreement. Pursuant to the Repurchase Agreement, on one or more occasions beginning September 6, 2023, Barclays began purchasing the Notes held by FSSL Finance BB Seller for an aggregate purchase price of $400,000 outstanding as of March 31, 2025, which price may, subject to satisfaction of certain conditions, increase from time to time up to the maximum aggregate purchase price of $500,000. The scheduled Repurchase Date is September 6, 2026.
Pursuant to the Repurchase Agreement, FSSL Finance BB Seller has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar transactions. The Repurchase Agreement contains events of default customary for similar financing transactions, including, without limitation: (a) failure to pay the repurchase price upon the applicable payment dates; (b) failure to pay the financing fees and make-whole amounts when due; (c) failure to post collateral as required; (d) occurrence of an event of default under the Indenture, (e) occurrence of insolvency events with respect to FSSL Finance BB Seller; (f) cross default by the Company with respect to its indebtedness above a certain threshold amount and (g) financial covenant breach by the Company.
As of March 31, 2025, Notes in an aggregate principal amount of $400,000 had been purchased by FSSL Finance BB Seller from FSSL Finance BB AssetCo and subsequently sold to Barclays under the Barclays Facility for aggregate proceeds of $397,025. The carrying amount outstanding under the Barclays Facility approximates its fair value. The Company funded the purchase of Notes by FSSL Finance BB Seller through a capital contribution to FSSL Finance BB Seller. The Notes issued by FSSL Finance BB AssetCo and purchased by FSSL Finance BB Seller eliminate in consolidation on the Company's financial statements.
The Company incurred costs of $6,199 in connection with obtaining the Barclays Facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the Barclays Facility. As of March 31, 2025, $2,975 of such deferred financing costs had yet to be amortized to interest expense.
The following table presents the carrying amount of the collateral pledged with the Company's open repurchase agreement as of March 31, 2025:
Counterparty
Repurchase Agreement
Non-Cash Collateral Pledged(1)
Cash Collateral Pledged
Net Exposure Due (to)/from Counterparty(2)
Barclays Facility
$ (397,025) $ 397,025 $ - $ -
_________________________
(1) In some instances, the actual amount of the collateral received and/or pledged may be more than the amount shown due to overcollateralization.
(2) Net exposure represents the net receivable (payable) that would be due from (to) the counterparty in the event of default.
34
Table of Contents
FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financing Arrangements (continued)
The repurchase agreement is collateralized by all or a portion of the securities held within FSSL Finance BB AssetCo LLC. The following table presents the fair market value of collateral, principal value and principal value plus accrued interest of the securities pledged as collateral to the Barclays Facility as of March 31, 2025:
Repurchase Agreement
Fair Market Value of Collateral
Principal Value
Principal Value including Accrued Interest
Barclays Facility(1)
$ 927,247 $ 400,000 $ 401,233
_________________________
(1) See footnote (f) to the consolidated schedule of investments as of March 31, 2025 in this quarterly report on Form 10-Q.
The following table reflects a breakdown of transactions accounted for as secured borrowings, the gross obligation by the type, and the remaining contractual maturity of those transactions as of March 31, 2025:
Remaining Contractual Maturity of the Agreements
Overnight and Continuous
Less Than 30 Days
30 - 90 Days
More Than 90 Days
Total
Repurchase Agreement
Barclays Facility(1)
$ - $ - $ - $ (401,233) $ (401,233)
_________________________
(1) The repurchase agreement is collateralized by Senior Secured Loans, Senior Secured Bonds, Unsecured Debt and Equity.
Note 10. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company's maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. FS/EIG Advisor has reviewed the Company's existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company's knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company's rights under contracts with its portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial condition or results of operations.
See Note 4 for a discussion of the Company's commitments to FS/EIG Advisor and its affiliates (including FS Investments) and Note 7 for a discussion of the Company's unfunded commitments.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 11. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2025 and the year ended December 31, 2024:
Three Months Ended
March 31, 2025 (Unaudited)
Year Ended
December 31, 2024
Per Share Data:(1)
Net asset value, beginning of period $ 3.30 $ 3.43
Results of operations(2)
Net investment income 0.06 0.30
Net realized gain (loss) and unrealized appreciation (depreciation) 0.02 (0.09)
Net increase (decrease) in net assets resulting from operations 0.08 0.21
Shareholder distributions(3)
Distributions from net investment income (0.01) (0.34)
Net decrease in net assets resulting from shareholder distributions (0.01) (0.34)
Net asset value, end of period $ 3.37 $ 3.30
Shares outstanding, end of period 455,506,155 455,506,155
Total return(4)
2.33 % 6.20 %
Total return (without assuming reinvestment of distributions)(4)
2.33 % 6.04 %
Ratio/Supplemental Data:
Net assets, end of period $ 1,534,790 $ 1,503,456
Ratio of net investment income to average net assets(5)(6)
7.16 % 8.65 %
Ratio of total operating expenses to average net assets(5)
5.65 % 5.69 %
Ratio of management fee offset to average net assets(5)
- (0.00) %
Ratio of net operating expenses to average net assets(5)
5.65 % 5.69 %
Ratio of interest expense to average net assets(5)
2.40 % 2.31 %
Portfolio turnover(7)
19.33 % 68.24 %
Total amount of senior securities outstanding
$ 400,000 $ 500,000
Asset coverage per unit(8)
$ 4,837 $ 4,007
Asset coverage ratio(8)
4.84 4.01
_________________________
(1) Per share data may be rounded in order to recompute the ending net asset value per share.
(2) The per share data was derived by using the weighted average shares outstanding during the applicable period.
