FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FS KKR Capital Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2013
Business Model: 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 U.S. companies to generate current income and long-term capital appreciation.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2013 | Nine Months Ended Sep 30, 2013 | Balance Sheet (Sep 30, 2013) |
|---|---|---|---|
| Total Investment Income | $123.3 million | $357.7 million | — |
| Net Investment Income | $67.8 million | $192.6 million | — |
| Net Increase in Net Assets (Operations) | $59.6 million | $189.0 million | — |
| Earnings Per Share (Basic/Diluted) | $0.23 | $0.75 | — |
| Total Assets | — | — | $4,633.6 million |
| Total Liabilities | — | — | $2,035.9 million |
| Stockholders' Equity | — | — | $2,597.7 million |
| Net Asset Value (NAV) Per Share | — | — | $10.10 |
| Cash and Cash Equivalents | — | — | $290.4 million |
| Investments at Fair Value | — | — | $4,200.8 million |
| Total Debt (Credit Facilities + Repurchase Agreements) | — | — | $1,892.5 million |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total investment income increased significantly from $84.0 million in the three months ended September 30, 2012, to $123.3 million in the same period in 2013. This growth is attributed to portfolio expansion and a transition to higher-yielding non-broadly syndicated assets.
- Net Income Decline: Despite higher revenue, the net increase in net assets resulting from operations decreased from $121.8 million (Q3 2012) to $59.6 million (Q3 2013). This was primarily driven by a net change in unrealized depreciation on investments of $(14.9) million in Q3 2013, compared to unrealized appreciation of $69.2 million in Q3 2012.
- Expense Increases: Total operating expenses rose to $55.5 million in Q3 2013 from $49.3 million in Q3 2012. Increases were driven by higher management fees and the accrual of subordinated income incentive fees ($16.6 million in Q3 2013 vs. $0 in Q3 2012).
- Portfolio Composition: The portfolio shifted toward proprietary and anchor order investments, which now constitute 67% of the portfolio (up from 38% in 2012), while broadly syndicated loans decreased to 23% (down from 42%).
Guidance, Outlook, and Management Commentary
- Valuation Trends: Management noted that the net change in unrealized depreciation in Q3 2013 was driven by mark-to-market declines in certain senior secured bond positions and a general widening of credit spreads in the second quarter of 2013.
- Distribution Policy: On October 16, 2013, the Board increased the regular monthly cash distribution from $0.06975 to $0.0720 per share, raising the annual distribution rate from 7.75% to 8.00% based on the last public offering price.
- Financing: The company maintains significant leverage with $1.89 billion in outstanding debt. The JPM Facility was amended in April 2013 to increase capacity to $950 million and extend the maturity to April 2017. The Broad Street Credit Facility matures on December 22, 2013.
- Risks: The company faces interest rate risk, with 70% of the portfolio paying variable rates. Rising rates would increase interest income but also increase interest expense on floating-rate debt. Additionally, the company relies on fair value estimates for Level 3 assets, which are subject to market volatility.
Investor Verification Checklist
- Debt Maturities: Verify the refinancing status of the Broad Street Credit Facility ($240 million) maturing December 22, 2013.
- Unrealized Losses: Review the specific senior secured bond positions contributing to the $40.8 million net unrealized depreciation for the nine months ended September 30, 2013.
- Incentive Fee Accruals: Confirm the impact of the $27.3 million accrued capital gains incentive fee (mostly based on unrealized gains) on future cash outflows if gains are realized.
- Portfolio Yield: Assess the sustainability of the 10.4% gross portfolio yield prior to leverage, particularly given the shift to non-broadly syndicated assets.
- Expense Reimbursement: Monitor the expense reimbursement agreement with Franklin Square Holdings, which ensures distributions are not paid from offering proceeds or borrowings, though no reimbursements were required in the current period.