FS KKR Capital Corp. 10-Q Summary (Period Ended June 30, 2020)
Business Context and Reporting Period
FS KKR Capital Corp. (NYSE: FSK) is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private middle-market U.S. companies. This report covers the quarterly period ended June 30, 2020. Notably, the company effected a 4-for-1 reverse stock split on June 15, 2020; all share and per-share data presented herein are retroactively adjusted to reflect this split.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|
| Total Investment Income | $329 million | $394 million |
| Net Investment Income | $175 million | $196 million |
| Net Realized and Unrealized Gain (Loss) | $(933) million | $6 million |
| Net Increase (Decrease) in Net Assets from Operations | $(758) million | $202 million |
| Earnings Per Share (Basic & Diluted) | $(6.07) | $1.54 |
| Total Assets | $6,956 million | $8,216 million (Dec 31, 2019) |
| Total Investments (Fair Value) | $6,624 million | $7,357 million (Dec 31, 2019) |
| Total Debt Outstanding | $3,928 million | $4,195 million (Dec 31, 2019) |
| Net Asset Value (NAV) Per Share | $23.37 | $30.54 (Dec 31, 2019) |
| Asset Coverage Ratio | 174% | 192% (Dec 31, 2019) |
Material Changes vs. Prior Period
- Significant Decline in Net Assets: Net assets decreased by approximately $975 million (25%) from December 31, 2019, to June 30, 2020. This decline was driven primarily by a net unrealized depreciation of $750 million on investments, largely attributed to the economic impact of the COVID-19 pandemic.
- Investment Portfolio Valuation: The fair value of the investment portfolio decreased from $7,357 million to $6,624 million. The weighted average annual yield on all debt investments declined from 8.8% to 7.4%.
- Non-Accrual Status: The percentage of investments on non-accrual status increased from 2.8% at year-end 2019 to 3.8% at June 30, 2020.
- Debt Reduction: Total debt outstanding decreased by approximately $267 million as the company reduced leverage and repaid borrowings.
- Share Repurchases: The company repurchased approximately 2.8 million shares (adjusted for split) for $47 million during the six-month period.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted that the rapid spread of the COVID-19 pandemic has negatively impacted the business operations of portfolio companies. The company expects these adverse effects to continue for the foreseeable future, potentially requiring investment restructurings and resulting in further impairments. Originations have been limited due to market disruptions.
Risks and Contingencies:
- Pandemic Impact: Continued economic distress may lead to further decreases in investment values and investment income.
- Liquidity: While the company maintains sufficient cash and available borrowings to fund unfunded commitments ($330.3 million in debt and $261.0 million in asset-based/other commitments), market disruptions could limit access to capital markets.
- Legal Proceedings: The company is not currently subject to any material legal proceedings.
Distributions: The board declared a quarterly cash distribution of $0.60 per share for the second quarter of 2020, payable in October 2020. For the six months ended June 30, 2020, total distributions were $170 million, fully sourced from net investment income.
Key Facts for Investor Verification
- Reverse Stock Split: Verify that all historical share counts and per-share metrics are adjusted for the 4-for-1 reverse split effective June 15, 2020.
- Unrealized Losses: Confirm the magnitude of the $750 million unrealized depreciation and its specific attribution to portfolio companies affected by the pandemic.
- Asset Coverage: Monitor the asset coverage ratio (currently 174%) to ensure it remains above the 150% regulatory requirement for BDCs.
- Non-Accrual Trends: Track the 3.8% non-accrual rate to assess potential future credit losses and restructuring needs.
- Debt Maturities: Review the maturity schedule of the $3.9 billion debt portfolio, noting significant unsecured notes maturing in 2022 and 2024.