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 company focuses on generating current income and long-term capital appreciation primarily through senior secured loans, second lien loans, and subordinated debt of private middle-market U.S. companies. This report covers the quarterly period ended September 30, 2020.
On June 15, 2020, the company completed a 4-for-1 reverse stock split. All share and per-share data in this filing have been retroactively adjusted to reflect this split.
Key Financial Metrics
| Metric | Q3 2020 (3 Months) | YTD 2020 (9 Months) | YTD 2019 (9 Months) |
|---|---|---|---|
| Total Investment Income | $147 million | $476 million | $593 million |
| Net Investment Income | $78 million | $253 million | $311 million |
| Net Realized Gain (Loss) | $(209) million | $(408) million | $(61) million |
| Net Unrealized Appreciation (Depreciation) | $341 million | $(393) million | $23 million |
| Net Increase (Decrease) in Net Assets | $210 million | $(548) million | $273 million |
| Earnings Per Share (Basic & Diluted) | $1.70 | $(4.40) | $2.09 |
| Net Asset Value (NAV) Per Share | $24.46 | $24.46 | $30.54 (Dec 31, 2019) |
| Total Debt Outstanding | $3,980 million | $3,980 million | $4,195 million (Dec 31, 2019) |
| Asset Coverage Ratio | 176% | 176% | 192% (Dec 31, 2019) |
| Cash and Foreign Currency | $136 million | $136 million | $106 million (Dec 31, 2019) |
Material Changes vs. Prior Period
- Revenue Decline: Total investment income decreased by 26% year-over-year for the nine months ended September 30, 2020 ($476M vs. $593M). This was driven by lower interest income due to the repayment of higher-yielding assets, the decline in LIBOR affecting floating-rate investments, and an increase in non-accrual assets.
- Realized Losses: The company recognized a net realized loss of $408 million for the nine months ended September 30, 2020, compared to a loss of $61 million in the same period in 2019. This was primarily due to sales and repayments of investments at prices below amortized cost.
- Unrealized Volatility: While the nine-month period showed a net unrealized depreciation of $393 million driven by COVID-19 related mark-to-market declines, the third quarter alone saw a significant unrealized appreciation of $341 million. This Q3 improvement was attributed to mark-to-market recoveries on certain assets and the reversal of unrealized losses from restructured troubled investments.
- Expense Reduction: Total operating expenses decreased to $223 million for the nine months ended September 30, 2020, from $282 million in the prior year period. This reduction was largely due to the absence of subordinated income incentive fees in 2020 ($0 vs. $57 million in 2019) as the company did not exceed the hurdle rate.
- Portfolio Composition: The portfolio fair value decreased from $7.36 billion at year-end 2019 to $6.65 billion at September 30, 2020. The percentage of investments on non-accrual status remained stable at 2.8%.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management states that the pandemic has negatively impacted portfolio company operations and is expected to continue doing so. This has led to economic distress, potential restructurings, and limited investment originations. The company cannot fully predict the duration or magnitude of these effects.
- Liquidity and Capital Resources: As of September 30, 2020, the company held $136 million in cash and had $1.1 billion available under financing arrangements. The company maintains sufficient liquidity to fund unfunded commitments totaling approximately $641 million ($311M debt, $212M equity/other, and $118M to a joint venture).
- Distributions: The company declared a quarterly cash distribution of $0.60 per share for the third quarter of 2020. For the nine months ended September 30, 2020, total distributions were $244 million, fully covered by net investment income. The company intends to maintain its quarterly distribution policy, subject to legal restrictions and board discretion.
- Financing: The company issued $250 million of 8.625% Notes due 2025 in April 2020. Asset coverage remains compliant with the 150% requirement under the Investment Company Act of 1940.
Investor Verification Checklist
- Non-Accrual Assets: Verify the specific portfolio companies placed on non-accrual status and the potential for further impairments given the economic environment.
- Realized Loss Drivers: Review the specific transactions contributing to the $408 million net realized loss to understand if they were strategic exits or distressed sales.
- Unrealized Reversals: Scrutinize the $341 million unrealized appreciation in Q3 to determine the sustainability of these mark-to-market improvements versus one-time restructuring reversals.
- Debt Maturity Wall: Assess the maturity profile of the $3.98 billion debt outstanding, particularly the unsecured notes maturing in 2022 and 2024, to evaluate refinancing risks.
- Joint Venture Exposure: Review the performance and capital commitments related to Strategic Credit Opportunities Partners, LLC (SCJV), which represents a significant portion of the portfolio (9.7% by fair value).