FS KKR Capital Corp. II 10Q 2019 Q1 Quarterly report

TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-00926

FS Investment Corporation II

(Exact name of registrant as specified in its charter)

	Maryland			80-0741103
	(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
	201 Rouse Boulevard Philadelphia, Pennsylvania			19112
	(Address of principal executive offices)			(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 ☑ No ☐

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 ☐ No ☐

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	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to 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 ☑

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 324,182,415 shares of common stock outstanding as of May 10, 2019.

TABLE OF CONTENTS

	Page
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018		1
Unaudited Consolidated Statements of Operations for the three and three months ended March 31, 2019 and 2018		2
Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2019 and 2018		3
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018		4
Consolidated Schedules of Investments as of March 31, 2019 (Unaudited) and December 31, 2018		5
Notes to Unaudited Consolidated Financial Statements		28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		53
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68
ITEM 4. CONTROLS AND PROCEDURES		69
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		71
ITEM 1A. RISK FACTORS		71
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		71
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		71
ITEM 4. MINE SAFETY DISCLOSURES		71
ITEM 5. OTHER INFORMATION		71
ITEM 6. EXHIBITS		71
SIGNATURES		75

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FS Investment Corporation II

Consolidated Balance Sheets
(in thousands, except share and per share amounts)

	March 31, 2019 (Unaudited)			December 31, 2018
Assets
Investments, at fair value
Non-controlled/unaffiliated investments (amortized cost—$4,546,541 and $4,312,105, respectively)		$	4,402,970		$	4,131,877
Non-controlled/affiliated investments (amortized cost—$253,344 and $248,500, respectively)			231,848			227,403
Total investments, at fair value (amortized cost—$4,799,885 and $4,560,605, respectively)			4,634,818			4,359,280
Cash			109,670			148,172
Foreign currency, at fair value (cost—$1,318 and $2,264, respectively)			1,325			2,286
Collateral held at broker for open interest rate swap contracts			6,700			—
Receivable for investments sold and repaid			2,878			4,025
Interest receivable			43,314			34,221
Deferred financing costs			7,403			6,000
Receivable on interest rate swaps			2,474			173
Prepaid expenses and other assets			49			97
Total assets		$	4,808,631		$	4,554,254
Liabilities
Payable for investments purchased		$	54,759		$	42,236
Credit facilities payable (net of deferred financing costs of $2,628 and $3,122, respectively)(1)			2,108,336			1,887,132
Stockholder distributions payable			11,901			11,688
Management fees payable			17,864			17,256
Subordinated income incentive fees payable(2)			11,131			5,796
Administrative services expense payable			499			365
Interest payable			18,040			16,480
Directors’ fees payable			139			243
Interest rate swap income payable			2,406			174
Unrealized depreciation on interest rate swaps			5,739			1,743
Other accrued expenses and liabilities			1,600			3,732
Total liabilities			2,232,414			1,986,845
Commitments and contingencies(3)
Stockholders’ equity
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding			—			—
Common stock, $0.001 par value, 450,000,000 shares authorized, 326,339,625 and 326,445,320 shares issued and outstanding, respectively			326			326
Capital in excess of par value			2,990,149			2,990,996
Retained earnings (accumulated deficit)(4)			(414,258)			(423,913)
Total stockholders’ equity			2,576,217			2,567,409
Total liabilities and stockholders’ equity		$	4,808,631		$	4,554,254
Net asset value per share of common stock at period end		$	7.89		$	7.86

(1)

See Note 9 for a discussion of the Company’s financing arrangements.

(2)

See Note 2 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.

(3)

See Note 10 for a discussion of the Company’s commitments and contingencies.

(4)

See Note 5 for a discussion of the sources of distributions paid by the Company.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)

	Three Months Ended March 31,
	2019			2018
Investment income
From non-controlled/unaffiliated investments:
Interest income		$	102,601		$	95,157
Paid-in-kind interest income			1,881			2,221
Fee income			7,044			3,951
Dividend income			71			7,494
From non-controlled/affiliated investments:
Interest income			5,267			4,999
Paid-in-kind interest income			3,075			2,757
Fee income			—			1,123
Total investment income			119,939			117,702
Operating expenses
Management fees(1)			17,864			25,234
Subordinated income incentive fees(2)			11,131			5,575
Administrative services expenses			907			782
Stock transfer agent fees			705			495
Accounting and administrative fees			433			421
Interest expense(3)			29,575			24,183
Directors’ fees			142			504
Other general and administrative expenses			1,068			1,271
Operating expenses			61,825			58,465
Management fee waiver(1)			—			(3,154)
Net expenses			61,825			55,311
Net investment income			58,114			62,391
Realized and unrealized gain/loss
Net realized gain (loss) on investments:
Non-controlled/unaffiliated investments			(18,665)			(19,294)
Non-controlled/affiliated investments			179			—
Net realized gain (loss) on foreign currency			3			(327)
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/unaffiliated investments			36,657			(83,890)
Non-controlled/affiliated investments			(399)			(4,722)
Net change in unrealized appreciation (depreciation) on interest rate swaps			(3,996)			—
Net change in unrealized gain (loss) on foreign currency			(1,124)			410
Total net realized and unrealized gain (loss) on investments			12,655			(107,823)
Net increase (decrease) in net assets resulting from operations		$	70,769		$	(45,432)
Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share)		$	0.22		$	(0.14)
Weighted average shares outstanding			324,309,084			324,916,879

(1)

See Note 4 for a discussion of the waiver by FSIC II Advisor, LLC, the Company’s former investment adviser, of certain management fees to which it was otherwise entitled during the applicable period.

(2)

See Note 2 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.

(3)

See Note 9 for a discussion of the Company’s financing arrangements.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)

	Three Months Ended March 31,
	2019			2018
Operations
Net investment income		$	58,114		$	62,391
Net realized gain (loss) on investments and foreign currency			(18,483)			(19,621)
Net change in unrealized appreciation (depreciation) on investments and interest rate swaps(1)			32,262			(88,612)
Net change in unrealized gain (loss) on foreign currency			(1,124)			410
Net increase (decrease) in net assets resulting from operations			70,769			(45,432)
Stockholder distributions(2)
Distributions to stockholders			(61,114)			(61,153)
Net decrease in net assets resulting from stockholder distributions			(61,114)			(61,153)
Capital share transactions(3)
Reinvestment of stockholder distributions			25,694			28,959
Repurchases of common stock			(26,541)			(29,993)
Net increase (decrease) in net assets resulting from capital share transactions			(847)			(1,034)
Total increase (decrease) in net assets			8,808			(107,619)
Net assets at beginning of period			2,567,409			2,853,021
Net assets at end of period		$	2,576,217		$	2,745,402

(1)

See Note 7 for a discussion of these financial instruments.

(2)

See Note 5 for a discussion of the sources of distributions paid by the Company.

(3)

See Note 3 for a discussion of the Company’s capital share transactions.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Statements of Cash Flows
(in thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations		$	70,769		$	(45,432)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investments			(453,599)			(199,941)
Paid-in-kind interest			(4,956)			(4,978)
Proceeds from sales and repayments of investments			203,103			301,070
Net realized (gain) loss on investments			18,486			19,294
Net change in unrealized (appreciation) depreciation on investments			(36,258)			88,612
Net change in unrealized (appreciation) depreciation on interest rate swaps			3,996			—
Accretion of discount			(2,314)			(1,703)
Amortization of deferred financing costs and discount			990			1,358
Unrealized (gain) loss on borrowings in foreign currency			1,108			219
(Increase) decrease in receivable for investments sold and repaid			1,147			(241)
(Increase) decrease in interest receivable			(9,093)			(315)
(Increase) decrease in receivable on interest rate swaps			(2,301)			—
(Increase) decrease in prepaid expenses and other assets			48			39
Increase (decrease) in payable for investments purchased			12,523			(3,162)
Increase (decrease) in management fees payable			608			(515)
Increase (decrease) in subordinated income incentive fees payable			5,335			(13,554)
Increase (decrease) in administrative services expense payable			134			235
Increase (decrease) in interest payable			1,560			977
Increase (decrease) in directors’ fees payable			(104)			222
Increase (decrease) in interest rate swap income payable			2,232			—
Increase (decrease) in other accrued expenses and liabilities			(2,132)			(2,390)
Net cash provided by (used in) operating activities			(188,718)			139,795
Cash flows from financing activities
Repurchases of common stock			(26,541)			(29,993)
Stockholder distributions			(35,207)			(31,928)
Borrowings under credit facilities(1)			436,602			2,970
Repayments of credit facilities(1)			(217,000)			(4,730)
Deferred financing costs paid			(1,899)			—
Net cash provided by financing activities			155,955			(63,681)
Total increase (decrease) in cash			(32,763)			76,114
Cash, restricted cash and foreign currency at beginning of period			150,458			460,409
Cash, restricted cash and foreign currency at end of period(2)		$	117,695		$	536,523
Supplemental disclosure
Distributions reinvested		$	25,694		$	28,959
Local and excise taxes paid		$	2,096		$	2,574

(1)

See Note 9 for a discussion of the Company’s financing arrangements. During the three months ended March 31, 2019 and 2018, the Company paid $27,025 and $21,848 respectively, in interest expense on the credit facilities.

(2)

As of March 31, 2019, balance includes cash of $110,995 and restricted cash of $6,700, respectively. As of March 31, 2018, balance includes cash of $536,523 and restricted cash of $0, respectively.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Schedule of Investments
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Senior Secured Loans—First Lien—136.6%
5 Arch Income Fund 2, LLC	(m)(q)	Diversified Financials	9.0%			11/18/23		$	39,540		$	39,551		$	39,540
5 Arch Income Fund 2, LLC	(m)(n)(q)	Diversified Financials	9.0%			11/18/23			34,461			34,470			34,461
Abaco Energy Technologies LLC	(h)(i)(s)	Energy	L+700, 2.5% PIK (2.5% Max PIK)		1.0%	11/20/20			24,074			23,652			24,134
ABB CONCISE Optical Group LLC	(s)	Retailing	L+500		1.0%	6/15/23			2,762			2,771			2,637
Accuride Corp	(s)	Capital Goods	L+525		1.0%	11/17/23			539			519			453
Acosta Holdco Inc	(h)(s)	Commercial & Professional Services	L+325		1.0%	9/26/21			6,627			5,369			3,122
Addison Holdings	(f)(g)(h)(i)	Commercial & Professional Services	L+675		1.0%	12/29/23			84,953			84,953			85,803
Advanced Lighting Technologies Inc	(h)(t)	Materials	L+750		1.0%	10/4/22			9,102			7,968			9,102
Advantage Sales & Marketing Inc	(i)(s)	Commercial & Professional Services	L+325		1.0%	7/23/21			15,330			14,697			13,086
All Systems Holding LLC	(h)	Commercial & Professional Services	L+725		1.0%	10/31/23			10,557			10,557			10,662
All Systems Holding LLC	(g)(h)(i)	Commercial & Professional Services	L+767		1.0%	10/31/23			101,066			101,066			102,077
Altus Power America Inc		Energy	L+750		1.5%	9/30/21			683			683			656
Altus Power America Inc	(n)	Energy	L+750		1.5%	9/30/21			140			140			135
Altus Power America Inc	(i)	Energy	L+750		1.5%	10/8/21			2,500			2,500			2,400
American Tire Distributors Inc	(s)	Automobiles & Components	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	9/1/23			634			595			626
American Tire Distributors Inc	(s)	Automobiles & Components	L+750		1.0%	9/2/24			4,021			3,512			3,607
Ammeraal Beltech Holding BV	(m)(s)	Capital Goods	E+375			7/30/25		€	1,491			1,725			1,674
Apex Group Limited	(m)(n)	Diversified Financials	L+650			6/15/23		$	2,302			2,241			1,961
Apex Group Limited	(f)(g)(m)	Diversified Financials	L+650		1.0%	6/15/25			44,691			44,183			43,672
Apex Group Limited	(m)(n)	Diversified Financials	L+650		1.0%	6/15/25			5,833			5,809			5,700
Ascension Insurance Inc	(f)(g)(h)	Insurance	L+825		1.3%	6/5/19			91,635			91,579			91,635
Ascension Insurance Inc	(n)	Insurance	L+825		1.3%	6/5/19			13,800			13,800			13,800
Aspect Software Inc	(n)	Software & Services	L+500		1.0%	7/15/23			865			865			865
Aspect Software Inc	(h)	Software & Services	L+500			1/15/24			5,656			5,002			4,991
ATX Networks Corp	(f)(i)(m)(s)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21			26,516			26,110			25,190
AVF Parent LLC	(h)(i)	Retailing	L+725		1.3%	3/1/24			73,980			73,980			64,178
Belk Inc	(s)	Retailing	L+475		1.0%	12/12/22			22,561			19,823			18,265
Borden Dairy Co	(g)(h)	Food, Beverage & Tobacco	L+750		1.0%	7/6/23			52,500			52,500			47,654
Caprock Midstream LLC	(s)	Energy	L+475			11/3/25			6,046			5,919			5,738
Cimarron Energy Inc		Energy	L+900		1.0%	6/30/21			7,500			7,500			7,500
Conservice LLC		Consumer Services	L+525			11/30/24			31,904			31,595			31,961
Conservice LLC	(n)	Consumer Services	L+525			11/30/24			5,955			5,919			5,820

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Constellis Holdings LLC/Constellis Finance Corp	(h)	Capital Goods	L+575		1.0%		4/15/22		$	47,206		$	46,547		$	46,676
CSafe Global		Capital Goods	L+725		1.0%		11/1/21			2,296			2,296			2,296
CSafe Global	(n)	Capital Goods	L+725		1.0%		11/1/21			3,965			3,965			3,965
CSafe Global	(f)(g)(h)	Capital Goods	L+725		1.0%	��	10/31/23			53,485			53,485			54,019
CSM Bakery Products	(i)(s)	Food, Beverage & Tobacco	L+400		1.0%		7/3/20			5,217			5,091			5,004
Dade Paper and Bag Co Inc	(f)(g)(h)	Capital Goods	L+700		1.0%		6/10/24			17,269			17,269			16,600
Dade Paper and Bag Co Inc	(f)(g)(h)(i)	Capital Goods	L+750		1.0%		6/10/24			135,389			135,389			132,682
Dayton Superior Corp	(i)(s)	Materials	L+800, 6.0% PIK (6.0% Max PIK)		1.0%		11/15/21			11,934			11,746			10,054
Diamond Resorts International Inc	(i)(s)	Consumer Services	L+375		1.0%		9/2/23			14,050			13,773			13,558
Distribution International Inc	(s)	Retailing	L+500		1.0%		12/15/21			3,389			3,249			3,093
Eagle Family Foods Inc	(n)	Food, Beverage & Tobacco	L+650		1.0%		6/14/23			4,126			4,087			3,499
Eagle Family Foods Inc	(g)(h)	Food, Beverage & Tobacco	L+650		1.0%		6/14/24			27,299			27,024			26,438
Eagleclaw Midstream Ventures LLC	(i)(s)	Energy	L+425		1.0%		6/24/24			11,426			10,908			10,753
EIF Van Hook Holdings LLC	(i)(s)	Energy	L+525				9/5/24			7,285			7,148			6,975
Empire Today LLC	(f)(g)(h)(i)	Retailing	L+700		1.0%		11/17/22			87,975			87,975			87,202
Fairway Group Holdings Corp	(k)(l)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)				11/27/23			2,013			1,733			264
Fairway Group Holdings Corp		Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)				8/28/23			218			217			218
Fairway Group Holdings Corp	(n)	Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)				8/28/23			455			453			455
Fairway Group Holdings Corp	(h)	Food & Staples Retailing	12.0% PIK (12.0% Max PIK)				11/27/23			3,165			3,165			3,074
Fairway Group Holdings Corp		Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)				11/27/23			1,099			1,085			1,099
Foresight Energy LLC	(h)(m)(s)	Materials	L+575		1.0%		3/28/22			10,591			10,576			10,401
Fox Head Inc	(h)(i)	Consumer Durables & Apparel	L+850		1.0%		12/19/20			52,149			52,149			50,134
FullBeauty Brands Holdings Corp		Retailing	10.0%				6/30/19			188			189			184
FullBeauty Brands Holdings Corp		Retailing	L+900		1.0%		2/7/24			1,099			1,073			1,072
Gulf Finance LLC	(i)(s)	Energy	L+525		1.0%		8/25/23			4,675			4,578			3,745
HM Dunn Co Inc	(h)(k)(l)(t)	Capital Goods	L+875 PIK (L+875 Max PIK)				6/30/21			43,885			38,571			4,005
Hudson Technologies Co	(h)(i)(m)	Commercial & Professional Services	L+1025		1.0%		10/10/23			50,717			50,302			35,882
Icynene Group Ltd	(f)(h)(i)	Materials	L+700		1.0%		11/30/24			35,550			35,550			34,483
Industrial Group Intermediate Holdings LLC	(f)(g)(h)(i)	Materials	L+800		1.3%		5/31/20			118,840			118,840			119,732
Industry City TI Lessor LP	(h)	Consumer Services	10.8%, 1.0% PIK (1.0% Max PIK)				6/30/26			11,308			11,308			12,015
JAKKS Pacific Inc	(h)	Consumer Durables & Apparel	L+900		1.5%		6/14/21			2,793			2,777			2,812

See notes to unaudited consolidated financial statements.

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FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Jazz Acquisition Inc		Capital Goods	L+550		1.0%	6/1/22		$	20,258		$	20,258		$	20,091
JC Penney Corp Inc	(m)(s)	Retailing	L+425		1.0%	6/23/23			1,196			1,144			1,066
JHC Acquisition LLC	(f)(g)	Capital Goods	L+750		1.0%	11/6/21			20,495			20,495			20,495
JHC Acquisition LLC	(f)(g)(h)	Capital Goods	L+750		1.0%	1/29/24			101,452			101,452			101,452
JHC Acquisition LLC	(n)	Capital Goods	L+750		1.0%	1/29/24			35,269			35,269			35,269
Jo-Ann Stores Inc	(i)(s)	Retailing	L+500		1.0%	10/20/23			4,903			4,894			4,891
Jostens Inc	(s)	Consumer Services	L+550			12/19/25			3,508			3,405			3,514
JSS Holdings Ltd	(f)(h)(i)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23			72,790			72,259			74,974
Kodiak BP LLC	(g)(h)(i)	Capital Goods	L+725		1.0%	12/1/24			110,425			110,425			108,079
Kodiak BP LLC	(n)	Capital Goods	L+725		1.0%	12/1/24			9,849			9,849			9,639
Lazard Global Compounders Fund	(m)	Diversified Financials	L+725		3.8%	4/1/26			37,786			37,786			37,219
Lazard Global Compounders Fund	(m)(n)	Diversified Financials	L+725		3.8%	4/1/26			7,214			7,214			7,106
LD Intermediate Holdings Inc	(i)(s)	Software & Services	L+588		1.0%	12/9/22			15,938			14,925			13,886
Lipari Foods LLC		Food & Staples Retailing	L+588		1.0%	1/4/25			121,935			120,971			120,859
Lipari Foods LLC	(n)	Food & Staples Retailing	L+588		1.0%	1/4/25			25,220			25,220			24,997
MB Precision Holdings LLC	(g)(h)(t)	Capital Goods	L+725, 2.3% PIK (2.3% Max PIK)		1.3%	1/23/21			21,369			20,733			21,369
Mitel US Holdings Inc	(i)(s)	Technology Hardware & Equipment	L+450			11/30/25			119			119			117
Monitronics International Inc	(m)(s)	Commercial & Professional Services	L+550		1.0%	9/30/22			3,829			3,698		��	3,220
Murray Energy Corp	(h)	Energy	L+900		1.0%	2/12/21			10,891			10,830			10,826
NaviHealth Inc.	(i)(s)	Health Care Equipment & Services	L+500			8/1/25			15,073			14,419			14,678
North Haven Cadence Buyer Inc	(n)	Consumer Services	L+500		1.0%	9/2/21			2,625			2,625			2,625
North Haven Cadence Buyer Inc	(h)	Consumer Services	L+777		1.0%	9/2/22			10,656			10,656			10,523
North Haven Cadence Buyer Inc	(h)(i)	Consumer Services	L+798		1.0%	9/2/24			51,188			51,188			50,548
North Haven Cadence Buyer Inc		Consumer Services	L+650		1.0%	9/2/24			14,283			14,283			14,105
North Haven Cadence Buyer Inc	(n)	Consumer Services	L+650		1.0%	9/2/24			292			292			288
P2 Energy Solutions, Inc.	(s)	Software & Services	L+400		1.0%	10/30/20			74			73			73
PAE Holding Corp	(s)	Capital Goods	L+550		1.0%	10/20/22			9			9			9
Peak 10 Holding Corp	(s)	Telecommunication Services	L+350			8/1/24			8,942			8,327			8,219
PF Chang’s China Bistro Inc	(s)	Consumer Services	L+650			3/1/26			5,817			5,760			5,751
PHRC License LLC	(g)(h)	Consumer Services	L+850, 0.3% PIK (0.3% Max PIK)		1.5%	4/28/22			66,646			66,646			67,563
Power Distribution Inc	(f)(i)	Capital Goods	L+725		1.3%	1/25/23			43,907			43,907			42,974
Production Resource Group LLC	(f)(g)(h)(i)	Media	L+700		1.0%	8/21/24			207,992			207,992			204,872

