10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

OR

☐ 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒  (Do not check if a smaller reporting company)	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 278,837,744 shares of the registrant’s common stock outstanding as of May 2, 2017.

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets as of March 31, 2017 (Unaudited) and December 31, 2016		1
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016		2
	Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March  31, 2017 and 2016		3
	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016		4
	Consolidated Schedules of Investments as of March 31, 2017 (Unaudited) and December 31, 2016		5
	Notes to Unaudited Consolidated Financial Statements		25
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		69
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		95
ITEM 4.	CONTROLS AND PROCEDURES		96
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS		97
ITEM 1A.	RISK FACTORS		97
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		97
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		97
ITEM 4.	MINE SAFETY DISCLOSURES		97
ITEM 5.	OTHER INFORMATION		97
ITEM 6.	EXHIBITS		98
	SIGNATURES		103

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FS Investment Corporation III

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31,  2017 (Unaudited)			December 31, 2016
Assets
Investments, at fair value
Non-controlled/unaffiliated investments (amortized cost—$3,292,903 and $3,145,895, respectively)	$	3,293,312		$	3,134,721
Non-controlled/affiliated investments (amortized cost—$104,110 and $103,246, respectively)		101,136			108,589
Total investments, at fair value (amortized cost—$3,397,013 and $3,249,141, respectively)		3,394,448			3,243,310
Cash		281,055			249,862
Due from counterparty		108,000			118,000
Receivable for investments sold and repaid		16,149			5,228
Income receivable		34,523			29,501
Deferred financing costs		2,823			2,641
Deferred offering costs		1,049			977
Receivable due on total return swap(1)		2,630			1,817
Prepaid expenses and other assets		166			—
Unrealized appreciation on total return swap(1)		12,527			11,403
Total assets	$	3,853,370		$	3,662,739
Liabilities
Payable for investments purchased	$	77,811		$	4,850
Repurchase agreement payable (net of deferred financing costs of $911 and $1,009, respectively)(2)		299,089			298,991
Credit facilities payable (net of deferred financing costs of $305 and $340, respectively)		1,028,395			977,360
Secured borrowing, at fair value (amortized proceeds of $13,808 and $13,801, respectively)(3)		14,092			14,040
Management fees payable		17,112			17,823
Subordinated income incentive fees payable(4)		9,619			12,323
Administrative services expense payable		782			632
Interest payable		9,081			8,586
Directors’ fees payable		261			243
Other accrued expenses and liabilities		3,190			3,951
Total liabilities		1,459,432			1,338,799
Commitments and contingencies(5)		—			—
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, 279,234,382 and 272,354,014 shares issued and outstanding, respectively		279			272
Capital in excess of par value		2,435,550			2,376,143
Accumulated net realized losses on investments and total return swap(6)		(51,374	)		(61,526	)
Accumulated undistributed (distributions in excess of) net investment income(6)		(195	)		3,718
Net unrealized appreciation (depreciation) on investments, total return swap and secured borrowing		9,678			5,333
Total stockholders’ equity		2,393,938			2,323,940
Total liabilities and stockholders’ equity	$	3,853,370		$	3,662,739
Net asset value per share of common stock at period end	$	8.57		$	8.53

(1) See Note 8 for a discussion of the Company’s total return swap agreement.

(2) See Note 8 for a discussion of the Company’s repurchase transaction.

(3) See Note 8 for a discussion of the Company’s secured borrowing.

(4) See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.

(5) See Note 9 for a discussion of the Company’s commitments and contingencies.

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

See notes to unaudited consolidated financial statements.

1

FS Investment Corporation III

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

	Three Months Ended March 31,
	2017			2016
Investment income
From non-controlled/unaffiliated investments:
Interest income	$	78,364		$	72,093
Fee income		5,919			1,183
From non-controlled/affiliated investments:
Interest income		1,169			—
Fee income		185			—
Total investment income		85,637			73,276
Operating expenses
Management fees(1)		18,616			15,590
Subordinated income incentive fees(2)		9,619			5,647
Administrative services expenses		819			574
Stock transfer agent fees		387			446
Accounting and administrative fees		278			246
Interest expense		11,820			8,458
Directors’ fees		261			251
Offering costs		504			100
Other general and administrative expenses		739			1,082
Operating expenses		43,043			32,394
Management fee waiver(1)		(1,504	)		—
Net expenses		41,539			32,394
Net investment income		44,098			40,882
Realized and unrealized gain/loss
Net realized gain (loss) on investments:
Non-controlled/unaffiliated investments		3,912			(5,828	)
Net realized gain (loss) on total return swap(3)		6,240			4,356
Net change in unrealized appreciation (depreciation) on investments:
Non-controlled/unaffiliated investments		11,583			(16,915	)
Non-controlled/affiliated investments		(8,317	)		—
Net change in unrealized appreciation (depreciation) on total return swap(3)		1,124			1,944
Net change in unrealized appreciation (depreciation) on secured borrowing(4)		(45	)		—
Total net realized and unrealized gain (loss)		14,497			(16,443	)
Net increase (decrease) in net assets resulting from operations	$	58,595		$	24,439
Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (earnings per share)	$	0.21		$	0.10
Weighted average shares outstanding		274,381,521			252,692,204

(1) See Note 4 for a discussion of the permanent waiver by FSIC III Advisor, LLC, the Company’s investment adviser, of a portion of management fees to which it was otherwise entitled during the applicable period.

(2) See Note 2 and Note 4 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 total return swap agreement.

(4) See Note 8 for a discussion of the Company’s secured borrowing.

See notes to unaudited consolidated financial statements.

2

FS Investment Corporation III

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

	Three Months Ended March 31,
	2017			2016
Operations
Net investment income	$	44,098		$	40,882
Net realized gain (loss) on investments and total return swap(1)		10,152			(1,472	)
Net change in unrealized appreciation (depreciation) on investments		3,266			(16,915	)
Net change in unrealized appreciation (depreciation) on total return swap(1)		1,124			1,944
Net change in unrealized appreciation (depreciation) on secured borrowing(2)		(45	)		—
Net increase in net assets resulting from operations		58,595			24,439
Stockholder distributions(3)
Distributions from net investment income		(48,011	)		(44,066	)
Net decrease in net assets resulting from stockholder distributions		(48,011	)		(44,066	)
Capital share transactions(4)
Issuance of common stock		47,979			122,266
Reinvestment of stockholder distributions		24,568			23,578
Repurchases of common stock		(13,133	)		(4,637	)
Net increase in net assets resulting from capital share transactions		59,414			141,207
Total increase in net assets		69,998			121,580
Net assets at beginning of period		2,323,940			1,895,042
Net assets at end of period	$	2,393,938		$	2,016,622
Accumulated undistributed (distributions in excess of net) investment income(3)	$	(195	)	$	3,045

(1) See Note 8 for a discussion of the Company’s total return swap agreement.

(2) See Note 8 for a discussion of the Company’s secured borrowing.

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

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

See notes to unaudited consolidated financial statements.

3

FS Investment Corporation III

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations	$	58,595		$	24,439
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investments		(341,257	)		(191,016	)
Paid-in-kind interest		(5,929	)		(3,333	)
Proceeds from sales and repayments of investments		207,531			75,584
Net realized (gain) loss on investments		(3,912	)		5,828
Net change in unrealized (appreciation) depreciation on investments		(3,266	)		16,915
Net change in unrealized (appreciation) depreciation on total return swap(1)		(1,124	)		(1,944	)
Net change in unrealized appreciation (depreciation) on secured borrowing(2)		45			—
Accretion of discount		(4,305	)		(3,281	)
Amortization of deferred financing costs and discount on secured borrowing		458			368
Amortization of deferred offering costs		504			100
(Increase) decrease in due from counterparty		10,000			(15,000	)
(Increase) decrease in receivable for investments sold and repaid		(10,921	)		(4,067	)
(Increase) decrease in income receivable		(5,022	)		(4,750	)
(Increase) decrease in receivable due on total return swap(1)		(813	)		279
(Increase) decrease in prepaid expenses and other assets		(166	)		42
Increase (decrease) in payable for investments purchased		72,961			7,004
Increase (decrease) in management fees payable		(711	)		1,579
Increase (decrease) in expense recoupment payable to sponsor(3)		—			(218	)
Increase (decrease) in subordinated income incentive fees payable		(2,704	)		(6,178	)
Increase (decrease) in administrative services expense payable		150			(202	)
Increase (decrease) in interest payable		495			1,229
Increase (decrease) in directors’ fees payable		18			27
Increase (decrease) in other accrued expenses and liabilities		(761	)		(2,675	)
Net cash provided by (used in) operating activities		(30,134	)		(99,270	)
Cash flows from financing activities
Issuance of common stock		47,979			141,302
Reinvestment of stockholder distributions		24,568			23,578
Repurchases of common stock		(13,133	)		(4,637	)
Offering costs incurred		(576	)		(1,200	)
Stockholder distributions		(48,011	)		(44,154	)
Borrowings under credit facilities(4)		51,000			49,345
Borrowings under repurchase agreement(5)		—			—
Proceeds from secured borrowing(2)		—			—
Deferred financing costs paid		(500	)		(171	)
Net cash provided by financing activities		61,327			164,063
Total increase (decrease) in cash		31,193			64,793
Cash at beginning of period		249,862			142,393
Cash at end of period	$	281,055		$	207,186
Supplemental disclosure
Local and excise taxes paid	$	229		$	260

(1) See Note 8 for a discussion of the Company’s total return swap agreement.

(2) See Note 8 for a discussion of the Company’s secured borrowing. During the three months ended March 31, 2017 and 2016, the Company paid $196 and $0, respectively, in interest expense on its secured borrowing.

(3) See Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts paid by the Company to its investment adviser and affiliates.

(4) See Note 8 for a discussion of the Company’s credit facilities. During the three months ended March 31, 2017 and 2016, the Company paid $8,081 and $4,897, respectively, in interest expense on the credit facilities.

(5) See Note 8 for a discussion of the Company’s repurchase transaction. During the three months ended March 31, 2017 and 2016, the Company paid $2,590 and $1,964, respectively, in interest expense pursuant to the repurchase agreement.

See notes to unaudited consolidated financial statements.

4

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments

As of March 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—94.0%
5 Arch Income Fund 2, LLC	(j)(p)	Diversified Financials	10.5%				11/18/21	$	56,494	$	56,666	$	56,494
5 Arch Income Fund 2, LLC	(j)(l)(p)	Diversified Financials	10.5%				11/18/21		76,506		76,506		76,506
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750		1.0	%	12/29/23		12,469		12,469		12,562
AG Group Merger Sub, Inc.	(l)	Commercial & Professional Services	L+750		1.0	%	12/29/23		5,500		5,500		5,541
All Systems Holding LLC	(f)(g)(i)	Commercial & Professional Services	L+770		1.0	%	10/31/23		45,000		45,000		45,320
Altus Power America, Inc.		Energy	L+750		1.5	%	9/30/21		2,805		2,805		2,854
Altus Power America, Inc.	(l)	Energy	L+750		1.5	%	9/30/21		945		945		962
ASG Technologies Group, Inc.	(g)	Software & Services	L+786, 1.2% PIK (1.2% Max PIK)		1.0	%	4/30/20		18,204		18,161		18,477
Aspect Software, Inc.	(u)	Software & Services	L+1000		1.0	%	5/25/18		2,823		2,823		2,816
Aspect Software, Inc.	(l)(u)	Software & Services	L+1000		1.0	%	5/25/18		2,310		2,310		2,304
Aspect Software, Inc.	(f)(u)	Software & Services	L+1000		1.0	%	5/25/20		10,091		10,091		10,129
Aspect Software, Inc.	(l)(u)	Software & Services	L+1200		1.0	%	5/25/18		1,822		1,822		1,822
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+803		1.0	%	5/8/19		28,000		28,000		28,420
ATX Networks Corp.	(h)(i)(j)	Technology Hardware & Equipment	L+600		1.0	%	6/11/21		9,825		9,717		9,727
ATX Networks Corp.	(g)(h)(i)(j)	Technology Hardware & Equipment	L+600		1.0	%	6/11/21		29,916		29,070		29,617
AVF Parent, LLC	(f)(h)	Retailing	L+725		1.3	%	3/1/24		17,000		17,000		17,126
AVF Parent, LLC	(l)	Retailing	L+725		1.3	%	3/1/24		5,100		5,100		5,138
BenefitMall Holdings, Inc.	(g)(h)	Commercial & Professional Services	L+725		1.0	%	11/24/20		34,213		34,213		34,384
BMC Software Finance, Inc.	(l)	Software & Services	L+400				9/10/18		10,000		10,000		9,650
Cactus Wellhead, LLC	(f)(i)	Energy	L+600		1.0	%	7/31/20		11,454		10,895		10,995
Casablanca US Holdings Inc.	(k)	Consumer Services	L+475		1.0	%	2/21/24		5,000		4,875		4,997
CEVA Group Plc	(j)	Transportation	L+500				3/19/19		2,700		2,515		2,484
CEVA Group Plc	(j)(l)	Transportation	L+500				3/19/19		12,300		11,459		11,316
Corner Investment PropCo, LLC	(f)	Consumer Services	L+975		1.3	%	11/2/19		12,289		12,478		12,504
CSafe Acquisition Co., Inc.		Capital Goods	L+725		1.0	%	11/1/21		696		696		696
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0	%	11/1/21		1,913		1,913		1,913
CSafe Acquisition Co., Inc.	(f)(h)	Capital Goods	L+725		1.0	%	10/31/23		19,950		19,950		20,125
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725		1.0	%	10/31/23		12,174		12,174		12,280
Empire Today, LLC	(f)(g)(h)	Retailing	L+800		1.0	%	11/17/22		44,888		44,887		45,190
Equian Buyer Corp.		Health Care Equipment & Services	L+500		1.0	%	12/18/21		905		905		905
Equian Buyer Corp.	(f)(g)(h)(i)	Health Care Equipment & Services	L+812		1.0	%	12/18/21		156,195		156,195		158,538
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	L+800		1.0	%	1/3/20		5,631		5,631		5,659
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)				1/3/20		3,725		3,725		3,111

See notes to unaudited consolidated financial statements.

5

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)		Amortized Cost		Fair Value(d)
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850		1.0	%	12/19/20	$	1,693	$	1,693	$	1,701
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1050				3/31/21		36,164		36,336		36,344
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100				3/31/21		50,000		50,000		50,750
Greystone Equity Member Corp.	(j)(l)	Diversified Financials	L+1100				3/31/21		19,836		19,836		19,936
Gulf Finance, LLC	(h)	Energy	L+525		1.0	%	8/25/23		4,975		4,837		4,977
H.M. Dunn Co., Inc.	(f)	Capital Goods	L+954		1.0	%	3/26/21		9,643		9,643		9,643
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850		1.0	%	12/19/20		6,207		6,207		6,238
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800		1.3	%	5/31/20		10,368		10,368		10,524
JMC Acquisition Merger Corp.	(f)(g)(h)(i)	Capital Goods	L+857		1.0	%	11/6/21		105,736		105,736		106,265
JSS Holdings, Inc.	(f)(g)(h)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0	%	3/31/23		66,000		65,340		65,340
JSS Holdings, Inc.	(l)	Capital Goods	L+800, 0.0% PIK (2.5% Max PIK)		1.0	%	3/31/23		12,000		12,000		12,000
Latham Pool Products, Inc.	(g)(h)	Commercial & Professional Services	L+775		1.0	%	6/29/21		45,000		45,000		45,225
Murray Energy Corp.	(f)(i)	Energy	L+725		1.0	%	4/16/20		10,588		10,385		10,314
Nobel Learning Communities, Inc.		Consumer Services	L+450		1.0	%	4/27/20		5,031		5,031		5,031
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+450		1.0	%	4/27/20		6,149		6,149		6,149
Nobel Learning Communities, Inc.	(f)(g)(h)(i)	Consumer Services	L+840		1.0	%	4/27/21		84,472		84,472		84,894
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+812		1.0	%	9/2/22		21,746		21,746		21,882
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+750		1.0	%	9/2/22		3,250		3,250		3,270
Panda Temple Power, LLC	(f)(m)(n)	Energy	L+625		1.0	%	3/6/22		14,885		14,673		12,652
Payless Inc.	(k)(n)	Retailing	L+400		1.0	%	3/11/21		2,680		1,294		1,322
PHRC License, LLC	(f)	Consumer Services	L+900		1.5	%	8/14/20		14,574		14,574		14,793
Polymer Additives, Inc.	(f)(i)	Materials	L+888		1.0	%	12/19/22		18,920		18,920		19,252
Polymer Additives, Inc.	(f)(h)	Materials	L+978		1.0	%	12/19/22		21,623		21,623		21,623
Power Distribution, Inc.		Capital Goods	L+725		1.3	%	1/25/23		20,103		20,103		20,103
Production Resource Group, LLC	(f)(i)	Media	L+850		1.0	%	7/23/19		52,500		52,403		51,975
Production Resource Group, LLC	(g)(h)(i)	Media	L+850		1.0	%	7/23/19		75,902		75,901		75,142
Propulsion Acquisition, LLC	(h)(i)	Commercial & Professional Services	L+600		1.0	%	7/13/21		21,280		20,032		21,174
PSKW, LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+838		1.0	%	11/25/21		154,000		154,000		150,073
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+725		1.0	%	3/15/23		101,063		101,063		102,578
Rogue Wave Software, Inc.	(f)(g)(h)(i)	Software & Services	L+861		1.0	%	9/25/21		123,900		123,900		124,519
Safariland, LLC	(f)(h)	Capital Goods	L+770		1.0	%	11/18/23		42,893		42,893		43,643
Safariland, LLC	(l)	Capital Goods	L+725		1.0	%	11/18/23		11,566		11,566		11,769
Sequential Brands Group, Inc.	(f)(g)(h)(i)	Consumer Durables & Apparel	L+900				7/1/22		130,404		130,404		131,709
Sorenson Communications, Inc.	(f)	Telecommunication Services	L+575		2.3	%	4/30/20		4,887		4,873		4,905

See notes to unaudited consolidated financial statements.

6

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)		Amortized Cost			Fair Value(d)
Sports Authority, Inc.	(f)(m)(n)	Retailing	L+600		1.5	%	11/16/17	$	3,263	$	2,270		$	234
SSC (Lux) Limited S.a. r.l.	(f)(g)(j)	Health Care Equipment & Services	L+750		1.0	%	9/10/24		45,455		45,455			45,511
Strike, LLC	(l)	Energy	L+800		1.0	%	5/30/19		6,667		6,572			6,800
Strike, LLC	(h)	Energy	L+800		1.0	%	11/30/22		4,938		4,793			5,036
SunGard Availability Services Capital, Inc.	(l)	Software & Services	L+450				3/8/18		7,000		5,539			6,650
SunGard Availability Services Capital, Inc.	(f)(h)(i)	Software & Services	L+500		1.0	%	3/29/19		24,822		23,714			24,108
Sunnova Asset Portfolio 5 Holdings, LLC		Energy	12.0%, 0.0% PIK (12.0% Max PIK)				11/14/21		12,957		12,778			12,957
Swift Worldwide Resources US Holdings Corp.		Energy	L+1100		1.0	%	7/20/21		17,226		17,226			17,527
TierPoint, LLC	(h)	Software & Services	L+450		1.0	%	12/2/21		3,611		3,550			3,631
Transplace Texas, LP	(f)(g)(h)(i)	Transportation	L+744		1.0	%	9/16/21		179,976		179,976			181,325
U.S. Xpress Enterprises, Inc.	(f)	Transportation	L+1000, 0.0% PIK (1.8% Max PIK)		1.5	%	5/30/19		10,612		10,612			10,559
USI Senior Holdings, Inc.	(f)	Capital Goods	L+782		1.0	%	1/5/22		5,000		5,000			5,010
USI Senior Holdings, Inc.	(l)	Capital Goods	L+725		1.0	%	1/5/22		1,190		1,190			1,193
UTEX Industries, Inc.	(f)	Energy	L+400		1.0	%	5/21/21		748		746			704
Vertellus Performance Chemicals LLC	(f)(g)	Materials	L+950		1.0	%	1/30/20		42,000		42,000			39,278
Warren Resources, Inc.	(g)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0	%	5/22/20		17,789		17,789			17,500
Warren Resources, Inc.	(l)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0	%	5/22/20		1,265		1,264			1,244
Waste Pro USA, Inc.	(f)(g)	Commercial & Professional Services	L+750		1.0	%	10/15/20		33,287		33,287			33,828
York Risk Services Holding Corp.	(k)	Insurance	L+375		1.0	%	10/1/21		997		990			975
Zeta Interactive Holdings Corp.	(g)(h)(i)	Software & Services	L+750		1.0	%	7/29/22		47,608		47,728			48,401
Zeta Interactive Holdings Corp.	(g)(h)(t)	Software & Services	L+750		1.0	%	7/29/22		13,929		13,808			14,059
Zeta Interactive Holdings Corp.	(l)	Software & Services	L+750		1.0	%	7/29/22		8,664		8,664			8,794
Zeta Interactive Holdings Corp.	(l)(t)	Software & Services	L+750		1.0	%	7/29/22		2,229		2,229			2,262
Total Senior Secured Loans—First Lien											2,450,677			2,456,613
Unfunded Loan Commitments											(206,738	)		(206,738	)
Net Senior Secured Loans—First Lien											2,243,939			2,249,875
Senior Secured Loans—Second Lien—8.9%
Alison US LLC	(g)(j)	Capital Goods	L+850		1.0	%	8/29/22		6,389		6,193			6,373
Arena Energy, LP	(f)(g)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0	%	1/24/21		24,105		24,105			24,226
Ascent Resources—Marcellus, LLC	(n)	Energy	L+750		1.0	%	8/4/21		6,667		6,583			850

See notes to unaudited consolidated financial statements.

7

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)		Amortized Cost			Fair Value(d)
ASG Technologies Group, Inc.		Software & Services	L+1100, 0.0% PIK (6.0% Max PIK)		1.0	%	6/27/22	$	5,155	$	3,924		$	5,077
Byrider Finance, LLC		Automobiles & Components	L+1000, 0.5% PIK (0.5% Max PIK)		1.3	%	8/22/20		3,370		3,370			3,370
Casablanca US Holdings Inc.	(k)	Consumer Services	L+900		1.0	%	2/21/25		3,330		3,213			3,288
CDS U.S. Intermediate Holdings, Inc.	(f)(j)	Media	L+825		1.0	%	7/10/23		9,000		8,893			8,978
Chief Exploration & Development LLC		Energy	L+650		1.3	%	5/16/21		991		927			968
Chisholm Oil and Gas Operating, LLC		Energy	L+800		1.0	%	3/21/24		750		750			750
Chisholm Oil and Gas Operating, LLC	(l)	Energy	L+800		1.0	%	3/21/24		250		250			250
Compuware Corp.	(f)(g)	Software & Services	L+825		1.0	%	12/15/22		13,654		12,585			13,763
Crossmark Holdings, Inc.		Media	L+750		1.3	%	12/21/20		1,500		1,292			1,001
DTZ U.S. Borrower, LLC		Real Estate	L+825		1.0	%	11/4/22		170		172			170
EagleView Technology Corp.	(i)	Software & Services	L+825		1.0	%	7/14/23		15,385		15,199			15,361
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)				10/3/21		3,252		3,252			2,472
Fieldwood Energy LLC		Energy	L+713		1.3	%	9/30/20		5,835		4,558			4,245
Gruden Acquisition, Inc.	(i)	Transportation	L+850		1.0	%	8/18/23		10,000		9,596			9,700
Inmar, Inc.	(h)	Software & Services	L+700		1.0	%	1/27/22		5,008		5,004			4,746
Jazz Acquisition, Inc.		Capital Goods	L+675		1.0	%	6/19/22		1,998		2,006			1,783
Jonah Energy LLC		Energy	L+650		1.0	%	5/12/21		3,739		3,431			3,599
Logan’s Roadhouse, Inc.		Consumer Services	L+850 PIK (L+850 Max PIK)		1.0	%	11/23/20		3,667		3,639			3,483
National Surgical Hospitals, Inc.	(g)	Health Care Equipment & Services	L+900		1.0	%	6/1/23		5,000		5,000			5,022
Neff Rental LLC	(f)	Capital Goods	L+625		1.0	%	6/9/21		11,248		11,265			11,281
Nielsen & Bainbridge, LLC	(g)	Consumer Durables & Apparel	L+925		1.0	%	8/15/21		5,558		5,495			5,544
Peak 10, Inc.	(i)	Software & Services	L+725		1.0	%	6/17/22		18,510		17,565			18,244
Spencer Gifts LLC	(g)(i)	Retailing	L+825		1.0	%	6/29/22		37,000		36,948			29,970
Titan Energy Operating, LLC	(g)	Energy	2.0%, L+900 PIK (L+900 Max PIK)		1.0	%	2/23/20		35,333		29,891			27,101
UTEX Industries, Inc.		Energy	L+725		1.0	%	5/20/22		1,273		1,268			1,120
Total Senior Secured Loans—Second Lien											226,374			212,735
Unfunded Loan Commitments											(250	)		(250	)
Net Senior Secured Loans—Second Lien											226,124			212,485

See notes to unaudited consolidated financial statements.

