FS KKR Capital (US:FSK)2021-02-28 16:00Valuation and Fair Value Measurement - The Advisor employs a 1 to 4 investment rating system to assess expected returns on portfolio investments [78]. - The net asset value of the investment portfolio is determined quarterly, with fair value assessed based on various inputs including recent financial statements and independent valuations [79]. - Fair value measurements are guided by ASC Topic 820, which establishes a three-tier hierarchy prioritizing observable inputs [80]. - A multi-step valuation process is conducted quarterly for investments without readily available market quotations, involving detailed analyses and independent third-party evaluations [81]. - The fair value of fixed income investments is influenced by factors such as prevailing interest rates and the borrower's ability to service debt [84]. - Equity interests in portfolio companies are valued based on multiples of EBITDA, cash flows, and other financial metrics, with adjustments made for specific circumstances [86]. - The Advisor and independent valuation services consider private M&A statistics and public trading multiples in determining fair value [87]. - The board of directors is responsible for approving fair valuations based on recommendations from the valuation committee and the Advisor [90]. - Fair value determinations may differ materially from actual realizable values, potentially causing net asset value to understate or overstate the true value of investments [220]. - The investment portfolio is primarily recorded at fair value, leading to uncertainty in the valuation of portfolio investments due to the lack of a public market for privately held companies [219]. Regulatory Compliance and Taxation - The company is regulated as a BDC under the 1940 Act, which imposes restrictions on transactions and requires a majority of independent directors [102]. - The company must distribute at least 90% of its investment company taxable income each tax year to maintain its RIC status, which generally includes net ordinary income and excess short-term capital gains [114]. - The company is subject to a 4% nondeductible federal excise tax on certain undistributed income unless it meets specific distribution requirements [116]. - The company must ensure that at least 50% of its assets consist of cash, U.S. government securities, and other qualifying securities to satisfy diversification requirements [127]. - The company must distribute at least 90% of its net ordinary income and net short-term capital gain to satisfy the Annual Distribution Requirement to maintain RIC status [276]. - The company is subject to a 4% nondeductible U.S. federal excise tax if it does not meet certain minimum distribution requirements on a calendar year basis [276]. - The company must earn at least 90% of its gross income from dividends, interest, and gains from the sale of securities to satisfy the 90% Income Test for RIC qualification [276]. - The company must meet specific asset diversification requirements, including that at least 50% of its assets consist of cash, U.S. government securities, and other RICs [276]. - The company may face risks related to corporate-level income tax if it fails to qualify as a RIC under Subchapter M of the Code [274]. Investment Strategy and Risks - Managerial assistance is provided to portfolio companies, which may include operational monitoring and financial guidance [91]. - The company competes with other BDCs, investment funds, and traditional financial services companies for investment opportunities [131]. - The advisor's limited experience as an investment adviser to a BDC may hinder the company's ability to achieve its investment objectives [153]. - The company may face significant risks related to compliance with regulations applicable to BDCs and RICs, which could affect its ability to raise capital [146]. - The company’s investment strategy may be adversely affected by the inability to maintain relationships with private equity sponsors and banks, impacting growth opportunities [154]. - The competitive pressures in the private debt markets could lead to lower short-term returns compared to long-term targets [156]. - The company may face challenges in obtaining debt or equity financing on acceptable terms, adversely affecting its ability to acquire investments and expand operations [184]. - The company may incur additional leverage under the SBCA Act, which could impact its operational flexibility [142]. - The company may face conflicts of interest due to compensation arrangements with the Advisor, potentially leading to riskier investments [174]. - The Advisor may receive incentive fees based on accrued income that has not yet been collected, impacting financial results [175]. - The company may need to periodically access capital markets to fund new investments, which could limit investment opportunities compared to other companies [186]. - The company may face liquidity risks from investments in private investment funds, which may not provide the required liquidity [208]. - The company may acquire unsecured debt investments, which do not benefit from collateral and may rank equally with other creditors' claims in the event of liquidation [214]. - The company may invest in non-U.S. securities, exposing it to additional risks such as political and economic developments [196]. - The company may invest in structured products, which are subject to higher risks of total loss and may be illiquid [198]. - Investments in below investment grade securities, often referred to as "junk," carry