FS Investment Corp III 10Q 2018 Q3 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 SEPTEMBER 30, 2018

☐

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: 814-01047

FS Investment Corporation III

(Exact name of registrant as specified in its charter)

	Maryland			90-0994912
	(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)

(215) 495-1150

(Registrant’s telephone number, including area code)

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.

There were 288,451,659 shares of the registrant’s common stock outstanding as of November 14, 2018.

TABLE OF CONTENTS

	Page
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017		1
Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017		2
Unaudited Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2018 and 2017		3
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017		4
Consolidated Schedules of Investments as of September 30, 2018 (Unaudited) and December 31, 2017		5
Notes to Unaudited Consolidated Financial Statements		21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		50
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		67
ITEM 4. CONTROLS AND PROCEDURES		68
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		69
ITEM 1A. RISK FACTORS		69
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		69
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		69
ITEM 4. MINE SAFETY DISCLOSURES		69
ITEM 5. OTHER INFORMATION		69
ITEM 6. EXHIBITS		69
SIGNATURES		76

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

FS Investment Corporation III

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

	September 30, 2018 (Unaudited)			December 31, 2017
Assets
Investments, at fair value
Non-controlled/unaffiliated investments (amortized cost—$3,280,445 and $3,326,008, respectively)		$	3,209,311		$	3,301,261
Non-controlled/affiliated investments (amortized cost—$86,553 and $107,137, respectively)			41,771			40,265
Total investments, at fair value (amortized cost—$3,366,998 and $3,433,145, respectively)			3,251,082			3,341,526
Cash			168,149			359,975
Foreign currency, at fair value (cost—$179 and $8,178, respectively)			181			8,369
Due from counterparty			114,689			98,005
Receivable for investments sold and repaid			26,570			675
Interest receivable			34,424			35,499
Deferred financing costs			4,730			1,874
Receivable due on total return swap(1)			6,052			1,107
Prepaid expenses and other assets			77			250
Total assets		$	3,605,954		$	3,847,280
Liabilities
Unrealized depreciation on total return swap(1)		$	10,002		$	3,756
Payable for investments purchased			4,878			22,175
Repurchase agreement payable (net of deferred financing costs of $314 and $611, respectively)(1)			299,686			299,389
Credit facilities payable (net of deferred financing costs of $1,980 and $196, respectively)(1)			932,738			1,087,504
Stockholder distributions payable			9,204			—
Management fees payable			13,724			17,015
Subordinated income incentive fees payable(2)			12,827			14,487
Administrative services expense payable			854			277
Interest payable(1)			12,292			10,870
Directors’ fees payable			247			253
Other accrued expenses and liabilities			1,909			2,830
Total liabilities			1,298,361			1,458,556
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, 550,000,000 shares authorized, 290,360,066 and 290,566,041 shares issued and outstanding, respectively			290			291
Capital in excess of par value			2,527,159			2,529,098
Accumulated earnings (loss)			(219,856)			(140,665)
Total stockholders’ equity			2,307,593			2,388,724
Total liabilities and stockholders’ equity		$	3,605,954		$	3,847,280
Net asset value per share of common stock at period end		$	7.95		$	8.22

(1)

See Note 8 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 9 for a discussion of the Company’s commitments and contingencies.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Investment income
From non-controlled/unaffiliated investments:
Interest income		$	71,536		$	76,649		$	221,286		$	222,569
Paid-in-kind interest income			10,424			6,274			22,939			17,931
Fee income			8,659			3,033			15,823			21,736
Dividend income			353			—			430			74
From non-controlled/affiliated investments:
Interest income			1,225			887			3,287			2,666
Paid-in-kind interest income			559			411			982			1,036
Fee income			388			6			871			198
Total investment income			93,144			87,260			265,618			266,210
Operating expenses
Management fees(1)			13,724			19,382			47,248			57,171
Subordinated income incentive fees(2)			12,827			5,166			25,631			26,278
Administrative services expenses			919			569			2,435			2,098
Stock transfer agent fees			346			396			1,124			1,174
Accounting and administrative fees			274			282			834			837
Interest expense			17,709			13,775			48,961			38,561
Directors’ fees			200			284			913			809
Offering costs			—			2,118			—			3,054
Other general and administrative expenses			743			776			2,249			2,290
Operating expenses			46,742			42,748			129,395			132,272
Management fees waiver(1)			—			(2,423)			(2,594)			(6,324)
Net expenses			46,742			40,325			126,801			125,948
Net investment income			46,402			46,935			138,817			140,262
Realized and unrealized gain/loss
Net realized gain (loss) on investments:
Non-controlled/unaffiliated investments			2,882			2,902			(20,152)			7,510
Non-controlled/affiliated investments			—			—			(29,568)			—
Net realized gain (loss) on total return swap(3)			4,021			11,255			14,258			18,434
Net realized gain (loss) on foreign currency			(516)			893			(290)			1,030
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/unaffiliated investments			(25,549)			(7,142)			(46,387)			11,390
Non-controlled/affiliated investments			(174)			(7,477)			22,090			(31,359)
Net change in unrealized appreciation (depreciation) on total return swap(3)			939			(9,274)			(6,246)			(11,672)
Net change in unrealized appreciation (depreciation) on secured borrowing(3)			—			16			—			(33)
Net change in unrealized gain (loss) on foreign currency			216			(448)			(253)			162
Total net realized gain (loss) and unrealized appreciation (depreciation)			(18,181)			(9,275)			(66,548)			(4,538)
Net increase (decrease) in net assets resulting from operations		$	28,221		$	37,660		$	72,269		$	135,724
Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share)		$	0.10		$	0.13		$	0.25		$	0.49
Weighted average shares outstanding			288,969,053			283,734,531			289,044,461			279,420,801

(1)

See Note 4 for a discussion of the waiver by FSIC III 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 8 for a discussion of the Company’s financing arrangements.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

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

	Nine Months Ended September 30,
	2018			2017
Operations
Net investment income		$	138,817		$	140,262
Net realized gain (loss) on investments, total return swap and foreign currency(1)			(35,752)			26,974
Net change in unrealized appreciation (depreciation) on investments			(24,297)			(19,969)
Net change in unrealized appreciation (depreciation) on total return swap(1)			(6,246)			(11,672)
Net change in unrealized appreciation (depreciation) on secured borrowing(1)			—			(33)
Net change in unrealized gain (loss) on foreign currency			(253)			162
Net increase in net assets resulting from operations			72,269			135,724
Stockholder distributions(2)
Distributions to stockholders			(151,460)			(146,609)
Net decrease in net assets resulting from stockholder distributions			(151,460)			(146,609)
Capital share transactions(3)
Issuance of common stock			—			122,948
Reinvestment of stockholder distributions			70,953			74,284
Repurchases of common stock			(72,893)			(68,455)
Net increase (decrease) in net assets resulting from capital share transactions			(1,940)			128,777
Total increase in net assets			(81,131)			117,892
Net assets at beginning of period			2,388,724			2,323,940
Net assets at end of period		$	2,307,593		$	2,441,832

(1)

See Note 8 for a discussion of the Company’s financing arrangements.

(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 III

Unaudited Consolidated Statements of Cash Flows
(in thousands)

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations		$	72,269		$	135,724
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investments			(1,089,493)			(1,008,621)
Paid-in-kind interest			(23,921)			(18,967)
Proceeds from sales and repayments of investments			1,133,149			837,803
Net realized (gain) loss on investments			49,720			(7,510)
Net change in unrealized (appreciation) depreciation on investments			24,297			19,969
Net change in unrealized (appreciation) depreciation on total return swap(1)			6,246			11,672
Net change in unrealized appreciation (depreciation) on secured borrowing(1)			—			33
Accretion of discount			(3,308)			(9,844)
Amortization of deferred financing costs and discount on secured borrowing			2,063			1,388
Amortization of deferred offering costs			—			3,054
(Increase) decrease in due from counterparty			(16,684)			20,000
(Increase) decrease in receivable for investments sold and repaid			(25,895)			(13,138)
(Increase) decrease in interest receivable			1,075			(10,004)
(Increase) decrease in receivable due on total return swap(1)			(4,945)			(3,646)
(Increase) decrease in prepaid expenses and other assets			173			(86)
Increase (decrease) in payable for investments purchased			(17,297)			60,935
Increase (decrease) in management fees payable			(3,291)			(864)
Increase (decrease) in subordinated income incentive fees payable			(1,660)			(7,157)
Increase (decrease) in administrative services expense payable			577			172
Increase (decrease) in interest payable(1)			1,422			1,466
Increase (decrease) in directors’ fees payable			(6)			41
Increase (decrease) in other accrued expenses and liabilities			(921)			(992)
Net cash provided by (used in) operating activities			103,570			11,428
Cash flows from financing activities
Issuance of common stock			—			122,948
Reinvestment of stockholder distributions			70,953			74,284
Repurchases of common stock			(72,893)			(68,455)
Offering costs incurred			—			(2,077)
Stockholder distributions			(142,256)			(146,609)
Borrowings under credit facilities(1)			715,521			110,000
Repayments of credit facilities(1)			(868,503)			—
Deferred financing costs paid			(6,406)			(500)
Net cash provided by financing activities			(303,584)			89,591
Total increase (decrease) in cash			(200,014)			101,019
Cash and foreign currency at beginning of period			368,344			249,862
Cash and foreign currency at end of period		$	168,330		$	350,881
Supplemental disclosure
Excise and state taxes paid		$	573		$	335

(1)

See Note 8 for a discussion of the Company’s financing arrangements. During the nine months ended September 30, 2018 and 2017, the Company paid $0 and $588, respectively, in interest expense on its secured borrowing, $35,675 and $27,112, respectively, in interest expense on the credit facilities and $9,801 and $8,007, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

Unaudited Consolidated Schedule of Investments
As of September 30, 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—101.9%
5 Arch Income Fund 2, LLC	(i)(n)	Diversified Financials	9.0%			11/18/21			$	143,185		$	143,336		$	143,185
5 Arch Income Fund 2, LLC	(j)	Diversified Financials	9.0%			11/18/21				5,215			5,215			5,215
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750		1.0%	12/29/23				17,497			17,497			17,585
All Systems Holding LLC	(f)(g)(h)	Commercial & Professional Services	L+767		1.0%	10/31/23				54,011			54,011			54,551
Altus Power America, Inc.		Energy	L+750		1.5%	9/30/21				3,110			3,110			3,016
Altus Power America, Inc.	(j)	Energy	L+750		1.5%	9/30/21				213			213			207
Aspect Software, Inc.	(t)	Software & Services	L+400, 6.5% PIK (6.5% Max PIK)			5/25/20				12,861			12,861			11,399
Aspect Software, Inc.	(f)(t)	Software & Services	L+1050		1.0%	5/25/20				9,901			9,901			8,775
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+725		1.0%	12/29/22				42,667			42,667			43,520
ATX Networks Corp.	(h)(i)(r)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21	��			9,430			9,358			8,958
ATX Networks Corp.	(g)(h)(i)(r)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21				28,735			28,181			27,298
AVF Parent, LLC	(f)	Retailing	L+725		1.3%	3/1/24				29,628			29,628			27,998
BMC Software Finance, Inc.	(j)(r)	Software & Services	L+400			9/10/20				10,000			10,000			9,990
Borden Dairy Co.	(f)(g)	Food, Beverage & Tobacco	L+819		1.0%	7/6/23				48,125			48,125			46,874
ConnectiveRx, LLC	(f)(g)(h)	Health Care Equipment & Services	L+827		1.0%	11/25/21				172,364			172,225			172,588
CSafe Acquisition Co., Inc.		Capital Goods	L+725		1.0%	11/1/21				261			261			261
CSafe Acquisition Co., Inc.	(j)	Capital Goods	L+725		1.0%	11/1/21				2,435			2,348			2,348
CSafe Acquisition Co., Inc.	(f)	Capital Goods	L+725		1.0%	10/31/23				22,388			22,388			22,388
CSafe Acquisition Co., Inc.	(j)	Capital Goods	L+725		1.0%	10/31/23				9,426			9,426			9,426
Dade Paper & Bag, LLC		Capital Goods	L+700		1.0%	6/10/24				5,644			5,644			5,524
Dade Paper & Bag, LLC	(g)(h)	Capital Goods	L+750		1.0%	6/10/24				44,253			44,253			44,253
Eagle Family Foods Group LLC	(j)	Food, Beverage & Tobacco	L+650		1.0%	6/14/23				3,507			3,470			3,132
Eagle Family Foods Group LLC	(f)	Food, Beverage & Tobacco	L+650		1.0%	6/14/24				23,321			23,070			23,012
Elo Touch Solutions, Inc.	(r)	Technology Hardware & Equipment	L+600		1.0%	10/31/23				2,916			2,890			2,947
Empire Today, LLC	(f)(g)	Retailing	L+800		1.0%	11/17/22				44,213			44,212			44,434
EmployBridge, LLC	(r)	Commercial & Professional Services	L+500		1.0%	4/18/25				1,682			1,706			1,699
Fairway Group Acquisition Co.	(t)	Food & Staples Retailing	12.0% PIK (12.0% Max PIK)			1/3/20				6,669			6,669			6,485
Fairway Group Acquisition Co.	(k)(l)(t)(r)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)			1/3/20				4,328			3,953			476
Fairway Group Acquisition Co.	(t)	Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)			8/28/23				467			460			467
Fairway Group Acquisition Co.	(j)(t)	Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)			8/28/23				1,028			1,028			1,028
Fairway Group Acquisition Co.	(t)	Food & Staples Retailing	4.0%, 11.0% PIK (11.0% Max PIK)			8/28/23				2,352			2,203			2,352
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20				1,067			1,067			1,062
FullBeauty Brands Holdings Corp.		Retailing	L+800		1.0%	10/14/20				13,000			13,000			13,000
FullBeauty Brands Holdings Corp.	(s)(r)	Retailing	L+475		1.0%	10/14/22				8,137			2,428			2,486
GC Agile Intermediate Holdings Ltd.	(i)(j)	Commercial & Professional Services	L+650			6/15/23				1,957			1,899			1,752
GC Agile Intermediate Holdings Ltd.	(f)(i)	Commercial & Professional Services	L+650		1.0%	6/15/25				13,263			13,007			13,124
GC Agile Intermediate Holdings Ltd.	(i)(j)	Commercial & Professional Services	L+650		1.0%	6/15/25				6,382			6,260			6,315

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
GC Agile Intermediate Holdings Ltd.	(i)(j)	Commercial & Professional Services	L+650		1.0%	6/15/25		$	5,319		$	5,227		$	5,263
Greystone Equity Member Corp.	(i)	Diversified Financials	L+725		3.8%	4/1/26			96,787			96,787			97,029
Greystone Equity Member Corp.	(i)(j)	Diversified Financials	L+725		3.8%	4/1/26			22,463			22,463			22,519
Gulf Finance, LLC	(h)(r)	Energy	L+525		1.0%	8/25/23			4,699			4,592			3,965
H.M. Dunn Co., Inc.	(k)(l)(t)	Capital Goods	L+875 PIK (L+875 Max PIK)			6/30/21			6,397			5,786			1,439
Harrison Gypsum, LLC	(f)	Materials	L+700		1.0%	4/29/24			17,884			17,719			17,541
Harrison Gypsum, LLC	(j)	Materials	L+700		1.0%	4/29/24			5,737			5,736			5,627
Hudson Technologies Co.	(g)(i)	Commercial & Professional Services	L+1025		1.0%	10/10/23			7,929			7,859			6,224
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20			6,113			6,113			6,079
Icynene U.S. Acquisition Corp.	(f)(g)(h)(i)	Materials	L+700		1.0%	11/30/24			76,423			76,422			76,996
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800		1.3%	5/31/20			9,787			9,787			9,799
JAKKS Pacific, Inc.		Consumer Durables & Apparel	L+900		1.5%	6/14/21			2,374			2,357			2,355
JMC Acquisition Merger Corp.	(f)(g)(h)	Capital Goods	L+750		1.0%	1/29/24			176,168			176,168			176,168
JMC Acquisition Merger Corp.	(j)	Capital Goods	L+750		1.0%	1/29/24			21,787			21,787			21,787
JSS Holdings, Inc.	(f)(g)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23			65,673			65,147			68,891
Kodiak BP, LLC	(f)(g)(h)	Capital Goods	L+725		1.0%	12/1/24			90,364			90,364			89,348
Kodiak BP, LLC	(j)	Capital Goods	L+725		1.0%	12/1/24			11,594			11,594			11,464
Latham Pool Products, Inc.	(g)	Consumer Durables & Apparel	L+775		1.0%	6/29/21			36,118			36,118			36,118
Logan’s Roadhouse, Inc.		Consumer Services	L+1300 PIK (L+1300 Max PIK)		1.0%	5/5/19			1,583			1,583			1,583
Logan’s Roadhouse, Inc.		Consumer Services	L+1300 PIK (L+1300 Max PIK)		1.0%	5/5/19			356			356			356
Logan’s Roadhouse, Inc.	(j)	Consumer Services	L+1300 PIK (L+1300 Max PIK)		1.0%	5/5/19			220			220			220
Murray Energy Corp.		Energy	L+900		1.0%	2/12/21			9,258			9,194			9,184
North Haven Cadence Buyer, Inc.	(j)	Consumer Services	L+500		1.0%	9/2/21			750			750			750
North Haven Cadence Buyer, Inc.	(f)(g)	Consumer Services	L+823		1.0%	9/2/22			17,686			17,686			17,664
PHRC License, LLC	(f)	Consumer Services	L+850		1.5%	4/28/22			16,797			16,797			17,300
Power Distribution, Inc.		Capital Goods	L+725		1.3%	1/25/23			19,615			19,615			19,934
Production Resource Group, LLC	(f)(h)	Media	L+700		1.0%	8/21/24			173,008			173,008			173,008
Propulsion Acquisition, LLC	(f)(h)(r)	Capital Goods	L+600		1.0%	7/13/21			60,447			59,310			59,843
Reliant Acquisitions Holdings, Inc.	(g)	Health Care Equipment & Services	L+675		1.0%	8/30/24			46,880			46,418			46,691
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)	Health Care Equipment & Services	L+675		1.0%	3/15/23			94,698			94,698			89,111
Rogue Wave Software, Inc.	(f)(g)(h)	Software & Services	L+844		1.0%	9/25/21			151,900			151,900			151,900
Safariland, LLC	(f)	Capital Goods	L+778		1.1%	11/18/23			42,893			42,893			39,032
Sequel Youth and Family Services, LLC	(f)(g)	Health Care Equipment & Services	L+755		1.0%	9/1/22			15,277			15,277			15,475
Sequential Brands Group, Inc.	(f)(g)(h)	Consumer Durables & Apparel	L+875			2/7/24			98,508			96,592			98,508
Sorenson Communications, Inc.	(f)(r)	Telecommunication Services	L+575		2.3%	4/30/20			4,812			4,805			4,838
Specialty Building Products Holdings, LLC	(r)	Capital Goods	L+600		1.0%	10/26/23			9,467			9,180			9,520
SSC (Lux) Limited S.Ã r.l.	(f)(g)(i)	Health Care Equipment & Services	L+750		1.0%	9/10/24			45,455			45,455			46,648
Strike, LLC	(r)	Energy	L+800		1.0%	11/30/22			2,896			2,830			2,940

