FS KKR Capital Corp. 2023 Q3 10-Q Summary
Business context and reporting period
FS KKR Capital Corp. is an externally managed, non-diversified business development company and regulated investment company focused primarily on current income and, to a lesser extent, long-term capital appreciation from private middle-market company investments. The filing covers the quarter and nine months ended September 30, 2023; financial statements are unaudited and presented in millions except per-share data.
Key financial metrics
| Metric | Three months ended September 30, 2023 | Nine months ended September 30, 2023 | Comparable period |
|---|---|---|---|
| Total investment income | $465 | $1,383 | $411 / $1,186 |
| Net investment income | $234; $0.84 per share | $692; $2.47 per share | $216 / $639 |
| Net realized gain/(loss) | $(62) | $(327) | $70 / $235 |
| Net unrealized appreciation/(depreciation) | $93 | $241 | $(413) / $(846) |
| Net increase in net assets from operations | $265; $0.95 per share | $606; $2.16 per share | $(127) / $25 |
| Cash distributions | $210; $0.75 per share | $616; $2.20 per share | $190 / $562 |
- Net investment income represented approximately 50% of investment income for both the quarter and nine-month period.
- Investment income included $58 million of PIK interest in the quarter and $156 million for the nine months. Cash income was $395 million in the quarter and $1,186 million for the nine months.
- Net assets were $6.97 billion at September 30, 2023, unchanged in NAV per share at $24.89 from December 31, 2022. Shares outstanding were 280.1 million.
- Fair-value investments were $14.67 billion versus $15.38 billion at December 31, 2022. The portfolio comprised 201 portfolio companies, with weighted average annual yields of 12.7% on accruing debt investments and 11.9% on all debt investments.
- Portfolio composition by fair value included first-lien senior secured loans of $8.77 billion, or 59.8%; second-lien loans of $1.10 billion, or 7.5%; asset-based finance of $1.74 billion, or 11.8%; COPJV of $1.40 billion, or 9.6%; and equity/other investments of $1.23 billion, or 8.4%.
- Operating cash flow was $1.25 billion for the first nine months, compared with $411 million in the prior-year period. Financing cash flow was $(1.33) billion, primarily reflecting $1.80 billion of debt repayments, $1.13 billion of borrowings, and $612 million of distributions.
- Cash and foreign currency were $176 million at September 30, 2023. Available borrowing capacity was $3.23 billion, subject to borrowing-base and other limitations.
- Debt outstanding for asset-coverage purposes was $8.05 billion, or approximately 1.15 times stockholders’ equity. Asset coverage was 187%, above the 150% statutory requirement. Net balance-sheet debt was $8.02 billion.
- Average borrowings were $8.61 billion at a weighted average rate of 5.22% for the nine-month period; the effective rate was 5.31% at quarter-end, versus 3.43% and 4.21%, respectively, in the prior-year comparisons.
Material changes versus prior comparable periods
- Quarterly investment income increased 13%, and nine-month investment income increased 17%, primarily because of higher interest rates. Net investment income increased 8% for the quarter and 8% for the nine months.
- Interest income increased, while fee income declined to $12 million in the quarter and $23 million for the nine months, reflecting reduced structuring and repayment activity.
- Interest expense increased to $117 million in the quarter and $349 million for the nine months, driven by higher benchmark rates. Subordinated income incentive fees increased to $47 million and $140 million, respectively. The prior-year incentive fee waiver had expired on December 31, 2022.
- Realized investment losses were $(66) million in the quarter and $(338) million for the nine months, compared with realized investment gains of $63 million and $214 million in the prior-year periods.
- Unrealized investment results improved materially to $79 million in the quarter and $237 million for the nine months, compared with $(451) million and $(930) million, respectively. Management attributed the improvement primarily to tighter credit spreads and appreciation in several specific assets.
- The portfolio contracted on a net basis: nine-month purchases were $1.14 billion versus sales and repayments of $1.91 billion. Investment fair value declined by $711 million from year-end 2022.
- Portfolio credit ratings shifted toward closer monitoring: rating-1 investments declined to 72% from 75% of fair value, while rating-2 investments increased to 24% from 19%. Rating-3 and rating-4 investments represented 1% and 3%, respectively. Non-accrual investments were 2.4% of portfolio fair value, unchanged from year-end.
- Distributions increased to $2.20 per share for the first nine months from $1.98 per share in the prior-year period. The filing states that 100% of distributions paid during both periods were sourced from net investment income, with no return of capital.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or distribution guidance. Future distributions remain subject to legal restrictions and board discretion. The board declared a $0.70 per-share regular distribution payable in January 2024 and $0.10 per share of additional special distributions payable in February and May 2024.
- Management highlights sensitivity to interest rates: a 100-basis-point increase was estimated to increase annual interest income by $103 million, interest expense by $33 million, and net interest income by $70 million, assuming no portfolio or financing changes. A 100-basis-point decline was estimated to reduce net interest income by $70 million.
- Unfunded commitments totaled $926.2 million for debt investments, $695.3 million for equity/other investments, and $560.2 million to COPJV. Management stated that cash, available borrowings, and liquid securities were sufficient, but commitments may still be drawn.
- Foreign-currency investments had fair value of approximately $582 million, with $156.6 million of forward contracts used for hedging. A 10% adverse currency movement was estimated to reduce unhedged investment fair value by approximately $58.3 million.
- Approximately $13.03 billion of investments were classified as Level 3, making valuation sensitive to unobservable discount rates, EBITDA multiples, cash-flow assumptions, and other estimates. The filing identifies portfolio valuation as a critical accounting estimate.
- Subsequent to quarter-end, the Ambler facility was amended to extend maturity to May 2027 and change pricing and benchmark provisions. The senior secured revolving credit facility was upsized from $4.655 billion to $4.670 billion, with its revolving period extended to October 2027 and scheduled maturity to October 2028.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls. It was in compliance with financing covenants at September 30, 2023.
Most important facts for investors to verify
- Whether elevated benchmark rates continue to support investment income after considering higher borrowing costs and incentive fees.
- The performance, valuation, and repayment prospects of rating-3 and rating-4 investments, non-accrual assets, and material PIK positions.
- The sustainability of $0.70 regular quarterly distributions and announced special distributions relative to recurring cash income and required RIC distributions.
- Liquidity available for $2.18 billion of unfunded portfolio and COPJV commitments and upcoming 2024–2025 debt maturities.
- The reliability of Level 3 valuations, particularly for equity, subordinated debt, asset-based finance, and investments with significant valuation declines.
- Effects of the October 31, 2023 financing amendments on borrowing capacity, interest expense, collateral requirements, and maturity risk.