FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a Maryland corporation operating as a Business Development Company (BDC) and Regulated Investment Company (RIC).
Reporting Period: Quarterly period ended September 30, 2015 (Nine months ended September 30, 2015).
Business Overview: FSIC invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. middle-market companies. The portfolio is managed by FB Income Advisor, LLC, with GSO/Blackstone Debt Funds Management LLC acting as sub-adviser.
Key Financial Metrics (Nine Months Ended Sept 30, 2015)
| Metric | Amount (in thousands) | Per Share |
|---|---|---|
| Total Investment Income | $360,034 | - |
| Net Investment Income | $208,939 | $0.86 |
| Net Realized Gain (Loss) | $(42,766) | - |
| Net Change in Unrealized Appreciation (Depreciation) | $(51,945) | - |
| Net Increase in Net Assets from Operations | $116,853 | $0.48 |
| Total Assets | $4,264,904 | - |
| Total Liabilities | $1,928,945 | - |
| Net Assets (Stockholders' Equity) | $2,335,959 | - |
| Net Asset Value (NAV) per Share | - | $9.64 |
| Cash and Foreign Currency | $85,935 | - |
| Debt Outstanding (Total) | $1,831,812 | - |
| Asset Coverage Ratio | 2.28x | - |
Material Changes vs. Prior Comparable Period
- Operating Results: Net increase in net assets from operations decreased to $116.9 million for the nine months ended Sept 30, 2015, compared to $205.0 million in the prior year period. This decline was driven primarily by a net realized loss of $42.1 million (vs. a gain of $26.0 million previously) and net unrealized depreciation of $51.9 million (vs. appreciation of $5.1 million previously).
- Portfolio Valuation: The portfolio fair value decreased to $4.10 billion from $4.18 billion at year-end 2014. The unrealized depreciation was attributed to widening credit spreads and market volatility, particularly in the energy sector and senior secured bonds.
- Expense Reduction: Total operating expenses decreased to $151.1 million from $180.3 million in the prior year. This reduction was due to a reversal of capital gains incentive fees of $18.4 million (vs. an accrual of $6.2 million previously) and lower management fees.
- Debt Structure: The company issued $275 million in 4.750% Notes due 2022 during the period. The JPM repurchase facility was reduced from $950 million to $800 million.
Guidance, Outlook, and Risks
- Outlook: Management does not provide specific forward-looking financial guidance. The company intends to maintain its quarterly distribution policy, with a regular quarterly cash distribution of $0.22275 per share declared for payment in January 2016.
- Portfolio Yield: The estimated gross portfolio yield prior to leverage was 9.9% as of September 30, 2015, down slightly from 10.0% at December 31, 2014.
- Risks and Contingencies:
- Market Risk: 68.2% of the portfolio pays variable interest rates. Rising rates could increase interest expense on floating-rate debt while potentially increasing income on variable-rate assets, though floors may limit income growth.
- Credit Risk: The portfolio includes investments in the energy sector which faced significant market volatility. As of September 30, 2015, 15% of the portfolio was rated "3" (requiring closer monitoring) and 0% was rated "4" or "5" (underperforming).
- Liquidity: The company has $393.2 million available under financing arrangements and $85.9 million in cash. It has $98.5 million in unfunded debt commitments.
- Unusual Items: A significant portion of the expense reduction was due to the reversal of accrued capital gains incentive fees based on unrealized losses. Additionally, fee income decreased due to reduced repayment and new direct origination activity in the quarter.
Key Facts for Investor Verification
- Distribution Coverage: Verify the source of distributions. For the nine months ended Sept 30, 2015, 79% of distributions were funded by net investment income and 21% by long-term capital gains. No return of capital was reported for this period.
- Incentive Fee Accruals: Note that the company accrues capital gains incentive fees on unrealized gains for GAAP purposes, even though they are not payable until realized. The reversal of these accruals significantly impacted net income.
- Debt Maturities: Review the maturity schedule of senior securities. $800 million of the JPM Facility is due April 15, 2017, and $125 million of the Broad Street Credit Facility is due December 18, 2015.
- Portfolio Concentration: Capital Goods (21%) and Consumer Services (11%) are the largest industry allocations. Energy remains a significant portion (10%) despite market headwinds.
- NAV vs. Market Price: As of September 30, 2015, the NAV per share was $9.64, while the market price was $9.32, trading at a discount to NAV.