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 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.	(f)(h)(r)	Software & Services	L+700		1.0%	9/30/21		$	24,325		$	24,147		$	22,622
SunGard Availability Services Capital, Inc.	(r)	Software & Services	L+1000		1.0%	10/1/22			2,450			2,334			2,413
Swift Worldwide Resources US Holdings Corp.		Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	7/20/21			17,227			17,227			17,571
Trace3, LLC	(f)(g)	Software & Services	L+675		1.0%	6/6/23			37,672			37,672			37,672
VP Parent Holdings, Inc.	(f)(g)(h)	Software & Services	L+650		1.0%	5/22/25			54,833			54,307			54,282
Warren Resources, Inc.	(g)(t)	Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	5/22/20			6,160			6,160			6,160
York Risk Services Holding Corp.	(r)	Insurance	L+375		1.0%	10/1/21			982			977			954
Zeta Interactive Holdings Corp.	(g)(h)	Software & Services	L+750		1.0%	7/29/22			62,929			62,929			64,188
Zeta Interactive Holdings Corp.	(j)	Software & Services	L+750		1.0%	7/29/22			11,143			11,143			11,366
Total Senior Secured Loans—First Lien												2,485,459			2,469,475
Unfunded Loan Commitments												(118,779)			(118,779)
Net Senior Secured Loans—First Lien												2,366,680			2,350,696
Senior Secured Loans—Second Lien—7.6%
Ammeraal Beltech Holding BV	(i)	Capital Goods	L+800			9/28/26			44,463			43,574			43,573
Arena Energy, LP	(f)(g)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0%	1/24/21			25,605			25,605			25,605
Bellatrix Exploration Ltd.	(i)	Energy	8.5%			7/26/23			1,872			1,872			1,877
Bellatrix Exploration Ltd.	(i)(j)	Energy	8.5%			7/26/23			3,120			3,120			3,128
Bellatrix Exploration Ltd.	(i)	Energy	8.5%			7/26/23			9,000			8,004			7,965
Byrider Finance, LLC		Automobiles & Components	L+1000, 0.5% PIK (4.0% Max PIK)		1.3%	8/22/20			5,931			5,931			5,805
CDS U.S. Intermediate Holdings, Inc.	(f)(i)(r)	Media	L+825		1.0%	7/10/23			9,000			8,906			8,707
Chisholm Oil and Gas Operating, LLC		Energy	L+800		1.0%	3/21/24			16,000			16,000			15,883
Crossmark Holdings, Inc.	(k)(l)(r)	Media	L+750		1.3%	12/21/20			1,500			1,340			145
Fairway Group Acquisition Co.	(k)(l)(t)(r)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)			10/3/21			3,835			3,472			422
Gruden Acquisition, Inc.	(h)(r)	Transportation	L+850		1.0%	8/18/23			10,000			9,688			10,000
Jazz Acquisition, Inc.	(r)	Capital Goods	L+675		1.0%	6/19/22			1,998			2,004			1,923
Logan’s Roadhouse, Inc.	(k)(l)	Consumer Services	L+850 PIK (L+850 Max PIK)		1.0%	11/23/20			4,275			3,983			1,103
One Call Corp.	(g)(h)	Health Care Equipment & Services	L+375, 6.0% PIK (6.0% Max PIK)			4/11/24			2,729			2,704			2,692
Spencer Gifts LLC	(g)(h)(r)	Retailing	L+825		1.0%	6/29/22			37,000			36,961			27,843
Titan Energy Operating, LLC	(g)(k)(l)	Energy	L+1300 PIK (L+1300 Max PIK)		1.0%	2/23/20			42,763			33,111			6,586
Ultimate Baked Goods Midco LLC	(f)	Food & Staples Retailing	L+800		1.0%	8/9/26			15,292			15,142			15,112
UTEX Industries, Inc.	(r)	Energy	L+725		1.0%	5/20/22			1,273			1,269			1,259
Total Senior Secured Loans—Second Lien												222,686			179,628
Unfunded Loan Commitment												(3,120)			(3,120)
Net Senior Secured Loans—Second Lien												219,566			176,508

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 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 Bonds—3.9%
Altice France SA	(e)(i)(r)	Telecommunication Services	8.1%		2/1/27		$	1,767		$	1,767		$	1,823
APX Group, Inc.	(h)(r)	Consumer Services	7.9%		12/1/22			10,708			10,630			10,935
Avantor, Inc.	(r)	Materials	6.0%		10/1/24			1,361			1,361			1,384
Black Swan Energy Ltd.	(i)	Energy	9.0%		1/20/24			1,333			1,333			1,333
Boyne USA Inc.	(e)(r)	Consumer Services	7.3%		5/1/25			54			56			57
CSVC Acquisition Corp.	(e)(r)	Diversified Financials	7.8%		6/15/25			13,774			13,774			11,889
Diamond Resorts International, Inc.	(h)(r)	Consumer Services	7.8%		9/1/23			11,965			11,965			12,301
DJO Finco Inc.	(r)	Health Care Equipment & Services	8.1%		6/15/21			2,660			2,679			2,726
Eagle Intermediate Global Holding B.V.	(e)(i)(r)	Consumer Durables & Apparel	7.5%		5/1/25			4,284			4,322			4,204
Genesys Telecommunications Laboratories, Inc.	(r)	Software & Services	10.0%		11/30/24			1,409			1,561			1,561
Global A&T Electronics Ltd.	(i)(r)	Semiconductors & Semiconductor Equipment	8.5%		1/12/23			7,120			7,182			6,924
J.C. Penney Corp., Inc.	(e)(i)(s)(r)	Retailing	5.7%		6/1/20			143			133			127
JW Aluminum Co.	(r)	Materials	10.3%		6/1/26			759			759			760
Pattonair Holdings, Ltd.	(e)(i)(r)	Capital Goods	9.0%		11/1/22			4,660			4,830			4,827
Pisces Midco Inc.	(r)	Capital Goods	8.0%		4/15/26			3,277			3,217			3,304
Sorenson Communications, Inc.	(r)	Telecommunication Services	9.0%, 0.0% PIK (9.0% Max PIK)		10/31/20			11,820			11,611			11,702
Starfruit Finco B.V.	(e)(s)(r)	Materials	8.0%		10/1/26			2,288			2,288			2,325
Sunnova Energy Corp.		Energy	6.0%, 6.0% PIK (6.0% Max PIK)		1/24/19			2,490			2,490			2,487
Talos Production LLC	(r)	Energy	11.0%		4/3/22			4,500			4,712			4,832
Velvet Energy Ltd.	(i)	Energy	9.0%		10/5/23			4,500			4,500			4,703
Total Senior Secured Bonds											91,170			90,204
Subordinated Debt—23.5%
APX Group, Inc.	(e)(r)	Consumer Services	8.8%		12/1/20			4,406			4,104			4,409
APX Group, Inc.	(e)(h)(r)	Consumer Services	7.6%		9/1/23			7,510			6,791			6,931
Ascent Resources Utica Holdings, LLC	(e)(r)	Energy	10.0%		4/1/22			30,000			30,000			33,806
Avantor, Inc.	(g)(h)(r)	Materials	9.0%		10/1/25			52,500			52,502			54,258
Byrider Holding Corp.		Automobiles & Components	20.0% PIK (20.0% Max PIK)		4/1/22			292			292			292
Calumet Specialty Products Partners, L.P.	(e)(i)(r)	Energy	7.8%		4/15/23			10,300			10,251			10,310
Canbriam Energy Inc.	(e)(i)(r)	Energy	9.8%		11/15/19			19,550			19,493			19,501
CEC Entertainment, Inc.	(g)(r)	Consumer Services	8.0%		2/15/22			39,014			37,924			35,747
ClubCorp Holdings, Inc.	(e)(r)	Consumer Services	8.5%		9/15/25			9,202			8,866			8,784
Diamond Resorts International, Inc.	(e)(r)	Consumer Services	10.8%		9/1/24			3,453			3,621			3,364
Eclipse Resources Corp.	(e)(i)(r)	Energy	8.9%		7/15/23			9,175			9,042			9,358
Exterran Energy Solutions, L.P.	(e)(i)(r)	Capital Goods	8.1%		5/1/25			7,714			7,714			8,066

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			1/30/25		$	950		$	950		$	941
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			4/30/25			6,035			6,035			5,983
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			9/3/25			1,247			1,247			1,235
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			9/29/25			1,174			1,174			1,162
Global Jet Capital Inc.	(i)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/4/25			77,999			77,999			77,122
Global Jet Capital Inc.	(i)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/9/25			12,757			12,757			12,613
Global Jet Capital Inc.	(i)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			1/29/26			6,680			6,680			6,605
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			2/17/26			16,334			16,334			16,150
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			4/14/26			10,115			10,115			10,001
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/2/26			14,950			14,950			14,763
Great Lakes Dredge & Dock Corp.	(e)(i)(r)	Capital Goods	8.0%			5/15/22			8,352			8,364			8,602
Greystone Mezzanine Equity Member Corp.	(i)(j)	Diversified Financials	L+650		4.5%	9/15/25			39,750			39,750			39,253
KGA Escrow LLC	(e)(r)	Automobiles & Components	7.5%			8/15/23			4,039			4,048			4,207
P.F. Chang’s China Bistro, Inc.	(e)(g)(r)	Consumer Services	10.3%			6/30/20			49,532			49,369			47,991
PriSo Acquisition Corp.	(e)(r)	Capital Goods	9.0%			5/15/23			47,859			47,545			49,669
Quorum Health Corp.	(e)(r)	Health Care Equipment & Services	11.6%			4/15/23			2,816			2,806			2,825
S1 Blocker Buyer Inc.		Commercial & Professional Services	10.0% PIK (10.0% Max PIK)			10/31/22			116			116			116
Sorenson Communications, Inc.	(g)(r)	Telecommunication Services	13.9%, 0.0% PIK (13.9% Max PIK)			10/31/21			8,983			9,261			9,455
SRS Distribution Inc.	(e)(r)	Capital Goods	8.3%			7/1/26			11,646			11,594			11,398
Stars Group Holdings B.V.	(e)(i)(r)	Consumer Services	7.0%			7/15/26			2,770			2,770			2,860
SunGard Availability Services Capital, Inc.	(g)(r)	Software & Services	8.8%			4/1/22			16,400			12,691			7,927
Surgery Center Holdings, Inc.	(e)(r)	Health Care Equipment & Services	6.8%			7/1/25			2,215			2,109			2,129
Team Health Holdings Inc	(e)(r)	Health Care Equipment & Services	6.4%			2/1/25			8,677			7,658			7,632
Vertiv Group Corp.	(e)(r)	Capital Goods	9.3%			10/15/24			14,697			14,324			15,364
York Risk Services Holding Corp.	(g)(h)(r)	Insurance	8.5%			10/1/22			36,050			34,069			31,844
Total Subordinated Debt												585,315			582,673
Unfunded Debt Commitment												(39,750)			(39,750)
Net Subordinated Debt												545,565			542,923
Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D	(i)	Diversified Financials	L+435			1/25/27			730			698			732
NewStar Clarendon 2014-1A Class Subord. B	(i)	Diversified Financials	9.7%			1/25/27			8,310			5,372			5,659
Total Collateralized Securities												6,070			6,391

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Number of Shares		Cost			Fair Value(d)
Equity/Other—3.7%
5 Arches, LLC, Common Equity	(i)(m)	Diversified Financials					56,000		$	1,381		$	2,800
ACP FH Holdings GP, LLC, Common Equity	(k)	Consumer Durables & Apparel					11,429			11			6
ACP FH Holdings, LP, Common Equity	(k)	Consumer Durables & Apparel					1,131,428			1,131			614
Altus Power America Holdings, LLC, Common Equity	(k)	Energy					462,008			462			69
Altus Power America Holdings, LLC, Preferred Equity	(o)	Energy	9.0%, 5.0% PIK		10/3/23		1,036,585			1,037			1,000
ASG Everglades Holdings, Inc., Warrants	(k)	Software & Services			6/27/22		48,325			1,377			1,474
Aspect Software Parent, Inc., Common Equity	(k)(t)	Software & Services					1,142,735			28,097			—
ATX Holdings, LLC, Common Equity	(i)(k)	Technology Hardware & Equipment					83,488			134			79
Byrider Holding Corp., Common Equity	(k)	Automobiles & Components					278			—			—
Chisholm Oil and Gas, LLC, Series A Units	(k)(m)	Energy					75,000			75			70
CSF Group Holdings, Inc., Common Equity	(k)	Capital Goods					173,900			174			191
Escape Velocity Holdings, Inc., Common Equity	(k)	Software & Services					7,725			77			297
Fairway Group Holdings Corp., Common Equity	(k)(t)	Food & Staples Retailing					71,465			2,296			—
Global Jet Capital Holdings, LP, Preferred Equity	(i)(k)	Commercial & Professional Services					42,484,416			42,484			15,507
H.I.G. Empire Holdco, Inc., Common Equity	(k)	Retailing					206			614			634
Harvest Oil & Gas Corp., Common Equity	(k)(r)	Energy					59,487			1,309			1,190
Harvey Holdings, LLC, Common Equity	(k)	Capital Goods					2,000,000			2,000			5,150
HM Dunn Aerosystems, Inc., Preferred Equity, Series A	(k)(t)	Capital Goods					1,929			—			—
HM Dunn Aerosystems, Inc., Preferred Equity, Series B	(k)(t)	Capital Goods					1,929			—			—
Industrial Group Intermediate Holdings, LLC, Common Equity	(k)(m)	Materials					220,619			221			199
JMC Acquisition Holdings, LLC, Common Equity	(k)	Capital Goods					8,068			8,068			9,359
JSS Holdco, LLC, Net Profits Interest	(k)	Capital Goods					—			—			651
JW Aluminum Co., Common Equity	(k)	Materials					41			—			185
JW Aluminum Co., Preferred Equity		Materials	12.5% PIK		11/17/25		1,087			4,488			6,527
North Haven Cadence TopCo, LLC, Common Equity	(k)	Consumer Services					833,333			833			1,312
PDI Parent LLC, Common Equity	(k)	Capital Goods					923,077			923			762
Ridgeback Resources Inc., Common Equity	(i)(k)(q)	Energy					827,156			5,082			5,712
Roadhouse Holding Inc., Common Equity	(k)	Consumer Services					1,202,991			1,250			—
S1 Blocker Buyer Inc., Common Equity		Commercial & Professional Services					60			581			939
Sequential Brands Group, Inc., Common Equity	(k)(r)	Consumer Durables & Apparel					125,391			1,693			209
SSC Holdco Limited, Common Equity	(i)(k)	Health Care Equipment & Services					113,636			2,273			2,671
Sunnova Energy Corp., Common Equity	(k)	Energy					577,086			2,166			—
Sunnova Energy Corp., Preferred Equity	(k)	Energy					105,341			561			609
TE Holdings, LLC, Common Equity	(k)(m)(r)	Energy					129,829			1,104			130
TE Holdings, LLC, Preferred Equity	(k)(r)	Energy					86,061			859			559

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Number of Shares		Cost			Fair Value(d)
Titan Energy, LLC, Common Equity	(k)(r)	Energy					72,739		$	2,299		$	30
Warren Resources, Inc., Common Equity	(k)(t)	Energy					998,936			4,695			3,796
White Star Petroleum Holdings, LLC, Common Equity	(k)(m)	Energy					1,738,244			1,478			739
Zeta Interactive Holdings Corp., Preferred Equity, Series E-1	(k)	Software & Services					1,051,348			8,357			10,832
Zeta Interactive Holdings Corp., Preferred Equity, Series F	(k)	Software & Services					956,233			8,357			9,616
Zeta Interactive Holdings Corp., Warrants	(k)	Software & Services			4/20/27		143,435			—			442
Total Equity/Other										137,947			84,360
TOTAL INVESTMENTS—140.9%									$	3,366,998			3,251,082
LIABILITIES IN EXCESS OF OTHER ASSETS—(40.9%)													(943,489)
NET ASSETS—100.0%												$	2,307,593

Total Return Swap		Notional Amount			Unrealized Depreciation
Citibank TRS Facility (Note 8)	(j)		$	484,378		$	(10,002)

(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 September 30, 2018, the three-month London Interbank Offered Rate, or LIBOR, or “L”, was 2.40%, and the U.S. Prime Lending Rate, or Prime, was 5.25%. 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 7).

(e)

Security or portion thereof held within Burholme Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage International, Ltd. (as assignee of BNP Paribas Prime Brokerage, Inc., or BNPP. Securities held within Burholme Funding LLC may be rehypothecated from time to time as permitted under Rule 15c-1(a)(1) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8).

(f)

Security or portion thereof held within Dunlap Funding LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).

(g)

Security or portion thereof held within Jefferson Square Funding LLC and is pledged as collateral supporting the amounts outstanding under a term loan credit facility with JPMorgan Chase Bank, National Association (see Note 8).

(h)

Security or portion thereof held within Germantown Funding LLC and is pledged as collateral supporting the amounts outstanding under the notes issued to Society Hill Funding LLC pursuant to an indenture with Citibank, N.A., as trustee (see Note 8).

(i)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of September 30, 2018, 80.9% of the Company’s total assets represented qualifying assets. In addition, the Company also calculates its compliance with the qualifying asset test on a “look through” basis by disregarding the value of the Company’s total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 80.6% of the Company’s total assets represented qualifying assets as of September 30, 2018.

(j)

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.

(k)

Security is non-income producing.

(l)

Security was on non-accrual status as of September 30, 2018.

(m)

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

(n)

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

(o)

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

(p)

Security or portion thereof held within Burholme Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8). As of September 30, 2018, the fair value of securities rehypothecated by BNPP was $109,820.

(q)

Investment denominated in Canadian dollars. Cost and fair value are converted into U.S. dollars at an exchange rate of CAD $1.00 to USD $0.77 as of September 30, 2018.

(r)

Security is classified as Level 1 or Level 2 in the Company’s fair value hierarchy (see Note 7).

(s)

Position or portion thereof unsettled as of September 30, 2018.

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)

(t)

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 September 30, 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 nine months ended September 30, 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 September 30, 2018			Interest Income(3)			PIK Income(3)			Fee Income(3)
Senior Secured Loans—First Lien
Aspect Software, Inc.		$	5,004		$	—		$	—		$	(5,004)		$	—		$	—		$	—		$	—		$	286		$	—		$	6
Aspect Software, Inc.			9,156			—			195			(193)			—			—			(383)			8,775			932			195			293
Aspect Software, Inc.(1)			(1,822)			—			1,822			(1,822)			—			—			1,822			—			22			—			4
Aspect Software, Inc.			—			—			13,018			(157)			—			—			(1,462)			11,399			441			118			2
Fairway Group Acquisition Co.			6,159			—			510			—			—			—			(184)			6,485			569			510			—
Fairway Group Acquisition Co.			903			—			37			—			—			—			(464)			476			41			37			—
Fairway Group Acquisition Co.(2)			—			—			460			—			—			—			7			467			7			4			93
Fairway Group Acquisition Co.			—			—			2,317			(116)			2			—			149			2,352			33			22			—
H.M. Dunn Co., Inc.			—			9,643			—			—			—			(3,857)			(4,347)			1,439			279			—			—
Warren Resources, Inc.			18,372			—			60			(11,824)			—			—			(448)			6,160			638			60			473
Senior Secured Loans—Second Lien
Fairway Group Acquisition Co.			795			—			36			—			—			—			(409)			422			39			36			—
Equity/Other
Aspect Software Parent, Inc., Common Equity			—			—			—			—			—			(25,711)			25,711			—			—			—			—
Fairway Group Holdings Corp., Common Equity			—			—			—			—			—			—			—			—			—			—			—
HM Dunn Aerosystems, Inc. Preferred Equity, Series A			—			—			—			—			—			—			—			—			—			—			—
HM Dunn Aerosystems, Inc. Preferred Equity, Series B			—			—			—			—			—			—			—			—			—			—			—
Warren Resources, Inc., Common Equity			1,698			—			—			—			—			—			2,098			3,796			—			—			—
Total		$	40,265		$	9,643		$	18,455		$	(19,116)		$	2		$	(29,568)		$	22,090		$	41,771		$	3,287		$	982		$	871

(1)

Security was an unfunded commitment with an amortized cost of $1,822 and a fair value of $0 as of December 31, 2017.

(2)

Security includes a partially unfunded commitment with an amortized cost of $1,028 and a fair value of $1,028.

(3)

Interest income, PIK income and fee income presented for the full nine months ended September 30, 2018.