8

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 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 Bonds—4.0%
Black Swan Energy Ltd.		(j)	Energy		9.0%			1/20/24	$	1,333	$	1,333	$	1,316
Caesars Entertainment Resort Properties, LLC		(e)	Consumer Services		8.0%			10/1/20		5,000		5,231		5,218
Caesars Growth Properties Holdings, LLC		(e)(k)	Consumer Services		9.4%			5/1/22		18,000		19,372		19,384
CEVA Group Plc		(e)(j)	Transportation		7.0%			3/1/21		3,000		2,588		2,681
Diamond Resorts International, Inc.		(e)(r)	Consumer Services		7.8%			9/1/23		30,000		30,000		31,382
FBM Finance, Inc.		(e)	Capital Goods		8.3%			8/15/21		7,140		7,140		7,609
Global A&T Electronics Ltd.		(e)(j)	Semiconductors & Semiconductor Equipment		10.0%			2/1/19		12,550		12,101		9,130
Ridgeback Resources Inc.		(j)	Energy		12.0%			12/29/20		335		328		335
Sorenson Communications, Inc.		(e)(r)	Telecommunication Services		9.0%, 0.0% PIK (9.0% Max PIK)			10/31/20		11,820		11,493		11,111
Valeant Pharmaceuticals International, Inc.		(j)	Pharmaceuticals, Biotechnology & Life Sciences		6.5%			3/15/22		1,734		1,734		1,786
Valeant Pharmaceuticals International, Inc.		(j)	Pharmaceuticals, Biotechnology & Life Sciences		7.0%			3/15/24		3,233		3,233		3,316
Velvet Energy Ltd.		(j)	Energy		9.0%			10/5/23		3,000		3,000		2,984
Total Senior Secured Bonds												97,553		96,252
Subordinated Debt—27.8%
Ascent Resources Utica Holdings, LLC		(e)(k)	Energy		10.0%			4/1/22		30,000		30,000		31,031
Bellatrix Exploration Ltd.		(e)(j)	Energy		8.5%			5/15/20		10,000		9,865		9,531
BMC Software Finance, Inc.		(e)	Software & Services		7.3%			6/1/18		6,713		6,639		6,914
Calumet Specialty Products Partners, L.P.		(e)(j)	Energy		7.8%			4/15/23		10,300		10,238		8,721
Canbriam Energy Inc.		(e)(j)	Energy		9.8%			11/15/19		20,300		20,160		21,315
CEC Entertainment, Inc.		(e)	Consumer Services		8.0%			2/15/22		39,014		37,554		40,904
Ceridian HCM Holding, Inc.		(e)(r)	Commercial & Professional Services		11.0%			3/15/21		92,439		92,469		97,331
Coveris Holdings S.A.		(e)(j)	Materials		7.9%			11/1/19		32,855		32,241		32,440
Eclipse Resources Corp.		(e)(j)	Energy		8.9%			7/15/23		9,175		9,011		9,366
EV Energy Partners, L.P.			Energy		8.0%			4/15/19		2,150		1,985		1,644
Exterran Energy Solutions, L.P.		(e)(j)(k)	Capital Goods		8.1%			5/1/25		7,714		7,714		7,878
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			1/30/25		759		759		754
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			4/30/25		4,824		4,824		4,794
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			9/3/25		997		997		991

See notes to unaudited consolidated financial statements.

9

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 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)			9/29/25	$	938	$	938	$	933
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			12/4/25		62,340		62,340		61,950
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			12/9/25		10,196		10,196		10,132
Global Jet Capital Inc.		(j)	Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			1/29/26		5,339		5,339		5,306
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			2/17/26		13,054		13,054		12,973
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			4/14/26		8,084		8,085		8,034
Global Jet Capital Inc.			Commercial & Professional Services		15.0% PIK (15.0% Max PIK)			12/2/26		11,948		11,948		11,874
Jupiter Resources Inc.		(e)(j)	Energy		8.5%			10/1/22		31,850		28,940		26,356
NewStar Financial, Inc.		(f)(j)	Diversified Financials		8.3%, 0.0% PIK (8.8% Max PIK)			12/4/24		75,000		61,850		70,125
Northern Oil and Gas, Inc.		(e)	Energy		8.0%			6/1/20		3,150		3,042		2,642
P.F. Chang’s China Bistro, Inc.		(e)(g)(i)(r)	Consumer Services		10.3%			6/30/20		70,595		70,644		70,606
PriSo Acquisition Corp.		(e)(r)	Capital Goods		9.0%			5/15/23		50,859		50,470		51,050
S1 Blocker Buyer Inc.			Commercial & Professional Services		10.0% PIK (10.0% Max PIK)			10/31/22		130		130		135
Sorenson Communications, Inc.		(e)	Telecommunication Services		13.9%, 0.0% PIK (13.9% Max PIK)			10/31/21		8,983		9,359		8,579
SunGard Availability Services Capital, Inc.		(e)	Software & Services		8.8%			4/1/22		16,400		11,699		11,794
Talos Production LLC			Energy		9.8%			2/15/18		4,500		4,334		3,082
TI Group Automotive Systems, LLC		(e)(j)	Automobiles & Components		8.8%			7/15/23		7,302		7,302		7,713
York Risk Services Holding Corp.		(e)(k)	Insurance		8.5%			10/1/22		31,050		28,795		29,245
Total Subordinated Debt												652,921		666,143
Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D		(j)	Diversified Financials		L+435			1/25/27		730		692		730
NewStar Clarendon 2014-1A Class Subord. B		(j)	Diversified Financials		15.8%			1/25/27		8,310		6,533		6,728
Total Collateralized Securities												7,225		7,458

See notes to unaudited consolidated financial statements.

10

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Number of Shares		Cost		Fair Value(d)
Equity/Other—6.8%
5 Arches, LLC, Common Equity	(j)(m)(o)	Diversified Financials		33,163	$	875	$	875
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		1,131		873
Altus Power America Holdings, LLC, Common Equity	(m)	Energy		462,008		462		462
Altus Power America Holdings, LLC, Preferred Equity	(q)	Energy		934,959		935		935
ASG Technologies Group, Inc., Warrants, 6/27/2022	(m)	Software & Services		48,325		1,377		826
Aspect Software Parent, Inc., Common Equity	(m)(u)	Software & Services		1,142,735		53,808		54,966
ATX Holdings, LLC, Common Equity	(j)(m)	Technology Hardware & Equipment		83,488		134		134
Chisholm Oil and Gas, LLC, Series A Units	(m)(o)	Energy		53,793		54		54
CSF Group Holdings, Inc., Common Equity	(m)	Capital Goods		173,900		174		174
Fairway Group Holdings Corp., Common Equity	(m)(u)	Food & Staples Retailing		71,465		2,296		214
Global Jet Capital Holdings, LP, Preferred Equity	(j)(m)	Commercial & Professional Services		42,484,416		42,484		42,484
H.I.G. Empire Holdco, Inc., Common Equity	(m)	Retailing		206		614		628
Harvey Holdings, LLC, Common Equity	(m)	Capital Goods		2,000,000		2,000		5,000
Industrial Group Intermediate Holdings, LLC, Common Equity	(m)(o)	Materials		220,619		221		386
JMC Acquisition Holdings, LLC, Common Equity	(m)	Capital Goods		8,068		8,068		8,995
JSS Holdco, LLC, Net Profits Interest	(m)	Capital Goods		—		—		—
NewStar Financial, Inc., Warrants, 11/4/2024	(j)(m)	Diversified Financials		3,000,000		15,058		6,480
North Haven Cadence TopCo, LLC, Common Equity	(m)	Consumer Services		833,333		833		1,000
PDI Parent LLC, Common Equity	(m)	Capital Goods		923,077		923		923
Ridgeback Resources Inc., Common Equity	(j)(m)(s)	Energy		827,156		5,082		4,843
Roadhouse Holding Inc., Common Equity	(m)	Consumer Services		1,202,991		1,250		1,396
S1 Blocker Buyer Inc., Common Equity		Commercial & Professional Services		60		600		677
SandRidge Energy, Inc., Common Equity	(e)(j)(m)	Energy		253,009		5,647		4,678
Sequential Brands Group, Inc., Common Equity	(m)	Consumer Durables & Apparel		125,391		1,693		488
SSC Holdco Limited, Common Equity	(j)(m)	Health Care Equipment & Services		113,636		2,273		2,273
Sunnova Energy Corp., Common Equity	(m)	Energy		577,086		2,166		3,307
Sunnova Energy Corp., Preferred Equity	(m)	Energy		54,543		290		313
TE Holdings, LLC, Common Equity	(m)(o)	Energy		129,829		1,104		1,047
TE Holdings, LLC, Preferred Equity	(m)	Energy		86,061		859		1,097
Titan Energy, LLC, Common Equity	(m)	Energy		72,739		2,299		1,324
Warren Resources, Inc., Common Equity	(m)(u)	Energy		998,936		4,695		4,295

See notes to unaudited consolidated financial statements.

11

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Number of Shares		Cost		Fair Value(d)
White Star Petroleum Holdings, LLC, Common Equity	(m)(o)	Energy		1,738,244	$	1,478	$	1,477
Zeta Interactive Holdings Corp., Preferred Equity	(m)	Software & Services		1,051,348		8,357		9,602
Total Equity/Other						169,251		162,235
TOTAL INVESTMENTS—141.8%					$	3,397,013		3,394,448
LIABILITIES IN EXCESS OF ASSETS—(41.8%)								(1,000,510	)
NET ASSETS—100.0%							$	2,393,938
Total Return Swap			Notional Amount				Unrealized Appreciation
Citibank TRS Facility (Note 8)	(j)		$	401,260			$	12,527

(a) Security may be an obligation of one or more entities affiliated with the named company.

(b) Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2017, the three-month London Interbank Offered Rate, or LIBOR or L, was 1.15% and the U.S. Prime Lending Rate, or Prime, was 4.00%. 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) 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, 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).

See notes to unaudited consolidated financial statements.

12

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2017

(in thousands, except share amounts)

(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) 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).

(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 March 31, 2017, 86.2% of the Company’s total assets represented qualifying assets. In addition, as described in Note 8, 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, 84.7% of the Company’s total assets represented qualifying assets as of March 31, 2017.

(k) Position or portion thereof unsettled as of March 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 March 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 March 31, 2017, the fair value of securities rehypothecated by BNPP was $161,751.

(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 $0.75 as of March 31, 2017.

(t) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the consolidated schedule of investments as of March 31, 2017 (see Note 8).

See notes to unaudited consolidated financial statements.

13

FS Investment Corporation III

Unaudited Consolidated Schedule of Investments (continued)

As of March 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 March 31, 2017, the Company held investments in three 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 three months ended March 31, 2017:

Portfolio Company	Fair Value at December 31, 2016		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 March 31, 2017		Interest Income		Fee Income		Dividend Income
Senior Secured Loans—First Lien
Aspect Software, Inc.(1)	$	3,200	$	521	$	(898	)		—		—	$	(13	)	$	2,810	$	286	$	51		—
Aspect Software, Inc.	$	10,270		—	$	(65	)		—		—	$	(76	)	$	10,129	$	90	$	77		—
Aspect Software, Inc.(2)		—		—		—			—		—		—			—		—	$	57		—
Fairway Group Acquisition Co.	$	5,687		—		—			—		—	$	(28	)	$	5,659	$	127		—		—
Fairway Group Acquisition Co.	$	3,306	$	92		—			—		—	$	(287	)	$	3,111	$	91		—		—
Warren Resources, Inc.(3)	$	17,744	$	45		—			—		—	$	(309	)	$	17,480	$	488		—		—
Senior Secured Loans—Second Lien
Fairway Group Acquisition Co.	$	2,595	$	88		—			—		—	$	(211	)	$	2,472	$	87		—		—
Equity/Other
Aspect Software Parent, Inc., Common Equity	$	59,634	$	1,081		—			—		—	$	(5,749	)	$	54,966		—		—		—
Fairway Group Holdings Corp., Common Equity	$	1,858		—		—			—		—	$	(1,644	)	$	214		—		—		—
Warren Resources, Inc., Common Equity	$	4,295		—		—			—		—		—		$	4,295		—		—		—

(1) Security includes a partially unfunded commitment with an amortized cost of $2,310 and a fair value of $2,304.

(2) Security is an unfunded commitment with an amortized cost of $1,822 and a fair value of $1,822.

(3) Security includes a partially unfunded commitment with an amortized cost of $1,264 and a fair value of $1,244.

See notes to unaudited consolidated financial statements.

14

FS Investment Corporation III

Consolidated Schedule of Investments

As of December 31, 2016

(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—91.9%
5 Arch Income Fund 2, LLC	(j)(p)	Diversified Financials	10.5%			11/18/21	$	68,464	$	68,639	$	68,464
5 Arch Income Fund 2, LLC	(j)(l)(p)	Diversified Financials	10.5%			11/18/21		64,536		64,536		64,536
Aeneas Buyer Corp.		Health Care Equipment & Services	L+500		1.0%	12/18/21		916		916		916
Aeneas Buyer Corp.	(f)(g)(h)(i)	Health Care Equipment & Services	L+815		1.0%	12/18/21		156,195		156,195		158,538
AG Group Merger Sub, Inc.	(g)	Commercial & Professional Services	L+750		1.0%	12/29/23		12,500		12,500		12,500
AG Group Merger Sub, Inc.	(l)	Commercial & Professional Services	L+750		1.0%	12/29/23		5,500		5,500		5,500
All Systems Holding LLC	(f)(g)(i)	Commercial & Professional Services	L+770		1.0%	10/31/23		45,000		45,000		45,378
Altus Power America, Inc.		Energy	L+750		1.5%	9/30/21		2,665		2,665		2,715
Altus Power America, Inc.	(l)	Energy	L+750		1.5%	9/30/21		1,085		1,085		1,106
American Bath Group, LLC	(h)	Capital Goods	L+575		1.0%	9/30/23		3,854		3,703		3,868
ASG Technologies Group, Inc.	(g)	Software & Services	L+786, 1.2% PIK (1.2% Max PIK)		1.0%	4/30/20		18,150		18,104		18,422
Aspect Software, Inc.	(u)	Software & Services	L+1000		1.0%	5/25/18		3,200		3,200		3,200
Aspect Software, Inc.	(l)(u)	Software & Services	L+1000		1.0%	5/25/18		110		110		110
Aspect Software, Inc.	(u)	Software & Services	L+1000		1.0%	5/25/20		10,156		10,156		10,270
Atlas Aerospace LLC	(f)(g)	Capital Goods	L+804		1.0%	5/8/19		28,000		28,000		28,420
ATX Networks Corp.	(h)(i)(j)	Technology Hardware & Equipment	L+600		1.0%	6/11/21		9,850		9,736		9,678
ATX Networks Corp.	(g)(h)(i)(j)	Technology Hardware & Equipment	L+600		1.0%	6/11/21		29,991		29,093		29,091
BenefitMall Holdings, Inc.	(g)(h)	Commercial & Professional Services	L+725		1.0%	11/24/20		34,300		34,300		34,643
BMC Software Finance, Inc.	(l)	Software & Services	L+400			9/10/18		10,000		10,000		9,456
Cactus Wellhead, LLC	(f)(i)	Energy	L+600		1.0%	7/31/20		11,483		10,892		10,478
Caesars Entertainment Operating Co., Inc.	(j)(m)	Consumer Services	L+575			3/1/17		3,846		3,820		3,892
Caesars Entertainment Operating Co., Inc.	(j)(m)	Consumer Services	L+675			3/1/17		594		590		610
CEVA Group Plc	(j)(l)	Transportation	L+500			3/19/19		15,000		13,851		12,000
Corner Investment PropCo, LLC	(f)	Consumer Services	L+975		1.3%	11/2/19		12,289		12,494		12,412
CSafe Acquisition Co., Inc.		Capital Goods	L+725			11/1/21		348		348		348
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725			11/1/21		2,261		2,261		2,261
CSafe Acquisition Co., Inc.	(f)(h)	Capital Goods	L+725			10/31/23		20,000		20,000		20,000
CSafe Acquisition Co., Inc.	(l)	Capital Goods	L+725			10/31/23		12,174		12,174		12,174
Emerging Markets Communications, LLC	(g)	Telecommunication Services	L+575		1.0%	7/1/21		16,745		16,144		16,494
Empire Today, LLC	(f)(g)(h)	Retailing	L+800		1.0%	11/17/22		45,000		45,000		45,398
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	L+800		1.0%	1/3/20		5,631		5,631		5,687

See notes to unaudited consolidated financial statements.

15

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor		Maturity	Principal Amount(c)		Amortized Cost		Fair Value(d)
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	10.0% PIK (10.0% Max PIK)			1/3/20	$	3,633	$	3,633	$	3,306
Fox Head, Inc.	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20		1,697		1,697		1,673
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1050			3/31/21		46,307		46,492		46,712
Greystone Equity Member Corp.	(j)	Diversified Financials	L+1100			3/31/21		50,000		50,000		51,125
Greystone Equity Member Corp.	(j)(l)	Diversified Financials	L+1100			3/31/21		9,693		9,693		9,778
Gulf Finance, LLC	(h)	Energy	L+525		1.0%	8/25/23		4,988		4,844		5,025
H.M. Dunn Co., Inc.	(f)	Capital Goods	L+955		1.0%	3/26/21		9,643		9,643		9,751
H.M. Dunn Co., Inc.	(l)	Capital Goods	L+775		1.0%	3/26/21		3,214		3,214		3,250
Hybrid Promotions, LLC	(f)	Consumer Durables & Apparel	L+850		1.0%	12/19/20		6,223		6,223		6,133
Industrial Group Intermediate Holdings, LLC	(g)	Materials	L+800		1.3%	5/31/20		10,379		10,379		10,534
JMC Acquisition Merger Corp.	(f)(g)(h)(i)	Capital Goods	L+857		1.0%	11/6/21		105,736		105,736		105,736
JSS Holdings, Inc.	(h)	Capital Goods	L+650		1.0%	8/31/21		15,962		15,327		15,883
Latham Pool Products, Inc.	(g)(h)	Commercial & Professional Services	L+775		1.0%	6/29/21		45,000		45,000		45,450
Murray Energy Corp.	(i)	Energy	L+725		1.0%	4/16/20		10,616		10,398		10,191
Nobel Learning Communities, Inc.		Consumer Services	L+450		1.0%	4/27/20		4,193		4,193		4,193
Nobel Learning Communities, Inc.	(l)	Consumer Services	L+450		1.0%	4/27/20		6,988		6,988		6,988
Nobel Learning Communities, Inc.	(f)(g)(h)(i)	Consumer Services	L+841		1.0%	4/27/21		84,472		84,472		85,739
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+813		1.0%	9/2/22		21,417		21,417		21,417
North Haven Cadence Buyer, Inc.	(l)	Consumer Services	L+750		1.0%	9/2/22		3,583		3,583		3,583
Panda Temple Power, LLC	(f)	Energy	L+625		1.0%	3/6/22		14,738		14,515		13,116
PHRC License, LLC	(f)	Consumer Services	L+900		1.5%	8/14/20		14,626		14,626		14,773
Polymer Additives, Inc.	(f)(i)	Materials	L+888		1.0%	12/20/21		18,920		18,920		19,015
Polymer Additives, Inc.	(h)	Materials	L+978		1.0%	12/20/21		9,706		9,706		10,094
Production Resource Group, LLC	(f)(i)	Media	L+850		1.0%	7/23/19		52,500		52,395		51,975
Production Resource Group, LLC	(g)(h)(i)	Media	L+850		1.0%	7/23/19		75,902		75,902		75,142
Propulsion Acquisition, LLC	(h)(i)	Commercial & Professional Services	L+600		1.0%	7/13/21		21,334		20,030		20,907
PSKW, LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+839		1.0%	11/25/21		154,000		154,000		149,834
Roadrunner Intermediate Acquisition Co., LLC	(f)(g)(h)(i)	Health Care Equipment & Services	L+800		1.0%	9/22/21		101,719		101,719		103,245
Rogue Wave Software, Inc.	(f)(g)(h)(i)	Software & Services	L+802		1.0%	9/25/21		123,900		123,900		123,900
Safariland, LLC	(f)(h)	Capital Goods	L+769		1.0%	11/18/23		42,893		42,893		42,786
Safariland, LLC	(l)	Capital Goods	L+725		1.0%	11/18/23		11,566		11,566		11,537
Sequential Brands Group, Inc.	(f)(g)(h)(i)(j)	Consumer Durables & Apparel	L+900			7/1/22		131,060		131,060		132,370

See notes to unaudited consolidated financial statements.

16

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)		Amortized Cost			Fair Value(d)
ServiceMaster Co., LLC	(l)	Commercial & Professional Services	L+325				7/1/19	$	2,500	$	2,500		$	2,075
Sorenson Communications, Inc.	(f)	Telecommunication Services	L+575		2.3	%	4/30/20		4,899		4,884			4,863
Sports Authority, Inc.	(f)(m)(n)	Retailing	L+600		1.5	%	11/16/17		3,263		2,645			665
Strike, LLC	(l)	Energy	L+800		1.0	%	5/30/19		6,667		6,568			6,567
Strike, LLC	(h)(k)	Energy	L+800		1.0	%	11/30/22		5,000		4,850			4,950
SunGard Availability Services Capital, Inc.	(l)	Software & Services	L+450				3/8/18		7,000		5,539			6,353
SunGard Availability Services Capital, Inc.	(f)(h)(i)	Software & Services	L+500		1.0	%	3/29/19		24,822		23,587			24,098
Sunnova Asset Portfolio 5 Holdings, LLC		Energy	12.0%, 0.0% PIK (12.0% Max PIK)				11/14/21		14,108		13,900			14,249
Swift Worldwide Resources US Holdings Corp.		Energy	L+1100		1.0	%	7/20/21		17,269		17,270			17,269
TierPoint, LLC	(h)	Software & Services	L+450		1.0	%	12/2/21		3,621		3,556			3,649
Transplace Texas, LP	(f)(g)(h)(i)	Transportation	L+744		1.0	%	9/16/21		179,976		179,976			179,976
Transplace Texas, LP	(l)	Transportation	L+700		1.0	%	9/16/21		3,973		3,973			3,973
TTM Technologies, Inc.	(h)(j)	Technology Hardware & Equipment	L+425		1.0	%	5/31/21		1,847		1,733			1,874
U.S. Xpress Enterprises, Inc.	(f)	Transportation	L+1000, 0.0% PIK (1.8% Max PIK)		1.5	%	5/30/19		10,687		10,687			10,687
UTEX Industries, Inc.	(f)	Energy	L+400		1.0	%	5/21/21		750		747			702
Vertellus Performance Chemicals LLC	(f)(g)	Materials	L+950		1.0	%	1/30/20		42,000		42,000			39,451
Warren Resources, Inc.	(g)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0	%	5/22/20		17,744		17,744			17,744
Warren Resources, Inc.	(l)(u)	Energy	L+900, 1.0% PIK (1.0% Max PIK)		1.0	%	5/22/20		1,265		1,265			1,265
Waste Pro USA, Inc.	(f)(g)	Commercial & Professional Services	L+750		1.0	%	10/15/20		33,372		33,372			33,997
Zeta Interactive Holdings Corp.	(g)(h)(i)	Software & Services	L+750		1.0	%	7/29/22		47,608		47,735			48,083
Zeta Interactive Holdings Corp.	(g)(h)(t)	Software & Services	L+750		1.0	%	7/29/22		13,929		13,801			14,020
Zeta Interactive Holdings Corp.	(l)	Software & Services	L+750		1.0	%	7/29/22		8,664		8,664			8,743
Zeta Interactive Holdings Corp.	(l)(t)	Software & Services	L+750		1.0	%	7/29/22		2,229		2,229			2,249
Total Senior Secured Loans—First Lien											2,310,782			2,311,978
Unfunded Loan Commitments											(176,049	)		(176,049	)
Net Senior Secured Loans—First Lien											2,134,733			2,135,929
Senior Secured Loans—Second Lien—10.1%
Alison US LLC	(g)(j)	Capital Goods	L+850		1.0	%	8/29/22		6,389		6,186			6,197
Arena Energy, LP	(g)	Energy	L+900, 4.0% PIK (4.0% Max PIK)		1.0	%	1/24/21		23,864		23,864			23,983

See notes to unaudited consolidated financial statements.

17

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Rate(b)	Floor			Maturity	Principal Amount(c)		Amortized Cost		Fair Value(d)
Ascent Resources—Marcellus, LLC		Energy	L+750		1.0	%	8/4/21	$	6,667	$	6,583	$	883
Ascent Resources—Utica, LLC		Energy	L+950		1.5	%	9/30/18		683		681		689
ASG Technologies Group, Inc.		Software & Services	L+1100, 0.0% PIK (6.0% Max PIK)		1.0	%	6/27/22		5,155		3,875		5,000
BBB Industries US Holdings, Inc.	(f)(g)	Automobiles & Components	L+875		1.0	%	11/3/22		25,000		23,789		24,375
Byrider Finance, LLC		Automobiles & Components	L+1000, 0.5% PIK (0.5% Max PIK)		1.3	%	8/22/20		3,349		3,349		3,299
CDS U.S. Intermediate Holdings, Inc.	(f)(j)	Media	L+825		1.0	%	7/10/23		9,000		8,889		8,837
Chief Exploration & Development LLC		Energy	L+650		1.3	%	5/16/21		991		924		974
ColourOz Investment 2 LLC	(j)	Materials	L+725		1.0	%	9/5/22		1,143		1,136		1,132
Compuware Corp.	(f)(g)	Software & Services	L+825		1.0	%	12/15/22		17,000		15,610		17,085
Crossmark Holdings, Inc.		Media	L+750		1.3	%	12/21/20		1,500		1,280		712
DTZ U.S. Borrower, LLC		Real Estate	L+825		1.0	%	11/4/22		170		172		171
EagleView Technology Corp.	(i)	Software & Services	L+825		1.0	%	7/14/23		15,385		15,192		15,361
Fairway Group Acquisition Co.	(u)	Food & Staples Retailing	11.0% PIK (11.0% Max PIK)				10/3/21		3,164		3,164		2,595
Fieldwood Energy LLC		Energy	L+713		1.3	%	9/30/20		5,835		4,492		4,158
Gruden Acquisition, Inc.	(i)	Transportation	L+850		1.0	%	8/18/23		10,000		9,581		7,917
Inmar, Inc.	(h)	Software & Services	L+700		1.0	%	1/27/22		5,008		5,004		4,802
Jazz Acquisition, Inc.		Capital Goods	L+675		1.0	%	6/19/22		1,998		2,007		1,695
Jonah Energy LLC		Energy	L+650		1.0	%	5/12/21		3,739		3,416		3,552
Logan’s Roadhouse, Inc.		Consumer Services	L+850 PIK (L+850 Max PIK)		1.0	%	11/23/20		2,905		2,905		2,779
National Surgical Hospitals, Inc.	(g)	Health Care Equipment & Services	L+900		1.0	%	6/1/23		5,000		5,000		5,002
Neff Rental LLC	(f)	Capital Goods	L+625		1.0	%	6/9/21		11,535		11,556		11,490
Nielsen & Bainbridge, LLC	(g)	Consumer Durables & Apparel	L+925		1.0	%	8/15/21		5,558		5,492		5,447
Peak 10, Inc.	(i)	Software & Services	L+725		1.0	%	6/17/22		18,510		17,532		17,446
Spencer Gifts LLC	(g)(i)	Retailing	L+825		1.0	%	6/29/22		37,000		36,945		30,617
Titan Energy Operating, LLC	(g)	Energy	2.0%, L+900 PIK (L+900 Max PIK)		1.0	%	2/23/20		34,455		28,684		28,191
UTEX Industries, Inc.		Energy	L+725		1.0	%	5/20/22		1,273		1,268		904
Total Senior Secured Loans—Second Lien											248,576		235,293

See notes to unaudited consolidated financial statements.

