FS KKR Capital (US:FSK)2025-02-26 21:24Investment Valuation and Fair Value - The fair value of the investment portfolio is determined quarterly, with publicly-traded securities valued at the reported closing price on the valuation date [77]. - For investments without readily available market prices, a multi-step valuation process is conducted each quarter, involving independent third-party pricing services [78]. - The valuation methods for portfolio companies may vary based on industry and company-specific considerations, focusing on enterprise value assessments [82]. - Fair value for fixed income investments is influenced by factors such as prevailing interest rates and the borrower's ability to service its debt [83]. - The Adviser may utilize independent third-party valuation services to ensure fair value determinations are reliable and accurate [81]. - The fair value of investments is subject to uncertainty, as many portfolio investments do not have readily available market prices [221]. Regulatory Compliance and Restrictions - The company is regulated as a Business Development Company (BDC) under the 1940 Act, which imposes certain restrictions on transactions and requires a majority of independent directors [102]. - The company must distribute at least 90% of its investment company taxable income to maintain RIC tax treatment [114]. - The company is subject to a 4% nondeductible federal excise tax on certain undistributed income unless it meets the Excise Tax Avoidance Requirement [116]. - The company must ensure that at least 90% of its gross income is derived from qualifying sources to satisfy the 90% Income Test [120]. - The company is limited in its ability to deduct expenses in excess of its investment company taxable income, which may lead to net operating losses [122]. - The company may utilize subsidiary entities to manage income that could disqualify it as a RIC for failing to satisfy the 90% Income Test [129]. - The company is subject to regulatory restrictions under the 1940 Act and the Code, which may limit its investment flexibility compared to competitors [131]. - The company must satisfy ongoing tests to maintain RIC tax treatment, which may restrict cash distributions necessary for stockholder returns [269]. Investment Strategy and Risks - The Adviser integrates sustainability considerations into the investment decision-making process, assessing potential financial and reputational risks [91]. - The company operates in a highly competitive market for investment opportunities, facing competition from public and private funds, commercial banks, and hedge funds, which may have greater financial resources and lower costs of capital [148]. - The company may incur additional leverage under the Small Business Credit Availability Act, which could enhance its investment capacity [140]. - The company faces risks associated with changes in interest rates, which could adversely affect its investment portfolio [144]. - The company may experience lower short-term returns due to increased competition in the private debt markets, which could impact long-term targets [149]. - The company primarily invests in privately held companies, which presents challenges such as reduced access to capital markets and diminished capital resources [231]. - The company may face risks related to covenants in its debt financing arrangements, which could adversely affect its ability to meet investment obligations [248]. Financial Performance and Distributions - The company must distribute at least 90% of its taxable income to maintain RIC tax treatment, which may limit available capital for investments [180]. - The company may incur excise tax on undistributed income and capital gains, which could affect its distribution strategy [117]. - The company cannot assure stockholders of achieving specified levels of cash distributions, as these depend on various factors including earnings and compliance with regulations [250]. - The company may pay distributions from offering proceeds, borrowings, or asset sales if cash flows from operations are insufficient to fund declared distributions [253]. - The company may experience fluctuations in quarterly results due to investment criteria, interest rates, and general economic conditions [164]. Sustainability and Environmental Risks - Sustainability-related risks may impose additional costs and affect investment returns, depending on the company's exposure to such risks [174]. - The company faces potential declines in investment value due to sustainability-related events, which depend on various factors including market conditions [175]. - Sustainability risk evaluations may rely on third-party data, which can be subjective and may not fully address significant sustainability factors [176]. - Increased attention to sustainability could lead to higher compliance costs and impact operational results if the company fails to meet regulatory requirements [177]. Debt and Leverage - The company is authorized to borrow funds to satisfy distribution requirements, but must meet asset coverage tests before making distributions [126]. - The company may incur debt that ranks equally with or senior to its investments, which could affect repayment in case of insolvency [213]. - A significant portion of the investment portfolio consists of senior secured debt with maturities typically ranging from three to seven years [224]. - The total assets of the company are approximately $19.3 billion, with $11.8 billion in debt outstanding and a weighted average cost of funds of 5.51% [246]. Investment Types and Characteristics - The company may invest in derivatives, exposing it to market, liquidity, and leverage risks, which could magnify potential gains or losses [156]. - The company may invest in structured products, which include collateralized debt obligations and structured notes, but these investments are subject to higher risks of total loss and illiquidity [200]. - The company may invest in middle market companies, which have limited financial resources and may struggle to meet debt obligations, increasing the risk of loss [212]. - The company may invest in private investment funds, exposing it to underlying risks and additional fees, which could adversely affect investment returns [206]. - The company may invest in original issue discount and PIK instruments, which carry specific risks [144]. Market and Economic Conditions - The company may face challenges in meeting the Annual Distribution Requirement due to the illiquid nature of its portfolio [126]. - Inflation could adversely impact the operating results of portfolio companies, affecting their ability to service debt [191]. - The company may face risks associated with international investments, including currency devaluations and adverse changes in foreign laws and regulations [205]. - Rising interest rates could increase the cost of funds, materially reducing net investment income [225]. Corporate Governance and Management - The company has no employees and relies on the Adviser and its affiliates for investment operations, which may impact its ability to achieve investment objectives if the Adviser loses senior management [132][144]. - The company’s board of directors has the authority to change operating policies and strategies without prior notice, which could adversely affect investment outcomes [153]. - Stockholder activism could result in significant costs and divert management's attention, potentially affecting stock price and investment strategy [173]. - Certain provisions in the company's charter and bylaws may deter takeover attempts and impact the value of common stock [256].