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments
As of December 31, 2017
(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—93.0%
5 Arch Income Fund 2, LLC	(j)(p)	Diversified Financials	10.5%			11/18/21			$	104,385		$	104,547		$	104,385
5 Arch Income Fund 2, LLC	(j)(l)(p)	Diversified Financials	10.5%			11/18/21				28,615			28,615			28,615
Actian Corp.	(g)(i)	Software & Services	L+806		1.0%	6/30/22				21,333			21,333			21,600
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750		1.0%	12/29/23				17,834			17,834			18,146
All Systems Holding LLC	(f)(g)(i)	Commercial & Professional Services	L+767		1.0%	10/31/23				50,108			50,108			50,860
Altus Power America, Inc.		Energy	L+750		1.5%	9/30/21				2,866			2,866			2,809
Altus Power America, Inc.	(l)	Energy	L+750		1.5%	9/30/21	��			884			884			866
Aspect Software, Inc.	(u)	Software & Services	L+1050		1.0%	5/25/18				5,004			5,004			5,004
Aspect Software, Inc.	(l)(u)	Software & Services	L+1050		1.0%	5/25/18				128			128			128
Aspect Software, Inc.	(f)(u)	Software & Services	L+1050		1.0%	5/25/20				9,899			9,899			9,156
Aspect Software, Inc.	(l)(u)	Software & Services	L+1200		1.0%	5/25/18				1,822			1,822			—
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+802		1.0%	12/29/22				42,667			42,667			42,667
ATX Networks Corp.	(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21				9,649			9,561			9,589
ATX Networks Corp.	(g)(h)(i)(j)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)		1.0%	6/11/21				29,390			28,692			29,206
Avaya Inc.	(h)	Technology Hardware & Equipment	L+475		1.0%	12/15/24				8,000			7,920			7,888
AVF Parent, LLC	(f)(h)	Retailing	L+725		1.3%	3/1/24				30,198			30,198			30,823
BMC Software Finance, Inc.	(l)	Software & Services	L+400			9/10/20				10,000			10,000			9,100
Borden Dairy Co.	(f)(g)	Food, Beverage & Tobacco	L+804		1.0%	7/6/23				48,125			48,125			48,111
Cactus Wellhead, LLC	(f)(i)	Energy	L+600		1.0%	7/31/20				11,365			10,909			11,384
CEVA Group Plc	(j)(l)	Transportation	L+500			3/19/19				15,000			14,350			14,062
ConnectiveRx, LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+828		1.0%	11/25/21				157,004			157,004			157,067
CSafe Acquisition Co., Inc.		Capital Goods	L+725		1.0%	11/1/21				1,478			1,478			1,465
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0%	11/1/21				1,130			1,131			1,121
CSafe Acquisition Co., Inc.	(f)(h)	Capital Goods	L+725		1.0%	10/31/23				20,806			20,806			20,624
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0%	10/31/23				11,165			11,165			11,068
Dade Paper & Bag, LLC	(g)(i)	Capital Goods	L+750		1.0%	6/10/24				44,589			44,589			46,150
Elo Touch Solutions, Inc.	(h)	Technology Hardware & Equipment	L+600		1.0%	10/25/23				4,267			4,225			4,277
Empire Today, LLC	(f)(g)(h)	Retailing	L+800		1.0%	11/17/22				44,550			44,550			44,995
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	12.0% PIK (12.0% Max PIK)			1/3/20				6,159			6,159			6,159
Fairway Group Acquisition Co.	(m)(n)(u)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)			1/3/20				4,015			3,916			903
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20				1,680			1,680			1,679
FullBeauty Brands Holdings Corp.		Consumer Durables & Apparel	L+800		1.0%	10/14/20				13,000			13,000			12,837
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1050			3/31/21				19,015			19,054			19,038
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21				50,000			50,000			50,500
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21				29,467			29,467			29,762

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Greystone Equity Member Corp.	(j)(l)	Diversified Financials	L+1100			3/31/21		$	7,518		$	7,518		$	7,594
Gulf Finance, LLC	(h)	Energy	L+525		1.0%	8/25/23			4,864			4,745			4,391
H.M. Dunn Co., Inc.		Capital Goods	L+946		1.0%	3/26/21			9,643			9,643			9,209
Hudson Technologies Co.	(g)(j)	Commercial & Professional Services	L+725		1.0%	10/10/23			7,989			7,989			8,099
Hudson Technologies Co.	(j)(l)	Commercial & Professional Services	L+725		1.0%	10/10/23			1,902			1,902			1,928
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20			6,160			6,160			6,155
Icynene U.S. Acquisition Corp.	(f)(g)(h)(i)	Materials	L+700		1.0%	11/30/24			77,000			77,000			77,015
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800		1.3%	5/31/20			10,746			10,746			10,907
JMC Acquisition Merger Corp.	(f)(g)(h)(i)	Capital Goods	L+854		1.0%	11/6/21			114,086			114,086			115,940
JSS Holdings, Inc.	(f)(g)(h)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23			65,742			65,147			66,761
JSS Holdings, Inc.	(l)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0%	3/31/23			12,000			12,000			12,186
Kodiak BP, LLC	(f)(g)(h)(i)	Capital Goods	L+725		1.0%	12/1/24			68,348			68,348			68,519
Kodiak BP, LLC	(l)	Capital Goods	L+725		1.0%	12/1/24			19,697			19,697			19,746
Latham Pool Products, Inc.	(g)(h)	Commercial & Professional Services	L+775		1.0%	6/29/21			36,118			36,118			36,524
Logan’s Roadhouse, Inc.		Consumer Services	L+1100 PIK (L+1100 Max PIK)		1.0%	5/5/19			1,256			1,256			1,256
Logan’s Roadhouse, Inc.	(l)	Consumer Services	L+1100 PIK (L+1100 Max PIK)		1.0%	5/5/19			202			204			202
Nobel Learning Communities, Inc.		Consumer Services	L+450		1.0%	5/5/21			3,075			3,075			3,075
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+450		1.0%	5/5/21			8,106			8,106			8,106
Nobel Learning Communities, Inc.	(f)(g)(h)(i)	Consumer Services	L+436		4.5%	5/5/23			84,472			84,472			84,044
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+375		4.5%	5/5/23			49,689			49,689			49,439
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+500		1.0%	9/2/21			750			750			750
North Haven Cadence Buyer, Inc.	(f)(g)	Consumer Services	L+810		1.0%	9/2/22			22,149			22,149			22,564
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+750		1.0%	9/2/22			2,833			2,833			2,886
Panda Temple Power, LLC	(m)(n)	Energy	L+625		1.0%	3/6/22			24,808			21,322			18,048
Panda Temple Power, LLC		Energy	L+900		1.0%	4/28/18			943			943			944
PHRC License, LLC	(f)	Consumer Services	L+850		1.5%	4/28/22			16,875			16,875			17,297
Polymer Additives, Inc.	(f)(i)	Materials	L+888		1.0%	12/19/22			18,920			18,920			19,583
Polymer Additives, Inc.	(f)(h)	Materials	L+834		1.0%	12/19/22			21,623			21,623			22,056
Power Distribution, Inc.		Capital Goods	L+725		1.3%	1/25/23			19,952			19,952			20,252
Production Resource Group, LLC	(f)	Media	L+750		1.0%	1/14/19			65,208			65,208			68,958
Propulsion Acquisition, LLC	(f)(h)(i)(k)	Commercial & Professional Services	L+600		1.0%	7/13/21			60,966			59,633			60,356
Quest Software US Holdings Inc.	(h)	Software & Services	L+550		1.0%	10/31/22			5,867			5,838			5,971
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+725		1.0%	3/15/23			99,094			99,094			99,931
Rogue Wave Software, Inc.	(f)(g)(h)(i)	Software & Services	L+858		1.0%	9/25/21			151,900			151,900			151,900
Safariland, LLC	(f)(h)	Capital Goods	L+768		1.1%	11/18/23			42,893			42,893			43,483
Safariland, LLC	(l)	Capital Goods	L+725		1.1%	11/18/23			11,566			11,566			11,725

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Sequel Youth and Family Services, LLC	(f)(g)	Health Care Equipment & Services	L+778		1.0%	9/1/22		$	15,294		$	15,294		$	15,435
Sequel Youth and Family Services, LLC	(l)	Health Care Equipment & Services	L+700		1.0%	9/1/22			765			765			772
Sequential Brands Group, Inc.	(f)(g)(h)(i)	Consumer Durables & Apparel	L+900			7/1/22			128,439			128,439			127,154
Sorenson Communications, Inc.	(f)	Telecommunication Services	L+575		2.3%	4/30/20			4,849			4,838			4,889
Specialty Building Products Holdings, LLC	(h)	Capital Goods	L+600		1.0%	10/26/23			9,538			9,213			9,574
SSC (Lux) Limited S.Ã r.l.	(f)(g)(j)	Health Care Equipment & Services	L+750		1.0%	9/10/24			45,455			45,455			46,364
Strike, LLC		Energy	L+800		1.0%	5/30/19			3,734			3,687			3,752
Strike, LLC	(h)	Energy	L+800		1.0%	11/30/22			3,015			2,939			3,060
SunGard Availability Services Capital, Inc.	(l)	Software & Services	L+450			3/8/18			7,000			5,539			6,685
SunGard Availability Services Capital, Inc.	(f)(h)(i)	Software & Services	L+700		1.0%	9/30/21			24,822			24,600			23,022
SunGard Availability Services Capital, Inc.	(k)	Software & Services	L+1000		1.0%	10/1/22			2,500			2,375			2,405
Swift Worldwide Resources US Holdings Corp.		Energy	L+1000, 1.0% PIK (1.0% Max PIK)		1.0%	7/20/21			17,226			17,226			17,571
Trace3, LLC	(f)	Software & Services	L+775		1.0%	6/6/23			12,438			12,438			12,733
U.S. Xpress Enterprises, Inc.	(f)	Transportation	L+1075, 0.0% PIK (1.8% Max PIK)		1.5%	5/30/20			10,537			10,537			10,563
USI Senior Holdings, Inc.	(f)	Capital Goods	L+779		1.0%	1/5/22			5,144			5,144			5,173
USI Senior Holdings, Inc.	(l)	Capital Goods	L+725		1.0%	1/5/22			1,047			1,047			1,053
UTEX Industries, Inc.	(f)	Energy	L+400		1.0%	5/21/21			742			740			730
Warren Resources, Inc.	(g)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0%	5/22/20			17,924			17,924			18,372
Waste Pro USA, Inc.	(f)(g)	Commercial & Professional Services	L+750		1.0%	10/15/20			33,032			33,032			33,651
York Risk Services Holding Corp.		Insurance	L+375		1.0%	10/1/21			990			983			971
Zeta Interactive Holdings Corp.	(g)(h)(i)	Software & Services	L+750		1.0%	7/29/22			57,358			57,358			58,218
Zeta Interactive Holdings Corp.	(l)	Software & Services	L+750		1.0%	7/29/22			10,892			10,892			11,056
Total Senior Secured Loans—First Lien												2,413,551			2,423,047
Unfunded Loan Commitments												(200,603)			(200,603)
Net Senior Secured Loans—First Lien												2,212,948			2,222,444
Senior Secured Loans—Second Lien—11.0%
Arena Energy, LP	(f)(g)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0%	1/24/21			24,844			24,844			23,621
Byrider Finance, LLC		Automobiles & Components	L+1000, 0.5% PIK (4.0% Max PIK)		1.3%	8/22/20			4,522			4,522			4,256
Casablanca US Holdings Inc.		Consumer Services	L+900		1.0%	3/31/25			3,330			3,220			3,409
CDS U.S. Intermediate Holdings, Inc.	(f)(j)	Media	L+825		1.0%	7/10/23			9,000			8,905			8,916
Chief Exploration & Development LLC		Energy	L+650		1.0%	5/16/21			165			154			163
Chisholm Oil and Gas Operating, LLC		Energy	L+800		1.0%	3/21/24			16,000			16,000			15,998
Compuware Corp.	(f)(g)	Software & Services	L+825		1.0%	12/15/22			2,901			2,709			2,915
Crossmark Holdings, Inc.		Media	L+750		1.3%	12/21/20			1,500			1,331			169
Fairway Group Acquisition Co.	(m)(n)(u)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)			10/3/21			3,531			3,436			795
Fieldwood Energy LLC	(m)(n)	Energy	L+713		1.3%	9/30/20			5,011			4,127			1,679

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Gruden Acquisition, Inc.	(i)	Transportation	L+850		1.0%	8/18/23		$	10,000		$	9,642		$	9,988
Jazz Acquisition, Inc.		Capital Goods	L+675		1.0%	6/19/22			1,998			2,005			1,890
JW Aluminum Co.		Materials	L+850		0.8%	11/17/20			779			779			791
Logan’s Roadhouse, Inc.		Consumer Services	L+850 PIK (L+850 Max PIK)		1.0%	11/23/20			3,953			3,930			1,817
LTI Holdings, Inc.	(i)	Materials	L+875		1.0%	5/16/25			9,259			9,087			9,421
Production Resource Group, LLC	(f)(g)(h)(i)	Media	L+850		1.0%	7/23/19			128,402			128,329			129,284
Spencer Gifts LLC	(g)(i)	Retailing	L+825		1.0%	6/29/22			37,000			36,951			19,980
Talos Production LLC		Energy	11.0%			4/3/22			4,500			4,211			4,466
Titan Energy Operating, LLC	(g)	Energy	2.0%, L+1100 PIK (L+1100 Max PIK)		1.0%	2/23/20			38,598			33,110			20,469
UTEX Industries, Inc.		Energy	L+725		1.0%	5/20/22			1,273			1,269			1,212
Total Senior Secured Loans—Second Lien												298,561			261,239
Senior Secured Bonds—2.5%
Avantor, Inc.	(e)	Materials	6.0%			10/1/24			1,361			1,361			1,363
Black Swan Energy Ltd.	(j)	Energy	9.0%			1/20/24			1,333			1,333			1,343
CSVC Acquisition Corp.	(e)	Diversified Financials	7.8%			6/15/25			13,774			13,774			13,257
Diamond Resorts International, Inc.	(e)(r)	Consumer Services	7.8%			9/1/23			11,965			11,965			12,992
Global A&T Electronics Ltd.	(e)(j)(m)(n)	Semiconductors & Semiconductor Equipment	10.0%			2/1/19			12,550			12,179			11,635
Ridgeback Resources Inc.	(j)	Energy	12.0%			12/29/20			335			330			335
Sorenson Communications, Inc.	(e)	Telecommunication Services	9.0%, 0.0% PIK (9.0% Max PIK)			10/31/20			11,820			11,551			11,820
Sunnova Energy Corp.		Energy	6.0%, 6.0% PIK (6.0% Max PIK)			10/24/18			3,175			3,175			3,175
Velvet Energy Ltd.	(j)	Energy	9.0%			10/5/23			4,500			4,500			4,558
Total Senior Secured Bonds												60,168			60,478
Subordinated Debt—28.8%
Ascent Resources Utica Holdings, LLC	(e)(r)	Energy	10.0%			4/1/22			30,000			30,000			32,420
Avantor, Inc.	(e)(g)(i)	Materials	9.0%			10/1/25			52,500			52,502			52,205
Bellatrix Exploration Ltd.	(e)(j)	Energy	8.5%			5/15/20			10,000			9,894			9,550
Calumet Specialty Products Partners, L.P.	(e)(j)(r)	Energy	7.8%			4/15/23			10,300			10,243			10,403
Canbriam Energy Inc.	(e)(j)	Energy	9.8%			11/15/19			20,300			20,193			20,731
CEC Entertainment, Inc.	(e)(r)	Consumer Services	8.0%			2/15/22			39,014			37,733			36,917
Ceridian HCM Holding, Inc.	(e)(r)	Commercial & Professional Services	11.0%			3/15/21			92,439			92,417			96,707
Coveris Holdings S.A.	(e)(i)(j)	Materials	7.9%			11/1/19			64,255			63,530			64,135
Eclipse Resources Corp.	(e)(j)	Energy	8.9%			7/15/23			9,175			9,028			9,439
EV Energy Partners, L.P.	(n)	Energy	8.0%			4/15/19			2,150			2,028			1,097
Exterran Energy Solutions, L.P.	(e)(j)(r)	Capital Goods	8.1%			5/1/25			7,714			7,714			8,331
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			1/30/25			849			849			864
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			4/30/25			5,398			5,398			5,492

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)			Amortized Cost			Fair Value(d)
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			9/3/25		$	1,115		$	1,115		$	1,135
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			9/29/25			1,050			1,050			1,069
Global Jet Capital Inc.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/4/25			69,760			69,760			70,980
Global Jet Capital Inc.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/9/25			11,409			11,409			11,609
Global Jet Capital Inc.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			1/29/26			5,975			5,975			6,079
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			2/17/26			14,608			14,608			14,864
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			4/14/26			9,047			9,047			9,205
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)			12/2/26			13,370			13,371			13,604
Great Lakes Dredge & Dock Corp.	(e)(j)	Capital Goods	8.0%			5/15/22			8,352			8,366			8,773
Greystone Mezzanine Equity Member Corp.	(j)	Diversified Financials	L+650		4.5%	9/15/25			2,680			2,680			2,680
Greystone Mezzanine Equity Member Corp.	(j)(l)	Diversified Financials	L+650		4.5%	9/15/25			50,320			50,320			50,320
Jupiter Resources Inc.	(e)(j)	Energy	8.5%			10/1/22			31,850			29,228			19,667
Northern Oil and Gas, Inc.	(e)	Energy	8.0%			6/1/20			3,150			3,065			2,461
P.F. Chang’s China Bistro, Inc.	(e)(g)(i)(r)	Consumer Services	10.3%			6/30/20			73,286			73,162			67,162
PriSo Acquisition Corp.	(e)(r)	Capital Goods	9.0%			5/15/23			47,859			47,506			50,760
S1 Blocker Buyer Inc.		Commercial & Professional Services	10.0% PIK (10.0% Max PIK)			10/31/22			143			143			159
Sorenson Communications, Inc.	(e)	Telecommunication Services	13.9%, 0.0% PIK (13.9% Max PIK)			10/31/21			8,983			9,312			9,320
SunGard Availability Services Capital, Inc.	(e)(r)	Software & Services	8.8%			4/1/22			16,400			12,157			10,230
TI Group Automotive Systems, LLC	(e)(j)	Automobiles & Components	8.8%			7/15/23			3,408			3,408			3,664
York Risk Services Holding Corp.	(e)(i)	Insurance	8.5%			10/1/22			36,050			33,775			35,509
Total Subordinated Debt												740,986			737,541
Unfunded Debt Commitments												(50,320)			(50,320)
Net Subordinated Debt												690,666			687,221
Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D	(j)	Diversified Financials	L+435			1/25/27			730			695			731
NewStar Clarendon 2014-1A Class Subord. B	(j)	Diversified Financials	15.8%			1/25/27			8,310			6,002			6,831
Total Collateralized Securities												6,697			7,562

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Number of Shares		Cost			Fair Value(d)
Equity/Other—4.3%
5 Arches, LLC, Common Equity	(j)(o)	Diversified Financials					70,000		$	1,750		$	1,750
ACP FH Holdings GP, LLC, Common Equity	(m)	Consumer Durables & Apparel					11,429			11			9
ACP FH Holdings, LP, Common Equity	(m)	Consumer Durables & Apparel					1,131,428			1,132			860
Altus Power America Holdings, LLC, Common Equity	(m)	Energy					462,008			462			69
Altus Power America Holdings, LLC, Preferred Equity	(q)	Energy	9.0%, 5.0% PIK		10/3/23		955,284			955			955
ASG Everglades Holdings, Inc., Warrants, 6/27/2022	(m)	Software & Services					48,325			1,377			1,324
Aspect Software Parent, Inc., Common Equity	(m)(u)	Software & Services					1,142,735			53,808			—
ATX Holdings, LLC, Common Equity	(j)(m)	Technology Hardware & Equipment					83,488			134			96
Chisholm Oil and Gas, LLC, Series A Units	(m)(o)	Energy					70,947			71			70
CSF Group Holdings, Inc., Common Equity	(m)	Capital Goods					173,900			174			122
Escape Velocity Holdings, Inc., Common Equity	(m)	Software & Services					7,725			77			182
Fairway Group Holdings Corp., Common Equity	(m)(u)	Food & Staples Retailing					71,465			2,296			—
Global Jet Capital Holdings, LP, Preferred Equity	(j)(m)	Commercial & Professional Services		��			42,484,416			42,484			38,236
H.I.G. Empire Holdco, Inc., Common Equity	(m)	Retailing					206			614			613
Harvey Holdings, LLC, Common Equity	(m)	Capital Goods					2,000,000			2,000			5,100
Industrial Group Intermediate Holdings, LLC, Common Equity	(m)(o)	Materials					220,619			221			331
JMC Acquisition Holdings, LLC, Common Equity	(m)	Capital Goods					8,068			8,068			10,932
JSS Holdco, LLC, Net Profits Interest	(m)	Capital Goods					—			—			452
JW Aluminum Co., Common Equity	(m)	Materials					18			—			—
JW Aluminum Co., Preferred Equity	(m)	Materials					83			294			827
North Haven Cadence TopCo, LLC, Common Equity	(m)	Consumer Services					833,333			833			1,292
PDI Parent LLC, Common Equity	(m)	Capital Goods					923,077			923			969
Ridgeback Resources Inc., Common Equity	(j)(m)(s)	Energy					827,156			5,082			5,022
Roadhouse Holding Inc., Common Equity	(m)	Consumer Services					1,202,991			1,250			—
S1 Blocker Buyer Inc., Common Equity		Commercial & Professional Services					60			600			913
SandRidge Energy, Inc., Common Equity	(e)(j)(m)(t)	Energy					253,009			5,647			5,331
Sequential Brands Group, Inc., Common Equity	(m)(t)	Consumer Durables & Apparel					125,391			1,693			223
SSC Holdco Limited, Common Equity	(j)(m)	Health Care Equipment & Services					113,636			2,273			2,716
Sunnova Energy Corp., Common Equity	(m)	Energy					577,086			2,166			—
Sunnova Energy Corp., Preferred Equity	(m)	Energy					105,341			561			425
TE Holdings, LLC, Common Equity	(m)(o)	Energy					129,829			1,104			211
TE Holdings, LLC, Preferred Equity	(m)	Energy					86,061			859			818
Titan Energy, LLC, Common Equity	(m)(t)	Energy					72,739			2,299			111

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor	Maturity	Number of Shares		Cost			Fair Value(d)
Warren Resources, Inc., Common Equity	(m)(u)	Energy					998,936		$	4,695		$	1,698
White Star Petroleum Holdings, LLC, Common Equity	(m)(o)	Energy					1,738,244			1,478			1,304
Zeta Interactive Holdings Corp., Preferred Equity, Series E-1	(m)	Software & Services					1,051,348			8,357			10,200
Zeta Interactive Holdings Corp., Preferred Equity, Series F	(m)	Software & Services					956,233			8,357			8,922
Zeta Interactive Holdings Corp., Warrants, 4/20/2027	(m)	Software & Services					143,435			—			499
Total Equity/Other										164,105			102,582
TOTAL INVESTMENTS—139.9%									$	3,433,145			3,341,526
LIABILITIES IN EXCESS OF OTHER ASSETS—(39.9%)													(952,802)
NET ASSETS—100.0%												$	2,388,724

Total Return Swap		Notional Amount			Unrealized Depreciation
Citibank TRS Facility (Note 8)	(j)		$	340,523		$	(3,756)

(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, 2017, the three-month London Interbank Offered Rate, or LIBOR, or L, was 1.69% and the U.S. Prime Lending Rate, or Prime, was 4.50%. PIK means paid-in-kind.