18

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(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—3.7%
BlueLine Rental Finance Corp.	(e)	Capital Goods	7.0%		2/1/19	$	12,983	$	11,432	$	12,745
CEVA Group Plc	(e)(j)	Transportation	7.0%		3/1/21		3,000		2,567		2,449
Diamond Resorts International, Inc.	(e)(r)	Consumer Services	7.8%		9/1/23		30,000		30,000		30,250
FBM Finance, Inc.	(e)	Capital Goods	8.3%		8/15/21		7,140		7,140		7,568
Global A&T Electronics Ltd.	(e)(j)	Semiconductors & Semiconductor Equipment	10.0%		2/1/19		12,550		12,049		9,554
Kinetic Concepts, Inc.	(e)	Health Care Equipment & Services	9.6%		10/1/21		4,430		4,430		4,699
Ridgeback Resources Inc.	(j)	Energy	12.0%		12/29/20		335		328		335
Sorenson Communications, Inc.	(e)	Telecommunication Services	9.0%, 0.0% PIK (9.0% Max PIK)		10/31/20		11,820		11,476		10,520
Tembec Industries Inc.	(e)(j)	Materials	9.0%		12/15/19		3,715		3,715		3,477
Velvet Energy Ltd.	(j)	Energy	9.0%		10/5/23		3,000		3,000		3,067
Total Senior Secured Bonds									86,137		84,664
Subordinated Debt—26.5%
Bellatrix Exploration Ltd.	(e)(j)	Energy	8.5%		5/15/20		10,000		9,856		9,844
BMC Software Finance, Inc.	(e)	Software & Services	7.3%		6/1/18		10,069		9,927		10,113
Calumet Specialty Products Partners, L.P.	(e)(j)(r)	Energy	7.8%		4/15/23		10,300		10,235		8,688
Canbriam Energy Inc.	(e)(j)	Energy	9.8%		11/15/19		20,300		20,150		21,416
CEC Entertainment, Inc.	(e)	Consumer Services	8.0%		2/15/22		39,014		37,497		39,924
Ceridian HCM Holding, Inc.	(e)(r)	Commercial & Professional Services	11.0%		3/15/21		92,439		92,458		95,443
Coveris Holdings S.A.	(e)(j)	Materials	7.9%		11/1/19		32,855		32,186		32,863
Eclipse Resources Corp.	(e)(j)	Energy	8.9%		7/15/23		9,175		9,008		9,573
EV Energy Partners, L.P.		Energy	8.0%		4/15/19		2,150		1,966		1,524
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		1/30/25		732		732		727
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		4/30/25		4,649		4,649		4,620
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		9/3/25		961		961		955
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		9/29/25		904		904		899
Global Jet Capital Inc.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/4/25		60,087		60,087		59,711
Global Jet Capital Inc.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/9/25		9,827		9,827		9,766

See notes to unaudited consolidated financial statements.

19

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(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.	(j)	Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		1/29/26	$	5,146	$	5,146	$	5,114
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		2/17/26		12,583		12,582		12,504
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		4/14/26		7,792		7,792		7,744
Global Jet Capital Inc.		Commercial & Professional Services	15.0% PIK (15.0% Max PIK)		12/2/26		11,517		11,517		11,517
Jupiter Resources Inc.	(e)(j)	Energy	8.5%		10/1/22		31,850		28,838		27,656
NewStar Financial, Inc.	(f)(j)	Diversified Financials	8.3%, 0.0% PIK (8.8% Max PIK)		12/4/24		75,000		61,616		65,250
Northern Oil and Gas, Inc.	(e)	Energy	8.0%		6/1/20		3,150		3,035		2,544
P.F. Chang’s China Bistro, Inc.	(e)(g)(i)(r)	Consumer Services	10.3%		6/30/20		70,595		70,674		69,301
PriSo Acquisition Corp.	(e)(r)	Capital Goods	9.0%		5/15/23		50,859		50,458		51,113
S1 Blocker Buyer Inc.		Commercial & Professional Services	10.0% PIK (10.0% Max PIK)		10/31/22		130		130		132
SandRidge Energy, Inc.	(e)(j)(m)	Energy	0.0%		10/4/20		2,643		3,522		3,318
Scientific Games Corp.	(e)(j)	Consumer Services	8.1%		9/15/18		14,638		13,782		14,825
Sorenson Communications, Inc.	(e)	Telecommunication Services	13.9%, 0.0% PIK (13.9% Max PIK)		10/31/21		8,983		9,376		8,264
SunGard Availability Services Capital, Inc.	(e)	Software & Services	8.8%		4/1/22		16,400		11,550		11,295
Talos Production LLC	(e)	Energy	9.8%		2/15/18		4,500		4,291		2,498
TI Group Automotive Systems, LLC	(e)(j)	Automobiles & Components	8.8%		7/15/23		7,302		7,302		7,699
York Risk Services Holding Corp.	(e)	Insurance	8.5%		10/1/22		9,050		8,295		7,602
Total Subordinated Debt									610,349		614,442
Collateralized Securities—0.3%
NewStar Clarendon 2014-1A Class D	(j)	Diversified Financials	L+435		1/25/27		730		691		689
NewStar Clarendon 2014-1A Class Subord. B	(j)	Diversified Financials	16.4%		1/25/27		8,310		6,626		6,638
Total Collateralized Securities									7,317		7,327

See notes to unaudited consolidated financial statements.

20

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Number of Shares		Cost		Fair Value(d)
Equity/Other—7.1%
5 Arches, LLC, Common Equity	(j)(m)(o)	Diversified Financials		33,163	$	875	$	875
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		1,131		906
Altus Power America Holdings, LLC, Common Equity	(m)	Energy		462,008		462		462
Altus Power America Holdings, LLC, Preferred Equity	(q)	Energy		888,211		888		888
ASG Technologies Group, Inc., Warrants, 6/27/2022	(m)	Software & Services		48,325		1,377		1,228
Aspect Software, Inc., Common Equity	(m)(u)	Software & Services		1,092,200		52,727		59,634
ATX Holdings, LLC, Common Equity	(j)(m)	Technology Hardware & Equipment		83,488		134		134
CSF Group Holdings, Inc., Common Equity	(m)	Capital Goods		173,900		174		174
Fairway Group Acquisition Co., Common Equity	(m)(u)	Food & Staples Retailing		71,465		2,296		1,858
Global Jet Capital Holdings, LP, Preferred Equity	(j)(m)	Commercial & Professional Services		42,484,416		42,484		42,484
H.I.G. Empire Holdco, Inc., Common Equity	(m)	Retailing		206		614		630
Harvey Holdings, LLC, Common Equity	(m)	Capital Goods		2,000,000		2,000		4,600
Industrial Group Intermediate Holdings, LLC, Common Equity	(m)(o)	Materials		220,619		221		386
JMC Acquisition Holdings, LLC, Common Equity	(m)	Capital Goods		8,068		8,068		8,995
NewStar Financial, Inc., Warrants, 11/4/2024	(j)(m)	Diversified Financials		3,000,000		15,058		8,310
North Haven Cadence Buyer, Inc., Common Equity	(m)	Consumer Services		833,333		833		875
Ridgeback Resources Inc., Common Equity	(j)(m)(s)	Energy		827,156		5,082		5,082
Roadhouse Holding Inc., Common Equity	(m)	Consumer Services		1,202,991		1,250		1,469
S1 Blocker Buyer Inc., Common Equity		Commercial & Professional Services		60		600		584
SandRidge Energy, Inc., Common Equity	(e)(j)(m)	Energy		112,112		2,803		2,640
Sequential Brands Group, Inc., Common Equity	(j)(m)	Consumer Durables & Apparel		125,391		1,693		587
Sunnova Energy Corp., Common Equity	(m)	Energy		577,086		2,166		3,134
Sunnova Energy Corp., Preferred Equity	(m)	Energy		54,543		290		296
TE Holdings, LLC, Common Equity	(m)(o)	Energy		129,829		1,104		974
TE Holdings, LLC, Preferred Equity	(m)	Energy		86,061		859		1,291
Titan Energy, LLC, Common Equity	(m)	Energy		72,739		2,299		1,746
Warren Resources, Inc., Common Equity	(m)(u)	Energy		998,936		4,695		4,295

See notes to unaudited consolidated financial statements.

21

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company(a)	Footnotes	Industry	Number of Shares		Cost		Fair Value(d)
White Star Petroleum Holdings, LLC, Common Equity	(m)(o)	Energy		1,738,244	$	1,478	$	1,695
Zeta Interactive Holdings Corp., Preferred Equity	(m)	Software & Services		1,051,348		8,357		9,414
Total Equity/Other						162,029		165,655
TOTAL INVESTMENTS—139.6%					$	3,249,141		3,243,310
LIABILITIES IN EXCESS OF OTHER ASSETS—(39.6%)								(919,370	)
NET ASSETS—100.0%							$	2,323,940
Total Return Swap			Notional Amount				Unrealized Appreciation
Citibank TRS Facility (Note 8)	(j)		$	388,681			$	11,403

(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, 2016, the three-month London Interbank Offered Rate, or LIBOR or L, was 1.00% and the U.S. Prime Lending Rate, or Prime, was 3.75%. 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) 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, 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 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).

See notes to unaudited consolidated financial statements.

22

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

(i) 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).

(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, 2016, 82.4% of the Company’s total assets represented qualifying assets. In addition, as described in Note 8, 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, 80.9% of the Company’s total assets represented qualifying assets as of December 31, 2016.

(k) Position or portion thereof unsettled as of December 31, 2016.

(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, 2016.

(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, 2016, the fair value of securities rehypothecated by BNPP was $176,481.

(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 $0.74 as of December 31, 2016.

(t) The transfer of a portion of this loan does not qualify for sale accounting under Accounting Standards Codification Topic 860, Transfers and Servicing, and therefore, the entire senior secured loan remains in the consolidated schedule of investments as of December 31, 2016 (see Note 8).

(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, 2016, the Company held investments in three 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, 2016:

See notes to unaudited consolidated financial statements.

23

FS Investment Corporation III

Consolidated Schedule of Investments (continued)

As of December 31, 2016

(in thousands, except share amounts)

Portfolio Company	Fair Value at December 31, 2015		Purchases and Paid-in- Kind Interest		Sales and Repayments			Accretion of Discount		Net Realized Gain (Loss)		Net Change in Unrealized Appreciation (Depreciation)			Fair Value at December 31, 2016		Interest Income		Fee Income		Dividend Income
Senior Secured Loans—First Lien
Aspect Software, Inc.(1)		—	$	3,200		—			—		—		—		$	3,200	$	121	$	199		—
Aspect Software, Inc.		—	$	10,285	$	(129	)		—		—	$	114		$	10,270	$	669		—		—
Fairway Group Acquisition Co.		—	$	5,631		—			—		—	$	56		$	5,687	$	256		—		—
Fairway Group Acquisition Co.		—	$	3,633		—			—		—	$	(327	)	$	3,306	$	177		—		—
Warren Resources, Inc.(2)		—	$	17,744		—			—		—		—		$	17,744	$	419	$	76		—
Senior Secured Loans—Second Lien
Fairway Group Acquisition Co.		—	$	3,164		—			—		—	$	(569	)	$	2,595	$	169		—		—
Subordinated Debt
Aspect Software, Inc.		—	$	7,836	$	(11,557	)		—	$	3,721		—			—	$	118		—		—
Equity/Other
Aspect Software, Inc., Common Equity		—	$	52,727		—			—		—	$	6,907		$	59,634		—	$	118		—
Fairway Group Acquisition Co., Common Equity		—	$	2,296		—			—		—	$	(438	)	$	1,858		—		—		—
Warren Resources, Inc., Common Equity		—	$	4,695		—			—		—	$	(400	)	$	4,295		—		—		—

(1) Security includes a partially unfunded commitment with an amortized cost of $110 and a fair value of $110.

(2) Security includes a partially unfunded commitment with an amortized cost of $1,265 and a fair value of $1,265.

See notes to unaudited consolidated financial statements.

24

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 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of shares of its common stock in its continuous public offering to persons who were not affiliated with the Company or the Company’s investment adviser, FSIC III Advisor, LLC, or FSIC III Advisor, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering requirement, the Company had no operations except for matters relating to its organization.

The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of March 31, 2017, 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 March 31, 2017. 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 minority 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 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. FSIC III Advisor 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.

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

25

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)

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, 2016 included in the Company’s annual report on Form 10-K for the year ended December 31, 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. The December 31, 2016 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, 2016. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Update No. 2013-08, 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: The Company entered into an investment advisory and administrative services agreement with FSIC III Advisor, dated as of December 20, 2013, which was amended and restated on August 6, 2014, and which, as amended and restated, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of the Company’s incentive fee capital gains (i.e., 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. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC III Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC III Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Based on an interpretation of the applicable language in the Advisers Act by the staff of the Division of Investment Management of the SEC, the Company “looks through” its total return swap, or TRS, in calculating

26

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)

the capital gains incentive fee. Under this “look through” 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 FSIC III Advisor pursuant to the 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 FSIC III Advisor with respect to realized gains. See Note 8 for a discussion of the TRS.

Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FSIC III Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. 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 amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, FSIC III Advisor will not earn this part of the incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC III Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375% of adjusted capital, or 9.375% annually. Thereafter, FSIC III Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

Offering Costs: Offering costs primarily include, 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 (see Note 4).

Partial Loan Sales: The Company follows the guidance in Accounting Standards Codification 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 ASC Topic 860, 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 are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 8 for additional information.

Reclassifications: Certain amounts in the unaudited consolidated financial statements as of and for the three months ended March 31, 2016 and the audited consolidated financial statements as of and for the year ended December 31, 2016 have been reclassified to conform to the classifications used to prepare the unaudited

27

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)

consolidated financial statements as of and for the three months ended March 31, 2017. These reclassifications had no material impact on the Company’s consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to shares of the Company’s common stock during the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017						2016
	Shares			Amount			Shares			Amount
Gross Proceeds from Offering		5,567,346		$	47,979			15,286,391		$	132,258
Reinvestment of Distributions		2,849,070			24,568			2,984,057			23,578
Total Gross Proceeds		8,416,416			72,547			18,270,448			155,836
Commissions and Dealer Manager Fees		—			—			—			(9,992	)
Net Proceeds to Company		8,416,416			72,547			18,270,448			145,844
Share Repurchase Program		(1,536,048	)		(13,133	)		(569,282	)		(4,637	)
Net Proceeds to Company from Share Transactions		6,880,368		$	59,414			17,701,166		$	141,207

Status of Continuous Public Offering

Since commencing its continuous public offering and through May 2, 2017, the Company has issued 286,797,865 shares of common stock for gross proceeds of $2,733,461. As of May 2, 2017, the Company had raised total gross proceeds of $2,745,448, including $200 of seed capital contributed by the principals of FSIC III Advisor in October 2013 and $11,787 in proceeds raised in a private placement completed in April 2014 from the principals of FSIC III Advisor, certain members of the Company’s board of directors and other individuals and entities affiliated with FSIC III Advisor and GSO / Blackstone Debt Funds Management LLC, or GDFM, the Company’s investment sub-adviser (see Note 4).

During the three months ended March 31, 2017 and 2016, the Company issued 8,416,416 and 18,270,448 shares of common stock for gross proceeds of $72,547 and $155,836 at an average price per share of $8.62 and $8.53, respectively. The gross proceeds received during the three months ended March 31, 2017 and 2016, include reinvested stockholder distributions of $24,568 and $23,578 for which the Company issued 2,849,070 and 2,984,057 shares of common stock, respectively. During the period from April 1, 2017 to May 2, 2017, the Company issued 2,073,921 shares of common stock for gross proceeds of $17,913 at an average price per share of $8.64.

The proceeds from the issuance of common stock as presented on the Company’s consolidated statements of changes in net assets and consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $9,992 for the three months ended March 31, 2016.

The Company is currently offering shares of its common stock pursuant to its continuous public offering only to persons who purchase through investment advisors whose contracts for investment advisory and related

28

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

services include a fixed or “wrap” fee or other asset-based fee arrangement, and who are collectively referred to herein as Advisors, and to certain affiliated investors who purchase through FS Investment Solutions, LLC, or FS Investment Solutions, the dealer manager for the continuous public offering. Sales of shares of the Company’s common stock through Advisors is referred to herein as the Institutional Channel. 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 have 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%, respectively, of the public offering price. Following the IBD Channel closing, shares of common stock in its continuous public offering have been sold at an institutional offering price that does not include any selling commissions or dealer manager fees. The institutional offering price as of March 31, 2017 was $8.64 per share; however, to the extent that the Company’s net asset value per share increases, the Company will sell at a price necessary to ensure that shares are not sold at a price per share that is below the Company’s net asset value per share. In the event of a material decline in the Company’s net asset value per share, which the Company considers to be a 2.5% decrease below the Company’s then-current institutional offering price, the Company will reduce its institutional offering price in order to establish a new institutional offering price that is not more than 2.5% above the Company’s net asset value per share.

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 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 sale of shares of common stock under the Company’s distribution reinvestment plan during the calendar year (less the amount of any such proceeds used to repurchase shares of common stock on each previous repurchase date during the calendar year) and (ii) 10.0% 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,

29

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

2017 , the board of directors of the Company amended the share repurchase program so that the maximum number of shares of common stock to be repurchased for any repurchase offer will not exceed (i) the greater of (x) the number of shares of common stock that the Company can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan during the twelve-month period ending on the expiration date of such repurchase offer (less the amount of any such proceeds used to repurchase shares of common stock on each previous repurchase date for tender offers conducted during such period and (y) the number of shares of common stock that the Company can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment place during the three month period ending on the expiration date of such repurchase offer and (ii) 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter. The purpose of this amendment was to provide the potential for the repurchase of a greater number of shares under the share repurchase program, particularly in the early quarters of the calendar year, in light of the limitation relating to proceeds received in connection with the Company’s distribution reinvestment plan. 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 Company currently intends to offer to repurchase such shares of common stock on each date of repurchase at a price equal to the institutional offering price in effect on the date of repurchase. In months in which the Company repurchases shares of common stock pursuant to its share repurchase program, it expects to conduct repurchases on the same date that it holds its first weekly closing in such month for the sale of shares of common stock in its continuous public offering. The Company’s board of directors may amend, suspend or terminate the share repurchase program at any time upon 30 days’ notice.

The following table provides information concerning the Company’s repurchases of shares of its common stock pursuant to its share repurchase program during the three months ended March 31, 2017 and 2016:

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 2016
December 31, 2015		January 6, 2016		569,282		100	%		0.24	%	$	8.145	$	4,637
Fiscal 2017
December 31, 2016		January 4, 2017		1,536,048		100	%		0.56	%	$	8.550	$	13,133

On April 5, 2017, the Company repurchased 2,470,559 shares of common stock (representing 100% of the shares of common stock tendered for repurchase and 0.88% of the shares outstanding as of such date) at $8.64 per share for aggregate consideration totaling $21,346.

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FSIC III Advisor is entitled to an annual base management fee of 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. The Company commenced accruing fees under the investment advisory and administrative services agreement on April 2, 2014, upon commencement of the Company’s

30

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)

investment operations. Management fees are paid on a quarterly basis in arrears. Effective February 3, 2017, FSIC III Advisor has contractually agreed to permanently waive 0.25% of the base management fee so that the fee received equals 1.75% of the Company’s average weekly gross assets.

The incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. 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 amounts paid for share repurchases pursuant to the Company’s share repurchase program. As a result, FSIC III 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 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC III Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. This “catch-up” feature allows FSIC III Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FSIC III Advisor will be entitled to receive 20.0% of the Company’s pre-incentive fee net investment income.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company’s incentive fee capital gains (i.e., 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 capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FSIC III 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. See Note 2 for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.

Pursuant to an investment sub-advisory agreement between FSIC III Advisor and GDFM, or the investment sub-advisory agreement, GDFM will receive 50% of all management and incentive fees payable to FSIC III Advisor under the investment advisory and administrative services agreement with respect to each year.

The Company reimburses FSIC III Advisor for expenses necessary to perform services related to the Company’s administration and operations, including FSIC III Advisor’s allocable portion of the compensation and related expenses of certain personnel of Franklin Square Holdings, L.P. (which does business as FS Investments), or FS Investments, the Company’s sponsor and an affiliate of FSIC III Advisor, providing administrative services to the Company on behalf of FSIC III Advisor. The amount of this reimbursement is set at the lesser of (1) FSIC III 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. FSIC III Advisor allocates the cost of such services to the Company based on factors such as 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

31

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)

allocation of administrative expenses among the Company and certain affiliates of FSIC III Advisor. The Company’s board of directors then assesses the reasonableness of such reimbursements for expenses allocated to the Company based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Company’s board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company’s board of directors compares the total amount paid to FSIC III Advisor for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs. The Company does not reimburse FSIC III Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FSIC III Advisor.

Under the investment advisory and administrative services agreement, the Company, either directly or through reimbursement to FSIC III Advisor or its affiliates, is 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 include 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 includes 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, are recorded as a reduction of capital. Commencing January 1, 2016, offering costs incurred by the Company are deferred and amortized to expense over twelve months (see Note 2).

Since June 7, 2013 (Inception) through December 31, 2014, FS Investments funded $3,801 in organization and offering costs, all of which were reimbursed during the period from April 2, 2014 (Commencement of Operations) through December 31, 2014. The reimbursements were recorded as a reduction of capital. During the three months ended March 31, 2017, FS Investments did not fund any of the Company’s organization and offering costs. As of March 31, 2017, no amounts remain reimbursable to FSIC III Advisor and its affiliates under this arrangement.

The dealer manager for the Company’s continuous public offering is FS Investment Solutions, which is one of the Company’s affiliates. Prior to the IBD Channel closing, 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

32

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)

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. Following the IBD Channel closing, the dealer manager has 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 the Company’s continuous public offering and, as a result, no selling commissions or dealer manager fees will be paid to the dealer manager from that date forward.

The following table describes the fees and expenses the Company accrued under the investment advisory and administrative services agreement and the dealer manager fees FS Investment Solutionsreceived under the dealer manager agreement during the three months ended March 31, 2017 and 2016:

			Three Months Ended March 31,
Related Party	Source Agreement	Description	2017		2016
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee(1)	$	17,112	$	15,590
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income(2)	$	9,619	$	5,647
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses(3)	$	819	$	574
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Offering Costs(4)	$	447	$	962
FS Investment Solutions	Dealer Manager Agreement	Dealer Manager Fee(5)	$	—	$	1,961

(1) FSIC III Advisor has contractually agreed, effective February 3, 2017, to permanently waive 0.25% of its base management fee to which it is entitled under the investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of the Company’s weekly gross assets. As a result, the amount shown for the three months ended March 31, 2017 are net of waivers of $1,504. During the three months ended March 31, 2017 and 2016, $17,823 and $14,011, respectively, in base management fees were paid to FSIC III Advisor. As of March 31, 2017, $17,112 in base management fees were payable to FSIC III Advisor.

(2) During the three months ended March 31, 2017 and 2016, $12,323 and $11,825, respectively, of subordinated incentive fees on income were paid to FSIC III Advisor. As of March 31, 2017, a subordinated incentive fee on income of $9,619 was payable to FSIC III Advisor.

(3) During the three months ended March 31, 2017 and 2016, $802 and $538, 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 the remainder related to other reimbursable expenses. The Company paid $669 and $776 in administrative services expenses to FSIC III Advisor during the three months ended March 31, 2017 and 2016, respectively.

(4) During the three months ended March 31, 2017 and 2016, the Company incurred offering costs of $576 and $1,200, respectively, of which $447 and $962, respectively, 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.

(5) Represents aggregate dealer manager fees retained by FS Investment Solutions and not re-allowed to selected broker-dealers. Following the IBD Channel closing, the dealer manager has 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 the Company’s continuous public offering. The fees shown for the three months ended March 31, 2016 represent fees retained by FS Investment Solutions prior to the IBD Channel closing in February 2016.

33

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)

Capital Contributions by FSIC III Advisor and GDFM

In October 2013, pursuant to a private placement, Michael C. Forman and David J. Adelman, the principals of FSIC III Advisor, contributed an aggregate of $200, which was used in its entirety to purchase 22,222 shares of common stock at $9.00 per share, which represented the initial public offering price of $10.00 per share, excluding selling commissions and dealer manager fees. The principals will not tender these shares of common stock for repurchase as long as FSIC III Advisor remains the Company’s investment adviser.

