FSK

FS KKR Capital Corp. 10-Q Summary (Period Ended June 30, 2021)

Business Context and Reporting Period

FS KKR Capital Corp. (FSK) is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC). The reporting period covers the three and six months ended June 30, 2021. A material event during this period was the completion of the "2021 Merger" on June 16, 2021, where FSK acquired FS KKR Capital Corp. II (FSKR). The merger was accounted for as an asset acquisition, resulting in the issuance of approximately 161.4 million shares of FSK common stock to former FSKR stockholders.

Key Financial Metrics

Material Changes vs. Prior Period

• Merger Impact: The acquisition of FSKR significantly expanded the portfolio. Total investments at fair value increased from $6,780 million at December 31, 2020, to $14,734 million at June 30, 2021. Debt increased from $3,997 million to $7,720 million, largely due to the assumption of FSKR's debt obligations.
• Profitability: The Company reported a net increase in net assets from operations of $1,064 million for the six months ended June 30, 2021, compared to a net decrease of $758 million in the same period in 2020. This improvement was driven by significant net unrealized appreciation on investments ($929 million in 2021 vs. $(750) million in 2020).
• Share Count: Shares outstanding increased from approximately 123.8 million at December 31, 2020, to 285.1 million at June 30, 2021, primarily due to the merger exchange ratio.
• Portfolio Composition: Senior Secured Loans—First Lien now represent 56.4% of the portfolio (up from 50.9% in 2020), while Software & Services became the largest industry allocation at 15.8%.

Guidance, Outlook, and Risks

• Management Commentary: Management emphasizes a defensive investment approach focused on long-term credit performance. The merger was structured to ensure NAV parity for investors. The Company maintains sufficient liquidity to fund unfunded commitments of approximately $1.76 billion ($951 million debt, $455 million asset-based/other, and $350 million to Credit Opportunities Partners JV).
• Dividends: The Company declared a quarterly cash distribution of $0.65 per share on August 6, 2021, payable in October 2021. For the six months ended June 30, 2021, total distributions were $149 million, fully covered by net investment income.
• Risks:
  • COVID-19: The pandemic continues to negatively impact portfolio company operations, potentially leading to restructuring, reduced income, or impairments.
  • Liquidity and Leverage: The Company utilizes significant leverage (Asset Coverage of 1.99x). Rising interest rates or market disruptions could increase funding costs or limit access to capital markets.
  • Valuation: A significant portion of the portfolio (Level 3 inputs) relies on unobservable inputs and independent valuation firms, introducing subjectivity to fair value measurements.

Key Facts for Investor Verification

• Merger Accounting: Verify the allocation of the $3,650 million purchase price to assets acquired ($7,741 million) and liabilities assumed ($4,091 million), noting the write-off of $19 million in deferred costs and the $26 million mark-to-market gain on FSKR's notes.
• Debt Maturities: Review the maturity schedule of the $7.74 billion debt portfolio, noting significant unsecured notes maturing in 2022 ($695 million) and 2025 ($1,195 million).
• Unfunded Commitments: Confirm the Company's ability to fund $1.76 billion in unfunded commitments, particularly the $350 million commitment to the Credit Opportunities Partners JV (COPJV).
• Level 3 Valuations: Scrutinize the $12,666 million in Level 3 investments, which represent 86% of the total portfolio, and the sensitivity of these valuations to changes in discount rates and EBITDA multiples.
• Subordinated Incentive Fee: Note the accrual of $8 million in subordinated income incentive fees for the six-month period, subject to a 7.0% annualized hurdle rate.