(c)

Denominated in U.S. dollars unless otherwise noted.

(d)

Fair value determined by the Company’s board of directors (see Note 7).

(e)

(f)

(g)

(h)

Security or portion thereof held within Chestnut Hill Funding LLC and is pledged as collateral supporting the amounts outstanding under a revolving credit facility with Capital One, National Association (see Note 8).

(i)

(j)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than 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, 2017, 86.1% of the Company’s total assets represented qualifying assets. In addition, the Company also calculates its compliance with the qualifying asset test on a “look through” basis by disregarding the value of the Company’s total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 85.9% of the Company’s total assets represented qualifying assets as of December 31, 2017.

(k)

Position or portion thereof unsettled as of December 31, 2017.

(l)

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.

(m)

Security is non-income producing.

(n)

Security was on non-accrual status as of December 31, 2017.

(o)

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

(p)

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

(q)

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

(r)

Security or portion thereof held within Burholme Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNPP (see Note 8). As of December 31, 2017, the fair value of securities rehypothecated by BNPP was $185,262.

(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 USD $0.80 as of December 31, 2017.

(t)

Security is classified as Level 1 in the Company’s fair value hierarchy (see Note 7).

See notes to unaudited consolidated financial statements.

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FS Investment Corporation III

Consolidated Schedule of Investments (continued)
As of December 31, 2017
(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, 2017, 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, 2017:

Portfolio Company	Fair Value at December 31, 2016			Purchases and Paid- in-Kind Interest			Sales and Repayments			Net Realized Gain (Loss)			Net Change in Unrealized Appreciation (Depreciation)			Fair Value at December 31, 2017			Interest Income			PIK Income			Fee Income
Senior Secured Loans—First Lien
Aspect Software, Inc.(1)		$	3,200		$	2,703		$	(899)		$	—		$	—		$	5,004		$	1,151		$	—		$	51
Aspect Software, Inc.			10,270			—			(257)			—			(857)			9,156			453			—			90
Aspect Software, Inc.(2)			—			—									(1,822)			(1,822)			21			—			63
Fairway Group Acquisition Co.			5,687			528			—			—			(56)			6,159			132			528			—
Fairway Group Acquisition Co.			3,306			283			—			—			(2,686)			903			—			283			—
Warren Resources, Inc.(2)			17,744			180			—			—			448			18,372			1,845			180			—
Senior Secured Loans—Second Lien
Fairway Group Acquisition Co.			2,595			272			—			—			(2,072)			795			—			272			—
Equity/Other
Aspect Software, Inc., Common Equity			59,634			270			—			811			(60,715)			—			—			—			—
Fairway Group Acquisition Co., Common Equity			1,858			—			—			—			(1,858)			—			—			—			—
Warren Resources, Inc., Common Equity			4,295			—			—			—			(2,597)			1,698			—			—			—
Total		$	108,589		$	4,236		$	(1,156)		$	811		$	(72,215)		$	40,265		$	3,602		$	1,263		$	204

(1)

Security includes a partially unfunded commitment with an amortized cost of $128 and a fair value of $128.

(2)

Security includes a partially unfunded commitment with an amortized cost of $1,822 and a fair value of $0.

See notes to unaudited consolidated financial statements.

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 1. Principal Business and Organization

FS Investment Corporation III, or the Company, was incorporated under the general corporation laws of the State of Maryland on June 7, 2013 and formally commenced investment operations on April 2, 2014. In November 2017, the Company closed its continuous public offering of common stock to new investors. 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 September 30, 2018, the Company had seven wholly-owned financing subsidiaries, three wholly-owned subsidiaries through which it holds equity interests in non-controlled portfolio companies and one wholly-owned subsidiary through which it expects to hold equity interests in non-controlled portfolio companies. The unaudited consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiaries as of September 30, 2018. All significant intercompany transactions have been eliminated in consolidation. One of the Company’s consolidated subsidiaries is 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 by investing primarily in senior secured loans and second lien secured loans of private U.S. companies. The Company seeks to generate superior risk-adjusted returns by focusing on debt investments in a broad array of private U.S. companies, including middle market companies, which the Company defines as companies with annual revenues of $50 million to $2.5 billion at the time of investment. The Company 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 the Company’s target companies as primary market or directly originated investments. In connection with the Company’s debt investments, the Company may on occasion receive equity interests such as warrants or options as additional consideration. The Company 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 the Company’s target companies, generally in conjunction with one of the Company’s 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 the Company’s portfolio may be comprised of corporate bonds, collateralized loan obligations, or CLOs, other debt securities and derivatives, including total return swaps and credit default swaps. The Company’s investment adviser will seek to tailor the Company’s investment focus as market conditions evolve. Depending on market conditions, the Company may increase or decrease its exposure to less senior portions of the capital structure or otherwise make opportunistic investments.

As the Company previously announced 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 III Advisor, LLC, or FSIC III 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 an investment advisory and administrative services agreement, or the FS/KKR Advisor investment advisory and administrative services agreement, with FS/KKR Advisor, LLC, or FS/KKR Advisor, a newly-formed investment adviser jointly operated by an affiliate of Franklin Square Holdings, L.P. (which does business as FS Investments) and by KKR Credit Advisors (US), LLC, or KKR Credit, pursuant to which FS/KKR Advisor acts as investment adviser to the Company. The FS/KKR Advisor investment advisory and administrative services agreement replaced the amended and restated investment advisory and administrative services agreement, dated August 6, 2014, or the FSIC III Advisor investment advisory and administrative services agreement, by and between the Company and FSIC III Advisor.

TABLE OF CONTENTS

FS Investment Corporation III

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

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 U.S. generally accepted accounting principles, 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, 2017 included in the Company’s annual report on Form 10-K for the year ended December 31, 2017. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The December 31, 2017 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, 2017. 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. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the U.S. Securities and Exchange Commission, or the SEC.

Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.

Capital Gains Incentive Fee: Pursuant to the terms of the FS/KKR Advisor 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 FS/KKR Advisor 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 the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to FS/KKR Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. The terms of the incentive fee on capital gains were substantially similar under the FSIC III Advisor investment advisory and administrative services agreement.

The Company “looks through” its total return swap, or TRS, between its wholly-owned financing subsidiary Center City Funding LLC, or Center City Funding, and Citibank, N.A., or Citibank, in calculating the capital gains incentive fee. Under this methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans underlying the TRS directly is treated as net investment income subject to the subordinated incentive fee on income payable to FS/KKR Advisor pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans underlying the TRS further reduces the capital gains incentive fee payable to FS/KKR Advisor with respect to realized gains. See Note 8 for additional information regarding the Company’s TRS.

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 2. Summary of Significant Accounting Policies (continued)

Subordinated Income Incentive Fee: Pursuant to the terms of the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income under the FS/KKR Advisor investment advisory and administrative services agreement is calculated and payable quarterly in arrears, and equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.75% per quarter (1.875% under the FSIC III Advisor investment advisory and administrative services agreement), or an annualized hurdle rate of 7.0% (7.5% under the FSIC III 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, FS/KKR 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 III Advisor investment advisory and administrative services agreement). Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS/KKR Advisor will be entitled to a “catch-up” fee equal to the amount of the Company’s pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.1875%, or 8.75% annually (2.34375%, or 9.375% annually under the FSIC III Advisor investment advisory and administrative services agreement), of the Company’s adjusted capital. Thereafter, FS/KKR Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

Offering Costs: Offering costs primarily included, among other things, marketing expenses and printing, legal and due diligence fees and other costs pertaining to the Company’s continuous public offering of shares of its common stock. Historically, the Company has charged offering costs against capital in excess of par value on its consolidated balance sheets. Following discussions with the Staff of the Division of Investment Management of the SEC, the Company changed its accounting treatment of offering costs to defer and amortize such costs to expense over twelve months. The Company evaluated this change in accounting treatment of offering costs, which it implemented effective January 1, 2016, and determined that it did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Following the closing of the Company’s continuous public offering to new investors in November 2017, all deferred offering costs that had not been amortized were expensed.

Partial Loan Sales: The Company follows the guidance in ASC Topic 860, Transfers and Servicing, or ASC Topic 860, when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings were carried at fair value to correspond with the related investments, which were carried at fair value. See Note 8 for additional information regarding the Company’s secured borrowing.

Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2017 and the audited consolidated financial statements as of and for the year ended December 31, 2017 may have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2018. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

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FS Investment Corporation III

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

Note 2. Summary of Significant Accounting Policies (continued)

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. 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. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

Effective January 1, 2018, the Company adopted ASC Topic 606, Revenue from Contracts with Customers, or ASC Topic 606, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. The Company did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, the Company did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which the Company has applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

For the nine months ended September 30, 2018, the Company recognized $4,188 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on its consolidated statement of operations. Comparative periods are presented in accordance with revenue recognition guidance effective prior to January 1, 2018, under which the Company recorded structuring and other non-recurring upfront fees as income when earned. The Company has determined that the adoption of the new revenue recognition guidance did not have a material impact on the amount of revenue recognized for the nine months ended September 30, 2018.

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FS Investment Corporation III

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

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018					2017
	Shares		Amount			Shares		Amount
Gross Proceeds from Offering		—		$	—		14,245,955		$	122,948
Reinvestment of Distributions		8,610,947			70,953		8,603,346			74,284
Total Gross Proceeds		8,610,947			70,953		22,849,301			197,232
Share Repurchase Program		(8,816,922)			(72,893)		(7,938,999)			(68,455)
Net Proceeds from Share Transactions		(205,975)		$	(1,940)		14,910,302		$	128,777

During the period from October 1, 2018 to November 9, 2018, the Company issued 930,912 shares of common stock pursuant to its distribution reinvestment plan, or DRP, for gross proceeds of $7,492 and 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 10, 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

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FS Investment Corporation III

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

Note 3. Share Transactions (continued)

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.

On October 13, 2017, the Company further amended the terms of its share repurchase program, or the amended share repurchase program, which was first effective for the Company’s quarterly repurchase offer for the fourth quarter of 2017. Prior to amending the share repurchase program, the Company offered to repurchase shares of its common stock on a quarterly basis at a repurchase price equal to the institutional offering price in effect on each date of repurchase. Under the amended 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 its 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 nine months ended September 30, 2018 and 2017:

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 2017
December 31, 2016	January 4, 2017		1,536,048		100%		0.56%		$	8.55		$	13,133
March 31, 2017	April 5, 2017		2,470,559		100%		0.88%		$	8.64			21,346
June 30, 2017	July 5, 2017		3,932,392		100%		1.38%		$	8.64			33,976
Total			7,938,999									$	68,455
Fiscal 2018
December 31, 2017	January 10, 2018		2,986,249		40%		1.03%		$	8.35		$	24,935
March 31, 2018	April 2, 2018		2,943,198		28%		1.01%		$	8.25			24,281
June 30, 2018	July 2, 2018		2,887,475		19%		0.99%		$	8.20			23,677
Total			8,816,922									$	72,893

On October 2, 2018, the Company repurchased 2,839,319 shares of common stock (representing approximately 17% of the shares of common stock tendered for repurchase and 0.98% of the shares outstanding as of such date) at $8.10 per share for aggregate consideration totaling $22,998.

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FS Investment Corporation III

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

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor is entitled to an annual base management fee based on 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, and is calculated at an annual rate of 1.50% of the average weekly value of the Company’s gross assets. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that FS/KKR Advisor may be entitled to under the FS/KKR Advisor investment advisory and administrative services agreement.

Pursuant to the FSIC III Advisor investment advisory and administrative services agreement, FSIC III Advisor was entitled to an annual base management fee equal to 2.0% of the average weekly value of the Company’s gross assets (gross assets equal the total assets of the Company set forth on the Company’s consolidated balance sheets) and an incentive fee based on the Company’s performance. Effective February 3, 2017, FSIC III Advisor contractually had agreed to permanently waive 0.25% of the base management fee to which it was entitled under the FSIC III Advisor investment advisory and administrative services agreement, so that the fee received equaled 1.75% of the average weekly 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 III Advisor under the FSIC III Advisor investment advisory and administrative services agreement with respect to each year.

Pursuant to the FS/KKR Advisor investment advisory and administrative services agreement, FS/KKR Advisor also oversees the Company’s day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities and other administrative services. FS/KKR 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 SEC. In addition, FS/KKR 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 FS/KKR Advisor investment advisory and administrative services agreement, the Company reimburses FS/KKR Advisor for expenses necessary to perform services related to its administration and operations, including FS/KKR Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to the Company on behalf of FS/KKR Advisor. The Company reimburses FS/KKR 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) FS/KKR Advisor’s actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FS/KKR 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 FS/KKR 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

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FS Investment Corporation III

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

Note 4. Related Party Transactions (continued)

providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to FS/KKR 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 III Advisor investment advisory and administrative services agreement were substantially similar to the administrative services provisions of the FS/KKR Advisor investment advisory and administrative services agreement.

Under the FSIC III investment advisory and administrative services agreement, the Company, either directly or through reimbursement to FSIC III Advisor or its affiliates, was responsible for its organization and offering costs in an amount up to 1.5% of gross proceeds raised in the Company’s continuous public offering. Organization and offering costs primarily included legal, accounting, printing and other expenses relating to the Company’s continuous public offering, including costs associated with technology integration between the Company’s systems and those of its selected broker-dealers, marketing expenses, salaries and direct expenses of FSIC III Advisor’s personnel, employees of its affiliates and others while engaged in registering and marketing the Company’s common stock, which included the development of marketing materials and presentations, training and educational meetings, and generally coordinating the marketing process for the Company.

Prior to satisfaction of the minimum offering requirement and for a period of time thereafter, FS Investments funded certain of the Company’s organization and offering costs. Following this period, the Company has paid certain of its organization and offering costs directly and reimbursed FSIC III Advisor for offering costs incurred by FSIC III Advisor on the Company’s behalf, including marketing expenses, salaries and other direct expenses of FSIC III Advisor’s personnel and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock. Organization and offering costs funded directly by FS Investments were recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. All other offering costs, including costs incurred directly by the Company, amounts reimbursed to FSIC III Advisor for ongoing offering costs and any reimbursements paid to FS Investments for organization and offering costs previously funded, were recorded as a reduction of capital. Commencing January 1, 2016, offering costs incurred by the Company were deferred and amortized to expense over twelve months. Following the closing of the Company’s continuous public offering to new investors in November 2017, all deferred offering costs were expensed (see Note 2).

The dealer manager for the Company’s continuous public offering was FS Investment Solutions, which is one of the Company’s affiliates. Prior to the closing of the Company’s continuous public offering, the dealer manager was entitled under the dealer manager agreement, dated as of December 20, 2013, by and among the Company, FSIC III Advisor and FS Investment Solutions, or the dealer manager agreement, to receive selling commissions and dealer manager fees in connection with the sale of shares of common stock in the Company’s continuous public offering, all or a portion of which could be re-allowed to selected broker-dealers. In February 2016, the Company closed its continuous public offering to investors investing through the IBD Channel, or the IBD Channel closing. As used herein, the IBD Channel refers to sales of shares of the Company’s common stock through broker-dealers (other than the dealer manager) that are members of the Financial Industry Regulatory Authority, or FINRA, and other properly licensed financial securities firms whose contracts for investment advisory and related services do not include a fixed or “wrap” fee or other asset-based fee arrangement, and who are collectively referred to herein as selected broker-dealers. Historically, sales through the IBD Channel constituted the majority of shares sold in the Company’s continuous public offering. Prior to the IBD Channel closing, shares of the Company’s common stock in its continuous public offering were subject to a sales load of up to 10.0% of the public offering price, which consisted of selling commissions and dealer manager fees of up to 7.0% and 3.0%,

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FS Investment Corporation III

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

Note 4. Related Party Transactions (continued)

respectively, of the public offering price. Following the IBD Channel closing, the dealer manager waived its right to receive any selling commissions or dealer manager fees in connection with shares of the Company’s common stock sold pursuant to its continuous public offering and, as a result, no selling commissions or dealer manager fees were paid to the dealer manager from that date forward. The price at which shares of the Company’s common stock were sold following the IBD Channel closing is referred to as the institutional offering price. The dealer manager agreement terminated in connection with the closing of the Company’s continuous public offering in November 2017.

The following table describes the fees and expenses the Company accrued under the FSIC III Advisor investment advisory and administrative services agreement and the FS/KKR Advisor investment advisory and administrative services agreement, as applicable, during the three and nine months ended September 30, 2018 and 2017:

Related Party	Source Agreement	Description	Three Months Ended September 30,						Nine Months Ended September 30,
Related Party	Source Agreement	Description	2018			2017			2018			2017
FSIC III Advisor and FS/KKR Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement	Base Management Fee(1)		$	13,724		$	16,959		$	44,654		$	50,847
FSIC III Advisor and FS/KKR Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income(2)		$	12,827		$	5,166		$	25,631		$	26,278
FSIC III Advisor and FS/KKR Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement and FS/KKR Advisor Investment Advisory and Administrative Services Agreement	Administrative Services Expenses(3)		$	919		$	569		$	2,435		$	2,098
FSIC III Advisor	FSIC III Advisor Investment Advisory and Administrative Services Agreement	Offering Costs(4)			—		$	474			—		$	1,227

(1)

FSIC III Advisor contractually agreed, effective February 3, 2017, to permanently waive 0.25% of its base management fee to which it was entitled under the FSIC III Advisor investment advisory and administrative services agreement, so that the fee received equaled 1.75% of the average value of the Company’s weekly gross assets. As a result, the amounts shown for the three and nine months ended September 30, 2018 are net of waivers of $0 and $2,594, respectively, and the amounts shown for the three and nine months ended September 30, 2017 are net of waivers of $2,423 and $6,324, respectively. During the nine months ended September 30, 2018 and 2017, $47,945 and $51,711, respectively, in base management fees were paid to FS/KKR Advisor and/or FSIC III Advisor. As of September 30, 2018, $13,724 in net base management fees were payable to FSIC III Advisor and FS/KKR Advisor.

(2)

During the nine months ended September 30, 2018 and 2017, $27,291 and $33,435, respectively, of subordinated incentive fees on income were paid to FS/KKR Advisor and/or FSIC III Advisor. As of September 30, 2018, a subordinated incentive fee on income of $12,827 was payable to FS/KKR Advisor.

(3)

During the nine months ended September 30, 2018 and 2017, $2,047 and $2,016, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by FSIC III Advisor and FS/KKR Advisor and the remainder related to other reimbursable expenses. The Company paid $1,858 and $1,926 in administrative services expenses to FSIC III Advisor and FS/KKR Advisor during the nine months ended September 30, 2018 and 2017, respectively.

(4)

During the nine months ended September 30, 2017, the Company incurred offering costs of $2,077, of which $1,227 generally related to the reimbursement of marketing expenses, salaries and direct expenses of FSIC III Advisor’s employees and employees of its affiliates while engaged in registering and marketing the Company’s shares of common stock. See Note 2 for a discussion regarding the Company’s change in accounting treatment of offering costs.

Potential Conflicts of Interest

The members of the senior management and investment teams of FS/KKR 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, FS/KKR Advisor is the investment adviser to FS Investment Corporation, FS Investment Corporation II, FS Investment

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FS Investment Corporation III

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

Note 4. Related Party Transactions (continued)

Corporation IV, Corporate Capital Trust, Inc. and Corporate Capital Trust II, and the officers, managers and other personnel of FS/KKR 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, 2017.

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 III Advisor, including FS Energy and Power Fund, FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation IV and any future BDCs that are advised by FSIC III Advisor or its affiliated investment advisers. However, in connection with the investment advisory relationship with FS/KKR 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 FS/KKR Advisor or KKR Credit, with certain affiliates of FS/KKR Advisor.

FS Benefit Trust

FS Benefit Trust, or FS Trust, was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to employees of FS Investments and its affiliates. During the nine months ended September 30, 2018 and 2017, FS Trust purchased $0 and $216, respectively, of the Company’s shares at a purchase price per share of $8.64 for the nine months ended September 30, 2017, which price was equal to the institutional offering price in effect on the date of purchase.

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FS Investment Corporation III

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

Note 5. Distributions

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the nine months ended September 30, 2018 and 2017:

	Distribution
For the Three Months Ended	Per Share			Amount
Fiscal 2017
March 31, 2017		$	0.17499		$	48,011
June 30, 2017			0.17499			48,942
September 30, 2017			0.17499			49,656
Total		$	0.52497		$	146,609
Fiscal 2018
March 31, 2018		$	0.17499		$	50,490
June 30, 2018			0.17499			50,489
September 30, 2018			0.17499			50,481
Total		$	0.52497		$	151,460

The Company intends to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis. On August 8, 2018 and November 6, 2018, the Company’s board of directors declared regular monthly cash distributions for October 2018 through December 2018 and January 2019 through March 2019, respectively, each in the amount of $0.058331 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.

