FS KKR Capital Corp. 10-Q Summary (Q1 2021)
Business Context and Reporting Period
FS KKR Capital Corp. (NYSE: FSK) is an externally managed, non-diversified, closed-end management investment company regulated as a Business Development Company (BDC). The company invests primarily in senior secured loans, second lien secured loans, and subordinated loans of private middle-market U.S. companies. This report covers the quarterly period ended March 31, 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net Investment Income | $78 million ($0.63 per share) | $98 million ($0.78 per share) |
| Total Net Realized and Unrealized Gain/Loss | $121 million | $(801) million |
| Net Increase in Net Assets from Operations | $199 million ($1.61 per share) | $(703) million ($(5.59) per share) |
| Total Assets | $6,964 million | $7,237 million |
| Total Investments (Fair Value) | $6,457 million | $6,780 million |
| Total Debt Outstanding | $3,633 million | $4,042 million |
| Net Asset Value (NAV) per Share | $26.03 | $25.02 |
| Asset Coverage Ratio | 189% | 177% |
| Cash and Foreign Currency | $149 million | $193 million |
Material Changes vs. Prior Period
- Performance Reversal: The company reported a net increase in net assets of $199 million in Q1 2021, a significant improvement from a net decrease of $703 million in Q1 2020. This turnaround was driven primarily by a net change in unrealized appreciation of $242 million in Q1 2021, compared to a depreciation of $695 million in the prior year, reflecting portfolio mark-to-market improvements following the initial COVID-19 market shock.
- Investment Income Decline: Total investment income decreased to $151 million from $179 million year-over-year. This was attributed to the repayment of higher-yielding assets, the impact of declining LIBOR on floating-rate investments, and an increase in non-accrual assets.
- Debt Reduction: Total debt outstanding decreased by approximately $409 million to $3,633 million, improving the asset coverage ratio to 189% from 177%.
- Portfolio Composition: The portfolio consists of 152 portfolio companies. Senior Secured Loans (First Lien) remain the largest asset class at 51.2% of the portfolio fair value.
Guidance, Outlook, and Risks
- Pending Merger: The company is pursuing a merger with FS KKR Capital Corp II (FSKR), anticipated to close in the second or third quarter of 2021. The merger agreement includes a proposed reduction of the income incentive fee rate from 20% to 17.5% and a waiver of $90 million in incentive fees over the first six quarters post-merger.
- Distributions: The board declared a quarterly cash distribution of $0.60 per share for Q1 2021, paid from net investment income. The company intends to maintain its status as a Regulated Investment Company (RIC).
- COVID-19 Impact: Management notes that the pandemic continues to negatively impact portfolio company operations, potentially leading to further restructuring, reduced investment income, or impairments. However, the portfolio has shown resilience with improved valuations in Q1 2021.
- Interest Rate Risk: Approximately 60.1% of the portfolio is variable-rate debt. A rise in interest rates would increase interest income but also increase interest expense on floating-rate borrowings.
Investor Verification Checklist
- Merger Approval: Verify the status of stockholder approvals and regulatory clearances required for the FSKR merger.
- Non-Accrual Assets: Review the specific portfolio companies on non-accrual status (3.6% of portfolio) and the potential for further credit deterioration.
- Debt Maturities: Assess the schedule of debt maturities, particularly the $695 million in notes due in 2022, to evaluate refinancing risks.
- Unfunded Commitments: Confirm the company's liquidity position relative to $523.5 million in total unfunded commitments (debt, equity, and joint venture).
- Fee Structure Changes: Monitor the implementation of the proposed incentive fee reduction and waiver following the merger.