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Propulsion Acquisition LLC	(f)(h)(i)(s)	Capital Goods	L+600		1.0%	7/13/21		$	52,322		$	51,121		$	51,798
PSKW LLC	(f)(h)	Health Care Equipment & Services	L+825		1.0%	10/1/21			26,000			26,000			26,000
PSKW LLC	(f)(h)	Health Care Equipment & Services	L+826		1.0%	11/25/21			30,025			29,986			30,025
Reliant Rehab Hospital Cincinnati LLC	(h)	Health Care Equipment & Services	L+675		1.0%	8/30/24			60,001			59,494			59,166
Roadrunner Intermediate Acquisition Co LLC	(f)	Health Care Equipment & Services	L+675		1.0%	9/22/21			7,115			7,115			6,565
Safariland LLC	(g)(h)	Capital Goods	L+765		1.1%	11/18/23			70,234			70,234			63,474
Savers Inc		Retailing	L+650, 0.8% PIK (0.8% Max PIK)		1.5%	3/28/24		C$	36,443			26,804			26,938
Savers Inc		Retailing	L+650, 0.8% PIK (0.8% Max PIK)		1.5%	3/28/24		$	26,242			25,915			25,914
Sequa Corp	(i)(s)	Materials	L+500		1.0%	11/28/21			18,420			18,184			18,075
Sequel Youth & Family Services LLC	(h)	Health Care Equipment & Services	L+700		1.0%	9/1/23			12,199			12,199			12,309
Sequel Youth & Family Services LLC	(f)(h)(i)	Health Care Equipment & Services	L+800			9/1/23			70,000			70,000			70,633
Sequential Brands Group Inc.	(g)(h)(i)	Consumer Durables & Apparel	L+875			2/7/24			118,132			116,207			117,099
SI Group Inc	(s)	Materials	L+475			10/15/25			2,915			2,810			2,919
SIRVA Worldwide Inc	(i)(s)	Commercial & Professional Services	L+550			8/2/25			2,759			2,721			2,697
Sorenson Communications LLC	(f)(g)(h)(s)	Telecommunication Services	L+575		2.3%	4/30/20			107,112			106,964			106,041
Sorenson Communications LLC	(j)(s)	Telecommunication Services	L+650			3/14/24			55,946			53,708			55,456
SSC (Lux) Limited S.a r.l.	(g)(h)(i)(m)	Health Care Equipment & Services	L+750		1.0%	9/10/24			104,545			104,545			105,359
Staples Canada	(m)	Retailing	L+700		1.0%	9/12/24		C$	55,460			42,914			42,111
Sungard Availability Services Capital Inc	(f)(k)(l)(s)	Software & Services	L+700		1.0%	9/30/21		$	9,606			9,471			6,556
Sungard Availability Services Capital Inc	(k)(l)(s)	Software & Services	L+1000		1.0%	10/1/22			894			845			771
Sutherland Global Services Inc	(h)(i)(m)(s)	Software & Services	L+538		1.0%	4/23/21			12,990			12,507			12,697
Swift Worldwide Resources Holdco Ltd	(f)(g)	Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	7/20/21			19,492			19,492			19,492
Tangoe LLC		Software & Services	L+650		1.0%	11/28/25			51,894			51,395			51,243
Team Health Inc	(s)	Health Care Equipment & Services	L+275		1.0%	2/6/24			78			71			69
Trace3 Inc	(f)(g)(h)(i)	Software & Services	L+675		1.0%	8/5/24			161,180			161,180			161,180
Virgin Pulse Inc	(h)(i)	Software & Services	L+650		1.0%	5/22/25			79,691			79,108			78,663
Vivint Inc	(i)(s)	Commercial & Professional Services	L+500			4/1/24			18,536			18,491			18,131
Warren Resources Inc	(h)(j)(t)	Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	5/22/20			14,697			14,697			14,697
York Risk Services Group Inc	(s)	Insurance	L+375		1.0%	10/1/21			977			973			920

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Zeta Interactive Holdings Corp	(f)(h)	Software & Services	L+750		1.0%	7/29/22		$	37,112		$	37,112		$	37,483
Zeta Interactive Holdings Corp	(n)	Software & Services	L+750		1.0%	7/29/22			6,571			6,571			6,637
Total Senior Secured Loans—First Lien												3,770,028			3,677,909
Unfunded Loan Commitments												(158,789)			(158,789)
Net Senior Secured Loans—First Lien												3,611,239			3,519,120
Senior Secured Loans—Second Lien—15.1%
Access CIG LLC	(s)	Software & Services	L+775			2/27/26			1,326			1,342			1,317
Advantage Sales & Marketing Inc	(s)	Commercial & Professional Services	L+650		1.0%	7/25/22			2,291			2,052			1,693
American Bath Group LLC	(i)(s)	Capital Goods	L+975		1.0%	9/30/24			7,000			6,605			7,000
Ammeraal Beltech Holding BV	(m)	Capital Goods	L+800			7/27/26			52,309			51,306			51,208
Arena Energy LP	(f)(h)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0%	1/24/21			26,125			26,125			26,125
athenahealth Inc	(h)	Health Care Equipment & Services	L+850		1.0%	2/11/27			65,229			64,590			65,554
Bellatrix Exploration Ltd	(m)	Energy	8.5%			7/26/23			6,372			5,966			5,792
Bellatrix Exploration Ltd	(m)(n)	Energy	8.5%			7/26/23			624			624			618
Byrider Finance LLC		Automobiles & Components	L+1000, 0.5% PIK (4.0% Max PIK)		1.3%	8/22/20			29,731			29,731			29,397
Catalina Marketing Corp	(i)(k)(l)(s)	Media	L+675		1.0%	4/11/22			10,000			9,958			200
Chisholm Oil & Gas Operating LLC	(h)	Energy	L+800		1.0%	3/21/24			16,000			16,000			15,705
Crossmark Holdings Inc	(i)(k)(l)(s)	Media	L+750		1.3%	12/21/20			7,778			7,786			58
Envigo Laboratories Inc	(h)(s)	Health Care Equipment & Services	L+775			4/29/20			3,272			3,202			3,043
Fairway Group Holdings Corp	(k)(l)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)			2/24/24			1,793			1,520			—
Grocery Outlet Inc	(s)	Food & Staples Retailing	L+725			10/22/26			2,287			2,266			2,287
Gruden Acquisition Inc	(h)(s)	Transportation	L+850		1.0%	8/18/23			15,000			14,531			14,887
Jazz Acquisition Inc	(f)(s)	Capital Goods	L+675		1.0%	6/19/22			3,700			3,727			3,478
LBM Borrower LLC	(f)(i)(s)	Capital Goods	L+925		1.0%	8/20/23			29,332			29,099			28,745
One Call Care Management Inc	(h)	Insurance	L+375, 6.0% PIK (6.0% Max PIK)		1.0%	4/11/24			12,666			12,560			11,554
OPE Inmar Acquisition Inc	(i)(s)	Software & Services	L+800		1.0%	5/1/25			2,615			2,584			2,596
P2 Energy Solutions, Inc.	(i)(s)	Software & Services	L+800		1.0%	4/30/21			14,500			14,603			14,011
Paradigm Acquisition Corp	(s)	Health Care Equipment & Services	L+750			10/26/26			1,599			1,595			1,591
Peak 10 Holding Corp	(i)(s)	Telecommunication Services	L+725		1.0%	8/1/25			5,814			5,635			5,146
Pure Fishing Inc	(i)	Consumer Durables & Apparel	L+838		1.0%	12/31/26			46,828			46,371			47,107
Rise Baking Company	(i)	Food, Beverage & Tobacco	L+800		1.0%	8/9/26			17,990			17,821			17,676

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Sequa Corp	(i)(s)	Materials	L+900		1.0%	4/28/22		$	7,462		$	7,419		$	7,322
SIRVA Worldwide Inc	(i)(s)	Commercial & Professional Services	L+950			8/2/26			2,494			2,315			2,195
SMG/PA	(s)	Consumer Services	L+700			1/23/26			3,641			3,671			3,691
Spencer Gifts LLC	(i)(s)	Retailing	L+825		1.0%	6/29/22			8,736			8,761			8,342
Titan Energy LLC	(h)(k)(l)	Energy	L+1300 PIK (L+1300 Max PIK)		1.0%	2/3/20			91,946			67,595			6,743
WireCo WorldGroup Inc	(s)	Capital Goods	L+900		1.0%	9/30/24			5,115			5,176			5,102
Total Senior Secured Loans—Second Lien												472,536			390,183
Unfunded Loan Commitments												(624)			(624)
Net Senior Secured Loans—Second Lien												471,912			389,559
Other Senior Secured Debt—6.7%
Advanced Lighting Technologies Inc	(k)(l)(t)	Materials	L+700, 10.0% PIK (10.0% Max PIK)		1.0%	10/4/23			12,493			10,663			344
Akzo Nobel Specialty Chemicals	(m)(s)	Materials	8.0%			10/1/26			2,019			2,020			2,037
Artesyn Embedded Technologies Inc	(s)	Technology Hardware & Equipment	9.8%			10/15/20			1,574			1,526			1,495
Black Swan Energy Ltd	(m)	Energy	9.0%			1/20/24			1,333			1,333			1,320
FourPoint Energy LLC	(h)(i)	Energy	9.0%			12/31/21			46,313			45,226			45,386
Genesys Telecommunications Laboratories Inc	(s)	Technology Hardware & Equipment	10.0%			11/30/24			144			158			158
JC Penney Corp Inc	(m)(s)	Retailing	5.7%			6/1/20			126			118			115
JW Aluminum Co	(h)(s)(t)	Materials	10.3%			6/1/26			33,001			33,001			34,197
Lycra	(m)(s)	Consumer Durables & Apparel	7.5%			5/1/25			3,659			3,686			3,613
Mood Media Corp	(h)(t)	Media	L+1400 PIK (L+1400 Max PIK)		1.0%	7/1/24			30,835			30,730			30,835
Numericable-SFR	(m)(s)	Software & Services	8.1%			2/1/27			917			917			928
Pattonair Holdings Ltd	(m)(s)	Capital Goods	9.0%			11/1/22			4,111			4,245			4,184
Ply Gem Holdings Inc	(s)	Capital Goods	8.0%			4/15/26			7,807			7,463			7,015
Sorenson Communications LLC	(h)(s)	Telecommunication Services	9.0%, 0.0% PIK (9.0% Max PIK)			10/31/20			7,058			6,964			7,128
Sunnova Energy Corp		Energy	6.0%, 6.0% PIK (6.0% Max PIK)			7/31/19			1,140			1,140			1,136
Velvet Energy Ltd	(i)(m)	Energy	9.0%			10/5/23			15,000			15,000			15,338
Vivint Inc	(h)(s)	Commercial & Professional Services	7.9%			12/1/22			11,307			11,089			11,334
Vivint Inc	(h)(s)	Commercial & Professional Services	7.6%			9/1/23			7,309			6,733			6,237
Total Other Senior Secured Debt												182,012			172,800

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Subordinated Debt—8.6%
All Systems Holding LLC		Commercial & Professional Services	10.0% PIK (10.0% Max PIK)		10/31/22		$	206		$	206		$	206
Ascent Resources Utica Holdings LLC/ARU Finance Corp	(h)(i)(s)	Energy	10.0%		4/1/22			26,026			26,026			28,506
athenahealth Inc		Health Care Equipment & Services	L+1125 PIK (L+1125 Max PIK)		11/30/25			32,614			32,614			32,988
Avantor Inc	(i)(s)	Pharmaceuticals, Biotechnology & Life Sciences	9.0%		10/1/25			20,000			20,000			21,675
Byrider Finance LLC		Automobiles & Components	20.0% PIK (20.0% Max PIK)		3/31/22			1,604			1,604			1,604
CEC Entertainment Inc	(s)	Consumer Services	8.0%		2/15/22			11,479			11,374			10,622
ClubCorp Club Operations Inc	(h)(s)	Consumer Services	8.5%		9/15/25			10,733			10,373			9,803
Diamond Resorts International Inc	(s)	Consumer Services	10.8%		9/1/24			3,048			3,187			2,890
Eclipse Resources Corp	(m)(s)	Energy	8.9%		7/15/23			9,175			9,053			8,756
Hub International Ltd	(s)	Insurance	7.0%		5/1/26			578			563			573
Intelsat Jackson Holdings SA	(m)(s)	Media	5.5%		8/1/23			5,752			5,204			5,112
Ken Garff Automotive LLC	(s)	Retailing	7.5%		8/15/23			6,004			6,053			6,102
LifePoint Hospitals Inc	(s)	Health Care Equipment & Services	9.8%		12/1/26			7,656			7,572			7,953
Logan’s Roadhouse Inc		Consumer Services			11/1/24			4,907			4,859			4,907
Quorum Health Corp	(s)	Health Care Equipment & Services	11.6%		4/15/23			2,396			2,384			2,157
Sorenson Communications LLC	(h)(s)	Telecommunication Services	13.9%, 0.0% PIK (13.9% Max PIK)		10/31/21			5,364			5,182			5,525
SRS Distribution Inc	(h)(s)	Capital Goods	8.3%		7/1/26			11,667			11,479			11,229
Stars Group Holdings BV	(m)(s)	Consumer Services	7.0%		7/15/26			1,438			1,438			1,501
Sungard Availability Services Capital Inc	(k)(l)(s)	Software & Services	8.8%		4/1/22			5,900			4,860			315
Team Health Inc	(s)	Health Care Equipment & Services	6.4%		2/1/25			6,901			5,987			5,620
Vertiv Group Corp	(h)(s)	Technology Hardware & Equipment	9.3%		10/15/24			16,584			16,419			16,377
Vivint Inc	(h)(s)	Commercial & Professional Services	8.8%		12/1/20			7,602			7,360			7,497
York Risk Services Group Inc	(h)(i)(s)	Insurance	8.5%		10/1/22			38,070			35,840			30,932
Total Subordinated Debt											229,637			222,850

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Principal Amount(c)/ Shares			Cost			Fair Value(d)
Asset Based Finance—1.8%
Altus Power America Inc, Preferred Stock	(r)	Energy	9.0%, 5.0% PIK		10/3/23			1,107,723		$	1,108		$	1,106
CGMS CLO 2013-3A Class Subord., 7/15/2025	(m)	Commercial & Professional Services	26.1%		7/15/25		$	23,263			9,069			12,251
Global Jet Capital LLC, Structured Mezzanine	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		1/30/25		$	1,023			994			1,006
Global Jet Capital LLC, Structured Mezzanine	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		4/30/25		$	6,502			6,315			6,396
Global Jet Capital LLC, Structured Mezzanine	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		9/3/25		$	1,344			1,305			1,322
Global Jet Capital LLC, Structured Mezzanine	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		9/29/25		$	1,265			1,229			1,244
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/4/25		$	7,636			7,417			7,512
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/4/25		$	1,700			1,651			1,673
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/9/25		$	176			171			173
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/9/25		$	1,351			1,312			1,329
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		1/29/26		$	654			635			643
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		1/29/26		$	146			142			144
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/2/26		$	2,420			2,350			2,380
NewStar Clarendon 2014-1A Class D	(m)	Diversified Financials	20.3%		1/25/27		$	12,140			7,579			8,089
Total Asset Based Finance											41,277			45,268

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity		Number of Shares		Cost			Fair Value(d)
Equity/Other—11.1%
Abaco Energy Technologies LLC, Common Stock	(l)	Energy						3,055,556		$	3,056		$	1,413
Abaco Energy Technologies LLC, Preferred Stock	(l)	Energy						12,734,481			637			7,322
Advanced Lighting Technologies Inc, Common Stock	(l)(t)	Materials						265,747			7,471			—
Advanced Lighting Technologies Inc, Warrant	(l)(t)	Materials				10/4/27		4,189			39			—
All Systems Holding LLC, Common Stock		Commercial & Professional Services						1,240,204			1,201			1,692
Altavair NewCo, Private Equity	(l)(m)	Capital Goods						3,429,458			3,429			3,519
Ascent Resources Utica Holdings LLC/ARU Finance Corp, Common Stock	(o)	Energy						13,556			12,900			4,365
Ascent Resources Utica Holdings LLC/ARU Finance Corp, Trade Claim	(o)	Energy						115,178,571			25,800			37,088
ASG Technologies, Common Stock	(l)(t)	Software & Services						625,178			13,475			36,667
ASG Technologies, Warrants	(l)(t)	Software & Services				6/27/22		253,704			7,231			9,362
Aspect Software Inc, Common Stock	(h)(l)	Software & Services						304,599			494			494
Aspect Software Inc, Warrant	(h)(l)	Software & Services				1/15/24		304,120			—			—
ATX Networks Corp, Common Stock	(l)(m)	Technology Hardware & Equipment						72,635			116			94
Aurora Diagnostics Holdings LLC/Aurora Diagnostics Financing Inc, Warrant	(h)(l)	Health Care Equipment & Services				5/25/27		94,193			686			277
Australis Maritime, Private Equity	(l)(m)	Transportation						1,136,041			1,136			1,136
Byrider Finance LLC, Common Stock	(l)	Automobiles & Components						1,389			—			—
Chisholm Oil & Gas Operating LLC, Series A Units	(l)(p)	Energy						75,000			75			34
Cimarron Energy Inc, Common Stock	(l)	Energy						4,302,293			3,950			217
Cimarron Energy Inc, Participation Option	(l)	Energy						25,000,000			1,289			1,263
CSafe Global, Common Stock	(l)	Capital Goods						417,400			417			741
Empire Today LLC, Common Stock	(l)	Retailing						411			1,227			1,350
Envigo Laboratories Inc, Series A Warrant	(h)(l)(s)	Health Care Equipment & Services				4/29/24		10,924			—			—
Envigo Laboratories Inc, Series B Warrant	(h)(l)(s)	Health Care Equipment & Services				4/29/24		17,515			—			—
Fairway Group Holdings Corp, Common Stock	(l)	Food & Staples Retailing						31,626			1,016			—
FourPoint Energy LLC, Common Stock, Class C - II - A Units	(l)(p)	Energy						13,000			13,000			2,896
FourPoint Energy LLC, Common Stock, Class D Units	(l)(p)	Energy						2,437			1,610			549
FourPoint Energy LLC, Common Stock, Class E - II Units	(l)(p)	Energy						29,730			7,432			6,622
FourPoint Energy LLC, Common Stock, Class E - III Units	(l)(p)	Energy						43,875			10,969			9,773
Fox Head Inc, Common Stock	(e)(l)	Consumer Durables & Apparel						8,857,143			8,857			3,569
FullBeauty Brands Holdings Corp, Common Stock	(l)	Retailing						5,583			26			26

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity		Number of Shares		Cost			Fair Value(d)
Global Jet Capital LLC, Preferred Stock	(e)(l)(m)	Commercial & Professional Services						6,228,866		$	6,229		$	467
Harvest Oil & Gas Corp, Common Stock	(e)(l)(s)	Energy						7,161			158			120
Harvey Industries Inc, Common Stock	(l)	Capital Goods						666,667			667			1,350
HM Dunn Co Inc, Preferred Stock, Series A	(h)(l)(t)	Capital Goods						12,857			—			—
HM Dunn Co Inc, Preferred Stock, Series B	(h)(l)(t)	Capital Goods						12,857			—			—
Industrial Group Intermediate Holdings LLC, Common Stock	(l)(p)	Materials						2,678,947			2,679			3,416
JHC Acquisition LLC, Common Stock	(l)	Capital Goods						1,449			1,449			1,880
JSS Holdings Ltd, Net Profits Interest	(l)	Capital Goods						27			—			469
JW Aluminum Co, Common Stock	(e)(i)(l)(t)	Materials						548			—			—
JW Aluminum Co, Preferred Stock	(e)(i)(t)	Materials	12.5% PIK			11/17/25		4,869			33,914			49,830
MB Precision Holdings LLC, Class A - 2 Units	(g)(h)(l)(p)(t)	Capital Goods						6,655,178			2,288			—
MB Precision Holdings LLC, Preferred Stock	(g)(h)(l)(t)	Capital Goods						41,778,909			8,774			3,539
Mood Media Corp, Common Stock	(l)(t)	Media						17,400,835			12,644			10,906
North Haven Cadence Buyer Inc, Common Stock	(l)	Consumer Services						2,916,667			2,917			4,958
Power Distribution Inc, Common Stock	(l)	Capital Goods						2,076,923			2,077			467
Professional Plumbing Group Inc, Common Stock	(e)(l)	Materials						3,000,000			3,000			8,250
Ridgeback Resources Inc, Common Stock	(e)(l)(m)	Energy						817,308			5,022			3,885
Sequential Brands Group Inc., Common Stock	(e)(l)(s)	Consumer Durables & Apparel						408,685			5,517			523
Sorenson Communications LLC, Common Stock	(e)(l)	Telecommunication Services						43,796			—			33,620
SSC (Lux) Limited S.a r.l., Common Stock	(l)(m)	Health Care Equipment & Services						261,364			5,227			6,403
Sunnova Energy Corp, Common Stock	(l)	Energy						384,746			1,444			477
Sunnova Energy Corp, Preferred Stock	(l)	Energy						70,229			374			413
Swift Worldwide Resources Holdco Ltd, Common Stock	(l)	Energy						1,250,000			2,009			438
Templar Energy LLC, Common Stock	(e)(l)(p)(s)	Energy						717,718			6,101			404
Templar Energy LLC, Preferred Stock	(e)(l)(s)	Energy						475,758			4,751			1,189
Titan Energy LLC, Common Stock	(e)(l)(s)	Energy						200,039			6,321			20
Trace3 Inc, Common Stock	(l)	Software & Services						33,216			332			1,513
Warren Resources Inc, Common Stock	(l)(t)	Energy						2,371,337			11,145			6,995
White Star Petroleum LLC, Common Stock	(l)(p)	Energy						1,613,753			1,372			363
Zeta Interactive Holdings Corp, Preferred Stock, Series E - 1	(l)	Software & Services						620,025			4,929			6,649
Zeta Interactive Holdings Corp, Preferred Stock, Series F	(l)	Software & Services						563,932			4,929			5,961
Zeta Interactive Holdings Corp, Warrant	(l)	Software & Services				4/20/27		84,590			—			247
Total Equity/Other											263,808			285,221
TOTAL INVESTMENTS—179.9%										$	4,799,885			4,634,818
LIABILITIES IN EXCESS OF OTHER ASSETS—(79.9%)														(2,058,601)
NET ASSETS—100.0%													$	2,576,217

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

A summary of outstanding financial instruments as of March 31, 2019 is as follows:

Interest rate swaps

Counterparty	Notional Amount	Company Receives Floating Rate	Company Pays Fixed Rate		Termination Date		Premiums Paid/ (Received)			Value			Unrealized Depreciation
JP Morgan Chase Bank	$80,000	3-Month LIBOR		2.78%		12/18/2023		$	—		$	(2,029)		$	(2,029)
JP Morgan Chase Bank	$80,000	3-Month LIBOR		2.81%		12/18/2021			—			(1,154)			(1,154)
ING Capital Markets	$100,000	3-Month LIBOR		2.59%		1/14/2024			—			(1,654)			(1,654)
ING Capital Markets	$100,000	3-Month LIBOR		2.62%		1/14/2022			—			(902)			(902)
								$	—		$	(5,739)		$	(5,739)

(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, 2019, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 2.60%, the Euro Interbank Offered Rate, or EURIBOR, was (0.31)%, Candian Dollar Offer Rate, or CDOR was 2.02%, and the U.S. Prime Lending Rate, or Prime, was 5.50%. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment.

