FSK

FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary

Business Context and Reporting Period

Company: FS Investment Corporation (FSIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2014
Business Overview: FSIC is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC). It invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. middle-market companies. The company listed on the NYSE on April 16, 2014.

Key Financial Metrics (Nine Months Ended Sept 30, 2014)

Note: Debt includes $564,294 in credit facilities, $400,000 in unsecured notes, and $950,000 in repurchase agreements.

Material Changes vs. Prior Period

• Net Investment Income: Decreased to $173,953 (9 months 2014) from $192,556 (9 months 2013). The decline is attributed to tightening credit spreads reducing portfolio yields and increased interest expense.
• Operating Expenses: Increased to $177,481 (9 months 2014) from $165,144 (9 months 2013). This increase was driven by one-time listing expenses ($7,000) and accelerated amortization of deferred financing costs ($2,226) upon the termination of the Arch Street credit facility. These were partially offset by a reduction in management fees due to a waiver and subsequent permanent reduction.
• Portfolio Composition: The portfolio shifted toward direct originations, which now comprise 70% of the portfolio (up from 51% in 2013). The number of portfolio companies decreased from 165 to 128.
• Capital Structure: The company issued $400 million in 4.000% unsecured notes due 2019 in July 2014. Proceeds were used to repay the Arch Street credit facility ($350 million) and reduce borrowings under the Broad Street facility.
• Share Count: Shares outstanding decreased to 240,001,859 from 259,320,161 at year-end 2013, primarily due to a listing tender offer where the company repurchased approximately 23.3 million shares for $250 million.

Guidance, Outlook, and Management Commentary

• Investment Strategy: Management continues to focus on direct originations and opportunistic investments to generate current income and capital appreciation. The gross portfolio yield prior to leverage was 9.9% as of September 30, 2014.
• Distributions: The company declared a special cash distribution of $0.10 per share in July 2014. Effective January 1, 2015, regular cash distributions will be declared and paid on a quarterly basis rather than monthly.
• Expense Reimbursement: The expense reimbursement agreement with Franklin Square Holdings was terminated effective November 7, 2014, following the NYSE listing. No reimbursements were made under this agreement during the period.
• Asset Quality: 91% of the portfolio (by fair value) is rated 1 or 2 (performing or exceeding expectations). Only 1% is rated 5 (underperforming with expected loss of principal).
• Risks: The company faces interest rate risk, with 71.4% of the portfolio paying variable rates. Rising rates could increase interest expense on floating-rate debt, though many investments have interest rate floors.

Key Facts for Investor Verification

• Debt Maturities: Verify the maturity schedule of the $950 million JPM repurchase agreement (due April 2017) and the $400 million unsecured notes (due July 2019).
• Unfunded Commitments: Confirm the company's ability to fund $87,179 in unfunded loan commitments as of period end.
• Incentive Fee Accruals: Note that $36,737 in capital gains incentive fees are accrued, but only $2,714 is based on realized gains and currently payable. The remainder is based on unrealized gains.
• Listing Tender Offer Impact: Review the impact of the $250 million share repurchase on net asset value per share, as shares were repurchased at a premium to NAV ($10.75 vs $10.19).
• Non-Accrual Status: Verify the status of the single investment (Allen Systems Group, Inc.) noted as being on non-accrual status.