FS KKR Capital Corp (FSK) is a leading business development company (BDC) that has been navigating the dynamic financial markets with unwavering focus and strategic acumen. Established in 2007, the company has carved out a prominent position in the middle-market lending space, providing essential capital to a diverse portfolio of companies across various industries.
Business Overview FS KKR Capital Corp was incorporated under the general corporation laws of the State of Maryland on December 21, 2007, and formally commenced investment operations on January 2, 2009. The company is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940.
FS KKR Capital Corp was formed through the merger of Corporate Capital Trust, Inc. (CCT) and FS KKR Capital Corp. II (FSKR) in June 2021. This merger brought together two leading BDCs managed by FS Investments and KKR Credit, creating one of the largest publicly traded BDCs. Prior to the merger, CCT had been in operation since 2011 and FSKR had been in operation since 2016.
The company has faced various challenges throughout its history. In 2019, FS KKR Capital Corp had to navigate changes to the regulatory environment when the asset coverage requirement applicable to senior securities was reduced from 200% to 150%. The company was also impacted by the COVID-19 pandemic in 2020, which led to increased uncertainty and volatility in its portfolio. Despite these challenges, the company has remained focused on its investment objectives and has continued to grow its portfolio.
FS KKR Capital Corp's investment strategy has evolved over time to adapt to changing market conditions, but has remained centered around generating current income and, to a lesser extent, long-term capital appreciation. The company's portfolio is primarily comprised of investments in senior secured loans and second lien secured loans of private middle market U.S. companies, as well as subordinated loans and certain asset-based financing loans.
Navigating Market Conditions Throughout its history, FS KKR Capital Corp has demonstrated its ability to adapt and thrive in diverse market environments. The company has weathered various economic cycles, geopolitical tensions, and industry-specific challenges, leveraging its deep relationships, robust underwriting processes, and disciplined investment approach to deliver consistent performance.
During the recent period of elevated market volatility and macroeconomic uncertainty, FS KKR Capital Corp has remained steadfast in its commitment to capital preservation and risk management. The company has proactively managed its portfolio, reducing non-accrual investments and maintaining a strong balance sheet to position itself for the evolving landscape.
Operational Highlights As of September 30, 2024, FS KKR Capital Corp's investment portfolio had a fair value of $13.9 billion, consisting of 217 portfolio companies. The company's portfolio is diversified across various industries, with a focus on the upper end of the middle market, as evidenced by a weighted average EBITDA of $239 million for its portfolio companies.
FS KKR Capital Corp's direct origination platform has been a key driver of its success, enabling the company to source and structure attractive investment opportunities. During the nine months ended September 30, 2024, the company deployed $3.8 billion of capital into new investments, maintaining its disciplined approach and prudent risk management.
Financials For the nine months ended September 30, 2024, FS KKR Capital Corp reported net investment income of $642 million, or $2.29 per share. The company's total investment income for the period amounted to $1.31 billion, with interest income accounting for $915 million and fee and dividend income contributing $341 million.
In the most recent quarter, FS KKR Capital Corp reported revenue of $184 million, net income of $147 million, operating cash flow (OCF) of $978 million, and free cash flow (FCF) of $978 million. This represents a year-over-year increase in revenue, net income, OCF, and FCF. The increase can be attributed to strong operating performance and new investments added to the portfolio.
The company's investment portfolio composition as of September 30, 2024, was as follows: - Senior Secured Loans - First Lien: $8.36 billion or 59.9% of the total portfolio at fair value - Senior Secured Loans - Second Lien: $866 million or 6.2% of the total portfolio at fair value - Other Senior Secured Debt: $122 million or 0.9% of the total portfolio at fair value - Subordinated Debt: $221 million or 1.6% of the total portfolio at fair value - Asset Based Finance: $1.99 billion or 14.3% of the total portfolio at fair value - Credit Opportunities Partners JV, LLC: $1.38 billion or 9.9% of the total portfolio at fair value - Equity/Other: $1 billion or 7.2% of the total portfolio at fair value
The weighted average annual yield on accruing debt investments was 11.9% as of September 30, 2024. Additionally, 68.6% of the portfolio investments based on fair value were debt investments paying variable interest rates, while 8.2% were debt investments paying fixed interest rates.
