FS KKR Capital Corp (FS Investment Corporation) 10-K Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FS KKR Capital Corp)
Reporting Period: Fiscal Year Ended December 31, 2012
Structure: Externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC).
Management: Managed by FB Income Advisor, LLC (FB Advisor) with GSO / Blackstone Debt Funds Management LLC (GDFM) as sub-adviser.
Strategy: Invests primarily in senior secured and second lien secured loans of private U.S. middle-market companies to generate current income and long-term capital appreciation. The company closed its continuous public offering in May 2012 and intends to seek a liquidity event (listing or merger) within 12-18 months of filing.
Key Financial Metrics (Year Ended Dec 31, 2012)
| Metric | 2012 Value | 2011 Value |
|---|---|---|
| Total Assets | $4.35 billion | $2.14 billion |
| Total Net Assets | $2.51 billion | $1.50 billion |
| Investment Portfolio Fair Value | $3.93 billion | $1.84 billion |
| Investment Income | $303.2 million | $115.5 million |
| Net Investment Income | $133.9 million ($0.59/share) | $71.4 million ($0.76/share) |
| Total Net Realized & Unrealized Gain/Loss | $196.3 million | $(17.9) million |
| Net Increase in Net Assets from Operations | $330.2 million ($1.45/share) | $53.5 million ($0.57/share) |
| Total Debt Outstanding | $1.65 billion | $554.3 million |
| Cash and Cash Equivalents | $338.9 million | $210.7 million |
| Portfolio Yield (Gross, Pre-Leverage) | 10.4% | 10.4% |
| Weighted Average Credit Rating | B3 (Moody's) | B2 (Moody's) |
Material Changes vs. Prior Period
- Portfolio Growth: The investment portfolio more than doubled in fair value from $1.84 billion in 2011 to $3.93 billion in 2012, driven by the closing of the continuous public offering in May 2012 which raised gross proceeds of $2.61 billion.
- Operating Expenses: Total operating expenses increased significantly to $169.3 million from $44.1 million. This includes a rise in base management fees ($68.1M vs $27.8M) and interest expense ($30.2M vs $11.3M) due to increased leverage and asset base.
- Incentive Fees: The company accrued $39.8 million in capital gains incentive fees in 2012 (including $28.0M on unrealized gains), compared to a reversal of $4.1 million in 2011 due to unrealized losses.
- Financing Structure: The company terminated a Total Return Swap (TRS) in August 2012 and replaced it with the Arch Street Credit Facility ($550M capacity). It also expanded the JPM Facility to $700M and added the Walnut Street Credit Facility ($250M capacity).
- Asset Quality: The percentage of the portfolio rated by NRSROs decreased from 70.9% in 2011 to 59.4% in 2012, primarily due to an increase in proprietary investments which are typically unrated.
Guidance, Outlook, and Risks
- Liquidity Event: Management intends to complete a liquidity event (listing on a national exchange, sale of assets, or merger) within 12 to 18 months of the filing date (March 2013), though no assurance is given.
- Distributions: The company declared regular monthly cash distributions of $0.0675 per share starting in June 2012. Distributions are funded primarily by net investment income (73%) and capital gains proceeds (27%).
- Share Repurchases: The company conducts quarterly tender offers. In 2012, it repurchased 1.88 million shares for $18.3 million. The program was amended in September 2012 to offer repurchase prices based on Net Asset Value (NAV) rather than a discount.
- Key Risks:
- Illiquidity: Shares are not listed on an exchange; liquidity is limited to quarterly tender offers.
- Valuation Uncertainty: A significant portion of the portfolio (Level 3 assets) is valued in good faith by the board due to lack of active markets.
- Leverage: The company utilizes debt financing (currently ~66% of total assets), which magnifies volatility in net asset value.
- Regulatory Constraints: As a BDC, the company is subject to asset coverage tests that may limit distributions or borrowing capacity.
Investor Verification Checklist
- NAV vs. Offering Price: Verify the current Net Asset Value per share ($9.97 at year-end) relative to the offering price ($10.80) and repurchase price ($10.00) to assess potential dilution or discount.
- Debt Maturities: Review the maturity schedule of the four credit facilities (Broad Street, Arch Street, JPM, Walnut Street) to assess refinancing risk, particularly the Broad Street facility maturing in late 2013.
- Incentive Fee Accruals: Confirm the impact of the $28.0 million accrual for capital gains incentive fees on unrealized gains, which reduces reported Net Investment Income but is not payable until gains are realized.
- Portfolio Concentration: Analyze industry exposure, noting significant allocations to Capital Goods (17%), Energy (11%), and Software & Services (9%).
- Liquidity Event Timeline: Monitor subsequent filings for progress on the intended 12-18 month liquidity event, as failure to list could limit shareholder exit options.