In April 2014, pursuant to a private placement, Messrs. Forman (through an affiliated entity) and Adelman purchased 111,111 additional shares of common stock at $9.00 per share, which represented the initial public offering price of $10.00 per share, excluding selling commissions and dealer manager fees. The principals will not tender these shares of common stock for repurchase as long as FSIC III Advisor remains the Company’s investment adviser. In connection with the same private placement, certain members of the Company’s board of directors and other individuals and entities affiliated with FSIC III Advisor purchased 640,194 shares of common stock, and certain individuals and entities affiliated with GDFM purchased 558,334 shares of common stock, in each case at a price of $9.00 per share, which represented the initial public offering price of $10.00 per share, excluding selling commissions and dealer manager fees. In connection with the private placement, the Company sold an aggregate of 1,309,639 shares of common stock for aggregate proceeds of $11,787 upon satisfying the minimum offering requirement on April 2, 2014. As of May 2, 2017, the Company has issued an aggregate of 2,082,584 shares of common stock for aggregate proceeds of $18,518 to members of the Company’s board of directors and other individuals and entities affiliated with FSIC III Advisor and GDFM, including shares of common stock sold to Messrs. Forman and Adelman in October 2013 and shares sold in the private placement completed in April 2014.

Potential Conflicts of Interest

FSIC III Advisor’s senior management team is comprised of substantially the same personnel as the senior management teams of the investment advisers to certain other BDCs, open- and closed-end management investment companies and a real estate investment trust sponsored by FS Investments, or the Fund Complex. As a result, such personnel provide, or expect to provide, investment advisory services to certain other funds in the Fund Complex and such personnel may serve in similar or other capacities for the investment advisers to future investment vehicles in the Fund Complex. While none of the investment advisers are currently providing investment advisory services to clients other than the funds in the Fund Complex, any, or all, may do so in the future. In the event that FSIC III Advisor or its management team undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FSIC III Advisor or its management team. For additional information regarding potential conflicts of interest, please see the Company’s annual report on Form 10-K for the year ended December 31, 2016.

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, the SEC granted exemptive relief to affiliates of the Company, upon which the Company may rely, and

34

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)

which permits 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 Investment Corporation, FS Energy and Power Fund, FS Investment Corporation II, FS Investment Corporation IV and any future BDCs that are advised by FSIC III Advisor or its affiliated investment advisers, or collectively, the Company’s co-investment affiliates. The Company believes this relief has and may continue to enhance its ability to further its investment objectives and strategies. The Company believes this relief may also increase favorable investment opportunities for it, in part, by allowing the Company to participate in larger investments, together with its co-investment affiliates, than would be available to the Company if such relief had not been obtained. Because the Company’s affiliates did not seek exemptive relief to engage in co-investment transactions with GDFM and its affiliates, the Company is permitted to co-invest with GDFM and its affiliates only in accordance with existing regulatory guidance (e.g. where price is the only negotiated term).

Expense Reimbursement

Pursuant to the expense support and conditional reimbursement agreement, dated as of December 20, 2013, by and between FS Investments and the Company, or the expense reimbursement agreement, FS Investments has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company’s distributions to stockholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company’s distributions to stockholders may also be deemed to constitute a return of capital to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to stockholders. Under those circumstances, FS Investments will not reimburse the Company for the portion of such distributions to stockholders that represent a return of capital, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.

Under the expense reimbursement agreement, FS Investments will reimburse the Company for expenses in an amount equal to the difference between the Company’s cumulative distributions paid to its stockholders in each quarter, less the sum of the Company’s net investment company taxable income, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment company taxable income or net capital gains) in each quarter.

Pursuant to the expense reimbursement agreement, the Company has a conditional obligation to reimburse FS Investments for any amounts funded by FS Investments under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which FS Investments funded such amount, the sum of the Company’s net investment company taxable income, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment company taxable income or net capital gains) exceeds the regular cash distributions paid by the Company to its stockholders; provided, however, that (i) the Company will only reimburse FS Investments for expense support payments made by FS Investments with respect to any calendar quarter to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to

35

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)

exceed the lesser of (A) 1.75% of the Company’s average net assets attributable to shares of its common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company’s average net assets attributable to shares of its common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from FS Investments was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from FS Investments made during the same fiscal year) and (ii) the Company will not reimburse FS Investments for expense support payments made by FS Investments for any calendar quarter if the annualized rate of regular cash distributions declared by the Company at the time of such reimbursement payment is less than the annualized rate of regular cash distributions declared by the Company at the time FS Investments made the expense support payment to which such reimbursement payment relates. The Company is not obligated to pay interest on the reimbursements it is required to make to FS Investments under the expense reimbursement agreement. “Other operating expenses” means the Company’s total “operating expenses” (as defined below), excluding base management fees, incentive fees, offering and organization expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

The Company or FS Investments may terminate the expense reimbursement agreement at any time. FS Investments has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that it bears a reasonable level of expenses in relation to its income. The specific amount of expenses reimbursed by FS Investments, if any, will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by FS Investments, FS Investments will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, the Company’s conditional obligation to reimburse FS Investments pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

FS Investments is controlled by the Company’s chairman, president and chief executive officer, Michael C. Forman, and its vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that FS Investments will reimburse any portion of the Company’s expenses in future quarters. As of March 31, 2017 and December 31, 2016, no amounts remained subject to repayment by the Company to FS Investments.

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 three months ended March 31, 2017 and 2016, FS Trust did not purchase any shares of the Company’s common stock.

36

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 three months ended March 31, 2017 and 2016:

	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2016
March 31, 2016	$	0.1750	$	44,066
Fiscal 2017
March 31, 2017	$	0.1750	$	48,011

The Company currently declares regular cash distributions on a quarterly basis and pays such distributions on a monthly basis to stockholders of record, as determined on a weekly basis. On March 7, 2017 and May 10, 2017, the Company’s board of directors declared regular weekly cash distributions for April 2017 through June 2017 and July 2017 through September 2017, respectively, each in the amount of $0.013461 per share. These distributions have been or will be paid monthly to stockholders of record as of weekly 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 distribution reinvestment plan 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 distribution reinvestment plan.

Under the distribution reinvestment plan, cash distributions to participating stockholders are 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. Although distributions paid in the form of additional shares of common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders who elect to participate in the Company’s distribution reinvestment plan 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 offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from FS Investments. 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 and will be made after deducting the fees and expenses payable in connection with the Company’s continuous public offering, including any fees payable to FSIC III Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions (i.e., paid

37

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

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.

For a period of time following commencement of the Company’s continuous public offering, which time period may be significant, substantial portions of the Company’s distributions have been, and may in the future, be funded through the reimbursement of certain expenses by FS Investments and its affiliates, including through the waiver of certain investment advisory fees by FSIC III Advisor, that are subject to repayment by the Company within three years. The purpose of this arrangement is to ensure that no portion of the Company’s distributions to stockholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on the Company’s investment performance, and can only be sustained if the Company achieves positive investment performance in future periods and/or FS Investments continues to make such reimbursements or waivers of such fees. The Company’s future repayments of amounts reimbursed or waived by FS Investments or its affiliates will reduce the distributions that stockholders would otherwise receive in the future. FS Investments and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. No portion of the distributions paid during the three months ended March 31, 2017 and 2016 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 has paid on its common stock during the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017				2016
Source of Distribution	Distribution Amount		Percentage		Distribution Amount		Percentage
Offering proceeds	$	—		—	$	—		—
Borrowings		—		—		—		—
Net investment income(1)		48,011		100%		44,066		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		—		—		—		—
Expense reimbursement from sponsor		—		—		—		—
Total	$	48,011		100%	$	44,066		100%

(1) During the three months ended March 31, 2017 and 2016, 91.0% and 91.5%, respectively, of the Company’s gross investment income was attributable to cash income earned, 2.1% and 4.0%, respectively, was attributable to non-cash accretion of discount and 6.9% and 4.5%, respectively, was attributable to PIK interest.

The Company’s net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $46,093 and $45,324, respectively. As of March 31, 2017 and December 31, 2016, the Company had $7,671 and $9,589, respectively, of undistributed net investment income and $50,633 and $60,099, respectively, of accumulated capital losses on a tax basis.

38

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

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 or deferred to future periods for tax purposes, the inclusion of a portion of the periodic net settlement payments due on the Company’s TRS in tax-basis net investment income and the accretion of discount on the TRS.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017			2016
GAAP-basis net investment income	$	44,098		$	40,882
Reclassification or deferral of unamortized original issue discount and prepayment fees		(4,137	)		(425	)
Tax-basis net investment income portion of total return swap payments		4,960			4,005
Accretion of discount on total return swap		869			743
Other miscellaneous differences		303			119
Tax-basis net investment income	$	46,093		$	45,324

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.

As of March 31, 2017 and December 31, 2016, the components of accumulated earnings on a tax basis were as follows:

	March 31,  2017 (Unaudited)			December 31, 2016
Distributable ordinary income	$	7,671		$	9,589
Other temporary differences		(202	)		(206	)
Accumulated capital losses(1)		(50,633	)		(60,099	)
Net unrealized appreciation (depreciation) on investments, secured borrowing and total return swap(2)		1,841			(1,759	)
Total	$	(41,323	)	$	(52,475	)

(1) Under the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010, may be carried forward indefinitely, and their character is retained as short-term or long-term losses. As of March 31, 2017, the Company had short-term and long-term capital loss carryforwards available to offset future realized capital gains of $0 and $50,633, respectively.

(2) As of March 31, 2017 and December 31, 2016, the gross unrealized appreciation on the Company’s investments, secured borrowing and TRS was $72,761 and $65,610, respectively. As of March 31, 2017 and December 31, 2016, the gross unrealized depreciation on the Company’s investments, secured borrowing and TRS was $70,920 and $67,369, respectively.

39

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

The aggregate cost of the Company’s investments, including the accretion of discount on the TRS, for U.S. federal income tax purposes totaled $3,404,850 and $3,256,233 as of March 31, 2017 and December 31, 2016, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis, including the Company’s TRS, was $1,841 and $(1,759) as of March 31, 2017 and December 31, 2016, respectively.

As of March 31, 2017, the Company had a total deferred tax asset of $1,518 comprised of the Company’s wholly-owned taxable subsidiary’s unrealized depreciation, on a tax basis, on investments, a net operating loss carryforward, and a capital loss carryforward. As of March 31, 2017, the wholly-owned taxable subsidiary anticipated that it would be unable to fully utilize the components of the deferred tax asset. Therefore the deferred tax asset was offset by a valuation allowance of $1,518. For the three months ended March 31, 2017, the Company did not record a provision for taxes related to its wholly-owned taxable subsidiary.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of March 31, 2017 and December 31, 2016:

	March 31, 2017 (Unaudited)						December 31, 2016
	Amortized Cost(1)		Fair Value		Percentage of Portfolio		Amortized Cost(1)		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,243,939	$	2,249,875		66%	$	2,134,733	$	2,135,929		66%
Senior Secured Loans—Second Lien		226,124		212,485		6%		248,576		235,293		7%
Senior Secured Bonds		97,553		96,252		3%		86,137		84,664		3%
Subordinated Debt		652,921		666,143		20%		610,349		614,442		19%
Collateralized Securities		7,225		7,458		0%		7,317		7,327		0%
Equity/Other		169,251		162,235		5%		162,029		165,655		5%
Total	$	3,397,013	$	3,394,448		100%	$	3,249,141	$	3,243,310		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 March 31, 2017 and December 31, 2016 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 $401,260 and $409,056, respectively, as of March 31, 2017 and $388,681 and $394,986, respectively, as of December 31, 2016.

	March 31, 2017 (Unaudited)						December 31, 2016
	Amortized Cost(1)		Fair Value		Percentage of Portfolio		Amortized Cost(1)		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,600,068	$	2,612,577		69%	$	2,488,519	$	2,495,162		69%
Senior Secured Loans—Second Lien		271,255		258,839		7%		283,471		271,046		7%
Senior Secured Bonds		97,553		96,252		3%		86,137		84,664		2%
Subordinated Debt		652,921		666,143		17%		610,349		614,442		17%
Collateralized Securities		7,225		7,458		0%		7,317		7,327		0%
Equity/Other		169,251		162,235		4%		162,029		165,655		5%
Total	$	3,798,273	$	3,803,504		100%	$	3,637,822	$	3,638,296		100%

40

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (continued)

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

As of March 31, 2017, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of Aspect Software, Inc., in which the Company had three senior secured loan investments, one of which had a partially unfunded commitment and one of which had a fully unfunded commitment, and an equity/other investment, Fairway Group Acquisition Co., in which the Company had three senior secured loan investments and an equity/other investment, and Warren Resources, Inc., in which the Company had a senior secured loan investment, which was a partially unfunded commitment, and an equity/other investment. As of March 31, 2017, the Company did not “control”, as defined in the 1940 Act, any of its portfolio companies.

As of December 31, 2016, the Company was deemed to be an “affiliated person”, as defined in the 1940 Act, of Aspect Software, Inc., in which the Company had two senior secured loan investments, one of which was a partially unfunded commitment and an equity/other investment, Fairway Group Acquisition Co., in which the Company had three senior secured loan investments and an equity/other investment, and Warren Resources, Inc., in which the Company had a senior secured loan investment, which was a partially unfunded commitment, and an equity/other investment. As of December 31, 2016, the Company did not “control”, as defined in the 1940 Act, any of its portfolio companies.

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.

The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, pursuant to which the Company may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2017, the Company had twenty-three unfunded debt investments with aggregate unfunded commitments of $206,988, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC. As of December 31, 2016, the Company had twenty-one unfunded debt investments with aggregate unfunded commitments of $176,049 and one unfunded commitment to purchase up to $362 in shares of preferred stock of Altus Power America Holdings, LLC. The Company maintains sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise. For additional details regarding the Company’s unfunded debt investments, see the Company’s unaudited consolidated schedule of investments as of March 31, 2017 and audited consolidated schedule of investments as of December 31, 2016.

41

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 table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2017 and December 31, 2016:

	March 31, 2017 (Unaudited)				December 31, 2016
Industry Classification	Fair Value		Percentage of Portfolio		Fair Value		Percentage of  Portfolio
Automobiles & Components	$	11,083		0%	$	35,373		1%
Capital Goods		400,623		12%		331,376		10%
Commercial & Professional Services		450,902		13%		444,650		14%
Consumer Durables & Apparel		146,562		4%		147,125		5%
Consumer Services		320,782		10%		302,459		9%
Diversified Financials		228,626		7%		248,148		8%
Energy		300,755		9%		272,759		9%
Food & Staples Retailing		11,456		0%		13,446		1%
Health Care Equipment & Services		464,900		14%		422,234		13%
Insurance		30,220		1%		7,602		0%
Materials		123,503		4%		116,952		4%
Media		137,096		4%		136,666		4%
Pharmaceuticals, Biotechnology & Life Sciences		5,102		0%		—		—
Real Estate		170		0%		171		0%
Retailing		94,508		3%		77,310		2%
Semiconductors & Semiconductor Equipment		9,130		0%		9,554		0%
Software & Services		388,351		11%		397,389		12%
Technology Hardware & Equipment		39,478		1%		40,777		1%
Telecommunication Services		24,595		1%		40,141		1%
Transportation		206,606		6%		199,178		6%
Total	$	3,394,448		100%	$	3,243,310		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 that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs that are unobservable for an asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

42

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)

As of March 31, 2017 and December 31, 2016, the Company’s investments and total return swap were categorized as follows in the fair value hierarchy:

	March 31,  2017 (Unaudited)				December 31, 2016
Valuation Inputs	Investments		Total Return Swap		Investments		Total Return Swap
Level 1—Price quotations in active markets	$	6,490	$	—	$	4,973	$	—
Level 2—Significant other observable inputs		—		—		—		—
Level 3—Significant unobservable inputs		3,387,958		12,527		3,238,337		11,403
Total	$	3,394,448	$	12,527	$	3,243,310	$	11,403

The Company has elected the fair value option under ASC Topic 825, Financial Instruments, or ASC Topic 825, 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 secured borrowing as of March 31, 2017, was valued using Level 3 inputs under the fair value hierarchy. The Company’s approach to determining fair value of the Level 3 secured borrowing is consistent with its approach to determining fair value of the Level 3 investments that are associated with the secured borrowing. See Note 2 and Note 8 for additional information.

As of March 31, 2017 and December 31, 2016, the Company’s secured borrowing was categorized as follows in the fair value hierarchy:

Valuation Inputs	March 31,  2017 (Unaudited)		December 31, 2016
Level 1—Price quotations in active markets	$	—	$	—
Level 2—Significant other observable inputs		—		—
Level 3—Significant unobservable inputs		14,092		14,040
Total	$	14,092	$	14,040

The Company’s investments as of March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-four senior secured loan investments, three senior secured bond investments and twelve subordinated debt investments, for which broker quotes were not available, were valued by independent valuation firms, which determined 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 were also valued by independent valuation firms, which determined 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

43

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)

value or liquidation value. Two senior secured loan investments and two equity/other investments, which were newly issued and purchased near March 31, 2017, were valued at cost, as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Three equity/other investments, which were traded on an active public market, were valued at their closing price as of March 31, 2017. Except as described above, the Company valued its other investments 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.

The Company’s investments as of December 31, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Forty-nine senior secured loan investments, two senior secured bond investments and twelve subordinated debt investments, for which broker quotes were not available, were valued by independent valuation firms, which determined 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 were also valued by independent valuation firms, which determined 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 EBITDA, cash flows, net income, revenues, or, in limited instances, book value or liquidation value. Three senior secured loan investments and one equity/other investment, which were newly issued and purchased near December 31, 2016, were valued at cost, as the Company’s board of directors determined that the cost of each such investment was the best indication of its fair value. Three equity/other investments, which were traded on an active public market, were valued at their closing price as of December 31, 2016. Except as described above, the Company valued its other investments 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.

The Company values the TRS in accordance with the agreements between Center City Funding LLC, or Center City Funding, and Citibank N.A., or 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. For additional information on the Company’s TRS, see Note 8.

The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers, 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. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, to

44

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)

determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where the Company’s board of directors otherwise determines that the use of such other methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which the Company purchases and sells its investments. 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 three months ended March 31, 2017 and 2016 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

	For the Three Months Ended March 31, 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)		1,283			1,996			247			871			(92	)		—			4,305
Net realized gain (loss)		520			174			1,363			1,044			—			811			3,912
Net change in unrealized appreciation (depreciation)		4,740			(356	)		172			9,129			223			(9,315	)		4,593
Purchases		199,924			9,440			44,015			81,467			—			3,567			338,413
Paid-in-kind interest		338			1,309			—			4,282			—			—			5,929
Sales and redemptions		(92,859	)		(35,371	)		(34,209	)		(45,092	)		—			—			(207,531	)
Net transfers in or out of Level 3(1)		—			—			—			—			—			—			—
Fair value at end of period	$	2,249,875		$	212,485		$	96,252		$	666,143		$	7,458		$	155,745		$	3,387,958
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	$	8,859		$	1,571		$	1,515		$	10,002		$	223		$	(9,997)		$	12,173

45

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 Three Months Ended March 31, 2016
	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	$	1,878,552		$	264,261		$	75,597		$	451,694		$	7,607		$	66,919		$	2,744,630
Accretion of discount (amortization of premium)		1,389			309			661			1,092			(170	)		—			3,281
Net realized gain (loss)		75			18			(1,157	)		(4,764	)		—			—			(5,828	)
Net change in unrealized appreciation (depreciation)		12,635			(11,200	)		(22,479	)		8,738			(14	)		(4,539	)		(16,859	)
Purchases		84,947			20,505			4,549			69,924			—			11,091			191,016
Paid-in-kind interest		418			6			—			2,909			—			—			3,333
Sales and redemptions		(27,860	)		(3,170	)		(6,893	)		(37,661	)		—			—			(75,584	)
Net transfers in or out of Level 3		—			—			—			—			—			(857	)		(857	)
Fair value at end of period	$	1,950,156		$	270,729		$	50,278		$	491,932		$	7,423		$	72,614		$	2,843,132
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	$	10,451		$	(11,254)		$	(25,372)		$	914		$	(14)		$	(5,436)		$	(30,711)

The following is a reconciliation for the three months ended March 31, 2017 of a secured borrowing for which significant unobservable inputs (Level 3) were used in determining market value:

	For the Three Months Ended March 31, 2017
Fair value at beginning of period	$	(14,040)
Amortization of premium (accretion of discount)		(7)
Net realized gain (loss)		—
Net change in unrealized appreciation (depreciation)		(45)
Proceeds from secured borrowing		—
Paid-in-kind interest		—
Repayments on secured borrowing		—
Net transfers in or out of Level 3		—
Fair value at end of period	$	(14,092)
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 still held at the reporting date	$	(45)

46

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 following is a reconciliation for the three months ended March 31, 2017 and 2016 of the total return swap for which significant unobservable inputs (Level 3) were used in determining the fair value:

	For the Three Months Ended March 31, 2017
	2017			2016
Fair value at beginning of period	$	11,403		$	(25,927	)
Accretion of discount (amortization of premium)		—			—
Net realized gain (loss)		6,240			4,356
Net change in unrealized appreciation (depreciation)		1,124			1,944
Sales and redemptions		(6,240	)		(4,356	)
Net transfers in or out of Level 3		—			—
Fair value at end of period	$	12,527		$	(23,983	)
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 the total return swap still held at the reporting date	$	1,124		$	1,944

47

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 March 31, 2017 and December 31, 2016 were as follows:

Type of Investment	Fair Value at March 31, 2017 (Unaudited)			Valuation Technique(1)		Unobservable Input	Range		Weighted Average
Senior Secured Loans—First Lien	$	1,882,798			Market Comparables	Market Yield (%)		5.6% - 16.7%		9.5%
		79,790			Other(2)	Other		N/A		N/A
		221,947			Market Quotes	Indicative Dealer Quotes		6.0% - 102.5%		97.5%
		65,340			Cost	Cost		99.0% - 99.0%		99.0%
Senior Secured Loans—Second Lien		63,257			Market Comparables	Market Yield (%)		10.5% - 30.0%		18.0%
		5,022			Other(2)	Other		N/A		N/A
		143,456			Market Quotes	Indicative Dealer Quotes		11.4% - 101.4%		93.2%
		750			Cost	Cost		100.0% - 100.0%		100.0%
Senior Secured Bonds		4,635			Market Comparables	Market Yield (%)		9.0% - 9.8%		9.5%
						EBITDA Multiples (x)		4.8x - 5.3x		5.0x
						Production Multiples (Mboe/d)		$40,000.0 - $42,500.0		$41,250.0
						Proved Reserves Multiples (Mmboe)		$11.5 - $12.5		$12.0
						PV-10 Multiples (x)		0.8x - 0.9x		0.8x
		91,617			Market Quotes	Indicative Dealer Quotes		72.5% - 107.8%		100.4%
Subordinated Debt		188,000			Market Comparables	Market Yield (%)		9.3% - 15.3%		13.0%
						EBITDA Multiples (x)		10.5x - 11.5x		11.0x
		478,143			Market Quotes	Indicative Dealer Quotes		67.0% - 106.1%		99.3%
Collateralized Securities		7,458			Market Quotes	Indicative Dealer Quotes		81.0% - 100.0%		82.8%
Equity/Other		100,372			Market Comparables	Market Yield (%)		13.8% - 14.3%		14.0%
						EBITDA Multiples (x)		4.8x - 14.8x		8.9x
						Production Multiples (Mboe/d)		$40,000.0 - $57,500.0		$44,464.5
						Proved Reserves Multiples (Mmboe)		$10.3 - $12.5		$11.7
						Production Multiples (MMcfe/d)		$2,375.0 - $2,625.0		$2,500.0
						Proved Reserves Multiples (Bcfe)		$1.1 - $1.2		$1.1
						PV-10 Multiples (x)		0.8x - 6.6x		3.2x
						Capacity Multiple ($/kW)		$2,750.0 - $3,250.0		$3,000.0
					Option Valuation Model	Volatility (%)		37.5% - 40.0%		38.8%
		52,961			Other(2)	Other		N/A		N/A
		2,358			Market Quotes	Indicative Dealer Quotes		3.0% - 12.8%		9.8%
		54			Cost	Cost		100.0% - 100.0%		100.0%
Total	$	3,387,958
Total Return Swap	$	12,527			Market Quotes	Indicative Dealer Quotes		83.0% - 101.6%		97.5%
Secured Borrowing	$	(14,092	)		Market Comparables	Market Yield (%)		(6.1)% - (7.1)%		(6.6)%

(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. 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)

48

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)

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 or other various factors.

Type of Investment	Fair Value at December 31, 2016			Valuation Technique(1)	Unobservable Input	Range	Weighted Average
Senior Secured Loans—First Lien	$	1,803,209		Market Comparables	Market Yield (%)	5.5% -17.3%	9.7%
		68,811		Other(2)	Other	N/A	N/A
		222,318		Market Quotes	Indicative Dealer Quotes	18.2% - 102.7%	97.7%
		41,591		Cost	Cost	100.0% - 100.0%	100.0%
Senior Secured Loans—Second Lien		68,944		Market Comparables	Market Yield (%)	10.3% - 22.9%	16.3%
		166,349		Market Quotes	Indicative Dealer Quotes	12.0% - 101.0%	92.4%
Senior Secured Bonds		3,403		Market Comparables	Market Yield (%)	8.5% - 9.0%	8.8%
					EBITDA Multiples (x)	6.8x - 7.3x	7.0x
					Production Multiples (Mboe/d)	$45,000.0 - $50,000.0	$47,500.0
					Proved Reserves Multiples (Mmboe)	$14.5 - $15.0	$14.8
					PV-10 Multiples (x)	0.8x - 0.9x	0.9x
		81,261		Market Quotes	Indicative Dealer Quotes	76.0% - 106.6%	95.9%
Subordinated Debt		178,938		Market Comparables	Market Yield (%)	10.5% - 15.3%	13.5%
					EBITDA Multiples (x)	9.3x - 10.3x	9.8x
		435,504		Market Quotes	Indicative Dealer Quotes	54.5% - 125.5%	98.5%
Collateralized Securities		7,327		Market Quotes	Indicative Dealer Quotes	79.9% - 94.3%	81.2%
Equity/Other		103,652		Market Comparables	EBITDA Multiples (x)	4.5x - 16.3x	9.6x
					Production Multiples (Mboe/d)	$2,225.0 - $55,000.0	$30,941.4
					Proved Reserves Multiples (Mmboe)	$0.7 - $15.0	$8.7
					PV-10 Multiples (x)	0.8x - 2.1x	1.4x
					Capacity Multiple ($/kW)	$2,375.0 - $2,875.0	$2,625.0
				Option Valuation Model	Volatility (%)	37.5% - 40.0%	38.8%
		4,123		Market Quotes	Indicative Dealer Quotes	7.5% - 26.0%	18.2%
		52,773		Other(2)	Other	N/A	N/A
		134		Cost	Cost	100.0% - 100.0%	100.0%
Total	$	3,238,337
Total Return Swap	$	11,403		Market Quotes	Indicative Dealer Quotes	51.6% - 110.8%	97.6%
Secured Borrowing	$	(14,040	)	Market Comparables	Market Yield (%)	(6.0)% - (7.1)%	(6.6)%

(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. 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 or other various factors.

