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Franklin BSP Capital Corp 10-K Analysis & Summary – 3/14/2025

⚠️This is not investment advice.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️

FRANKLIN BSP CAP CORP

Filing date:

03/14/2025

TLDR:

ELI5:

Franklin BSP Capital Corp made more money from investments after merging with another company, but they also spent more and had some loans that weren’t being paid back. There are some potential conflicts of interest to watch out for.

Accession #:

0001825248-25-000004

Published on

Analyst Summary

  • Investment income significantly increased due to the merger with Franklin BSP Lending Corporation (FBLC), but operating expenses also rose substantially due to increased management and incentive fees, and interest expenses.
  • The number of portfolio companies on non-accrual status increased significantly, partially due to the FBLC merger, indicating higher credit risk.
  • The incentive fee structure may incentivize the Adviser to take on riskier investments or increase leverage.
  • The accounting treatment of the merger resulted in a purchase price premium that is being amortized, impacting net investment income.
  • The company’s debt-to-equity ratio increased from 0.82 in 2023 to 1.07 in 2024, indicating greater reliance on debt financing.
  • Net profit margin decreased significantly from 83.21% in 2023 to 14.51% in 2024, reflecting investment losses in 2024.
  • Adjusted net investment income after taxes decreased from $53,575 in 2023 to $175,702 in 2024.
  • Weighted Average Current Yield decreased from 12.0% in 2023 to 10.5% in 2024.
  • Days Sales Outstanding (DSO) increased from 31.10 days in 2023 to 186.14 days in 2024, potentially indicating issues with collecting investment income.

Opportunities and Risks

  • Merger Synergies: The merger with FBLC provides opportunities for increased scale and diversification.
  • Middle Market Lending: The underserved middle market provides attractive investment opportunities.
  • Strategic Capital Provider: The Adviser’s expertise and relationships can provide access to non-competitive deals.
  • Credit Risk: Investments in middle market companies, including senior secured and subordinated debt, carry significant credit risk.
  • Interest Rate Risk: Fluctuations in interest rates could negatively impact portfolio companies and increase borrowing costs.
  • Liquidity Risk: The illiquidity of many investments could limit the company’s ability to exit positions.
  • Management Conflicts: The fee structure and potential for co-investments with affiliates create conflicts of interest for the Adviser.
  • Cybersecurity Risk: Reliance on information systems makes the company vulnerable to cyberattacks.
  • Merger Integration Risk: Inability to realize anticipated benefits from the Mergers, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

Potential Implications

Company Performance

  • Closely monitor the performance of portfolio companies, particularly those on non-accrual status.
  • Assess the impact of the fee structure on shareholder returns and evaluate potential mitigation strategies.
  • Evaluate the success of the merger integration and the realization of anticipated synergies.

Stock Price

  • The increase in non-accrual loans could negatively impact investor sentiment.
  • The complex fee structure may raise concerns about alignment with shareholder interests.
  • Successful integration of the merger and realization of synergies could positively impact the stock price.

Franklin BSP Capital Corp (FBCC) 10-K Report Analysis – FY2024

Executive Summary

This report analyzes Franklin BSP Capital Corp’s (FBCC) 10-K filing for the fiscal year ended December 31, 2024. Key findings include a significant increase in investment income driven by the merger with Franklin BSP Lending Corporation (FBLC), an increase in non-accrual loans, and a complex fee structure with potential conflicts of interest. Overall assessment: Hold. While the merger provides growth opportunities, increased risk and potential conflicts warrant caution. Recommendation: Monitor portfolio company performance, particularly non-accrual loans, and assess the impact of the fee structure on shareholder returns.

Company Overview

Franklin BSP Capital Corporation (FBCC) is a non-diversified, closed-end management investment company that has elected to be regulated as a Business Development Company (BDC) and intends to qualify as a Regulated Investment Company (RIC). FBCC primarily invests in first and second lien senior secured loans of private U.S. middle market companies. The company is externally managed by Franklin BSP Capital Adviser L.L.C., an affiliate of Benefit Street Partners L.L.C. A key event in 2024 was the merger with Franklin BSP Lending Corporation (FBLC).