(3) The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.
(4) The total return for each period presented was calculated based on the change in net asset value during the applicable period, assuming the reinvestment of all distributions at the Company's net asset value per share as of the end of the applicable period. The total return (without assuming reinvestment of distributions) for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share which were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total returns do not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of the Company's common shares. The total returns include the effect of the issuance of common shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculations of total returns in the table should not be considered representations of the Company's future total returns, which may be greater or less than the returns shown in the table due to a number of factors, including the Company's ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company's expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total returns on the Company's investment portfolio during the applicable period and do not represent actual returns to shareholders.
(5) Weighted average net assets during the applicable period are used for this calculation. Ratios for the three months ended March 31, 2025 are annualized. Annualized ratios for the three months ended March 31, 2025 are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2025.
(6) If FS/EIG Advisor had not agreed to offset the amount of any structuring, upfront or certain other fees it or its members received against the management fee payable by the Company, the ratio of net investment income to average net assets would have been 7.16% and 8.65% for the three months ended March 31, 2025 and the year ended December 31, 2024, respectively. See Note 4 for a discussion of the management fee offset with FS/EIG Advisor.
(7) Portfolio turnover for the three months ended March 31, 2025 is not annualized.
(8) Asset coverage per unit is the ratio of the carrying value of the Company's total consolidated assets, less liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness.
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FS Specialty Lending Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 12. Subsequent Events
Reorganization
On April 22, 2025, the Company's board of trustees approved a plan to list the common shares on a national securities exchange prior to the end of 2025, subject to shareholder approval, market conditions and final board of trustees approval. In connection with the listing, the board of trustees determined to convert the Company from a BDC to a closed-end fund registered under the 1940 Act. To effectuate the conversion to a closed-end fund, the board of trustees approved the merger of the Company, or the Reorganization, with and into New FS Specialty Lending Fund, or the Successor Company, a newly organized Delaware statutory trust registered under the 1940 Act as a closed-end fund, pursuant to an Agreement and Plan of Reorganization, or the Reorganization Agreement, dated as of April 22, 2025, among the Company, the Successor Company, and, for the limited purposes set forth therein, FS/EIG Advisor. The Reorganization Agreement and the consummation of the transactions contemplated thereby, including the Reorganization, have been approved by the board of trustees of the Company and the board of trustees of the Successor Company.
Following the Reorganization, the Successor Company intends to change its name to FS Specialty Lending Fund and to seek to list its common shares on the New York Stock Exchange under the symbol "FSSL."
As a result of the Reorganization, Company shareholders will hold an investment in a registered closed-end fund that has not elected to be treated as a BDC under the 1940 Act. The Successor Company will have the same investment objectives and investment policies as the Company and will operate pursuant to investment restrictions substantially identical to those of the Company, except for certain requirements applicable to the Company as a result of its election to be regulated as a BDC which will not apply to the Successor Company. The Successor Company will be overseen by a board of trustees comprised of the same members as the board of trustees of the Company. The Successor Company will continue to be managed by FS/EIG Advisor, subject to the transaction involving FS/EIG Advisor described below.
In the Reorganization, shareholders of the Company will receive Successor Company shares having an aggregate net asset value equal to the aggregate net asset value of the shares such shareholder held in the Company immediately prior to the effectiveness of the Reorganization as determined pursuant to the Reorganization. Because the Successor Company will have no assets or operations prior to the Closing Date, it is expected that shareholders of the Company will receive one share of the Successor Company for each share of the Company held as of the Closing Date (and a fractional share of the Successor Company for each fractional share of the Company held).
Completion of the Reorganization is subject to various customary conditions, including approval of the Reorganization Agreement by Company shareholders. Shareholders of the Company will be asked to vote on the Reorganization at a special meeting of shareholders expected to take place later this year, at a time and location to be determined by the board of trustees. A proxy statement/prospectus containing information about the special meeting of shareholders and the Reorganization is expected to be provided to each Company shareholder of record as of the record date for the special meeting of shareholders, which date will be determined by the board of trustees.
Reverse Share Split
In advance of the anticipated listing, the board of trustees has approved a reverse share split, to be effective on or around May 15, 2025. As of the effective time of the reverse share split, every six common shares of the Company will be combined into one share, and each shareholder's common shares will automatically be converted into a number of common shares (and/or fractional common shares, as applicable) equal to the number of common shares of the Company held immediately prior to the reverse share split divided by six. In effect, the reverse share split will reduce the number of common shares of the Company outstanding while maintaining the Company's and each shareholder's aggregate net asset value. Immediately following the reverse share split, each shareholder of record will hold the same percentage of the Company's outstanding common shares as held immediately prior to the reverse share split. There will be no change in the par value of $0.001 per share as a result of the reverse share split. In addition, the reverse share split will not modify the rights or preferences of the Company's common shares.
Amendments to Declaration of Trust
On April 22, 2025, the board of trustees approved certain amendments to the Agreement and Declaration of Trust, or the Declaration of Trust, of the Company. Such amendments are intended to align the Declaration of Trust with the anticipated operation of the Company as a registered closed-end fund. Such amendments are subject to approval by shareholders of the Company. The approval of such amendments is a condition to shareholder's consideration of the Reorganization.