predominantly speculative characteristics and may be difficult to value and illiquid [200][201]. - The company may face significant risks from political, economic, and legal instability in countries where it invests, potentially leading to nationalization or expropriation of assets [203]. - The company relies on information from managers of private investment funds for valuation, which may lead to inaccurate valuations affecting the value of its common stock [206]. - Investments in middle market companies may involve risks such as limited financial resources and less predictable operating results, which could adversely affect the company's operating results [210]. - The company may not control most of its portfolio companies, leading to risks associated with business decisions made by those companies that may not align with the company's interests [217]. - The company may face challenges in meeting the Annual Distribution Requirement due to the illiquid nature of its portfolio [128]. Financial Performance and Market Conditions - The company has total assets of $8.8 billion and $5.1 billion in outstanding debt, with a weighted average cost of funds of 3.71% [250]. - The corresponding return to stockholders could range from (34.49)% to 22.28% based on various assumed returns on the portfolio [252]. - The company may need to achieve an annual return of approximately 2.15% to cover interest payments on its outstanding debt [252]. - There are financial and operational covenants in the company's debt financing arrangements that must be maintained, including asset coverage and minimum stockholders' equity [253]. - Failure to comply with these covenants could lead to defaults, potentially forcing the company to liquidate investments at unfavorable times [254]. - The company may pay distributions from offering proceeds, borrowings, or asset sales if cash flows from operations are insufficient [259]. - Stockholders may experience dilution if the company issues additional shares, which could reduce the overall value of their investment [260]. - The company is authorized to issue up to 750 million shares of common stock, which could lead to further dilution for existing stockholders [261]. - Distributions may exceed earnings, resulting in a return of capital to stockholders, which lowers their tax basis in shares [257]. - The company's shares may trade at a discount to net asset value, affecting the ability to issue additional shares without stockholder approval [258]. - The net asset value of the company's common stock may fluctuate significantly due to factors such as changes in regulatory policies, loss of RIC or BDC status, and variations in operating results [265]. - The company has obtained stockholder approval to issue shares of common stock at prices below the then-current net asset value, which could materially dilute stockholders' interests [273]. - The issuance of preferred stock, debt securities, or convertible debt may increase the volatility of the net asset value and market value of the company's common stock [268]. - The company may need to liquidate investments to fund redemptions of preferred stock or debt securities, which could lead to substantial losses [271]. Operational and Management Risks - The company has no employees and relies on the advisor for investment operations, which poses risks if the advisor loses senior management [149]. - The board of directors has the authority to change operating policies and strategies without prior notice, which could adversely affect business and stockholder interests [161]. - Changes in laws or regulations could require alterations to business practices, potentially impacting operations and financial condition [162]. - Compliance with the Sarbanes-Oxley Act incurs significant expenses, which may negatively impact financial performance and distributions [167]. - Quarterly results may fluctuate due to various factors, including investment opportunities and general economic conditions [168]. - Cybersecurity risks could compromise business operations and lead to significant losses or reputational damage [169]. - The Advisor's liability is limited under investment advisory agreements, which may lead to riskier actions on behalf of the company [181]. - The company may use structured financial instruments for hedging, which could be costly and may not effectively reduce risks, potentially impacting cash available for debt servicing or distributions [209]. - An increase in interest rates could significantly reduce net investment income and increase the cost of financing, adversely affecting investment objectives and returns [221][223]. - The company has structured most debt investments with floating interest rates to mitigate exposure to rising interest rates, although this strategy may not fully protect against risks [225]. - Portfolio companies may be highly leveraged, which could impair their ability to finance operations and respond to changing economic conditions [232]. - Investments may include original issue discount and PIK instruments, which carry higher credit risks and may lead to unreliable valuations [239][240]. - Prepayments of debt investments by portfolio companies could adversely impact results of operations and reduce return on equity [238]. - The transition from LIBOR to alternative reference rates poses uncertainties that could materially affect the company's financial condition and results of operations [226][227]. - The lack of liquidity in certain investments may hinder the ability to sell them at favorable prices, potentially leading to losses [235].