FS KKR Capital Corp. 10-Q Summary (Period Ended June 30, 2019)
Business Context and Reporting Period
FS KKR Capital Corp. (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 June 30, 2019, and the six-month period ended June 30, 2019. The company completed the merger with Corporate Capital Trust, Inc. (CCT) in December 2018, significantly increasing its asset base.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|
| Total Investment Income | $394 million | $197 million |
| Net Investment Income | $196 million | $97 million |
| Net Increase in Net Assets from Operations | $202 million | ($18) million |
| Earnings Per Share (Basic & Diluted) | $0.38 | ($0.08) |
| Total Assets | $7,744 million | $7,705 million (Dec 31, 2018) |
| Total Investments (Fair Value) | $7,283 million | $7,387 million (Dec 31, 2018) |
| Total Debt Outstanding | $3,451 million | $3,397 million (Dec 31, 2018) |
| Net Asset Value (NAV) Per Share | $7.88 | $7.84 (Dec 31, 2018) |
| Asset Coverage Ratio | 219% | 223% (Dec 31, 2018) |
| Cash and Restricted Cash | $264 million | $101 million (Dec 31, 2018) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased 100% year-over-year (from $197 million to $394 million), primarily driven by the larger asset base resulting from the December 2018 merger with CCT.
- Profitability: The company reported a net increase in net assets of $202 million for the six months ended June 30, 2019, compared to a net decrease of $18 million in the prior year period. This turnaround was driven by higher net investment income and a net change in unrealized appreciation of $88 million (compared to $142 million depreciation in 2018).
- Realized Losses: The company recognized a net realized loss of $82 million for the six months ended June 30, 2019, compared to a net realized gain of $27 million in the prior year. This was largely due to the reversal of unrealized losses upon the sale of certain investments.
- Expense Increases: Total operating expenses rose to $198 million from $103 million, reflecting higher management fees ($57 million vs. $33 million) and interest expense ($84 million vs. $41 million) due to increased leverage and asset size.
- Share Repurchases: The company repurchased 11.2 million shares for $71 million during the six months ended June 30, 2019, compared to 5.1 million shares for $39 million in the prior year.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the improved results primarily to the merger with CCT. The company continues to focus on generating current income and long-term capital appreciation through direct originations and secondary market transactions.
- Asset Coverage: Effective June 15, 2019, the company's asset coverage requirement for senior securities was reduced from 200% to 150%. As of June 30, 2019, the company's asset coverage was 219%, providing significant headroom for leverage.
- Financing Activity: In June 2019, the company completed a $378.7 million CLO transaction (2019-1 Notes). In July 2019 (subsequent event), the company issued $400 million of 4.625% notes due 2024 and an additional $175 million of 4.750% notes due 2022.
- Risks: Key risks include the impact of general economic conditions on portfolio companies, the ability to maintain RIC status, interest rate fluctuations affecting borrowing costs, and the valuation of Level 3 assets (which comprised 90.3% of the portfolio at fair value).
- Unfunded Commitments: As of June 30, 2019, the company had unfunded debt commitments of $179.3 million and unfunded equity/other commitments of $336.6 million, plus $581.0 million in commitments to its joint venture, Strategic Credit Opportunities Partners, LLC.
Key Facts for Investor Verification
- NAV vs. Market Price: Verify the discount to NAV. As of June 30, 2019, the NAV per share was $7.88, while the market price was $5.96, representing a discount of approximately 24%.
- Distribution Coverage: Confirm the sustainability of the $0.19 per share quarterly distribution. For the six months ended June 30, 2019, distributions totaled $199 million, fully covered by net investment income of $196 million (GAAP) and $182 million (Tax basis), with no return of capital reported for the period.
- Level 3 Valuations: Review the sensitivity of the portfolio valuation to unobservable inputs, as 90.3% of investments are classified as Level 3. Significant changes in discount rates or EBITDA multiples could materially impact NAV.
- Debt Maturities: Monitor upcoming debt maturities, including $400 million of 4.000% notes due July 15, 2019, and $405 million of 4.250% notes due January 15, 2020.
- Non-Accrual Assets: Verify the quality of the portfolio. Investments on non-accrual status represented 1.2% of the portfolio at fair value as of June 30, 2019.