FS/KKR Non-traded BDC liquidity plan NOVEMBER 2019
Franchise core themes Keys to driving shareholder value Maintain credit discipline, Focus direct origination efforts on especially in current environment upper middle-market companies Aggressively manage Reduce allocation to underperforming assets non-income producing assets 2
A staged liquidity plan designed to maximize shareholder value 1 2 3 Merge Recapitalize List common equity on non-traded funds 1 combined entity 2 New York Stock Exchange FSIC II Preferred equity $2.5B $1.0B FSIC III $2.2B Common equity $5.1B FSIC IV Common equity $0.3B $4.1B CCT II $0.1B 1. Total stockholders’ equity as of September 30, 2019. 2. Assumes $1 billion issuance of preferred equity to the holders of the combined entity. Exact amount will be determined by the combined company’s board of directors. 3
Key considerations of the liquidity plan 127,000+ 200+ 18,000+ Ensure the plan is in the best interest of shareholders 1 Investors Selling group members Advisors Each fund has similar yet different: • Dividend yields Manage the complexity • Distribution coverage of a multi-fund merger • Portfolio vintages • Operating expenses • FSK’s common stock currently trades at a discount to book value. Merger with public fund (FSK) is not ideal for non-traded • Merger of non- traded funds into FSK could create technical pressure on the price of FSK’s common stock upon a merger, shareholder bases which could further reduce the value of FSK shares to non-traded shareholders. Public markets generally assign a higher valuation to business development companies (BDCs) with: • Distribution yields of 9% or greater Position portfolio & dividend for public markets • Strong distribution coverage • Senior secured debt representing at least 80% of the investment portfolio 1. As of September 30, 2019. 4
Strategic rationale of staged liquidity plan Create significant scale • Combined entity will become the second-largest BDC in the market, with over $8.9 billion in assets, by merging FS Investment Corporation III for public markets (FSIC III), FS Investment Corporation IV (FSIC IV) and Corporate Capital Trust II (CCT II) into FS Investment Corporation II (FSIC II). 1 Ensure shareholders • Net asset value (NAV)-for-NAV mergers provide certainty of transaction pricing and help ensure shareholders receive equal value in FSIC II’s common shares, subject to merger expenses and other adjustments. receive equal value MERGE • Pro forma portfolio composed of 210 portfolio companies across 21 different industries Enhance portfolio • Reduces concentration of top 10 investments and single name exposure diversification • Maintains focus on senior secured debt (84%) and floating rate debt (77%) based on fair value 2 • Eliminates duplicative administrative expenses (legal, audit, regulatory and administrative costs) Reduce expenses • Reduces cost of borrowings by consolidating existing facilities, leveraging scale to reduce borrowing costs and by potentially accessing debt capital markets as a publicly traded company • Preferred shares would provide current income (5.5%) and rank senior to the combined company’s common equity RECAPITALIZE • Aligns the combined company’s expected dividend yield, dividend coverage and return on equity to a competitive level with lea ding Align dividend & return publicly traded BDCs on equity for the public • Helps mitigate selling pressure upon listing of common equity markets • Ability to select optimal path to liquidity post-merger based on market conditions and other considerations LIST • Single transaction eliminates the uncertainty of timing and impact of future mergers on shareholder value Minimize execution risks 1. As of September 30, 2019. 2. Excludes assets underlying the applicable fund’s total return swap (TRS) financing arrangements with Citibank, N.A. and asset s on non-accrual status. 5
MERGER Merger creates significant visibility for the public markets The combined company will become the second-largest BDC in the market. TOTAL ASSETS AS OF SEPTEMBER 30, 2019 ($B) 16 $14.5 14 CCT II $0.2B 12 FSIC IV $0.4B 10 $8.9 $8.6 $7.8 8 FSIC III $5.6 6 $3.9 4 $3.1 $2.9 $2.7 $2.2 $2.1 $2.0 $1.8 $1.7 FSIC II $1.5 $1.5 2 $1.2 $4.4 0 ARCC Combined ORCC FSK PSEC NMFC AINV BCSF CGBD TSLX GBDC TCPC SLRC GSBD OCSL BBDC company Externally managed BDC assets under management with market capitalization greater than $500 million as of November 12, 2019. Ares Capital Corporation (ARCC), Owl Rock Capital Corp. (ORCC), FS KKR Capital Corp. (FSK), Prospect Capital Corporation (PSEC), New Mountain Finance Corporation (NMFC), Apollo Investment Corporation (AINV), Bain Capital Security Finance Inc. (BCSF), TCG BDC, Inc. (CGBD), TPG Specialty Lending, Inc. (TSLX), Golub Capital BDC, Inc. (GBDC), BlackRock TCP Capital Corp. (TCPC), Solar Capital Ltd. (SLRC), Goldman Sachs BDC, Inc. (GSBD), Oaktree Specialty Lending Corporation (OCSL), and Barings BDC, Inc. (BBDC). Assumes the merger of each of FSIC III, FSIC IV and CCT II into FSIC II closes. GBDC and OCSL assets reported as of June 30, 2019. 6
