FS KKR Capital (US:FSK)2026-02-25 21:40Investment Strategy and Valuation - The Adviser employs an investment rating system on a scale of 1 to 4 to monitor expected returns on portfolio investments [79]. - The quarterly fair valuation process includes delivering updated financial information to an independent third-party pricing service for valuation [84]. - Fair value is determined based on market prices for publicly-traded securities and good faith assessments for non-public securities [82]. - The Adviser utilizes a multi-step valuation process for investments without readily available market quotations, involving internal and external valuation techniques [83]. - The company focuses on investments with attractive exit possibilities, including repayment, IPOs, mergers, or sales [93]. - The Adviser integrates sustainability considerations into the investment decision-making process, assessing potential financial and reputational risks [94]. Fees and Incentives - The base management fee is set at an annual rate of 1.50% of the average weekly value of gross assets, excluding cash and cash equivalents [111]. - The incentive fee consists of components based on a percentage of income and capital gains, allowing for independent payment of each component [113]. - The Adviser may temporarily or permanently waive fees, with any deferred fees being paid without interest [110]. - The subordinated income incentive fee is 17.5% of the Company's pre-incentive fee net investment income for the preceding quarter, subject to a hurdle rate of 1.75% per quarter (7.0% annualized) [114]. - The Adviser will receive a catch-up fee once the pre-incentive fee net investment income exceeds the hurdle rate, until it reaches 2.12% (8.48% annualized) of net assets [114]. - The incentive fee on capital gains is 20% of the Company's realized capital gains, calculated net of all realized capital losses and unrealized capital depreciation [117]. - No subordinated income incentive fee will be payable if the pre-incentive fee net investment income does not exceed the hurdle rate [118]. - The Company will accrue for the incentive fee on capital gains quarterly, including unrealized gains in the calculation [119]. Regulatory and Compliance - The Advisory Agreement was re-approved for an additional one-year term on April 17, 2025, after reviewing the nature and quality of services provided by the Adviser [125]. - The Adviser oversees the Company's day-to-day operations, including accounting, legal services, and investor relations [127]. - The Company reimburses the Adviser for necessary expenses related to administration and operations, reviewed quarterly by the Board [128]. - The Company is regulated as a BDC under the 1940 Act, which imposes restrictions on transactions with affiliates [134]. - The company is subject to reporting and disclosure requirements under the Securities Exchange Act of 1934, including filing quarterly, annual, and current reports [157]. - The company is required to monitor compliance with the Sarbanes-Oxley Act and corporate governance regulations set by the NYSE [158][160]. - The company has no employees and relies on the Adviser and its affiliates for management and oversight of investment operations [179]. Capital Structure and Financing - The company is permitted to issue multiple classes of debt and one class of stock senior to its common stock if its asset coverage is at least 150% immediately after each issuance, increasing the maximum debt to equity ratio from 1.0x to 2.0x [150]. - The company may borrow amounts up to 5% of the value of its total assets for temporary purposes without regard to asset coverage [150]. - The company has established credit facilities and entered into financing arrangements to facilitate investments and timely payment of expenses [145]. - The company may enter into total return swap agreements to add leverage to its portfolio without owning the underlying securities [147]. - The company is allowed to invest in cash equivalents and U.S. government securities as temporary investments pending investment in Qualifying Assets [142]. - The company must provide significant managerial assistance to portfolio companies to count their securities as Qualifying Assets [140]. - The company is subject to restrictions on the issuance of warrants, options, or rights to purchase shares, which cannot exceed 25% of its total outstanding shares [143]. - The company may co-invest in transactions with affiliated entities under certain conditions, ensuring fairness and consistency with its investment objectives [149]. Taxation and Distribution Requirements - The company is subject to a 4% nondeductible federal excise tax on certain undistributed income unless it meets the Annual Distribution Requirement [163]. - To maintain qualification as a RIC, the company must distribute at least 90% of its investment company taxable income each tax year [161]. - The company has previously incurred excise tax on undistributed income and may not always distribute sufficient amounts to avoid this tax [167]. - The company must satisfy the 90% Income Test to qualify as a RIC, deriving at least 90% of its gross income from specified sources [172]. - The company may need to sell assets or raise additional debt to meet distribution requirements, which could occur at non-advantageous times [174]. Interest Rate and Currency Risks - Changes in interest rates can significantly affect the company's net interest income and the value of its investment portfolio [528]. - The company borrows at a floating rate based on benchmark interest rates, with fixed rates for certain notes, including 3.400% Notes due 2026 and 2.625% Notes due 2027 [529]. - A 250 basis point increase in interest rates would result in a $202 million increase in interest income and a $116 million increase in interest expense, leading to an $86 million increase in net interest income, representing a 15.5% change [531]. - The company expects long-term investments to be financed primarily with equity and debt, utilizing interest rate risk management techniques to minimize exposure to interest rate fluctuations [532]. - As of December 31, 2025, the net contractual amount of foreign currency forward contracts totaled $220 million, all related to hedging foreign currency denominated debt investments [538]. - A 10% unfavorable change in foreign currency exchange rates would reduce the fair value of investments denominated in foreign currencies by $79.2 million [535]. - The company has outstanding borrowings in foreign currencies totaling €361 million, £180 million, and AUD3 million under its Senior Secured Revolving Credit Facility [538]. - The company utilizes derivative instruments, including foreign currency forward contracts and cross currency swaps, to manage fluctuations in foreign currency exchange rates [536]. - The company is typically a net receiver of foreign currencies related to international investment positions, benefiting from a weaker U.S. dollar [536]. - Changes in interest rates or hedging transactions could have a material adverse effect on the company's business and financial condition [532]. - The company may face risks regarding portfolio valuation, impacting financial results [539].