FS KKR Capital (FSK) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements for FS KKR Capital Corp. as of September 30, 2022, including key financial statements and investment schedules Consolidated Balance Sheets Total assets decreased to $16.72 billion and stockholders' equity declined to $7.16 billion, resulting in a NAV per share of $25.30 Consolidated Balance Sheet Summary (in millions, except per share data) | Metric | September 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total investments, at fair value | $15,792 | $16,101 | | Total assets | $16,716 | $17,228 | | Total debt (net) | $9,137 | $9,142 | | Total liabilities | $9,556 | $9,498 | | Total stockholders' equity | $7,160 | $7,730 | | Net asset value per share | $25.30 | $27.17 | Consolidated Statements of Operations Net assets decreased by $127 million in Q3 2022 due to a $343 million loss, while nine-month net investment income rose to $639 million Consolidated Statements of Operations Summary (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $411 | $360 | $1,186 | $717 | | Net expenses | $194 | $159 | $546 | $322 | | Net investment income | $216 | $201 | $639 | $395 | | Total net realized and unrealized gain (loss) | ($343) | $69 | ($611) | $939 | | Net increase (decrease) in net assets | ($127) | $270 | $25 | $1,334 | Per Share Information (Basic and Diluted) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Earnings (Losses) per Share | ($0.45) | $0.95 | $0.09 | $7.13 | Consolidated Statements of Changes in Net Assets Net assets decreased by $570 million to $7.16 billion in the first nine months of 2022, primarily due to distributions and stock repurchases Changes in Net Assets for the Nine Months Ended September 30, 2022 (in millions) | Category | Amount | | :--- | :--- | | Net assets at beginning of period | $7,730 | | Net increase in net assets from operations | $25 | | Distributions to stockholders | ($562) | | Repurchases of common stock | ($33) | | Net assets at end of period | $7,160 | Consolidated Statements of Cash Flows Net cash from operations was $411 million, while financing activities used $522 million, leading to a total cash decrease of $111 million Consolidated Statements of Cash Flows Summary (in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $411 | ($306) | | Net cash provided by (used in) financing activities | ($522) | $356 | | Total increase (decrease) in cash | ($111) | $50 | Consolidated Schedules of Investments Investment portfolio fair value was $15.79 billion, concentrated in Senior Secured Loans (69.8%), with top industries including Software & Services Investment Portfolio Composition by Type (in millions) | Investment Type | Fair Value (Sep 30, 2022) | % of Portfolio | Fair Value (Dec 31, 2021) | % of Portfolio | | :--- | :--- | :--- | :--- | :--- | | Senior Secured Loans—First Lien | $9,781 | 61.9% | $9,765 | 60.7% | | Senior Secured Loans—Second Lien | $1,245 | 7.9% | $1,557 | 9.7% | | Asset Based Finance | $1,826 | 11.6% | $2,245 | 13.9% | | Credit Opportunities Partners JV, LLC | $1,466 | 9.3% | $1,396 | 8.7% | | Equity/Other | $1,109 | 7.0% | $907 | 5.6% | | Other Debt | $365 | 2.3% | $231 | 1.4% | | Total | $15,792 | 100.0% | $16,101 | 100.0% | Top Industry Concentrations by Fair Value (in millions) | Industry Classification | Fair Value (Sep 30, 2022) | % of Portfolio | | :--- | :--- | :--- | | Software & Services | $2,847 | 18.0% | | Capital Goods | $2,224 | 14.1% | | Health Care Equipment & Services | $1,976 | 12.5% | | Commercial & Professional Services | $1,673 | 10.6% | | Credit Opportunities Partners JV, LLC | $1,466 | 9.3% | Notes to Unaudited Consolidated Financial Statements This section details accounting policies, share transactions, related party dealings, distributions, portfolio valuation, and financing arrangements - The company is an externally managed BDC that elected to be treated as a RIC for tax purposes. Its primary investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation[146][147] - On June 16, 2021, the company completed its acquisition of FS KKR Capital Corp. II (FSKR)[149] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses financial performance, portfolio activity, and liquidity, noting a Q3 net decrease in net assets due to unrealized losses Portfolio and Investment Activity Net portfolio dispositions were $44 million in Q3 2022, with the portfolio comprising 195 companies and a weighted average yield of 11.1% Portfolio Investment Activity (in millions) | Period | Purchases | Sales and Repayments | Net Portfolio Activity | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30, 2022 | $907 | ($951) | ($44) | | Nine Months Ended Sep 30, 2022 | $3,779 | ($3,530) | $249 | Portfolio Quality Distribution by Fair Value | Investment Rating | Fair Value (Sep 30, 2022) | % of Portfolio | Fair Value (Dec 31, 2021) | % of Portfolio | | :--- | :--- | :--- | :--- | :--- | | 