On October 13, 2017, the Company amended and restated its DRP, or the amended DRP, which first applied to the reinvestment of cash distributions paid on or after November 29, 2017. Under the original DRP, cash distributions to participating stockholders were reinvested in additional shares of the Company’s common stock at a purchase price equal to the institutional offering price in effect on the date of issuance. Under the amended 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 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 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, non-capital gains

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FS Investment Corporation III

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

Note 5. Distributions (continued)

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. No portion of the distributions paid during the nine months ended September 30, 2018 and 2017 was funded through the reimbursement of operating expenses by FS Investments.

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018					2017
Source of Distribution	Distribution Amount			Percentage		Distribution Amount			Percentage
Offering proceeds		$	—		—		$	—		—
Borrowings			—		—			—		—
Net investment income(1)			151,460		100%			146,609		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		$	151,460		100%		$	146,609		100%

(1)

During the nine months ended September 30, 2018 and 2017, 89.9% and 91.0%, respectively, of the Company’s gross investment income was attributable to cash income earned, 1.1% and 1.9%, respectively, was attributable to non-cash accretion of discount and 9.0% and 7.1%, respectively, was attributable to PIK interest.

The Company’s net investment income on a tax basis for the nine months ended September 30, 2018 and 2017 was $147,127 and $147,382, respectively. As of September 30, 2018 and December 31, 2017, the Company had $13,859 and $18,192, respectively, of undistributed net investment income and $94,811 and $54,075, 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 for tax purposes, the inclusion of a portion of the periodic net settlement payments due on the TRS in tax-basis net investment income and the accretion of discount on the TRS.

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FS Investment Corporation III

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

Note 5. Distributions (continued)

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018			2017
GAAP-basis net investment income		$	138,817		$	140,262
Reclassification of unamortized original issue discount and prepayment fees			(7,315)			(11,354)
Tax-basis net investment income portion of total return swap payments			12,615			13,351
Accretion of discount on total return swap			1,124			1,552
Non-deductible offering costs			—			3,054
Other miscellaneous differences			1,886			517
Tax-basis net investment income		$	147,127		$	147,382

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 September 30, 2018 and December 31, 2017, the components of accumulated earnings on a tax basis were as follows:

	September 30, 2018 (Unaudited)			December 31, 2017
Distributable ordinary income		$	13,859		$	18,192
Accumulated capital losses(1)			(94,811)			(54,075)
Other temporary differences			(176)			(199)
Net unrealized appreciation (depreciation) on investments, secured borrowing and total return swap and gain/loss on foreign currency(2)			(138,966)			(104,583)
Total		$	(220,094)		$	(140,665)

(1)

Net capital losses may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of September 30, 2018, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $0 and $94,811, respectively.

(2)

As of September 30, 2018 and December 31, 2017, the gross unrealized appreciation on the Company’s investments, secured borrowing and TRS and gain on foreign currency was $46,199 and $65,093, respectively, and the gross unrealized depreciation on the Company’s investments, secured borrowing and TRS and loss on foreign currency was $(185,165) and $(169,676), respectively.

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $3,379,984 and $3,442,544 as of September 30, 2018 and December 31, 2017, respectively. The aggregate net unrealized appreciation (depreciation) on investments on a tax basis, including the TRS, was $(138,966) and $(104,583) as of September 30, 2018 and December 31, 2017, respectively.

As of September 30, 2018, the Company had a deferred tax asset of $1,052 comprised of the Company’s wholly-owned taxable subsidiary’s unrealized depreciation on investments, net operating loss carryforward and capital loss carryforward. As of September 30, 2018, the wholly-owned taxable subsidiary anticipated that it would be unable to fully utilize the components of the deferred tax assets, therefore, the deferred tax assets were offset by valuation allowance of $1,052, respectively. For the nine months ended September 30, 2018, the Company did not record a provision for taxes related to its wholly-owned taxable subsidiary.

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FS Investment Corporation III

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

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2018 and December 31, 2017:

	September 30, 2018 (Unaudited)								December 31, 2017
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	2,366,680		$	2,350,696		72%		$	2,212,948		$	2,222,444		66%
Senior Secured Loans—Second Lien			219,566			176,508		5%			298,561			261,239		8%
Senior Secured Bonds			91,170			90,204		3%			60,168			60,478		2%
Subordinated Debt			545,565			542,923		17%			690,666			687,221		21%
Collateralized Securities			6,070			6,391		0%			6,697			7,562		0%
Equity/Other			137,947			84,360		3%			164,105			102,582		3%
Total		$	3,366,998		$	3,251,082		100%		$	3,433,145		$	3,341,526		100%

(1)

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

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of September 30, 2018 and December 31, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8. The investments underlying the TRS had a notional amount and market value of $484,378 and $477,380, respectively, as of September 30, 2018 and $340,523 and $334,647, respectively, as of December 31, 2017.

	September 30, 2018 (Unaudited)								December 31, 2017
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	2,760,667		$	2,739,359		74%		$	2,489,749		$	2,493,086		68%
Senior Secured Loans—Second Lien			309,957			265,225		7%			362,283			325,244		9%
Senior Secured Bonds			91,170			90,204		2%			60,168			60,478		1%
Subordinated Debt			545,565			542,923		15%			690,666			687,221		19%
Collateralized Securities			6,070			6,391		0%			6,697			7,562		0%
Equity/Other			137,947			84,360		2%			164,105			102,582		3%
Total		$	3,851,376		$	3,728,462		100%		$	3,773,668		$	3,676,173		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 September 30, 2018, the Company did not “control” any of its portfolio companies. As of September 30, 2018, the Company held investments in four portfolio companies of which it is deemed to be an “affiliated person” but was 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 September 30, 2018 in this quarterly report on Form 10-Q.

As of December 31, 2017, the Company did not “control” any of its portfolio companies. As of December 31, 2017, the Company held investments in three 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, 2017 in this quarterly report on Form 10-Q.

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FS Investment Corporation III

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

Note 6. Investment Portfolio (continued)

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 September 30, 2018, the Company had nineteen unfunded debt investments with aggregate unfunded commitments of $161,649 and one unfunded commitment to purchase up to $71 in shares of preferred stock of Altus Power America Holdings, LLC. As of December 31, 2017, the Company had twenty-three unfunded debt investments with aggregate unfunded commitments of $250,923, one unfunded commitment to purchase up to $295 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $4 in shares of common stock of Chisholm Oil and Gas, 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 September 30, 2018 and audited consolidated schedule of investments as of December 31, 2017.

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 September 30, 2018 and December 31, 2017:

	September 30, 2018 (Unaudited)					December 31, 2017
Industry Classification	Fair Value			Percentage of Portfolio		Fair Value			Percentage of Portfolio
Automobiles & Components		$	10,304		0%		$	7,920		0%
Capital Goods			742,830		23%			537,439		16%
Commercial & Professional Services			256,264		8%			478,578		14%
Consumer Durables & Apparel			149,155		5%			148,917		4%
Consumer Services			172,697		5%			251,626		8%
Diversified Financials			260,853		8%			229,010		7%
Energy			202,247		6%			279,844		8%
Food & Staples Retailing			25,314		1%			7,857		0%
Food, Beverage & Tobacco			69,548		2%			48,111		1%
Health Care Equipment & Services			391,188		12%			321,520		10%
Insurance			32,798		1%			36,480		1%
Materials			169,865		5%			258,634		8%
Media			181,860		6%			207,327		6%
Retailing			116,522		4%			96,411		3%
Semiconductors & Semiconductor Equipment			6,924		0%			11,635		0%
Software & Services			385,613		12%			322,869		10%
Technology Hardware & Equipment			39,282		1%			51,056		2%
Telecommunication Services			27,818		1%			26,029		1%
Transportation			10,000		0%			20,263		1%
Total		$	3,251,082		100%		$	3,341,526		100%

Note 7. 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

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FS Investment Corporation III

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

Note 7. Fair Value of Financial Instruments (continued)

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.

As of September 30, 2018 and December 31, 2017, the Company’s investments and total return swap were categorized as follows in the fair value hierarchy:

Valuation Inputs	September 30, 2018 (Unaudited)						December 31, 2017
Valuation Inputs	Investments			Total Return Swap			Investments			Total Return Swap
Level 1—Price quotations in active markets		$	1,429		$	—		$	5,665		$	—
Level 2—Significant other observable inputs			680,055			—			—			—
Level 3—Significant unobservable inputs			2,569,598			(10,002)			3,335,861			(3,756)
Total		$	3,251,082		$	(10,002)		$	3,341,526		$	(3,756)

The Company has elected the fair value option under ASC Topic 825, Financial Instruments, relating to accounting for debt obligations at their fair value for its secured borrowing which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its secured borrowing as a component of the net change in unrealized appreciation (depreciation) on secured borrowing in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal amount due on maturity.

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 prepayments 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 values its other investments by using the

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FS Investment Corporation III

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

Note 7. Fair Value of Financial Instruments (continued)

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 values the TRS in accordance with the agreements between Center City Funding and Citibank, that collectively established the TRS, which agreements are collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The valuation committee of the Company’s board of directors, or the valuation committee, and the board of directors review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis. To the extent the Company’s valuation committee or board of directors has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation is discussed or challenged pursuant to the terms of the TRS Agreement. See Note 8 for additional information regarding the TRS.

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 of the Company’s board of directors, or 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.

The following is a reconciliation for the nine months ended September 30, 2018 and 2017 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

	For the Nine Months Ended September 30, 2018
	Senior Secured Loans— First Lien			Senior Secured Loans— Second Lien			Senior Secured Bonds			Subordinated Debt			Collateralized Securities			Equity/ Other			Total
Fair value at beginning of period		$	2,222,444		$	261,239		$	60,478		$	687,221		$	7,562		$	96,917		$	3,335,861
Accretion of discount (amortization of premium)			1,195			91			1			—			(627)			8			668
Net realized gain (loss)			(3,879)			649			(1,059)			121			—			(25,406)			(29,574)
Net change in unrealized appreciation (depreciation)			(25,501)			(14,694)			671			(4,498)			(544)			8,173			(36,393)
Purchases			782,150			72,583			—			48,930			—			3,581			907,244
Paid-in-kind interest			5,410			896			133			15,674			—			839			22,952
Sales and repayments			(581,698)			(134,018)			(12,269)			(51,481)			—			(841)			(780,307)
Net transfers in or out of Level 3(1)			(200,374)			(60,537)			(39,432)			(549,481)			—			(1,029)			(850,853)
Fair value at end of period		$	2,199,747		$	126,209		$	8,523		$	146,486		$	6,391		$	82,242		$	2,569,598
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		$	(544)		$	(17,205)		$	132		$	(21,082)		$	(13,460)		$	(4,500)		$	(56,659)

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FS Investment Corporation III

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

Note 7. Fair Value of Financial Instruments (continued)

	For the Nine Months Ended September 30, 2017
	Senior Secured Loans— First Lien			Senior Secured Loans— Second Lien			Senior Secured Bonds			Subordinated Debt			Collateralized Securities			Equity/ Other			Total
Fair value at beginning of period		$	2,135,929		$	235,293		$	84,664		$	614,442		$	7,327		$	160,682		$	3,238,337
Accretion of discount (amortization of premium)			2,308			5,337			237			2,362			(400)			—			9,844
Net realized gain (loss)			932			1,485			2,905			1,377			—			811			7,510
Net change in unrealized appreciation (depreciation)			9,779			(22,397)			3,714			19,031			692			(28,756)			(17,937)
Purchases			570,800			157,857			90,258			173,961			—			12,901			1,005,777
Paid-in-kind interest			1,145			4,299			34			13,489			—			—			18,967
Sales and repayments			(579,785)			(125,745)			(68,531)			(63,742)			—			—			(837,803)
Net transfers in or out of Level 3			—			—			—			—			—			—			—
Fair value at end of period		$	2,141,108		$	256,129		$	113,281		$	760,920		$	7,619		$	145,638		$	3,424,695
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		$	10,061		$	(20,900)		$	5,487		$	18,262		$	692		$	(17,412)		$	(3,810)

(1)

As of June 30, 2018, the Company determined to classify certain investments whose valuations were obtained from independent third-party pricing services as Level 2 in the fair value hierarchy as the Company identified significant other observable inputs used in these market quotations. It is the Company’s policy to recognize transfers between levels at the beginning of the reporting period.

The following is a reconciliation for the nine months ended September 30, 2018 and 2017 of the secured borrowing and total return swap for which significant unobservable inputs (Level 3) were used in determining fair value:

	Secured Borrowing						Total Return Swap
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Fair value at beginning of period		$	—		$	(14,040)		$	(3,756)		$	11,403
Amortization of premium (accretion of discount)			—			(21)			—			—
Net realized gain (loss)			—			—			14,258			18,434
Net change in unrealized appreciation (depreciation)			—			(33)			(6,246)			(11,672)
Proceeds			—			—			—			—
Sales and repayments			—			—			(14,258)			(18,434)
Net transfers in or out of Level 3			—			—			—			—
Fair value at end of period		$	—		$	(14,094)		$	(10,002)		$	(269)
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 a secured borrowing and the total return swap still held at the reporting date		$	—		$	(33)		$	(6,246)		$	(11,672)

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FS Investment Corporation III

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

Note 7. Fair Value of Financial Instruments (continued)

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of September 30, 2018 and December 31, 2017 were as follows:

Type of Investment

Fair Value at
September 30,
2018
(Unaudited)

Valuation
Technique(1)

Unobservable Input

Range

Weighted
Average

Senior Secured Loans—First Lien

1,984,578

Market Comparables

Market Yield (%)

6.5% – 21.8%

10.5%

EBITDA Multiples (x)

4.8x – 9.0x

7.1x

215,169

Other(2)

Other

N/A

Senior Secured Loans—Second Lien

76,042

Market Comparables

Market Yield (%)

8.6% – 15.0%

12.2%

EBITDA Multiples (x)

4.8x – 5.3x

5.0x

6,594

Other(2)

Other

N/A

43,573

Cost

100.0% – 100.0%

100.0%

Senior Secured Bonds

8,523

Market Comparables

Market Yield (%)

6.6% – 12.8%

8.8%

Subordinated Debt

146,486

Market Comparables

Market Yield (%)

14.8% – 20.3%

15.1%

EBITDA Multiples (x)

12.5x – 13.0x

12.8x

Cost

100.0% – 100.0%

100.0%

Collateralized Securities

6,391

Market Quotes

Indicative Dealer Quotes

68.1% – 100.3%

71.8%

Equity/Other

54,147

Market Comparables

Market Yield (%)

17.5% – 18.7%

18.1%

Capacity Multiple ($/kW)

$1,875.0 – $2,125.0

$2,000.0

EBITDA Multiples (x)

5.0x – 14.2x

9.9x

Production Multiples (Mboe/d)

$36,250.0 – $53,750.0

$49,675.4

Proved Reserves Multiples (Mmboe)

$8.3 – $18.0

$16.2

PV-10 Multiples (x)

1.1x – 1.4x

1.1x

Option Valuation
Model

Volatility (%)

25.0% – 25.0%

25.0%

28,095

Other(2)

Other

N/A

Total

2,569,598

Total Return Swap

(10,002)

Market Quotes

Indicative Dealer Quotes

75.4% – 102.0%

97.0%

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 7. Fair Value of Financial Instruments (continued)

Type of Investment

Fair Value at
December 31,
2017

Valuation
Technique(1)

Unobservable Input

Range

Weighted
Average

Senior Secured Loans—First Lien

1,893,151

Market Comparables

Market Yield (%)

4.8% – 14.0%

9.6%

EBITDA Multiples (x)

5.0x – 7.5x

7.2x

128,916

Other(2)

Other

N/A

200,377

Market Quotes

Indicative Dealer Quotes

20.0% – 102.1%

95.8%

Senior Secured Loans—Second Lien

200,702

Market Comparables

Market Yield (%)

8.3% – 20.7%

15.4%

EBITDA Multiples (x)

5.0x – 6.5x

6.2x

60,537

Market Quotes

Indicative Dealer Quotes

9.4% – 103.3%

81.7%

Senior Secured Bonds

9,411

Market Comparables

Market Yield (%)

7.7% – 12.3%

10.0%

EBITDA Multiples (x)

4.8x – 5.3x

5.0x

Production Multiples (Mboe/d)

$42,250.0 – $44,750.0

$43,500.0

Proved Reserves Multiples (Mmboe)

$10.3 – $11.3

$10.8

PV-10 Multiples (x)

0.8x – 0.8x

0.8x

11,635

Other(2)

Other

N/A

39,432

Market Quotes

Indicative Dealer Quotes

95.5% – 109.0%

101.6%

Subordinated Debt

137,741

Market Comparables

Market Yield (%)

11.6% – 14.8%

14.4%

EBITDA Multiples (x)

10.5x – 11.0x

10.8x

549,480

Market Quotes

Indicative Dealer Quotes

50.0% – 108.5%

98.4%

Collateralized Securities

7,562

Market Quotes

Indicative Dealer Quotes

82.2% – 100.2%

83.9%

Equity/Other

72,394

Market Comparables

Market Yield (%)

15.3% – 15.8%

15.5%

Capacity Multiple ($/kW)

$2,000.0 – $2,250.0

$2,125.0

EBITDA Multiples (x)

4.8x – 23.5x

11.4x

Production Multiples (Mboe/d)

$42,250.0 – $51,250.0

$44,839.6

Proved Reserves Multiples (Mmboe)

$10.0 – $11.3

$10.6

PV-10 Multiples (x)

0.8x – 2.4x

1.1x

Option Valuation
Model

Volatility (%)

30.0%

23,494

Other(2)

Other

N/A

1,029

Market Quotes

Indicative Dealer Quotes

1.6% – 9.5%

7.9%

Total

3,335,861

Total Return Swap

(3,756)

Market Quotes

Indicative Dealer Quotes

58.3% – 101.5%

96.7%

(1)

Investments using a market quotes valuation technique were 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, with the exception of investments in the Total Return Swap, which was valued by using the bid price from dealers on the date of the relevant period end. 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 III

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

Note 8. Financing Arrangements

The following tables present summary information with respect to the Company’s outstanding financing arrangements as of September 30, 2018 and December 31, 2017. 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, 2017. Any significant changes to the Company’s financing arrangements during the three months ended September 30, 2018 are discussed below.

As of September 30, 2018
(Unaudited)

Arrangement

Type of
Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility(1)

Prime Brokerage Facility

L+1.25%

—

250,000

March 27, 2019(2)

Deutsche Bank Credit Facility(1)

Revolving Credit Facility

L+2.25%

289,000

61,000

September 22, 2019

JPM Credit Facility(1)

Term Loan Credit Facility

L+2.50%

340,000

60,000

July 16, 2022

Goldman Facility(1)

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Senior Secured Revolving Credit Facility(1)

Revolving Credit Facility

L+ 2.00% –
2.25%(3)

305,718(4)

344,282

August 9, 2023

Total

1,234,718

715,282

Citibank Total Return Swap

Total Return Swap

L+1.55%

484,378

15,622

N/A(5)

As of December 31, 2017

Arrangement

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility(1)

Prime Brokerage Facility

L+1.25%

187,700

62,300

September 27, 2018(2)

Deutsche Bank Credit Facility(1)

Revolving Credit Facility

L+2.25%

350,000

—

September 22, 2019

JPM Credit Facility(1)

Term Loan Credit Facility

L+2.69%

400,000

—

May 8, 2019

Goldman Facility(1)

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Capital One Credit Facility(1)

Revolving Credit Facility

L+1.75% to
L+2.50%

150,000

—

August 13, 2020

Total

1,387,700

62,300

Citibank Total Return Swap

Total Return Swap

L+1.55%

340,523

159,477

N/A(6)

(1)

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

(2)

This facility generally is terminable upon 270 days’ notice by either party. As of September 30, 2018 and December 31, 2017, neither party to the facility had provided notice of its intent to terminate the facility.

(3)

The spread over LIBOR is determined by reference to the ratio of the value of the borrowing base to a combined debt amount calculation.

(4)

Amount includes borrowings in U.S. dollars and Canadian dollars. Canadian dollar balance outstanding of CAD $6,800 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.77 as of September 30, 2018 to reflect total amount outstanding in U.S. dollars.

(5)

The TRS may be terminated by Center City Funding at any time, subject to payment of an early termination fee if prior to the date 90 days before December 31, 2018, or by Citibank on or after December 31, 2018, in each case, in whole or in part, upon prior written notice to the other party.

(6)

The TRS may be terminated by Center City Funding at any time, subject to payment of an early termination fee if prior to the date 90 days before June 30, 2018, or by Citibank on or after June 30, 2018, in each case, in whole or in part, upon prior written notice to the other party.