Liquidity FS KKR Capital Corp's balance sheet remains strong, with $4.8 billion in available liquidity as of December 31, 2024. The company's gross debt-to-equity ratio stood at 112%, with approximately 75% of its drawn balance sheet comprising unsecured debt, providing financial flexibility and supporting its investment activities.
As of the most recent quarter, the company had $366 million in cash and cash equivalents and $3.54 billion in available borrowing capacity under its various credit facilities. The company's debt-to-equity ratio was 1.21, current ratio was 1.79, and quick ratio was 1.77.
To finance its investment activities, FSK utilizes a variety of financing arrangements, including: - Senior Secured Revolving Credit Facility: $1.04 billion outstanding, $3.53 billion available as of September 30, 2024 - Various Unsecured Notes: $4.5 billion outstanding with maturities ranging from 2024 to 2029 - Collateralized Loan Obligation (CLO): $249 million outstanding as of September 30, 2024
As of September 30, 2024, the company's asset coverage ratio was 183%, providing significant cushion above the minimum 150% asset coverage requirement for BDCs. The weighted average effective interest rate on the company's borrowings was 5.49% as of the same date.
Guidance and Outlook For the first quarter of 2025, FS KKR Capital Corp expects GAAP net investment income to approximate $0.66 per share and adjusted net investment income to approximate $0.64 per share. The company has also provided guidance for the full year 2025, anticipating total distributions of at least $2.80 per share, comprising $2.56 per share of base distributions and $0.24 per share of supplemental distributions.
It's worth noting that for Q4 2024, FSK had guided for GAAP net investment income of approximately $0.63 per share and adjusted net investment income of approximately $0.68 per share. The company reported actual Q4 2024 GAAP net investment income of $0.61 per share and adjusted net investment income of $0.66 per share, which was slightly below their guidance. The company cited the decline in base rates and some spread compression as factors that contributed to the decrease in net investment income compared to guidance in Q4 2024. FSK also mentioned they had some new investment opportunities that closed after year-end, which impacted the reported financial results.
The company's management team remains cautiously optimistic about the market environment, noting the potential for a continued increase in M&A activity and robust pipeline of investment opportunities. FS KKR Capital Corp's strong liquidity position and focus on credit quality position it well to navigate the evolving landscape and capitalize on compelling investment opportunities.
Risks and Challenges As with any investment, FS KKR Capital Corp faces a variety of risks and challenges. These include interest rate fluctuations, credit risk within its portfolio, regulatory changes, and competition from other capital providers. The company's management team actively monitors these risks and implements strategies to mitigate their impact on the business.
Additionally, the company's performance is susceptible to broader macroeconomic conditions, geopolitical events, and industry-specific developments that could affect the financial health of its portfolio companies. FS KKR Capital Corp's diversified portfolio and disciplined underwriting approach help to manage these risks, but they remain an important consideration for investors.
Industry Trends The business development company (BDC) industry has seen a compound annual growth rate (CAGR) of approximately 8% in assets under management over the past 5 years, driven by increased investor demand for alternative credit strategies. This trend bodes well for FS KKR Capital Corp, as it positions the company to capitalize on the growing interest in BDCs and middle-market lending.
Conclusion FS KKR Capital Corp has demonstrated its ability to navigate the complex financial markets with resilience and strategic vision. The company's diversified portfolio, robust origination platform, and disciplined approach to risk management have enabled it to deliver consistent performance and position itself for continued success.
As the financial landscape continues to evolve, FS KKR Capital Corp remains committed to identifying and capitalizing on compelling investment opportunities that align with its objectives of generating current income and long-term capital appreciation. With its strong balance sheet, experienced management team, and unwavering focus on risk management, the company is well-equipped to navigate the challenges and seize the opportunities that lie ahead.