49

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 March 31, 2017 and December 31, 2016. For additional information regarding these financing arrangements, please 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, 2016 and the additional disclosure set forth in this Note 8.

Arrangement	As of March 31, 2017 (Unaudited)
	Type of Arrangement	Rate	Amount Outstanding		Amount Available		Maturity Date
Citibank Total Return Swap	Total Return Swap	L+1.55%	$	401,260	$	98,740	N/A(1)
BNP Facility	Prime Brokerage Facility	L+1.25%	$	187,700	$	62,300	December 26, 2017(2)
Deutsche Bank Credit Facility	Revolving Credit Facility	L+2.25%	$	291,000	$	59,000	September 22, 2019
JPM Credit Facility	Term Loan Credit Facility	L+2.69%	$	400,000	$	—	May 8, 2019
Goldman Facility	Repurchase Agreement	L+2.50%	$	300,000	$	—	July 15, 2019
Capital One Credit Facility	Revolving Credit Facility	L+1.75% to L+2.50%	$	150,000	$	—	August 13, 2020
Partial Loan Sale	Secured Borrowing	L+4.50% (1.0% Floor)	$	13,929	$	—	July 29, 2022

(1) The TRS may be terminated by Center City Funding or by Citibank at any time on or after June 27, 2017, in each case, in whole or in part, upon prior written notice to the other party.

(2) As described below, this facility generally is terminable upon 270 days’ notice by either party. As of March 31, 2017, neither party to the facility had provided notice of its intent to terminate the facility.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2017 were $1,303,677 and 3.49%, respectively. As of March 31, 2017, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.44%.

	As of December 31, 2016
Arrangement	Type of Arrangement	Rate	Amount Outstanding		Amount Available		Maturity Date
Citibank Total Return Swap	Total Return Swap	L+1.55%	$	388,681	$	111,319	N/A(1)
BNP Facility(2)	Prime Brokerage Facility	L+1.10%	$	187,700	$	62,300	September 27, 2017(3)
Deutsche Bank Credit Facility(4)	Revolving Credit Facility	L+2.25%	$	240,000	$	10,000	September 22, 2019
JPM Credit Facility	Term Loan Credit Facility	L+2.69%	$	400,000	$	—	May 8, 2019
Goldman Facility	Repurchase Agreement	L+2.50%	$	300,000	$	—	July 15, 2019
Capital One Credit Facility	Revolving Credit Facility	L+1.75% to L+2.50%	$	150,000	$	—	August 13, 2020
Partial Loan Sale	Secured Borrowing	L+4.50% (1.0% Floor)	$	13,929	$	—	July 29, 2022

(1) The TRS may be terminated by Center City Funding or by Citibank at any time on or after June 27, 2017, in each case, in whole or in part, upon prior written notice to the other party.

(2) On August 29, 2016, Burholme Funding LLC entered into an amendment to the prime brokerage facility with BNPP to, among other things, (i) increase the interest rate payable on borrowings under the committed facility agreement from three-month LIBOR plus 110 basis points to three-month LIBOR plus 125 basis points effective on and after January 2, 2017 and (ii) increase the commitment fee payable under the committed facility agreement from 55 basis points on all unused amounts to, effective on and after January 2, 2017, (a) 65 basis points on unused amounts so long as 75% or more of the facility amount under the committed facility agreement is utilized or (b) 85 basis points on unused amounts if less than 75% of the facility amount under the committed facility agreement is utilized. On November 15, 2016, Burholme Funding LLC entered into an amendment to the facility to increase the maximum commitment financing available to Burholme Funding LLC to $250,000 from $200,000.

50

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

(3) As described below, this facility generally is terminable upon 270 days’ notice by either party. As of December 31, 2016, neither party to the facility had provided notice of its intent to terminate the facility.

(4) On January 12, 2017, Dunlap Funding entered into an amendment to the Deutsche Bank credit facility to increase the aggregate principal amount of borrowings available under the Deutsche Bank credit facility from $250,000 to $350,000.

The Company’s average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2016 were $1,196,899 and 3.12%, respectively. As of December 31, 2016, the Company’s weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.30%.

Citibank Total Return Swap

On June 26, 2014, the Company’s wholly-owned financing subsidiary, Center City Funding, entered into a TRS for a portfolio of primarily senior secured floating rate loans with Citibank which has subsequently been amended multiple times to, among other things, increase the maximum aggregate notional amount of the portfolio of loans subject to the TRS from $100,000, initially, to $500,000. Most recently, on June 27, 2016, Center City Funding entered into a sixth amendment to the TRS to, among other things, (x) extend the date that Citibank may terminate the TRS from any time on or after June 26, 2016 to any time on or after June 27, 2017 and (y) increase the swap spread over one-month LIBOR that Center City Funding pays to Citibank on the utilized notional amount under the TRS from 1.50% per annum to 1.55% per annum.

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. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

The TRS with Citibank enables the Company, through its ownership of Center City Funding, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Center City Funding borrowing funds to acquire loans and incurring interest expense to a lender.

The obligations of Center City Funding under the TRS are non-recourse to the Company and its exposure under the TRS is limited to the value of the Company’s investment in Center City Funding, which generally will equal the value of cash collateral provided by Center City Funding under the TRS. Pursuant to the terms of the TRS, Center City Funding may select a portfolio of loans with a maximum aggregate notional amount (determined at the time each such loan becomes subject to the TRS) of $500,000. Center City Funding is required to initially cash collateralize a specified percentage of the notional amount of each loan (generally 20%) that becomes subject to the TRS in accordance with margin requirements described in the TRS agreement. Under the terms of the TRS, Center City Funding has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Center City Funding are available to pay the Company’s debts.

51

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

Pursuant to the terms of an investment management agreement that the Company has entered into with Center City Funding, the Company acts as the investment manager of the rights and obligations of Center City Funding under the TRS, including selecting the specific loans to be included in the portfolio of loans subject to the TRS. Accordingly, the loans subject to the TRS are selected by the Company in accordance with the Company’s investment objectives and strategy to generate current income and, to a lesser extent, long-term capital appreciation. In addition, pursuant to the terms of the TRS, Center City Funding may select any loan or obligation available in the market to be included in the portfolio of loans that meets the obligation criteria set forth in the TRS agreement.

Each individual loan, and the portfolio of loans taken as a whole, must meet criteria described in the TRS agreement, including a requirement that substantially all of the loans underlying the TRS be rated by Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Ratings Services, or S&P, and quoted by a nationally recognized pricing service. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Center City Funding receives from Citibank all interest and fees payable in respect of the loans included in the portfolio. Center City Funding 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. In addition, upon the termination or repayment of any loan subject to the TRS, Center City Funding will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

Under the terms of the TRS, Center City Funding may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Center City Funding may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Center City Funding. The amount of collateral required to be posted by Center City Funding is determined primarily on the basis of the aggregate value of the underlying loans. The terms of the TRS with Citibank, the counter-party, incorporate a master netting arrangement. If Center City Funding enters into another derivative with the counter party, it could be offset with the TRS. As of March 31, 2017 and December 31, 2016 there were no other contracts to offset the TRS.

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its equity investment in Center City Funding for the purpose of funding any additional collateral or payment obligations for which Center City Funding may become obligated during the term of the TRS. If the Company does not make any such additional investment in Center City Funding and Center City Funding fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Center City Funding under the TRS. In the event of an early termination of the TRS, Center City Funding would be required to pay an early termination fee.

Citibank may terminate the TRS from any time on or after June 27, 2017. 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. Any termination prior to June 27, 2017, will result in payment of an early termination fee to Citibank based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments, based on the minimum utilization amount, which

52

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

would be owed by Center City Funding to Citibank for the period from the termination date through and including June 27, 2017. Such monthly payments will equal the present value of the product of (x) 80%, multiplied by (y) the maximum notional amount of the TRS ($500,000), multiplied by (z) 1.55% per annum. If the TRS had been terminated as of March 31, 2017, Center City Funding would have been required to pay an early termination fee of approximately $1,015, based on the maximum notional amount of the TRS of $500,000 as of such date. Other than during the first 90 days and last 30 days of the term of the TRS, Center City Funding is required to pay a minimum usage fee if less than 80% of the maximum notional amount of the TRS is utilized and an unused fee on any amounts unutilized if greater than 80% but less than 100% of the maximum notional amount of the TRS is utilized.

The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to Center City Funding.

As of March 31, 2017 and December 31, 2016, the fair value of the TRS was $12,527 and $11,403, respectively, which is reflected in the Company’s consolidated balance sheets as unrealized appreciation on total return swap. As of March 31, 2017 and December 31, 2016, the receivable due on the TRS was $2,630 and $1,817, respectively, which is reflected in the Company’s consolidated balance sheets as receivable due on total return swap. As of March 31, 2017 and December 31, 2016, the Company posted $108,000 and $118,000, respectively, in cash collateral held by Citibank (of which only $94,566 and $94,651, 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 related to the TRS with any unrealized appreciation (depreciation) outstanding on the consolidated balance sheets as of March 31, 2017 and December 31, 2016.

As of March 31, 2017, Center City Funding had selected 54 underlying loans with a notional amount and market value of $401,260 and $409,056, respectively. As of December 31, 2016, Center City Funding had selected 53 underlying loans with a notional amount and market value of $388,681 and $394,986, respectively.

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Center City Funding under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

53

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 March 31, 2017:

Underlying Loan(1)	Industry	Rate(2)		Floor	Maturity	Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
Alison US LLC(3)	Capital Goods		L+425	1.0%	8/29/21	$	7,245	$	7,252	$	7
Alison US LLC(3)(7)	Capital Goods		L+850	1.0%	8/29/22		2,400		2,473		73
American Bath Group, LLC	Capital Goods		L+525	1.0%	9/30/23		3,343		3,511		168
American Bath Group, LLC	Capital Goods		L+975	1.0%	9/30/24		2,760		2,880		120
AqGen Ascensus, Inc.	Diversified Financials		L+400	1.0%	12/5/22		13,932		14,905		973
ATX Networks Corp.(3)(7)	Technology Hardware & Equipment		L+600	1.0%	6/11/21		4,839		4,839		—
ATX Networks Corp. (3)	Technology Hardware & Equipment		L+600	1.0%	6/11/21		7,718		7,837		119
Avantor Performance Materials Holdings, Inc.	Materials		L+400	1.0%	3/11/24		6,180		6,214		34
Avantor Performance Materials Holdings, Inc.(4)	Materials		L+400	1.0%	3/11/24		260		262		2
Avantor Performance Materials Holdings, Inc.	Materials		L+825	1.0%	3/10/25		2,918		2,962		44
Avantor Performance Materials Holdings, Inc.(4)	Materials		L+825	1.0%	3/10/25		128		130		2
BBB Industries US Holdings, Inc.	Automobiles & Components		L+500	1.0%	11/3/21		7,703		7,865		162
Caesars Entertainment Resort Properties, LLC	Consumer Services		L+600	1.0%	10/11/20		16,077		16,241		164
Casablanca US Holdings Inc.(7)	Consumer Services		L+900	1.0%	2/21/25		4,925		4,912		(13	)
CDS U.S. Intermediate Holdings, Inc.(3)(7)	Media		L+825	1.0%	7/10/23		8,865		8,910		45
CEVA Group Plc(3)	Transportation		L+550	1.0%	3/19/21		1,734		1,798		64
CEVA Intercompany BV(3)	Transportation		L+550	1.0%	3/19/21		1,774		1,839		65
CEVA Logistics Canada, ULC(3)	Transportation		L+550	1.0%	3/19/21		306		317		11
CEVA Logistics U.S. Holdings, Inc.	Transportation		L+550	1.0%	3/19/21		2,446		2,537		91
Confie Seguros Holding II Co.(3)	Insurance		L+475	1.0%	4/19/22		6,913		7,001		88
Corner Investment PropCo, LLC(7)	Consumer Services		L+975	1.3%	11/2/19		6,459		6,418		(41	)
Dayton Superior Corp.	Materials		L+800	1.0%	11/15/21		11,288		11,579		291
Diamond Resorts International, Inc.	Consumer Services		L+600	1.0%	9/2/23		27,163		28,052		889
Engility Corp.(3)	Capital Goods		L+375	1.0%	8/14/23		5,147		5,194		47
FHC Health Systems, Inc.	Health Care Equipment & Services		L+400	1.0%	12/23/21		8,908		8,435		(473	)
Forterra Finance, LLC(3)	Materials		L+350	1.0%	10/25/23		13,979		14,159		180
FullBeauty Brands Holdings Corp.	Consumer Durables & Apparel		L+475	1.0%	10/14/22		7,257		6,842		(415	)
Gulf Finance, LLC(7)	Energy		L+525	1.0%	8/25/23		9,651		9,909		258
Inmar, Inc.(7)	Software & Services		L+700	1.0%	1/27/22		3,439		3,296		(143	)
Ivanti Software, Inc.	Software & Services		L+425	1.0%	1/22/24		7,511		7,581		70
Jazz Acquisition, Inc.(7)	Capital Goods		L+675	1.0%	6/19/22		2,512		2,200		(312	)
LBM Borrower, LLC	Capital Goods		L+525	1.0%	8/20/22		5,400		5,440		40
LD Intermediate Holdings, Inc.	Software & Services		L+588	1.0%	12/9/22		8,944		9,428		484
McGraw-Hill Global Education Holdings, LLC	Media		L+400	1.0%	5/4/22		1,473		1,462		(11	)
MORSCO, Inc.	Capital Goods		L+700	1.0%	10/31/23		9,540		10,025		485
Murray Energy Corp.(7)	Energy		L+725	1.0%	4/16/20		9,848		10,260		412
National Surgical Hospitals, Inc.	Health Care Equipment & Services		L+350	1.0%	6/1/22		6,843		6,835		(8	)
Navistar, Inc.(3)	Capital Goods		L+400	1.0%	8/7/20		9,185		9,954		769
Neff Rental LLC(7)	Capital Goods		L+625	1.0%	6/9/21		8,996		10,705		1,709
New Arclin U.S. Holding Corp.	Materials		L+425	1.0%	2/14/24		7,814		7,912		98
Nielsen & Bainbridge, LLC	Consumer Durables & Apparel		L+500	1.0%	8/15/20		8,620		8,654		34
P2 Upstream Acquisition Co.	Energy		L+400	1.3%	10/30/20		2,301		2,434		133
Panda Temple Power, LLC(5)(6)(7)	Energy		L+625	1.0%	3/6/22		9,629		8,286		(1,343	)
QCP SNF East REIT, LLC(3)	Real Estate		L+525	1.0%	10/31/22		3,910		4,055		145
Spencer Gifts LLC	Retailing		L+425	1.0%	7/16/21		15,977		13,600		(2,377	)
SRS Distribution Inc.	Capital Goods		L+425	1.0%	8/25/22		10,176		10,265		89
Strike, LLC(7)	Energy		L+800	1.0%	11/30/22		4,789		5,012		223
SunGard Availability Services Capital, Inc.(7)	Software & Services		L+500	1.0%	3/29/19		4,770		5,251		481
TierPoint, LLC(7)	Software & Services		L+450	1.0%	12/2/21		4,424		4,518		94
TravelCLICK, Inc.	Software & Services		L+775	1.0%	11/6/21		3,310		3,293		(17	)
TTM Technologies, Inc.(3)	Technology Hardware & Equipment		L+425	1.0%	5/31/21		8,521		9,665		1,144
Weight Watchers International, Inc.(3)	Consumer Services		L+325	0.8%	4/2/20		31,008		34,237		3,229
Winebow Holdings, Inc.	Retailing		L+750	1.0%	1/2/22		4,878		4,593		(285	)
York Risk Services Holding Corp.(7)	Insurance		L+375	1.0%	10/1/21		15,124		14,822		(302	)
Total						$	401,260	$	409,056		7,796
				Total TRS Accrued Income and Liabilities:							4,731
				Total TRS Fair Value:						$	12,527

54

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

(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 March 31, 2017, three-month LIBOR was 1.15%.

(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 an unfunded commitment.

(5) Security is non-income producing.

(6) Security was on non-accrual status as of March 31, 2017.

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

The following is a summary of the underlying loans subject to the TRS as of December 31, 2016:

Underlying Loan(1)	Industry	Rate(2)		Floor	Maturity	Notional Amount		Market Value		Unrealized Appreciation/ (Depreciation)
Alison US LLC(3)	Capital Goods		L+425	1.0%	8/29/21	$	7,264	$	7,282	$	18
Alison US LLC(3)	Capital Goods		L+850	1.0%	8/29/22		2,400		2,400		—
American Bath Group, LLC	Capital Goods		L+575	1.0%	9/30/23		3,352		3,487		135
American Bath Group, LLC	Capital Goods		L+975	1.0%	9/30/24		2,760		2,880		120
AqGen Ascensus, Inc.	Diversified Financials		L+450	1.0%	12/5/22		13,967		14,822		855
ATX Networks Corp.(3)	Technology Hardware & Equipment		L+600	1.0%	6/11/21		4,851		4,802		(49	)
ATX Networks Corp.(3)	Technology Hardware & Equipment		L+600	1.0%	6/11/21		7,737		7,777		40
Avantor Performance Materials Holdings, Inc.	Materials		L+500	1.0%	6/21/22		22,721		23,297		576
BBB Industries US Holdings, Inc.	Automobiles & Components		L+500	1.0%	11/3/21		7,703		7,860		157
Caesars Entertainment Operating Co., Inc.(3)(4)	Consumer Services		L+575		3/1/17		7,097		8,266		1,169
Caesars Entertainment Operating Co., Inc.(3)(4)	Consumer Services		L+675		3/1/17		1,601		1,896		295
Caesars Entertainment Resort Properties, LLC	Consumer Services		L+600	1.0%	10/11/20		5,171		5,430		259
CDS U.S. Intermediate Holdings, Inc.(3)	Media		L+825	1.0%	7/10/23		8,865		8,752		(113	)
CEVA Group Plc(3)	Transportation		L+550	1.0%	3/19/21		1,734		1,681		(53	)
CEVA Intercompany BV(3)	Transportation		L+550	1.0%	3/19/21		1,778		1,724		(54	)
CEVA Logistics Canada, ULC(3)	Transportation		L+550	1.0%	3/19/21		307		297		(10	)
CEVA Logistics U.S. Holdings, Inc.	Transportation		L+550	1.0%	3/19/21		2,453		2,378		(75	)
Compuware Corp.	Software & Services		L+525	1.0%	12/15/21		11,172		11,813		641
Concordia Healthcare Corp.(3)	Pharmaceuticals, Biotechnology & Life Sciences		L+425	1.0%	10/21/21		8,452		6,937		(1,515	)
Confie Seguros Holding II Co.(3)	Insurance		L+475	1.0%	4/19/22		6,930		7,023		93
Corner Investment PropCo, LLC	Consumer Services		L+975	1.3%	11/2/19		6,459		6,355		(104	)
Dayton Superior Corp.	Materials		L+800	1.0%	11/15/21		11,317		11,696		379
Diamond Resorts International, Inc.	Consumer Services		L+600	1.0%	9/2/23		27,232		27,930		698
DTZ U.S. Borrower, LLC	Real Estate		L+825	1.0%	11/4/22		816		833		17
Engility Corp.(3)	Capital Goods		L+475	1.0%	8/14/23		5,381		5,485		104
FHC Health Systems, Inc.	Health Care Equipment & Services		L+400	1.0%	12/23/21		8,930		8,750		(180	)
Forterra Finance, LLC(3)	Materials		L+350	1.0%	10/25/23		14,015		14,233		218
Gulf Finance, LLC	Energy		L+525	1.0%	8/25/23		9,676		10,000		324
Inmar, Inc.	Software & Services		L+700	1.0%	1/27/22		3,439		3,343		(96	)
Jazz Acquisition, Inc.	Capital Goods		L+675	1.0%	6/19/22		2,512		2,079		(433	)
Landslide Holdings, Inc.	Software & Services		L+450	1.0%	9/27/22		6,369		6,506		137
LBM Borrower, LLC	Capital Goods		L+525	1.0%	8/20/22		5,414		5,382		(32	)
LD Intermediate Holdings, Inc.	Software & Services		L+588	1.0%	12/9/22		9,000		9,250		250
McGraw-Hill Global Education Holdings, LLC	Media		L+400	1.0%	5/4/22		1,476		1,484		8
MORSCO, Inc.	Capital Goods		L+700	1.0%	10/31/23		9,600		10,025		425
Murray Energy Corp.	Energy		L+725	1.0%	4/16/20		9,875		10,118		243
National Surgical Hospitals, Inc.	Health Care Equipment & Services		L+350	1.0%	6/1/22		6,861		6,895		34
Navistar, Inc.(3)	Capital Goods		L+550	1.0%	8/7/20		9,208		9,994		786
Neff Rental LLC	Capital Goods		L+625	1.0%	6/9/21		9,225		10,898		1,673
Nielsen & Bainbridge, LLC	Consumer Durables & Apparel		L+500	1.0%	8/15/20		8,620		8,610		(10	)
P2 Upstream Acquisition Co.	Energy		L+400	1.0%	10/30/20		2,307		2,344		37
Panda Temple Power, LLC	Energy		L+625	1.0%	3/6/22		9,628		8,597		(1,031	)

55

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)
Payless Inc.	Retailing		L+400		1.0%	3/11/21	$	2,620	$	1,386	$	(1,234	)
Printpack Holdings, Inc.	Materials		L+400		1.0%	7/26/23		3,947		3,992		45
QCP SNF East REIT, LLC(3)	Real Estate		L+525		1.0%	10/31/22		11,760		12,210		450
Spencer Gifts LLC	Retailing		L+425		1.0%	7/16/21		15,977		13,982		(1,995	)
SRS Distribution Inc.	Capital Goods		L+425		1.0%	8/25/22		7,832		7,902		70
Strike, LLC	Energy		L+800		1.0%	11/30/22		4,850		4,925		75
SunGard Availability Services Capital, Inc.	Software & Services		L+500		1.0%	3/29/19		4,770		5,249		479
TierPoint, LLC	Software & Services		L+450		1.0%	12/2/21		4,435		4,539		104
TTM Technologies, Inc.(3)	Technology Hardware & Equipment		L+425		1.0%	5/31/21		11,450		12,834		1,384
Weight Watchers International, Inc.(3)	Consumer Services		L+325		0.8%	4/2/20		10,487		11,788		1,301
Winebow Holdings, Inc.	Retailing		L+750		1.0%	1/2/22		4,878		4,568		(310	)
Total							$	388,681	$	394,986		6,305
					Total TRS Accrued Income and Liabilities:							5,098
					Total TRS Fair Value:						$	11,403

(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, 2016, three-month LIBOR was 1.00%.

(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 non-income producing.

BNP Facility

On October 17, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Burholme Funding LLC, or Burholme Funding, entered into a committed facility arrangement and related transaction documents, or the BNP facility, with BNP Paribas Prime Brokerage, Inc., or BNPP, on behalf of itself and as agent for BNP Paribas, BNP Paribas Prime Brokerage International, Ltd. and BNPP PB, Inc., or, collectively, the BNPP Entities. The BNP facility was effected through a committed facility agreement by and between Burholme Funding and BNPP, or the committed facility agreement, a U.S. PB agreement by and between Burholme Funding and BNPP, and a special custody and pledge agreement by and among Burholme Funding, BNPP and State Street Bank and Trust Company, or State Street, as custodian, each dated as of October 17, 2014, and which are collectively referred to herein as the BNP financing agreements. The BNP facility has subsequently been amended from time to time, most recently pursuant to an amendment dated as of November 15, 2016, to, among other matters, increase the maximum commitment financing available to Burholme Funding under the BNP facility to $250,000 from $200,000. In addition, on August 29, 2016, Burholme Funding entered into an amendment to the BNP facility to, among other things, (i) increase the interest rate payable on borrowings under the committed facility agreement from three-month LIBOR plus 110 basis points to three-month LIBOR plus 125 basis points effective on and after January 2, 2017 and (ii) increase the commitment fee payable under the committed facility agreement from 55 basis points on all unused amounts to, effective on and after January 2, 2017, (a) 65 basis points on unused amounts so long as 75% or more of the facility amount under the committed facility agreement is utilized or (b) 85 basis points on unused amounts if less than 75% of the facility amount under the committed facility agreement is utilized.

The Company may contribute securities to Burholme Funding from time to time, subject to certain restrictions set forth in the committed facility agreement, and will retain a residual interest in any securities contributed through its ownership of Burholme Funding or will receive fair market value for any securities sold

56

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

to Burholme Funding. Burholme Funding may purchase additional securities from various sources. Burholme Funding has appointed the Company to manage its portfolio of securities pursuant to the terms of an investment management agreement. Burholme Funding’s obligations to BNPP under the BNP facility are secured by a first priority security interest in substantially all of the assets of Burholme Funding, including its portfolio of securities. Such pledged portfolio of securities is held in a segregated custody account with State Street. The value of securities required to be pledged by Burholme Funding is determined in accordance with the margin requirements described in the BNP financing agreements. The obligations of Burholme Funding under the BNP facility are non-recourse to the Company, and the Company’s exposure under the BNP facility is limited to the value of its investment in Burholme Funding.