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

For the three months ended September 30, 2018 and 2017, the components of total interest expense for the Company’s financing arrangements were as follows:

	Three Months Ended September 30,
	2018									2017
Arrangement(1)	Interest Expense(2)			Amortization of Deferred Financing Costs			Total Interest Expense			Interest Expense(2)			Amortization of Deferred Financing Costs			Total Interest Expense
BNP Facility		$	775		$	—		$	775		$	1,334		$	12		$	1,346
Deutsche Bank Credit Facility			3,899			235			4,134			3,369			235			3,604
JPM Credit Facility			5,878			144			6,022			4,044			36			4,080
Goldman Facility			3,711			100			3,811			2,896			100			2,996
Capital One Credit Facility			341			587			928			1,467			70			1,537
Senior Secured Revolving Credit Facility			1,911			128			2,039			—			—			—
Partial Loan Sale(3)			—			—			—			205			7			212
Total		$	16,515		$	1,194		$	17,709		$	13,315		$	460		$	13,775

(1)

Borrowings of each of the Company’s wholly-owned 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)

Interest expense may include the effect of non-usage fees, administration fees and/or make-whole fees.

(3)

Total interest expense for the secured borrowing includes the effect of amortization of discount.

For the nine months ended September 30, 2018 and 2017, the components of total interest expense for the Company’s financing arrangements were as follows:

	Nine Months Ended September 30,
	2018									2017
Arrangement(1)	Interest Expense(2)			Amortization of Deferred Financing Costs			Total Interest Expense			Interest Expense(2)			Amortization of Deferred Financing Costs			Total Interest Expense
BNP Facility		$	4,094		$	—		$	4,094		$	3,789		$	62		$	3,851
Deutsche Bank Credit Facility			11,694			698			12,392			8,827			693			9,520
JPM Credit Facility			15,232			216			15,448			11,486			108			11,594
Goldman Facility			10,430			297			10,727			8,275			297			8,572
Capital One Credit Facility			3,537			724			4,261			4,201			207			4,408
Senior Secured Revolving Credit Facility			1,911			128			2,039			—			—			—
Partial Loan Sale(3)			—			—			—			595			21			616
Total		$	46,898		$	2,063		$	48,961		$	37,173		$	1,388		$	38,561

(1)

(2)

Interest expense may include the effect of non-usage fees, administration fees and/or make-whole fees.

(3)

Total interest expense for the secured borrowing includes the effect of amortization of discount.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the nine months ended September 30, 2018 were $1,343,639 and 4.67%, respectively. As of September 30, 2018, the Company’s weighted average effective interest rate on borrowings was 4.79%.

Senior Secured Revolving Credit Facility

On August 9, 2018, or the Effective Date, the Company entered into a senior secured revolving credit facility, or the Senior Secured Revolving Credit Facility, with Corporate Capital Trust, Inc., or CCT, FS Investment Corporation, or FSIC, FS Investment Corporation II, or FSIC II, JPMorgan Chase Bank, N.A., or JPMorgan, as administrative agent, ING Capital LLC, or ING, as collateral agent and the lenders party thereto. The Senior Secured Revolving Credit Facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $3,435,000, with an option

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

for the Company to request, at one or more times after the Effective Date, that existing or new lenders, at their election, provide up to $1,717,500 of additional commitments. As of the Effective Date, the Senior Secured Revolving Credit Facility provides for a sublimit available for the Company to borrow up to $650,000 of the total facility amount, which sublimit may be reduced or increased from time to time pursuant to the terms of the Senior Secured Revolving Credit Facility and subject to the oversight and approval of the Company’s board of directors. A sublimit of the total facility amount also is available to each of CCT, FSIC and FSIC II, as additional borrowers, and the obligations of the other borrowers under the Senior Secured Revolving Credit Facility are several (and not joint) in all respects. The Senior Secured Revolving Credit Facility provides for the issuance of letters of credit on behalf of the Company in an aggregate face amount not to exceed $25,000. The Company’s obligations under the Senior Secured Revolving Credit Facility are guaranteed by certain of the Company’s subsidiaries including FSIC III Investments, Inc., IC III Altus Investments, LLC and IC III Arches Investments LLC. The Company’s obligations under the Senior Secured Revolving Credit Facility are secured by a first priority security interest in substantially all of the assets of the Company and the subsidiary guarantors thereunder.

Availability under the Senior Secured Revolving Credit Facility will terminate on August 9, 2022, or the Revolver Termination Date, and the outstanding loans under the Senior Secured Revolving Credit Facility will mature on August 9, 2023. The Senior Secured Revolving Credit Facility also requires mandatory prepayment of interest and principal upon certain events during the term-out period commencing on the Revolver Termination Date.

Borrowings under the Senior Secured Revolving Credit Facility are subject to compliance with a borrowing base test. Interest under the Senior Secured Revolving Credit Facility for (i) loans for which the Company elects the base rate option, (A) if the value of the borrowing base is equal to or greater than 1.85 times the combined debt amount, is payable at an “alternate base rate” (which is the greatest of (a) the prime rate as publicly announced by JPMorgan, (b) the sum of (x) the greater of (I) the federal funds effective rate and (II) the overnight bank funding rate plus (y) 0.5%, and (c) the one month LIBOR plus 1% per annum) plus 1.00% and, (B) if the value of the borrowing base is less than 1.85 times the combined debt amount, the alternate base rate plus 1.25%; and (ii) loans for which the Company elects the Eurocurrency option (A) if the value of the borrowing base is equal to or greater than 1.85 times the combined debt amount, is payable at a rate equal to LIBOR plus 2.00% and (B) if the value of the borrowing base is less than 1.85 times the combined debt amount, is payable at a rate equal to LIBOR plus 2.25%. The Company will pay a non-usage fee of at least 0.375% and up to 0.50% per annum (based on the immediately preceding quarter’s average usage) on the unused portion of its sublimit under the Senior Secured Revolving Credit Facility during the revolving period. The Company also will be required to pay letter of credit participation fees and a fronting fee on the average daily amount of any lender’s exposure with respect to any letters of credit issued under the Senior Secured Revolving Credit Facility.

In connection with the Senior Secured Revolving Credit Facility, the Company has made certain representations and warranties and must comply with various covenants and reporting requirements customary for facilities of this type. In addition, the Company must comply with the following financial covenants: (a) the Company must maintain a minimum shareholders’ equity, measured as of each fiscal quarter end; and (b) the Company must maintain at all times a 200% asset coverage ratio.

The Senior Secured Revolving Credit Facility contains events of default customary for facilities of this type. Upon the occurrence of an event of default, JPMorgan, at the instruction of the lenders, may terminate the commitments and declare the outstanding advances and all other obligations under the Senior Secured Revolving Credit Facility immediately due and payable.

The Company incurred costs in connection with obtaining the Senior Secured Revolving Credit Facility, which the Company has recorded as deferred financing costs.

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

JPMorgan Credit Facility

On July 16, 2018, Jefferson Square Funding LLC, or Jefferson Square, entered into an Amended and Restated Loan and Security Agreement, or the Amended and Restated Agreement, with JPMorgan, as administrative agent and State Street Bank and Trust Company, as collateral agent, securities intermediary, and collateral administrator, amending the Loan Agreement, dated May 8, 2015.

The Amended and Restated Agreement provides for, among other things, (i) decreasing the interest rate on US dollar borrowings to 3-month LIBOR plus 2.50% per annum, (ii) extending the maturity date to July 16, 2022, (iii) temporarily increasing the total amount of available borrowings to $800,000 (iv) permitting Jefferson Square to borrow, pay down, and reborrow a certain percentage of the total available borrowings on a revolving basis, and (v) permitting a limited amount of borrowings in certain foreign currencies.

On August 9, 2018, Jefferson Square elected to pay down and reduce the total amount of borrowings available under the Amended and Restated Agreement to $400,000 in connection with the Company entering into the Senior Secured Revolving Credit Facility.

Deutsche Bank Credit Facility

On September 17, 2018, Dunlap Funding LLC, or Dunlap Funding, entered into an amendment to its revolving credit facility, or the Deutsche Bank Credit Facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, to, among other things, extend the revolving period during which Dunlap Funding may make new borrowings by three months to December 31, 2018.

Citibank Total Return Swap

Counterparty			Description			Termination Date			Value as of September 30, 2018
Citibank			A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during a specified period, in return for periodic payments based on a fixed or variable interest rate.			Citibank may terminate the TRS on or after December 31, 2018, unless certain specified events permit Citibank to terminate the TRS on an earlier date. Center City Funding may terminate the TRS at any time upon providing no more than 30 days, and no less than 10 days, prior notice to Citibank.			$(10,002)

As of September 30, 2018 and December 31, 2017, the fair value of the TRS was $(10,002) and $(3,756), respectively, which is reflected in the Company’s consolidated balance sheets as unrealized appreciation (depreciation) on total return swap. As of September 30, 2018 and December 31, 2017, the receivable due on the TRS was $6,052 and $1,107, respectively, which is reflected in the Company’s consolidated balance sheets as receivable due on total return swap. As of September 30, 2018 and December 31, 2017, the Company posted $114,689 and $98,005, respectively, in cash collateral held by Citibank (of which only $109,827 and $80,867, respectively, was required to be posted). The cash collateral held by Citibank is reflected in the Company’s consolidated balance sheets as due from counterparty. The Company does not offset collateral posted in relation to the TRS with any unrealized appreciation (depreciation) outstanding on the consolidated balance sheets as of September 30, 2018 and December 31, 2017.

For the nine months ended September 30, 2018 and 2017, transactions in the TRS resulted in net realized gain (loss) on total return swap of $14,258 and $18,434, respectively, and unrealized appreciation (depreciation) on total return swap of $(6,246) and $(11,672), respectively, which are reflected in the Company’s consolidated statements of operations.

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

On September 28, 2018, Center City Funding LLC entered into an amendment to the TRS to, among other things, extend the optional termination date to December 31, 2018.

The following is a summary of the underlying loans subject to the TRS as of September 30, 2018:

Underlying Loan(1)	Industry	Rate(2)	Floor	Maturity	Notional Amount			Market Value			Unrealized Appreciation/ (Depreciation)
Acosta, Inc.	Media	L+325	1.0%	9/26/21		$	11,508		$	10,638		$	(870)
Advantage Sales & Marketing Inc.	Media	L+325	1.0%	7/23/21			15,127			14,731			(396)
Advantage Sales & Marketing Inc.	Media	L+650	1.0%	7/25/22			3,923			3,696			(227)
Aleris International, Inc.	Materials	L+475		2/27/23			2,612			2,684			72
Alison US LLC(3)	Capital Goods	L+450	1.0%	8/29/21			7,134			7,020			(114)
American Bath Group, LLC	Capital Goods	L+975	1.0%	9/30/24			2,760			3,015			255
American Tire Distributors, Inc.	Retailing	L+425	1.0%	9/1/21			7,168			7,071			(97)
APX Group, Inc.	Consumer Services	L+500		4/1/24			16,582			16,553			(29)
ATX Networks Corp.(3)(4)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21			4,593			4,432			(161)
ATX Networks Corp.(3)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21			7,329			7,182			(147)
Avantor, Inc.	Materials	L+400	1.0%	11/21/24			19,528			19,543			15
BCP Raptor, LLC	Energy	L+425	1.0%	6/24/24			5,354			5,447			93
Belk, Inc.	Retailing	L+475	1.0%	12/12/22			2,518			2,598			80
Brand Energy & Infrastructure Services, Inc.	Capital Goods	L+425	1.0%	6/21/24			10,011			9,984			(27)
CDS U.S. Intermediate Holdings, Inc.(3)(4)	Media	L+825	1.0%	7/10/23			8,865			8,625			(240)
Confie Seguros Holding II Co.(3)	Insurance	L+525	1.0%	4/19/22			6,809			6,706			(103)
CSM Bakery Solutions LLC	Food, Beverage & Tobacco	L+400	1.0%	7/3/20			3,652			3,646			(6)
Dayton Superior Corp.	Materials	L+800, 6.0% PIK (6.0% Max PIK)	1.0%	11/15/21			11,119			9,891			(1,228)
Diamond Resorts International, Inc.	Consumer Services	L+375	1.0%	9/2/23			37,481			36,976			(505)
Distribution International, Inc.	Capital Goods	L+500	1.0%	12/15/21			354			347			(7)
Elo Touch Solutions, Inc.(4)	Technology Hardware & Equipment	L+600	1.0%	10/31/23			5,773			5,868			95
EmployBridge, LLC(4)	Commercial & Professional Services	L+500	1.0%	4/18/25			1,186			1,179			(7)
Evergreen AcqCo 1 LP	Retailing	L+375	1.3%	7/9/19			2,943			2,873			(70)
FHC Health Systems, Inc.	Health Care Equipment & Services	L+400	1.0%	12/23/21			8,771			7,593			(1,178)
Foresight Energy LLC(3)	Energy	L+575	1.0%	3/28/22			12,386			12,425			39
FPC Holdings, Inc.	Capital Goods	L+450	1.3%	11/18/22			2,795			2,792			(3)
Gulf Finance, LLC(4)	Energy	L+525	1.0%	8/25/23			9,116			7,857			(1,259)
Inmar, Inc.	Software & Services	L+800	1.0%	5/1/25			14,775			15,000			225
Intelsat Jackson Holdings S.A.(3)	Diversified Financials	L+375	1.0%	11/27/23			20,024			20,069			45
Ivanti Software, Inc.	Software & Services	L+425	1.0%	1/20/24			7,404			7,494			90
J.C. Penney Corp., Inc.(3)	Retailing	L+425	1.0%	6/23/23			2,219			2,142			(77)
Jazz Acquisition, Inc.(4)	Capital Goods	L+675	1.0%	6/19/22			2,512			2,375			(137)
Jo-Ann Stores, LLC	Retailing	L+500	1.0%	10/16/23			3,128			3,123			(5)
LBM Borrower, LLC	Capital Goods	L+375	1.0%	8/20/22			5,303			5,356			53
LBM Borrower, LLC	Capital Goods	L+925	1.0%	8/20/23			19,733			19,832			99
LD Intermediate Holdings, Inc.	Software & Services	L+588	1.0%	12/9/22			8,606			9,180			574
Mitel US Holdings, Inc.	Software & Services	L+450		7/11/25			8,759			8,857			98
naviHealth, Inc.	Health Care Equipment & Services	L+500		8/1/25			8,517			8,698			181
Navistar, Inc.(3)	Capital Goods	L+350		11/6/24			9,653			9,750			97
P.F. Chang’s China Bistro, Inc.	Consumer Services	L+500	1.0%	9/1/22			3,342			3,436			94
P2 Upstream Acquisition Co.	Energy	L+400	1.3%	10/30/20			2,255			2,394			139
Peak 10 Holding Corp.	Software & Services	L+725	1.0%	8/1/25			6,899			6,756			(143)

TABLE OF CONTENTS

FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

Underlying Loan(1)	Industry	Rate(2)	Floor	Maturity	Notional Amount			Market Value			Unrealized Appreciation/ (Depreciation)
Schenectady International Group, Inc.	Materials	L+475	1.0%	8/17/25		$	1,476		$	1,541		$	65
Sequa Mezzanine Holdings L.L.C.	Capital Goods	L+500	1.0%	11/28/21			5,018			5,000			(18)
Sequa Mezzanine Holdings L.L.C.	Capital Goods	L+900	1.0%	4/28/22			5,195			5,113			(82)
SGS Cayman, L.P.(3)	Commercial & Professional Services	L+538	1.0%	4/23/21			1,962			1,943			(19)
SIRVA Worldwide Inc	Transportation	L+550		7/31/25			3,099			3,147			48
SIRVA Worldwide Inc	Transportation	L+950		7/31/26			2,614			2,614			—
SMG US Midco 2, Inc.	Consumer Services	L+700		1/23/26			954			947			(7)
Specialty Building Products Holdings, LLC(4)	Capital Goods	L+600	1.0%	10/26/23			7,308			7,597			289
Spencer Gifts LLC	Retailing	L+425	1.0%	7/16/21			15,196			14,273			(923)
Strike, LLC(4)	Energy	L+800	1.0%	11/30/22			2,809			2,925			116
SunGard Availability Services Capital, Inc.(4)	Software & Services	L+700	1.0%	9/30/21			4,675			4,922			247
Sutherland Global Services Inc.	Commercial & Professional Services	L+538	1.0%	4/23/21			8,430			8,348			(82)
TierPoint, LLC	Software & Services	L+725	1.0%	5/5/25			6,930			6,869			(61)
TKC Holdings, Inc.	Retailing	L+800	1.0%	2/1/24			4,020			4,037			17
TravelCLICK, Inc.	Software & Services	L+775	1.0%	11/6/21			4,023			4,007			(16)
Westbridge Technologies, Inc.	Technology Hardware & Equipment	L+850	1.0%	4/28/23			21,293			21,281			(12)
West Corp.	Commercial & Professional Services	L+400	1.0%	10/10/24			20,084			19,778			(306)
West Corp.	Commercial & Professional Services	L+350	1.0%	10/10/24			4,981			4,940			(41)
Winebow Holdings, Inc.	Retailing	L+750	1.0%	1/2/22			4,877			3,537			(1,340)
WireCo WorldGroup, Inc.	Materials	L+900	1.0%	9/30/24			2,311			2,294			(17)
York Risk Services Holding Corp.(4)	Insurance	L+375	1.0%	10/1/21			6,597			6,433			(164)
Total						$	484,378		$	477,380			(6,998)
Total TRS Accrued Income and Liabilities:													(3,004)
Total TRS Fair Value:												$	(10,002)

(1)

Loan may be an obligation of one or more entities affiliated with the named company.

(2)

The variable rate securities underlying the TRS bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of September 30, 2018, three-month LIBOR was 2.40%.

(3)

The investment is not a qualifying asset under the 1940 Act. A BDC 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.

(4)

Security is also held directly by the Company or one of its wholly-owned subsidiaries.

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FS Investment Corporation III

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

Note 8. Financing Arrangements (continued)

The following is a summary of the underlying loans subject to the TRS as of December 31, 2017:

Underlying Loan(1)	Industry	Rate(2)	Floor	Maturity	Notional Amount			Market Value			Unrealized Appreciation/ (Depreciation)
Alison US LLC(3)	Capital Goods	L+450	1.0%	8/29/21		$	7,190		$	6,930		$	(260)
American Bath Group, LLC	Capital Goods	L+525	1.0%	9/30/23			3,318			3,481			163
American Bath Group, LLC	Capital Goods	L+975	1.0%	9/30/24			2,760			2,992			232
AqGen Ascensus, Inc.	Diversified Financials	L+400	1.0%	12/5/22			13,828			14,753			925
ATX Networks Corp.(3)(4)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21			4,740			4,752			12
ATX Networks Corp.(3)	Technology Hardware & Equipment	L+600, 1.0% PIK (1.0% Max PIK)	1.0%	6/11/21			7,563			7,699			136
Avaya Inc.(4)	Technology Hardware & Equipment	L+475	1.0%	12/15/24			14,850			14,744			(106)
BBB Industries US Holdings, Inc.	Automobiles & Components	L+450	1.0%	11/3/21			7,314			7,542			228
Casablanca US Holdings Inc.(4)	Consumer Services	L+900	1.0%	3/31/25			4,925			5,075			150
CDS U.S. Intermediate Holdings, Inc.(3)(4)	Media	L+825	1.0%	7/10/23			8,865			8,854			(11)
Confie Seguros Holding II Co.(3)	Insurance	L+525	1.0%	4/19/22			6,861			6,909			48
Dayton Superior Corp.	Materials	L+800	1.0%	11/15/21			11,203			9,702			(1,501)
Diamond Resorts International, Inc.	Consumer Services	L+450	1.0%	9/2/23			26,959			27,831			872
Elo Touch Solutions, Inc.(4)	Technology Hardware & Equipment	L+600	1.0%	10/25/23			8,448			8,512			64
FHC Health Systems, Inc.	Health Care Equipment & Services	L+400	1.0%	12/23/21			8,839			8,683			(156)
FullBeauty Brands Holdings Corp.	Consumer Durables & Apparel	L+475	1.0%	10/14/22			7,201			4,765			(2,436)
Gulf Finance, LLC(4)	Energy	L+525	1.0%	8/25/23			9,437			8,712			(725)
Inmar, Inc.	Software & Services	L+800	1.0%	5/1/25			14,775			15,000			225
Ivanti Software, Inc.	Software & Services	L+425	1.0%	1/20/24			7,457			7,113			(344)
Jazz Acquisition, Inc.(4)	Capital Goods	L+675	1.0%	6/19/22			2,513			2,345			(168)
LBM Borrower, LLC	Capital Goods	L+450	1.0%	8/20/22			5,359			5,439			80
LD Intermediate Holdings, Inc.	Software & Services	L+588	1.0%	12/9/22			8,775			8,686			(89)
LTI Holdings, Inc.	Materials	L+475	1.0%	5/16/24			9,851			9,987			136
MORSCO, Inc.	Capital Goods	L+700	1.0%	10/31/23			9,360			9,872			512
Navistar, Inc.(3)	Capital Goods	L+350		11/6/24			9,701			9,777			76
P.F. Chang’s China Bistro, Inc.	Consumer Services	L+500	1.0%	9/1/22			7,257			7,026			(231)
P2 Upstream Acquisition Co.	Energy	L+400	1.3%	10/30/20			2,283			2,398			115
Peak 10 Holding Corp.	Software & Services	L+725	1.0%	8/1/25			6,873			6,969			96
Quest Software US Holdings Inc.(4)	Software & Services	L+550	1.0%	10/31/22			17,877			18,233			356
Specialty Building Products Holdings, LLC(4)	Capital Goods	L+600	1.0%	10/26/23			7,364			7,631			267
Spencer Gifts LLC	Retailing	L+425	1.0%	7/16/21			15,939			11,464			(4,475)
SRS Distribution Inc.	Capital Goods	L+325	1.0%	8/25/22			10,098			10,099			1
Strike, LLC(4)	Energy	L+800	1.0%	11/30/22			2,925			3,045			120
SunGard Availability Services Capital, Inc.(4)	Software & Services	L+700	1.0%	9/30/21			4,770			4,986			216
ThermaSys Corp.	Capital Goods	L+400	1.3%	5/3/19			6,612			6,489			(123)
TierPoint, LLC	Software & Services	L+725	1.0%	5/5/25			6,930			7,009			79
TKC Holdings, Inc.	Retailing	L+800	1.0%	2/1/24			4,020			4,020			—

TravelCLICK, Inc.	Software & Services	L+775	1.0%	11/6/21			7,183			7,173			(10)
Westbridge Technologies, Inc.	Software & Services	L+850	1.0%	4/28/23			6,774			6,826			52
Winebow Holdings, Inc.	Retailing	L+750	1.0%	1/2/22			4,878			4,568			(310)
York Risk Services Holding Corp.(4)	Insurance	L+375	1.0%	10/1/21			6,648			6,556			(92)
Total						$	340,523		$	334,647			(5,876)
Total TRS Accrued Income and Liabilities:													2,120
Total TRS Fair Value:												$	(3,756)

(1)

Loan may be an obligation of one or more entities affiliated with the named company.

