FSK

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, 2011
Business Model: 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 debt of private U.S. companies.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Portfolio Growth: Investments at fair value increased from $733.6 million (Dec 31, 2010) to $1.33 billion (Sep 30, 2011), driven by significant capital raises ($890.5 million gross proceeds in the first nine months of 2011).
• Operating Results: Net investment income for the nine months ended Sep 30, 2011, was $48.6 million, a substantial increase from $7.8 million in the same period in 2010, reflecting portfolio expansion.
• Unrealized Losses: The company reported a net change in unrealized depreciation on investments of $(64.7) million for the nine months ended Sep 30, 2011, compared to unrealized appreciation of $1.8 million in the prior year period. This was primarily driven by widening credit spreads due to European sovereign debt uncertainty.
• Incentive Fee Reversal: The company reversed $4.1 million in capital gains incentive fees accrued in 2010 due to unrealized losses in the portfolio during the current period.
• Leverage: The company fully utilized its $340 million revolving credit facility and initiated a new $300 million repurchase facility (JPM Facility), with $109.3 million outstanding as of period end.

Guidance, Outlook, and Risks

• Market Conditions: Management attributes unrealized losses to general widening of credit spreads and uncertainty surrounding European sovereign debt. No specific forward-looking financial guidance was provided in the text.
• Liquidity: The company maintains significant cash reserves ($270.2 million) and has access to committed credit facilities. It conducts quarterly tender offers for share repurchases.
• Key Risks:
  • Interest Rate Risk: The company is exposed to floating rate debt (LIBOR-based). Rising rates increase interest expense, though variable-rate assets may offset this.
  • Valuation Risk: Investments are primarily Level 3 assets (unobservable inputs), requiring significant management judgment and third-party pricing.
  • Counterparty Risk: Exposure to Citibank (Total Return Swap) and JPMorgan (Repurchase Facility).
  • Regulatory Risk: Compliance with BDC asset coverage requirements and RIC distribution rules.
• Unusual Items: The reversal of the capital gains incentive fee payable is a non-cash accounting adjustment that significantly improved net income for the period.

Investor Verification Checklist

• Portfolio Quality: Verify the concentration of assets rated below investment grade and the specific impact of European debt exposure on the portfolio's fair value.
• Debt Covenants: Review the "Super-Collateralization Events" and borrowing base limitations in the Deutsche Bank credit facility to assess leverage sustainability.
• Distribution Sustainability: Confirm that distributions are fully covered by net investment income (92% coverage in 9M 2011) and not reliant on return of capital or borrowings.
• Total Return Swap (TRS): Assess the $7.6 million unrealized loss on the TRS and the potential early termination fee ($3.4 million) if the facility were terminated.
• Capital Raises: Monitor the pace of the continuous offering to ensure sufficient capital for deploying the $15.7 million in unfunded loan commitments.