(c)

Denominated in U.S. dollars unless otherwise noted.

(d)

Fair value determined by the Company’s board of directors (see Note 8).

(e)

Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with ING Capital LLC (see Note 9).

(f)

Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 9).

(g)

Security or portion thereof held within Darby Creek LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 9).

(h)

Security or portion thereof held within Juniata River LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, N.A. (see Note 9).

(i)

Security or portion thereof held within Green Creek LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with Goldman Sachs Bank USA (see Note 9).

(j)

Position or portion thereof unsettled as of March 31, 2019.

(k)

Security was on non-accrual status as of March 31, 2019.

(l)

Security is non-income producing.

(m)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of March 31, 2019, 89.5% of the Company’s total assets represented qualifying assets.

(n)

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.

(o)

Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

(p)

Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company.

(q)

Security held within IC II Arches Investments, LLC, a wholly-owned subsidiary of the Company.

(r)

Security held within IC II Altus Investments, LLC, a wholly-owned subsidiary of the Company.

(s)

Security is classified as Level 1 or Level 2 in the Company’s fair value hierarchy (see Note 8).

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)

(t)

Under the Investment Company Act of 1940, as amended, 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, 2019, 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 for the three months ended March 31, 2019:

Portfolio Company	Fair Value at December 31, 2018			Gross Additions(1)			Gross Reductions(2)			Net Realized Gain (Loss)			Net Change in Unrealized Appreciation (Depreciation)			Fair Value at March 31, 2019			Interest Income(3)			PIK Income(3)			Fee Income(3)
Senior Secured Loans—First Lien
Advanced Lighting Technologies, Inc.		$	9,125		$	56		$	(24)		$	3		$	(58)		$	9,102		$	234		$	—		$	—
H.M. Dunn Co., Inc.			7,022			—			—			—			(3,017)			4,005			—			—			—
MB Precision Holdings LLC			21,339			690			(497)			176			(339)			21,369			644			117			—
Warren Resources, Inc.			14,652			45			—			—			—			14,697			441			45			—
Senior Secured Loans—Second Lien
JW Aluminum Co.			—			—			—			—			—			—			—			—			—
Other Senior Secured Debt
Advanced Lighting Technologies, Inc.			3,630			—			—			—			(3,286)			344			—			—			—
JW Aluminum Co.			32,919			—			—			—			1,278			34,197			846			—			—
Mood Media Corp.			28,478			2,347			—			—			10			30,835			1,300			1,139			—
Equity/Other
Advanced Lighting Technologies, Inc., Common Equity			—			—			—			—			—			—			—			—			—
Advanced Lighting Technologies, Warrants, 10/4/2027			—			—			—			—			—			—			—			—			—
ASG Everglades Holdings, Inc., Common Equity			31,743			—			—			—			4,924			36,667			—			—			—
ASG Everglades Holdings, Inc., 6/27/2022, Warrants			7,364			—			—			—			1,998			9,362			—			—			—
HM Dunn Aerosystems, Inc., Preferred Equity, Series A			—			—			—			—			—			—			—			—			—
HM Dunn Aerosystems, Inc., Preferred Equity, Series B			—			—			—			—			—			—			—			—			—
JW Aluminum Co., Common Equity			—			—			—			—			—			—			—			—			—
JW Aluminum Co., Preferred Equity			43,890			1,874			—			—			4,066			49,830			1,802			1,774			—
MB Precision Holdings LLC, Class A-2 Units			—			—			—			—			—			—			—			—			—
MB Precision Holdings LLC, Preferred Stock			5,826			174			—			—			(2,461)			3,539			—			—			—
Mood Media Corp.			15,842			—			—			—			(4,936)			10,906			—			—			—
Warren Resources, Inc., Common Equity			5,573			—			—			—			1,422			6,995			—			—			—
Total		$	227,403		$	5,186		$	(521)		$	179		$	(399)		$	231,848		$	5,267		$	3,075		$	—

(1)

Gross additions 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 of one or more new securities and the movement of an existing portfolio company into this category from a different category.

(2)

Gross reductions 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 the movement of an existing portfolio company out of this category into a different category.

(3)

Interest, PIK and fee income presented for the three months ended March 31, 2019.

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Senior Secured Loans—First Lien—128.3%
5 Arch Income Fund 2, LLC	(m)(q)	Diversified Financials	9.0%			11/18/23		$	39,540		$	39,561		$	39,540
5 Arch Income Fund 2, LLC	(m)(n)(q)	Diversified Financials	9.0%			11/18/23			34,461			34,461			34,461
Abaco Energy Technologies LLC	(h)(i)(t)	Energy	L+700, 2.5% PIK(2.5% Max PIK)		1.0%	11/20/20			24,428			23,941			24,153
ABB CONCISE Optical Group LLC	(t)	Retailing	L+500		1.0%	6/15/23			2,769			2,779			2,658
Accuride Corp	(j)(t)	Capital Goods	L+525		1.0%	11/17/23			540			520			518
Acosta Holdco Inc	(h)(t)	Commercial & Professional Services	L+325		1.0%	9/26/21			6,644			5,383			4,081
Addison Holdings	(f)(g)(h)(i)	Commercial & Professional Services	L+675		1.0%	12/29/23			83,832			83,832			83,974
Advanced Lighting Technologies Inc	(h)(u)	Materials	L+750		1.0%	10/4/22			9,125			7,933			9,125
Advantage Sales & Marketing Inc	(i)(t)	Commercial & Professional Services	L+325		1.0%	7/23/21			15,370			14,681			13,654
Aleris International Inc	(h)(t)	Materials	L+475			2/27/23			1,367			1,354			1,358
All Systems Holding LLC	(g)(h)(i)	Commercial & Professional Services	L+767		1.0%	10/31/23			111,623			111,623			112,739
Altus Power America Inc	(i)	Energy	L+750		1.5%	9/30/21			3,183			3,183			3,087
Altus Power America Inc	(n)	Energy	L+750		1.5%	9/30/21			140			140			136
American Tire Distributors Inc	(t)	Automobiles & Components	L+750		1.0%	8/30/24			4,031			3,521			3,319
American Tire Distributors Inc	(t)	Automobiles & Components	L+650, 1.0% PIK(1.0% Max PIK)		1.0%	9/1/23			634			593			593
Ammeraal Beltech Holding BV	(m)(t)	Capital Goods	E+375			7/30/25		€	1,491			1,725			1,701
Apex Group Limited	(m)(n)	Diversified Financials	L+650			6/15/23		$	2,302			2,238			1,970
Apex Group Limited	(f)(g)(m)	Diversified Financials	L+650		1.0%	6/15/25			15,565			15,271			14,948
Apex Group Limited	(m)(n)	Diversified Financials	L+650		1.0%	6/15/25			7,509			7,370			7,211
Apex Group Limited	(m)	Diversified Financials	L+650		1.0%	6/15/25			2,503			2,466			2,404
Apex Group Limited	(m)(n)	Diversified Financials	L+650		1.0%	6/15/25			3,754			3,699			3,606
Ascension Insurance Inc	(f)(g)(h)	Insurance	L+825		1.3%	3/5/19			77,635			77,567			77,635
Ascension Insurance Inc	(n)	Insurance	L+825		1.3%	3/5/19			27,800			27,800			27,800
Aspect Software Inc	(k)(l)	Software & Services	L+400, 6.5% PIK(6.5% Max PIK)			5/25/20			4,671			4,657			3,480
Aspect Software Inc	(h)(k)(l)	Software & Services	L+1100		1.0%	5/25/20			3,598			3,556			2,680
ATX Networks Corp	(f)(m)(t)	Technology Hardware & Equipment	L+600, 1.0% PIK(1.0% Max PIK)		1.0%	6/11/21			1,852			1,839			1,759
ATX Networks Corp	(f)(i)(m)(t)	Technology Hardware & Equipment	L+600, 1.0% PIK(1.0% Max PIK)		1.0%	6/11/21			24,804			24,368			23,564
AVF Parent LLC	(h)(i)	Retailing	L+725		1.3%	3/1/24			74,461			74,461			69,605
Belk Inc	(t)	Retailing	L+475		1.0%	12/12/22			22,635			19,743			18,366
Borden Dairy Co	(g)(h)	Food, Beverage & Tobacco	L+808		1.0%	7/6/23			52,500			52,500			47,738
Caprock Midstream LLC	(t)	Energy	L+475			11/3/25			6,046			5,916			5,638
Cimarron Energy Inc		Energy	L+900		1.0%	6/30/21			7,500			7,500			7,500
Constellis Holdings LLC/Constellis Finance Corp		Capital Goods	L+575		1.0%	4/1/22			47,325			46,621			46,615
CSafe Global		Capital Goods	L+725		1.0%	11/1/21			626			626			632
CSafe Global	(n)	Capital Goods	L+725		1.0%	11/1/21			5,635			5,635			5,691
CSafe Global	(f)(g)(h)	Capital Goods	L+725		1.0%	10/31/23			53,605			53,605			54,141

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
CSM Bakery Products	(i)(t)	Food, Beverage & Tobacco	L+400		1.0%	7/3/20		$	5,217		$	5,071		$	4,845
Dade Paper and Bag Co Inc	(f)(g)(h)(i)	Capital Goods	L+750		1.0%	6/10/24			135,734			135,734			133,019
Dade Paper and Bag Co Inc	(f)(g)(h)	Capital Goods	L+700		1.0%	6/10/24			17,312			17,312			16,620
Dayton Superior Corp	(i)(t)	Materials	L+800, 6.0% PIK(6.0% Max PIK)		1.0%	11/15/21			11,790			11,585			9,874
Diamond Resorts International Inc	(i)(t)	Consumer Services	L+375		1.0%	9/2/23			14,085			13,795			13,170
Distribution International Inc	(t)	Retailing	L+500		1.0%	12/15/21			3,398			3,247			3,024
Eagle Family Foods Inc	(n)	Food, Beverage & Tobacco	L+650		1.0%	6/14/23			4,126			4,084			3,516
Eagle Family Foods Inc	(g)(h)	Food, Beverage & Tobacco	L+650		1.0%	6/14/24			27,368			27,082			26,950
Eagleclaw Midstream Ventures LLC	(i)(j)(t)	Energy	L+425		1.0%	6/24/24			11,455			10,917			10,747
EIF Van Hook Holdings LLC	(i)(t)	Energy	L+525			9/5/24			7,378			7,234			7,184
Empire Today LLC	(f)(g)(h)(i)	Retailing	L+700		1.0%	11/17/22			88,200			88,200			88,361
Fairway Group Holdings Corp	(k)(l)	Food & Staples Retailing	10.0% PIK(10.0% Max PIK)			11/27/23			1,964			1,733			258
Fairway Group Holdings Corp	(h)	Food & Staples Retailing	12.0% PIK(12.0% Max PIK)			11/27/23			3,072			3,072			2,984
Fairway Group Holdings Corp		Food & Staples Retailing	4.0%, 11.0% PIK(11.0% Max PIK)			8/28/23			212			210			212
Fairway Group Holdings Corp	(n)	Food & Staples Retailing	4.0%, 11.0% PIK(11.0% Max PIK)			8/28/23			455			455			455
Fairway Group Holdings Corp		Food & Staples Retailing	4.0%, 11.0% PIK(11.0% Max PIK)			8/28/23			1,070			1,055			1,070
Foresight Energy LLC	(h)(m)(t)	Materials	L+575		1.0%	3/28/22			10,591			10,575			10,423
Fox Head Inc	(h)(i)	Consumer Durables & Apparel	L+850		1.0%	12/19/20			5,051			5,051			4,989
Fox Head Inc	(h)(i)	Consumer Durables & Apparel	L+850		1.0%	12/19/20			47,253			47,253			46,671
FullBeauty Brands Holdings Corp	(k)(l)(t)	Retailing	L+475		1.0%	10/14/22			4,910			4,574			1,495
Gulf Finance LLC	(i)(t)	Energy	L+525		1.0%	8/25/23			4,687			4,585			3,615
HM Dunn Co Inc	(h)(k)(l)(u)	Capital Goods	L+875 PIK(L+875 Max PIK)			6/30/21			43,885			38,571			7,022
Hudson Technologies Co	(h)(i)(m)	Commercial & Professional Services	L+1025		1.0%	10/10/23			50,717			50,286			36,262
Icynene Group Ltd	(f)(h)(i)	Materials	L+700		1.0%	11/30/24			35,640			35,640			34,656
Industrial Group Intermediate Holdings LLC	(f)(g)(h)(i)	Materials	L+800		1.3%	5/31/20			118,840			118,840			118,098
Industry City TI Lessor LP	(h)	Consumer Services	10.8%, 1.0% PIK(1.0% Max PIK)			6/30/26			11,522			11,522			11,522
JAKKS Pacific Inc	(h)	Consumer Durables & Apparel	L+900		1.5%	6/14/21			2,793			2,775			2,803
JC Penney Corp Inc	(m)(t)	Retailing	L+425		1.0%	6/23/23			1,205			1,149			1,034
JHC Acquisition LLC	(f)(g)(h)	Capital Goods	L+750		1.0%	1/29/24			121,947			121,947			121,947
JHC Acquisition LLC	(n)	Capital Goods	L+750		1.0%	1/29/24			35,269			35,268			35,269
Jo-Ann Stores Inc	(i)(t)	Retailing	L+500		1.0%	10/20/23			5,013			5,004			4,794
Jostens Inc	(j)(t)	Consumer Services	L+550			12/19/25			3,663			3,552			3,574
JSS Holdings Ltd	(f)(h)(i)	Capital Goods	L+800, 0.0% PIK(2.5% Max PIK)		1.0%	3/31/23			72,696			72,140			74,877
Kodiak BP LLC	(g)(h)(i)	Capital Goods	L+725		1.0%	12/1/24			110,681			110,681			108,329
Kodiak BP LLC	(n)	Capital Goods	L+725		1.0%	12/1/24			9,849			9,849			9,639
Lazard Global Compounders Fund	(m)	Diversified Financials	L+725		3.8%	4/1/26			38,356			38,356			38,644
Lazard Global Compounders Fund	(m)(n)	Diversified Financials	L+725		3.8%	4/1/26			6,644			6,644			6,694

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
LD Intermediate Holdings Inc	(i)(t)	Software & Services	L+588		1.0%	12/9/22		$	16,150		$	15,058		$	14,656
MB Precision Holdings LLC	(g)(h)(k)(l)(u)	Capital Goods	L+725, 2.3% PIK(2.3% Max PIK)		1.3%	1/23/21			21,339			20,364			21,339
Mitel US Holdings Inc	(i)(t)	Technology Hardware & Equipment	L+450			11/30/25			4,559			4,548			4,431
Monitronics International Inc	(j)(m)(t)	Commercial & Professional Services	L+550		1.0%	9/30/22			3,838			3,702			3,442
Murray Energy Corp	(h)	Energy	L+900		1.0%	2/12/21			10,891			10,824			10,842
NaviHealth Inc.	(i)(j)(t)	Health Care Equipment & Services	L+500			8/1/25			15,111			14,437			14,318
North Haven Cadence Buyer Inc	(n)	Consumer Services	L+500		1.0%	9/2/21			2,625			2,625			2,625
North Haven Cadence Buyer Inc	(h)	Consumer Services	L+777		1.0%	9/2/24			14,762			14,762			14,614
North Haven Cadence Buyer Inc	(h)(i)	Consumer Services	L+798		1.0%	9/2/24			51,187			51,187			50,676
North Haven Cadence Buyer Inc	(n)	Consumer Services	L+650		1.0%	9/2/24			10,500			10,500			10,395
P2 Energy Solutions, Inc.	(t)	Energy	L+400		1.3%	10/30/20			74			73			71
PAE Holding Corp	(j)(t)	Capital Goods	L+550		1.0%	10/20/22			9			9			9
Panda Liberty LLC	(f)(g)(t)	Energy	L+650		1.0%	8/21/20			11,515			11,525			10,383
Peak 10 Holding Corp	(j)(t)	Telecommunication Services	L+325		1.0%	8/1/24			8,965			8,329			8,181
PHRC License LLC	(g)(h)	Consumer Services	L+850, 0.3% PIK(0.3% Max PIK)		1.5%	4/28/22			66,842			66,842			68,262
Power Distribution Inc	(f)(i)	Capital Goods	L+725		1.3%	1/25/23			44,021			44,021			44,021
Production Resource Group LLC	(f)(g)(h)(i)	Media	L+700		1.0%	8/21/24			207,992			207,992			204,352
Propulsion Acquisition LLC	(f)(h)(i)(t)	Capital Goods	L+600		1.0%	7/13/21			58,267			56,734			57,684
PSKW LLC	(f)(h)	Health Care Equipment & Services	L+850		1.0%	11/25/21			56,025			55,983			56,166
Reliant Rehab Hospital Cincinnati LLC	(h)	Health Care Equipment & Services	L+675		1.0%	8/30/24			55,015			54,490			54,850
Roadrunner Intermediate Acquisition Co LLC	(f)	Health Care Equipment & Services	L+675		1.0%	3/15/23			7,165			7,165			6,673
Rogue Wave Software Inc	(h)	Software & Services	L+843		1.0%	9/25/21			72,434			72,434			72,343
Safariland LLC	(g)(h)	Capital Goods	L+765		1.1%	11/18/23			70,234			70,234			62,947
Savers Inc	(t)	Retailing	L+375		1.3%	7/9/19			1,539			1,529			1,473
Sequa Corp	(i)(j)(t)	Materials	L+500		1.0%	11/28/21			18,467			18,212			17,705
Sequel Youth & Family Services LLC	(h)	Health Care Equipment & Services	L+700		1.0%	9/1/23			12,229			12,229			12,448
Sequel Youth & Family Services LLC	(f)(h)(i)	Health Care Equipment & Services	L+800			9/1/23			70,000			70,000			71,247
Sequential Brands Group Inc.	(g)(h)(i)	Consumer Durables & Apparel	L+875			2/7/24			118,929			116,976			118,929
SI Group Inc	(j)(t)	Materials	L+475			10/15/25			2,922			2,814			2,820
SIRVA Worldwide Inc	(i)(t)	Commercial & Professional Services	L+550			8/2/25			2,776			2,737			2,728
Sorenson Communications LLC	(f)(g)(h)(j)(t)	Telecommunication Services	L+575		2.3%	4/30/20			107,393			107,217			106,991
SSC (Lux) Limited S.a r.l.	(g)(h)(i)(m)	Health Care Equipment & Services	L+750		1.0%	9/10/24			104,545			104,545			105,591
Staples Canada	(m)	Retailing	L+700		1.0%	9/12/24		C$	56,874			44,009			42,101
Strike LLC	(i)(t)	Energy	L+800		1.0%	11/30/22		$	4,285			4,191			4,290
Sungard Availability Services Capital Inc	(f)(t)	Software & Services	L+700		1.0%	9/30/21			10,336			10,266			8,827