MERGER Merger enhances portfolio diversification FSIC II FSIC III FSIC IV CCT II Pro forma 1 Increase number of portfolio companies 174 167 94 110 210 Reduce concentration of top 10 issuers 28.3% 32.3% 31.5% 28.4% 26.0% Reduce avg. single name exposure 0.57% 0.60% 1.06% 0.91% 0.48% Maintain focus on senior secured debt 2 85% 83% 75% 82% 84% Maintain focus on floating rate debt 3 79% 77% 65% 78% 77% PRO FORMA ASSET AND INDUSTRY ALLOCATION AS OF SEPTEMBER 30, 2019 (BASED ON FAIR VALUE) 69% 14% 1st lien loans Capital goods 11% 11% 2nd lien loans Software & services 4% 10% Other senior debt Healthcare equipment & services 7% 9% Subordinated debt Commercial & professional services 5% 6% Asset-based finance Energy 4% 6% Equity/other Retailing 6% Diversified financials As of September 30, 2019. 1. Assumes the merger of each of FSIC III, FSIC IV and CCT II into FSIC II closes. 38% Other 2. Excludes assets underlying the applicable fund’s total return swap (TRS) financing arrangement with Citibank, N.A. 3. Does not include assets on non-accrual. 7
MERGER Combination is expected to reduce expenses ESTIMATED ANNUAL EXPENSE REDUCTIONS 1 CATEGORY POTENTIAL SAVINGS • Administrative fees $11M Administrative • Directors fees in expected savings $31M • Quarterly and annual filings Regulatory • Sarbanes-Oxley expenses $20M • Legal expenses Other • Internal audit fees professional • Tax consulting expenses services • Printing expenses Current combined expenses Expected pro forma expenses 1. Excludes one-time merger and listing-related expenses. 8
MERGER The investor experience: NAV-for-NAV merger FSIC III, FSIC IV and CCT II shareholders will receive equal value in FSIC II shares. ILLUSTRATIVE NAV-FOR-NAV EXCHANGE RATIO 1 Pro forma 2 FSIC III FSIC IV CCT II FSIC II Total NAV ($M) $2,175 $336 $106 $2,499 $5,115 Total common shares outstanding (M) 293 32 12 329 674 NAV per share $7.42 $10.54 $8.60 $7.59 $7.59 (/) FSIC II NAV per share $7.59 $7.59 $7.59 -- -- Exchange ratio 0.9776 1.3887 1.1331 -- -- -- Number of FSIC II shares that FSIC III, FSIC IV and CCT II shareholders will receive post-merger Numbers may be rounded. 1. As of September 30, 2019. Does not include the impact of adjustments contained in the merger agreements, including, but not limited to, merger-related expenses and special distributions. 2. Assumes the merger of each of FSIC III, FSIC IV and CCT II into FSIC II closes. 9
MERGER The investor experience: NAV-for-NAV merger Hypothetical shareholder experience FSIC III FSIC IV CCT II FSIC II Beginning shareholder value $100,000 $100,000 $100,000 $100,000 The example does not include: Number of common shares pre-merger 1 13,477 9,488 11,628 13,175 • Merger-related expenses • Distribution of undistributed (x) Exchange ratio 0.9776 1.3887 1.1331 -- -- net investment income and net realized capital gains Number of FSIC II common shares 13,175 13,175 13,175 13,175 (post-merger) (x) Combined company NAV $7.59 $7.59 $7.59 $7.59 Ending shareholder value $100,000 $100,000 $100,000 $100,000 Numbers may be rounded. 1. Based on FSIC II’s NAV per share of $7.59 as of September 30, 2019. 10
RECAPITALIZATION The investor experience: Recapitalization Preferred shares are expected to be structured to provide current income and a path to full liquidity. POST-MERGER RECAPITALIZATION Preferred equity INDICATIVE TERMS $1.0B ~20% Preferred dividend 5.5%; cumulative 2 Prior to the listing of the combined company ’s Issuance Investors receive common stock equal value in Common equity common and 40M shares ($1 billion in liquidation preference) Amount $5.1B preferred shares 1 Subject to market conditions after the listing of the Common equity Listing combined company’s common stock $4.1B (goal to list in Perpetual Maturity 1H 2020) ~80% $25.00 per share Liquidation preference 1. Assumes an approximately $1 billion issuance of preferred equity to the common equity holders. Exact amount will be determine d by the combined company’s board of directors. 2. Must be fully paid prior to payment of ordinary dividends on common stock. 11
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