FS/EIG Advisor Transaction
Concurrently with the closing of the Reorganization, FS Investments will acquire EIG's interest in FS/EIG Advisor, or the Adviser Transaction, FS/EIG Advisor will become an indirect wholly-owned subsidiary of Franklin Square Holdings, L.P. and FS/EIG Advisor will be renamed FS Specialty Lending Advisor, LLC. FS/EIG Advisor personnel from FS Investments that provide services to the Company will continue to provide services to the Successor Company following the completion of the Reorganization and the Adviser Transaction.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share amounts)
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us" and "our" refer to FS Specialty Lending Fund and "FS/EIG Advisor" refers to FS/EIG Advisor, LLC.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
•our future operating results;
• our business prospects and the prospects of the companies in which we may invest, including our and their ability to achieve our respective objectives as a result of our board of trustees' approval of changes to our investment policy;
• the impact of the investments that we expect to make;
• the ability of our portfolio companies to achieve their objectives;
• our current and expected financing arrangements and investments;
• our ability to complete a liquidity event;
•our ability to complete the reorganization;
•our ability to complete a listing of the common shares on a national securities exchange;
•the price at which the common shares may trade on a national securities exchange;
•changes in the general interest rate environment;
•the elevated levels of inflation, and its impact on our portfolio companies and on the industries in which we invest;
• the adequacy of our cash resources, financing sources and working capital;
• the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;
• our contractual arrangements and relationships with third parties;
• actual and potential conflicts of interest with the other funds managed by FS/EIG Advisor, FS Investments, EIG, or any of their respective affiliates;
• the dependence of our future success on the general economy and its effect on the industries in which we may invest;
• general economic, political and industry trends and other external factors;
• our use of financial leverage;
• the ability of FS/EIG Advisor to locate suitable investments for us and to monitor and administer our investments;
• the ability of FS/EIG Advisor or its affiliates to attract and retain highly talented professionals;
• our transition from an investment policy of investing primarily in private U.S. energy and power companies to a diversified credit investment policy of investing across private and public credit in a broader set of industries, sectors and sub-sectors;
• our distribution rate and intention to declare dividends, including with respect to the amount and timing of any such distributions;
• our ability to maintain our qualification as a RIC and as a BDC;
• the impact on our business of U.S. and international financial reform legislation, rules and regulations;
• the effect of changes to tax legislation on us and the portfolio companies in which we may invest and our and their tax position; and
• the tax status of the enterprises in which we may invest.
Words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause our actual results to differ materially from those expressed or forecasted in the forward-looking statements for any reason, including the factors set forth in ''Item 1A. Risk Factors.'' Other factors that could cause actual results to differ materially include changes relating to those set forth above and the following, among others:
• changes in the economy;
• geo-political risks;
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• risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or pandemics;
• future changes in laws or regulations and conditions in our operating areas; and
• our ability to (i) transition to a diversified credit strategy within anticipated timeframes or at all, (ii) pay the targeted distributions, (iii) obtain leverage on terms satisfactory to us and (iv) achieve a liquidity event.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders are advised to consult any additional disclosures that we may make directly to shareholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
Overview
We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced investment operations on July 18, 2011. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. In November 2016, we closed our continuous public offering of common shares to new investors.
Our investment activities are managed by FS/EIG Advisor and supervised by our board of trustees, a majority of whom are independent. Under the FS/EIG investment advisory agreement, we have agreed to pay FS/EIG Advisor an annual base management fee based on the average weekly value of our gross assets and an incentive fee based on our performance.
In May 2023, we announced that our board of trustees approved our transition from an investment policy of investing primarily in Energy companies to a diversified credit investment policy of investing across private and public credit in a broader set of industries, sectors and sub-sectors. Following a shareholder notice period, the new policy became effective on September 29, 2023. Our allocation to Energy investments has declined and we expect it to further decline over time, in each case, through the natural course of maturities, repayments and sales activity and by growing the total size of the portfolio through leverage facilities. The pace of the portfolio rotation remains dependent upon a number of factors, including the turnover of concentrated illiquid Energy investments, performance of underlying portfolio companies, high yield and energy market conditions, our access to borrowings and the amount and pace of the payment of enhanced distributions to shareholders, among others.
Our investment policy is to invest primarily in a portfolio of secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments, which, under normal circumstances, will represent at least 80% of our total assets. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change.
Our current investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We intend to pursue our investment objectives by investing in both direct originations and broadly syndicated investments of secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments. Investing in both direct originations and broadly syndicated investments allows us to be dynamic in our pursuit of opportunities across changing economic and credit cycles. We intend to focus on the following investment categories in an effort to generate returns for our investors with an acceptable level of risk.
• Direct Originations: Direct lending and innovative capital structure solutions to both sponsored and non-sponsored companies, typically based in the U.S. and operating within the middle market. These investments may include both debt and equity components.
• Broadly Syndicated Loan and Bond Transactions: Opportunistic investments into primary and secondary markets, broadly syndicated loans and bonds. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In the case of broadly syndicated investments, we generally intend to capitalize on market inefficiencies by investing in loans, bonds, and other asset classes where the market price of such investment reflects a lower value than we believe is warranted based on our fundamental analysis, providing us with an opportunity to earn an attractive return on our investment.
However, we may pursue other investment opportunities if we believe they are in our best interests and consistent with our investment objectives.
Prior to September 29, 2023, our investment policy was to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies and our investment objectives were to generate current income and long-term capital appreciation.
