FSK

FS KKR Capital Corp. 10-Q Summary (Period Ended September 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). This report covers the quarterly period ended September 30, 2021. A material event during this period was the completion of the merger with FS KKR Capital Corp. II (FSKR) on June 16, 2021, which significantly expanded the Company's asset base and share count.

Key Financial Metrics

Material Changes vs. Prior Period

• Merger Impact: The 2021 Merger with FSKR resulted in the issuance of approximately 161.4 million shares of common stock. Total investments increased from $6,780 million at December 31, 2020, to $15,824 million at September 30, 2021. Total debt increased from $3,997 million to $8,492 million.
• Investment Income: Total investment income for the nine months ended September 30, 2021, was $717 million, compared to $476 million in the same period in 2020. This increase is primarily attributable to the larger portfolio size post-merger.
• Operating Expenses: Total operating expenses for the nine months ended September 30, 2021, were $337 million, compared to $223 million in the prior year period. Interest expense increased to $158 million from $128 million due to higher leverage levels.
• Realized and Unrealized Gains: The Company reported a total net realized and unrealized gain of $939 million for the nine months ended September 30, 2021, a significant improvement from a net loss of $801 million in the same period in 2020.

Guidance, Outlook, and Risks

• Outlook: The Company's investment objectives remain to generate current income and, to a lesser extent, long-term capital appreciation. The portfolio is primarily comprised of senior secured loans and second lien secured loans of private middle-market U.S. companies.
• Fee Waivers: The Advisor has agreed to waive income incentive fees of $15 million per quarter for the first six full fiscal quarters following the merger (commencing July 1, 2021).
• Subsequent Events: On October 12, 2021, the Company issued $500 million of 1.650% Notes due 2024 and $750 million of 3.125% Notes due 2028. Additionally, the Company announced the full redemption of its 5.000% Notes due 2022.
• Risks: Key risks include the impact of the COVID-19 pandemic, general economic conditions, interest rate fluctuations, and the ability of portfolio companies to service their debt. The Company maintains a significant portion of its portfolio in Level 3 fair value measurements, which rely on unobservable inputs.

Key Facts for Investor Verification

• Merger Accounting: Verify the allocation of the purchase price in the 2021 Merger, specifically the fair value of assets acquired ($7,741 million) versus liabilities assumed ($4,091 million), resulting in a net purchase price of $3,650 million.
• Debt Maturities: Review the maturity schedule of the $8.5 billion in senior securities, noting significant maturities in 2022 (e.g., 4.750% and 5.000% Notes) and the recent refinancing activities.
• Unfunded Commitments: Confirm the Company's liquidity position relative to its $1,313.7 million in unfunded debt commitments and $511.3 million in unfunded asset-based finance/other commitments.
• Non-Accrual Assets: Monitor the level of assets on non-accrual status, which impacts the recognition of interest income and potential future credit losses.
• Distribution Coverage: Assess the sustainability of the $0.65 per share quarterly distribution declared for the third quarter, noting that distributions were fully covered by net investment income for the nine-month period.