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Sungard Availability Services Capital Inc	(t)	Software & Services	L+1000		1.0%	10/1/22		$	962		$	918		$	933
Sutherland Global Services Inc	(h)(i)(j)(m)(t)	Software & Services	L+538		1.0%	4/23/21			10,564			10,143			9,974
Sutherland Global Services Inc	(h)(i)(j)(m)(t)	Software & Services	L+538		1.0%	4/23/21			2,459			2,361			2,322
Swift Worldwide Resources Holdco Ltd	(f)(g)	Energy	L+1000, 1.0% PIK(1.0% Max PIK)		1.0%	7/20/21			19,492			19,492			19,492
Tangoe LLC		Software & Services	L+650		1.0%	11/28/25			52,024			51,511			51,504
Team Health Inc	(j)(t)	Health Care Equipment & Services	L+275		1.0%	2/6/24			78			71			70
Trace3 Inc	(f)(g)(h)(i)	Diversified Financials	L+675		1.0%	8/5/24			161,585			161,585			159,970
Virgin Pulse Inc	(h)(i)	Software & Services	L+650		1.0%	5/22/25			79,891			79,290			77,407
Vivint Inc	(i)(t)	Commercial & Professional Services	L+500			4/1/24			18,583			18,537			18,111
Warren Resources Inc	(h)(u)	Energy	L+1000, 1.0% PIK(1.0% Max PIK)		1.0%	5/22/20			14,652			14,652			14,652
York Risk Services Group Inc	(t)	Insurance	L+375		1.0%	10/1/21			980			975			919
Zeta Interactive Holdings Corp	(f)(h)	Software & Services	L+750		1.0%	7/29/22			37,112			37,112			37,483
Zeta Interactive Holdings Corp	(n)	Software & Services	L+750		1.0%	7/29/22			6,571			6,571			6,637
Total Senior Secured Loans—First Lien												3,539,497			3,450,630
Unfunded Loan Commitments												(157,339)			(157,339)
Net Senior Secured Loans—First Lien												3,382,158			3,293,291
Senior Secured Loans—Second Lien—13.0%
Access CIG LLC	(t)	Software & Services	L+775			2/27/26			1,326			1,342			1,314
Advantage Sales & Marketing Inc	(t)	Commercial & Professional Services	L+650		1.0%	7/25/22			2,291			2,039			1,815
American Bath Group LLC	(i)(t)	Capital Goods	L+975		1.0%	9/30/24			7,000			6,588			6,965
Ammeraal Beltech Holding BV	(m)	Capital Goods	L+800			7/27/26			52,309			51,285			51,183
Arena Energy LP	(f)(h)	Energy	L+900, 4.0% PIK(4.0% Max PIK)		1.0%	1/24/21			25,872			25,872			25,872
Bellatrix Exploration Ltd	(m)	Energy	8.5%			7/26/23			4,500			4,076			3,979
Bellatrix Exploration Ltd	(m)	Energy	8.5%			7/26/23			1,872			1,872			1,866
Bellatrix Exploration Ltd	(m)(n)	Energy	8.5%			7/26/23			624			624			622
Byrider Finance LLC		Automobiles & Components	L+1000, 0.5% PIK(4.0% Max PIK)		1.3%	8/22/20			29,695			29,695			29,138
Catalina Marketing Corp	(i)(k)(l)(t)	Media	L+675		1.0%	4/11/22			10,000			9,958			237
Chisholm Oil & Gas Operating LLC	(h)	Energy	L+800		1.0%	3/21/24			16,000			16,000			15,811
Crossmark Holdings Inc	(i)(k)(l)(t)	Media	L+750		1.3%	12/21/20			7,778			7,786			311
Envigo Laboratories Inc	(h)(t)	Health Care Equipment & Services	L+775			4/29/20			3,272			3,189			3,051
Fairway Group Holdings Corp	(k)(l)	Food & Staples Retailing	11.0% PIK(11.0% Max PIK)			2/24/24			1,744			1,520			—
Grocery Outlet Inc	(t)	Food & Staples Retailing	L+725			10/22/26			2,287			2,265			2,273
Gruden Acquisition Inc	(h)(t)	Transportation	L+850		1.0%	8/18/23			15,000			14,511			15,038
Jazz Acquisition Inc	(f)(t)	Capital Goods	L+675		1.0%	6/19/22			3,700			3,729			3,460
LBM Borrower LLC	(f)(i)(j)(t)	Capital Goods	L+925		1.0%	8/20/23			29,332			29,090			28,746
One Call Care Management Inc	(h)	Insurance	L+375, 6.0% PIK(6.0% Max PIK)			4/11/24			12,472			12,362			11,946

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
OPE Inmar Acquisition Inc	(i)(t)	Software & Services	L+800		1.0%	5/1/25		$	2,615		$	2,583		$	2,589
P2 Energy Solutions, Inc.	(i)(t)	Energy	L+800		1.0%	4/30/21			14,500			14,614			13,920
Paradigm Acquisition Corp	(t)	Health Care Equipment & Services	L+750			10/26/26			1,599			1,595			1,607
Peak 10 Holding Corp	(i)(j)(t)	Telecommunication Services	L+725		1.0%	8/1/25			5,814			5,630			5,247
Pure Fishing Inc		Consumer Durables & Apparel	L+838		1.0%	12/31/26			46,828			46,362			46,359
Rise Baking Company	(i)	Food, Beverage & Tobacco	L+800		1.0%	8/9/26			17,990			17,817			17,822
Sequa Corp	(i)(t)	Materials	L+900		1.0%	4/28/22			7,462			7,416			7,089
SIRVA Worldwide Inc	(i)(t)	Commercial & Professional Services	L+950			8/2/26			2,494			2,312			2,207
SMG/PA	(j)(t)	Consumer Services	L+700			1/23/26			3,641			3,671			3,599
Spencer Gifts LLC	(i)(t)	Retailing	L+825		1.0%	6/29/22			20,000			20,063			17,100
Titan Energy LLC	(h)(k)(l)	Energy	L+1300 PIK(L+1300 Max PIK)		1.0%	2/23/20			89,408			67,595			8,316
WireCo WorldGroup Inc	(t)	Capital Goods	L+900		1.0%	9/30/24			5,115			5,178			5,128
Total Senior Secured Loans—Second Lien												418,639			334,610
Unfunded Loan Commitments												(624)			(624)
Net Senior Secured Loans—Second Lien												418,015			333,986
Other Senior Secured Debt—7.7%
Advanced Lighting Technologies Inc	(k)(l)(u)	Materials	L+700, 10.0% PIK(10.0% Max PIK)		1.0%	10/4/23			11,342			10,663			3,630
Akzo Nobel Specialty Chemicals	(m)(t)	Materials	8.0%			10/1/26			2,019			2,019			1,890
Artesyn Embedded Technologies Inc	(t)	Technology Hardware & Equipment	9.8%			10/15/20			1,574			1,518			1,456
Black Swan Energy Ltd	(m)	Energy	9.0%			1/20/24			1,333			1,333			1,286
Boyne USA Inc	(t)	Consumer Services	7.3%			5/1/25			44			46			46
DJO Finance LLC/DJO Finance Corp	(t)	Health Care Equipment & Services	8.1%			6/15/21			6,838			6,886			7,060
FourPoint Energy LLC	(h)(i)	Energy	9.0%			12/31/21			46,313			45,107			45,502
Genesys Telecommunications Laboratories Inc	(t)	Technology Hardware & Equipment	10.0%			11/30/24			144			159			152
Global A&T Electronics Ltd	(i)(m)(t)	Semiconductors & Semiconductor Equipment	8.5%			1/12/23			15,949			16,079			14,155
JC Penney Corp Inc	(j)(m)(t)	Retailing	5.7%			6/1/20			126			117			101
JW Aluminum Co	(h)(t)(u)	Materials	10.3%			6/1/26			33,001			33,001			32,919
Lycra	(m)(t)	Consumer Durables & Apparel	7.5%			5/1/25			3,659			3,687			3,444
Mood Media Corp	(h)(u)	Media	L+1400 PIK(L+1400 Max PIK)		1.0%	6/28/24			28,478			28,383			28,478
Numericable-SFR	(m)(t)	Software & Services	8.1%			2/1/27			917			917			869
Pattonair Holdings Ltd	(m)(t)	Capital Goods	9.0%			11/1/22			4,111			4,252			4,153
Ply Gem Holdings Inc	(t)	Capital Goods	8.0%			4/15/26			7,807			7,453			7,182
Sorenson Communications LLC	(h)(t)	Telecommunication Services	9.0%, 0.0% PIK(9.0% Max PIK)			10/31/20			7,058			6,952			6,987
Sunnova Energy Corp		Energy	6.0%, 6.0% PIK(6.0% Max PIK)			7/31/19			1,123			1,123			1,116
Talos Production LLC	(h)(t)	Energy	11.0%			4/3/22			4,500			4,701			4,376

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Velvet Energy Ltd	(i)(m)	Energy	9.0%			10/5/23		$	15,000		$	15,000		$	15,120
Vivint Inc	(h)(t)	Commercial & Professional Services	7.6%			9/1/23			7,309			6,707			5,981
Vivint Inc	(h)(t)	Commercial & Professional Services	7.9%			12/1/22			11,307			11,078			10,713
Total Other Senior Secured Debt												207,181			196,616
Subordinated Debt—8.6%
All Systems Holding LLC		Commercial & Professional Services	10.0% PIK(10.0% Max PIK)			10/31/22			206			206			206
Ascent Resources Utica Holdings LLC/ARU Finance Corp	(h)(i)(t)	Energy	10.0%			4/1/22			26,026			26,026			26,635
Aurora Diagnostics Holdings LLC/Aurora Diagnostics Financing Inc	(h)(t)	Health Care Equipment & Services	12.3%, 1.5% PIK(1.5% Max PIK)			1/15/20			6,235			5,951			6,235
Avantor Inc	(i)(t)	Pharmaceuticals, Biotechnology & Life Sciences	9.0%			10/1/25			20,000			20,000			20,012
Byrider Finance LLC		Automobiles & Components	20.0% PIK(20.0% Max PIK)			3/31/22			1,458			1,458			1,458
CEC Entertainment Inc	(t)	Consumer Services	8.0%			2/15/22			18,510			18,397			16,659
ClubCorp Club Operations Inc	(h)(t)	Consumer Services	8.5%			9/15/25			10,733			10,361			9,660
Diamond Resorts International Inc	(t)	Consumer Services	10.8%			9/1/24			3,048			3,191			2,751
Eclipse Resources Corp	(m)(t)	Energy	8.9%			7/15/23			9,175			9,049			7,879
Great Lakes Dredge & Dock Corp	(m)(t)	Capital Goods	8.0%			5/15/22			5,276			5,276			5,364
Intelsat Jackson Holdings SA	(m)(t)	Media	5.5%			8/1/23			5,752			5,178			5,058
Ken Garff Automotive LLC	(t)	Retailing	7.5%			8/15/23			6,004			6,055			5,959
Lazard Global Compounders Fund	(m)(n)	Diversified Financials	L+650		4.5%	9/15/25			15,000			15,000			14,682
LifePoint Hospitals Inc	(t)	Health Care Equipment & Services	9.8%			12/1/26			7,656			7,571			7,295
Logan’s Roadhouse Inc	(l)	Consumer Services				11/1/24			4,907			4,857			4,855
PF Chang’s China Bistro Inc	(h)(i)(t)	Consumer Services	10.3%			6/30/20			28,977			28,320			26,460
Quorum Health Corp	(t)	Health Care Equipment & Services	11.6%			4/15/23			2,566			2,554			2,446
Sorenson Communications LLC	(h)(t)	Telecommunication Services	13.9%, 0.0% PIK(13.9% Max PIK)			10/31/21			5,364			5,170			5,498
SRS Distribution Inc	(h)(t)	Capital Goods	8.3%			7/1/26			11,667			11,476			10,734
Stars Group Holdings BV	(m)(t)	Consumer Services	7.0%			7/15/26			1,438			1,438			1,398
Sungard Availability Services Capital Inc	(t)	Software & Services	8.8%			4/1/22			5,900			4,860			1,322
Team Health Inc	(t)	Health Care Equipment & Services	6.4%			2/1/25			6,901			5,958			5,633
Vertiv Group Corp	(h)(t)	Technology Hardware & Equipment	9.3%			10/15/24			16,584			16,411			14,760
Vivint Inc	(h)(t)	Commercial & Professional Services	8.8%			12/1/20			7,602			7,328			7,250
York Risk Services Group Inc	(h)(i)(t)	Insurance	8.5%			10/1/22			38,070			35,701			26,649
Total Subordinated Debt												257,792			236,858
Unfunded Debt Commitments												(15,000)			(15,000)
Net Subordinated Debt												242,792			221,858

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Principal Amount(c)/ Shares			Cost			Fair Value(d)
Asset Based Finance—1.8%
Altus Power America Inc, Preferred Stock	(r)	Energy	9.0%, 5.0% PIK		10/3/23			1,060,975		$	1,061		$	1,045
CGMS CLO 2013-3A Class Subord., 7/15/2025	(m)	Diversified Financials	27.8%		7/15/25		$	23,263			9,222			12,050
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		1/30/25		$	986			971			986
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		4/30/25		$	6,267			6,174			6,267
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		9/3/25		$	1,295			1,276			1,295
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		9/29/25		$	1,219			1,201			1,219
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		12/4/25		$	7,287			7,179			7,287
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		12/4/25		$	1,712			1,687			1,712
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		12/9/25		$	219			216			219
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		12/9/25		$	1,253			1,234			1,253
Global Jet Capital LLC, Structured Mezzanine	(e)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		1/29/26		$	625			616			625
Global Jet Capital LLC, Structured Mezzanine	(e)(m)	Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		1/29/26		$	146			143			146
Global Jet Capital LLC, Structured Mezzanine		Commercial & Professional Services	15.0% PIK(15.0% Max PIK)		12/2/26		$	2,332			2,298			2,332
NewStar Clarendon 2014-1A Class Subord. B	(m)	Diversified Financials	L+435		1/25/27		$	1,060			1,014			1,055
NewStar Clarendon 2014-1A Class D	(m)	Diversified Financials	13.2%		1/25/27		$	12,140			7,758			8,661
Total Asset Based Finance											42,050			46,152
Equity/Other—10.4%
5 Arch Income Fund 2, LLC, Common Stock	(m)(p)	Diversified Financials						8,000			197			400
Abaco Energy Technologies LLC, Common Equity	(l)	Energy						3,055,556			3,056			1,299
Abaco Energy Technologies LLC, Preferred Equity	(l)	Energy						12,734,481			637			6,686
Advanced Lighting Technologies Inc, Common Stock	(l)(u)	Materials						265,747			7,471			—
Advanced Lighting Technologies Inc, Warrant	(l)(u)	Materials			10/4/27			4,189			39			—
All Systems Holding LLC, Common Stock		Commercial & Professional Services						124			1,201			1,384
Altus Power America Inc, Common Stock	(l)	Energy						462,008			462			81
Ascent Resources Utica Holdings LLC/ARU Finance Corp, Common Stock	(o)	Energy						13,555,557			12,900			3,768
Ascent Resources Utica Holdings LLC/ARU Finance Corp, Trade Claim	(o)	Energy						115,178,572			25,800			32,020
ASG Technologies, Common Stock	(l)(u)	Software & Services						625,178			13,475			31,743
ASG Technologies, Warrants	(l)(u)	Software & Services			6/27/22			253,704			7,231			7,364
Aspect Software Inc, Common Stock	(l)	Software & Services						38,574			9,932			—

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Principal Amount(c)/ Shares		Cost			Fair Value(d)
ATX Networks Corp, Common Stock	(l)(m)	Technology Hardware & Equipment					72,635		$	116		$	56
Aurora Diagnostics Holdings LLC/Aurora Diagnostics Financing Inc, Warrant	(h)(l)	Health Care Equipment & Services			5/25/27		94,193			686			135
Australis Maritime, Private Equity	(l)(m)	Transportation					—			1,136			1,136
Byrider Finance LLC, Common Stock	(l)	Automobiles & Components					1,389			—			—
Chisholm Oil & Gas Operating LLC, Series A Units	(l)(p)	Energy					75,000			75			32
Cimarron Energy Inc, Common Stock	(l)	Energy					4,302,293			3,950			194
Cimarron Energy Inc, Participation Option	(l)	Energy					25,000,000			1,289			1,125
CSafe Global, Common Stock	(l)	Capital Goods					417,400			417			584
Eastman Kodak Co, Common Stock	(l)(t)	Consumer Durables & Apparel					354			7			1
Empire Today LLC, Common Stock	(l)	Retailing					411			1,227			1,189
Envigo Laboratories Inc, Warrant	(h)(l)(t)	Health Care Equipment & Services			4/29/24		10,924			—			—
Envigo Laboratories Inc, Warrant	(h)(l)(t)	Health Care Equipment & Services			4/29/24		17,515			—			—
Fairway Group Holdings Corp, Common Stock	(l)	Food & Staples Retailing					31,626			1,016			—
FourPoint Energy LLC, Common Stock, Class C - II - A Units	(l)(p)	Energy					13,000			13,000			2,909
FourPoint Energy LLC, Common Stock, Class D Units	(l)(p)	Energy					2,437			1,610			551
FourPoint Energy LLC, Common Stock, Class E - II Units	(l)(p)	Energy					29,730			7,432			6,652
FourPoint Energy LLC, Common Stock, Class E - III Units	(l)(p)	Energy					43,875			10,969			9,817
Fox Head Inc, Common Stock	(e)(l)	Consumer Durables & Apparel					8,857,143			8,857			3,947
Global Jet Capital LLC, Preferred Stock	(e)(l)	Commercial & Professional Services					5,385,440			5,386			754
Global Jet Capital LLC, Preferred Stock	(e)(l)(m)	Commercial & Professional Services					843,426			843			118
Harvest Oil & Gas Corp, Common Stock	(e)(l)(t)	Energy					7,161			158			129
Harvey Industries Inc, Common Stock	(l)	Capital Goods					666,667			667			1,350
HM Dunn Co Inc, Preferred Stock, Series A	(h)(l)(u)	Capital Goods					12,857			—			—
HM Dunn Co Inc, Preferred Stock, Series B	(h)(l)(u)	Capital Goods					12,857			—			—
Industrial Group Intermediate Holdings LLC, Common Stock	(l)(p)	Materials					2,678,947			2,679			1,607
JHC Acquisition LLC, Common Stock	(l)	Capital Goods					1,449			1,449			1,946
JSS Holdings Ltd, Net Profits Interest	(l)	Capital Goods					—			—			471
JW Aluminum Co, Common Stock	(e)(i)(l)(u)	Materials					548			—			—

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

Portfolio Company(a)		Footnotes	Industry	Rate(b)	Floor	Maturity	Principal Amount(c)/ Shares		Cost			Fair Value(d)
JW Aluminum Co, Preferred Stock		(e)(i)(u)	Materials	12.5% PIK		11/17/25		4,869		$	32,040		$	43,890
MB Precision Holdings LLC, Class A-2 Units		(g)(h)(l)(u)	Capital Goods					6,655,178			2,288			—
MB Precision Holdings LLC, Preferred Stock		(g)(h)(l)(p)(u)	Capital Goods					41,778,909			8,600			5,826
Mood Media Corp, Common Stock	��	(l)(u)	Media					17,400,835			12,644			15,842
North Haven Cadence Buyer Inc, Common Equity		(l)	Consumer Services					2,916,667			2,917			4,448
Power Distribution Inc, Common Stock		(l)	Capital Goods					2,076,923			2,077			1,090
Professional Plumbing Group Inc, Common Stock		(e)(l)	Capital Goods					3,000,000			3,000			7,800
Ridgeback Resources Inc, Common Stock		(e)(l)(m)(s)	Energy					817,308			5,022			4,043
Sequential Brands Group Inc., Common Stock		(e)(l)(t)	Consumer Durables & Apparel					408,685			5,517			327
Sorenson Communications LLC, Common Stock		(e)(l)	Telecommunication Services					43,796			—			36,026
SSC (Lux) Limited S.a r.l., Common Stock		(l)(m)	Health Care Equipment & Services					261,364			5,227			6,403
Sunnova Energy Corp, Common Stock		(l)	Energy					384,746			1,444			—
Sunnova Energy Corp, Preferred Stock		(l)	Energy					70,229			374			385
Swift Worldwide Resources Holdco Ltd, Common Stock		(l)	Energy					1,250,000			2,009			625
Templar Energy LLC, Common Stock		(e)(l)(p)(t)	Energy					717,718			6,101			449
Templar Energy LLC, Preferred Stock		(e)(l)(t)	Energy					475,758			4,751			1,427
Titan Energy LLC, Common Stock		(e)(l)(t)	Energy					200,040			6,321			60
Trace3 Inc, Common Stock			Diversified Financials					33,216			332			616
Warren Resources Inc, Common Stock		(l)(u)	Energy					2,371,337			11,145			5,573
White Star Petroleum LLC		(l)(p)	Energy					1,613,753			1,372			524
Zeta Interactive Holdings Corp, Preferred Stock, Series E - 1		(l)	Software & Services					620,025			4,929			6,519
Zeta Interactive Holdings Corp, Preferred Stock, Series F		(l)	Software & Services					563,932			4,929			5,816
Zeta Interactive Holdings Corp, Warrant		(l)	Software & Services			4/20/27		84,590			—			240
Total Equity/Other											268,409			267,377
TOTAL INVESTMENTS—169.8%										$	4,560,605			4,359,280
LIABILITIES IN EXCESS OF ASSETS—(69.8%)														(1,791,871)
NET ASSETS—100.0%													$	2,567,409

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

A summary of outstanding financial instruments as of December 31, 2018 is as follows:

Interest rate swaps

Counterparty	Notional Amount	Company Receives Floating Rate	Company Pays Fixed Rate		Termination Date		Premiums Paid/ (Received)			Value			Unrealized Depreciation
JP Morgan Chase Bank	$80,000	3-Month LIBOR		2.78%		12/18/2023		$	—		$	(1,090)		$	(1,090)
JP Morgan Chase Bank	$80,000	3-Month LIBOR		2.81%		12/18/2021			—			(653)			(653)
								$	—		$	(1,743)		$	(1,743)

(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, 2018, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 2.81%, and the U.S. Prime Lending Rate, or Prime, was 5.50%. PIK means paid-in-kind. PIK income accruals may be adjusted based on the fair value of underlying investment.

