FSK

FS KKR Capital Corp. 10-Q Summary (Period Ended September 30, 2019)

Business Context and Reporting Period

FS KKR Capital Corp. (NYSE: FSK) is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated loans of private middle-market U.S. companies. This report covers the quarterly period ended September 30, 2019, and the nine months ended on that date. The company completed its merger with Corporate Capital Trust, Inc. (CCT) on December 19, 2018, significantly expanding its asset base.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total investment income for the nine months ended September 30, 2019, was $593 million, a significant increase from $292 million in the same period in 2018. This growth is primarily attributed to the increased asset base resulting from the December 2018 merger with CCT.
• Expense Increases: Total operating expenses for the nine months ended September 30, 2019, rose to $282 million from $142 million in the prior year period. This includes higher management fees ($85 million vs. $47 million) and interest expense ($126 million vs. $62 million) due to the larger portfolio and increased leverage.
• Profitability: The company reported a net increase in net assets resulting from operations of $273 million for the nine months ended September 30, 2019, compared to a net decrease of $30 million in the same period in 2018.
• Portfolio Composition: Senior Secured Loans—First Lien decreased as a percentage of the portfolio from 54.2% to 50.8%, while Asset Based Finance increased from 9.0% to 9.7%.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the improvement in results to the merger with CCT. The company continues to focus on generating current income and, to a lesser extent, long-term capital appreciation through direct originations and secondary market transactions.
• Dividends: The company declared a regular quarterly cash distribution of $0.19 per share on October 30, 2019, payable in January 2020. For the nine months ended September 30, 2019, total distributions were $297 million, fully covered by net investment income.
• Share Repurchases: The company repurchased 19.2 million shares for $118 million during the nine months ended September 30, 2019, under a program authorized in December 2018.
• Risks and Contingencies:
  • Asset Coverage: Effective June 15, 2019, the asset coverage requirement for senior securities was reduced from 200% to 150%. As of September 30, 2019, the ratio was 214%.
  • Unfunded Commitments: The company has significant unfunded commitments totaling approximately $992 million ($271.1 million in debt, $270.2 million in equity/other, and $450.8 million to the Strategic Credit Opportunities Partners joint venture).
  • Portfolio Quality: Investments on non-accrual status represented 1.7% of the portfolio by fair value as of September 30, 2019, up from 1.0% at year-end 2018.

Key Facts for Investor Verification

• NAV vs. Market Price: Verify the current market price of FSK stock relative to the reported NAV of $7.86 per share to assess the discount or premium.
• Debt Maturities: Review the maturity schedule of the $3.5 billion in outstanding debt, noting the $405 million in 4.250% Notes due January 2020.
• Unfunded Commitments: Confirm the company's liquidity position ($126 million cash + $1,245 million available borrowings) against its $992 million in unfunded commitments.
• Non-Accrual Assets: Monitor the trend of non-accrual assets (currently 1.7% of portfolio) and specific portfolio companies identified as underperforming (Rating 3 or 4).
• Fee Structure: Note the permanent waiver of the management fee on assets financed using leverage over 1.0x debt-to-equity, reducing the effective fee rate on those assets from 1.5% to 1.0%.