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The majority of our portfolio is comprised of income-oriented securities, which principally refers to debt securities and other income-producing investments, of privately-held companies within the United States. Historically, our portfolio has largely been invested in Energy companies, although our portfolio has shifted away from investments in Energy companies as we pursue a diversified credit strategy. Generally, in the long-term we expect to weight our investments more heavily towards directly originated investments, as this will provide us with the ability to tailor investments to best match a project's or company's needs with our investment objectives. However, our investment policy enables FS/EIG Advisor to opportunistically invest in broadly syndicated investments and dynamically adjust allocations between private and public markets depending on where the risk-adjusted returns are most attractive. We intend to weight our portfolio towards senior secured debt, which we believe offers opportunities for superior risk-adjusted returns and income generation. Our debt investments may take the form of corporate or project loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by yield enhancements. These yield enhancements may include common equity, warrants, options, net profits interests, cash flow participations or other forms of equity participation that can provide additional consideration or "upside" in a transaction. A portion of our portfolio may be comprised of derivatives, including the use of total return swaps, credit default swaps and other swap contracts. In connection with certain of our debt investments or any restructuring of these debt investments, we may on occasion receive equity interests, including warrants or options, as additional consideration or otherwise in connection with a restructuring. FS/EIG Advisor will seek to tailor our investment focus as market conditions evolve.
Our future financial condition, results of operations and cash flows may be impacted by the transition to a new investment policy.
Revenues
The principal measure of our financial performance is net increase or decrease in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, foreign currency and swap contracts, net change in unrealized appreciation or depreciation on investments, net change in unrealized gain or loss on foreign currency and net change in unrealized appreciation or depreciation on swap contracts. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to non-investment related foreign currency fluctuations. Net realized gain or loss on swap contracts is the portion of realized gain or loss attributable to the difference between the fixed price specified in the contract and the referenced settlement price. Net change in unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net change in unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. Net change in unrealized appreciation or depreciation on swap contracts is the net change in the value of receivables or accruals due to the impact of the difference between the fixed price specified in the contract and the referenced settlement price.
We principally generate revenues in the form of interest income on the debt investments we hold. We also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees.
Expenses
Our primary operating expenses include the payment of management and incentive fees and other expenses under the FS/EIG investment advisory agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate FS/EIG Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.
FS/EIG Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/EIG Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS/EIG Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.
We reimburse FS/EIG Advisor for expenses necessary to perform services related to our administration and operations, including FS/EIG Advisor's allocable portion of the compensation and related expenses of certain personnel of FS Investments and EIG providing administrative services to us on behalf of FS/EIG Advisor, and for transactional expenses for prospective investments, such as fees and expenses associated with performing due diligence reviews of investments that do not close, often referred to as "broken deal" costs. We reimburse FS/EIG Advisor no less than quarterly for all costs and expenses incurred by FS/EIG Advisor in performing its obligations and providing personnel under the FS/EIG investment advisory agreement. The amount of this
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reimbursement is set at the lesser of (1) FS/EIG Advisor's actual costs incurred in providing such services and (2) the amount that we estimate would be required to pay alternative service providers for comparable services in the same geographic location. FS/EIG Advisor allocates the cost of such services to us based on factors such as time allocations and other reasonable metrics. Our board of trustees reviews the methodology employed in determining how the expenses are allocated to us and assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of trustees compares the total amount paid to FS/EIG Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. We do not reimburse FS/EIG Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FS/EIG Advisor.
We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to all other expenses incurred by FS/EIG Advisor in connection with administering our business, including expenses incurred by FS/EIG Advisor in performing administrative services for us and administrative personnel paid by FS/EIG Advisor, to the extent they are not controlling persons of FS/EIG Advisor or any of its affiliates, subject to the limitations included in the FS/EIG investment advisory agreement.
In addition, we have contracted with State Street to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FS/EIG Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
For information regarding the fee offset with FS/EIG Advisor, see Note 4 to our unaudited consolidated financial statements included herein.
Expected Distributions
In March 2020, our board of trustees determined to suspend for an indefinite period of time our share repurchase program and will reassess our ability to recommence such program in future periods. As a result, no common shares were purchased pursuant to our share repurchase program and there were no de minimis account liquidations during the three months ended March 31, 2025 and 2024.
Subject to applicable legal restrictions and the sole discretion of our board of trustees, we expect to provide enhanced quarterly distributions to shareholders until the achievement of a long-term liquidity event. The enhanced distribution rate for each quarter in 2024 represented an annualized distribution rate of approximately 10.0%, in each case based on the then-current estimated net asset value. We expect to provide enhanced quarterly distributions to shareholders representing an annualized distribution rate of approximately 12.5% and 15.0% based on estimated net asset value as of such quarter end for 2025 and 2026 and beyond, respectively, provided we have not achieved a long-term liquidity event. We expect a portion of these distributions may represent a return of investor capital, helping to accelerate liquidity for shareholders in the near-term. Our board of trustees has and will continue to evaluate our ability to pay any distributions in the future. There can be no assurance that we will be able to pay distributions in the future. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.