Financial Statement Analysis

Key Financial Data (FY2024)

  • Investment Portfolio: $3,966.1 million
  • Net Assets Attributable to Common Stock: $1,910.4 million
  • Debt (net of deferred financing costs): $2,054.7 million
  • Net Asset Value (NAV) per share: $14.10
  • Net Investment Income (NII) per share: $1.47

Income Statement Highlights

Investment income significantly increased due to the FBLC merger. However, operating expenses also rose substantially, primarily due to increased management and incentive fees, and interest expenses.

Balance Sheet Highlights

The merger significantly increased total assets and liabilities. The asset coverage ratio was 189% as of December 31, 2024.

Key Ratios

Ratio Value (FY2024) Notes
Asset Coverage Ratio 189% Indicates leverage level; must be monitored for compliance with BDC regulations.
Weighted Average Current Yield (Total Portfolio) 10.5% Reflects the income-generating capacity of the portfolio.

Management’s Discussion and Analysis (MD&A) Insights

Management attributes the increase in investment income to the FBLC merger. They highlight the company’s investment strategy focused on private debt opportunities and downside protection. However, the MD&A also acknowledges risks related to interest rate fluctuations and the valuation of portfolio investments.

Red Flags & Uncommon Metrics

  • Increase in Non-Accrual Loans: The number of portfolio companies on non-accrual status increased significantly, partially due to the FBLC merger. This is a major red flag and requires close monitoring.
  • Complex Fee Structure: The incentive fee structure may incentivize the Adviser to take on riskier investments or increase leverage.
  • Purchase Price Premium Amortization: The accounting treatment of the merger resulted in a purchase price premium that is being amortized, impacting net investment income.

Risk Assessment

  • Credit Risk: Investments in middle market companies, including senior secured and subordinated debt, carry significant credit risk.
  • Interest Rate Risk: Fluctuations in interest rates could negatively impact portfolio companies and increase borrowing costs.
  • Liquidity Risk: The illiquidity of many investments could limit the company’s ability to exit positions.
  • Management Conflicts: The fee structure and potential for co-investments with affiliates create conflicts of interest for the Adviser.
  • Cybersecurity Risk: Reliance on information systems makes the company vulnerable to cyberattacks.
  • Merger Integration Risk: Inability to realize anticipated benefits from the Mergers, including estimated cost savings, or it may take longer than anticipated to achieve such benefits.

Opportunity Assessment

  • Merger Synergies: The merger with FBLC provides opportunities for increased scale and diversification.
  • Middle Market Lending: The underserved middle market provides attractive investment opportunities.
  • Strategic Capital Provider: The Adviser’s expertise and relationships can provide access to non-competitive deals.

Conclusion & Actionable Insights

FBCC’s FY2024 results reflect a company in transition following a significant merger. While the merger provides growth opportunities, the increase in non-accrual loans and potential conflicts of interest warrant caution. The complex fee structure requires careful monitoring to ensure alignment with shareholder interests.

Overall Assessment: Hold.

Recommendations:

  • Closely monitor the performance of portfolio companies, particularly those on non-accrual status.
  • Assess the impact of the fee structure on shareholder returns and evaluate potential mitigation strategies.
  • Evaluate the success of the merger integration and the realization of anticipated synergies.

Disclaimer: This analysis is based on the provided SEC filing and publicly available information. It is not financial advice and should not be used as the sole basis for investment decisions. Consult with a qualified financial advisor before making any investment decisions.

Financial Analysis of FRBP (Franklin BSP Capital Corporation) – 2024 Annual Report

1. Commentary

Franklin BSP Capital Corporation’s (FRBP) 2024 annual report reveals a mixed financial performance. The company significantly increased its investment portfolio, reflecting substantial capital deployment. Net investment income rose, but net realized and unrealized losses on investments led to a lower net increase in net assets compared to the previous year. Increased debt levels and associated interest expenses also impacted profitability. The shift in portfolio composition towards senior secured first lien debt and a lower weighted average current yield suggest a more conservative investment strategy.

