FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a Maryland corporation operating as a Business Development Company (BDC) and Regulated Investment Company (RIC).
Reporting Period: Three months ended March 31, 2016.
Business Overview: FSIC invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. middle-market companies. The portfolio is managed by FB Income Advisor, LLC (FB Advisor) with GSO Capital Partners LP acting as sub-adviser. As of March 31, 2016, the portfolio consisted of 111 companies with a total fair value of $3.87 billion.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net Investment Income | $49.9 million | $51.6 million |
| Net Realized Gain/(Loss) | $(13.7) million | $3.3 million |
| Net Unrealized Appreciation/(Depreciation) | $(46.7) million | $11.9 million |
| Net Increase/(Decrease) in Net Assets from Operations | $(12.1) million | $70.4 million |
| Earnings Per Share (Basic & Diluted) | $(0.05) | $0.29 |
| Net Asset Value (NAV) per Share | $8.82 | $9.10 |
| Total Assets | $3.99 billion | $4.15 billion |
| Total Liabilities | $1.85 billion | $1.94 billion |
| Cash and Cash Equivalents | $71.4 million | $80.8 million |
| Stockholder Distributions Paid | $54.1 million ($0.2228/share) | $53.7 million ($0.2228/share) |
Debt and Liquidity: Total senior securities outstanding were $1.76 billion. The company maintains a weighted average effective interest rate on borrowings of 3.98%. Available borrowing capacity under the ING Credit Facility was $267.3 million.
Material Changes vs. Prior Period
- Operating Results: The company reported a net decrease in net assets of $12.1 million for Q1 2016, a significant reversal from the $70.4 million increase in Q1 2015. This decline was driven primarily by a $46.7 million net unrealized depreciation on investments and a $13.8 million net realized loss.
- Investment Income: Total investment income decreased to $103.1 million from $108.6 million. Fee income dropped significantly to $1.6 million from $4.7 million due to reduced repayment and new direct origination activity.
- Portfolio Valuation: The portfolio fair value decreased by approximately $162.6 million from the prior year-end, largely attributed to volatility in high-yield markets impacting senior secured bond and subordinated debt positions.
- Expense Reduction: Total operating expenses decreased to $53.1 million from $56.9 million, primarily due to the absence of a $3.7 million capital gains incentive fee accrual in the current period (which was based on unrealized gains in the prior year).
Guidance, Outlook, and Risks
Management Commentary: Management attributes the unrealized depreciation to market volatility in high-yield sectors. The company continues to focus on direct originations and opportunistic investments. The gross portfolio yield prior to leverage was 9.6% as of March 31, 2016.
Distributions: The Board declared a quarterly distribution of $0.22275 per share on May 3, 2016, payable July 5, 2016. Distributions for Q1 2016 were funded entirely by net investment income.
Risks and Contingencies:
- Market Risk: 66.2% of the portfolio pays variable interest rates. Rising rates could increase interest expense on floating-rate debt while potentially increasing income on variable-rate assets, though floors may limit income growth.
- Credit Risk: 0.3% of the portfolio is on non-accrual status. Investments are rated on a 1-5 scale; 20% of the portfolio is rated 4 or 5 (underperforming or expected loss).
- Liquidity: The company has $120.8 million in unfunded debt commitments and maintains sufficient cash and borrowing capacity to meet these obligations.
Investor Verification Checklist
- Unrealized Losses: Verify the specific portfolio positions driving the $46.7 million unrealized depreciation, particularly in senior secured bonds and subordinated debt.
- Non-Accrual Status: Review the details of the 0.3% of the portfolio on non-accrual status and the company's recovery expectations.
- Fee Income Volatility: Assess the sustainability of fee income given the significant drop from $4.7M to $1.6M and its reliance on transactional activity.
- Distribution Coverage: Confirm that the declared distribution of $0.22275/share remains sustainable given the current net investment income of $49.9M versus the $54.1M distribution paid in Q1.
- Debt Maturities: Review the maturity schedule of the $1.76 billion in senior securities, noting the $725 million JPM Facility repurchase agreement maturing April 15, 2017.