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Portfolio Investment Activity for the Three Months Ended March 31, 2025 and for the Year Ended December 31, 2024
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2025:
Net Investment Activity For the Three Months Ended
March 31, 2025
Purchases $ 357,342
Sales and Repayments (385,345)
Net Portfolio Activity $ (28,003)
For the Three Months Ended
March 31, 2025
New Investment Activity by Asset Class Purchases Percentage
Senior Secured Loans-First Lien $ 274,217 77 %
Senior Secured Loans-Second Lien - -
Senior Secured Bonds - -
Unsecured Debt
- -
Asset Based Finance
22,000 6 %
Equity/Other 61,125 17 %
Total $ 357,342 100 %
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2025 and December 31, 2024:
March 31, 2025
(Unaudited) 		December 31, 2024
Amortized
Cost(1)
Fair Value
Percentage
of Portfolio
Amortized
Cost(1)
Fair Value
Percentage
of Portfolio
Senior Secured Loans-First Lien $ 1,464,750 $ 1,440,091 79 % $ 1,456,889 $ 1,445,351 78 %
Senior Secured Loans-Second Lien 52,827 50,277 3 % 51,604 49,191 3 %
Senior Secured Bonds 93,923 89,579 5 % 104,296 103,726 6 %
Unsecured Debt
39,877 40,109 2 % 38,785 38,962 2 %
Asset Based Finance
66,206 61,594 3 % 49,437 46,171 2 %
Equity/Other 155,023 145,911 8 % 202,778 159,236 9 %
Total
$ 1,872,606 $ 1,827,561 100 % $ 1,903,789 $ 1,842,637 100 %
_________________________
(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2025 and December 31, 2024:
March 31, 2025 December 31, 2024
Number of Portfolio Companies 82 86
% Variable Rate (based on fair value) 82.6% 81.3%
% Fixed Rate (based on fair value) 9.4% 10.0%
% Income Producing Equity/Other Investments (based on fair value)
4.9% 5.8%
% Non-Income Producing Equity/Other Investments (based on fair value)
3.1% 2.9%
Weighted Average Purchase Price of Debt Investments (as a % of par value) 98.8% 97.9%
% of Investments on Non-Accrual (based on fair value) 0.4% 1.1%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) 9.4% 9.2%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)-Excluding Non-Income Producing Assets 9.9% 9.8%
Subject to applicable legal restrictions and the sole discretion of our board of trustees, we expect to provide enhanced quarterly distributions to shareholders until the achievement of a long-term liquidity event. See "Expected Distributions" above for a discussion of the enhanced quarterly distributions paid and expected to be paid, subject to applicable legal restrictions and the sole
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discretion of our board of trustees. For the three months ended March 31, 2025 and the year ended December 31, 2024, our total return was 2.33% and 6.20%, respectively, and our total return without assuming reinvestment of distributions was 2.33% and 6.04%, respectively.
Our estimated gross portfolio yield and annualized distribution rate to shareholders do not represent actual investment returns to shareholders. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the sections entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2024 and in our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
Direct Originations
We define Direct Originations as any investment where FS/EIG Advisor or its affiliates negotiate the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These Direct Originations include participation in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions.
The following table presents certain selected information regarding our Direct Originations as of March 31, 2025 and December 31, 2024:
Characteristics of All Direct Originations held in Portfolio March 31, 2025 December 31, 2024
Number of Portfolio Companies 43 40
% of Investments on Non-Accrual (based on fair value) 0.4% 0.5%
Total Cost of Direct Originations $1,086,781 $1,001,354
Total Fair Value of Direct Originations $1,064,765 $953,612
% of Total Investments, at Fair Value 58.3% 51.8%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations 9.0% 8.9%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations-Excluding Non-Income Producing Assets 9.9% 9.7%
Portfolio Composition by Strategy
The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of March 31, 2025 and December 31, 2024:
March 31, 2025 December 31, 2024
Portfolio Composition by Strategy
Fair Value
Percentage
of Portfolio
Fair Value
Percentage
of Portfolio
Direct Originations $ 1,064,765 58 % $ 953,612 52 %
Broadly Syndicated/Other 762,796 42 % 889,025 48 %
Total $ 1,827,561 100 % $ 1,842,637 100 %
See Note 7 to our unaudited consolidated financial statements included herein for additional information regarding our investment portfolio.
Portfolio Asset Quality
In addition to various risk management and monitoring tools, FS/EIG Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FS/EIG Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment Rating
Summary Description
1 Investment exceeding expectations and/or capital gain expected.
2 Performing investment generally executing in accordance with the portfolio company's business plan-full return of principal and interest expected.
3 Performing investment requiring closer monitoring.
4 Underperforming investment-some loss of interest or dividend possible, but still expecting a positive return on investment.
5 Underperforming investment with expected loss of interest and some principal.
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The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2025 and December 31, 2024:
March 31, 2025 December 31, 2024
Investment Rating
Fair Value
Percentage
of Portfolio
Fair Value
Percentage
of Portfolio
1 $ - - $ - -
2 1,629,439 89 % 1,687,410 92 %
3 155,330 9 % 42,047 2 %
4 42,038 2 % 104,898 6 %
5 754 0 % 8,282 0 %
Total
$ 1,827,561 100 % $ 1,842,637 100 %
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended March 31, 2025 and 2024
Revenues
Our investment income for the three months ended March 31, 2025 and 2024 was as follows:
Three Months Ended
March 31,
2025 2024
Amount Percentage of
Total Income 		Amount Percentage of
Total Income
Interest income $ 41,221 85 % $ 62,840 91 %
Paid-in-kind interest income 3,245 7 % 1,648 2 %
Fee income 1,382 3 % 412 1 %
Dividend income 2,690 5 % 4,350 6 %
Total investment income(1)
$ 48,538 100 % $ 69,250 100 %
_____________________________
(1) Such revenues represent $42,671 and $65,441 of cash income earned as well as $5,867 and $3,809 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2025 and 2024, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.
The level of interest income we receive is generally related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We may experience volatility in the amount of interest income that we earn as the accrual status of existing portfolio investments may fluctuate due to restructuring activity in the portfolio.
The decrease in the amount of interest income for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to one time interest received on certain preferred equity positions during the three months ended March 31, 2024. Preferred equity positions may be treated as debt for GAAP or tax purposes. The increase in the amount of PIK income for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to acquisition of certain investments earning PIK income.
Fee income is transaction based, and typically consists of prepayment fees and structuring fees. As such, future fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees. The increase in the amount of fee income for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to the increase in miscellaneous fees during the period.
