FS KKR Capital Corp. (NYSE:FSK) is a leading publicly traded business development company (BDC) focused on providing customized credit solutions to private middle market U.S. companies. The company has delivered a strong start to 2024, reporting net investment income of $0.76 per share and adjusted net investment income of $0.73 per share for the first quarter.

Business Overview

FSK's investment portfolio had a fair value of $14.2 billion as of March 31, 2024, consisting of 205 portfolio companies. The portfolio is well-diversified, with the top 10 holdings representing approximately 20% of the total fair value. The company's investment strategy focuses primarily on senior secured loans and second lien secured loans of private middle market U.S. companies, as well as, to a lesser extent, subordinated loans and certain asset-based financing loans.

During the first quarter of 2024, FSK originated $1.4 billion of new investments, with approximately 75% of the new investments being focused on add-on financings to existing portfolio companies and long-term KKR relationships. The new investments consisted of 69% first lien loans, 3% second lien loans, 3% other senior secured debt, 1% subordinated debt, and 24% asset-based finance investments. The weighted average EBITDA of the new direct lending investments was approximately $243 million, with 5.7x leverage and a 47% equity contribution, all with a weighted average coupon of SOFR plus 570 basis points.

Financials

The company's net asset value as of March 31, 2024 was $24.32 per share. FSK's board of directors has declared a second quarter distribution of $0.70 per share, consisting of a base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. Additionally, the company previously declared a special distribution totaling $0.10 per share, with the first $0.05 per share installment paid in February and the second $0.05 per share installment to be paid later this month. Accounting for the special distribution, FSK's total second quarter distribution will be $0.75 per share.

For the full year 2024, the company expects to deliver a minimum of $2.90 per share in total distributions, which equates to an 11.9% yield on the March 31, 2024 net asset value and an annualized yield of approximately 15% based on the recent share price.

From a financial performance perspective, FSK reported total investment income of $434 million for the first quarter of 2024, a decrease of $13 million compared to the prior quarter. The decrease was primarily due to repayments of higher-yielding positions and the impact of investments placed on nonaccrual during the fourth quarter of 2023. Interest income totaled $350 million, a decrease of $18 million quarter-over-quarter, while dividend and fee income increased by $5 million to $84 million.

Interest expense for the first quarter was $116 million, a decrease of $2 million quarter-over-quarter, with a weighted average cost of debt of 5.4% as of March 31, 2024. Management fees were $55 million, a decrease of $1 million, and incentive fees were $43 million, an increase of $2 million quarter-over-quarter. Other expenses totaled $8 million, a decrease of $2 million.

For the second quarter of 2024, the company expects GAAP net investment income to approximate $0.74 per share and adjusted net investment income to approximate $0.71 per share. Recurring interest income is expected to be approximately $341 million, with recurring dividend income from the joint venture expected to be $52 million and other fee and dividend income expected to be $34 million.

On the expense side, FSK expects management fees to be approximately $55 million, incentive fees to be approximately $42 million, interest expense to be approximately $114 million, and other G&A expenses to be approximately $10 million.

Liquidity

From a liquidity perspective, the company ended the first quarter with approximately $4.2 billion of available liquidity. FSK's gross and net debt to equity levels were 117% and 109%, respectively, at March 31, 2024, compared to 120% and 113% at December 31, 2023. Approximately 65% of the company's drawn balance sheet and 44% of its committed balance sheet was comprised of unsecured debt as of March 31, 2024.

Risks and Challenges

The company's portfolio continues to demonstrate resilience, with the weighted average yield on accruing debt investments at 12.1% as of March 31, 2024, a decrease of 10 basis points compared to December 31, 2023. Non-accruals represented 6.5% of the portfolio on a cost basis and 4.2% on a fair value basis as of the end of the first quarter, compared to 8.9% on a cost basis and 5.5% on a fair value basis at the end of 2023.

During the first quarter, FSK placed one small investment on nonaccrual with a cost and fair value of $21 million and $19 million, respectively. Additionally, the company removed three investments from nonaccrual status with a combined cost and fair value of $395 million and $224 million, respectively. This progress reflects the benefits of KKR Credit's investment platform and the company's fundamental derisking approach.

Outlook

Looking ahead, FSK remains confident in the long-term earnings power of the business, which enables the company to continue providing attractive distributions to shareholders. The private credit markets continue to experience strong tailwinds, and the company believes it is well-positioned to capitalize on these opportunities given its extensive origination capabilities and deep relationships within the middle market.

Conclusion

Overall, FS KKR Capital Corp. has delivered a solid start to 2024, demonstrating the resilience of its portfolio and the strength of its investment strategy. The company's focus on senior secured loans, asset-based finance, and strategic restructurings has positioned it well to navigate the current market environment and continue generating attractive risk-adjusted returns for its shareholders.