FS KKR Capital Corp (FSIC) - 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a Business Development Company (BDC) regulated under the Investment Company Act of 1940.
Reporting Period: Quarterly period ended September 30, 2018 (Nine months ended September 30, 2018).
Key Context: The Company changed investment advisers on April 9, 2018, transitioning from FB Income Advisor, LLC (with GSO/Blackstone as sub-adviser) to FS/KKR Advisor, LLC. On July 22, 2018, the Company entered into a merger agreement to acquire Corporate Capital Trust, Inc. (CCT), expected to close in Q4 2018.
Key Financial Metrics
| Metric | 9 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2017 |
|---|---|---|
| Net Investment Income | $152,584 | $149,698 |
| Net Realized Gain (Loss) | $56,307 | $(133,219) |
| Net Unrealized Appreciation (Depreciation) | $(234,161) | $155,677 |
| Net Increase (Decrease) in Net Assets from Operations | $(29,753) | $167,233 |
| Earnings Per Share (Basic & Diluted) | $(0.12) | $0.68 |
| Total Assets | $3,698,671 | $4,104,275 |
| Total Investments (Fair Value) | $3,537,252 | $3,926,234 |
| Net Assets | $2,066,861 | $2,284,723 |
| Net Asset Value (NAV) per Share | $8.64 | $9.30 |
| Total Debt Outstanding | $1,557,041 | $1,721,750 |
| Cash and Foreign Currency | $99,965 | $178,991 |
| Available Borrowing Capacity | $632,959 | $260,750 |
Material Changes vs. Prior Period
- Performance Decline: The Company reported a net decrease in net assets of $29.8 million for the nine months ended September 30, 2018, compared to a net increase of $167.2 million in the prior year period. This reversal was driven primarily by a net unrealized depreciation of $234.2 million, contrasting with $155.7 million of unrealized appreciation in 2017.
- Portfolio Valuation: Total investments at fair value decreased by approximately $389 million (from $3.93 billion to $3.54 billion). The decline was attributed to lower valuations in select investments and net sales/repayments exceeding purchases.
- Expense Reduction: Net operating expenses decreased to $138.5 million from $158.8 million year-over-year. This was largely due to the elimination of the subordinated income incentive fee (which was $22.9 million in 2018 vs. $37.4 million in 2017) and a management fee waiver of $2.8 million.
- Debt Refinancing: The Company entered into a new Senior Secured Revolving Credit Facility in August 2018, replacing the Hamilton Street and ING credit facilities. Total debt outstanding decreased by $164.7 million.
- Share Repurchases: The Company completed a $50 million share repurchase program, buying back 6.57 million shares at an average price of $7.61 per share.
Guidance, Outlook, and Risks
- Merger with CCT: The Company is pursuing a merger with Corporate Capital Trust, Inc. (CCT). The transaction is expected to close in Q4 2018, subject to stockholder and regulatory approvals. The merger agreement includes a termination fee of approximately $75.2 million if the deal fails under certain circumstances.
- Investment Strategy: The portfolio remains heavily weighted toward Direct Originations (93% of portfolio fair value). The Company continues to focus on senior secured loans and second lien secured loans of private U.S. middle-market companies.
- Asset Quality: Investments on non-accrual status increased to 2.7% of the portfolio (fair value) from 0.2% in the prior year. The portfolio rating distribution shows 28% of assets rated 3, 4, or 5 (underperforming or requiring monitoring), up from 10% in the prior year.
- Interest Rate Risk: 72.2% of the portfolio pays variable interest rates. A 100 basis point increase in rates is projected to increase net interest income by approximately 7.4%.
- Distributions: The Company declared a regular quarterly distribution of $0.19 per share and a special distribution of $0.09 per share. Distributions for the nine months ended September 30, 2018, were fully covered by net investment income.
Investor Verification Checklist
- Merger Completion: Verify the status of the CCT merger, including stockholder approval results and regulatory clearance, as this is a material corporate event.
- Unrealized Losses: Review the specific portfolio companies driving the $234 million unrealized depreciation to assess the permanence of these impairments.
- Non-Accrual Assets: Investigate the specific investments moved to non-accrual status (2.7% of portfolio) and the likelihood of recovery or principal loss.
- Debt Covenants: Confirm compliance with the 200% asset coverage ratio and minimum shareholders' equity covenants under the new Senior Secured Revolving Credit Facility.
- Fee Structure Changes: Review the proposed amendments to the investment advisory agreement related to the CCT merger, specifically regarding the calculation of management fees and incentive fee caps.