The decrease in the amount of dividend income for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 was primarily due to the decrease in dividends paid with respect to our investments in certain common equities.
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Expenses
Our operating expenses for the three months ended March 31, 2025 and 2024 were as follows:
Three Months Ended
March 31,
2025 2024
Management fees $ 8,870 $ 9,112
Administrative services expenses 1,253 1,535
Share transfer agent fees 793 919
Accounting and administrative fees 178 125
Interest expense 9,081 9,084
Trustees' fees 164 164
Expenses associated with our independent audit and related fees 129 140
Legal fees 315 221
Printing fees 203 280
Other 426 457
Total operating expenses 21,412 22,037
Federal and state taxes 3 793
Total net expenses, including federal and state taxes $ 21,415 $ 22,830
The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2025 and 2024 (not annualized):
Three Months Ended
March 31,
2025 2024
Ratio of operating expenses and federal and state taxes to average net assets
1.41 % 1.45 %
Ratio of interest expense and federal and state taxes to average net assets
(0.60) % (0.63) %
Ratio of net operating expenses, excluding certain expenses, to average net assets
0.81 % 0.82 %
Interest expense may increase or decrease our expense ratios relative to comparative periods depending on changes in benchmark interest rates such as SOFR, leverage utilization rates and the terms of our financing arrangements, among other factors.
Net Investment Income
Our net investment income totaled $27,123 ($0.06 per share) and $46,420 ($0.10 per share) for the three months ended March 31, 2025 and 2024, respectively.
Net Realized Gains or Losses
Our net realized gains (losses) on investments, foreign currency and swap contracts for the three months ended March 31, 2025 and 2024, were as follows:
Three Months Ended
March 31,
2025 2024
Net realized gain (loss) on investments(1)
$ (9,047) $ 4,190
Net change in realized gain (loss) on foreign currency
(24) -
Net realized gain (loss) on swap contracts 409 2,327
Total net realized gain (loss) $ (8,662) $ 6,517
_________________________
(1) We sold investments and received principal repayments, other than short-term investments and U.S. government obligations, of $290,840 and $94,505, respectively, during the three months ended March 31, 2025 and $68,747 and $63,370, respectively, during the three months ended March 31, 2024.
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Net Change in Unrealized Appreciation (Depreciation)
Our net change in unrealized appreciation (depreciation) on investments, swap contracts and foreign currency for the three months ended March 31, 2025 and 2024 were as follows:
Three Months Ended
March 31,
2025 2024
Net change in unrealized appreciation (depreciation) on investments $ 16,107 $ (35,013)
Net change in unrealized appreciation (depreciation) on swap contracts (260) 196
Net change in unrealized appreciation (depreciation) on foreign currency - (9)
Net change in unrealized appreciation (depreciation) on forward foreign currency exchange contracts
123 -
Total net change in unrealized appreciation (depreciation) $ 15,970 $ (34,826)
During the three months ended March 31, 2025 and 2024, the net change in unrealized appreciation (depreciation) on our investments was primarily driven by the performance of our directly originated assets and certain of our equity/other investments.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2025 and 2024, the net increase (decrease) in net assets resulting from operations was $34,431 ($0.08 per share) and $18,111 ($0.04 per share), respectively.
This "Results of Operations" section should be read in conjunction with "Expected Distributions" above.
Financial Condition, Liquidity and Capital Resources
Overview
As of March 31, 2025, we had $95,265 in cash and cash equivalents and foreign currency, which we held in custodial accounts and a money market fund, and $100,000 in borrowings available under our financing arrangement. As of March 31, 2025, we also had broadly syndicated investments that could be sold to create additional liquidity. As of March 31, 2025, we had eighteen senior secured loan investments with aggregate unfunded commitments of $87,572. We maintain sufficient cash on hand, available borrowings and/or liquid securities to fund such unfunded commitments and other contractual commitments should the need arise.
We generate cash primarily from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. To seek to enhance our returns, we may also seek to employ leverage as market conditions permit and at the discretion of FS/EIG Advisor, but unless and until we elect otherwise, as permitted by the 1940 Act, in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act.
Prior to investing in securities of portfolio companies, we invest the net proceeds from sales and paydowns of existing investments primarily in cash, cash equivalents, including money market funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
This "Financial Condition, Liquidity and Capital Resources" section should be read in conjunction with "Expected Distributions" above and "-Financing Arrangement" below.
Financing Arrangement
The following table presents a summary of information with respect to our outstanding financing arrangement as of March 31, 2025:
Arrangement(1)
Type of
Arrangement
Rate(2)
Amount
Outstanding 		Amount
Available 		Maturity Date
Barclays Facility Repurchase Term SOFR+3.00% $ 400,000 $ 100,000 September 6, 2026
______________________
(1) The carrying amount outstanding under the facility approximates its fair value, unless otherwise noted.
(2) The financing fee under the Barclays Facility is based on three-month term SOFR (with a floor of 0.00%) plus a facility margin calculated monthly as the weighted average of the individual margin of the collateral obligations (subject to a floor, in the aggregate, of 3.00%).
For additional information regarding our financing arrangements, see Note 9 to our unaudited consolidated financial statements included herein.
