FS KKR Capital Corp (FS Investment Corporation) - 10-Q Summary
Business Context and Reporting Period
FS Investment Corporation (the "Company") is an externally managed, non-diversified closed-end investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The Company commenced operations on January 2, 2009. This report covers the quarterly period ended September 30, 2009. As of November 13, 2009, the Company had 8,787,528 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Investment Income | $1,353 | $2,081 |
| Net Investment Income | $632 | $806 |
| Net Realized Gain | $319 | $678 |
| Net Change in Unrealized Appreciation | $4,331 | $6,503 |
| Net Increase in Net Assets from Operations | $5,282 | $7,987 |
| Earnings Per Share (Basic & Diluted) | $1.02 | $2.82 |
| Total Assets | $64,843 (as of Sep 30, 2009) | |
| Total Investments (Fair Value) | $54,559 (as of Sep 30, 2009) | |
| Cash and Cash Equivalents | $9,742 (as of Sep 30, 2009) | |
| Net Asset Value (NAV) per Share | $9.18 (as of Sep 30, 2009) | |
| Portfolio Yield (Gross Annual) | 14.6% (based on purchase price) |
Debt and Liquidity: The Company reported no borrowings as of September 30, 2009. Total liabilities were $5,315, primarily consisting of payables for investments purchased ($3,817) and stockholder distributions payable ($951). The Company maintains liquidity through cash balances and a continuous public offering.
Material Changes vs. Prior Period
The Company commenced operations on January 2, 2009; therefore, the nine months ended September 30, 2009, represents the first full period of operations. Comparisons to the nine months ended September 30, 2008, are not meaningful as the Company had no investment portfolio or operating income in 2008, only incurring organization costs.
- Portfolio Growth: The Company invested $53.6 million in 46 portfolio companies during the nine months ended September 30, 2009. The portfolio fair value grew from $0 to $54.6 million.
- Profitability: The Company generated a net increase in net assets of $7.99 million for the nine-month period, compared to a net decrease of $0.46 million in the prior year period (which consisted solely of organization costs).
- Capital Raising: Gross proceeds from the sale of common stock totaled approximately $81.5 million through November 13, 2009.
Guidance, Outlook, and Risks
Management Commentary: Management notes that global credit markets have shown signs of improvement since March 2009, though economic activity remains subdued. The Company's unrealized appreciation was driven by a general increase in prices for senior secured debt. The Company intends to maintain its RIC status by distributing at least 90% of its investment company taxable income.
Expense Reimbursement: The Company's affiliate, Franklin Square Holdings, agreed to reimburse expenses to ensure distributions do not represent a return of capital. Reimbursements totaled $240,000 for the nine months ended September 30, 2009. There is no assurance this will continue indefinitely.
Risks and Contingencies:
- Market Risk: The Company is subject to interest rate risk. While most investments are variable-rate, rising rates could increase borrowing costs if leverage is utilized.
- Valuation Risk: All investments are classified as Level 3 (unobservable inputs) due to the private nature of the market. Valuations are determined in good faith by the Board of Directors.
- Distribution Risk: Distributions may exceed net investment income, potentially resulting in a return of capital. The Company may fund distributions from offering proceeds or borrowings.
- Leverage: The Company is in discussions regarding a leverage facility but has not yet secured one. There is no assurance leverage will be obtained.
Investor Verification Checklist
- Expense Reimbursement Sustainability: Verify the duration and conditions under which Franklin Square Holdings will continue to reimburse operating expenses to support distributions.
- Portfolio Valuation Methodology: Review the Board's process for determining fair value of Level 3 assets, given the lack of active market prices.
- Distribution Sources: Confirm the proportion of distributions funded by net investment income versus capital gains or offering proceeds to assess the sustainability of the yield.
- Leverage Plans: Monitor progress on securing a leverage facility and the associated terms, as this will impact future returns and risk profile.
- Offering Price vs. NAV: Note the recent increase in the public offering price to $10.40 to ensure it remains above the Net Asset Value per share ($9.18).