Prior to January 2, 2017 borrowings under the BNP facility accrued interest at a rate equal to three-month LIBOR plus 1.10% per annum and a non-usage fee in an amount equal to 0.55% was charged on unused commitments. On August 29, 2016, Burholme Funding entered into an amendment to the BNP facility which resulted in increases effective on and after January 2, 2017 to the (i) interest rate payable on borrowings to three month LIBOR plus 1.25% per annum and (ii) the commitment fee payable on all unused amounts to (a) 0.65% per annum on unused amounts so long as 75% or more of the facility amount is utilized or (b) 0.85% per annum on unused amounts if less than 75% of the facility amount is utilized. Burholme Funding may terminate the committed facility agreement upon 270 days’ notice. Absent a default or facility termination event (or the ratings decline described in the following sentence), BNPP is required to provide Burholme Funding with 270 days’ notice prior to terminating or materially amending the committed facility agreement. BNPP has a cancellation right if BNP Paribas’ long-term credit rating declines three or more notches below its highest rating by any of S&P, Moody’s or Fitch Ratings, Inc., during the term of the BNP facility. Upon any such termination, BNPP is required to pay Burholme Funding a fee equal to 0.50% of the maximum amount of financing available on the termination date. Burholme Funding paid an arrangement fee and incurred certain other customary costs and expenses in connection with obtaining the BNP facility.

Under the terms of the BNP financing agreements, BNPP has the ability to borrow a portion of the pledged collateral, or collectively, the rehypothecated securities, subject to certain limits. Burholme Funding will receive a fee from BNPP in connection with any rehypothecated securities. Burholme Funding may designate any security within the pledged collateral as ineligible to be a rehypothecated security, provided there are eligible securities within the segregated custody account in an amount equal to the outstanding borrowings owed by Burholme Funding to BNPP. Burholme Funding may recall any rehypothecated security at any time, and BNPP must return such security or equivalent security within a commercially reasonable period. In the event BNPP does not return the security, Burholme Funding will have the right to, among other things, apply and set off an amount equal to 100% of the then-current fair market value of such unreturned rehypothecated security against any outstanding borrowings owed to BNPP under the BNP financing agreements. Rehypothecated securities are marked-to-market daily and if the value of all rehypothecated securities exceeds 100% of the outstanding borrowings owed by Burholme Funding under the BNP financing agreements, BNPP may either reduce the amount of rehypothecated securities to eliminate such excess or deposit into the segregated custody account an amount of cash equal to such excess. Burholme Funding will continue to receive interest and the scheduled repayment of principal balances on rehypothecated securities.

As of March 31, 2017 and December 31, 2016, $187,700 and $187,700, respectively, was outstanding under the BNP facility. The carrying amount outstanding under the BNP facility approximates its fair value. The Company incurred costs of $375 in connection with obtaining the facility, which the Company has recorded as

57

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

deferred financing costs on the Company’s consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2017, $37 of such deferred financing costs had yet to been amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the BNP facility were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	1,089	$	620
Non-usage fees		101		80
Amortization of deferred financing costs		25		—
Total interest expense	$	1,215	$	700

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the BNP facility were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense	$	1,130		$	485
Average borrowings under the facility	$	187,700		$	142,211
Effective interest rate on borrowings (including the effect of non-usage fees)		2.62	%		1.98	%
Weighted average interest rate (including the effect of non-usage fees)(1)		2.53	%		1.95	%

(1) The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings of Burholme Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Deutsche Bank Credit Facility

On December 2, 2014, the Company’s wholly-owned, special-purpose financing subsidiary, Dunlap Funding LLC, or Dunlap Funding, entered into a revolving credit facility, or the Deutsche Bank AG, New York Branch, or Deutsche Bank, credit facility, with Deutsche Bank, as administrative agent, each of the lenders and other agents from time to time party thereto, and Wells Fargo Bank, National Association, as the collateral agent and collateral custodian under the Deutsche Bank credit facility, which has subsequently been amended from time to time to, among other matters, (i) increase the aggregate principal amount of available borrowings to $350,000 on a committed basis and (ii) extend the term of the facility to September 22, 2019.

The Company may contribute assets to Dunlap Funding from time to time and will retain a residual interest in any assets contributed through its ownership of Dunlap Funding or will receive fair market value for any assets sold to Dunlap Funding. Dunlap Funding may purchase additional assets from various sources. Dunlap Funding has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Dunlap Funding’s obligations to Deutsche Bank under the Deutsche Bank credit facility are secured

58

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

by a first priority security interest in substantially all of the assets of Dunlap Funding, including its portfolio of assets. The obligations of Dunlap Funding under the Deutsche Bank credit facility are non-recourse to the Company, and the Company’s exposure under the Deutsche Bank credit facility is limited to the value of its investment in Dunlap Funding.

Pricing under the Deutsche Bank credit facility is based on LIBOR for a three-month interest period (for each committed lender) or the commercial paper rate of each conduit lender, plus, in each case, a spread of 2.25% per annum. Interest is payable quarterly in arrears. Dunlap Funding will be subject to a non-usage fee of 0.50% per annum to the extent the aggregate principal amount available under the Deutsche Bank credit facility has not been borrowed. In addition, Dunlap Funding is subject to (i) a make-whole fee on a quarterly basis effectively equal to a portion of the spread that would have been payable if the full amount under the Deutsche Bank credit facility had been borrowed, less the non-usage fee accrued during such quarter and (ii) an administration fee. Any amounts borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable on September 22, 2019. Dunlap Funding paid a structuring fee and incurred certain other customary costs and expenses in connection with obtaining the Deutsche Bank credit facility.

As of March 31, 2017 and December 31, 2016, $291,000 and $240,000, respectively, was outstanding under the Deutsche Bank credit facility. The carrying amount outstanding under the Deutsche Bank credit facility approximates its fair value. The Company incurred costs of $3,438 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on the Company’s consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2017, $1,854 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Deutsche Bank credit facility were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	2,227	$	1,798
Non-usage and make whole fees		107		—
Amortization of deferred financing costs		225		186
Total interest expense	$	2,559	$	1,984

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Deutsche Bank credit facility were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense	$	2,040		$	1,729
Average borrowings under the facility	$	252,048		$	250,000
Effective interest rate on borrowings (including the effect of non-usage and administration fees)		3.45	%		2.82	%
Weighted average interest rate (including the effect of non-usage and administration fees)(1)		3.71	%		2.85	%

59

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

(1) The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings of Dunlap Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

JPM Credit Facility

On May 8, 2015, the Company’s wholly-owned, special purpose financing subsidiary, Jefferson Square Funding LLC, or Jefferson Square Funding, entered into a senior secured term loan credit facility, or the JPM credit facility, with JP Morgan Chase Bank, National Association, or JPM, as administrative agent, each of the lenders from time to time party thereto, Citibank, as collateral agent, and Virtus Group, LP as collateral administrator. On March 1, 2016, Jefferson Square Funding entered into an amendment with JPM to (i) increase the aggregate principal amount of advances by $50,000 to $350,000, plus an option, with the consent of Jefferson Square Funding, JPM, as administrative agent, and the lenders at the time, to further increase the aggregate principal amount of advances by an additional $50,000 prior to April 30, 2016 and (ii) increase the applicable interest rate from LIBOR for each three-month interest period plus 2.50% to LIBOR for each three-month interest period plus 2.69%. On April 28, 2016, Jefferson Square Funding exercised its option, with the necessary consents, to increase the aggregate principal amount of advances to $400,000.

The Company may contribute cash, loans or bonds to Jefferson Square Funding from time to time, subject to certain restrictions set forth in the JPM credit facility, and will retain a residual interest in any assets contributed through its ownership of Jefferson Square Funding or will receive fair market value for any assets sold to Jefferson Square Funding. Jefferson Square Funding may purchase additional assets from various sources. Jefferson Square Funding has appointed the Company to manage its portfolio of assets pursuant to the terms of an investment management agreement. Jefferson Square Funding’s obligations to JPM under the JPM credit facility are secured by a first priority security interest in substantially all of the assets of Jefferson Square Funding, including its portfolio of assets. The obligations of Jefferson Square Funding under the JPM credit facility are non-recourse to the Company, and the Company’s exposure under the JPM credit facility is limited to the value of the Company’s investment in Jefferson Square Funding.

Borrowings under the JPM credit facility accrued interest at a rate equal to three-month LIBOR plus 2.69% per annum as of March 31, 2017. Interest is payable in arrears beginning on October 25, 2015 and each quarter thereafter. Between September 8, 2015 and November 10, 2015, Jefferson Square Funding was subject to a non-usage fee of 1.00% per annum to the extent the aggregate principal amount available under the JPM credit facility had not been borrowed. Any amounts borrowed under the JPM credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 8, 2019.

As of March 31, 2017 and December 31, 2016, $400,000 and $400,000, respectively, was outstanding under the JPM credit facility. The carrying amount outstanding under the JPM credit facility approximates its fair value. The Company incurred costs of $477 in connection with obtaining the JPM credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the JPM credit facility. As of March 31, 2017, $305 of such deferred financing costs had yet to be amortized to interest expense.

60

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 March 31, 2017 and 2016, the components of total interest expense for the JPM credit facility were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	3,690	$	2,524
Amortization of deferred financing costs		35		14
Total interest expense	$	3,725	$	2,538

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the JPM credit facility were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense	$	3,608		$	2,103
Average borrowings under the facility	$	400,000		$	317,033
Effective interest rate on borrowings		3.71	%		3.31	%
Weighted average interest rate(1)		3.69	%		3.15	%

(1) The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings of Jefferson Square Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Goldman Facility

On June 18, 2015, the Company, through its two wholly-owned, special-purpose financing subsidiaries, Germantown Funding LLC, or Germantown Funding, and Society Hill Funding LLC, or Society Hill Funding, entered into a debt financing arrangement with Goldman Sachs Bank USA, or Goldman, pursuant to which up to $300,000 is available to the Company. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternative arrangements.

The Company may sell and/or contribute assets to Germantown Funding from time to time pursuant to an amended and restated sale and contribution agreement, dated as of June 18, 2015, between the Company and Germantown Funding, or the sale and contribution agreement. The assets held by Germantown Funding secure the obligations of Germantown Funding under floating rate notes, or the notes issued from time to time by Germantown Funding to Society Hill Funding pursuant to an indenture, dated as of June 18, 2015, with Citibank, as trustee, or the indenture. Pursuant to the indenture, the aggregate principal amount of notes that may be issued by Germantown Funding from time to time is $500,000. Society Hill Funding has purchased the notes issued by Germantown Funding from time to time at a purchase price equal to their par value.

Interest on the notes under the indenture will accrue at three-month LIBOR plus a spread of 4.00% per annum. Principal and any unpaid interest on the notes will be due and payable on the stated maturity date of October 15, 2027.

61

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

Society Hill Funding, in turn, has entered into a repurchase transaction with Goldman, pursuant to the terms of a master repurchase agreement and the related annex and master confirmation thereto, each dated as of June 18, 2015 and effective as of July 15, 2015, or collectively, the Goldman facility. Pursuant to the Goldman facility, from time to time, Goldman has purchased notes held by Society Hill Funding for an aggregate purchase price equal to 60% of the principal amount of notes purchased. Subject to certain conditions, the maximum principal amount of notes that may be purchased under the Goldman facility is $500,000. Accordingly, the aggregate maximum amount made available under the Goldman facility will not exceed $300,000.

Society Hill Funding will repurchase the notes sold to Goldman under the Goldman facility no later than July 15, 2019. The repurchase price paid by Society Hill Funding to Goldman will be equal to the purchase price paid by Goldman for the repurchased notes, plus financing fees accrued at the applicable pricing rate under the Goldman facility. Up until November 15, 2015, financing fees were accrued on the aggregate purchase price paid by Goldman for such notes. Thereafter, financing fees have accrued, and will continue to accrue, on $300,000 (even if the aggregate purchase price paid for notes purchased by Goldman at that time is less than that amount), unless and until the outstanding amount is reduced in accordance with the terms of the Goldman facility. If the Goldman facility is accelerated prior to July 15, 2019 due to an event of default or the failure of Germantown Funding to commit to sell any underlying assets that become defaulted obligations within 30 days, then Society Hill Funding must pay to Goldman a fee equal to the present value of the aggregate amount of the financing fees that would have been payable to Goldman from the date of acceleration through July 15, 2019 had the acceleration not occurred. The financing fee under the Goldman facility is equal to three-month LIBOR plus a spread of up to 2.50% per annum for the relevant period.

Goldman may require Society Hill Funding to post cash collateral if the market value of the notes (measured by reference to the market value of Germantown Funding’s portfolio of assets), together with any posted cash collateral, is less than the required margin amount under the Goldman facility; provided, however, that Society Hill Funding will not be required to post cash collateral with Goldman until such market value has declined at least 10% from the initial market value of the notes. In addition, if the market value of any underlying asset held in Germantown Funding’s portfolio of assets is less than 70% of the initial market value of such underlying asset, Goldman may require Society Hill Funding to post additional cash collateral in an amount equal to 15% of the outstanding principal balance of such underlying asset. In each such event, in order to satisfy these requirements, Society Hill Funding intends to borrow funds from the Company pursuant to an uncommitted revolving credit agreement, dated as of June 18, 2015, between Society Hill Funding, as borrower, and the Company, as lender, or the revolving credit agreement. The Company may, in its sole discretion, make such loans from time to time to Society Hill Funding pursuant to the terms of the revolving credit agreement. Borrowings under the revolving credit agreement may not exceed $300,000 and will accrue interest at a rate equal to one-month LIBOR plus a spread of 0.75% per annum.

As of March 31, 2017 and December 31, 2016, notes in an aggregate principal amount of $500,000 and $500,000, respectively, had been purchased by Society Hill Funding from Germantown Funding and subsequently sold to Goldman under the Goldman facility for aggregate proceeds of $300,000 and $300,000, respectively. The carrying amount outstanding under the Goldman facility approximates its fair value. The Company funded each purchase of the notes by Society Hill Funding through a capital contribution to Society Hill Funding. As of March 31, 2017 and December 31, 2016, Society Hill Funding’s liability under the Goldman facility was $300,000 and $300,000, respectively, plus $2,173 and $2,141, respectively, of accrued interest expense. The notes issued by Germantown Funding and purchased by Society Hill Funding eliminate in consolidation on the Company’s financial statements.

62

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

As of March 31, 2017 and December 31, 2016, the fair value of assets held by Germantown Funding was $616,905 and $610,741, respectively.

The Company incurred costs of $1,590 in connection with obtaining the Goldman facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the Goldman facility. As of March 31, 2017, $911 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the Goldman facility were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	2,623	$	2,253
Amortization of deferred financing costs		98		99
Total interest expense	$	2,721	$	2,352

For the three months ended March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Goldman facility were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense(1)	$	2,590		$	1,964
Average borrowings under the facility	$	300,000		$	289,200
Effective interest rate on borrowings		3.52	%		3.12	%
Weighted average interest rate(1)		3.50	%		3.08	%

(1) Interest under the Goldman facility is payable quarterly in arrears and commenced on January 15, 2016. The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings under the Goldman facility will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Capital One Credit Facility

On August 13, 2015, the Company’s wholly-owned, special purpose financing subsidiary, Chestnut Hill Funding LLC or Chestnut Hill Funding, entered into a revolving credit facility, or the Capital One credit facility, with Capital One, National Association, or Capital One, as administrative agent, hedge counterparty, lead arranger and sole bookrunner, each of the conduit lenders and institutional lenders from time to time party thereto, and Wells Fargo Bank, National Association, as collateral agent, account bank and collateral custodian under the Capital One credit facility. The Capital One credit facility provides for borrowings in an aggregate principal amount up to $150,000 on a committed basis.

63

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 Company may contribute cash or loans to Chestnut Hill Funding from time to time and will retain a residual interest in any assets contributed through its ownership of Chestnut Hill Funding or will receive fair market value for any assets sold to Chestnut Hill Funding. Chestnut Hill Funding may purchase additional assets from various sources. Chestnut Hill Funding has appointed the Company to manage its portfolio of assets pursuant to the terms of a collateral management agreement. Chestnut Hill Funding’s obligations to Capital One under the Capital One credit facility are secured by a first priority security interest in substantially all of the assets of Chestnut Hill Funding, including its portfolio of assets. The obligations of Chestnut Hill Funding under the Capital One credit facility are non-recourse to the Company, and the Company’s exposure under the Capital One credit facility is limited to the value of the Company’s investment in Chestnut Hill Funding.

Borrowings under the Capital One credit facility accrue interest at a rate equal to LIBOR for each one-month, two-month or three-month interest period, as elected by Chestnut Hill Funding, in each case plus an applicable spread ranging between 1.75% and 2.50% per annum, depending on the composition of the portfolio of assets for the relevant period. Interest is payable quarterly in arrears. Chestnut Hill Funding is subject to (a) a non-usage fee to the extent it has not borrowed the aggregate principal amount available under the Capital One credit facility and (b) beginning February 13, 2016, a make-whole fee to the extent it has borrowed less than 60% of the aggregate principal amount available under the Capital One credit facility. Any amounts borrowed under the Capital One credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 13, 2020.

As of March 31, 2017 and December 31, 2016, $150,000 and $150,000, respectively, was outstanding under the Capital One credit facility. The carrying amount outstanding under the Capital One credit facility approximates its fair value. The Company incurred costs of $1,382 in connection with obtaining the Capital One credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the Capital One credit facility. As of March 31, 2017, $932 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2017, the components of total interest expense for the Capital One credit facility were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	1,295	$	769
Non-usage fees		38		46
Amortization of deferred financing costs		68		69
Total interest expense	$	1,401	$	884

64

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 March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Capital One credit facility were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense(1)	$	1,303		$	580
Average borrowings under the facility	$	150,000		$	101,014
Effective interest rate on borrowings (including the effect of non-usage fees)		3.37	%		3.13	%
Weighted average interest rate (including the effect of non-usage fees)(1)		3.55	%		3.19	%

(1) Interest under the Capital One credit facility is payable quarterly in arrears and commenced on January 15, 2016. The weighted average interest rate presented for periods of less than one year is annualized.

Borrowings of Chestnut Hill Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements applicable to BDCs under the 1940 Act.

Partial Loan Sale

Certain partial loan sales do not qualify for sale accounting under ASC Topic 860 because these sales do not 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 as an investment on the consolidated balance sheets and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated balance sheets. For these partial loan sales, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer in the partial loan sale is recorded within interest expense in the consolidated statements of operations.

As of March 31, 2017 and December 31, 2016, the Company recognized a secured borrowing at fair value of $14,092 and $14,040, respectively, and the fair value of the loan that is associated with the secured borrowing was $73,516 and $73,095, respectively. The secured borrowing was the result of the Company’s completion of a partial sale of a senior secured loan associated with one portfolio company that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and the partial loan sale was treated as a secured borrowing.

During the three months ended March 31, 2017, there were no new partial loan sales, fundings on revolving and delayed draw secured borrowings or repayments on secured borrowings.

For the three months ended March 31, 2017 and 2016, the components of total interest expense for the secured borrowing were as follows:

	Three Months Ended March 31,
	2017		2016
Direct interest expense	$	192	$	—
Amortization of discount		7		—
Total interest expense	$	199	$	—

65

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 March 31, 2017 and 2016, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the secured borrowing were as follows:

	Three Months Ended March 31,
	2017			2016
Cash paid for interest expense(1)	$	196			—
Average secured borrowing	$	13,929			—
Effective interest rate on secured borrowing		5.53	%		—
Weighted average interest rate(1)		5.50	%		—

(1) Interest under the secured borrowing is paid quarterly in arrears. The weighted average interest rate presented for periods of less than one year is annualized.

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 FSIC III 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 4 for a discussion of the Company’s commitments to FSIC III Advisor and its affiliates (including FS Investments) and Note 6 for a discussion of the Company’s unfunded commitments.

66

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the three months ended March 31, 2017 and the year ended December 31, 2016:

	Three Months Ended March 31, 2017 (Unaudited)			Year Ended December 31, 2016
Per Share Data:(1)
Net asset value, beginning of period	$	8.53		$	7.85
Results of operations(2)
Net investment income		0.16			0.65
Net realized and unrealized appreciation (depreciation) on investments, total return swap and secured borrowing		0.05			0.72
Net increase (decrease) in net assets resulting from operations		0.21			1.37
Stockholder distributions(3)
Distributions from net investment income		(0.17	)		(0.70	)
Net decrease in net assets resulting from stockholder distributions		(0.17	)		(0.70	)
Capital share transactions
Issuance of common stock(4)		—			0.01
Repurchases of common stock(5)		—			—
Net increase in net assets resulting from capital share transactions		—			0.01
Net asset value, end of period	$	8.57		$	8.53
Shares outstanding, end of period		279,234,382			272,354,014
Total return(6)		2.52	%		18.31	%
Total return (without assuming reinvestment of distributions)(7)		2.46	%		17.58	%
Ratio/Supplemental Data:
Net assets, end of period	$	2,393,938		$	2,323,940
Ratio of net investment income to average net assets(8)		1.87	%		8.00	%
Ratio of operating expenses and excise taxes to average net assets(8)		1.82	%		7.51	%
Ratio of net operating expenses and excise taxes to average net assets(8)		1.76	%		7.51	%
Portfolio turnover(9)		6.32	%		37.52	%
Total amount of senior securities outstanding, exclusive of treasury securities	$	1,649,323		$	1,585,659
Asset coverage per unit(10)		2.45			2.47

(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 Company’s distribution reinvestment plan. The issuance of common stock at an offering 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 to net asset value is 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 distribution reinvestment plan.

67

FS Investment Corporation III

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 10. Financial Highlights (continued)

The total return does 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 return includes 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 calculation of total return in the table should not be considered a representation of the Company’s future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

(7) 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 return (without assuming reinvestment of distributions) does 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 return (without assuming reinvestment of distributions) includes 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 calculation of total return (without assuming reinvestment of distributions) in the table should not be considered a representation of the Company’s future total return (without assuming reinvestment of distributions) which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to stockholders.

(8) Weighted average net assets during the applicable period are used for this calculation. The following is a schedule of supplemental ratios for the three months ended March 31, 2017 and the year ended December 31, 2016:

	Three Months Ended March 31, 2017 (Unaudited)			Year Ended December 31, 2016
Ratio of subordinated income incentive fees to average net assets		0.41	%		1.87	%
Ratio of interest expense to average net assets		0.50	%		1.87	%
Ratio of offering costs to average net assets		0.02	%		0.06	%
Ratio of excise taxes to average net assets		—			0.01	%

(9) Portfolio turnover for the three months ended March 31, 2017 is not annualized.

(10) 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.

68

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” and “our” 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 the Fund Complex or any affiliates thereof;

• 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 FSIC III Advisor to locate suitable investments for us and to monitor and administer our investments;

• the ability of FSIC III 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 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 upon raising gross proceeds in excess of $2,500 from sales of shares of our common stock in our continuous public offering to persons who were not affiliated with us or FSIC III Advisor. 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. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization.

Our investment activities are managed by FSIC III Advisor and supervised by our board of directors, a majority of whom are independent. Under the investment advisory and administrative services agreement, we have agreed to pay FSIC III Advisor an annual base management fee based on the average weekly value of our gross assets and an incentive fee based on our performance. FSIC III Advisor has engaged GDFM to act as our investment sub-adviser. GDFM assists FSIC III Advisor in identifying investment opportunities and makes investment recommendations for approval by FSIC III Advisor according to guidelines set by FSIC III Advisor.

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 leverage our relationships and our relationship with GDFM and its global sourcing and origination platform, including its industry relationships, 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. 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

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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 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 FSIC III Advisor and GDFM.

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 minority 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 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. FSIC III 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 nationally recognized statistical rating organization and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s or lower than “BBB-” by S&P). We also invest in non-rated debt securities.

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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 total return swap, net unrealized appreciation or depreciation on investments 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 cost. 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. 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. Any such fees generated in connection with our investments will be recognized as earned. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.

Expenses

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

We reimburse FSIC III Advisor for expenses necessary to perform services related to our administration and operations, including FSIC III Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments providing administrative services to us on behalf of FSIC III Advisor. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FSIC III 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, FSIC III 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. See Note 4 to our unaudited consolidated financial statements included herein for additional information regarding the reimbursements payable to FSIC III Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2016.

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

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Expense Reimbursement

Pursuant to the expense reimbursement agreement, FS Investments has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to stockholders may also be deemed to constitute a return of capital to the extent that we may use such dividends or other distribution proceeds to fund our distributions to stockholders. Under those circumstances, FS Investments will not reimburse us for the portion of such distributions to stockholders that represent a return of capital, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to stockholders.

Under the expense reimbursement agreement, FS Investments will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our stockholders in each quarter, less the sum of our net investment company taxable income, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment company taxable income or net capital gains) in each quarter.

Pursuant to the expense reimbursement agreement, we have a conditional obligation to reimburse FS Investments for any amounts funded by FS Investments under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which FS Investments funded such amount, the sum of our net investment company taxable income, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment company taxable income or net capital gains) exceeds the regular cash distributions paid by us to our stockholders; provided, however, that (i) we will only reimburse FS Investments for expense support payments made by FS Investments with respect to any calendar quarter to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense support payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to shares of our common stock for the fiscal year-to-date period after taking such payments into account and (B) the percentage of our average net assets attributable to shares of our common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from FS Investments was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from FS Investments made during the same fiscal year) and (ii) we will not reimburse FS Investments for expense support payments made by FS Investments for any calendar quarter if the annualized rate of regular cash distributions declared by us at the time of such reimbursement payment is less than the annualized rate of regular cash distributions declared by us at the time FS Investments made the expense support payment to which such reimbursement payment relates. We are not obligated to pay interest on the reimbursements we are required to make to FS Investments under the expense reimbursement agreement. “Other operating expenses” means our total “operating expenses” (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. “Operating expenses” means all operating costs and expenses incurred, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, for investment companies.