2. Financial Ratio and Metric Analysis

Profitability

  • Gross Profit Margin: Not applicable for a BDC like FRBP.
  • Operating Profit Margin: Not directly applicable, but can be proxied by (Net Investment Income / Total Investment Income): 2024: 56.38%, 2023: 54.94%, 2022: 55.46%.

    • Trend: Increased from 2023 to 2024 by 2.62%.
    • Industry: BDCs generally aim for high operating profit margins, reflecting efficient management of investment income relative to operating expenses. FRBP’s margin is within a reasonable range for the industry.
  • Net Profit Margin: (Net Increase in Net Assets Resulting from Operations / Total Investment Income): 2024: 14.51%, 2023: 83.21%, 2022: -55.63%.

    • Trend: Decreased significantly from 2023 to 2024 by -82.56%.
    • Industry: BDC net profit margins can be volatile due to the impact of realized and unrealized gains/losses on investments. The decrease reflects investment losses in 2024.
  • Return on Assets (ROA): (Net Income / Average Total Assets): 2024: 5.31%.

    • Trend: ROA for the previous period is not directly calculable from the provided data.
    • Industry: ROA varies significantly among BDCs depending on their investment strategy and leverage.
  • Return on Equity (ROE): (Net Income / Average Net Assets Attributable to Common Stock): 2024: 15.03%.

    • Trend: ROE for the previous period is not directly calculable from the provided data.
    • Industry: ROE is a key metric for BDCs, reflecting the return generated for shareholders.
  • EPS (Basic and Diluted): 2024: $0.64, 2023: $1.41, 2022: $1.12.

    • Trend: Decreased from 2023 to 2024 by -54.61%.
    • Industry: EPS is a critical metric for BDC investors. The decrease reflects lower profitability in 2024.

Liquidity

  • Current Ratio: (Total Assets / Total Liabilities): 2024: 1.91, 2023: 2.27.

    • Trend: Decreased from 2023 to 2024 by -15.86%.
    • Industry: BDCs generally operate with lower current ratios as they invest heavily in illiquid assets. A ratio above 1 indicates sufficient short-term assets to cover liabilities.
  • Quick Ratio (Acid-Test Ratio): ((Cash and Cash Equivalents + Interest and Dividends Receivable) / Total Liabilities): 2024: 0.06, 2023: 0.06.

    • Trend: No change from 2023 to 2024.
    • Industry: BDCs typically have low quick ratios due to the nature of their investments.
  • Cash Ratio: (Cash and Cash Equivalents / Total Liabilities): 2024: 0.05, 2023: 0.05.

    • Trend: No change from 2023 to 2024.
    • Industry: BDCs generally maintain low cash ratios, deploying capital into investments.

Solvency/Leverage

  • Debt-to-Equity Ratio: (Total Debt / Net Assets Attributable to Common Stock): 2024: 1.07, 2023: 0.82.

    • Trend: Increased from 2023 to 2024 by 30.49%.
    • Industry: BDCs are typically highly leveraged. The increase indicates greater reliance on debt financing.
  • Debt-to-Assets Ratio: (Total Debt / Total Assets): 2024: 0.49, 2023: 0.41.

    • Trend: Increased from 2023 to 2024 by 19.51%.
    • Industry: This ratio indicates the proportion of assets financed by debt. The increase suggests higher financial risk.
  • Interest Coverage Ratio (Times Interest Earned): (Net Investment Income / Interest Expense): 2024: 1.37, 2023: 1.25, 2022: 1.81.

    • Trend: Increased from 2023 to 2024 by 9.60%.
    • Industry: A higher ratio indicates a greater ability to cover interest payments. A ratio above 1 is generally considered acceptable, but the trend is concerning.

Activity/Efficiency

  • Inventory Turnover: Not applicable for a BDC.
  • Days Sales Outstanding (DSO): Not directly applicable, but can be proxied by (Interest and Dividends Receivable / Total Investment Income) * 365: 2024: 186.14 days, 2023: 31.10 days, 2022: 42.78 days.

