FS KKR Capital Corp (FS Investment Corporation) 10-Q Summary
Business Context and Reporting Period
Company: FS Investment Corporation (FS KKR Capital Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Business Model: Externally managed, non-diversified, closed-end business development company (BDC) regulated under the Investment Company Act of 1940. The company invests primarily in senior secured loans, second lien secured loans, and subordinated debt of private U.S. companies to generate current income and long-term capital appreciation.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Investment Income | $42,914 | $9,194 |
| Net Investment Income | $20,323 | $4,250 |
| Net Realized Gain on Investments | $20,023 | $3,089 |
| Net Increase in Net Assets from Operations | $40,142 | $1,152 |
| Net Asset Value (NAV) per Share | $9.64 | $9.42 |
| Total Assets | $1,292,914 | $782,005 |
| Total Stockholders' Equity | $865,329 | $389,232 |
| Cash and Cash Equivalents | $138,098 | $38,790 |
| Debt Outstanding (Credit Facility) | $340,000 | $297,201 |
| Portfolio Turnover | 67.42% | 67.48% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $733.6 million to $1.09 billion, driven by significant capital raises and new investment activity ($940.7 million in purchases vs. $305.3 million in the prior year).
- Revenue Surge: Investment income increased 367% year-over-year, primarily due to portfolio expansion. Net investment income rose 378%.
- Realized Gains: Net realized gains increased to $20.0 million from $3.1 million, reflecting active portfolio management and sales.
- Expense Increase: Total operating expenses rose to $22.6 million from $4.9 million. This includes a significant increase in base management fees ($10.8M vs $2.3M) and interest expense ($4.5M vs $0.9M) due to higher leverage and asset base.
- Leverage: The company fully utilized its $340 million revolving credit facility with Deutsche Bank, up from $297.2 million at year-end 2010.
Guidance, Outlook, and Risks
- Financing Strategy: The company entered a new debt securitization facility with JPMorgan Chase (JPM) in July 2011, providing up to $300 million in liquidity. Additionally, a Total Return Swap (TRS) with Citibank (notional amount $202.4 million) was utilized to gain exposure to loans without direct ownership.
- Distributions: The company declared semi-monthly cash distributions of $0.033594 per share in July and August 2011. Distributions are funded primarily by net investment income (84%) and capital gains (16%).
- Valuation Policy: The company changed its methodology for accruing capital gains incentive fees in late 2010 to include unrealized gains, resulting in higher accrued expenses ($3.9M for the six months ended June 30, 2011) even though fees are only payable on realized gains.
- Risks:
- Counterparty Risk: Exposure to Citibank (TRS) and JPM (securitization facility).
- Liquidity Risk: Dependence on the credit facility and securitization structure; margin calls on the TRS require cash collateral.
- Interest Rate Risk: Significant exposure to floating rate debt (LIBOR-based); rising rates increase interest expense.
- Asset Quality: 1% of the portfolio is rated "5" (underperforming with expected loss of principal), while 91% is rated "2" (performing).
Investor Verification Checklist
- Debt Covenants: Verify compliance with the "Super-Collateralization Events" and borrowing base requirements of the Deutsche Bank credit facility.
- Incentive Fee Accruals: Confirm the impact of the accounting policy change regarding unrealized gains on the capital gains incentive fee payable ($7.97 million accrued as of June 30, 2011).
- TRS Collateral: Monitor the $43.4 million cash collateral posted to Citibank and potential margin call requirements if underlying loan values depreciate.
- Portfolio Concentration: Review the top 10 portfolio companies, which represent a significant portion of the $1.09 billion portfolio.
- Subsequent Financing: Assess the terms and utilization of the new $300 million JPM securitization facility entered into in July 2011.