We or FS Investments may terminate the expense reimbursement agreement at any time. FS Investments has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. The specific amount of expenses reimbursed by FS Investments, if any, will be determined at the end of each quarter.

Upon termination of the expense reimbursement agreement by FS Investments, FS Investments will be required to fund any amounts accrued thereunder as of the date of termination. Similarly, our conditional

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obligation to reimburse FS Investments pursuant to the terms of the expense reimbursement agreement shall survive the termination of such agreement by either party.

FS Investments is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that FS Investments will reimburse any portion of our expenses in future quarters. As of March 31, 2017 and December 31, 2016, no amounts remained subject to repayment by us to FS Investments.

Portfolio Investment Activity for the Three Months Ended March 31, 2017 and for the Year Ended December 31, 2016

During the three months ended March 31, 2017, we made investments in portfolio companies totaling $341,257. During the same period, we sold investments for proceeds of $138,185 and received principal repayments of $69,346. As of March 31, 2017, our investment portfolio, with a total fair value of $3,394,448 (66% in first lien senior secured loans, 6% in second lien senior secured loans, 3% in senior secured bonds, 20% in subordinated debt, 0% in collateralized securities and 5% in equity/other), consisted of interests in 115 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $169.6 million. As of March 31, 2017, the debt investments in our portfolio were purchased at a weighted average price of 98.3% of par and our estimated gross portfolio yield, prior to leverage, was 9.4% based upon the amortized cost of our investments. For the three months ended March 31, 2017, our total return was 2.52% and our total return without assuming reinvestment of distributions was 2.46%.

Based on our regular weekly cash distribution amount of $0.013461 per share as of March 31, 2017 and our institutional offering price of $8.64 per share as of such date, the annualized distribution rate to stockholders as of March 31, 2017 was 8.10%. The annualized distribution rate to stockholders is expressed as a percentage equal to the projected annualized distribution amount per share divided by our institutional offering price per share as of March 31, 2017. Our annualized distribution rate to stockholders may include income, realized capital gains and a return of investors’ capital.

During the year ended December 31, 2016, we made investments in portfolio companies totaling $1,446,810. During the same period, we sold investments for proceeds of $523,654 and received principal repayments of $590,384. As of December 31, 2016, our investment portfolio, with a total fair value of $3,243,310 (66% in first lien senior secured loans, 7% in second lien senior secured loans, 3% in senior secured bonds, 19% in subordinated debt, 0% in collateralized securities and 5% in equity/other), consisted of interests in 114 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $159.5 million. As of December 31, 2016, the debt investments in our portfolio were purchased at a weighted average price of 98.2% of par and our estimated gross portfolio yield, prior to leverage, was 9.5% based upon the amortized cost of our investments. For the year ended December 31, 2016, our total return was 18.31% and our total return without assuming reinvestment of distributions was 17.58%.

Based on our regular weekly cash distribution amount of $0.013461 per share as of December 31, 2016 and our institutional offering price of $8.55 per share as of such date, the annualized distribution rate to stockholders as of December 31, 2016 was 8.19%. The annualized distribution rate to stockholders is expressed as a percentage equal to the projected annualized distribution amount per share divided by our institutional offering price per share as of December 31, 2016. Our annualized distribution rate to stockholders may include income, realized capital gains and a return of investors’ capital.

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 selling 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 returns and annualized distribution rate to

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stockholders do not represent actual investment returns to stockholders, are subject to change and, in the future, may be greater or less than the rates set forth above. See the section entitled “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2016 for a discussion of the uncertainties, risks and assumptions associated with these statements. See footnotes 6 and 7 to the table included in Note 10 to our unaudited consolidated financial statements included herein for information regarding the calculations of our total returns.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2017 and the year ended December 31, 2016:

Net Investment Activity	For the Three Months Ended March 31, 2017		For the Year Ended December 31, 2016
Purchases	$	341,257	$	1,446,810
Sales and Redemptions		(207,531)		(1,114,038)
Net Portfolio Activity	$	133,726	$	332,772

	For the Three Months Ended March 31, 2017				For the Year Ended December 31, 2016
New Investment Activity by Asset Class	Purchases		Percentage		Purchases		Percentage
Senior Secured Loans—First Lien	$	199,924		58%	$	874,221		60%
Senior Secured Loans—Second Lien		9,440		3%		92,906		6%
Senior Secured Bonds		44,015		13%		125,265		9%
Subordinated Debt		81,467		24%		255,347		18%
Collateralized Securities		—		—		—		—
Equity/Other		6,411		2%		99,071		7%
Total	$	341,257		100%	$	1,446,810		100%

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2017 and December 31, 2016:

	March 31, 2017 (Unaudited)						December 31, 2016
	Amortized Cost(1)		Fair Value		Percentage of Portfolio		Amortized Cost(1)		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,243,939	$	2,249,875		66%	$	2,134,733	$	2,135,929		66%
Senior Secured Loans—Second Lien		226,124		212,485		6%		248,576		235,293		7%
Senior Secured Bonds		97,553		96,252		3%		86,137		84,664		3%
Subordinated Debt		652,921		666,143		20%		610,349		614,442		19%
Collateralized Securities		7,225		7,458		0%		7,317		7,327		0%
Equity/Other		169,251		162,235		5%		162,029		165,655		5%
Total	$	3,397,013	$	3,394,448		100%	$	3,249,141	$	3,243,310		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 our investment portfolio at cost and fair value as of March 31, 2017 and December 31, 2016 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

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underlying the TRS had a notional amount and market value of $401,260 and $409,056, respectively, as of March 31, 2017 and $388,681 and $394,986, respectively, as of December 31, 2016.

	March 31, 2017 (Unaudited)						December 31, 2016
	Amortized Cost(1)		Fair Value		Percentage of Portfolio		Amortized Cost(1)		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	2,600,068	$	2,612,577		69%	$	2,488,519	$	2,495,162		69%
Senior Secured Loans—Second Lien		271,255		258,839		7%		283,471		271,046		7%
Senior Secured Bonds		97,553		96,252		3%		86,137		84,664		2%
Subordinated Debt		652,921		666,143		17%		610,349		614,442		17%
Collateralized Securities		7,225		7,458		0%		7,317		7,327		0%
Equity/Other		169,251		162,235		4%		162,029		165,655		5%
Total	$	3,798,273	$	3,803,504		100%	$	3,637,822	$	3,638,296		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 March 31, 2017 and December 31, 2016:

	March 31, 2017			December 31, 2016
Number of Portfolio Companies		115			114
% Variable Rate (based on fair value)		70.4	%		70.4	%
% Fixed Rate (based on fair value)		24.9	%		24.5	%
% Income Producing Equity/Other Investments (based on fair value)		0.0	%		0.0	%
% Non-Income Producing Equity/Other Investments (based on fair value)		4.7	%		5.1	%
Average Annual EBITDA of Portfolio Companies	$	169,600		$	159,500
Weighted Average Purchase Price of Debt Investments (as a % of par)		98.3	%		98.2	%
% of Investments on Non-Accrual (based on fair value)		0.4	%		0.0	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)		9.4	%		9.5	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets		10.0	%		10.0	%

Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2017 and the year ended December 31, 2016:

New Direct Originations	For the Three Months Ended March 31, 2017			For the Year Ended December 31, 2016
Total Commitments (including unfunded commitments)	$	195,329		$	749,165
Exited Investments (including partial paydowns)		(37,827	)		(532,119	)
Net Direct Originations	$	157,502		$	217,046

	For the Three Months Ended March 31, 2017					For the Year Ended December 31, 2016
New Direct Originations by Asset Class (including unfunded commitments)	Commitment Amount		Percentage			Commitment Amount		Percentage
Senior Secured Loans—First Lien	$	189,043		97	%	$	599,683		80	%
Senior Secured Loans—Second Lien		1,682		1	%		64,660		9	%
Senior Secured Bonds		1,333		1	%		3,335		0	%
Subordinated Debt		—		—			40,277		5	%
Collateralized Securities		—		—			—		—
Equity/Other		3,271		1	%		41,210		6	%
Total	$	195,329		100	%	$	749,165		100	%

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	For the Three Months Ended March 31, 2017			For the Year Ended December 31, 2016
Average New Direct Origination Commitment Amount	$	21,703		$	22,034
Weighted Average Maturity for New Direct Originations		8/29/23			3/27/22
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period		8.9	%		10.0	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period—Excluding Non-Income Producing Assets		9.1	%		10.5	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period		10.5	%		8.5	%

The following table presents certain selected information regarding our direct originations as of March 31, 2017 and December 31, 2016:

Characteristics of All Direct Originations Held in Portfolio	March 31, 2017			December 31, 2016
Number of Portfolio Companies		57			51
Average Annual EBITDA of Portfolio Companies	$	60,200		$	61,900
Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other and Collateralized Securities		4.3x			4.6x
% of Investments on Non-Accrual (based on fair value)		—			—
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations		9.7	%		9.6	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets		10.1	%		10.0	%

Portfolio Composition by Strategy and Industry

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 March 31, 2017 and December 31, 2016:

	March 31, 2017					December 31, 2016
Portfolio Composition by Strategy	Fair Value		Percentage of  Portfolio			Fair Value		Percentage of Portfolio
Direct Originations	$	2,422,060		72	%	$	2,264,209		70	%
Opportunistic		724,242		21	%		724,989		22	%
Broadly Syndicated/Other		248,146		7	%		254,112		8	%
Total	$	3,394,448		100	%	$	3,243,310		100	%

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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2017 and December 31, 2016:

	March 31, 2017 (Unaudited)					December 31, 2016
Industry Classification	Fair Value		Percentage of  Portfolio			Fair Value		Percentage of Portfolio
Automobiles & Components	$	11,083		0	%	$	35,373		1	%
Capital Goods		400,623		12	%		331,376		10	%
Commercial & Professional Services		450,902		13	%		444,650		14	%
Consumer Durables & Apparel		146,562		4	%		147,125		5	%
Consumer Services		320,782		10	%		302,459		9	%
Diversified Financials		228,626		7	%		248,148		8	%
Energy		300,755		9	%		272,759		9	%
Food & Staples Retailing		11,456		0	%		13,446		1	%
Health Care Equipment & Services		464,900		14	%		422,234		13	%
Insurance		30,220		1	%		7,602		0	%
Materials		123,503		4	%		116,952		4	%
Media		137,096		4	%		136,666		4	%
Pharmaceuticals, Biotechnology & Life Sciences		5,102		0	%		—		—
Real Estate		170		0	%		171		0	%
Retailing		94,508		3	%		77,310		2	%
Semiconductors & Semiconductor Equipment		9,130		0	%		9,554		0	%
Software & Services		388,351		11	%		397,389		12	%
Technology Hardware & Equipment		39,478		1	%		40,777		1	%
Telecommunication Services		24,595		1	%		40,141		1	%
Transportation		206,606		6	%		199,178		6	%
Total	$	3,394,448		100	%	$	3,243,310		100	%

As of March 31, 2017, we were determined to be an “affiliated person”, as defined in the 1940 Act, of Aspect Software, Inc., in which we had three senior secured loan investments, one of which had a partially unfunded commitment and one of which had a fully unfunded commitment, and an equity/other investment, Fairway Group Acquisition Co., in which we had three senior secured loan investments and an equity/other investment, and Warren Resources, Inc., in which we had a senior secured loan investment, which was a partially unfunded commitment, and an equity/other investment. As of March 31, 2017, we did not “control”, as defined in the 1940 Act, any of our portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to “control”, as defined in the 1940 Act, a portfolio company if we owned more than 25% of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person”, as defined in the 1940 Act, of a portfolio company if we owned 5% or more of its voting securities.

Our 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 we may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2017, we had twenty-three unfunded debt investments with aggregate unfunded commitments of $206,988, one unfunded commitment to purchase up to $315 in shares of preferred stock of Altus Power America Holdings, LLC and one unfunded commitment to purchase up to $21 in shares of common stock of Chisholm Oil and Gas, LLC, respectively. As of December 31, 2016, we had twenty-one unfunded debt investments with aggregate unfunded commitments of $176,049 and one unfunded commitment to purchase up to $362 in shares of preferred stock of Altus Power America Holdings, LLC. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise. For additional details regarding our unfunded debt investments, see our unaudited consolidated schedule of investments as of March 31, 2017 and our audited consolidated schedule of investments as of December 31, 2016.

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Portfolio Asset Quality

In addition to various risk management and monitoring tools, FSIC III Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FSIC III Advisor uses 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 March 31, 2017 and December 31, 2016:

	March 31, 2017					December 31, 2016
Investment Rating	Fair Value		Percentage of  Portfolio			Fair Value		Percentage of Portfolio
1	$	33,215		1	%	$	31,381		1	%
2		3,220,238		95	%		3,060,613		94	%
3		93,267		3	%		115,673		4	%
4		39,753		1	%		28,191		1	%
5		7,975		0	%		7,452		0	%
Total	$	3,394,448		100	%	$	3,243,310		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.

Results of Operations

Comparison of the Three Months Ended March 31, 2017 and 2016

Revenues

We generated investment income of $85,637 and $73,276 for the three months ended March 31, 2017 and 2016, respectively, in the form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds, subordinated debt and collateralized securities in our portfolio. Such revenues represent $77,903 and $67,045 of cash income earned as well as $7,734 and $6,231 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2017 and 2016, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.

During the three months ended March 31, 2017 and 2016, we generated $79,533 and $72,093, respectively, of interest income, which represented 92.9% and 98.4%, respectively, of total investment income. The increase in interest income was due primarily to the growth of our investment portfolio and the increase in the number of directly originated loans in our portfolio over the last year. The level of interest income we receive is generally

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related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated investments in our investment portfolio increases.

During the three months ended March 31, 2017 and 2016, we generated $6,104 and $1,183, respectively, of fee income, which represented 7.1% and 1.6% respectively, of total investment income. Fee income is transaction based, and typically consists of prepayment fees, structuring fees, amendment and consent fees and other non-recurring fees. As such, future fee income is generally dependent on new direct origination investments and the occurrence of prepayments and other events at existing portfolio companies resulting in such fees.

Expenses

Our net operating expenses for the three months ended March 31, 2017 and 2016 were $41,539 and $32,394, respectively. Our operating expenses include base management fees attributed to FSIC III Advisor of $17,112 and $15,590, net of waivers by FSIC III Advisor of base management fees to which it was otherwise entitled of $1,504 and $0 for the three months ended March 31, 2017 and 2016, respectively. Our operating expenses also include administrative services expenses attributed to FSIC III Advisor of $819 and $574 for the three months ended March 31, 2017 and 2016, respectively.

FSIC III Advisor is eligible to receive incentive fees based on our performance. During the three months ended March 31, 2017 and 2016, we accrued a subordinated incentive fee on income of $9,619 and $5,647, respectively, based on the performance of the portfolio. During the three months ended March 31, 2017 and 2016, we did not accrue any capital gains incentive fees on income based on the performance of our portfolio. See “—Critical Accounting Policies—Capital Gains Incentive Fee” and “—Critical Accounting Policies—Subordinated Income Incentive Fee” for additional information about how the incentive fees are calculated.

We recorded interest expense of $11,820 and $8,458 for the three months ended March 31, 2017 and 2016, respectively, in connection with our financing arrangements. For the three months ended March 31, 2017 and 2016, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $278 and $246, respectively, and fees and expenses incurred with our stock transfer agent totaled $387 and $446, respectively. Fees for our board of directors were $261 and $251 for the three months ended March 31, 2017 and 2016, respectively. Amortization of our deferred offering costs was $504 and $100 for the three months ended March 31, 2017 and 2016, respectively.

Our other general and administrative expenses totaled $739 and $1,082 for the three months ended March 31, 2017 and 2016, respectively, and consisted of the following:

	Three Months Ended March 31,
	2017		2016
Expenses associated with our independent audit and related fees	$	99	$	63
Legal fees		43		62
Printing fees		315		319
Other		282		638
Total	$	739	$	1,082

During the three months ended March 31, 2017 and 2016, the ratio of our net operating expenses to our average net assets was 1.76% and 1.67%, respectively. During the three months ended March 31, 2017 and 2016, the ratio of our net expenses to average net assets included $11,820 and $8,458, respectively, related to interest

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expense, $9,619 and $5,647, respectively, related to accruals for incentive fees and $504 and $100, respectively, related to the amortization of offering costs. Without such expenses, our ratio of net expenses to average net assets would have been 0.83% and 0.94% for the three months ended March 31, 2017 and 2016, respectively. 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 $44,098 ($0.16 per share) and $40,882 ($0.16 per share) for the three months ended March 31, 2017 and 2016, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $138,185 and $69,346, respectively, during the three months ended March 31, 2017, from which we realized a net gain of $3,912. We sold investments and received principal repayments of $57,603 and $17,981, respectively, during the three months ended March 31, 2016, from which we realized a net loss of $5,828. During the three months ended March 31, 2017 and 2016, we earned $6,240 and $4,356, respectively, from periodic net settlement payments on our TRS, which are reflected as realized gains.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Secured Borrowing and Total Return Swap

For the three months ended March 31, 2017, the net change in unrealized appreciation (depreciation) on investments totaled $3,266, the net change in unrealized appreciation (depreciation) on the secured borrowing was $(45) and the net change in unrealized appreciation (depreciation) on our TRS was $1,124. For the three months ended March 31, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $(16,915) and the net change in unrealized appreciation (depreciation) on our TRS was $1,944. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended March 31, 2017 was driven by improvement in the high yield markets.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2017 and 2016, the net increase in net assets resulting from operations was $58,595 ($0.21 per share) and $24,439 ($0.10 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of March 31, 2017, we had $281,055 in cash, which we and our wholly-owned financing subsidiaries held in custodial accounts, and $108,000 in cash held as collateral by Citibank under the terms of the TRS. In addition, as of March 31, 2017, we had $98,740 in capacity available under the TRS and $121,300 in borrowings available under our other financing arrangements, subject to borrowing base and other limitations. As of March 31, 2017, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2017, we had twenty-three debt investments with aggregate unfunded commitments of $206,988, one unfunded commitment to purchase up to $315 in shares of preferred stock and one unfunded commitment to purchase up to $21 in shares of common 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 the net proceeds of our continuous public offering and the issuance of shares under our distribution reinvestment plan and from cash flows from fees, interest and dividends earned from our investments, as well as 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 FSIC III 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 the net proceeds from our continuous public offering, from the issuance of shares of common stock under our distribution reinvestment plan, from fees, interest and dividends earned from our investments and 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.

Continuous Public Offering, Private Placement and Distribution Reinvestment Plan

We are engaged in a continuous public offering of our common stock. We accept subscriptions on a continuous basis and issue shares at weekly closings at prices that must be above our net asset value per share.

During the three months ended March 31, 2017, we issued 8,416,416 shares of common stock for gross proceeds of $72,547 at an average price per share of $8.62. The gross proceeds received during the three months ended March 31, 2017 include reinvested stockholder distributions of $24,568 for which we issued 2,849,070 shares of common stock.

Since commencing our continuous public offering and through May 2, 2017, we have issued 286,797,865 shares of common stock for gross proceeds of $2,733,461. As of May 2, 2017, we had raised total gross proceeds of $2,745,448, including $200 of seed capital contributed by the principals of FSIC III Advisor in October 2013 and $11,787 in proceeds raised in a private placement completed in April 2014 from the principals of FSIC III Advisor, certain members of our board of directors and other individuals and entities affiliated with FSIC III Advisor and GDFM.

In February 2016, we closed our continuous public offering to investors investing through the IBD Channel. We are currently offering shares of our common stock pursuant to our continuous public offering only to persons who purchase through the Institutional Channel and certain affiliated investors who purchase through the dealer manager. Historically, sales though the IBD Channel have constituted the majority of shares sold in our continuous public offering. Prior to the IBD Channel closing, shares of our common stock in our 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%, respectively, of the public offering price. Following the IBD Channel closing, shares of common stock in our continuous public offering have been sold at an institutional offering price that does not include any selling commissions or dealer manager fees.

Share Repurchase Program

To provide our stockholders with limited liquidity, we intend to continue to conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2014, and the repurchase occurred in connection with our October 1, 2014 weekly closing.

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The following table provides information concerning our repurchases of shares of common stock pursuant to our share repurchase program during the three months ended March 31, 2017 and 2016:

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 2016
December 31, 2015		January 6, 2016		569,282		100	%		0.24	%	$	8.145	$	4,637
Fiscal 2017
December 31, 2016		January 4, 2017		1,536,048		100	%		0.56	%	$	8.550	$	13,133

On April 5, 2017, we repurchased 2,470,559 shares of common stock (representing 100% of the shares of common stock tendered for repurchase and 0.88% of the shares outstanding as of such date) at $8.64 per share for aggregate consideration totaling $21,346.

For additional information regarding our share repurchase program, see Note 3 to our unaudited consolidated financial statements included herein.

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 March 31, 2017:

Arrangement	Type of Arrangement	Rate	Amount Outstanding		Amount Available		Maturity Date
Citibank Total Return Swap	Total Return Swap	L+1.55%	$	401,260	$	98,740	N/A(1)
BNP Facility	Prime Brokerage Facility	L+1.25%	$	187,700	$	62,300	December 26,  2017(2)
Deutsche Bank Credit Facility	Revolving Credit Facility	L+2.25%	$	291,000	$	59,000	September 22, 2019
JPM Credit Facility	Term Loan Credit Facility	L+2.69%	$	400,000	$	—	May 8, 2019
Goldman Facility	Repurchase Agreement	L+2.50%	$	300,000	$	—	July 15, 2019
Capital One Credit Facility	Revolving Credit Facility	L+1.75% to L+2.50%	$	150,000	$	—	August 13, 2020
Partial Loan Sale	Secured Borrowing	L+4.50% (1.0% Floor)	$	13,929	$	—	July 29, 2022

(1) The TRS may be terminated by Center City Funding or by Citibank at any time on or after June 27, 2017, in each case, in whole or in part, upon prior written notice to the other party.

(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 March 31, 2017, neither party to the facility had provided notice of its intent to terminate the facility.

Our average borrowings and weighted average interest rate, including the effect of non-usage fees, for the three months ended March 31, 2017 were $1,303,677 and 3.49%, respectively. As of March 31, 2017, our weighted average effective interest rate on borrowings, including the effect of non-usage fees, was 3.44%.

For additional information regarding our financing arrangements, see Note 8 to our unaudited consolidated financial statements included herein.

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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 taxes on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains in excess of capital losses, or “capital gain net income” (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our 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.

Our first distribution was declared for stockholders of record as of April 8, 2014. Subject to applicable legal restrictions and the sole discretion of our board of directors, we currently intend to declare regular cash distributions on a quarterly basis and pay such distributions on a monthly basis to stockholders of record, as determined on a weekly 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 we accept such stockholder’s subscription for shares of our common stock. 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 and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FSIC III Advisor. 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 three months ended March 31, 2017 and 2016 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 our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. stockholder.

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The following table reflects the cash distributions per share that we declared and paid on our common stock during the three months ended March 31, 2017 and 2016:

	Distribution
For the Three Months Ended	Per Share		Amount
Fiscal 2016
March 31, 2016	$	0.1750	$	44,066
Fiscal 2017
March 31, 2017	$	0.1750	$	48,011

On March 7, 2017 and May 10, 2017, our board of directors declared regular weekly cash distributions for April 2017 through June 2017 and July 2017 through September 2017, respectively, each in the amount of $0.013461 per share. These distributions have been or will be paid monthly to stockholders of record as of weekly record dates previously determined by our board of directors.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we make a cash distribution, our stockholders will receive the distribution in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our 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 distribution reinvestment plan.

Under the distribution reinvestment plan, cash distributions to participating stockholders are reinvested in additional shares of our common stock at a purchase price equal to the institutional offering price in effect on the date of issuance. 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 our distribution reinvestment plan 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 our shares of common stock.

We may fund our cash distributions to stockholders from any sources of funds legally available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from FS Investments. We have not established limits on the amount of funds we may use from available sources to make distributions. There can be no assurance that we will be able to pay distributions at a specific rate or at all.

Pursuant to the expense reimbursement agreement, FS Investments has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to stockholders will be paid from our offering proceeds or borrowings. For a period of time following commencement of our continuous public offering, which time period may be significant, substantial portions of our distributions have been, and may in the future, be funded through the reimbursement of certain expenses by FS Investments and its affiliates, including through the waiver of certain investment advisory fees by FSIC III Advisor, that are subject to repayment by us within three years. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or FS Investments and its affiliates continue to make such reimbursements or waivers of such fees. Our future repayments of amounts reimbursed or waived by FS Investments or its affiliates will reduce the distributions that stockholders would otherwise receive in the future. FS Investments and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

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The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common stock during the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017					2016
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income(1)		48,011		100	%		44,066		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		—		—			—		—
Expense reimbursement from sponsor		—		—			—		—
Total	$	48,011		100	%	$	44,066		100	%

(1) During the three months ended March 31, 2017 and 2016, 91.0% and 91.5%, respectively, of our gross investment income was attributable to cash income earned, 2.1% and 4.0%, respectively, was attributable to non-cash accretion of discount and 6.9% and 4.5%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the three months ended March 31, 2017 and 2016 was $46,093 and $45,324, respectively. As of March 31, 2017 and December 31, 2016, we had $7,671 and $9,589, respectively, of undistributed net investment income and $50,633 and $60,099, respectively, of accumulated capital losses on a tax basis.

See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the three months ended March 31, 2017 and 2016.

Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. 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, FSIC III Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including,

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but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.

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

• FSIC III 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 FSIC III 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 FSIC III Advisor, the valuation committee and any independent third-party valuation services, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of directors may use any approved independent third-party pricing or valuation services. However, our board of directors is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from FSIC III 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 FSIC III 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.