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RIC Tax Treatment and Distributions
We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute as dividends to our shareholders. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to maintain RIC tax treatment, we must distribute to our shareholders, for each tax year, dividends generally of an amount at least equal to 90% of our "investment company taxable income," which is generally the sum of our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses, determined without regard to any deduction for dividends paid. In addition, we may, in certain cases, satisfy the Annual Distribution Requirement by distributing dividends relating to a tax year after the close of such tax year under the "spillover dividend" provisions of Subchapter M of the Code. If we distribute a spillover dividend, such dividend will be included in a shareholder's gross income for the tax year in which the spillover distribution is paid. We intend to make sufficient distributions to our shareholders to maintain our RIC tax treatment each tax year. We will also be subject to nondeductible U.S. federal excise taxes on certain undistributed income unless we distribute in a timely manner to our shareholders of an amount at least equal to the sum of (1) 98% of our net ordinary taxable income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains over capital losses (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) 100% of any ordinary income and capital gain net income recognized for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to our shareholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our U.S. shareholders, on December 31 of the calendar year in which the distribution was declared.
In general, when we pay regular cash distributions, we intend to declare them on a quarterly or monthly basis and pay them on a monthly basis. We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions will begin to accrue on the date that common shares are issued to such shareholder. From time to time, we may also pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.
Our distribution proceeds have exceeded and in the future may exceed our earnings. Therefore, portions of the distributions that we have made represented, and may make in the future may represent, a return of capital to shareholders, which lowers their tax basis in their common shares. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FS/EIG Advisor. Moreover, a return of capital will generally not be taxable, but will reduce each shareholder's cost basis in our common shares, and will result in a higher reported capital gain or lower reported capital loss when the common shares on which such return of capital was received are sold. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our shareholders.
We intend to make any regular distributions in the form of cash, out of assets legally available for distribution. Prior to September 15, 2023, shareholders could elect to receive their cash distributions in additional common shares under our distribution reinvestment plan. Any distributions reinvested under the plan nevertheless remained taxable to a U.S. shareholder. Our distribution reinvestment plan was terminated effective as of September 15, 2023.
Subject to applicable legal restrictions and the sole discretion of our board of trustees, we expect to provide enhanced quarterly distributions to shareholders until the achievement of a long-term liquidity event. We expect to provide enhanced quarterly distributions to shareholders representing an annualized distribution rate of approximately 12.5% and 15.0% based on estimated net asset value as of such quarter end for 2025, and 2026 and beyond, respectively, provided we have not achieved a long-term liquidity event. We expect a portion of these distributions may represent a return of investor capital, helping to accelerate liquidity for shareholders in the near-term. Our board of trustees has and will continue to evaluate our ability to pay any distributions in the future. There can be no assurance that we will be able to pay distributions in the future. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.
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The following table reflects the cash distributions per share that we have declared on our common shares during the three months ended March 31, 2025 and 2024:
Distribution
For the Three Months Ended
Per Share
Amount
Fiscal 2024
March 31, 2024(1)
$ 0.0034 $ 1,549
Fiscal 2025
March 31, 2025(1)
$ 0.0068 $ 3,097
______________________
(1) For the quarter ended December 31, 2024, the distribution amount per share was $0.0821, comprised of an initial distribution per share of $0.0753 declared in December 2024 and the remaining distribution per share of $0.0068 declared in January 2025, collectively representing an annualized distribution rate to shareholders of approximately 10.0%. For the quarter ended December 31, 2023, the distribution amount per share was $0.0643, comprised of an initial distribution per share of $0.0609 declared in December 2023 and the remaining distribution per share of $0.0034 declared in January 2024, collectively representing an annualized distribution rate to shareholders of approximately 7.5%.
See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions.
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming the estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in Note 2 to our unaudited consolidated financial statements included herein. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We have identified one of our accounting policies, valuation of portfolio investments, as critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
Our board of trustees is responsible for overseeing the valuation of our portfolio investments at fair value as determined in good faith pursuant to FS/EIG Advisor's valuation policy. As permitted by Rule 2a-5 of the 1940 Act, our board of trustees has designated FS/EIG Advisor as our valuation designee, with day-to-day responsibility for implementing the portfolio valuation process set forth in FS/EIG Advisor's valuation policy.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, or the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical securities; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
FS/EIG Advisor determines the fair value of our investment portfolio each quarter. Securities that are publicly-traded with readily available market prices will be valued at the reported closing price on the valuation date. Securities that are not publicly-traded with readily available market prices will be valued at fair value as determined in good faith by FS/EIG Advisor. In connection with that determination, FS/EIG Advisor will prepare portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party pricing and valuation services.
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With respect to investments for which market quotations are not readily available, a multi-step valuation process is undertaken each quarter, as described below:
•our quarterly fair valuation process begins with FS/EIG Advisor facilitating the delivery of updated quarterly financial and other information relating to each investment to an independent third-party pricing or valuation service;
•the independent third-party pricing or valuation service then reviews and analyzes the information, along with relevant market and economic data, and determines proposed valuations for each portfolio company or investment according to the valuation methodologies in FS/EIG Advisor's valuation policy and communicates the information to FS/EIG Advisor in the form of a valuation range for Level 3 assets;
•FS/EIG Advisor then reviews the preliminary valuation information for each portfolio company or investment and provides feedback about the accuracy, completeness and timeliness of the valuation-related inputs considered by the independent third-party pricing or valuation service and any suggested revisions thereto prior to the independent third-party pricing or valuation service finalizing its valuation range;
•FS/EIG Advisor then provides the valuation committee with its valuation determinations and valuation-related information for each portfolio company or investment, along with any applicable supporting materials; and other information that is relevant to the fair valuation process as required by FS/EIG Advisor's board reporting obligations;
•the valuation committee meets with FS/EIG Advisor to receive the relevant quarterly reporting from FS/EIG Advisor and to discuss any questions from the valuation committee in connection with the valuation committee's role in overseeing the fair valuation process; and
•following the completion of its fair value oversight activities, the valuation committee (with the assistance of FS/EIG Advisor) provides our board of trustees with a report regarding the quarterly valuation process.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, FS/EIG Advisor may use any independent third-party pricing or valuation services for which it has performed the appropriate level of due diligence. However, FS/EIG Advisor is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information sourced by FS/EIG Advisor or provided by any independent third-party pricing or valuation service that FS/EIG Advisor deems to be reliable in determining fair value under the circumstances. Below is a description of factors that FS/EIG Advisor and any independent third-party valuation services may consider when determining the fair value of our investments.