(2)

The variable rate securities underlying the TRS bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2017, three-month LIBOR was 1.69%.

(3)

(4)

Security is also held directly by the Company or one of its wholly-owned subsidiaries.

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FS Investment Corporation III

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

Note 9. 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. Management of FS/KKR 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.

See Note 6 for a discussion of the Company’s unfunded commitments.

Note 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2018 and the year ended December 31, 2017:

	Nine Months Ended September 30, 2018 (Unaudited)			Year Ended December 31, 2017
Per Share Data:(1)
Net asset value, beginning of period		$	8.22		$	8.53
Results of operations(2)
Net investment income			0.48			0.69
Net realized gain (loss) and unrealized appreciation (depreciation)			(0.23)			(0.32)
Net increase (decrease) in net assets resulting from operations			0.25			0.37
Stockholder distributions(3)
Distributions from net investment income			(0.52)			(0.70)
Net decrease in net assets resulting from stockholder distributions			(0.52)			(0.70)
Capital share transactions
Issuance of common stock(4)			—			0.02
Repurchases of common stock(5)			—			—
Net increase in net assets resulting from capital share transactions			—			0.02
Net asset value, end of period		$	7.95		$	8.22
Shares outstanding, end of period			290,360,066			290,566,041
Total return(6)			3.06%			4.50%
Total return (without assuming reinvestment of distributions)(6)			3.04%			4.57%

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FS Investment Corporation III

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

Note 10. Financial Highlights (continued)

	Nine Months Ended September 30, 2018 (Unaudited)			Year Ended December 31, 2017
Ratio/Supplemental Data:
Net assets, end of period		$	2,307,593		$	2,388,724
Ratio of net investment income to average net assets(7)			7.91%			8.08%
Ratio of operating expenses to average net assets(7)			7.38%			7.64%
Ratio of net operating expenses to average net assets(7)			7.23%			7.27%
Portfolio turnover(8)			32.08%			36.76%
Total amount of senior securities outstanding, exclusive of treasury securities		$	1,609,269		$	1,647,355
Asset coverage per unit(9)			2.43			2.45

(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 in the Company’s continuous public offering and pursuant to the DRP. The issuance of common stock at a price, net of selling commissions and dealer manager fees, 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 repurchases of common stock is a reduction to net asset value of less than $0.01 per share during each period.

(6)

The total return for each period presented was calculated based on the change in net asset value during the applicable period, including the impact of distributions reinvested in accordance with the Company’s DRP. The total return (without assuming reinvestment of distributions) for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share which were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total returns do not consider the effect of any selling commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The total returns include the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculations of total returns in the table should not be considered representations of the Company’s future total returns, which may be greater or less than the returns shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total returns on the Company’s investment portfolio during the applicable period and do not represent actual returns to stockholders.

(7)

Weighted average net assets during the applicable period are used for this calculation. Ratios for the nine months ended September 30, 2018 are annualized. Annualized ratios for the nine months ended September 30, 2018 are not necessarily indicative of the ratios that may be expected for the year ending December 31, 2018. The following is a schedule of supplemental ratios for the nine months ended September 30, 2018 and the year ended December 31, 2017:

	Nine Months Ended September 30, 2018 (Unaudited)		Year Ended December 31, 2017
Ratio of subordinated income incentive fees to average net assets		1.46%		1.70%
Ratio of interest expense to average net assets		2.79%		2.20%
Ratio of offering costs to average net assets		—		0.14%

(8)

Portfolio turnover for the nine months ended September 30, 2018 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. In this report, “we,” “us,” “our” and the “Company” refer to FS Investment Corporation III.

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 FS/KKR Advisor, FS Investments, KKR Credit or any of their respective affiliates;

•

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

•

our use of financial leverage;

•

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

•

the ability of FS/KKR 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 June 7, 2013 and formally commenced investment operations on April 2, 2014. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. In November 2017, we closed our continuous public offering of shares of common stock to new investors.

Our investment activities are managed by FS/KKR Advisor and supervised by our board of directors, a majority of whom are independent. Under the FS/KKR Advisor investment advisory and administrative services agreement, we have agreed to pay FS/KKR Advisor an annual base management fee based on the average weekly value of our gross assets and an incentive fee based on our performance.

Our investment activities were managed by FSIC III Advisor until April 9, 2018 and thereafter have been managed by FS/KKR Advisor. FSIC III Advisor previously engaged GDFM to act as our investment sub-adviser. GDFM resigned as our investment sub-adviser and terminated the investment sub-advisory agreement on April 9, 2018.

Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.

Direct Originations: We intend to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not generally make equity investments independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may include event driven investments, anchor orders (i.e., certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the average syndicate participant) and CLOs.

In the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market’s apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company’s financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to

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successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.

We may also invest in anchor orders. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, industry or financial sponsor, and the broader investment experiences of our investment adviser.

In addition, we opportunistically invest in CLOs. CLOs are a form of securitization where the cash flow from a pooled basket of syndicated loans is used to support distribution payments made to different tranches of securities. While collectively CLOs represent nearly fifty percent of the broadly syndicated loan universe, investing in individual CLO tranches requires a high degree of investor sophistication due to their structural complexity and the illiquid nature of their securities.

Broadly Syndicated/Other: Although our primary focus is to invest in directly originated transactions and opportunistic investments, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.

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, CLOs, other debt securities and derivatives, including total return swaps and credit default swaps. FS/KKR 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. 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

Revenues

The principal measure of our financial performance is net increase (decrease) 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 realized gain or loss on total return swap, net unrealized appreciation or depreciation on investments, net unrealized gain or loss on foreign currency and net unrealized appreciation or depreciation on total return swap.

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

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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 realized gain or loss on total return swap is the net monthly settlement payments received on the TRS. 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. Net unrealized appreciation or depreciation on total return swap is the net change in the fair value of the TRS.

We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we may 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 FS/KKR Advisor 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 FS/KKR Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

FS/KKR Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. FS/KKR 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, FS/KKR 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 FS/KKR Advisor investment advisory and administrative services agreement, we reimburse FS/KKR Advisor for expenses necessary to perform services related to our administration and operations, including FS/KKR 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 FS/KKR Advisor. We reimburse FS/KKR 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) FS/KKR 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. FS/KKR Advisor 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 FS/KKR 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 FS/KKR 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 all other expenses incurred by FS/KKR Advisor in performing services for us and administrative personnel paid by FS Investments and KKR Credit.

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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 FS/KKR 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 and Nine Months Ended September 30, 2018 and for the Year Ended December 31, 2017

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three and nine months ended September 30, 2018:

Net Investment Activity	For the Three Months Ended September 30, 2018			For the Nine Months Ended September 30, 2018
Purchases		$	463,529		$	1,089,493
Sales and Repayments			(558,110)			(1,133,149)
Net Portfolio Activity		$	(94,581)		$	(43,656)

	For the Three Months Ended September 30, 2018					For the Nine Months Ended September 30, 2018
New Investment Activity by Asset Class	Purchases			Percentage		Purchases			Percentage
Senior Secured Loans—First Lien		$	368,518		78%		$	827,746		76%
Senior Secured Loans—Second Lien			68,526		15%			81,036		7%
Senior Secured Bonds			10,357		2%			48,509		5%
Subordinated Debt			16,086		3%			117,916		11%
Collateralized Securities			—		—			—		—
Equity/Other			9,437		2%			14,286		1%
Total		$	472,924		100%		$	1,089,493		100%

The following table summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2018 and December 31, 2017:

	September 30, 2018 (Unaudited)								December 31, 2017
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	2,366,680		$	2,350,696		72%		$	2,212,948		$	2,222,444		66%
Senior Secured Loans—Second Lien			219,566			176,508		5%			298,561			261,239		8%
Senior Secured Bonds			91,170			90,204		3%			60,168			60,478		2%
Subordinated Debt			545,565			542,923		17%			690,666			687,221		21%
Collateralized Securities			6,070			6,391		0%			6,697			7,562		0%
Equity/Other			137,947			84,360		3%			164,105			102,582		3%
Total		$	3,366,998		$	3,251,082		100%		$	3,433,145		$	3,341,526		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 summarizes the composition of our investment portfolio at cost and fair value as of September 30, 2018 and December 31, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8 to our unaudited consolidated financial statements included herein. The investments underlying the TRS had a notional amount and market value of $484,378 and $477,380, respectively, as of September 30, 2018 and $340,523, and $334,647, respectively, as of December 31, 2017.

	September 30, 2018 (Unaudited)								December 31, 2017
	Amortized Cost(1)			Fair Value			Percentage of Portfolio		Amortized Cost(1)			Fair Value			Percentage of Portfolio
Senior Secured Loans—First Lien		$	2,760,667		$	2,739,359		74%		$	2,489,749		$	2,493,086		68%
Senior Secured Loans—Second Lien			309,957			265,225		7%			362,283			325,244		9%
Senior Secured Bonds			91,170			90,204		2%			60,168			60,478		1%
Subordinated Debt			545,565			542,923		15%			690,666			687,221		19%
Collateralized Securities			6,070			6,391		0%			6,697			7,562		0%
Equity/Other			137,947			84,360		2%			164,105			102,582		3%
Total		$	3,851,376		$	3,728,462		100%		$	3,773,668		$	3,676,173		100%

(1)

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

The following table presents certain selected information regarding the composition of our investment portfolio as of September 30, 2018 and December 31, 2017:

	September 30, 2018	December 31, 2017
Number of Portfolio Companies	116	109
% Variable Rate (based on fair value)	72.8%	70.9%
% Fixed Rate (based on fair value)	24.7%	26.0%
% Income Producing Equity/Other Investments (based on fair value)	0.3%	0.1%
% Non-Income Producing Equity/Other Investments (based on fair value)	2.2%	3.0%
Average Annual EBITDA of Portfolio Companies	$180,600	$124,000
Weighted Average Purchase Price of Debt Investments (as a % of par)	98.8%	98.9%
% of Investments on Non-Accrual (based on fair value)	0.3%	1.0%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)	9.8%	9.4%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets	10.4%	10.0%

Based on our regular monthly cash distribution amount of $0.058331 per share as of September 30, 2018 and our distribution reinvestment price of $8.10 per share, the annualized distribution rate to stockholders as of September 30, 2018 was 8.64%. 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 nine months ended September 30, 2018, our total return was 3.06% and our total return without assuming reinvestment of distributions was 3.04%.

Based on our regular monthly cash distribution amount of $0.058331 per share as of December 31, 2017 and our distribution reinvestment price of $8.35 per share as of December 31, 2017, the annualized distribution rate to stockholders was 8.38%. During the year ended December 31, 2017, our total return was 4.50% and our total return without assuming reinvestment of distributions was 4.57%.

Our estimated gross portfolio yield may be higher than a stockholder’s yield on an investment in shares of our common stock. Our estimated gross portfolio yield does not reflect operating expenses that may be incurred by us. In addition, our estimated gross portfolio yield 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 estimated gross portfolio yield, total return and annualized distribution rate to stockholders do not represent actual investment returns to stockholders, are subject to

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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, 2017 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 10 to our unaudited consolidated financial statements included herein for information regarding the calculations of our total return.

Direct Originations

The following tables present certain selected information regarding our direct originations for the three and nine months ended September 30, 2018:

New Direct Originations	For the Three Months Ended September 30, 2018			For the Nine Months Ended September 30, 2018
Total Commitments (including unfunded commitments)		$	340,360		$	620,554
Exited Investments (including partial paydowns)			(418,580)			(545,306)
Net Direct Originations		$	(78,220)		$	75,248

	For the Three Months Ended September 30, 2018					For the Nine Months Ended September 30, 2018
New Direct Originations by Asset Class (including unfunded commitments)	Commitment Amount			Percentage		Commitment Amount			Percentage
Senior Secured Loans—First Lien		$	266,613		78%		$	539,126		87%
Senior Secured Loans—Second Lien			73,747		22%			77,802		12%
Senior Secured Bonds			—		—			—		—
Subordinated Debt			—		—			278		0%
Collateralized Securities			—		—			—		—
Equity/Other			—		—			3,348		1%
Total		$	340,360		100%		$	620,554		100%

	For the Three Months Ended September 30, 2018	For the Nine Months Ended September 30, 2018
Average New Direct Origination Commitment Amount	$37,818	$16,482
Weighted Average Maturity for New Direct Originations	11/2/24	2/14/24
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period	9.7%	10.3%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets	9.7%	10.3%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period	10.0%	10.4%

The following table presents certain selected information regarding our direct originations as of September 30, 2018 and December 31, 2017:

Characteristics of All Direct Originations Held in Portfolio	September 30, 2018	December 31, 2017
Number of Portfolio Companies	64	59
Average Annual EBITDA of Portfolio Companies	$80,400	$65,900
Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities	5.4x	4.7x
% of Investments on Non-Accrual (based on fair value)	0.4%	—
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations	9.9%	9.7%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets	10.5%	10.1%

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Portfolio Composition by Strategy

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of September 30, 2018 and December 31, 2017:

	September 30, 2018					December 31, 2017
Portfolio Composition by Strategy	Fair Value			Percentage of Portfolio		Fair Value			Percentage of Portfolio
Direct Originations		$	2,549,158		79%		$	2,427,744		73%
Opportunistic			465,113		14%			702,066		21%
Broadly Syndicated/Other			236,811		7%			211,716		6%
Total		$	3,251,082		100%		$	3,341,526		100%

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, FS/KKR Advisor uses, and FSIC III Advisor historically used, an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FS/KKR Advisor uses, and FSIC III Advisor historically used, an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment Rating			Summary Description
1			Investment exceeding expectations and/or capital gain expected.
2			Performing investment generally executing in accordance with the portfolio company’s business plan—full return of principal and interest expected.
3			Performing investment requiring closer monitoring.
4			Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment.
5			Underperforming investment with expected loss of interest and some principal.

The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of September 30, 2018 and December 31, 2017:

	September 30, 2018					December 31, 2017
Investment Rating	Fair Value			Percentage of Portfolio		Fair Value			Percentage of Portfolio
1		$	6,921		0%		$	66,286		2%
2			2,573,626		79%			3,006,809		90%
3			609,297		19%			211,214		6%
4			7,927		0%			1,817		0%
5			53,311		2%			55,400		2%
Total		$	3,251,082		100%		$	3,341,526		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 and Nine Months Ended September 30, 2018 and 2017

Revenues

Our investment income for the three and nine months ended September 30, 2018 and 2017 was as follows:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2018					2017					2018					2017
	Amount			Percentage of Total Income		Amount			Percentage of Total Income		Amount			Percentage of Total Income		Amount			Percentage of Total Income
Interest income		$	72,761		78%		$	77,536		89%		$	224,573		85%		$	225,235		85%
Paid-in-kind interest income			10,983		12%			6,685		8%			23,921		9%			18,967		7%
Fee income			9,047		10%			3,039		3%			16,694		6%			21,934		8%
Dividend income			353		0%			—		—			430		0%			74		0%
Total investment income(1)		$	93,144		100%		$	87,260		100%		$	265,618		100%		$	266,210		100%

(1)

For the three months ended September 30, 2018 and 2017, such revenues represent $80,647 and $79,125, respectively, of cash income earned as well as $12,497 and $8,135, respectively, in non-cash portions relating to accretion of discount and PIK interest. For the nine months ended September 30, 2018 and 2017, such revenues represent $238,732 and $242,322, respectively, of cash income earned as well as $26,886 and $23,888, 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. We expect the dollar amount of interest that we earn to increase as the proportion of directly originated investments in our investment portfolio increases. Fee income is transaction based, and typically consists of prepayment fees, structuring fees and other non-recurring 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 decrease in interest income during the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017 can be primarily attributed to the prepayment of certain higher yielding assets. The increase in fee income during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily due to the increase of prepayment activity during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. The decrease in fee income during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 was primarily due to the decrease of structuring activity during the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.

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Expenses

Our operating expenses for the three and nine months ended September 30, 2018 and 2017 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Management fees		$	13,724		$	19,382		$	47,248		$	57,171
Subordinated income incentive fees			12,827			5,166			25,631			26,278
Administrative services expenses			919			569			2,435			2,098
Stock transfer agent fees			346			396			1,124			1,174
Accounting and administrative fees			274			282			834			837
Interest expense			17,709			13,775			48,961			38,561
Directors’ fees			200			284			913			809
Offering costs			—			2,118			—			3,054
Expenses associated with our independent audit and related fees			101			191			300			395
Legal fees			157			13			226			91
Printing fees			22			122			591			756
Other			463			450			1,132			1,048
Operating expenses			46,742			42,748			129,395			132,272
Management fee waiver			—			(2,423)			(2,594)			(6,324)
Net expenses		$	46,742		$	40,325		$	126,801		$	125,948

The following table reflects selected expense ratios as a percent of average net assets for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Ratio of operating expenses to average net assets		2.02%		1.77%		5.53%		5.53%
Ratio of management fee waiver to average net assets(1)		—		(0.10)%		(0.11)%		(0.26)%
Ratio of net operating expenses to average net assets		2.02%		1.67%		5.42%		5.27%
Ratio of incentive fees, interest expense and offering costs to average net assets(1)		(1.32)%		(0.87)%		(3.19)%		(2.84)%
Ratio of net operating expenses to average net assets, excluding certain expenses		0.70%		0.80%		2.23%		2.43%

(1)

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

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 $46,402 ($0.16 per share) and $46,935 ($0.17 per share) for the three months ended September 30, 2018 and 2017, respectively. The decrease in net investment income for the three months ended September 30, 2018 can be attributed to the increase in interest expense and subordinated income incentive fees.

Our net investment income totaled $138,817 ($0.48 per share) and $140,262 ($0.50 per share) for the nine months ended September 30, 2018 and 2017, respectively. The decrease in net investment income for the nine months ended September 30, 2018 can be attributed to the decline in fee income as discussed above.

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Net Realized Gains or Losses

Our net realized gains (losses) on investments, TRS and foreign currency for the three and nine months ended September 30, 2018 and 2017 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net realized gain (loss) on investments(1)		$	2,882		$	2,902		$	(49,720)		$	7,510
Net realized gain (loss) on total return swap			4,021			11,255			14,258			18,434
Net realized gain (loss) on foreign currency			(516)			893			(290)			1,030
Total net realized gain (loss)		$	6,387		$	15,050		$	(35,752)		$	26,974

(1)

We sold investments and received principal repayments of $348,163 and $209,947, respectively, during the three months ended September 30, 2018 and $111,134 and $118,412, respectively, during the three months ended September 30, 2017. We sold investments and received principal repayments of $818,483 and $314,666, respectively, during the nine months ended September 30, 2018 and $443,597 and $394,206, respectively, during the nine months ended September 30, 2017.