(c)

Denominated in U.S. dollars unless otherwise noted.

(d)

Fair value determined by the Company’s board of directors (see Note 8).

(e)

Security or portion thereof held within Cobbs Creek LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with ING Capital LLC (see Note 9).

(f)

Security or portion thereof held within Cooper River LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 9).

(g)

(h)

(i)

Security or portion thereof held within Green Creek LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with Goldman Sachs Bank USA (see Note 9).

(j)

Position or portion thereof unsettled as of December 31, 2018.

(k)

Security was on non-accrual status as of December 31, 2018.

(l)

Security is non-income producing.

(m)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of December 31, 2018, 88.2% of the Company’s total assets represented qualifying assets.

(n)

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.

(o)

Security held within IC II American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

(p)

Security held within FSIC II Investments, Inc., a wholly-owned subsidiary of the Company.

(q)

Security held within IC II Arches Investments, LLC, a wholly-owned subsidiary of the Company.

(r)

Security held within IC II Altus Investments, LLC, a wholly-owned subsidiary of the Company.

(s)

Investment denominated in Canadian dollars. Cost and fair value are converted into U.S. dollars at an exchange rate of CAD $1.00 to $0.73 as of December 31, 2018.

(t)

Security is classified as Level 1 or Level 2 in the Company’s fair value hierarchy (see Note 8).

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Consolidated Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)

(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, 2018, 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 financial information with respect to investments in portfolio companies of which the Company was deemed to be an affiliated person for the year ended December 31, 2018:

Portfolio Company	Fair Value at December 31, 2017			Transfers In or Out			Purchases and Paid-in-Kind Interest			Sales and Repayments			Accretion of Discount			Net Realized Gain (Loss)			Net Change in Unrealized Appreciation (Depreciation)			Fair Value at December 31, 2018			Interest Income(1)			PIK Income(1)			Fee Income(1)
Senior Secured Loans—First Lien
Advanced Lighting Technologies, Inc.		$	9,218		$	—		$	—		$	(92)		$	223		$	13		$	(237)		$	9,125		$	1,119		$	—		$	—
H.M. Dunn Co., Inc.(2)			—			64,286			—			—			—			(25,715)			(31,549)			7,022			1,656			—			—
Logan’s Roadhouse, Inc.(3)			4,669			—			2,223			(6,875)			—			(25)			8			—			17			710			—
Logan’s Roadhouse, Inc.			—			—			1,347			(1,333)			—			(14)			—			—			529			529			—
MB Precision Holdings LLC(2)			—			64,367			710			(12,581)			—			(32,132)			975			21,339			3,507			—			—
Warren Resources, Inc.			43,613			—			170			(28,068)			—			—			(1,063)			14,652			1,939			170			1,123
Senior Secured Loans—Second Lien
JW Aluminum Co.			34,382			—			—			(33,874)			1			7			(516)			—			1,492			—			—
Logan’s Roadhouse, Inc.			6,771			—			194			(1,839)			6			(13,001)			7,869			—			188			194			—
Other Senior Secured Debt
Advanced Lighting Technologies, Inc.			10,278			—			646			(261)			—			—			(7,033)			3,630			1,182			646			—
JW Aluminum Co.			—			—			33,001			—			—			—			(82)			32,919			1,983			—			—
Mood Media Corp.			23,219			—			5,274			—			5			—			(20)			28,478			4,429			1,901			—
Equity/Other
Advanced Lighting Technologies, Inc., Common Equity			5,900			—			—			—			—			—			(5,900)			—			—			—			—
Advanced Lighting Technologies, Warrants, 10/4/2027			26			—			—			—			—			—			(26)			—			—			—			—
ASG Everglades Holdings, Inc., Common Equity			30,727			—			—			—			—			—			1,016			31,743			—			—			—
ASG Everglades Holdings, Inc., 6/27/2022, Warrants			6,951			—			—			—			—			—			413			7,364			—			—			—
HM Dunn Aerosystems, Inc., Preferred Equity, Series A(2)			—			—			—			—			—			—			—			—			—			—			—
HM Dunn Aerosystems, Inc., Preferred Equity, Series B(2)			—			—			—			—			—			—			—			—			—			—			—
JW Aluminum Co., Common Equity			—			—			—			—			—			—			—			—			—			—			—
JW Aluminum Co., Preferred Equity			15,074			—			18,992			—			210			—			9,614			43,890			5,632			4,785			—
MB Precision Holdings LLC, Class A-2 Units(2)			—			2,288			—			—			—			—			(2,288)			—			—			—			—
MB Precision Holdings LLC, Preferred Stock			—			—			8,600			—			—			—			(2,774)			5,826			—			—			—
Mood Media Corp.			28,659			—			—			—			—			—			(12,817)			15,842			—			—			—
Roadhouse Holding Inc., Common Equity			—			—			—			—			—			(4,657)			4,657			—			—			—			—
Warren Resources, Inc., Common Equity			4,031			—			—			—			—			—			1,542			5,573			—			—			—
Total		$	223,518		$	130,941		$	71,157		$	(84,923)		$	445		$	(75,524)		$	(38,211)		$	227,403		$	23,673		$	8,935		$	1,123

(1)

Interest, PIK and fee income presented for the year ended December 31, 2018.

(2)

The Company held this investment as of December 31, 2017 but it was not deemed to be an “affiliated person” of the portfolio company or deemed to “control” the portfolio company as of December 31, 2017. Transfers in or out have been presented at amortized cost.

(3)

Security includes a partially unfunded commitment as of December 31, 2017 with an amortized cost of $760 and a fair value of $752.

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

FS Investment Corporation II, or the Company, was incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012. 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. As of March 31, 2019, the Company had various wholly-owned subsidiaries, including special purpose financing subsidiaries and subsidiaries through which it holds interests in portfolio companies. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2019. 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.

The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. The Company’s portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. In addition, a portion of the Company’s portfolio may be comprised of equity and equity-related securities, corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps.

The Company is externally managed by FS/KKR Advisor, LLC, or the Advisor, pursuant to an investment advisory and administrative services agreement, dated as of April 9, 2018, or the investment advisory and administrative services agreement. On April 9, 2018, GSO/Blackstone Debt Funds Management LLC, or GDFM, resigned as the investment sub-adviser to the Company and terminated the investment sub-advisory agreement, or the investment sub-advisory agreement, between FSIC II Advisor, LLC, or FSIC II Advisor, and GDFM, effective April 9, 2018. In connection with GDFM’s resignation as the investment sub-adviser to the Company, on April 9, 2018, the Company entered into the investment advisory and administrative services agreement, which replaced an investment advisory and administrative services agreement, dated February 8, 2012, or the FSIC II Advisor investment advisory and administrative services agreement, by and between the Company and FSIC II Advisor.

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, 2018 included in the Company’s annual report on Form 10-K for the year ended December 31, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The December 31, 2018 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, 2018. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Codification, or ASC, Topic 946, Financial Services—Investment Companies.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

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.

Capital Gains Incentive Fee: Pursuant to the terms of the investment advisory and administrative services 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 the investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which equals the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any capital gain incentive fees previously paid by the Company. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fees as if it were due and payable as of the end of such period.

The Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to the Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Subordinated Income Incentive Fee: Pursuant to the terms of the investment advisory and administrative services agreement, the Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the investment advisory and administrative services agreement, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.75% per quarter (1.875% under the FSIC II Advisor investment advisory and administrative services agreement), or an annualized hurdle rate of 7.0% (7.5% under the FSIC II Advisor investment advisory and administrative services agreement). For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of the Company’s common stock (including proceeds from its distribution reinvestment plan) reduced for distributions paid to stockholders from proceeds of non-liquidating dispositions of the Company’s investments and amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, the 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 1.75% (1.875% under the FSIC II Advisor investment advisory and administrative services agreement). Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Advisor will be entitled to a “catch-up” fee equal to the amount of the 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 2.1875%, or 8.75% annually (2.34375%, or 9.375% annually under the FSIC II Advisor investment advisory and administrative services agreement), of the Company’s adjusted capital. Thereafter, the Advisor will be entitled to receive 20.0% of the pre-incentive fee net investment income.

Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three months ended March 31, 2018 and the audited consolidated financial statements as of and for the year ended December 31, 2018 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements as of and for the three months ended March 31, 2019.

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

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

(“LLC”) and limited partnership (“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 interest income 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. For the three months ended March 31, 2019, the Company recognized $6,105 in structuring fee revenue. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

Derivative Instruments: The Company recognizes all derivative instruments as assets or liabilities at fair value in its consolidated financial statements. Derivative contracts entered into by the Company are not designated as hedging instruments, and as a result, the Company presents changes in fair value through net change in unrealized appreciation (depreciation) on derivative instruments in the consolidated statements of operations. Realized gains and losses that occur upon the cash settlement of the derivative instruments are included in net realized gains (losses) on derivative instruments in the consolidated statements of operations. As of March 31, 2019, the Company’s derivative instruments included interest rate swaps.

Recent Accounting Pronouncements: In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update 2018-13, Fair Value Measurement—Disclosures Framework—Changes to Disclosure Requirements for Fair Value Measurement (Topic 820), or ASU 2018-13. ASU 2018-13 introduces new fair value disclosure requirements and eliminates and modifies certain existing fair value disclosure requirements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU 2018-13 on its financial statements.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019					2018
	Shares		Amount			Shares		Amount
Reinvestment of Distributions		3,191,361		$	25,694		3,316,098		$	28,959
Share Repurchase Program		(3,297,056)			(26,541)		(3,408,305)			(29,993)
Net Proceeds from Share Transactions		(105,695)		$	(847)		(92,207)		$	(1,034)

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

During the period from April 1, 2019 to May 10, 2019, the Company issued 1,034,362 shares of common stock pursuant to its distribution reinvestment plan, or DRP, for gross proceeds of $8,326,614 at an average price per share of $8.05. For additional information regarding the terms of the DRP, see Note 5.

Share Repurchase Program

The Company intends to continue to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock 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 shares of common stock or portions thereof; and

•

the condition of the securities markets.

Historically, the Company limited the number of shares of common stock to be repurchased during any calendar year to the lesser of (i) the number of shares of common stock that the Company could repurchase with the proceeds it received from the issuance of shares of common stock under the DRP and (ii) 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. On May 8, 2017, the board of directors of the Company amended the share repurchase program. As amended, the Company limits the maximum number of shares of common stock to be repurchased for any repurchase offer to the greater of (A) the number of shares of common stock that the Company can repurchase with the proceeds it has received from the sale of shares of common stock under the DRP during the twelve-month period ending on the date the applicable repurchase offer expires (less the amount of proceeds used to repurchase shares of common stock on each previous repurchase date for repurchase offers conducted during such twelve-month period) (the Company refers to this limitation as the twelve-month repurchase limitation) and (B) the number of shares of common stock that the Company can repurchase with the proceeds it received from the sale of shares of common stock under the DRP during the three-month period ending on the date the applicable repurchase offer expires (the Company refers to this limitation as the three-month repurchase limitation). In addition to this limitation, the maximum number of shares of common stock to be repurchased for any repurchase offer will also be limited to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. As a result, the maximum number of shares of common stock to be repurchased for any repurchase offer will not exceed the lesser of (i) 10% of the weighted average number of shares of common stock 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. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. The actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above. The Company’s board of directors may amend, suspend or terminate the share repurchase program at any time upon 30 days’ notice.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

Under the Company’s share repurchase program, the Company intends to offer to repurchase shares of common stock at a price equal to the price at which shares of common stock are issued pursuant to the DRP on the distribution date coinciding with the applicable share repurchase date. The price at which shares of common stock are issued under the DRP is determined by the Company’s board of directors or a committee thereof, in its sole discretion, and will be (i) not less than the net asset value per share of the Company’s common stock as determined in good faith by the Company’s board of directors 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 share as of such date.

The following table provides information concerning the Company’s repurchases of shares of common stock pursuant to its share repurchase program during the three months ended March 31, 2019 and 2018:

For the Three Months Ended	Repurchase Date	Shares Repurchased		Percentage of Shares Tendered That Were Repurchased		Percentage of Outstanding Shares Repurchased as of the Repurchase Date		Repurchase Price Per Share			Aggregate Consideration for Repurchased Shares
Fiscal 2018
December 31, 2017	January 12, 2018		3,408,305		28.0%		1.04%		$	8.800		$	29,993
Total			3,408,305									$	29,993
Fiscal 2019
December 31, 2018	January 2, 2019		3,297,056		16.7%		1.01%		$	8.050		$	26,541
Total			3,297,056									$	26,541

On April 1, 2019, the Company repurchased 3,191,572 shares of common stock (representing 14.2% of the shares of common stock tendered for repurchase and 0.98% of the shares outstanding as of such date) at $8.05 per share for aggregate consideration totaling $25,692.

Note 4. Related Party Transactions

Compensation of the Investment Adviser

Pursuant to the investment advisory and administrative services agreement, the Advisor is entitled to a base management fee calculated at an annual rate of 1.50% of the average weekly value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. The base management fee is payable quarterly in arrears. All or any part of the base management fee not taken as to any quarter will be deferred without interest and may be taken in such other quarter as the Advisor determines. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that the Advisor may be entitled to under the investment advisory and administrative services agreement.

Pursuant to the FSIC II Advisor investment advisory and administrative services agreement, which was in effect until April 9, 2018, FSIC II Advisor was entitled to an annual base management fee equal to 2.0% of the average value of the Company’s gross assets (gross assets equal the total assets of the Company as set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. Effective March 5, 2015, FSIC II Advisor had agreed to permanently waive 0.25% of its base management fee to which it was entitled under the FSIC II Advisor investment advisory and administrative services agreement, so that the fee received equaled 1.75% of the average value of the Company’s gross assets. Pursuant to the investment sub-advisory agreement, GDFM was entitled to receive 50% of all management and incentive fees payable to FSIC II Advisor under the FSIC II Advisor investment advisory and administrative services agreement with respect to each year.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

Pursuant to the investment advisory and administrative services agreement, the 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. The 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 stockholders and reports filed with the U.S. Securities and Exchange Commission, or the SEC. In addition, the Advisor assists the Company in calculating its net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others.

Pursuant to the investment advisory and administrative services agreement, the Company reimburses the Advisor for expenses necessary to perform services related to its administration and operations, including the Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P. (which does business as FS Investments), and KKR Credit Advisors (US), LLC, or KKR Credit, for providing administrative services to the Company on behalf of the Advisor. The Company reimburses the Advisor no less than monthly 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) the 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. The Advisor allocates the cost of such services to the Company based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company’s board of directors reviews the methodology employed in determining how the expenses are allocated to the Company and the proposed allocation of administrative expenses among the Company and certain affiliates of the Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to it 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 service providers known to be available. In addition, the Company’s board of directors 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 directors compares the total amount paid to the Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs. The administrative services provisions of the FSIC II Advisor investment advisory and administrative services agreement were substantially similar to the administrative services provisions of the investment advisory and administrative services agreement.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the FSIC II Advisor investment advisory and administrative services agreement, as applicable, during the three months ended March 31, 2019 and 2018:

Related Party	Source Agreement	Description	Three Months Ended March 31,
Related Party	Source Agreement	Description	2019			2018
The Advisor and FSIC II Advisor	FS/KKR Advisor Investment Advisory and Administrative Services Agreement and FSIC II Advisor Investment Advisory and Administrative Services Agreement	Base Management Fee(1)		$	17,864		$	22,080
The Advisor and FSIC II Advisor	FS/KKR Advisor Investment Advisory and Administrative Services Agreement and FSIC II Advisor Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income(2)		$	11,131		$	5,575
The Advisor and FSIC II Advisor	FS/KKR Advisor Investment Advisory and Administrative Services Agreement and FSIC II Advisor Investment Advisory and Administrative Services Agreement	Administrative Services Expenses(3)		$	907		$	782

(1)

FSIC II Advisor agreed, effective March 5, 2015, to permanently waive a portion of the base management fee to which it was entitled under the FSIC II Advisor investment advisory and administrative services agreement so that the fee received equaled 1.75% of the average value of the Company’s gross assets. As a result, the amount shown for the three months ended March 31, 2018 is net of waivers of $3,154. During the three months ended March 31, 2019 and 2018, $17,256 and $22,595, respectively, in base management fees were paid to FSIC II Advisor and the Advisor. As of March 31, 2019, $17,864 in base management fees were payable to the Advisor.

(2)

During the three months ended March 31, 2019 and 2018, $5,796 and $19,129, respectively, of subordinated incentive fees on income were paid to the Advisor and FSIC II Advisor. As of March 31, 2019, a subordinated incentive fee on income of $11,131 was payable to the Advisor.

(3)

During the three months ended March 31, 2019 and 2018, $534 and $588, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by the Advisor and FSIC II Advisor and the remainder related to other reimbursable expenses, including reimbursement of fees related to 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. Broken deal costs were $77 for the three months ended March 31, 2019. The Company paid $773 and $547 in administrative services expenses to the Advisor and FSIC II Advisor during the three months ended March 31, 2019 and 2018, respectively.

Potential Conflicts of Interest

The members of the senior management and investment teams of the 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. For example, the Advisor is the investment adviser to FS KKR Capital Corp., FS Investment Corporation III, FS Investment Corporation IV, and Corporate Capital Trust II, and the officers, managers and other personnel of the Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR Credit. 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 stockholders. The Company’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For additional information regarding potential conflicts of interest, see the Company’s annual report on Form 10-K for the year ended December 31, 2018.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

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 an order dated June 4, 2013, or the FS Order, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FSIC II Advisor, including FS Energy and Power Fund, FS KKR Capital Corp., FS Investment Corporation III, FS Investment Corporation IV and any future BDCs that are advised by FSIC II Advisor or its affiliated investment advisers. However, in connection with the investment advisory relationship with the Advisor, and in an effort to mitigate potential future conflicts of interest, the Company’s board of directors authorized and directed that the Company (i) withdraw from the FS Order, except with respect to any transaction in which the Company participated in reliance on the FS Order prior to April 9, 2018, and (ii) rely on an exemptive relief order, dated April 3, 2018, that permits the Company, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by the Advisor or KKR Credit, with certain affiliates of the Advisor.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the three months ended March 31, 2019 and 2018:

	Distribution
For the Three Months Ended	Per Share			Amount
Fiscal 2018
March 31, 2018		$	0.1885		$	61,153
Total		$	0.1885		$	61,153
Fiscal 2019
March 31, 2019		$	0.1885		$	61,114
Total		$	0.1885		$	61,114

The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On February 19, 2019 and April 30, 2019, the Company’s board of directors declared regular monthly cash distributions for April 2019 through June 2019 and July 2019 through September 2019, respectively, each in the amount of $0.06283 per share. These distributions have been or will be paid monthly to stockholders of record as of monthly record dates previously determined by the Company’s board of directors. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive the distribution in cash unless they specifically “opt in” to the DRP so as to have their cash distributions reinvested in additional shares of the Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the DRP.

Under the Company’s DRP, cash distributions to participating stockholders will be reinvested in additional shares of the Company’s common stock at a purchase price determined by the Company’s board of directors, or a committee thereof, in its sole discretion, that is (i) not less than the net asset value per

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

share of the Company’s common stock as determined in good faith by the Company’s board of directors 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 share of the Company’s common stock as of such date. Although distributions paid in the form of additional shares of common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders who elect to participate in the Company’s DRP will not receive any corresponding cash distributions with which to pay any such applicable taxes. Stockholders receiving distributions in the form of additional shares of common stock will be treated as receiving a distribution in the amount of the fair market value of the Company’s shares of common stock.

