FS KKR Capital Corp (FS Investment Corporation) - 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (d/b/a FS KKR Capital Corp)
Reporting Period: Quarterly period ended June 30, 2009 (Six months ended June 30, 2009)
Business Type: Business Development Company (BDC) and Regulated Investment Company (RIC).
Operations: The Company formally commenced operations on January 2, 2009, following the completion of its initial public offering. It invests primarily in senior secured loans, second lien secured loans, and to a lesser extent, senior unsecured bonds of private U.S. companies. As of June 30, 2009, the portfolio consisted of 30 companies with a total fair value of $29.3 million.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 |
Three Months Ended June 30, 2009 |
|---|---|---|
| Investment Income | $728,000 | $570,000 |
| Net Investment Income | $174,000 | $160,000 |
| Net Realized Gain | $359,000 | $235,000 |
| Net Unrealized Appreciation | $2,172,000 | $2,017,000 |
| Total Net Increase in Net Assets | $2,705,000 | $2,412,000 |
| Earnings Per Share (Basic/Diluted) | $1.71 | $1.04 |
| Net Asset Value (NAV) per Share | $8.63 (End of Period) | N/A |
| Total Assets | $31,426,000 | N/A |
| Cash and Cash Equivalents | $1,917,000 | N/A |
| Portfolio Yield (Gross Annual) | 14.9% | N/A |
Liquidity and Debt: The Company has no outstanding debt as of June 30, 2009. It maintains cash reserves of $1.9 million. Liabilities totaled $5.9 million, primarily consisting of $5.7 million payable for investments purchased but not yet settled.
Material Changes vs. Prior Period
Operational Status: The Company commenced operations on January 2, 2009. Consequently, there are no comparable operating results for the three or six months ended June 30, 2008, other than pre-operational organization costs.
Portfolio Growth:
- Investments: Purchased $31.2 million in investments during the six months ended June 30, 2009.
- Exits: Exited positions totaling $4.2 million and received principal repayments of $0.5 million.
- Valuation: The portfolio experienced significant unrealized appreciation ($2.2 million) driven by a recovery in senior secured debt prices from historical lows in late 2008.
Capital Raising: The Company raised approximately $24.6 million in gross proceeds from the sale of common stock during the six-month period. Total gross proceeds raised since inception (including seed capital) reached approximately $44.9 million.
Guidance, Outlook, and Risks
Management Commentary:
- Market Conditions: Management notes that while global credit markets have shown signs of improvement since March 2009, economic activity remains subdued and credit spreads are historically high.
- Expense Reimbursement: An affiliate, Franklin Square Holdings, agreed to reimburse operating expenses to ensure distributions do not represent a return of capital. This arrangement is expected to continue until the Company reaches $50 million in capital raised. Reimbursements totaled $176,000 for the six months ended June 30, 2009.
- Distributions: The Company declared monthly cash distributions and special stock distributions to maintain NAV below the offering price. No portion of distributions paid in the first half of 2009 is expected to be a return of capital.
Risks and Contingencies:
- Valuation Risk: 95% of the portfolio ($27.9 million) is classified as Level 3 (unobservable inputs), relying on third-party pricing services and internal models.
- Interest Rate Risk: Most portfolio investments pay variable rates; rising rates could increase borrowing costs if the Company leverages in the future.
- Expense Reimbursement Uncertainty: There is no assurance that the affiliate will continue reimbursing expenses in future quarters.
Investor Verification Checklist
- Expense Reimbursement Sustainability: Verify the duration and conditions of the expense reimbursement agreement with Franklin Square Holdings, as it significantly impacts net investment income and distribution coverage.
- Portfolio Valuation Methodology: Review the specific inputs used for Level 3 valuations, given that 95% of the portfolio relies on unobservable inputs in an illiquid market.
- Capital Deployment Rate: Monitor the pace of capital deployment against the $50 million threshold required to phase out expense reimbursements.
- Distribution Tax Characterization: Confirm the tax characterization of distributions (ordinary income vs. return of capital) via the annual Form 1099-DIV, despite management's current expectation.
- Share Count Adjustments: Note that share counts and per-share data have been retroactively adjusted for stock distributions issued between March and July 2009.