Net Change in Unrealized Appreciation (Depreciation)

Our net change in unrealized appreciation (depreciation) on investments, TRS, secured borrowing and unrealized gain (loss) on foreign currency for the three and nine months ended September 30, 2018 and 2017 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net change in unrealized appreciation (depreciation) on investments		$	(25,723)		$	(14,619)		$	(24,297)		$	(19,969)
Net change in unrealized appreciation (depreciation) on total return swap			939			(9,274)			(6,246)			(11,672)
Net change in unrealized appreciation (depreciation) on secured borrowing			—			16			—			(33)
Net change in unrealized gain (loss) on foreign currency			216			(448)			(253)			162
Total net change in unrealized appreciation (depreciation)		$	(24,568)		$	(24,325)		$	(30,796)		$	(31,512)

During the three and nine months ended September 30, 2018, the net change in unrealized appreciation (depreciation) was driven primarily by lower valuations in a few select investments.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended September 30, 2018 and 2017, the net increase in net assets resulting from operations was $28,221 ($0.10 per share) and $37,660 ($0.13 per share), respectively.

For the nine months ended September 30, 2018 and 2017, the net increase in net assets resulting from operations was $72,269 ($0.25 per share) and $135,724 ($0.49 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of September 30, 2018, we had $168,330 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $114,689 in cash held as collateral by Citibank under the terms of the TRS. In addition, as of September 30, 2018, we had $15,622 in capacity available under the TRS and $715,282 in borrowings available under our other financing arrangements, subject to borrowing base and other limitations. As of September 30, 2018, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of September 30, 2018, we had nineteen unfunded debt investments with aggregate unfunded commitments of $161,649 and one unfunded commitment to purchase up to $71 in shares of preferred stock. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.

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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 FS/KKR 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 DRP, as well as principal repayments and proceeds from sales of our investments primarily in cash, cash equivalents, including money market funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

Financing Arrangements

We borrow funds to make investments to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced debt financing opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. We do not currently anticipate issuing any preferred stock.

The following table presents summary information with respect to our outstanding financing arrangements as of September 30, 2018:

Arrangement

Type of Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity Date

BNP Facility(1)

Prime Brokerage Facility

L+1.25%

—

250,000

March 27, 2019(2)

Deutsche Bank Credit Facility(1)

Revolving Credit Facility

L+2.25%

289,000

61,000

September 22, 2019

JPM Credit Facility(1)

Term Loan Credit Facility

L+2.50%

340,000

60,000

July 16, 2022

Goldman Facility(1)

Repurchase Agreement

L+2.50%

300,000

—

July 15, 2019

Senior Secured Revolving Credit Facility(1)

Revolving Credit Facility

L+ 2.00% – 2.25%(3)

305,718(4)

344,282

August 9, 2023

Total

1,234,718

715,282

Citibank Total Return Swap

Total Return Swap

L+1.55%

484,378

15,622

N/A(5)

(1)

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

(2)

As described in Note 8 to our unaudited consolidated financial statements included herein, this facility generally is terminable upon 270 days’ notice by either party. As of September 30, 2018, neither party to the facility had provided notice of its intent to terminate the facility.

(3)

The spread over LIBOR is determined by reference to the ratio of the value of the borrowing base to a combined debt amount calculation.

(4)

(5)

For additional information regarding our financing arrangements, see Note 8 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

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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 U.S. 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.

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 (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 non-taxable distribution) will be mailed to our stockholders. No portion of the distributions paid during the nine months ended September 30, 2018 and 2017 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, unless stockholders elect to receive their cash distributions in additional shares of our common stock under the DRP. 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 nine months ended September 30, 2018 and 2017:

	Distribution
For the Three Months Ended	Per Share			Amount
Fiscal 2017
March 31, 2017		$	0.17499		$	48,011
June 30, 2017			0.17499			48,942
September 30, 2017			0.17499			49,656
Total		$	0.52497		$	146,609
Fiscal 2018
March 31, 2018		$	0.17499		$	50,490
June 30, 2018			0.17499			50,489
September 30, 2018			0.17499			50,481
Total		$	0.52497		$	151,460

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 nine months ended September 30, 2018 and 2017.

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

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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. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.

Valuation of Portfolio Investments

We determine the net asset 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, FS/KKR Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.

ASC Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, or the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; 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 FS/KKR Advisor’s management team reviewing and documenting valuations of each portfolio company or investment, which valuations may be obtained from an independent third-party valuation service, if applicable;

•

FS/KKR Advisor’s management team then provides the valuation committee with the preliminary valuations for each portfolio company or investment;

•

preliminary valuations are then discussed with the valuation committee;

•

the valuation committee reviews the preliminary valuations and FS/KKR Advisor’s management team, 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 FS/KKR Advisor, the valuation committee and any independent third-party valuation services, if applicable.

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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 FS/KKR 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 FS/KKR Advisor’s management team, 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.

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.

FS/KKR Advisor’s management team, 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. FS/KKR Advisor’s management team, 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 FS/KKR Advisor’s management team 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 FS/KKR Advisor’s management team, and has authorized FS/KKR Advisor’s management team 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 FS/KKR Advisor’s implementation of the valuation process.

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See Note 7 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. 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.

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. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

Effective January 1, 2018, we adopted ASC Topic 606, using the cumulative effect method applied to in-scope contracts with customers that have not been completed as of the date of adoption. We did not identify any in-scope contracts that had not been completed as of the date of adoption and, as a result, we did not recognize a cumulative effect on stockholders’ equity in connection with the adoption of the new revenue recognition guidance.

The new revenue recognition guidance applies to all entities and all contracts with customers to provide goods or services in the ordinary course of business, excluding, among other things, financial instruments as well as certain other contractual rights and obligations. Under the new revenue recognition guidance, which we have applied to all new in-scope contracts as of the date of adoption, structuring and other upfront fees are recognized as revenue based on the transaction price as the performance obligation is fulfilled. The related performance obligation consists of structuring activities and is satisfied over time as such activities are performed. Consideration is variable and is constrained from being included in the transaction price until the uncertainty associated with the variable consideration is resolved, typically as of the trade date of the related transaction. Payment is typically due on the settlement date of the related transaction.

For the nine months ended September 30, 2018, we recognized $4,188 in structuring fee revenue under the new revenue recognition guidance and included such revenue in the fee income line item on our consolidated statement of operations. Comparative periods are presented in accordance with revenue recognition guidance effective prior to January 1, 2018, under which we recorded structuring and other non-recurring upfront fees as income when earned. We have determined that the adoption of the new revenue recognition guidance did not have a material impact on the amount of revenue recognized for the nine months ended September 30, 2018.

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

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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.

We followed the guidance in ASC Topic 860 when accounting for loan participations and other partial loan sales. This guidance requires a participation or other partial loan sale to meet the definition of a participating interest, as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on our consolidated balance sheets and the proceeds are recorded as a secured borrowing until the participation or other partial loan sale meets the definition. Secured borrowings were carried at fair value to correspond with the related investments, which were carried at fair value.

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 nine months ended September 30, 2018 and 2017, we did not incur any interest or penalties.

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 FS/KKR Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the FS/KKR Advisor 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. FS/KKR 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 these agreements and for the amount of fees and expenses accrued under similar agreements with FSIC III Advisor during the nine months ended September 30, 2018 and 2017.

A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at September 30, 2018 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
BNP Facility(2)	March 27, 2019			—			—	—			—	—
Deutsche Bank Credit Facility(3)	September 22, 2019		$	289,000		$	289,000	—			—	—
JPM Credit Facility(4)	July 16, 2022		$	340,000			—	—		$	340,000	—
Goldman Facility(5)	July 15, 2019		$	300,000		$	300,000	—			—	—
Senior Secured Revolving Credit Facility(6)	August 9, 2023		$	305,718			—	—		$	305,718	—

(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 September 30, 2018, $250,000 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days’ notice by either party. As of September 30, 2018, neither party to the facility had provided notice of its intent to terminate the facility.

(3)

At September 30, 2018, $61,000 remained unused under the Deutsche Bank Credit facility.

(4)

At September 30, 2018, $60,000 remained unused under the JPM Credit Facility.

(5)

At September 30, 2018, no amounts remained unused under the financing arrangement.

(6)

At September 30, 2018, $344,282 remained unused under the Senior Secured Revolving Credit Facility. Amount includes borrowings in Canadian dollars. Canadian dollar balance outstanding of CAD $6,800 has been converted to U.S. dollars at an exchange rate of CAD $1.00 to $0.77 as of September 30, 2018 to reflect total amount outstanding in U.S. dollars.

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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

None.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk (dollar amounts in thousands).

We are subject to financial market risks, including changes in interest rates. As of September 30, 2018, 72.8% of our portfolio investments (based on fair value) paid variable interest rates, 24.7% paid fixed interest rates, 2.2% were non-income producing equity/other investments and the remaining 0.3% were income producing equity/other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income under the FS/KKR Advisor investment advisory and administrative services agreement, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FS/KKR Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant to the terms of the TRS between Center City Funding and Citibank, Center City Funding pays fees to Citibank at a floating rate equal to one-month LIBOR plus 1.55% per annum on the utilized notional amount of the loans subject to the TRS in exchange for the right to receive the economic benefit of a pool of loans having a maximum notional amount of $500,000. Pursuant to the terms of the BNP facility, Deutsche Bank credit facility, JPM credit facility, Goldman facility and the Senior Secured Revolving credit facility, 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 September 30, 2018:

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		$	(22,960)		$	(11,174)		$	(11,786)		(4.0)%
No change			—			—			—		—
Up 100 basis points		$	23,023		$	11,174		$	11,849		4.0%
Up 300 basis points		$	70,665		$	33,521		$	37,144		12.7%
Up 500 basis points		$	118,647		$	55,869		$	62,778		21.4%

(1)

Assumes no defaults or prepayments by portfolio companies over the next twelve months. Includes the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Pursuant to the TRS, Center City Funding receives from Citibank all interest payable in respect of the loans included in the TRS and pays to Citibank interest at a rate equal to one-month LIBOR plus 1.55% per annum on the utilized notional amount of the loans subject to the TRS. As of September 30, 2018, all of the loans underlying the TRS (based on fair value) paid variable interest rates.

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

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permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the nine months ended September 30, 2018 and 2017, we did not engage in interest rate hedging activities.

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 September 30, 2018.

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.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) that occurred during the three-month period ended September 30, 2018 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, 2017, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table provides information concerning our repurchases of shares of our common stock during the three months ended September 30, 2018, 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
July 1, 2018 to July 31, 2018		2,887,475		$	8.20		2,887,475		(1)
August 1, 2018 to August 31, 2018		—			—		—		—
September 1, 2018 to September 30, 2018		—			—		—		—
Total		2,887,475		$	8.20		2,887,475		(1)

(1)

The maximum number of shares available for repurchase on July 2, 2018 was 2,887,475. 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.

Please note that the agreements included as exhibits to this quarterly report on Form 10-Q are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about FS Investment Corporation III or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the actual state of affairs as of the date they were made or at any other time.

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The following exhibits are filed as part of this quarterly report or hereby incorporated by reference to exhibits previously filed with the SEC:

	3.1			Articles of Amendment and Restatement of the Registrant (Incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2014).
	3.2			Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit (b)(2) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013).
	4.1			Amended and Restated Distribution Reinvestment Plan of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’ s Current Report on Form 8-K filed on January 6, 2015).
	4.2			Second Amended and Restated Distribution Reinvestment Plan of the Registrant (Incorporated by reference to Exhibit 4.1 to the Registrant’ s Current Report on Form 8-K filed on October 13, 2017.)
	10.1			Investment Advisory and Administrative Services Agreement, dated as of April 9, 2018, by and between the Registrant and FS/KKR Advisor, LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-Kfiled on April 9, 2018).
	10.2			Amended and Restated Investment Advisory and Administrative Services Agreement, dated as of August 6, 2014, by and between the Registrant and FSIC III Advisor, LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 filed on August 14, 2014).
	10.3			Investment Sub-Advisory Agreement, dated as of January 2, 2014, by and between FSIC III Advisor, LLC and GSO / Blackstone Debt Funds Management LLC (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).
	10.4			Investment Advisory and Administrative Services Agreement, dated as of December 20, 2013, by and between the Registrant and FSIC III Advisor, LLC (Incorporated by reference to Exhibit (g)(1) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013).
	10.5			Follow-On Dealer Manager Agreement, dated as of June 2, 2017, by and among the Registrant, FSIC III Adviser, LLC and FS Investment Solutions, LLC (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 2 to the Registrant’s registration statement on Form N-2 (File No. 333-215360) filed on June 29, 2017).
	10.6			Form of Follow-On Selected Investment Adviser Agreement (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement).
	10.7			Custodian Agreement, dated as of January 6, 2014, by and between the Registrant and State Street Bank and Trust Company (Incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014).
	10.8			ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of June 26, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).
	10.9			Confirmation Letter Agreement, dated as of June 26, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).
	10.10			Investment Management Agreement, dated as of June 26, 2014, by and between the Registrant and Center City Funding LLC (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on July 2, 2014).

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	10.11			Amended and Restated Confirmation Letter Agreement, dated as of August 25, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 27, 2014).
	10.12			Second Amended and Restated Confirmation Letter Agreement, dated as of September 29, 2014, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 2, 2014).
	10.13			Third Amended and Restated Confirmation Letter Agreement, dated as of January 28, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 3, 2015).
	10.14			Fourth Amended and Restated Confirmation Letter Agreement, dated as of June 26, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2015).
	10.15			Fifth Amended and Restated Confirmation Letter Agreement, dated as of October 14, 2015, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 16, 2015).
	10.16			Sixth Amended and Restated Confirmation Letter Agreement, dated as of June 27, 2016, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 1, 2016).
	10.17			Seventh Amended and Restated Confirmation Letter Agreement, dated as of June 27, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 28, 2017).
	10.18			Eighth Amended and Restated Confirmation Letter Agreement, dated as of September 5, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 11, 2017).
	10.19			Ninth Amended and Restated Confirmation Letter Agreement, dated as of March 31, 2018, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 4, 2018).
	10.20			Tenth Amended and Restated Confirmation Letter Agreement, dated as of June 29, 2018, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 5, 2018).
	10.21			Eleventh Amended and Restated Confirmation Letter Agreement, dated as of September 28, 2018, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 1, 2018).
	10.22			Committed Facility Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).
	10.23			U.S. PB Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).
	10.24			Special Custody and Pledge Agreement, dated as of October 17, 2014, by and among Burholme Funding LLC, BNP Paribas Prime Brokerage, Inc. and State Street Bank and Trust Company, as custodian (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).
	10.25			Investment Management Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and the Registrant (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on October 23, 2014).

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	10.26			First Amendment Agreement, dated as of March 11, 2015, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities, and Burholme Funding LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 13, 2015).
	10.27			Second Amendment Agreement, dated as of October 21, 2015, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).
	10.28			Third Amendment Agreement, dated as of March 16, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016).
	10.29			Fourth Amendment Agreement, dated as of August 29, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 2, 2016).
	10.30			Fifth Amendment Agreement, dated as of November 15, 2016, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.34 to the Registrant’s Current Report on Form 8-K filed on November 21, 2016).
	10.31			Sixth Amendment Agreement, dated as of May 29, 2018, to the Committed Facility Agreement, dated as of October 17, 2014, between BNP Paribas Prime Brokerage International, Ltd. and Burholme Funding LLC. (Incorporated by reference to Exhibit 10.34 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
	10.32			Loan Financing and Servicing Agreement, dated as of December 2, 2014, by and among Dunlap Funding 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 Registrant’s Current Report on Form 8-K filed on December 8, 2014).
	10.33			Sale and Contribution Agreement, dated as of December 2, 2014, by and between the Registrant, as seller, and Dunlap Funding LLC, as purchaser (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on December 8, 2014).
	10.34			Investment Management Agreement, dated as of December 2, 2014, by and between Dunlap Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on December 8, 2014).
	10.35			Amendment No. 1 to Investment Management Agreement, dated as of May 1, 2015, by and between Dunlap Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).
	10.36			Securities Account Control Agreement, dated as of December 2, 2014, by and among Dunlap Funding LLC, as pledgor, Wells Fargo Bank, National Association, as secured party, and Wells Fargo Bank, National Association, as securities intermediary (Incorporated by reference to Exhibit 10.4 to the Registrant’ s Current Report on Form 8-K filed on December 8, 2014).
	10.36			Amendment No. 1 to Loan Financing and Servicing Agreement, dated as of February 24, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 2, 2015).

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	10.38			Amendment No. 2 to Loan Financing and Servicing Agreement, dated as of March 24, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 26, 2015).
	10.39			Amendment No. 3 to Loan Financing and Servicing Agreement, dated as of August 25, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on March 11, 2016).
	10.40			Amendment No. 4 to Loan Financing and Servicing Agreement, dated as of September 22, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 24, 2015).
	10.41			Amendment No. 5 to Loan Financing and Servicing Agreement, dated as of October 8, 2015, between Dunlap Funding LLC, as borrower, and Deutsche Bank AG, New York Branch, as administrative agent (Incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 11, 2016).
	10.42			Amendment No. 7 to Loan Financing and Servicing Agreement, dated as of January 12, 2017, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, each lender party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 19, 2017).
	10.43			Amendment No. 8 to Loan Financing and Servicing Agreement, dated as of April 5, 2017, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as administrative agent, each lender party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.37 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 filed on May 10, 2017).
	10.44			Amendment No. 9 to Loan Financing and Servicing Agreement, dated as of March 12, 2018, between Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as facility agent (formerly administrative agent), each lender party thereto, and Wells Fargo, National Association, as collateral agent and collateral custodian (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 15, 2018).
	10.45			Amendment No. 10 to Loan Financing and Servicing Agreement, dated as of June 20, 2018, among Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as facility agent (formerly administrative 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 10.48 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
	10.46*			Waiver, Assignment and Amendment No. 11 to Loan Financing and Servicing Agreement, dated as of September 17, 2018, among Dunlap Funding LLC, as borrower, Deutsche Bank AG, New York Branch, as facility agent (formerly administrative agent), each lender party thereto, each agent party thereto, and Wells Fargo Bank, National Association, as collateral agent and collateral custodian.
	10.47			Loan Agreement, dated as of May 8, 2015, by and among Jefferson Square Funding LLC, as borrower, JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).

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	10.48			Amendment No. 1 to Loan Agreement, dated as of September 8, 2015, between Jefferson Square Funding LLC, as borrower, and JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 14, 2015).
	10.49			Amendment No. 2 to Loan Agreement, dated as of March 1, 2016, between Jefferson Square Funding LLC, as borrower, and JPMorgan Chase Bank, National Association, as administrative agent, each of the lenders from time to time party thereto, Citibank, N.A., as collateral agent and securities intermediary and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 7, 2016).
	10.50			Sale and Contribution Agreement, dated as of May 8, 2015, between Jefferson Square Funding LLC, as purchaser, and the Registrant, as seller (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).
	10.51			Investment Management Agreement, dated as of May 8, 2015, by and between Jefferson Square Funding LLC and the Registrant, as investment manager (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).
	10.52			Collateral Administration Agreement, dated as of May 8, 2015, by and among Jefferson Square Funding LLC, JPMorgan Chase Bank, National Association, as administrative agent, the Registrant, as investment manager and Virtus Group, LP, as collateral administrator (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on May 14, 2015).
	10.53			Amended and Restated Loan and Security Agreement, dated as of July 16, 2018, by and between Jefferson Square Funding LLC, JPMorgan Chase Bank, N.A., the lenders party thereto, and State Street Bank and Trust Company (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 20, 2018).
	10.54			Amended and Restated Sale and Contribution Agreement, dated as of June 18, 2015, by and between the Registrant and Germantown Funding LLC (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.55			Indenture, dated as of June 18, 2015, by and between Germantown Funding LLC and Citibank, N.A., as trustee (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.56			Germantown Funding LLC Floating Rate Notes due 2027 (Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.57			September 1996 Version Master Repurchase Agreement between Goldman Sachs Bank USA and Society Hill Funding LLC, together with the related Annex and Master Confirmation thereto, each dated as of June 18, 2015 (Incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.58			Revolving Credit Agreement, dated as of June 18, 2015, by and between the Registrant and Society Hill Funding LLC (Incorporated by reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.59			Amended and Restated Investment Management Agreement, dated as of June 18, 2015, by and between Germantown Funding LLC and the Registrant (Incorporated by reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).
	10.60			Collateral Administration Agreement, dated as of June 18, 2015, by and among Germantown Funding LLC, the Registrant and Virtus Group, LP (Incorporated by reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K filed on June 24, 2015).

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	10.61			ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of June 26, 2014, including the Amended and Restated Paragraph 13 to such Credit Support Annex, dated September 5, 2017, by and between Center City Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 11, 2017).
	10.62			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, N.A. as administrative agent, and ING Capital LLC, as collateral agent. (Incorporated by reference to Exhibit 10.64 to the Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2018).
	31.1*			Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
	31.2*			Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
	32.1*			Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 November 14, 2018.

				FS INVESTMENT CORPORATION III
				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 Investment Corp III Inactive 10-Q2018 Q3 Quarterly report

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