The valuation methods utilized for each portfolio company may vary depending on industry and company-specific considerations. Typically, the first step is to make an assessment as to the enterprise value of the portfolio company's business in order to establish whether the portfolio company's enterprise value is greater than the amount of its debt as of the valuation date. This analysis helps to determine a risk profile for the applicable portfolio company and its related investments, and the appropriate valuation methodology to utilize as part of the security valuation analysis. The enterprise valuation may be determined using a market or income approach.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, FS/EIG Advisor may incorporate these factors into discounted cash flow models to arrive at fair value. Various methods may be used to determine the appropriate discount rate in a discounted cash flow model. Other factors that may be considered include the borrower's ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing the debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
Valuation of CLO subordinated notes considers a variety of relevant factors, including recent purchases and sales known to FS/EIG Advisor in similar securities and output from a third-party financial model. The third-party financial model contains detailed information on the characteristics of CLOs, including recent information about assets and liabilities, and is used to project future cash flows. Key inputs to the model include assumptions for future loan default rates, recovery rates, prepayment rates, reinvestment rates and discount rates. These are determined by considering both observable and third-party market data and prevailing general market assumptions and conventions.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price.
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When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. FS/EIG Advisor subsequently values these warrants or other equity securities received at their fair value.
Forward foreign currency exchange contracts typically will be valued at their quoted daily prices obtained from an independent third party. Futures contracts traded on exchanges typically will be valued daily at their last sale price. Swap contracts typically are valued at their daily prices obtained from an independent third party. The aggregate settlement values and notional amounts of the swap contracts are not recorded in the consolidated balance sheets. Fluctuations in the value of the swap contracts are recorded in the consolidated balance sheets as gross assets and gross liabilities and in the statements of operations as unrealized appreciation (depreciation) until closed, when they will be recorded as net realized gain (loss).
See Note 8 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.
Contractual Obligations
We have entered into an agreement with FS/EIG Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the FS/EIG investment advisory agreement are equal to 1.75% of the average weekly value of our gross assets and an incentive fee based on our performance. Base management fees are generally paid on a quarterly basis in arrears. FS/EIG Advisor is reimbursed for administrative services expenses incurred on our behalf. See Note 4 to our unaudited consolidated financial statements included herein for a discussion of this agreement and for the amount of fees and expenses accrued under this agreement during the three months ended March 31, 2025 and 2024.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates. As of March 31, 2025, 82.6% of our portfolio investments (based on fair value) paid variable interest rates, 9.4% paid fixed interest rates, 4.9% were income producing equity/other investments and the remaining 3.1% consisted of non-income producing equity/other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and the amount of incentive fees payable to FS/EIG Advisor with respect to our increased pre-incentive fee net investment income.
Pursuant to the terms of the Barclays Facility, we borrow at a floating rate based on a benchmark interest rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
The following table shows the effect over a twelve-month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangement in effect as of March 31, 2025 (dollar amounts are presented in thousands):
Basis Point Change in Interest Rates
Increase (Decrease) in
Interest Income(1)
Increase (Decrease) in
Interest Expense(2)
Increase (Decrease) in
Net Interest Income
Percentage Change in
Net Interest Income
Down 100 basis points $ (18,938) $ (4,000) $ (14,938) (10.8) %
No change - - - -
Up 100 basis points $ 11,006 $ 4,000 $ 7,006 5.1 %
Up 300 basis points $ 40,949 $ 12,000 $ 28,949 21.0 %
Up 500 basis points $ 70,893 $ 20,000 $ 50,893 36.8 %
___________________
(1) Assumes no defaults or prepayments by portfolio companies over the next twelve months.
(2) Assumes current debt outstanding as of March 31, 2025, and no changes over the next twelve months.
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the three months ended March 31, 2025 and 2024, we did not engage in interest rate hedging activities.
Foreign Currency Risk
From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as amounts translated into U.S. dollars for inclusion in our consolidated financial statements.
In addition, we may have risks regarding portfolio valuation and the potential inability of counterparties to meet the terms of their contracts. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates-Valuation of Portfolio Investments."
Item 4. Controls and Procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2025. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the three month period ended March 31, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material legal proceedings and, to our knowledge, no material legal proceedings are threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors that appeared under Item 1A. "Risk Factors" in our most recent Annual Report on Form 10-K. There are no material changes from the risk factors included within our most recent Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable. See Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more detailed discussion of the terms of our share repurchase program and de minimis account liquidation.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended March 31, 2025, no director or officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement."
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Item 6. Exhibits.
10.1* ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of October 31, 2024, by and between FS Specialty Lending Fund and Nomura Global Financial Products Inc.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
32.1* Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
_______________
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 9, 2025.
FS Specialty Lending Fund
By:
/s/ MICHAELC. FORMAN
Michael C. Forman
Chief Executive Officer
(Principal Executive Officer)
By:
/s/ EDWARDT. GALLIVAN, JR.
Edward T. Gallivan, Jr.
Chief Financial Officer
(Principal Financial and Accounting Officer)
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