FSK

FS KKR Capital Corp. 10-Q Summary (Period Ended June 30, 2022)

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) and taxed as a Regulated Investment Company (RIC). The company focuses on generating current income and long-term capital appreciation through investments in senior secured loans, second lien loans, and other debt instruments of private middle-market U.S. companies. This report covers the quarterly period ended June 30, 2022, and the six-month period ended June 30, 2022.

Key Financial Metrics

Material Changes vs. Prior Period

• Operating Results: Net investment income increased significantly ($423M vs. $194M) primarily due to a larger asset base following the 2021 merger with FS KKR Capital Corp. II (FSKR). However, the net increase in net assets from operations decreased sharply ($152M vs. $1,064M) due to a substantial net unrealized depreciation of $433 million, driven by widening credit spreads, compared to unrealized appreciation in the prior year.
• Portfolio Composition: Total investments at fair value were $16,178 million. Senior Secured Loans (First Lien) comprised 61.9% of the portfolio. The weighted average annual yield on accruing debt investments increased to 9.9% from 9.2% in the prior year.
• Expense Structure: Total operating expenses rose to $382 million from $163 million, reflecting higher management fees and interest expense due to the increased asset and debt base. The company recorded a $30 million incentive fee waiver during the period.
• Share Activity: The company repurchased 1,072,263 shares for $23 million under its share repurchase program. No new shares were issued during the six-month period.

Guidance, Outlook, and Risks

• Management Commentary: Management attributes the unrealized depreciation to general market conditions and widening credit spreads. The company maintains sufficient liquidity ($269 million cash and $1,943 million available borrowings) to fund unfunded commitments of approximately $2.09 billion.
• Distributions: The company declared a quarterly cash distribution of $0.67 per share on August 8, 2022. For the six months ended June 30, 2022, total distributions were $372 million, fully covered by net investment income.
• Risks: Key risks include the potential adverse impact of the Russian invasion of Ukraine on global markets and portfolio companies, rising interest rates affecting fixed-rate investments and borrowing costs, and the continued economic effects of the COVID-19 pandemic. The company holds 2.9% of its portfolio on non-accrual status.
• Financing: The company amended its Senior Secured Revolving Credit Facility in May 2022, increasing commitments to $4.64 billion and extending the maturity to May 2027. It also redeemed its 4.750% Notes due 2022 in April 2022.

Investor Verification Checklist

• Unrealized Depreciation Drivers: Verify the specific portfolio companies contributing most significantly to the $433 million unrealized depreciation to assess credit quality deterioration.
• Non-Accrual Status: Review the list of investments on non-accrual status (2.9% of portfolio) and the company's strategy for restructuring or recovering these assets.
• Interest Rate Sensitivity: Assess the impact of rising interest rates on the company's net investment income, given that 68.4% of debt investments are variable rate but borrowing costs are also rising.
• Unfunded Commitments: Confirm the company's ability to fund $2.09 billion in unfunded commitments without diluting shareholders or breaching asset coverage covenants.
• Fee Waivers: Monitor the duration and terms of the $30 million incentive fee waiver to understand its impact on future expense ratios.