FS KKR Capital Corp (FS Investment Corporation) - 10-K Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC), a non-diversified closed-end management investment company organized as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC).
Reporting Period: Fiscal year ended December 31, 2009.
Operations: Commenced operations on January 2, 2009. The company invests primarily in senior secured loans, second lien secured loans, and mezzanine debt of private U.S. companies. It is externally managed by FB Income Advisor, LLC, with GSO / Blackstone Debt Funds Management LLC acting as the investment sub-adviser.
Capital Structure: The company is conducting an ongoing public offering of common stock. As of March 19, 2010, 14,573,225 shares were outstanding. There is no established public market for the shares; liquidity is provided through quarterly tender offers.
Key Financial Metrics
| Metric | Value (in thousands) |
|---|---|
| Total Assets | $110,068 |
| Investment Portfolio (Fair Value) | $100,592 |
| Investment Portfolio (Cost) | $92,317 |
| Net Assets | $93,197 |
| Net Asset Value (NAV) per Share | $9.10 |
| Investment Income | $4,420 |
| Net Investment Income | $2,151 |
| Net Realized Gain | $1,030 |
| Net Unrealized Appreciation | $8,275 |
| Total Net Increase in Net Assets | $11,456 |
| Cash and Cash Equivalents | $9,035 |
| Debt/Leverage | None outstanding as of Dec 31, 2009 (Credit facility established March 2010) |
Portfolio Composition (Fair Value): 46% First Lien Senior Secured, 45% Second Lien Senior Secured, 9% Mezzanine Debt.
Portfolio Yield: Estimated gross annual yield of 13.2% based on purchase price.
Credit Quality: Weighted average credit rating of B3 (Moody's scale).
Material Changes vs. Prior Period
- Operational Status: The company commenced operations in January 2009. The 2008 period reflects only organizational costs and seed capital; therefore, no operational comparison is available for 2008.
- Capital Raised: Raised approximately $93.5 million in gross proceeds during 2009. Total gross proceeds raised since inception (including seed capital) reached approximately $139.0 million by March 2010.
- Profitability: Transitioned from a net loss of $(580) in 2008 (due to organization costs) to a net increase in net assets of $11,456 in 2009.
- Portfolio Growth: Invested $106.1 million in 62 portfolio companies during 2009. Exited positions totaling $11.8 million and received principal repayments of $4.9 million.
- Expense Reimbursement: Received $240,000 in expense reimbursements from sponsor Franklin Square Holdings in 2009 to ensure distributions did not exceed net investment income. No reimbursements were received in the fourth quarter of 2009.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to generate current income and long-term capital appreciation through a defensive investment approach. The company plans to utilize leverage up to 50% of asset value as market conditions permit.
Recent Developments (Post-Period): On March 10, 2010, the company's wholly-owned subsidiary, Broad Street Funding LLC, secured a $140 million revolving credit facility from Deutsche Bank. This facility allows the company to leverage its portfolio to fund new investments.
Distributions: The company declared cash distributions totaling $3.134 million in 2009. Sources included net investment income (61%), capital gains proceeds (31%), and sponsor expense reimbursements (8%). No portion of 2009 distributions was a return of capital.
Risks and Contingencies:
- Liquidity: Shares are not listed on an exchange. Liquidity is limited to quarterly tender offers (capped at 10% of shares outstanding annually) and a potential future liquidity event (listing or liquidation) expected 5-7 years after the offering stage concludes.
- Valuation Uncertainty: The entire portfolio ($100.6 million) is classified as Level 3 fair value (unobservable inputs), creating uncertainty regarding the realized value of assets.
- Regulatory Constraints: As a BDC, the company is subject to asset coverage tests that may limit distributions and borrowing. It is also restricted from co-investing with affiliates without an SEC exemptive order, which is currently being sought.
- Interest Rate Risk: While most investments are floating-rate, rising rates could increase borrowing costs under the new credit facility.
Investor Verification Checklist
- Expense Reimbursement Sustainability: Verify if the company can maintain distributions without the $240,000 sponsor reimbursement received in 2009, as the sponsor has no obligation to continue this support.
- Valuation Methodology: Review the specific inputs used for Level 3 fair value determinations, as 100% of the portfolio relies on unobservable inputs.
- Credit Facility Terms: Examine the covenants of the new $140 million Deutsche Bank facility, specifically the "Super-Collateralization Events" and the $50 million NAV threshold that could trigger defaults.
- Liquidity Event Timeline: Confirm the status of the ongoing public offering to determine when the "offering stage" concludes, which triggers the 5-7 year window for a liquidity event.
- SEC Exemptive Order: Monitor the status of the application for an exemptive order to allow co-investment with GSO affiliates, which could expand the investment universe.