The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including proceeds from the sale of the Company’s common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, gains from interest rate swaps, non-capital gains proceeds from the sale of assets and 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. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’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 stockholders. 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 paid on its common stock during the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019					2018
Source of Distribution	Distribution Amount			Percentage		Distribution Amount			Percentage
Offering proceeds		$	—		—		$	—		—
Borrowings			—		—			—		—
Net investment income(1)			61,114		100%			61,153		100%
Short-term capital gains proceeds from the sale of assets			—		—			—		—
Long-term capital gains proceeds from the sale of assets			—		—			—		—
Non-capital gains proceeds from the sale of assets			—		—			—		—
Distributions on account of preferred and common equity			—		—			—		—
Total		$	61,114		100%		$	61,153		100%

(1)

During the three months ended March 31, 2019 and 2018, 94.0% and 94.7%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.9% and 1.1%, respectively, was attributable to non-cash accretion of discount and 4.1% and 4.2%, respectively, was attributable to paid-in-kind, or PIK, interest.

The Company’s net investment income on a tax basis for the three months ended March 31, 2019 and 2018 was $59,367 and $59,524, respectively. As of March 31, 2019 and December 31, 2018, the Company had $56,281 and $58,028, respectively, of undistributed net investment income and $214,125 and $194,360, respectively, of accumulated capital losses on a tax basis.

The difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is primarily due to the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of loans from income for GAAP purposes to realized gains

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

or deferred to future periods for tax purposes, the impact of consolidating certain subsidiaries for purposes of computing GAAP-basis net investment income but not for purposes of computing tax-basis net investment income and income recognized for tax purposes on certain transactions but not recognized for GAAP purposes.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019			2018
GAAP-basis net investment income		$	58,114		$	62,391
Income subject to tax not recorded for GAAP (income recorded for GAAP not subject to tax)			(166)			1,035
GAAP versus tax-basis impact of consolidation of certain subsidiaries			1,711			1,897
Reclassification of unamortized original issue discount, prepayment fees and other income			(278)			(5,469)
Other miscellaneous differences			(14)			(330)
Tax-basis net investment income		$	59,367		$	59,524

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 stockholders are reported to stockholders annually on Form 1099-DIV.

As of March 31, 2019 and December 31, 2018, the components of accumulated earnings on a tax basis were as follows:

	March 31, 2019 (Unaudited)			December 31, 2018
Distributable ordinary income		$	56,281		$	58,028
Distributable realized gains			—			—
Capital loss carryover(1)			(214,125)			(194,360)
Other temporary differences			(129)			(139)
Net unrealized appreciation (depreciation) on investments and secured borrowing and gain (loss) on foreign currency(2)			(254,484)			(287,442)
Total		$	(412,457)		$	(423,913)

(1)

Net capital losses recognized may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2019, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $541 and $213,584, respectively.

(2)

As of March 31, 2019 and December 31, 2018, the gross unrealized appreciation on the Company’s investments and gain on foreign currency was $158,062 and $135,578, respectively. As of March 31, 2019 and December 31, 2018, the gross unrealized depreciation on the Company’s investments and loss on foreign currency was $(412,546) and $423,020, respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $4,884,591 and $4,647,131 as of March 31, 2019 and December 31, 2018, respectively. The aggregate net unrealized appreciation (depreciation) on investments on a tax basis was $(249,772) and $(287,851) as of March 31, 2019 and December 31, 2018, respectively.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

As of March 31, 2019, the Company had a deferred tax liability of $9,092 resulting from unrealized appreciation on investments held by the Company’s wholly-owned taxable subsidiaries and a deferred tax asset of $21,051 resulting from net operating losses and other tax attributes of the Company’s wholly-owned taxable subsidiaries. As of March 31, 2019, certain wholly-owned taxable subsidiaries anticipated that they would be unable to fully utilize their generated net operating losses, therefore the deferred tax asset was offset by a valuation allowance of $11,959. For the three months ended March 31, 2019, the Company did not record a provision for taxes related to its wholly-owned taxable subsidiaries.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of March 31, 2019 and December 31, 2018:

	March 31, 2019 (Unaudited)								December 31, 2018
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	3,611,239		$	3,519,120		76%		$	3,382,158		$	3,293,291		75%
Senior Secured Loans—Second Lien			471,912			389,559		8%			418,015			333,986		8%
Other Senior Secured Debt			182,012			172,800		4%			207,181			196,616		5%
Subordinated Debt			229,637			222,850		5%			242,792			221,858		5%
Asset Based Finance			41,277			45,268		1%			42,050			46,152		1%
Equity/Other			263,808			285,221		6%			268,409			267,377		6%
Total		$	4,799,885		$	4,634,818		100%		$	4,560,605		$	4,359,280		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 such 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, 2019, the Company did not “control” any of its portfolio companies. As of March 31, 2019, the Company held investments in seven 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 (t) to the unaudited consolidated schedule of investments as of March 31, 2019 in this quarterly report on Form 10-Q.

As of December 31, 2018, the Company did not “control” any of its portfolio companies. As of December 31, 2018, the Company held investments in seven portfolio companies of which it was deemed to be an “affiliated person” but was not deemed to “control.” For additional information with respect to such portfolio companies, see footnote (u) to the consolidated schedule of investments as of December 31, 2018 in this quarterly report on Form 10-Q.

The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw 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, 2019, the Company had unfunded debt investments with aggregate unfunded commitments of $159,413 and an unfunded commitment to purchase up to $47 in shares of preferred stock of Altus Power America Holdings, LLC.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (continued)

As of December 31, 2018, the Company had unfunded debt investments with aggregate unfunded commitments of $172,963 and an unfunded commitment to purchase up to $47 in shares of preferred stock of Altus Power America Holdings, LLC. The Company maintains sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise. For additional details regarding the Company’s unfunded debt investments, see the Company’s unaudited consolidated schedule of investments as of March 31, 2019 and audited consolidated schedule of investments as of December 31, 2018.

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, 2019 and December 31, 2018:

	March 31, 2019 (Unaudited)					December 31, 2018
Industry Classification	Fair Value			Percentage of Portfolio		Fair Value			Percentage of Portfolio
Automobiles & Components		$	35,234		1%		$	34,508		1%
Capital Goods			892,836		19%			893,250		21%
Commercial & Professional Services			342,074		7%			328,760		8%
Consumer Durables & Apparel			224,857		5%			227,470		5%
Consumer Services			247,807		5%			231,589		5%
Diversified Financials			128,014		3%			277,500		6%
Energy			348,664		8%			372,720		9%
Food & Staples Retailing			127,580		3%			6,797		0%
Food, Beverage & Tobacco			96,184		2%			96,787		2%
Health Care Equipment & Services			450,390		10%			361,228		8%
Insurance			135,614		3%			117,149		3%
Materials			310,162		7%			295,084		7%
Media			251,983		5%			254,278		6%
Pharmaceuticals, Biotechnology & Life Sciences			21,675		0%			20,012		0%
Retailing			293,486		6%			257,260		6%
Semiconductors & Semiconductor Equipment			—		—			14,155		0%
Software & Services			447,669		10%			339,451		8%
Technology Hardware & Equipment			43,431		1%			46,178		1%
Telecommunication Services			221,135		5%			168,930		4%
Transportation			16,023		0%			16,174		0%
Total		$	4,634,818		100%		$	4,359,280		100%

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 7. Financial Instruments

The following is a summary of the fair value and location of the Company’s derivative instruments in the consolidated balance sheets held as of March 31, 2019 and December 31, 2018:

Derivative Instrument	Statement Location	Fair Value
Derivative Instrument	Statement Location	March 31, 2019 (Unaudited)			December 31, 2018
Interest rate swaps	Unrealized depreciation on interest rate swaps		$	(5,739)		$	(1,743)
Total			$	(5,739)		$	(1,743)

Net realized and unrealized gains and losses on derivative instruments recorded by the Company for the three months ended March 31, 2019 and 2018 are in the following locations in the consolidated statements of operations:

Derivative Instrument	Statement Location	Net Realized Gains (Losses)
		Three Months Ended March 31,
		2019			2018
Interest Rate Swaps	Net realized gains (losses) on interest rate swaps		$	—		$	—
Total			$	—		$	—

Derivative Instrument	Statement Location	Net Unrealized Gains (Losses)
		Three Months Ended March 31,
		2019			2018
Interest Rate Swaps	Net change in unrealized appreciation (depreciation) on interest rate swaps		$	(3,996)		$	—
Total			$	(3,996)		$	—

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 condensed consolidated statements of assets and liabilities. The following tables present the Company’s assets and liabilities related to derivatives by counterparty, net of amounts available for offset under a master netting arrangement and net of any collateral received or pledged by the Company for such assets and liabilities as of March 31, 2019 and December 31, 2018:

As of March 31, 2019 (Unaudited)

Counterparty

Derivative Assets
Subject to Master
Netting Agreement

Derivatives
Available for Offset

Non-cash
Collateral
Received(1)

Cash
Collateral
Received(1)

Net Amount
of Derivative
Assets(2)

JP Morgan Chase Bank

—

ING Capital Markets

—

Total

—

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 7. Financial Instruments (continued)

Counterparty	Derivative Liabilities Subject to Master Netting Agreement			Derivatives Available for Offset			Non-cash Collateral Received(1)			Cash Collateral Pledged1)			Net Amount of Derivative Liabilities(3)
JP Morgan Chase Bank		$	3,183		$	—		$	—		$	3,183		$	—
ING Capital Markets			2,556			—			—			2,556			—
Total		$	5,739		$	—		$	—		$	5,739		$	—

As of December 31, 2018

Counterparty

Derivative Assets
Subject to Master
Netting Agreement

Derivatives
Available for Offset

Non-cash
Collateral
Received(1)

Cash
Collateral
Received(1)

Net Amount
of Derivative
Assets(2)

JP Morgan Chase Bank

—

Counterparty	Derivative Liabilities Subject to Master Netting Agreement			Derivatives Available for Offset			Non-cash Collateral Received(1)			Cash Collateral Pledged(1)			Net Amount of Derivative Liabilities(3)
JP Morgan Chase Bank		$	1,743		$	—		$	—		$	—		$	1,743
		$	1,743		$	—		$	—		$	—		$	1,743

(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 represents the net amount due from the counterparty to the Company.

(3)

Net amount of derivative liabilities represents the net amount due from the Company to the counterparty.

Interest Rate Swaps

Interest rate swap contracts are privately negotiated agreements between the Company and a counterparty. Pursuant to interest rate swap agreements, the Company makes fixed-rate payments to a counterparty in exchange for payments on a floating benchmark interest rate. Payments received or made are recorded as realized gains or losses. During the term of the outstanding swap agreement, changes in the underlying value of the swap are recorded as unrealized gains or losses. The value of the swap is determined by changes in the relationship between two rates of interest. The Company is exposed to credit loss in the event of non-performance by the swap counterparty. Risk may also arise from movements in interest rates. The Company attempts to limit counterparty risk by dealing only with well-known counterparties.

The interest rate swaps open at the end of the period are generally indicative of the volume of activity during the period.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 7. Financial Instruments (continued)

As of March 31, 2019 and December 31, 2018, the Company’s open interest rate swaps were as follows:

As of March 31, 2019 (Unaudited)
Counterparty	Notional Amount			Company Receives Floating Rate	Company Pays Fixed Rate		Termination Date	Premiums Paid/ (Received)			Value			Unrealized Appreciation (Depreciation)
JP Morgan Chase Bank		$	80,000	3-Month LIBOR		2.78%	12/18/2023		$	—		$	(2,029)		$	(2,029)
JP Morgan Chase Bank		$	80,000	3-Month LIBOR		2.81%	12/18/2021			—			(1,154)			(1,154)
ING Capital Markets		$	100,000	3-Month LIBOR		2.59%	1/14/2024			—			(1,654)			(1,654)
ING Capital Markets		$	100,000	3-Month LIBOR		2.62%	1/14/2022			—			(902)			(902)
									$	—		$	(5,739)		$	(5,739)

As of December 31, 2018
Counterparty	Notional Amount			Company Receives Floating Rate	Company Pays Fixed Rate		Termination Date	Premiums Paid/ (Received)			Value			Unrealized Appreciation (Depreciation)
JP Morgan Chase Bank		$	80,000	3-Month LIBOR		2.78%	12/18/2023		$	—		$	(1,090)		$	(1,090)
JP Morgan Chase Bank		$	80,000	3-Month LIBOR		2.81%	12/18/2021			—			(653)			(653)
									$	—		$	(1,743)		$	(1,743)

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:

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.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 8. Fair Value of Financial Instruments (continued)

As of March 31, 2019 and December 31, 2018, the Company’s investments were categorized as follows in the fair value hierarchy:

Valuation Inputs	March 31, 2019 (Unaudited)			December 31, 2018
Level 1—Price quotations in active markets		$	663		$	517
Level 2—Significant other observable inputs			869,552			906,192
Level 3—Significant unobservable inputs			3,764,603			3,452,571
Total		$	4,634,818		$	4,359,280

As of March 31, 2019 and December 31, 2018, the Company’s interest rate swaps were categorized as follows in the fair value hierarchy:

	March 31, 2019 (Unaudited)						December 31, 2018
Valuation Inputs	Assets			Liability			Asset			Liability
Level 1—Price quotations in active markets		$	—		$	—		$	—		$	—
Level 2—Significant other observable inputs			—			(5,739)			—			(1,743)
Level 3—Significant unobservable inputs			—			—			—			—
Total		$	—		$	(5,739)		$	—		$	(1,743)

The Company’s investments consist primarily of debt investments that were acquired directly from the issuer. Debt investments, for which broker quotes are not available, are valued by independent valuation firms, which determine the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated repayments and other relevant terms of the investments. Except as described below, all of the Company’s equity/other investments are also 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 or liquidation value. An investment that is newly issued and purchased near the date of the financial statements is valued at cost if the Company’s board of directors 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 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, the Company typically values its other investments and interest rate swaps 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 independent third-party pricing services and screened for validity by such services and are typically classified as Level 2 within the fair value hierarchy.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services 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, the Company believes that these prices are reliable indicators of fair value. The valuation committee and the board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.

TABLE OF CONTENTS

FS Investment Corporation II

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, 2019 and 2018 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

	For the Three Months Ended March 31, 2019
	Senior Secured Loans— First Lien			Senior Secured Loans— Second Lien			Other Senior Secured Debt			Subordinated Debt			Asset Based Finance			Equity/ Other			Total
Fair value at beginning of period		$	2,827,812		$	212,290		$	95,132		$	6,201		$	46,152		$	264,984		$	3,452,571
Accretion of discount (amortization of premium)			837			68			119			2			1			100			1,127
Net realized gain (loss)			(1,521)			—			—			—			114			(10,299)			(11,706)
Net change in unrealized appreciation (depreciation)			(8,812)			(564)			(3,257)			742			(111)			22,575			10,573
Purchases			291,045			64,577			1,209			32,614			—			4,123			393,568
Paid-in-kind interest			651			484			1,156			146			525			1,774			4,736
Sales and repayments			(86,294)			—			—			—			(1,413)			(292)			(87,999)
Net transfers in or out of Level 3			1,733			—			—			—			—			—			1,733
Fair value at end of period		$	3,025,451		$	276,855		$	94,359		$	39,705		$	45,268		$	282,965		$	3,764,603
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		$	(29)		$	14,613		$	(3,257)		$	(9,231)		$	(1,303)		$	51		$	844

	For the Three Months Ended March 31, 2018
	Senior Secured Loans— First Lien			Senior Secured Loans— Second Lien			Other Senior Secured Debt			Subordinated Debt			Asset Based Finance			Equity/ Other			Total
Fair value at beginning of period		$	3,421,070		$	327,135		$	124,673		$	345,593		$	47,173		$	325,582		$	4,591,226
Accretion of discount (amortization of premium)			839			235			190			438			1			—			1,703
Net realized gain (loss)			(1,395)			(1,329)			(1,852)			(13,058)			99			(1,759)			(19,294)
Net change in unrealized appreciation (depreciation)			(50,585)			(28,219)			902			(1,879)			(2,659)			(6,533)			(88,973)
Purchases			164,136			6,944			17,900			3,784			658			6,519			199,941
Paid-in-kind interest			1,731			464			1,509			48			754			472			4,978
Sales and repayments			(249,782)			(2,189)			(18,099)			(14,095)			(66)			(11,192)			(295,423)
Net transfers in or out of Level 3			(365,903)			(80,281)			(25,062)			(275,743)			—			(4,465)			(751,454)
Fair value at end of period		$	2,920,111		$	222,760		$	100,161		$	45,088		$	45,960		$	308,624		$	3,642,704
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		$	(48,621)		$	(28,923)		$	(252)		$	(324)		$	(2,661)		$	(6,121)		$	(86,902)

TABLE OF CONTENTS

FS Investment Corporation II

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, 2019 and December 31, 2018 were as follows:

Type of Investment

Fair Value at
March 31, 2019
(Unaudited)(1)

Valuation
Technique(2)

Unobservable Input

Range(3)

Impact to
Valuation from
an Increase in
Input(4)

Senior Debt

3,024,159

Discounted Cash Flow

Discount Rate

8.06% – 16.73% (9.62%)

Decrease

166,669

Waterfall

EBITDA Multiple

0.13x – 8.25x (4.81x)

Increase

105,878

Other(5)

99,959

Cost

Subordinated Debt

39,499

Discounted Cash Flow

Discount Rate

11.58% – 19.75% (12.11%)

Decrease

206

Waterfall

EBITDA Multiple

10.64x – 10.64x (10.64x)

Increase

Asset Based Finance

24,928

Waterfall

EBITDA Multiple

1.03x – 12.00x (1.51x)

Increase

20,340

Indicative Dealer Quotes

52.63% – 99.71% (71.35%)

Increase

Equity/Other

254,466

Waterfall

EBITDA Multiple

0.73x – 14.50x (5.29x)

Increase

23,375

Other(5)

4,655

Cost

469

Option Pricing Model

Equity Illiquidity Discount

15.00% – 15.00% (15.00%)

Decrease

Total

3,764,603

(1)

Certain investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value.

(2)

For the assets and investments that have more than one valuation technique, the Company may rely on the stated techniques individually or in the aggregate based on a weight ascribed to each valuation technique, ranging from 0 – 100%. Indicative dealer quotes obtained for valuation purposes are reviewed by the Company relative to other valuation techniques.

(3)

Weighted average amounts are based on the estimated fair values.

(4)

This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

(5)

Fair value based on expected outcome of proposed corporate transactions and/or other factors.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 8. Fair Value of Financial Instruments (continued)

Type of Investment

Fair Value at
December 31, 2018

Valuation
Technique(1)

Unobservable Input

Range

Weighted
Average

Senior Secured
Loans—First Lien

2,668,002

Market Comparables

Market Yield (%)

5.5% – 16.8%

10.5%

EBITDA Multiples (x)

5.3x – 9.5x

6.9x

Revenue Multiples (x)

0.1x – 0.1x

0.1x

61,692

Other(2)

Other

N/A

98,118

Cost

99.0% – 100.0%

99.5%

Senior Secured
Loans—Second Lien

157,615

Market Comparables

Market Yield (%)

8.9% – 15.0%

12.6%

8,316

Other(2)

Other

N/A

46,359

Cost

98.5% – 98.5%

98.5%

Other Senior Secured
Debt

95,132

Market Comparables

Market Yield (%)

8.2% – 13.6%

9.7%

EBITDA Multiples (x)

7.0x – 8.5x

7.5x

Subordinated Debt

6,201

Market Comparables

Market Yield (%)

12.0% – 20.0%

14.3%

EBITDA Multiples (x)

9.6x – 10.1x

9.9x

Asset Based Finance

24,385

Market Comparables

Market Yield (%)

17.7% – 19.0%

18.4%

Net Aircraft Book Value
Multiple (x)

1.0x – 1.0x

1.0x

21,767

Market Quotes

Indicative Dealer Quotes

51.8% – 99.6%

61.9%

Equity/Other

223,197

Market Comparables

Capacity Multiple ($/kW)

$1,875.0 – $2,125.0

$2,000.0

EBITDA Multiples (x)

4.0x – 14.3x

7.6x

Net Aircraft Book Value
Multiple (x)

1.0x – 1.0x

1.0x

Price to Book Multiple (x)

1.0x – 1.0x

1.0x

Production Multiples
(Mboe/d)

$25,000.0 – $38,750.0

$28,034.2

Production Multiples
(MMcfe/d)

$4,708.0 – $5,167.0

$4,937.5

Proved Reserves Multiples
(Bcfe)

$1.2 – $1.3

$1.2

Proved Reserves Multiples
(Mmboe)

$3.5 – $13.8

$5.4

PV-10 Multiples (x)

0.8x – 2.3x

1.7x

19,929

Discounted Cash Flow

Discount Rate (%)

11.8% – 13.8%

12.8%

471

Option Valuation Model

Volatility (%)

30.0% – 30.0%

30.0%

20,251

Other(2)

Other

N/A

1,136

Cost

100.0% – 100.0%

100.0%

Total

3,452,571

(1)

Investments using a market quotes valuation technique were primarily valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. Investments valued using an EBITDA multiple or a revenue multiple pursuant to the market comparables valuation technique may be conducted using an enterprise valuation waterfall analysis. 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 value based on expected outcome of proposed corporate transactions and/or other factors.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 9. Financing Arrangements

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of March 31, 2019 and December 31, 2018. For additional information regarding these financing arrangements, 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, 2018. Any significant changes to the Company’s financing arrangements during the three months ended March 31, 2019 are discussed below.

