FS KKR Capital Corp (FSIC) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a business development company (BDC) regulated under the Investment Company Act of 1940.
Reporting Period: Quarterly period ended June 30, 2018.
Key Context: On April 9, 2018, the Company transitioned its investment adviser from FB Income Advisor, LLC (with GSO/Blackstone as sub-adviser) to FS/KKR Advisor, LLC, a joint venture between FS Investments and KKR Credit. On July 22, 2018, the Company entered into a merger agreement to acquire Corporate Capital Trust, Inc. (CCT).
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $196.6 million | $204.8 million |
| Net Investment Income | $96.5 million | $99.1 million |
| Net Realized Gain (Loss) | $26.4 million | $(115.0) million |
| Net Unrealized Appreciation (Depreciation) | $(143.3) million | $101.5 million |
| Net Increase (Decrease) in Net Assets | $(18.4) million | $81.8 million |
| Earnings Per Share (Basic/Diluted) | $(0.08) | $0.33 |
| Net Asset Value (NAV) per Share | $8.87 | $9.30 |
| Total Assets | $3.88 billion | $4.10 billion |
| Total Liabilities | $1.75 billion | $1.82 billion |
| Stockholders' Equity | $2.13 billion | $2.28 billion |
| Cash and Foreign Currency | $200.8 million | $142.7 million |
| Debt Outstanding | $1.64 billion | $1.72 billion |
| Available Borrowing Capacity | $346.2 million | $260.8 million |
Material Changes vs. Prior Period
- Performance Decline: The Company reported a net decrease in net assets of $18.4 million for the six months ended June 30, 2018, compared to a net increase of $81.8 million in the prior year period. This was primarily driven by a net unrealized depreciation of $143.3 million, contrasting with $101.5 million of appreciation in the prior year.
- Revenue Composition: Total investment income decreased by 4.0% year-over-year. Fee income dropped significantly from $29.1 million to $5.4 million due to lower structuring and prepayment activity. This was partially offset by an increase in interest and paid-in-kind (PIK) income, attributed to higher LIBOR/Prime rates and asset restructuring.
- Portfolio Valuation: Total investments at fair value decreased from $3.93 billion to $3.63 billion. The portfolio composition shifted slightly, with Senior Secured First Lien loans increasing to 67% of the portfolio from 64%.
- Share Repurchases: The Company repurchased 5.1 million shares for $38.9 million during the period, reducing the share count from 245.7 million to 240.6 million.
Guidance, Outlook, and Risks
- Merger with CCT: The Company is pursuing a merger with Corporate Capital Trust, Inc. (CCT), expected to close in Q4 2018. The transaction is structured as a tax-free reorganization. Post-merger, the Company intends to amend its investment advisory agreement to exclude cash from the management fee base and revise incentive fee calculations.
- Financing Update: On August 9, 2018, the Company entered into a new $3.435 billion senior secured revolving credit facility, replacing existing facilities with ING and HSBC. This provides increased liquidity and flexibility.
- Distributions: The Company declared a regular quarterly distribution of $0.19 per share for Q2 2018. Management intends to make a special distribution in Q4 2018 representing cumulative net investment income in excess of $0.76 per share earned since October 1, 2017.
- Risks: Key risks include the impact of rising interest rates on fixed-rate assets, the ability to maintain RIC status, and the execution of the pending merger. The Company holds 22 unfunded debt commitments totaling approximately $127 million.
Investor Verification Checklist
- Merger Approval: Verify the status of stockholder and regulatory approvals for the CCT merger and the associated amendment to the investment advisory agreement.
- Unrealized Losses: Review the specific portfolio companies driving the $143 million unrealized depreciation to assess the permanence of these impairments.
- Fee Income Volatility: Monitor the sustainability of fee income given the significant drop in structuring and prepayment fees compared to the prior year.
- Debt Maturity Wall: Confirm the refinancing status of the $400 million 4.000% Notes due July 2019 and the $405 million 4.250% Notes due January 2020.
- NAV vs. Market Price: Note the widening discount between the market price ($7.35) and NAV ($8.87) as of period end.