FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FSIC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Business Model: Externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. middle-market companies.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | As of Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $103.7 million | $308.5 million | — |
| Net Investment Income | $50.6 million | $149.7 million | — |
| Net Increase in Net Assets (Operations) | $85.4 million | $167.2 million | — |
| Earnings Per Share (Basic & Diluted) | $0.35 | $0.68 | — |
| Total Assets | — | — | $4.14 billion |
| Total Investments (Fair Value) | — | — | $3.91 billion |
| Total Liabilities | — | — | $1.82 billion |
| Stockholders' Equity | — | — | $2.32 billion |
| Net Asset Value (NAV) Per Share | — | — | $9.43 |
| Cash and Foreign Currency | — | — | $179.0 million |
| Debt Outstanding | — | — | $1.72 billion |
| Available Borrowing Capacity | — | — | $261.4 million |
Material Changes vs. Prior Period
- Revenue: Total investment income for the nine months ended September 30, 2017, decreased to $308.5 million from $313.8 million in the prior year period. This was primarily due to prepayments of higher-yielding assets. However, fee income increased significantly to $35.3 million (from $21.8 million) due to prepayment and restructuring activity.
- Expenses: Total operating expenses remained relatively flat at $158.8 million for the nine months ended September 30, 2017, compared to $158.1 million in the prior year. Interest expense increased to $58.9 million (from $55.2 million), while subordinated income incentive fees decreased to $37.4 million (from $38.9 million).
- Net Income: Net increase in net assets resulting from operations decreased to $167.2 million for the nine months ended September 30, 2017, compared to $242.4 million in the prior year. This decline was driven by a net realized loss on investments of $133.4 million (compared to a loss of $19.1 million in the prior year) and lower net investment income.
- Portfolio Composition: Senior Secured Loans—First Lien increased to 61% of the portfolio (from 52% in 2016), while Senior Secured Loans—Second Lien decreased to 5% (from 16%).
Guidance, Outlook, and Risks
- Distributions: The company declared a regular quarterly cash distribution of $0.19 per share on November 1, 2017, payable January 3, 2018. For the nine months ended September 30, 2017, total distributions were $163.8 million, fully funded by net investment income.
- Portfolio Quality: As of September 30, 2017, 82% of the portfolio was rated "2" (performing), 11% rated "1" (exceeding expectations), and 1% rated "5" (underperforming with expected loss). Investments on non-accrual status represented 0.3% of the portfolio.
- Liquidity: The company maintains $179.0 million in cash and $261.4 million in available borrowings to fund unfunded commitments of approximately $176.5 million.
- Risks: Key risks include interest rate fluctuations (65.3% of the portfolio is variable rate), credit risk associated with private middle-market companies, and the potential for distributions to exceed earnings (return of capital), though no return of capital occurred in the current period.
Investor Verification Checklist
- Realized Losses: Verify the drivers of the $133.4 million net realized loss on investments for the nine-month period, specifically identifying if losses were concentrated in specific portfolio companies or asset classes.
- Fee Income Sustainability: Assess the sustainability of the increased fee income ($35.3 million), which is transaction-based and dependent on prepayments and restructurings.
- Debt Maturities: Review the maturity schedule of the $1.72 billion in debt, noting significant unsecured notes maturing in 2019 ($400 million) and 2020 ($405 million).
- NAV vs. Market Price: Compare the NAV per share ($9.43) to the market price ($8.45 as of period end) to evaluate the discount at which the stock is trading.
- Unfunded Commitments: Confirm the company's ability to fund the $176.5 million in unfunded debt commitments given current cash and borrowing availability.