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For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

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

FSIC III 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. FSIC III 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 FSIC III 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 solely 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 FSIC III Advisor’s management team, and has authorized FSIC III 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 FSIC III Advisor’s implementation of the valuation process.

Our investments as of March 31, 2017 consisted primarily of debt investments that were acquired directly from the issuer. Fifty-four senior secured loan investments, three senior secured bond investments and twelve subordinated debt investments, for which broker quotes were not available, were valued by independent valuation firms, which determined 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 our equity/other investments were also valued by independent valuation firms, which determined 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 EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Two senior secured loan investments and two equity/other investments, which were newly issued and purchased near March 31, 2017 were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Three equity/other investments, which were traded on an active public market, were valued at their closing price as of March 31, 2017. Except as described above, we valued our other investments by using the midpoint of the

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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.

Our investments as of December 31, 2016 consisted primarily of debt investments that were acquired directly from the issuer. Forty-nine senior secured loan investments, two senior secured bond investments and twelve subordinated debt investments, for which broker quotes were not available, were valued by independent valuation firms, which determined 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 our equity/other investments were also valued by independent valuation firms, which determined 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 EBITDA, cash flows, net income, revenues, or, in limited instances, book value or liquidation value. Three senior secured loan investments and one equity/other investment, which were newly issued and purchased near December 31, 2016, were valued at cost, as our board of directors determined that the cost of each such investment was the best indication of its fair value. Three equity/other investments, which were traded on an active public market, were valued at their closing price as of December 31, 2016. Except as described above, we valued our other investments 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.

We value the TRS in accordance with 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 us for review and testing. Our valuation committee and 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 our 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 to our unaudited consolidated financial statements included herein for additional information on the TRS.

We periodically benchmark the bid and ask prices we receive from the third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods, including the use of an independent valuation firm, to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, or where our board of directors otherwise determines that the use of such other methods is appropriate. We periodically benchmark the valuations provided by the independent valuation firms against the actual prices at which we purchase and sell our investments. 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 our valuation policy.

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

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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. Structuring and other non-recurring upfront fees are recorded as fee income when earned. We record prepayment premiums on loans and securities as fee income when we earn such amounts.

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

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

We follow 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 are carried at fair value to correspond with the related investments, which are carried at fair value.

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our 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. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FSIC III Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FSIC III Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

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Based on an interpretation of the applicable language in the Advisers Act by the staff of the Division of Investment Management of the SEC, we “look through” our TRS in calculating the capital gains incentive fee. Under this “look through” methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans underlying the TRS directly is treated as net investment income subject to the subordinated incentive fee on income payable to FSIC III Advisor pursuant to the 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 FSIC III Advisor with respect to realized gains. See Note 8 to our unaudited consolidated financial statements included herein for a discussion of the TRS.

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FSIC III Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.875% per quarter, or an annualized hurdle rate of 7.5%. For purposes of this fee, “adjusted capital” means cumulative gross proceeds generated from sales of our common stock (including proceeds from our distribution reinvestment plan) reduced for amounts paid for share repurchases pursuant to our share repurchase program. As a result, FSIC III Advisor will not earn this part of the incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FSIC III Advisor will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375%, or 9.375% annually, of adjusted capital. Thereafter, FSIC III Advisor will be entitled to receive 20.0% of pre-incentive fee net investment income.

Offering Costs

Our offering costs primarily include, among other things, marketing expenses and printing, legal and due diligence fees and other costs pertaining to our continuous public offering of shares of our common stock. Historically, we charged offering costs against capital in excess of par value on our consolidated balance sheets. Following recent discussions with the Staff of the Division of Investment Management of the SEC, we decided to change our accounting treatment of offering costs and defer and amortize such costs to expense over twelve months. We evaluated this change in accounting treatment of offering costs, which we implemented effective January 1, 2016, and determined that it did not have a material impact on our previously reported consolidated financial position, results of operations or cash flows. See Note 4 to our unaudited consolidated financial statements included herein and “—Related Party Transactions—Compensation of the Investment Adviser and Dealer Manager.”

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the three months ended March 31, 2017 and 2016, we did not incur any interest or penalties.

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Contractual Obligations

We have entered into an agreement with FSIC III Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets and (b) an incentive fee based on our performance. FSIC III Advisor, and to the extent it is required to provide such services, GDFM, are reimbursed for administrative expenses and/or organization and offering costs incurred on our behalf, as applicable. Effective February 3, 2017, FSIC III Advisor has contractually agreed to permanently waive 0.25% of the base management fee so that the fee received equals 1.75% of our average weekly gross assets. See Note 4 to our consolidated financial statements included herein and “—Related Party Transactions—Compensation of the Investment Adviser and Dealer Manager” for a discussion of this agreement and for the amount of fees and expenses accrued under this agreement during the three months ended March 31, 2017 and 2016.

A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at March 31, 2017 is as follows:

	Payments Due By Period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
BNP Facility(1)	$	187,700	$	187,700		—		—		—
Deutsche Bank Credit Facility(2)	$	291,000		—	$	291,000		—		—
JPM Credit Facility(3)	$	400,000		—	$	400,000		—		—
Goldman Facility(4)	$	300,000		—	$	300,000		—		—
Capital One Credit Facility(5)	$	150,000		—		—	$	150,000		—
Partial Loan Sale(6)	$	13,929		—		—		—	$	13,929

(1) At March 31, 2017, $62,300 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days’ notice by either party. As of March 31, 2017, neither party to the facility had provided notice of its intent to terminate the facility.

(2) At March 31, 2017, $59,000 remained unused under the Deutsche Bank credit facility. Amounts outstanding under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 22, 2019.

(3) At March 31, 2017, no amounts remained unused under the JPM credit facility. Amounts outstanding under the JPM credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 8, 2019.

(4) At March 31, 2017, no amounts remained unused under the Goldman facility. Amounts outstanding under the Goldman facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 15, 2019.

(5) At March 31, 2017, no amounts remained unused under the Capital One credit facility. Amounts outstanding under the Capital One credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on August 13, 2020.

(6) At March 31, 2017, no amounts remained unused under the secured borrowing. Amounts outstanding under the secured borrowing will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 29, 2022.

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.

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Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FSIC III Advisor is entitled to an annual base management fee of 2.0% of the average weekly value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on April 2, 2014, upon commencement of our investment operations. Management fees are paid on a quarterly basis in arrears. Effective February 3, 2017, FSIC III Advisor has contractually agreed to permanently waive 0.25% of the base management fee so that the fee received equals 1.75% of our average weekly gross assets.

The dealer manager for our continuous public offering is FS Investment Solutions, which is one of our affiliates. Prior to the IBD Channel closing, the dealer manager was entitled to receive selling commissions and dealer manager fees in connection with the sale of shares of common stock in our continuous public offering, all or a portion of which could be re-allowed to selected broker-dealers. Following the IBD Channel closing, the dealer manager has waived its right to receive any selling commissions or dealer manager fees in connection with shares of our common stock sold pursuant to our continuous public offering and, as a result, no selling commissions or dealer manager fees will be paid to the dealer manager from that date forward.

The following table describes the fees and expenses we accrued under the investment advisory and administrative services agreement and the dealer manager fees FS Investment Solutions received under the dealer manager agreement during the three months ended March 31, 2017 and 2016:

			Three Months Ended March 31,
Related Party	Source Agreement	Description	2017		2016
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee(1)	$	17,112	$	15,590
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income(2)	$	9,619	$	5,647
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses(3)	$	819	$	574
FSIC III Advisor	Investment Advisory and Administrative Services Agreement	Offering Costs(4)	$	447	$	962
FS Investment Solutions	Dealer Manager Agreement	Dealer Manager Fee(5)	$	—	$	1,961

(1) FSIC III Advisor has contractually agreed, effective February 3, 2017, to permanently waive 0.25% of its base management fee to which it is entitled under the investment advisory and administrative services agreement so that the fee received equals 1.75% of the average value of our weekly gross assets. As a result, the amount shown for the three months ended March 31, 2017 are net of waivers of $1,504. During the three months ended March 31, 2017 and 2016, $17,823 and $14,011, respectively, in base management fees were paid to FSIC III Advisor. As of March 31, 2017, $17,112 in base management fees were payable to FSIC III Advisor.

(2) During the three months ended March 31, 2017 and 2016, $12,323 and $11,825, respectively, of subordinated incentive fees on income were paid to FSIC III Advisor. As of March 31, 2017, a subordinated incentive fee on income of $9,619 was payable to FSIC III Advisor.

(3) During the three months ended March 31, 2017 and 2016, $802 and $538, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the us by FSIC III Advisor and the remainder related to other reimbursable expenses. We paid $669 and $776 in administrative services expenses to FSIC III Advisor during the three months ended March 31, 2017 and 2016, respectively.

(4) During the three months ended March 31, 2017 and 2016, we incurred offering costs of $576 and $1,200, respectively, of which $447 and $962, respectively, 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 our shares of common stock. See Note 2 for a discussion regarding the change in accounting treatment of offering costs.

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(5) Represents aggregate dealer manager fees retained by FS Investment Solutions and not re-allowed to selected broker-dealers. Following the IBD Channel closing, the dealer manager has waived its right to receive any selling commissions or dealer manager fees in connection with shares of our common stock sold pursuant to our continuous public offering. The fees shown for the three months ended March 31, 2017 represent fees retained by FS Investment Solutions prior to the IBD Channel closing in February 2016.

See Note 4 of our unaudited consolidated financial statements included herein for additional information regarding agreements with FSIC III Advisor and our other related party transactions and relationships, including a description of the fees and amounts due to FSIC III Advisor, capital contributions by FSIC III Advisor and GDFM, potential conflicts of interest, our exemptive relief order from the SEC, our expense reimbursement arrangement with FS Investments and FS Benefit Trust’s purchases of our common stock.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk (in thousands).

We are subject to financial market risks, including changes in interest rates. As of March 31, 2017, 70.4% of our portfolio investments (based on fair value) paid variable interest rates, 24.9% paid fixed interest rates, 4.7% were non-income producing equity/other investments and the remaining 0.0% 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. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FSIC III 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 Capital One credit facility, borrowings are at a floating rate based on LIBOR. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

The following table shows the effect over a twelve-month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangements in effect as of March 31, 2017:

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 115 basis points		$(1,682)		$(14,746)		$13,064		4.5	%
No change		—		—		—		—
Up 100 basis points		23,591		12,823		10,768		3.7	%
Up 300 basis points		71,221		38,468		32,753		11.4	%
Up 500 basis points		118,856		64,114		54,742		19.0	%

(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 March 31, 2017, 100% 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 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 three months ended March 31, 2017 and 2016, we did not engage in interest rate hedging activities.

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2017.

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 March 31, 2017 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, 2016.

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 pursuant to our share repurchase program during the quarter ended March 31, 2017:

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 Pans or Programs
January 1, to January 31, 2017		1,536,048	$	8.550		1,536,048		(1	)
February 1 to February 28, 2017		—		—		—		—
March 1 to March 31, 2017		—		—		—		—
Total		1,536,048	$	8.550		1,536,048		(1	)

(1) The maximum number of shares available for repurchase on January 4, 2017 was 4,259,891. A description of the maximum number of shares of 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.

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Item 6. Exhibits.

3.1	Articles of Amendment and Restatement of FS Investment Corporation III. (Incorporated by reference to Exhibit 3.1 to FS Investment Corporation III’s Current Report on Form 8-K filed on April 2, 2014.)
3.2	Amended and Restated Bylaws of FS Investment Corporation III. (Incorporated by reference to Exhibit (b)(2) filed with Pre-Effective Amendment No. 2 to FS Investment Corporation III’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013.)
4.1	Form of Subscription Agreement. (Incorporated by reference to Appendix A filed with FS Investment Corporation III’s prospectus supplement (File No. 333-191925) filed on January 19, 2017 pursuant to Rule 497 of the Securities Act of 1933, as amended.)
4.2	Amended and Restated Distribution Reinvestment Plan of FS Investment Corporation III. (Incorporated by reference to Exhibit 4.1 to FS Investment Corporation III’s Current Report on Form 8-K filed on January 6, 2015.)
10.1	Investment Advisory and Administrative Services Agreement, dated as of December 20, 2013, by and between FS Investment Corporation III and FSIC III Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Pre-Effective Amendment No. 2 to FS Investment Corporation III’s registration statement on Form N-2 (File No. 333-191925) filed on December 23, 2013.)
10.2	Amended and Restated Investment Advisory and Administrative Services Agreement, dated as of August 6, 2014, by and between FS Investment Corporation III and FSIC III Advisor, LLC. (Incorporated by reference to Exhibit 10.2 to FS Investment Corporation III’s Quarterly Report on Form 10-Q for the quarterly period 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 FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.)
10.4	Dealer Manager Agreement, dated as of December 20, 2013, by and among FS Investment Corporation III, FSIC III Advisor, LLC and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit 10.3 to FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.)
10.5	Form of Selected Dealer Agreement (Included as Exhibit A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit 10.4 to FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.)
10.6	Custodian Agreement, dated as of January 6, 2014, by and between FS Investment Corporation III and State Street Bank and Trust Company. (Incorporated by reference to Exhibit 10.5 to FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.)
10.7	Escrow Agreement, dated as of January 9, 2014, by and among FS Investment Corporation III, UMB Bank, N.A. and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit 10.6 to FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 filed on March 31, 2014.)
10.8	Investment Management Agreement, dated as of June 26, 2014, by and between FS Investment Corporation III and Center City Funding LLC. (Incorporated by reference to Exhibit 10.3 to FS Investment Corporation III’s Current Report on Form 8-K filed on July 2, 2014.)
10.9	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 FS Investment Corporation III’s Current Report on Form 8-K filed on July 2, 2014.)

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10.10	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 FS Investment Corporation III’s Current Report on Form 8-K filed on July 2, 2014.)
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 FS Investment Corporation III’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 FS Investment Corporation III’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 FS Investment Corporation III’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 FS Investment Corporation III’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 FS Investment Corporation III’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 FS Investment Corporation III’s Current Report on Form 8-K filed on July 1, 2016.)
10.17	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 FS Investment Corporation III’s Current Report on Form 8-K filed on October 23, 2014.)
10.18	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 FS Investment Corporation III’s Current Report on Form 8-K filed on October 23, 2014.)
10.19	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 FS Investment Corporation III’s Current Report on Form 8-K filed on October 23, 2014.)
10.20	Investment Management Agreement, dated as of October 17, 2014, by and between Burholme Funding LLC and FS Investment Corporation III. (Incorporated by reference to Exhibit 10.4 to FS Investment Corporation III’s Current Report on Form 8-K filed on October 23, 2014.)
10.21	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 FS Investment Corporation III’s Current Report on Form 8-K filed on March 13, 2015.)
10.22	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 10.1 to FS Investment Corporation III’s Current Report on Form 8-K filed on March 13, 2015.)

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10.23	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 return to Exhibit 10.23 to FS Investment Corporation III’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2016 filed on November 14, 2016.)
10.24	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 FS Investment Corporation III’s Current Report on Form 8-K filed on September 2, 2016.)
10.25	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 10.1 to FS Investment Corporation III’s Current Report on Form 8-K filed on November 21, 2016.)
10.26	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 FS Investment Corporation III’s Current Report on Form 8-K filed on December 8, 2014.)
10.27	Sale and Contribution Agreement, dated as of December 2, 2014, by and between FS Investment Corporation III, as seller, and Dunlap Funding LLC, as purchaser. (Incorporated by reference to Exhibit 10.2 to FS Investment Corporation III’s Current Report on Form 8-K filed on December 8, 2014.)
10.28	Investment Management Agreement, dated as of December 2, 2014, by and between Dunlap Funding LLC and FS Investment Corporation III, as investment manager. (Incorporated by reference to Exhibit 10.3 to FS Investment Corporation III’s Current Report on Form 8-K filed on December 8, 2014.)
10.29	Amendment No. 1 to Investment Management Agreement, dated as of May 1, 2015, by and between Dunlap Funding LLC and FS Investment Corporation III, as investment manager. (Incorporated by reference to Exhibit 10.25 to FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 11, 2016.)
10.30	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 FS Investment Corporation III’s Current Report on Form 8-K filed on December 8, 2014.)
10.31	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 FS Investment Corporation III’s Current Report on Form 8-K filed on March 2, 2015.)
10.32	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 FS Investment Corporation III’s Current Report on Form 8-K filed on March 26, 2015.)
10.33	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 FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 11, 2016.)

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10.34	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 FS Investment Corporation III’s Current Report on Form 8-K filed on September 24, 2015.)
10.35	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 FS Investment Corporation III’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed on March 11, 2016.)
10.36	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 FS Investment Corporation III’s Current Report on Form 8-K filed on January 19, 2017.)
10.37*	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.
10.38	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 FS Investment Corporation III’s Current Report on Form 8-K filed on May 14, 2015.)
10.39	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 FS Investment Corporation III’s Current Report on Form 8-K filed on September 14, 2015.)
10.40	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 FS Investment Corporation III’s Current Report on Form 8-K filed on March 7, 2016.)
10.41	Sale and Contribution Agreement, dated as of May 8, 2015, between Jefferson Square Funding LLC, as purchaser, and FS Investment Corporation III, as seller. (Incorporated by reference to Exhibit 10.2 to FS Investment Corporation III’s Current Report on Form 8-K filed on May 14, 2015.)
10.42	Investment Management Agreement, dated as of May 8, 2015, by and between Jefferson Square Funding LLC and FS Investment Corporation III, as investment manager. (Incorporated by reference to Exhibit 10.3 to FS Investment Corporation III’s Current Report on Form 8-K filed on May 14, 2015.)
10.43	Collateral Administration Agreement, dated as of May 8, 2015, by and among Jefferson Square Funding LLC, JPMorgan Chase Bank, National Association, as administrative agent, FS Investment Corporation III, as investment manager and Virtus Group, LP, as collateral administrator. (Incorporated by reference to Exhibit 10.4 to FS Investment Corporation III’s Current Report on Form 8-K filed on May 14, 2015.)
10.44	Amended and Restated Sale and Contribution Agreement, dated as of June 18, 2015, by and between FS Investment Corporation III and Germantown Funding LLC. (Incorporated by reference to Exhibit 10.1 to FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)

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10.45	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 FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
10.46	Germantown Funding LLC Floating Rate Notes due 2027. (Incorporated by reference to Exhibit 10.3 to FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
10.47	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 FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
10.48	Revolving Credit Agreement, dated as of June 18, 2015, by and between FS Investment Corporation III and Society Hill Funding LLC. (Incorporated by reference to Exhibit 10.5 to FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
10.49	Amended and Restated Investment Management Agreement, dated as of June 18, 2015, by and between Germantown Funding LLC and FS Investment Corporation III. (Incorporated by reference to Exhibit 10.6 to FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
10.50	Collateral Administration Agreement, dated as of June 18, 2015, by and among Germantown Funding LLC, FS Investment Corporation III and Virtus Group, LP. (Incorporated by reference to Exhibit 10.7 to FS Investment Corporation III’s Current Report on Form 8-K filed on June 24, 2015.)
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 May 11, 2017.

FS INVESTMENT CORPORATION III
By:	/s/    Michael C. Forman
	Michael C. Forman Chief Executive Officer (Principal Executive Officer)
By:	/s/    Edward T. Gallivan, Jr.
	Edward T. Gallivan, Jr. Chief Financial Officer (Principal Financial and Accounting Officer)

103

EX-10.37

Exhibit 10.37

EXECUTION VERSION

AMENDMENT NO. 8 TO LOAN FINANCING AND SERVICING AGREEMENT, dated as of April 5, 2017 (this “Amendment”), among Dunlap Funding LLC, a Delaware limited liability company (the “Borrower”), Deutsche Bank AG, New York Branch, as administrative agent (the “Administrative Agent”), each Lender party hereto (each, a “Lender” and collectively, the “Lenders”), each Agent party hereto (each, an “Agent” and collectively, the “Agents”) and Wells Fargo Bank, National Association, as collateral agent and collateral custodian (the “Collateral Agent”).

WHEREAS, the Borrower, the Collateral Agent, each Lender party thereto, each Agent party thereto and the Administrative Agent are party to the Loan Financing and Servicing Agreement, dated as of December 2, 2014 (as amended, supplemented, amended and restated and otherwise modified from time to time, the “Loan Agreement”);

WHEREAS, Reinsurance Group of America, Incorporated (“RGA”) is joining the Loan Agreement as an Agent and a Lender; and

WHEREAS, the Borrower, the Administrative Agent, the Lenders, the Agents and the Collateral Agent have agreed to amend the Loan Agreement in accordance with Section 17.2 of the Loan Agreement and the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing premises and the mutual agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:

ARTICLE I

Definitions

SECTION 1.1. Defined Terms. Terms used but not defined herein have the respective meanings given to such terms in the Loan Agreement.

ARTICLE II

Amendments

SECTION 2.1. Amendments to the Loan Agreement. As of the date of this Amendment, the Loan Agreement is hereby amended as follows:

(a) by deleting the third sentence in Section 2.8 in its entirety and inserting the following in lieu thereof:

“In the event any Lender reduces its Commitment (with the consent of the Borrower) concurrently with any other Lender increasing its Commitment (including the amount of a new Commitment by a new Lender), such reducing Lender shall pay an upfront fee to such increasing Lender in an aggregate

amount equal to the product of (x) 0.50%, (y) the ratio equal to (A) the number of days from the date on which such Lender’s Commitment was reduced until the end of the Revolving Period on such reduction date divided by (B) the number of days from the Fourth Amendment Effective Date to the end of the Revolving Period and (z) the amount of such reduction of such Lender’s Commitment.”

(b) by inserting the following contact information on Annex A of the Loan Agreement:

“REINSURANCE GROUP OF AMERICA, INCORPORATED,

as an Agent and as a Committed Lender

16600 Swingley Ridge Road

Chesterfield, MO 63017

Attention: Trade Operations

Phone: (636) 736-8080

Facsimile No.: (636) 736-8480

Email: TradeOps@rgare.com”

(c) by deleting Annex B in its entirety and inserting the following in lieu thereof:

Lender	Class A-1 Commitment		Class A-2 Commitment
Deutsche Bank AG, New York Branch	$	225,000,000	$	0
Pioneers Gate LLC	$	0	$	75,000,000
Reinsurance Group of America, Incorporated	$	0	$	50,000,000

ARTICLE III

Conditions to Effectiveness

SECTION 3.1. This Amendment shall become effective as of the date first written above upon:

(a) the execution and delivery of this Amendment by each party hereto; and

(b) all fees (including reasonable fees and out-of-pocket, documented expenses of counsel) due to the Lenders on or prior to the effective date of this Amendment have been paid in full.

2

ARTICLE IV

Representations and Warranties

SECTION 4.1. The Borrower hereby represents and warrants to the Administrative Agent that, as of the date first written above, (i) no Facility Termination Event or Unmatured Facility Termination Event has occurred and is continuing and (ii) the representations and warranties of the Borrower contained in the Loan Agreement are true and correct in all material respects on and as of such day (other than any representation and warranty that is made as of a specific date).

ARTICLE V

Miscellaneous

SECTION 5.1. Governing Law. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

SECTION 5.2. Severability Clause. In case any provision in this Amendment shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 5.3. Ratification. Except as expressly amended and waived hereby, the Loan Agreement is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect.

SECTION 5.4. Counterparts. The parties hereto may sign one or more copies of this Amendment in counterparts, all of which together shall constitute one and the same agreement. Delivery of an executed signature page of this Amendment by facsimile or email transmission shall be effective as delivery of a manually executed counterpart hereof.

SECTION 5.5. Headings. The headings of the Articles and Sections in this Amendment are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof.

[Signature pages follow]

3

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

DUNLAP FUNDING LLC, as Borrower
By:	/s/ Gerald F. Stahlecker
	Name: Gerald F. Stahlecker
	Title: Executive Vice President

[Eighth Amendment to LFSA]

DEUTSCHE BANK AG, NEW YORK BRANCH, as Administrative Agent
By:	/s/ Steven Flowers
	Name: Steven Flowers
	Title: Vice President
By:	/s/ Amit Patel
	Name: Amit Patel
	Title: Director

[Eighth Amendment to LFSA]

WELLS FARGO BANK, NATIONAL ASSOCIATION, as Collateral Agent and as Collateral Custodian
By:	/s/ Philip Dean
	Name: Philip Dean
	Title: Vice President

[Eighth Amendment to LFSA]

DEUTSCHE BANK AG, NEW YORK BRANCH, as an Agent and as a Committed Lender
By:	/s/ Steven Flowers
Name: Steven Flowers
Title: Vice President
By:	/s/ Amit Patel
Name: Amit Patel
Title: Director

[Eighth Amendment to LFSA]

PIONEERS GATE LLC, as an Agent and as a Committed Lender
By:	20 Gates Management LLC, its Managing
Agent
By:	/s/ Mark Golombeck
Name: Mark Golombeck
Title: Managing Director

[Eighth Amendment to LFSA]

REINSURANCE GROUP OF AMERICA, INCORPORATED, as an Agent and as a Committed Lender
By:	/s/ Christopher Quollen
	Name: Christopher Quollen
	Title: VP, Portfolio Management

[Eighth Amendment to LFSA]

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Michael C. Forman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of FS Investment Corporation III;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2017

/s/ MICHAEL C. FORMAN

Michael C. Forman

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Edward T. Gallivan, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of FS Investment Corporation III;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2017

/S/ EDWARD T. GALLIVAN, JR.

Edward T. Gallivan, Jr.

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CEO AND CFO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of FS Investment Corporation III (the “Company”) for the three months ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), Michael C. Forman, as Chief Executive Officer of the Company, and Edward T. Gallivan, Jr., as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

• the Form 10-Q of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

• the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: May 11, 2017

/S/ MICHAEL C. FORMAN

Michael C. Forman

Chief Executive Officer

/S/ EDWARD T. GALLIVAN, JR.

Edward T. Gallivan, Jr.

Chief Financial Officer