FS KKR Capital Corp. 10-Q Summary: Quarter Ended March 31, 2019
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) and taxed as a Regulated Investment Company (RIC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated loans of private middle-market U.S. companies. This report covers the quarterly period ended March 31, 2019. The company completed its merger with Corporate Capital Trust, Inc. (CCT) on December 19, 2018, significantly expanding its asset base.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net Investment Income | $95 million | $51 million |
| Net Increase in Net Assets from Operations | $101 million | $13 million |
| Earnings Per Share (Basic & Diluted) | $0.19 | $0.05 |
| Total Investments (Fair Value) | $7,440 million | $7,387 million (Dec 31, 2018) |
| Total Assets | $7,733 million | $7,705 million (Dec 31, 2018) |
| Total Liabilities | $3,613 million | $3,539 million (Dec 31, 2018) |
| Stockholders' Equity | $4,120 million | $4,166 million (Dec 31, 2018) |
| Net Asset Value (NAV) Per Share | $7.86 | $7.84 (Dec 31, 2018) |
| Weighted Average Shares Outstanding | 527.5 million | 245.7 million |
| Operating Expenses | $100 million | $53 million |
| Interest Expense | $43 million | $20 million |
| Cash and Foreign Currency | $92 million | $215 million (Dec 31, 2018) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased to $195 million from $101 million year-over-year, driven primarily by the larger asset base resulting from the CCT merger. Interest income rose to $153 million from $75 million.
- Expense Increase: Total operating expenses doubled to $100 million from $53 million. This includes a rise in interest expense to $43 million (from $20 million) and management fees to $29 million (from $18 million).
- Realized and Unrealized Gains: The company reported a net realized loss of $15 million and a net unrealized gain of $21 million, resulting in a total net realized and unrealized gain of $6 million. This contrasts with a net loss of $38 million in the prior year period.
- Share Repurchases: The company repurchased 7.4 million shares for $47 million during the quarter, compared to 0.1 million shares for $1 million in the prior year period.
- Distributions: Distributions to stockholders totaled $100 million ($0.19 per share), compared to $47 million ($0.19 per share) in the prior year.
Guidance, Outlook, and Risks
- Outlook: Management continues to pursue current income and long-term capital appreciation. The company maintains sufficient liquidity ($92 million cash and $1,160 million available borrowings) to fund unfunded commitments of approximately $641 million ($167 million debt, $331 million equity, $144 million SCJV).
- Financing: Total senior securities outstanding were $3,405 million. The company is seeking stockholder approval to reduce the asset coverage requirement from 200% to 150% to increase leverage capacity.
- Risks: Key risks include interest rate fluctuations (69.4% of portfolio is variable rate), credit risk in the private middle-market sector, and the impact of foreign currency exchange rates on non-U.S. investments. The company utilizes foreign currency forward contracts and cross-currency swaps to hedge these risks.
- Unusual Items: The significant increase in share count and assets is a direct result of the December 2018 merger with CCT. The company recognized $6 million in structuring fee revenue in Q1 2019.
Key Facts for Investor Verification
- NAV vs. Market Price: Verify the current market price of FSK stock relative to the reported NAV of $7.86 per share to assess the discount/premium.
- Distribution Coverage: Confirm that the $0.19 per share distribution is fully covered by net investment income ($0.18 per share) and whether any portion represents a return of capital.
- Asset Quality: Review the portfolio asset quality ratings; 94% of the portfolio is rated 1 or 2 (performing), while 6% is rated 3 or 4 (underperforming).
- Leverage Ratios: Verify the asset coverage ratio (reported as 2.21x) to ensure compliance with the 1940 Act requirements.
- Unfunded Commitments: Assess the company's ability to fund the $641 million in unfunded commitments given current cash levels and borrowing capacity.