    • Trend: Increased from 2023 to 2024 by 498.84%.
    • Industry: A higher DSO could indicate issues with collecting investment income.
  • Days Payable Outstanding (DPO): (Total Liabilities / Total Investment Income) * 365: 2024: 2307.81 days, 2023: 2164.31 days, 2022: 3658.31 days.

    • Trend: Increased from 2023 to 2024 by 6.63%.
    • Industry: A higher DPO indicates a longer time to pay suppliers and creditors.
  • Asset Turnover: (Total Investment Income / Average Total Assets): 2024: 0.09, 2023: 0.10, 2022: 0.07.

    • Trend: Decreased from 2023 to 2024 by -10%.
    • Industry: A lower ratio suggests the company is generating less revenue per dollar of assets.

Valuation

  • Price-to-Earnings Ratio (P/E): Stock price at the time of reporting (2025-03-13 – $11.30). EPS use annual. 2024: 17.66.
  • Price-to-Book Ratio (P/B): (Stock Price / Net Asset Value per Share): 2024: 0.80.
  • Price-to-Sales Ratio (P/S): (Market Cap / Total Investment Income): 2024: 3.50.
  • Enterprise Value to EBITDA (EV/EBITDA): (Market Cap + Total Debt – Cash) / Net Investment Income: 2024: 13.19.

Growth Rates

  • Revenue Growth: (2024 Total Investment Income – 2023 Total Investment Income) / 2023 Total Investment Income: 6.87%.
  • Net Income Growth: (2024 Net Income – 2023 Net Income) / 2023 Net Income: 107.30%.
  • EPS Growth: (2024 EPS – 2023 EPS) / 2023 EPS: -54.61%.

Other Relevant Metrics

  • Non-GAAP Supplemental Disclosure: Adjusted Net Investment Income
    • Description: This metric adjusts net investment income by removing purchase premium and other cost adjustments.
    • Calculation: Net Investment Income less Purchase Premium and Other Cost Adjustments.
    • Significance: It provides a view of core earnings by excluding non-recurring or acquisition-related items.
    • Assessment: The adjustments seem reasonable as they aim to present a clearer picture of recurring earnings.
    • Trend: Adjusted net investment income after taxes decreased from $53,575 in 2023 to $175,702 in 2024.
  • Loan Portfolio Composition:
    • Senior Secured First Lien Debt: Increased from 83.6% in 2023 to 74.7% in 2024.
    • Senior Secured Second Lien Debt: Decreased from 6.9% in 2023 to 3.1% in 2024.
    • Subordinated Debt: Increased from 4.7% in 2023 to 5.0% in 2024.
    • Equity/Other: Increased from 4.8% in 2023 to 6.7% in 2024.
    • FBLC Senior Loan Fund LLC: Increased from 0% in 2023 to 10.2% in 2024.
    • Weighted Average Current Yield: Decreased from 12.0% in 2023 to 10.5% in 2024.
  • Internal Performance Rating:
    • Investments rated “1” (exceeding expectations) increased significantly from 4.0% to 5.1% of total investments.
    • Investments rated “2” (performing as expected) increased from 61.6% to 74.8%.
    • Investments rated “3” (performing below expectations) decreased from 24.9% to 7.8%.
    • Investments rated “4” (risk of covenant breach and interest loss) increased from 4.3% to 4.5%.
    • Investments rated “5” (risk of covenant breach, interest loss and principal loss/default) increased from 0.4% to 1.1%.
  • Interest Rate Sensitivity:
    • The company provided an analysis of the potential impact of changes in base interest rates on net interest income.
    • A 50 basis point increase in interest rates would increase net interest income by $8.929 million.
    • A 50 basis point decrease in interest rates would decrease net interest income by $8.929 million.

⚠️ This is an experimental project and this report is for informational purposes only and should not be considered investment advice. Conduct your own thorough research and consult with a qualified financial advisor before making any investment decisions. ⚠️