FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a business development company (BDC) regulated under the Investment Company Act of 1940 and taxed as a regulated investment company (RIC).
Reporting Period: Quarterly period ended June 30, 2017 (Unaudited).
Business Overview: The Company invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. middle-market companies. As of June 30, 2017, the portfolio consisted of 107 portfolio companies with a total fair value of $3.90 billion.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Total Investment Income | $204,759 | $213,274 |
| Net Investment Income | $99,050 | $106,778 |
| Net Realized Gain (Loss) | $(114,984) | $(21,249) |
| Net Change in Unrealized Appreciation (Depreciation) | $101,495 | $42,843 |
| Net Increase in Net Assets from Operations | $81,835 | $128,060 |
| Earnings Per Share (Basic & Diluted) | $0.33 | $0.53 |
| Net Asset Value (NAV) per Share | $9.30 | $9.41 |
| Total Assets | $4,110,120 | $4,110,071 |
| Total Liabilities | $1,829,416 | $1,812,694 |
| Stockholders' Equity | $2,280,704 | $2,297,377 |
| Cash and Foreign Currency | $142,708 | $44,170 |
| Debt Outstanding (Credit Facilities & Notes) | $1,706,897 | $1,695,633 |
Note: Debt figures exclude secured borrowings of $2,893 and payable for investments purchased of $10,800.
Material Changes vs. Prior Period
- Revenue Decline: Total investment income decreased by approximately 4.0% year-over-year, primarily due to prepayments of higher-yielding assets.
- Realized Losses: Net realized losses increased significantly to $114.98 million (from $21.25 million in the prior year), driven by the disposition of certain portfolio investments.
- Unrealized Gains: Net change in unrealized appreciation increased to $101.50 million (from $42.84 million), offsetting realized losses and contributing to a net increase in net assets.
- Portfolio Composition: First lien senior secured loans increased to 60% of the portfolio (from 52%), while second lien loans decreased to 7% (from 16%).
- Liquidity: Cash and foreign currency increased to $142.7 million from $44.2 million, reflecting a net cash outflow from operating activities of $31.8 million and financing activities of $90.1 million.
Guidance, Outlook, and Management Commentary
- Fee Waiver: Effective October 1, 2017, the investment adviser (FB Advisor) agreed to waive a portion of the base management fee, reducing it from 1.75% to 1.50% of average gross assets through September 30, 2018. The subordinated incentive fee will continue to be calculated as if the fee was 1.75%.
- Distribution Policy: The Board declared a quarterly distribution of $0.22275 per share for the third quarter. Management intends to reduce the regular cash distribution to $0.19 per share starting in the fourth quarter of 2017, with a potential special distribution in Q4 2018 based on excess net investment income.
- Portfolio Yield: The estimated gross portfolio yield prior to leverage was 9.4% as of June 30, 2017, up from 9.1% at year-end 2016.
- Asset Quality: 86% of the portfolio is rated "2" (performing), with 8% rated "1" (exceeding expectations). Only 0% of the portfolio is on non-accrual status.
Investor Verification Checklist
- Realized Loss Drivers: Verify the specific portfolio companies contributing to the $115 million in realized losses to assess credit quality trends.
- Fee Waiver Impact: Confirm the effective date and duration of the management fee waiver (Oct 1, 2017 – Sep 30, 2018) and its impact on future net investment income.
- Distribution Sustainability: Review the sources of distributions; for the six months ended June 30, 2017, 100% of distributions were funded by net investment income, with no return of capital.
- Debt Maturities: Note the maturity profile of senior securities, including $400 million in 4.000% notes due July 2019 and $405 million in 4.250% notes due January 2020.
- Unfunded Commitments: Verify the $166.8 million in unfunded debt commitments and the Company's liquidity position to fund them.