Business Context and Reporting Period
FS KKR Capital Corp. is an externally managed, non-diversified business development company and regulated investment company focused primarily on senior secured loans and other debt investments in private middle-market companies. The filing reports unaudited results for the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The company had 280.1 million common shares outstanding as of April 30, 2024.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total investment income | $434 million | $456 million | Down $22 million |
| Net investment income | $212 million | $229 million | Down $17 million |
| Net investment income per share | $0.76 | $0.81 | Down $0.05 |
| Net realized gains/(losses) | $(246) million | $(54) million | More losses |
| Net unrealized appreciation/(depreciation), including foreign currency | $207 million | $24 million | Higher appreciation |
| Net increase in net assets from operations | $173 million | $199 million | Down $26 million |
| Earnings per share | $0.62 | $0.71 | Down $0.09 |
| Cash flow from operating activities | $466 million | $247 million | Up $219 million |
| Net cash flow from financing activities | $(455) million | $(248) million | Greater outflow |
| Cash and foreign currency at period end | $242 million | $250 million | Down $8 million |
Net investment income represented approximately 12.26% of average net assets on an annualized basis. Total operating expenses were $222 million, including $55 million of management fees, $43 million of subordinated income incentive fees and $116 million of interest expense. The operating expense ratio was 3.21% of average net assets.
Investment income included $388 million of cash income and $46 million of non-cash income from discount accretion and paid-in-kind interest. Approximately 89.4% of gross investment income was cash income, 2.5% was non-cash discount accretion and 8.1% was PIK interest.
Balance Sheet, Portfolio and Liquidity
- Total investments at fair value were $14.2 billion at March 31, 2024, compared with $14.6 billion at December 31, 2023.
- Net assets were $6.8 billion and net asset value per share was $24.32, compared with $24.46 at year-end 2023.
- The portfolio comprised 205 portfolio companies. First-lien senior secured loans represented 57.0% of investments at fair value, asset-based finance 14.6%, second-lien loans 7.1%, COPJV 9.8% and equity/other investments 8.1%.
- Approximately 68.0% of portfolio investments at fair value were variable-rate debt investments and 7.5% were fixed-rate debt investments. Weighted average annual yield was 12.5% on accruing debt investments and 11.4% on all debt investments.
- Investments on non-accrual status represented 4.2% of portfolio fair value, down from 5.5% at December 31, 2023. Investments rated 3 or 4 represented approximately 6% of portfolio fair value.
- Cash and foreign currency totaled $242 million. Borrowing capacity available under financing arrangements was $3.6 billion, subject to borrowing-base and other limitations.
- Unfunded commitments included $1.143 billion of debt commitments, $579 million of equity/other commitments and $560 million to COPJV. Management stated that available cash, borrowings and liquid securities were sufficient to fund these commitments if required.
Debt and Capital Structure
Senior securities outstanding totaled approximately $8.0 billion at March 31, 2024, compared with $8.2 billion at December 31, 2023. Asset coverage was 185%, above the 150% statutory requirement. Average borrowings during the quarter were $8.2 billion at a weighted average effective interest rate of 5.43%; the period-end effective rate was 5.35%. The company reported compliance with all financing covenants.
Material near-term maturities include $400 million of 4.625% notes due July 2024 and $500 million of 1.650% notes due October 2024, followed by several 2025 maturities. The company had no borrowings available under its CCT Tokyo Funding facility, while the Senior Secured Revolving Credit Facility had $3.415 billion available.
Material Changes Versus Prior Comparable Period
- Total investment income declined 4.8%, primarily because of lower interest and PIK income following repayments of higher-yielding positions and non-accrual placements, and lower dividends from certain asset-based finance investments.
- Fee income increased to $17 million from $5 million, reflecting higher origination activity.
- Net investment income fell 7.4% to $212 million, while interest expense increased modestly to $116 million from $114 million.
- Net realized losses increased to $246 million from $54 million, driven primarily by investment losses and dispositions.
- Net unrealized appreciation, including foreign currency effects, increased to $207 million from $24 million, partially offsetting realized losses.
- Purchases increased substantially to $1.444 billion from $270 million, while sales and repayments increased to $1.855 billion from $386 million, producing net portfolio activity of negative $411 million.
- The quarterly distribution increased to $0.75 per share from $0.70 per share. The filing states that Q1 distributions were funded entirely from net investment income and did not represent a return of capital.
- The company made no share repurchases during Q1 2024; the previously authorized repurchase program had concluded. An affiliated investment vehicle entered into a March 2024 plan to sell up to 3.8 million shares, commencing April 15, 2024.
Guidance, Outlook, Commentary and Risks
The filing does not provide quantitative earnings guidance. Management describes a defensive investment approach focused on long-term credit performance, principal protection and direct originations. Results for the quarter are not necessarily indicative of full-year 2024 results.
Management identified sensitivity to interest rates, credit performance, defaults, portfolio-company cash flows, inflation, economic conditions, foreign exchange movements, leverage, valuation assumptions and the ability to maintain RIC and BDC status. A 100-basis-point increase in interest rates was estimated to increase annual interest income by $98 million, interest expense by $28 million and net interest income by $70 million, assuming no changes in portfolio composition, defaults or prepayments.
Approximately $12.7 billion of investments were classified as Level 3, requiring significant unobservable inputs. Changes in discount rates, EBITDA multiples, collateral values or expected cash flows could materially affect fair value, net asset value and incentive fee accruals. The company also disclosed potential conflicts arising from the Adviser and its personnel managing or advising other investment vehicles.
The company reported no material legal proceedings, no material changes to previously disclosed risk factors, no guarantees outstanding and no off-balance-sheet arrangements. The filing states that disclosure controls and procedures were effective as of March 31, 2024.
On May 2, 2024, the board declared a regular quarterly distribution of $0.70 per share, payable on or about July 2, 2024. A previously declared $0.05 per share special distribution was scheduled for payment on or about May 29, 2024.
Investor Verification Checklist
- Verify the refinancing or repayment plan for the $900 million of notes maturing in July and October 2024 and the effect on future interest expense and liquidity.
- Review non-accrual investments, particularly the investments identified as non-accrual in the schedule of investments, and assess potential recovery values.
- Evaluate the sustainability of the $0.70 regular quarterly distribution and any special distributions relative to recurring cash income, PIK income and realized investment results.
- Reconcile the $1.143 billion of unfunded debt commitments, $579 million of equity/other commitments and $560 million COPJV commitment with available borrowing capacity and cash.
- Assess the effect of changes in interest rates, portfolio credit quality and foreign exchange rates on net investment income and net asset value.
- Review Level 3 valuation assumptions and the concentration of exposure in software and services, capital goods, commercial and professional services, health care and COPJV.
- Monitor affiliated share-sale activity and potential conflicts of interest involving the Adviser and related investment vehicles.