FS KKR Capital Corp (FS Investment Corporation) - 10-K Summary
Business Context and Reporting Period
Reporting Period: Fiscal year ended December 31, 2008.
Company Status: FS Investment Corporation (FSIC) is an externally managed, non-diversified closed-end management investment company organized as a Business Development Company (BDC) under the Investment Company Act of 1940. It intends to qualify as a Regulated Investment Company (RIC) for tax purposes.
Operational Status: The Company was incorporated in December 2007 but did not commence investment operations until January 2, 2009, after meeting its minimum offering requirement. Consequently, the 2008 reporting period reflects only organizational activities and fundraising, with no active investment portfolio at year-end.
Management: Managed by FB Income Advisor, LLC (FB Advisor), with GSO Debt Funds Management LLC (GDFM), a subsidiary of The Blackstone Group, acting as investment sub-adviser.
Key Financial Metrics (Year Ended Dec 31, 2008)
| Metric | Value (in thousands) |
|---|---|
| Revenue | $25 (Interest income on cash) |
| Operating Expenses | $605 (Organization costs) |
| Net Loss | $(580) |
| Net Asset Value (NAV) per Share | $8.99 |
| Total Assets | $1,000 |
| Total Net Assets | $999 |
| Shares Outstanding | 111,112 |
| Distributions Declared | $0.226 per share ($25 total) |
Liquidity and Capital: As of December 31, 2008, the Company held $1,000 in cash. Total gross proceeds raised to date (including seed capital and public offering) were $9,330. The Company has no debt outstanding as of the reporting date.
Material Changes and Subsequent Events
Commencement of Operations: The most significant change occurred post-year-end. On January 2, 2009, the Company commenced operations after raising over $2.5 million from unaffiliated investors.
Portfolio Deployment (Subsequent to Year-End): As of March 19, 2009, the Company had invested in 18 portfolio companies. The portfolio consists of 17 senior secured and second lien secured loans to private U.S. companies with an average EBITDA of $635.4 million. Investments were purchased at an average price of 75.2% of par value, with a weighted average credit rating of B2 and an estimated gross annual yield of 14.2%.
Capital Raising: Between January 1, 2009, and March 2, 2009, the Company sold 875,875 shares for gross proceeds of $8,330.
Guidance, Outlook, and Risks
Investment Strategy: The Company targets current income and long-term capital appreciation by investing primarily in senior secured loans, second lien secured loans, and mezzanine loans of private U.S. companies (small to middle-market). It intends to leverage up to 50% of asset value as permitted by the 1940 Act.
Liquidity Event: The Company is not listed on an exchange. It intends to seek a liquidity event (listing, merger, or liquidation) between five and seven years after the completion of its offering stage. Quarterly tender offers for share repurchases are planned to begin in January 2010, limited to 10% of shares outstanding annually.
Expense Reimbursement: To ensure distributions do not represent a return of capital during the early stages, affiliate Franklin Square Holdings agreed to reimburse expenses sufficient to cover distributions for at least the next two quarters following the filing date.
Key Risks:
- Market Conditions: Severe disruption in credit markets may impact asset values and financing costs.
- Illiquidity: Investments in private companies are illiquid; no public market exists for the Company's shares.
- Valuation Uncertainty: Portfolio investments are valued at fair value by the Board, which involves subjective judgment for non-traded securities.
- Regulatory Constraints: As a BDC, the Company is subject to asset coverage tests and restrictions on distributions and leverage.
Investor Verification Checklist
- Operational Start Date: Verify that investment activities and revenue generation began in January 2009, meaning 2008 financials reflect only startup costs.
- Expense Reimbursement: Confirm the terms and duration of the expense reimbursement agreement with Franklin Square Holdings to assess the sustainability of distributions.
- Portfolio Yield vs. Cost of Capital: Monitor the 14.2% estimated gross yield against future borrowing costs if leverage is employed.
- Liquidity Program: Review the specific terms of the quarterly tender offer program (starting Jan 2010) regarding repurchase limits (2.5% per quarter) and pricing (90% of offering price).
- Related Party Transactions: Scrutinize the Investment Advisory Agreement with FB Advisor and the sub-advisory role of GDFM (Blackstone affiliate) for potential conflicts of interest.