As of March 31, 2019
(Unaudited)

Arrangement(1)

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

Green Creek Credit Facility

Term Loan Credit Facility

L+2.50%

500,000

—

December 15, 2019

Cooper River Credit Facility

Revolving Credit Facility

L+2.25%

115,000

85,000

March 31, 2021

Darby Creek Credit Facility

Revolving Credit Facility

L+1.95%

185,000

65,000

February 26, 2024

Juniata River Credit Facility

Revolving Credit Facility

L+2.68%

850,000

—

October 11, 2020

Senior Secured Revolving Credit Facility

Revolving Credit Facility

L+2.00% – 2.25%(2)

460,964(3)

189,036

August 9, 2023

Total

2,110,964

339,036

As of December 31, 2018

Arrangement(1)

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

Green Creek Credit Facility

Term Loan Credit Facility

L+2.50%

500,000

—

December 15, 2019

Cooper River Credit Facility

Revolving Credit Facility

L+2.25%

107,000

93,000

May 29, 2020

Darby Creek Credit Facility

Revolving Credit Facility

L+2.50%

135,000

115,000

August 19, 2020

Juniata River Credit Facility

Term Loan Credit Facility

L+2.68%

850,000

—

October 11, 2020

Senior Secured Revolving Credit Facility

Revolving Credit Facility

L+2.00% – 2.25%(2)

298,254(4)

351,746

August 9, 2023

Total

1,890,254

559,746

(1)

The carrying amount outstanding under the facility approximates its fair value.

(2)

The spread over LIBOR is determined by reference to the ratio of the value of the borrowing base to the aggregate amount of certain outstanding indebtedness of the Company.

(3)

Amount includes borrowings in U.S. dollars, Euros, and Canadian Dollars. Euro balance outstanding of €1,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $98,700 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.75 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars.

(4)

Amount includes borrowings in U.S. dollars, Euros, and Canadian Dollars. Euro balance outstanding of €1,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.13 as of December 31, 2018 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $63,500 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.77 as of December 31, 2018 to reflect total amount outstanding in U.S. dollars.

TABLE OF CONTENTS

FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 9. Financing Arrangements (continued)

For the three months ended March 31, 2019 and 2018, the components of total interest expense for the Company’s financing arrangements were as follows:

	Three Months Ended March 31,
	2019									2018
Arrangement(1)	Direct Interest Expense(2)			Amortization of Deferred Financing Costs			Total Interest Expense			Direct Interest Expense(2)			Amortization of Deferred Financing Costs				Total Interest Expense
Green Creek Credit Facility		$	6,437		$	133		$	6,570		$	4,961		$	267			$	5,228
Cooper River Credit Facility			1,695			125			1,820			1,697			114	��			1,811
Wissahickon Creek Credit Facility			—			—			—			2,612			262				2,874
Darby Creek Credit Facility			2,473			130			2,603			2,786			250				3,036
Dunning Creek Credit Facility			—			—			—			1,365			92				1,457
Juniata River Credit Facility			11,692			361			12,053			9,242			361				9,603
FSIC II Revolving Credit Facility			—			—			—			162			12				174
Senior Secured Revolving Credit Facility			6,288			241			6,529			—			—				—
Total		$	28,585		$	990		$	29,575		$	22,825		$	1,358			$	24,183

(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.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2019 were $2,154,253 and 5.31%, respectively. As of March 31, 2019, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 5.29%.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2018 were $2,183,146 and 4.18%, respectively. As of March 31, 2018, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 4.24%.

Under its financing arrangements, the Company has made certain representations and warranties and is 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, 2019 and December 31, 2018.

Darby Creek Credit Facility

On February 20, 2019, Darby Creek LLC, the Company’s wholly-owned special purpose financing subsidiary, entered into an amendment to the revolving credit facility originally entered into on February 20, 2014 with Deutsche Bank AG, New York Branch, as administrative agent, each of the lenders from time to time party thereto, the other agents party thereto and Wells Fargo Bank, National Association, as collateral agent and collateral custodian. The amendment, among other things, extended the end of the revolving period to February 26, 2022, extended the maturity date to February 26, 2024, decrease the interest rate to, during the revolving period, 1.95% per annum, and after the revolving period, 2.05% per annum, in each case, plus 3-month LIBOR (or the relevant reference rate for any foreign currency borrowings), and decreased the non-usage fee from 0.50% to 0.375%.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 9. Financing Arrangements (continued)

Juniata River Credit Facility

On March 13, 2019, Juniata River LLC, the Company’s wholly-owned special purpose financing subsidiary, or Juniata River, amended and restated the revolving credit facility originally entered into on November 14, 2015 with JPMorgan Chase Bank, N.A., as administrative agent, and the financial institutions and other lenders from time to time party thereto, Citibank, N.A., or Citibank, as collateral agent, and Virtus Group, LP, or Virtus, as collateral administrator, to, among other things, (i) permit borrowings in certain foreign currencies up to a specified sublimit, (ii) provide for a reinvestment period during which Juniata River is permitted to borrow, repay and re-borrow advances through October 11, 2019, (iii) provide for an unfunded fee in an amount equal to the product of the interest rate applicable to U.S. Dollar borrowings on any day multiplied by the unborrowed amount, if any, below 80% of the committed facility amount, or the Minimum Funding Amount, as of such day, (iv) provide for an unused fee of 0.75% per annum on the average daily unborrowed portion of the committed facility amount above the Minimum Funding Amount, and (v) replace both Citibank, in its role as collateral agent and securities intermediary, and Virtus, in its role as collateral administrator, with Wells Fargo Bank, National Association.

Cooper River Credit Facility

On March 29, 2019, Cooper River LLC, the Company’s wholly-owned special purpose financing subsidiary, entered into an amendment to the revolving credit facility originally entered into May 29, 2015 with Citibank, N.A., as administrative agent, and the financial institutions and other lenders from time to time party thereto, which extended the reinvestment period to June 30, 2019 and set the final maturity date at March 31, 2021.

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. The 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 these 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.

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 10. Commitments and Contingencies (continued)

Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s condensed consolidated statements of assets and liabilities. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments. As of March 31, 2019, the Company’s unfunded commitments consisted of the following:

Category/Company(1)	Commitment Amount
Senior Secured Loans—First Lien
5 Arch Income Fund 2, LLC		$	34,470
Altus Power America Inc			140
Apex Group Limited			2,241
Apex Group Limited			5,809
Ascension Insurance Inc			13,800
Aspect Software Inc			865
Conservice LLC			5,919
CSafe Global			3,965
Eagle Family Foods Inc			4,087
Fairway Group Holdings Corp			453
JHC Acquisition LLC			35,269
Kodiak BP LLC			9,849
Lazard Global Compounders Fund			7,214
Lipari Foods LLC			25,220
North Haven Cadence Buyer Inc			2,625
North Haven Cadence Buyer Inc			292
Zeta Interactive Holdings Corp			6,571
Senior Secured Loans—Second Lien
Bellatrix Exploration Ltd			624
Total unfunded loans		$	159,413
Unfunded equity commitments		$	47

(1)

May be commitments to one or more entities affiliated with the named company.

As of March 31, 2019, the Company’s unfunded debt commitments have a fair value representing unrealized appreciation (deprecation) of $(1,573). The Company funds its equity investments as it receives funding notices from the portfolio companies. As of March 31, 2019, the Company’s unfunded equity commitments have a fair value of zero.

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FS Investment Corporation II

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, 2019 and the year ended December 31, 2018:

	Three Months Ended March 31, 2019 (Unaudited)			Year Ended December 31, 2018
Per Share Data:(1)
Net asset value, beginning of period		$	7.86		$	8.73
Results of operations(2)
Net investment income			0.18			0.73
Net realized gain (loss) and unrealized appreciation (depreciation)			0.04			(0.85)
Net increase (decrease) in net assets resulting from operations			0.22			(0.12)
Stockholder distributions(3)
Distributions from net investment income			(0.19)			(0.75)
Net decrease in net assets resulting from stockholder distributions			(0.19)			(0.75)
Capital share transactions
Issuance of common stock(4)			—			—
Repurchases of common stock(5)			—			—
Net increase (decrease) in net assets resulting from capital share transactions			—			—
Net asset value, end of period		$	7.89		$	7.86
Shares outstanding, end of period			326,339,625			326,445,320
Total return(6)			2.75%			(1.64)%
Total return (without assuming reinvestment of distributions)(6)			2.80%			(1.37)%
Ratio/Supplemental Data:
Net assets, end of period		$	2,576,217		$	2,567,409
Ratio of net investment income to average net assets(7)			9.07%			8.68%
Ratio of operating expenses and excise taxes to average net assets(7)			9.65%			8.12%
Ratio of net operating expenses and excise taxes to average net assets(7)			9.65%			7.99%
Portfolio turnover(8)			4.44%			43.12%
Total amount of senior securities outstanding, exclusive of treasury securities		$	2,110,964		$	1,890,254
Asset coverage per unit(9)			2.22			2.36

(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 issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at a price that is greater than the net asset value per share results in an increase in net asset value per share.

(5)

The per share impact of the Company’s distribution reinvestment plan is a reduction to net asset value of less than $0.01 per share during the period.

(6)

The total return based on net asset value 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 that were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. Total return based on net asset value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the Company’s future total return based on net asset value, which may be greater or less than the return 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

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FS Investment Corporation II

Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)

Note 11. Financial Highlights (continued)

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 return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

(7)

Weighted average net assets during the applicable period are used for this calculation. Ratios for the three months ended March 31, 2019 are annualized. Annualized ratios for the three months ended March 31, 2019 are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2019. The following is a schedule of supplemental ratios for the three months ended March 31, 2019 and the year ended December 31, 2018:

	Three Months Ended March 31, 2019 (Unaudited)		Year Ended December 31, 2018
Ratio of subordinated income incentive fees to average net assets		1.74%		0.91%
Ratio of interest expense to average net assets		4.62%		3.78%
Ratio of excise taxes to average net assets		—		0.09%

(8)

Portfolio turnover for the three months ended March 31, 2019 is not annualized.

(9)

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.

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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 related notes thereto appearing elsewhere in this quarterly report on Form 10-Q.

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;

•

the impact of the investments that we expect to make;

•

the ability of our portfolio companies to achieve their objectives;

•

our current and expected financings and investments;

•

changes in the general interest rate environment;

•

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 advised by the Advisor, their respective current or future investment advisers or any of their affiliates.

•

the dependence of our future success on the general economy and its effect on the industries in which we may invest;

•

our use of financial leverage;

•

the ability of the Advisor to locate suitable investments for us and to monitor and administer our investments;

•

the ability of the Advisor or its affiliates to attract and retain highly talented professionals;

•

our ability to maintain our qualification as a RIC and as a BDC;

•

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, and the rules and regulations issued thereunder;

•

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;

In addition, 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 involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:

•

changes in the economy;

•

risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

•

future changes in laws or regulations and conditions in our operating areas.

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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. 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. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders 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 Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

We were incorporated under the general corporation laws of the State of Maryland on July 13, 2011 and formally commenced investment operations on June 18, 2012. 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 March 2014, we closed our continuous public offering of shares of common stock to new investors.

We are externally managed by the Advisor pursuant to the investment advisory and administrative services agreement and supervised by our board of directors, a majority of whom are independent. On April 9, 2018, GSO/Blackstone Debt Funds Management LLC, or GDFM, resigned as our investment sub-adviser and terminated its investment sub-advisory agreement effective April 9, 2018. In connection with GDFM’s resignation as our investment sub-adviser, on April 9, 2018, we entered into the investment advisory and administrative services agreement with the Advisor, which replaced an investment advisory and administrative services agreement, or the FSIC II Advisor investment advisory and administrative services agreement with our former investment adviser, FSIC II Advisor, LLC, or FSIC II Advisor.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We pursue our investment objective by investing primarily in the debt of middle market U.S. companies with a focus on originated transactions sourced through the network of the Advisor and its affiliates. We define direct originations as any investment where the Advisor or its affiliates negotiates the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These directly originated transactions 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.

Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the “over-the-counter” market or directly from our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity, in our target companies, generally in conjunction with one of our debt investments, including through the restructuring of such investments, or through a co-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps. The Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structure or otherwise make opportunistic investments, such as where the market price of loans, bonds or other securities reflects a lower value than deemed warranted by the Advisor’s fundamental analysis, which may occur due to general dislocations in

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the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community and may include event driven investments, anchor orders and structured products. The senior secured loans, second lien secured loans and senior secured bonds in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. Our debt investments may be rated by a NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s, or lower than “BBB-” by S&P). We also invest in non-rated debt securities.

Revenues

The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments, and net unrealized appreciation or depreciation on foreign currency. 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 foreign currency fluctuations. Net 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 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.

We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.

Expenses

Our primary operating expenses include the payment of management and incentive fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate the Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

The 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. The 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 stockholders and reports filed with the SEC. In addition, the 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 stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.

Pursuant to the investment advisory and administrative services agreement, we reimburse the Advisor for expenses necessary to perform services related to our administration and operations, including the Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of the Advisor. We reimburse the Advisor no less than monthly for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) the Advisor’s actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. The Advisor

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allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of the Advisor. Our board of directors then 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 directors 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 directors compares the total amount paid to the Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.

We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

•

corporate and organization expenses relating to offerings of our securities, subject to limitations included in the investment advisory and administrative services agreement;

•

the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services;

•

the cost of effecting sales and repurchases of shares of our common stock and other securities;

•

investment advisory fees;

•

fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

•

interest payments on our debt or related obligations;

•

transfer agent and custodial fees;

•

research and market data (including news and quotation equipment and services, and any computer hardware and connectivity hardware (e.g., telephone and fiber optic lines) incorporated into the cost of obtaining such research and market data);

•

fees and expenses associated with marketing efforts;

•

federal and state registration fees;

•

federal, state and local taxes;

•

fees and expenses of directors not also serving in an executive officer capacity for us or the Advisor;

•

costs of proxy statements, stockholders’ reports, notices and other filings;

•

fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

•

direct costs such as printing, mailing, long distance telephone and staff;

•

fees and expenses associated with accounting, corporate governance, government and regulatory affairs activities, independent audits and outside legal costs;

•

costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws, including compliance with the Sarbanes-Oxley Act;

•

brokerage commissions for our investments;

•

and all other expenses incurred by the Advisor or us in connection with administering our business, including expenses incurred by the Advisor in performing administrative services for us and administrative personnel paid by the Advisor, to the extent they are not controlling persons of the Advisor or any of its affiliates, subject to the limitations included in the investment advisory and administrative services agreement.

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In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by the 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.

Portfolio Investment Activity for the Three Months Ended March 31, 2019 and for the Year Ended December 31, 2018

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2019 and the year ended December 31, 2018:

Net Investment Activity	For the Three Months Ended March 31, 2019			For the Year Ended December 31, 2018
Purchases		$	453,599		$	1,895,833
Sales and Repayments			(203,103)			(1,885,140)
Net Portfolio Activity		$	250,496		$	10,693

	For the Three Months Ended March 31, 2019					For the Year Ended December 31, 2018
New Investment Activity by Asset Class	Purchases			Percentage		Purchases			Percentage
Senior Secured Loans—First Lien		$	350,512		78%		$	1,448,861		76%
Senior Secured Loans—Second Lien			64,577		14%			197,852		11%
Other Senior Secured Debt			1,209		0%			103,808		6%
Subordinated Debt			33,178		7%			102,391		5%
Asset Based Finance			—		—			694		0%
Equity/Other			4,123		1%			42,227		2%
Total		$	453,599		100%		$	1,895,833		100%

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2019 and December 31, 2018:

	March 31, 2019 (Unaudited)								December 31, 2018
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	3,611,239		$	3,519,120		76%		$	3,382,158		$	3,293,291		75%
Senior Secured Loans—Second Lien			471,912			389,559		8%			418,015			333,986		8%
Other Senior Secured Debt			182,012			172,800		4%			207,181			196,616		5%
Subordinated Debt			229,637			222,850		5%			242,792			221,858		5%
Asset Based Finance			41,277			45,268		1%			42,050			46,152		1%
Equity/Other			263,808			285,221		6%			268,409			267,377		6%
Total		$	4,799,885		$	4,634,818		100%		$	4,560,605		$	4,359,280		100%

(1)

Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

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The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2019 and December 31, 2018:

	March 31, 2019	December 31, 2018
Number of Portfolio Companies	154	160
% Variable Rate Debt Investments (based on fair value)(1)(2)	84.0%	81.4%
% Fixed Rate Debt Investments (based on fair value)(1)(2)	10.4%	12.2%
% Other Income Producing Investments (based on fair value)(3)	1.0%	0.1%
% Non-Income Producing Investments (based on fair value)(2)	4.2%	5.2%
% of Investments on Non-Accrual (based on fair value)	0.4%	1.1%
Weighted Average Annual Yield on Accruing Debt Investments(2)(4)	10.4%	10.5%

(1)

“Debt Investments” means investments that pay or are expected to pay a stated interest rate, stated dividend rate or other similar stated return.

(2)

Does not include investments on non-accrual status.

(3)

“Other Income Producing Investments” means investments that pay or are expected to pay interest, dividends or other income to the Company on an ongoing basis but do not have a stated interest rate, stated dividend rate or other similar stated return.

(4)

The Weighted Average Annual Yield for Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period.

Based on our regular monthly cash distribution amount of $0.06283 per share as of March 31, 2019 and our distribution reinvestment price of $8.05 per share, the annualized distribution rate to stockholders as of March 31, 2019 was 9.37%. The annualized distribution rate to stockholders is expressed as a percentage equal to the projected annualized distribution amount per share divided by our distribution reinvestment price per share. Our annualized distribution rate to stockholders may include income, realized capital gains and a return of investors’ capital. During the three months ended March 31, 2019, our total return was 2.75% and our total return without assuming reinvestment of distributions was 2.80%.

Based on our regular monthly cash distribution amount of $0.06283 per share as of December 31, 2018 and our distribution reinvestment price of $8.05 per share, the annualized distribution rate to stockholders as of December 31, 2018 was 9.37%. During the year ended December 31, 2018, our total was (1.64)% and our total return without assuming reinvestment of distributions was (1.37)% .

Our weighted average annual yield on accruing debt investments may be higher than a stockholder’s yield on an investment in shares of our common stock. Our weighted average annual yield on accruing debt investments does not reflect operating expenses that may be incurred by us, nor does it include all of our investments. In addition, our weighted average annual yield on accruing debt investments and total return figures disclosed above do not consider the effect of any sales commissions or charges that may have been incurred in connection with the sale of shares of our common stock. Our weighted average annual yield on accruing debt investments, total return and annualized distribution rate to stockholders do not represent actual investment returns to stockholders, are subject to change and, in the future, may be greater or less than the rates set forth above. See the section entitled “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2018 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements. See footnote 6 to the financial highlights table included in Note 11 to our unaudited consolidated financial statements included herein for information regarding the calculations of our total return.

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Direct Originations

The following table presents certain selected information regarding our direct originations as of March 31, 2019 and December 31, 2018:

Characteristics of All Direct Originations Held in Portfolio	March 31, 2019	December 31, 2018
Number of Portfolio Companies	74	74
% of Investments on Non-Accrual (based on fair value)	2.4%	3.6%
Total Cost of Direct Originations	$3,928,473	$3,615,151
Total Fair Value of Direct Originations	$3,803,151	$3,497,141
% of Total Investments, at Fair Value	82.1%	80.2%
Weighted Average Annual Yield on Accruing Debt Investments(1)	10.5%	10.5%

(1)

The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Does not include Debt Investments on non-accrual status.

Portfolio Composition by Industry Classification

See Note 6 to our unaudited consolidated financial statements included herein for additional information regarding the composition of our investment portfolio by industry classification.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, the Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The Advisor uses an investment rating scale of 1 to 4. The following is a description of the conditions associated with each investment rating:

Investment Rating			Summary Description
1			Performing Investment—generally executing in accordance with plan and there are no concerns about the portfolio company’s performance or ability to meet covenant requirements.
2			Performing investment—no concern about repayment of both interest and our cost basis but company’s recent performance or trends in the industry require closer monitoring.
3			Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
4			Underperforming investment—concerns about the recoverability of principal or interest.

The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of March 31, 2019 and December 31, 2018:

	March 31, 2019					December 31, 2018
Investment Rating	Fair Value			Percentage of Portfolio		Fair Value			Percentage of Portfolio
1		$	3,062,579		66%		$	2,817,253		65%
2			1,353,997		29%			1,377,931		32%
3			125,052		3%			95,013		2%
4			93,190		2%			69,083		1%
Total		$	4,634,818		100%		$	4,359,280		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.

