FS KKR Capital Corp (FSIC) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a business development company (BDC) regulated under the Investment Company Act of 1940.
Reporting Period: Quarterly period ended June 30, 2014 (Six months ended June 30, 2014).
Key Event: The Company's common stock began trading on the New York Stock Exchange (NYSE) under the ticker "FSIC" on April 16, 2014. In connection with the listing, the Company completed a tender offer to repurchase approximately $250 million of its common stock.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|
| Total Investment Income | $235,517 | $234,393 |
| Net Investment Income | $113,850 | $124,784 |
| Net Increase in Net Assets from Operations | $149,371 | $129,415 |
| Earnings Per Share (Basic & Diluted) | $0.58 | $0.52 |
| Net Asset Value (NAV) per Share | $10.28 | $10.18 |
| Total Assets | $4,572,364 | $4,444,577 |
| Total Liabilities | $2,114,797 | $1,803,585 |
| Stockholders' Equity | $2,457,567 | $2,640,992 |
| Cash and Cash Equivalents | $244,074 | $227,328 |
| Debt Outstanding (Credit Facilities & Repurchase) | $1,915,686 | $1,673,682 |
Material Changes vs. Prior Period
- Net Investment Income Decline: Net investment income decreased by approximately 8.7% ($10.9 million) compared to the prior year period. This was primarily driven by increased costs of leverage, one-time listing expenses of approximately $7 million, and higher accruals for capital gains incentive fees.
- Operating Expenses: Total operating expenses increased to $124.5 million from $109.6 million. This increase included $5.0 million in listing advisory fees and other one-time costs associated with the NYSE listing. Interest expense rose to $26.8 million from $24.0 million due to increased borrowing levels.
- Portfolio Composition: The portfolio shifted toward direct originations, which now represent 66% of the portfolio (up from 51% in 2013). The number of portfolio companies decreased from 165 to 125 as the Company consolidated positions.
- Share Count Reduction: Following the listing tender offer, the Company repurchased 23,255,813 shares at $10.75 per share, reducing the outstanding share count by approximately 8.9%.
- Unrealized Gains: The Company recorded a net change in unrealized appreciation of $14.7 million for the six months ended June 30, 2014, compared to a depreciation of $26.0 million in the prior year period.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful transition to the NYSE, which provided enhanced liquidity for stockholders. The Company continues to focus on generating current income and long-term capital appreciation through direct originations and opportunistic investments. The gross portfolio yield prior to leverage was 9.9% as of June 30, 2014.
Distributions: The Company declared a regular monthly cash distribution of $0.07425 per share and a special cash distribution of $0.10 per share in July 2014. Distributions for the six months ended June 30, 2014, were funded entirely by net investment income.
Risks and Contingencies:
- Leverage Risk: The Company utilizes significant leverage (approximately 78% of assets financed by debt). Rising interest rates could increase interest expense and reduce net investment income.
- Valuation Risk: Approximately 99.9% of the portfolio is classified as Level 3 (unobservable inputs), requiring significant management judgment in fair value determinations.
- Covenant Compliance: The Company must maintain specific asset coverage ratios and minimum stockholders' equity levels under its credit facilities. Failure to comply could result in defaults.
- Expense Reimbursement: The Company has an expense reimbursement agreement with Franklin Square Holdings to ensure distributions are not paid from capital, though there is no assurance this will continue indefinitely.
Investor Verification Checklist
- Debt Maturities: Verify the maturity dates of the Arch Street ($350M), Broad Street ($125M), and JPM ($950M) facilities, noting that Arch Street was repaid in July 2014 using proceeds from a new $400M note issuance.
- Incentive Fee Accruals: Review the $37.6 million accrued capital gains incentive fee, noting that a significant portion ($31.7 million) is based on unrealized gains and is not payable until realized.
- Portfolio Concentration: Assess the concentration in the top 10 portfolio companies and the 21% allocation to Capital Goods.
- Non-Accrual Status: Confirm the status of the 0.5% of the portfolio on non-accrual status (specifically Allen Systems Group, Inc.).
- Listing Tender Offer Impact: Analyze the dilutive or accretive impact of the share repurchase program and the new distribution reinvestment plan (DRP).