1 (Highest Quality) | $11,881M | 75% | $12,602M | 78% | | 2 | $3,252M | 21% | $2,468M | 15% | | 3 | $207M | 1% | $748M | 5% | | 4 (Lowest Quality) | $452M | 3% | $283M | 2% | | Total | $15,792M | 100% | $16,101M | 100% | - As of September 30, 2022, 96.6% of the total investment portfolio at fair value consisted of directly originated investments[355] Results of Operations Total investment income rose to $411 million in Q3 2022, but a $451 million unrealized depreciation led to a net decrease in net assets Results of Operations Summary (in millions) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Total investment income | $411 | $360 | | Net operating expenses | $194 | $159 | | Net investment income | $216 | $201 | | Net realized gain (loss) | $63 | $197 | | Net change in unrealized appreciation (depreciation) | ($451) | ($142) | | Net Increase (Decrease) in Net Assets | ($127) | $270 | - The increase in interest income during Q3 2022 was primarily attributed to the rising interest rate environment[361] - The net change in unrealized depreciation during Q3 2022 was driven primarily by a general widening of credit spreads[373] Financial Condition, Liquidity and Capital Resources The company had $266 million in cash and $2.11 billion in available borrowings, with an asset coverage ratio of 178% and $1.97 billion in unfunded commitments - As of September 30, 2022, the company had $266 million in cash and foreign currency and $2,114 million in available borrowings[376] - The company's asset coverage ratio was 178% as of September 30, 2022, exceeding the regulatory requirement of 150%[274][377] - Total unfunded commitments were approximately $1.97 billion, comprising $1,042.4 million in debt, $362.8 million in equity/other, and $560.2 million to the Credit Opportunities Partners JV, LLC[376] Distributions Declared per Share | For the Three Months Ended | Per Share | Total Amount (in millions) | | :--- | :--- | :--- | | Fiscal 2022 | | | | March 31, 2022 | $0.63 | $179 | | June 30, 2022 | $0.68 | $193 | | September 30, 2022 | $0.67 | $190 | | Total | $1.98 | $562 | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company faces interest rate and foreign currency risks, with 70.9% of its portfolio in variable-rate debt and hedging strategies in place - As of September 30, 2022, 70.9% of the investment portfolio at fair value consisted of variable-rate debt investments[407] Interest Rate Sensitivity Analysis (in millions) | Basis Point Change in Interest Rates | Change in Net Interest Income | % Change in Net Interest Income | | :--- | :--- | :--- | | Down 100 bps | ($72) | (6.8)% | | Down 50 bps | ($36) | (3.4)% | | Up 50 bps | $36 | 3.4% | | Up 100 bps | $72 | 6.8% | | Up 200 bps | $144 | 13.6% | - The company uses foreign currency forward contracts and borrows in foreign currencies to hedge against exchange rate movements. As of September 30, 2022, the net contractual amount of foreign currency forward contracts was $192.8 million[415][416] ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[419] - No material changes in internal control over financial reporting occurred during the third quarter of 2022[420] PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is not currently subject to any material legal proceedings, nor is it aware of any threatened against it - The company reports no material legal proceedings as of the filing date[423] ITEM 1A. RISK FACTORS This section highlights a new risk factor concerning the potential material adverse impact of the Russian invasion of Ukraine on the company - A new risk factor has been added regarding the potential negative impact of the conflict between Russia and Ukraine on global markets, economies, and the company's business[425] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company repurchased 1.57 million shares for $33 million, and the board renewed the share repurchase program for up to $54 million - The company repurchased 1,565,083 shares of its common stock for a total of $33 million during the nine months ended September 30, 2022[427] - On October 31, 2022, the board of directors renewed the stock repurchase program, authorizing up to $54 million in additional share repurchases[426] Share Purchases in Q3 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2022 | 241,847 | $20.61 | | August 2022 | 132,479 | $21.97 | | September 2022 | 118,494 | $21.06 | ITEM 5. OTHER INFORMATION Todd C. Builione resigned from the Board of Directors, and Daniel Pietrzak was appointed to fill the vacant seat - Todd C. Builione resigned from the Board of Directors on November 1, 2022[436] - Daniel Pietrzak, the company's CIO and Co-President, was appointed to the Board of Directors, effective November 4, 2022[436][437] ITEM 6. EXHIBITS This section lists all the exhibits filed with the Form 10-Q, including agreements, articles of incorporation, and officer certifications