FSK

FS KKR Capital Corp. 10-Q Summary: Q2 2026

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2026. FS KKR Capital Corp. (FSK) is an 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 loans of private middle-market U.S. companies, with a secondary focus on asset-based finance and equity investments.

Key Financial Metrics

Material Changes vs. Prior Period

• Decline in Net Assets: Net assets decreased by $731 million (12.5%) from December 31, 2025, to June 30, 2026, driven primarily by a $712 million net unrealized depreciation on investments and a $287 million net realized loss.
• Revenue Decline: Total investment income decreased 25.6% year-over-year (YTD) to $594 million, attributed to a reduction in the investment portfolio size and the placement of certain assets on non-accrual status.
• Expense Reduction: Net operating expenses decreased to $355 million (YTD 2026) from $438 million (YTD 2025). This reduction was due to lower management fees, lower interest expense from reduced leverage, and a $11 million waiver of the subordinated income incentive fee.
• Portfolio Valuation: Significant unrealized depreciation was driven by reduced valuations of specific portfolio companies, including Credit Opportunities Partners JV (COPJV), Production Resource Group, and Medallia Inc.

Guidance, Outlook, and Management Commentary

• Fee Waiver: The Adviser waived 50% of the subordinated income incentive fee for the period from Q2 2026 through Q1 2027 to support net investment income.
• Capital Actions:
  • Preferred Stock Issuance: On June 29, 2026, the company issued 6 million shares of Cumulative Convertible Perpetual Preferred Stock, Series A, raising $150 million. Proceeds are intended for general corporate purposes, including share repurchases or debt repayment.
  • Share Repurchases: The company repurchased 377,800 shares during the quarter and an additional 3.35 million shares in the subsequent period (July–August 2026) at prices below NAV.
• Distributions: The Board declared a quarterly distribution of $0.44 per share for Q3 2026. YTD 2026 distributions totaled $0.90 per share, fully covered by net investment income.
• Liquidity: The company maintains $3.052 billion in available borrowings under its credit facilities and $109 million in cash/foreign currency. Asset coverage ratios remain compliant with the 1940 Act (179% for indebtedness, 177% for stock).

Risks and Contingencies

• Legal Proceedings: The company is subject to multiple shareholder derivative and class action lawsuits filed in May and June 2026. These cases allege violations of the Exchange Act and the Investment Company Act regarding portfolio valuations, restructuring, and fee structures. The company intends to vigorously defend these matters but cannot predict the outcome.
• Portfolio Quality: Investments on non-accrual status increased to 3.8% of the portfolio (from 3.4% at year-end 2025). Investments rated "4" (concerns about recoverability) represent 2% of the portfolio.
• Interest Rate Risk: A 100 basis point increase in interest rates would increase net interest income by approximately $27 million, while a 100 basis point decrease would reduce it by $27 million, assuming current portfolio composition.

Key Facts for Investor Verification

• NAV vs. Market Price: Verify the widening discount between the market price ($10.50 as of period end) and NAV ($18.30), representing a discount of approximately 42%.
• Unrealized Losses: Confirm the specific portfolio companies driving the $712 million YTD unrealized loss, particularly the valuation adjustments in COPJV and Production Resource Group.
• Legal Exposure: Monitor the status of the pending litigation regarding portfolio valuations and fee structures, as adverse outcomes could impact future operations or require financial settlements.
• Preferred Stock Terms: Review the conversion price ($18.83) and dividend terms (5.00% cash or 7.00% PIK) of the newly issued Series A Preferred Stock and its impact on common equity dilution.
• Debt Maturity Profile: Assess the maturity schedule of the $6.47 billion debt portfolio, noting the significant issuance of 7.500% Notes due 2031 ($900 million) in June 2026.