FS KKR Capital Corp. 10-Q Summary (Q1 2022)
Business Context and Reporting Period
FS KKR Capital Corp. (NYSE: FSK) is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company invests primarily in senior secured loans, second lien secured loans, and subordinated loans of private middle-market U.S. companies. This report covers the quarterly period ended March 31, 2022.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total Assets | $17,985 million | $17,228 million (Dec 31, 2021) |
| Total Investments (Fair Value) | $16,554 million | $16,101 million (Dec 31, 2021) |
| Net Investment Income | $220 million | $78 million |
| Net Increase in Net Assets from Operations | $225 million | $199 million |
| Earnings Per Share (Basic & Diluted) | $0.79 | $1.61 |
| Net Asset Value (NAV) Per Share | $27.33 | $27.17 (Dec 31, 2021) |
| Debt (Net of Deferred Costs) | $9,835 million | $9,142 million (Dec 31, 2021) |
| Cash and Cash Equivalents | $362 million | $258 million (Dec 31, 2021) |
| Stockholder Distributions | $179 million ($0.63/share) | $74 million ($0.60/share) |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased significantly to $396 million from $151 million in Q1 2021, driven by a larger portfolio and higher interest rates. Interest income rose to $241 million from $87 million.
- Expense Increase: Total operating expenses rose to $191 million from $73 million. This includes a $62 million management fee (up from $25 million) and $77 million in interest expense (up from $42 million), reflecting increased leverage and asset base.
- Realized and Unrealized Gains: Total net realized and unrealized gain/loss was $5 million, a sharp decline from $121 million in Q1 2021. This was due to a net realized loss of $26 million on investments and a net unrealized depreciation of $40 million on non-controlled/unaffiliated investments, contrasting with significant unrealized appreciation in the prior year.
- Portfolio Composition: Senior Secured Loans (First Lien) remained the largest asset class at 59.9% of the portfolio. Software & Services was the largest industry allocation at 16.9%.
Guidance, Outlook, and Risks
- Distributions: The Board declared a regular quarterly cash distribution of $0.68 per share on May 5, 2022, payable July 5, 2022. Distributions for Q1 2022 were fully covered by net investment income (100%).
- Share Repurchases: The company repurchased 404,928 shares for $9 million during the quarter under its $100 million repurchase program. The program remains active.
- Unfunded Commitments: As of March 31, 2022, the company had unfunded debt commitments of $1,584.1 million and unfunded equity/other commitments of $497.8 million.
- Risks and Contingencies:
- Non-Accrual Assets: The filing lists several assets on non-accrual status (denoted by footnote 'z'), including 5 Arch Income Fund 2 LLC, Cimarron Energy Inc, and Fairway Group Holdings Corp.
- Concentration Risk: The company holds investments in 18 portfolio companies it deems to "control" and 15 it deems to be an "affiliated person" of.
- Interest Rate Sensitivity: A significant portion of the portfolio consists of floating-rate loans tied to LIBOR/SOFR, which are sensitive to interest rate fluctuations.
Key Facts for Investor Verification
- NAV vs. Market Price: Verify the current market trading price relative to the reported NAV of $27.33 per share to assess the discount or premium.
- Debt Leverage: Confirm the company's leverage ratio (Debt/Equity) given the increase in debt to $9.835 billion and its impact on interest coverage.
- Non-Accrual Status: Review the specific details of the assets on non-accrual status (e.g., Fairway Group, Cimarron Energy) to understand potential credit losses.
- PIK Interest: Note that $18 million of investment income was Paid-In-Kind (PIK) interest, which increases the cost basis but does not provide immediate cash flow.
- Capital Loss Carryforwards: The company has approximately $2,021 million in capital loss carryforwards available to offset future realized capital gains.