FS Specialty Lending Fund updates

FS Specialty Lending Fund updates

FS Specialty Lending Fund updates

Summary

The Board of Trustees of FS Specialty Lending Fund approved a change in the Fund’s name, investment objectives and investment strategy as part of a plan to transition the Fund’s investment strategy from investing primarily in private U.S. energy and power companies to a diversified credit strategy investing across private and public credit in a broader set of industries, sectors and subsectors.

The transition to a diversified credit strategy is designed to help:

  • Enhance the return to shareholders
  • Maximize the Fund’s long-term liquidity options
  • Accelerate the timeline to a liquidity event and
  • Reduce the volatility associated with a single sector-focused strategy.

The Fund has been renamed FS Specialty Lending Fund to align with the transition to a diversified credit strategy. FS/EIG Advisor, LLC (the “Advisor”) will continue to manage the Fund under the new investment strategy. We expect investment professionals from FS Investments, including Andrew Beckman, Head of Liquid Credit and Special Situations at FS Investments, will supplement the Advisor’s investment management resources to assist in the transition and management of the diversified credit portfolio.  

We currently expect to target a liquidity event within three years of the effective date of the investment strategy change, subject to the pace of the portfolio rotation, Fund performance, market conditions and the best interest of shareholders. A liquidity event could include a merger, sale of the portfolio, a listing of the Fund’s common shares on a national securities exchange or other transaction as approved by the Board. 

The effective date of the new name and investment strategy was September 29, 2023.

Q3 2024 FS Specialty Lending Fund webinar replay now available

Key resources

Fact sheet  

Webinar transcript  

Commentary  

Quarterly update  

Presentation  

FS Global Credit team page  

Strategic rationale

The primary goal of transitioning to a diversified credit strategy is to maximize the Fund’s near-, medium- and long-term liquidity options. To demonstrate a meaningful and tangible step towards providing shareholders with liquidity in the near- to medium-term, we expect the Fund to provide enhanced distributions to shareholders. 

The enhanced distribution schedule is designed to meaningfully increase the return to shareholders during the transition process. Furthermore, since we expect a portion of the enhanced distributions will be funded through a return of capital, which would reduce the Fund’s total assets under management, the graduating schedule further aligns the interests of shareholders and the Advisor to seek to achieve a long-term liquidity event that maximizes shareholder value within the targeted three-year timeframe. 

Maximize the Fund’s long-term liquidity options by: 

  • Increasing the Fund’s distribution yield: The transition plan has been structured to enhance the Fund’s portfolio yield and ultimately seek to reach our targeted annualized distribution rate of approximately 9.0% based on the Fund’s NAV. We expect the combination of rotating the portfolio, optimizing the Fund’s borrowings and reducing the Fund’s exposure to energy and non-income-producing assets may help grow the income generated by the portfolio at an accelerated pace compared to the current investment strategy.
  • Diversifying the portfolio to appeal to a broader audience: Investor demand for energy-focused strategies has generally declined since FSSL’s launch in 2011 driven by the volatility associated with commodity cycles, a changing regulatory environment, climate change concerns and general competition for capital from other sectors. The result is a more limited investor base for energy-specific investments. We believe the flexibility to invest in private and public credit markets across the capital structure, industries, sectors and subsectors is critical to enhancing shareholder returns, reducing exposure to commodity price volatility and building a portfolio that may appeal to a broader set of investors.
  • Optimizing borrowings: FSSL has historically used leverage (borrowings) to enhance the return of FSSL’s investment portfolio. Many traditional lenders, such as banks and insurance companies, have eliminated or curtailed their lending to the energy sector or significantly increased the cost of borrowing due to many of the reasons noted above. We believe the transition to a diversified credit strategy may broaden the amount and type of financing options available to the Fund, reduce the cost of borrowing, accelerate the turnover of FSSL’s portfolio by growing the size of the portfolio and reducing the portfolio’s concentration of equity holdings and sustain a higher annualized distribution rate for shareholders.

Long-term liquidity outlook

We currently expect to target a liquidity event within three years of the effective date of the investment strategy change, subject to the pace of the portfolio rotation, Fund performance, market conditions and the best interest of shareholders. A liquidity event could include a merger, sale of the portfolio, a listing of the Fund’s common shares on a national securities exchange or other transaction as approved by the Board. 

Enhanced distributions

We expect the Fund to provide enhanced quarterly distributions to shareholders commencing in the third quarter of 2023 until the achievement of a long-term liquidity event.

If the client’s account is currently held with a custodian, the payment will be sent to the custodian. We recommend registered shareholders add bank account instructions to their account by completing the Account Maintenance Form so distributions are deposited directly into their account. Otherwise, they will receive a paper check to the address of record.

Targeted schedule of enhanced distributions1

Q3 2023Q4 2023202420252026
Annualized distribution rate27.5%7.5%10.0%12.5%15.0%3

Hypothetical account with a current value of $100,0004

Q3 2023Q4 2023202420252026
Cash distributions for the period$1,875$1,860$9,810$11,890$13,7503
Cumulative cash distributions $1,875$3,735$13,545$25,435$39,1853

View important disclosures

  • There can be no assurance that the Fund will be able to make these distributions or achieve these results. Distributions are subject to Board approval, market conditions and legal restrictions.
  • Annualized as a percentage of the estimated net asset value (NAV) at the time of declaration.
  • The payment of enhanced distributions is expected to be capped at an annualized rate of 15% of the Fund’s then-current net asset value beyond 2026 until the achievement of a long-term liquidity event.
  • For illustrative purposes only. The hypothetical example assumes the Fund’s NAV is unchanged during the transition period aside from the payment of the enhanced distributions, with a portion of the distributions representing a return of capital. The actual distributions are subject to Board approval, changes in the Fund’s NAV, the performance of the underlying portfolio companies, the pace of the portfolio transition and the Fund’s access to new borrowing facilities, among other factors.

Additional resources

FAQ  

Account Maintenance Form  
Shareholder notice  

10-Q filing  

FS Specialty Lending Fund page

RISK FACTORS

An investment in the common shares of FSSL involves a high degree of risk and may be considered speculative. The following are some of the risks an investment in our common shares involves; however, you should carefully consider all of the information found in Item 1A of our annual report on Form 10-K and other reports filed with the U.S. Securities and Exchange Commission.

CAUTIONARY STATEMENT FORWARD-LOOKING STATEMENTS
Statements included herein may constitute “forward-looking” statements as that term is defined in Section 27A of the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995, including statements with regard to future events or the future performance or operations of the Fund, the transition in investment policy, anticipated distribution rates, portfolio rotation, borrowings and liquidity events. Words such as “intends,” “will,” “expects,” and “may” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ materially include changes in the economy, geo-political risks, risks associated with possible disruption to the Fund’s operations or the economy generally due to hostilities, terrorism, natural disasters or pandemics such as COVID-19, future changes in laws or regulations and conditions in the Fund’s operating area, unexpected costs, the ability of the Fund to (i) transition to a diversified credit strategy within anticipated timeframes or at all, (ii) pay the targeted distributions, (iii) obtain the applied-for exemptive relief, (iv) obtain leverage on terms satisfactory to the Fund and (v) achieve a liquidity event, and such other factors that are disclosed in the Fund’s filings with the Securities and Exchange Commission (the “SEC”). The inclusion of forward-looking statements should not be regarded as a representation that any plans, estimates or expectations will be achieved. Any forward-looking statements speak only as of the date of this communication. Except as required by federal securities laws, the Fund undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on any of these forward-looking statements.

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