FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FS KKR Capital Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2013
Business Model: Externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. companies to generate current income and long-term capital appreciation.
Key Financial Metrics (Six Months Ended June 30, 2013)
| Metric | Value (in thousands) | Per Share (Basic/Diluted) |
|---|---|---|
| Total Investment Income | $234,393 | - |
| Net Investment Income | $124,784 | $0.49 |
| Net Realized Gain on Investments | $30,618 | - |
| Net Change in Unrealized Appreciation/Depreciation | $(25,980) | - |
| Net Increase in Net Assets from Operations | $129,415 | $0.52 |
| Total Assets | $4,492,383 | - |
| Total Liabilities | $1,920,835 | - |
| Stockholders' Equity | $2,571,548 | - |
| Net Asset Value (NAV) per Share | - | $10.08 |
| Cash and Cash Equivalents | $380,252 | - |
| Total Borrowings (Credit Facilities & Repurchase Agreements) | $1,800,358 | - |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total investment income increased significantly from $113.6 million in the prior year period to $234.4 million, driven by portfolio growth and a transition to higher-yielding non-broadly syndicated assets.
- Net Investment Income: Rose from $51.4 million (six months ended June 30, 2012) to $124.8 million, reflecting efficient capital deployment.
- Unrealized Losses: The company recorded a net change in unrealized depreciation of $(25.98) million for the six months ended June 30, 2013, compared to unrealized appreciation of $56.9 million in the prior year period. This shift was primarily due to a general widening of credit spreads in the second quarter of 2013.
- Expense Increases: Total operating expenses increased to $109.6 million from $62.2 million. This includes higher management fees and the accrual of $31.4 million in subordinated income incentive fees (compared to $0 in the prior year) and $0.9 million in capital gains incentive fees (compared to $16.5 million in the prior year).
- Portfolio Composition: The portfolio shifted toward proprietary and anchor order investments, which now constitute 58% of the portfolio (up from 38% in the prior year), while broadly syndicated loans decreased to 28% (down from 42%).
Guidance, Outlook, and Management Commentary
- Distribution Increase: On June 25, 2013, the Board increased the regular monthly cash distribution from $0.0675 to $0.06975 per share, raising the annual distribution rate to 7.75% (based on the last public offering price of $10.80).
- Financing Activity: The company amended its JPM Facility in April 2013, increasing available debt financing from $700 million to $950 million and extending the maturity to April 2017. As of June 30, 2013, $811.9 million was outstanding under this facility.
- Share Repurchases: The company continues its quarterly tender offer program. During the six months ended June 30, 2013, it repurchased approximately 1.94 million shares for $19.5 million.
- Expense Reimbursement: No expense reimbursements were required from the sponsor (Franklin Square Holdings) during the period to support distributions.
- Risks: The company faces interest rate risk (73% of the portfolio is variable rate) and credit spread widening. There are no material legal proceedings pending.
Investor Verification Checklist
- Unrealized Depreciation: Verify the impact of the $26 million unrealized loss on the portfolio's fair value and the specific credit spreads driving this change.
- Incentive Fee Accruals: Confirm the calculation of the $31.4 million subordinated income incentive fee and the reversal of $5.4 million in capital gains incentive fees during the quarter.
- Leverage Ratios: Review the total borrowings of $1.8 billion against the $4.0 billion investment portfolio to assess leverage levels and liquidity coverage.
- Distribution Sustainability: Analyze the sources of distributions (73% from net investment income, 27% from capital gains) to ensure the increased distribution rate is sustainable without return of capital.
- Portfolio Concentration: Assess the concentration in proprietary/anchor order deals (58% of portfolio) and the associated liquidity risks compared to broadly syndicated loans.