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Results of Operations

Comparison of the Three Months Ended March 31, 2019 and 2018

Revenues

Our investment income for the three months ended March 31, 2019 and 2018 was as follows:

	Three Months Ended March 31,
	2019					2018
	Amount			Percentage of Total Income		Amount			Percentage of Total Income
Interest income		$	107,868		90%		$	100,156		85%
Paid-in-kind interest income			4,956		4%			4,978		4%
Fee income			7,044		6%			5,074		4%
Dividend income			71		0%			7,494		7%
Total investment income(1)		$	119,939		100%		$	117,702		100%

(1)

For the three months ended March 31, 2019 and 2018, such revenues represent $112,669 and $111,382, respectively, of cash income earned as well as $7,270 and $6,320, respectively, in non-cash portions relating to accretion of discount and PIK interest. 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. Fee income is transaction based and typically consists of prepayment fees and structuring fees. As such, 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 interest income during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to the higher invested balance during the quarter ended March 31, 2019, compared to the quarter ended March 31, 2018.

The decrease in dividend income during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a one-time dividend paid in respect of one of our investments during the three months ended March 31, 2018.

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Expenses

Our operating expenses for the three months ended March 31, 2019 and 2018 were as follows:

	Three Months Ended March 31,
	2019			2018
Management fees		$	17,864		$	25,234
Subordinated income incentive fees			11,131			5,575
Administrative services expenses			907			782
Stock transfer agent fees			705			495
Accounting and administrative fees			433			421
Interest expense			29,575			24,183
Directors’ fees			142			504
Expenses associated with our independent audit and related fees			73			126
Legal fees			113			34
Printing fees			343			53
Other			539			1,058
Total operating expenses		$	61,825		$	58,465
Management fee waiver			—			(3,154)
Net operating expenses		$	61,825		$	55,311

The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2019 and 2018:

	Three Months Ended March 31,
	2019		2018
Ratio of operating expenses to average net assets		2.41%		2.06%
Ratio of management fee waiver to average net assets		—		(0.11)%
Ratio of net operating expenses to average net assets		2.41%		1.95%
Ratio of incentive fees and interest expense to average net assets(1)		1.59%		1.05%
Ratio of net operating expenses, excluding certain expenses, to average net assets		0.82%		0.90%

(1)

Ratio data may be rounded in order to recompute the ending ratio of net operating expenses, excluding certain expenses, to average net assets.

Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors.

Net Investment Income

Our net investment income totaled $58,114 ($0.18 per share) and $62,391 ($0.19 per share) for the three months ended March 31, 2019 and 2018, respectively. The decrease in net investment income for the three months ended March 31, 2019 can be attributed to the increase in interest income as discussed above, offset by higher incentive fees and interest expense.

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Net Realized Gains or Losses

Our net realized gains (losses) on investments and foreign currency for the three months ended March 31, 2019 and 2018 were as follows:

	Three Months Ended March 31,
	2019			2018
Net realized gain (loss) on investments(1)		$	(18,486)		$	(19,294)
Net realized gain (loss) on foreign currency			3			(327)
Total net realized gain (loss)		$	(18,483)		$	(19,621)

(1)

We sold investments and received principal repayments, respectively, of $114,730 and $88,373 during the three months ended March 31, 2019 and $55,669 and $245,401 during the three months ended March 31, 2018.

Net Change in Unrealized Appreciation (Depreciation)

Our net change in unrealized appreciation (depreciation) on investments and interest rate swaps and unrealized gain (loss) on foreign currency for the three months ended March 31, 2019 and 2018 were as follows:

	Three Months Ended March 31,
	2019			2018
Net change in unrealized appreciation (depreciation) on investments		$	36,258		$	(88,612)
Net change in unrealized appreciation (depreciation) on interest rate swaps			(3,996)			—
Net change in unrealized gain (loss) on foreign currency			(1,124)			410
Total net change in unrealized appreciation (depreciation)		$	31,138		$	(88,202)

During the three months ended March 31, 2019, the net change in unrealized appreciation (depreciation) was driven primarily by increased valuations in a several of our equity investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2019 and 2018, the net increase in net assets resulting from operations was $70,769 ($0.22 per share) and $(45,432) ($(0.14) per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2019, we had $110,995 in cash and foreign currency, which we and our wholly-owned financing subsidiaries held in custodial accounts, and $339,036 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of March 31, 2019, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2019, we had unfunded debt investments with aggregate unfunded commitments of $159,413 and an unfunded commitment to purchase up to $47 shares of preferred stock. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.

We currently generate cash primarily from cash flows from fees, interest and dividends earned from our investments as well as from the issuance of shares under the DRP, and principal repayments and proceeds from sales of our investments. To seek to enhance our returns, we also employ leverage as market conditions permit and at the discretion of the Advisor, but in no event will leverage employed exceed 50% of the value of our assets, as required by the 1940 Act. See “—Financing Arrangements.”

Prior to investing in securities of portfolio companies, we invest the cash received from fees, interest and dividends earned from our investments and from the issuance of shares under the distribution reinvestment plan, as well as principal repayments and proceeds from sales of our investments primarily in

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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.

Financing Arrangements

The following table presents summary information with respect to our outstanding financing arrangements as of March 31, 2019:

Arrangement(1)

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

Green Creek Credit Facility

Term Loan Credit Facility

L+2.50%

500,000

—

December 15, 2019

Cooper River Credit Facility

Revolving Credit Facility

L+2.25%

115,000

85,000

March 31, 2021

Darby Creek Credit Facility

Revolving Credit Facility

L+1.95%

185,000

65,000

February 26, 2024

Juniata River Credit Facility

Revolving Credit Facility

L+2.68%

850,000

—

October 11, 2020

Senior Secured Revolving Credit Facility

Revolving Credit Facility

L+2.00% – 2.25%(2)

460,964(3)

189,036

August 9, 2023

Total

2,110,964

339,036

(1)

The carrying amount outstanding under the facility approximates its fair value.

(2)

The spread over LIBOR is determined by reference to the ratio of the value of the borrowing base to the aggregate amount of certain outstanding indebtedness of the Company.

(3)

Amount includes borrowing in U.S. dollars, Euros, and Canadian Dollars. Euro balance outstanding of €1,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $98,700 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.75 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars.

For additional information regarding our financing arrangements, see Note 9 to our unaudited consolidated financial statements included herein.

RIC Status and Distributions

We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary 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 in excess of capital losses, or “capital gain net income” (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income 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 stockholders 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 stockholders, on December 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

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Subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. We will calculate each stockholder’s specific distribution amount for the period using record and declaration dates and each stockholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.

During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2019 and 2018 represented a return of capital.

We intend to continue to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those stockholders who receive their distributions in the form of shares of our common stock under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

The following table reflects the cash distributions per share that we have declared and paid on our common stock during the three months ended March 31, 2019 and 2018:

	Distribution
For the Three Months Ended	Per Share			Amount
Fiscal 2018
March 31, 2018		$	0.1885		$	61,153
Total		$	0.1885		$	61,153
Fiscal 2019
March 31, 2019		$	0.1885		$	61,114
Total		$	0.1885		$	61,114

See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the three months ended March 31, 2019 and 2018.

Critical Accounting Policies

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. 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. In preparing the financial statements, management has made 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. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its 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.

Valuation of Portfolio Investments

We determine the fair value of our investment portfolio each quarter. Securities are valued at fair value as determined in good faith by our board of directors. In connection with that determination, the Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs,

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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 valuation services.

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by 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; 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.

With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:

•

our quarterly fair valuation process begins with the Advisor reviewing and documenting valuations of each portfolio company or investment, which valuations are obtained from an independent third-party valuation service and provide a valuation range;

•

the Advisor then provides the valuation committee of our board of directors, or the valuation committee, with its valuation recommendation for each portfolio company or investment, along with supporting materials;

•

preliminary valuations are then discussed with the valuation committee;

•

our valuation committee reviews the preliminary valuations and the Advisor, together with our independent third-party valuation services, if applicable, supplement the preliminary valuations to reflect any comments provided by the valuation committee;

•

following its review, the valuation committee will recommend that our board of directors approve our fair valuations; and

•

our board of directors discusses the valuations and determines the fair value of each such investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of the Advisor, the valuation committee and any independent third-party valuation services, if applicable.

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, our board of directors may use any approved independent third-party pricing or valuation services. However, our board of directors 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 obtained from the Advisor or any approved independent third-party valuation or pricing service that our board of directors deems to be reliable in determining fair value under the circumstances. Below is a description of factors that the Advisor, any approved independent third party valuation services and our board of directors may consider when determining the fair value of our investments.

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, we may incorporate these factors into discounted cash flow models to arrive at fair value. 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 our debt investments.

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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.

Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

The Advisor, any approved independent third-party valuation services and our board of directors may also consider private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Advisor, any approved independent third-party valuation services and our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as our board of directors, in consultation with the Advisor and any approved independent third party valuation services, if applicable, may consider relevant in assessing 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. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

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. Our board of directors subsequently values these warrants or other equity securities received at their fair value.

The fair values of our investments are determined in good faith by our board of directors. Our board of directors is responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our board of directors has delegated day-to-day responsibility for implementing our valuation policy to the Advisor, and has authorized the Advisor to utilize independent third-party valuation and pricing services that have been approved by our board of directors. The valuation committee is responsible for overseeing the Advisor’s implementation of the valuation process.

See Note 8 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on the ex-dividend date. Distributions received from limited liability company (“LLC”) and limited partnership (“LP”) investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Our policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. We consider 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 we will receive any previously accrued interest, then the interest income 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 our judgment.

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Loan origination fees, original issue discount and market discount are capitalized and we amortize 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. For the three months ended March 31, 2019, we recognized $6,105 in structuring fee revenue. We record prepayment premiums on loans and securities as fee income when we earn such amounts.

Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the three months ended March 31, 2019 and 2018, we did not incur any interest or penalties.

Derivative Instruments

Our derivative instruments include foreign currency forward contracts and cross currency swaps. We recognize all derivative instruments as assets or liabilities at fair value in our consolidated financial statements. Derivative contracts entered into by us are not designated as hedging instruments, and as a result, we present changes in fair value through net change in unrealized appreciation (depreciation) on derivative instruments in the consolidated statements of operations. Realized gains and losses that occur upon the cash settlement of the derivative instruments are included in net realized gains (losses) on derivative instruments in the consolidated statements of operations.

See Note 2 to our unaudited consolidated financial statements included herein for additional information regarding our significant accounting policies.

Contractual Obligations

We have entered into an agreement with the Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets and (b) an incentive fee based on our performance. The Advisor is reimbursed for administrative 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 similar agreements with FSIC II Advisor during the three months ended March 31, 2018.

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A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at March 31, 2019 is as follows:

	Payments Due By Period
	Maturity Date(1)	Total			Less than 1 year			1 – 3 years			3 – 5 years			More than 5 years
Green Creek Credit Facility(2)	December 15, 2019		$	500,000		$	500,000			—			—		—
Cooper River Credit Facility(3)	March 31, 2021		$	115,000			—		$	115,000			—		—
Darby Creek Credit Facility(4)	February 26, 2024		$	185,000			—			—		$	185,000		—
Juniata River Credit Facility(2)	October 11, 2020		$	850,000			—		$	850,000			—		—
Senior Secured Revolving Credit Facility(5)	August 9, 2023		$	460,964			—			—		$	460,964		—

(1)

Amounts outstanding under the financing arrangements will mature, and all accrued and unpaid interest thereunder will be due and payable, on the maturity date.

(2)

At March 31, 2019, no amounts remained unused under the financing arrangement.

(3)

At March 31, 2019, $85,000 remained unused under the Cooper River credit facility.

(4)

At March 31, 2019, $65,000 remained unused under the Darby Creek credit facility.

(5)

At March 31, 2019, $189,036 remained unused under the Senior Secured Revolving Credit Facility. Amount includes borrowing in U.S. dollars, Euros, and Canadian Dollars. Euro balance outstanding of €1,500 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.12 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD $98,700 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.75 as of March 31, 2019 to reflect total amount outstanding in U.S. dollars.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement—Disclosures Framework—Changes to Disclosure Requirements for Fair Value Measurement (Topic 820), or ASU 2018-13. ASU 2018-13 introduces new fair value disclosure requirements and eliminates and modifies certain existing fair value disclosure requirements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of ASU 2018-13 on our financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

We are subject to financial market risks, including changes in interest rates. As of March 31, 2019, 84.0% of our portfolio investments (based on fair value) were debt investments paying variable interest rates and 10.4% were debt investments paying fixed interest rates, while 1.0% were other income producing investments, 4.2% were of non-income producing investments and the remaining 0.4% consisting of investments on non-accrual status. 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

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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 to the amount of incentive fees payable to the Advisor with respect to our increased pre-incentive fee net investment income.

Subject to the requirements of the 1940 Act, we may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. Although hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates. As of March 31, 2019, we have four pay-fixed, receive-floating interest rate swaps which we pay an annual fixed rate of 2.59% to 2.81% and receive three-month LIBOR on an aggregate notional amount of $360 million. The interest rate swaps have quarterly settlement payments.

Pursuant to the terms of all of our financing arrangements, borrowings are at a floating rate based on LIBOR. To the extent that any present or future credit facilities, total return swap agreements 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 arrangements in effect as of March 31, 2019 (dollar amounts are presented in thousands):

Basis Point Change in Interest Rates	Increase (Decrease) in Interest Income(1)			Increase (Decrease) in Interest Expense			Increase (Decrease) in Net Interest Income			Percentage Change in Net Interest Income
Down 100 basis points		$	(38,660)		$	(21,110)		$	(17,550)		(5.0)%
No change			—			—			—		—
Up 100 basis points		$	39,372		$	21,110		$	18,262		5.2%
Up 300 basis points		$	118,827		$	63,329		$	55,498		15.9%
Up 500 basis points		$	198,337		$	105,548		$	92,789		26.6%

(1)

Assumes no defaults or prepayments by portfolio companies 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.

In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”

Item 4.

Controls and Procedures.

Evaluation of Disclosure 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, 2019.

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.

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Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that occurred during the three-month period ended March 31, 2019 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, nor, to our knowledge, is any material legal proceeding 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 these proceedings will have a material adverse effect upon our financial condition or results of operations.

Item 1A.

Risk Factors.

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2018, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2019.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The table below provides information concerning our repurchases of shares of our common stock during the three months ended March 31, 2019, pursuant to our share repurchase program.

Period	Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2019 through January 31, 2019		3,297,056		$	8.05		3,297,056		(1)
February 1, 2018 through February 28, 2019		—			—		—		—
March 1, 2019 through March 31, 2019		—			—		—		—
Total		3,297,056		$	8.50		3,297,056		(1)

(1)

The maximum number of shares available for repurchase on January 2, 2019 was 3,297,056. A description of the calculation of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited consolidated financial statements included herein.

See Note 3 to our unaudited consolidated financial statements included herein for a more detailed discussion of the terms of our share repurchase program.

Item 3.

Defaults upon Senior Securities.

Not applicable.

Item 4.

Mine Safety Disclosures.

Not applicable.

Item 5.

Other Information.

Not applicable.

Item 6.

Exhibits.

	3.1			Articles of Amendment and Restatement of the Company. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 14, 2012.)
	3.2			Articles Supplementary of the Company. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 1, 2017.)

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	3.3			Articles Supplementary of the Company. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 13, 2017.)
	3.4			Third Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on June 13, 2017.)
	4.1			Amended and Restated Distribution Reinvestment Plan of the Company, effective as of March 26, 2014. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 24, 2014.)
	10.1			Investment Advisory and Administrative Services Agreement, dated as of April 9, 2018, by and between FS Investment Corporation II and FS/KKR Advisor, LLC. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 9, 2018.)
	10.2			Investment Advisory and Administrative Services Agreement, dated as of February 8, 2012, by and between the Company and FSIC II Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
	10.3			Investment Sub-Advisory Agreement, dated as of February 8, 2012, by and between FSIC II Advisor, LLC and GSO / Blackstone Debt Funds Management LLC. (Incorporated by reference to Exhibit (g)(2) filed with Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
	10.4			Custodian Agreement, dated as of February 8, 2012, by and between the Company and State Street Bank and Trust Company. (Incorporated by reference to Exhibit (j) filed with Pre-Effective Amendment No. 3 to the Company’s registration statement on Form N-2 (File No. 333-175654) filed on February 10, 2012.)
	10.5			Amended and Restated Credit Agreement, dated as of May 29, 2015, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 4, 2015.)
	10.6			Second Amendment, dated as of June 1, 2018, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed on August 14, 2018.)
	10.7			Third Amendment, dated as of July 30, 2018, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 filed on November 14, 2018.)
	10.8			Fourth Amendment, dated as of September 10, 2018, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 filed on November 14, 2018.)
	10.9			Fifth Amendment, dated as of November 30, 2018, by and among Cooper River LLC, as borrower, Citibank, N.A., as administrative agent, Citibank, N.A. acting through its Agency and Trust division, as collateral custodian and collateral agent, each of the lenders from time to time party thereto and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-K filed on March 19, 2019.)

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	10.11			Omnibus Sixth Amendment to Amended and Restated Credit and Security Agreement andLender Fee Letter, dated as of March 29, 2019, between Cooper River LLC, as borrower, Citibank N.A., as administrative agent, the lenders party thereto, Citibank, N.A., acting through its agency & trust division, as collateral custodian and collateral agent, and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 3, 2019.)
	10.10			Loan Financing and Servicing Agreement, dated as of February 20, 2014, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 25, 2014.)
	10.11			Amendment No. 1 to Loan Financing and Servicing Agreement, dated as of January 12, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
	10.12			Amendment No. 2 to Loan Financing and Servicing Agreement, dated as of February 3, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
	10.13			Amendment No. 3 to Loan Financing and Servicing Agreement, dated as of May 7, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
	10.14			Amendment No. 4 to Loan Financing and Servicing Agreement, dated as of October 8, 2015, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on March 25, 2016.)
	10.15			Amendment No. 6 to Loan Financing and Servicing Agreement, dated as of August 19, 2016, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 22, 2016.)
	10.16			Amendment No. 7 to Loan Financing and Servicing Agreement, dated as of February 15, 2019, by and among Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, Wells Fargo Bank, National Association, as collateral agent and collateral custodian, and the other lenders and lender agents from time to time party thereto. (Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-K filed on March 19, 2019.)
	10.17			Omnibus Amendment, dated as of February 20, 2019, between Darby Creek LLC, as borrower, Deutsche Bank AG, New York Branch, as facility agent, each lender party thereto, each agent party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 25, 2019.)

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	10.18			Loan Agreement, dated as of November 14, 2014, by and among Juniata River LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent and lender, Citibank, N.A., as collateral agent and Virtus Group, LP as collateral administrator. (Incorporated by reference to Exhibit 10.51 to the Company’s Annual Report on Form 10-K filed on March 18, 2015.)
	10.19			Amendment No. 1 to Loan Agreement, dated as of October 11, 2016, by and among Juniata River LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent and lender, Citibank, N.A., as collateral agent and Virtus Group, LP as collateral administrator. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 13, 2016.)
	10.20			Amended and Restated Loan and Security Agreement, dated as of March 13, 2019, by and between Juniata River LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent, the lenders party thereto, and Wells Fargo Bank, National Association, as collateral administrator, collateral agent and securities intermediary. (Incorporated by reference to Exhibit 10.20 to the Company’s Quarterly Report on Form 10-K filed on March 19, 2019.)
	10.21			Credit Agreement, dated as of May 15, 2017, among Green Creek LLC, Goldman Sachs Bank USA, as lender, sole lead arranger and administrative agent, Citibank, N.A., as collateral agent, and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 16, 2017.)
	10.22			Senior Secured Revolving Credit Agreement, dated as of August 9, 2018, among Corporate Capital Trust, Inc., FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, each other person designated as a “borrower” thereunder pursuant to section 9.19 thereof, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and ING Capital LLC, as collateral agent. (Incorporated by reference to Exhibit 10.56 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed on August 14, 2018.)
	10.23			Commitment Increase Agreement, dated as of November 8, 2018, among BNP Paribas, Corporate Capital Trust, Inc., FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, JPMorgan Chase Bank, N.A., Bank of Montreal, Suntrust Bank, and ING Capital LLC. (Incorporated by reference to Exhibit 10.23 to the Company’s Quarterly Report on Form 10-K filed on March 19, 2019.)
	10.24			Commitment Increase Agreement, dated as of November 8, 2018, among U.S. Bank National Association, Corporate Capital Trust, Inc., FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, JPMorgan Chase Bank, N.A., Bank of Montreal, Suntrust Bank, and ING Capital LLC. (Incorporated by reference to Exhibit 10.24 to the Company’s Quarterly Report on Form 10-K filed on March 19, 2019.)
	31.1*			Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.
	31.2*			Certification of Chief Financial Officer pursuant to Rule 13a-14 of 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.

Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized on May 15, 2019.

				FS INVESTMENT CORPORATION II
				By:			/s/ Michael C. Forman Michael C. Forman Chief Executive Officer (Principal Executive Officer)
				By:			/s/ William Goebel William Goebel Chief Financial Officer (Principal Financial and Accounting Officer)

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FS KKR Capital Corp. II (FSKR) 10-Q2019 Q1 Quarterly report

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