FS KKR Capital (FSK) - 2021 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated financial statements as of June 30, 2021, reflecting significant asset and liability increases due to the FSKR merger Consolidated Balance Sheets Total assets more than doubled to $15.7 billion by June 30, 2021, primarily due to the FSKR merger, with NAV per share rising to $26.84 Consolidated Balance Sheet Highlights (in millions, except per share data) | Metric | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Investments, at fair value | $14,734 | $6,780 | | Total Assets | $15,723 | $7,237 | | Total Liabilities | $8,070 | $4,141 | | Total Stockholders' Equity | $7,653 | $3,096 | | Net Asset Value per Share | $26.84 | $25.02 | - The significant growth in the balance sheet is a direct result of the merger with FSKR, which was completed on June 16, 2021[139] Unaudited Consolidated Statements of Operations Net assets increased by $865 million for Q2 2021, driven by higher investment income and significant net realized and unrealized gains Key Operating Results (in millions) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $206 | $150 | $357 | $329 | | Net Investment Income | $116 | $77 | $194 | $175 | | Total Net Realized and Unrealized Gain (Loss) | $749 | $(132) | $870 | $(933) | | Net Increase (Decrease) in Net Assets | $865 | $(55) | $1,064 | $(758) | Unaudited Consolidated Statements of Changes in Net Assets Net assets increased by $4.56 billion in H1 2021, primarily from capital share transactions related to the FSKR merger and operations Changes in Net Assets for the Six Months Ended June 30 (in millions) | Category | 2021 | 2020 | | :--- | :--- | :--- | | Net Increase (Decrease) from Operations | $1,064 | $(758) | | Net Decrease from Stockholder Distributions | $(149) | $(170) | | Net Increase (Decrease) from Capital Share Transactions | $3,642 | $(47) | | Total Increase (Decrease) in Net Assets | $4,557 | $(975) | | Net Assets at Beginning of Period | $3,096 | $3,866 | | Net Assets at End of Period | $7,653 | $2,891 | Unaudited Consolidated Statements of Cash Flows Net cash provided by operating activities was $544 million in H1 2021, with the FSKR merger involving $7.23 billion in non-cash investment acquisitions Cash Flow Summary for the Six Months Ended June 30 (in millions) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $544 | $477 | | Net Cash Used in Financing Activities | $(236) | $(488) | | Total Increase (Decrease) in Cash | $308 | $(11) | - In connection with the 2021 Merger, the company issued $3.65 billion in common stock, acquired investments with a cost of $7.23 billion, and assumed debt of $3.79 billion, which are treated as non-cash activities[25] Consolidated Schedules of Investments Total investment portfolio fair value reached $14.73 billion by June 30, 2021, heavily weighted towards Senior Secured Loans at 68.8% Investment Portfolio Composition as of June 30, 2021 (in millions) | Investment Type | Fair Value | % of Portfolio | | :--- | :--- | :--- | | Senior Secured Loans—First Lien | $8,316 | 56.4% | | Senior Secured Loans—Second Lien | $1,827 | 12.4% | | Other Senior Secured Debt | $186 | 1.3% | | Subordinated Debt | $99 | 0.7% | | Asset Based Finance | $1,905 | 12.9% | | Credit Opportunities Partners JV, LLC | $1,396 | 9.5% | | Equity/Other | $1,005 | 6.8% | | Total | $14,734 | 100.0% | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies, FSKR merger impact, related-party transactions, portfolio composition, financing, and distributions, highlighting $1.76 billion in unfunded commitments - The merger with FSKR on June 16, 2021, was accounted for as an asset acquisition, with the fair value of consideration allocated to assets acquired and liabilities assumed[341] - The company has significant unfunded commitments totaling $1.76 billion as of June 30, 2021, including $951.2 million in debt investments, $454.7 million in equity/other, and $350.2 million to its Credit Opportunities Partners JV[206][328] - As of June 30, 2021, the company had $7.74 billion in senior securities outstanding and an asset coverage ratio of 199%, compliant with the 150% regulatory requirement[294] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, portfolio activity, and liquidity, highlighting the $14.7 billion portfolio scale post-FSKR merger and $116 million net investment income for Q2 2021 Portfolio and Investment Activity Investment portfolio grew to $14.7 billion across 195 companies by June 30, 2021, largely due to the FSKR merger, with 93.8% directly originated and improved asset quality Portfolio Composition by Fair Value | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Investments (Fair Value) | $14,734M | $6,780M | | Number of Portfolio Companies | 195 | 164 | | % of Direct Originations | 93.8% | 95.1% | | % of Investments on Non-Accrual | 3.0% | 2.5% | Investment Rating Distribution by Fair Value | Investment Rating | % of Portfolio (June 30, 2021) | % of Portfolio (Dec 31, 2020) | | :--- | :--- | :--- | | 1 (Highest Quality) | 74% | 67% | | 2 | 17% | 23% | | 3 | 6% | 5% | | 4 (Lowest Quality) | 3% | 5% | Results of Operations Q2 2021 total investment income rose to $206 million, with net investment income at $116 million, and a net increase in net assets of $865 million driven by unrealized gains Comparison of Q2 2021 vs Q2 2020 (in millions) | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Total Investment Income | $206 | $150 | | Total Operating Expenses | $90 | $73 | | Net Investment Income | $116 | $77 | | Net Realized Gain (Loss) | $51 | $(69) | | Net Unrealized Appreciation (Depreciation) | $698 | $(63) | | Net Increase (Decrease) in Net Assets | $865 | $(55) | - The increase in dividend income was primarily attributed to dividends from the Credit Opportunities Partners JV, LLC and a one-time $20 million dividend from an equity investment[384] - The significant net change in unrealized appreciation was driven by $628 million of appreciation from merger accounting associated with the 2021 Merger[392] Financial Condition, Liquidity and Capital Resources Strong liquidity as of June 30, 2021, with $499 million cash and $2.7 billion available under financing, maintaining a 199% asset coverage ratio Liquidity and Capital Resources as of June 30, 2021 (in millions) | Metric | Amount | | :--- | :--- | | Cash and Foreign Currency | $499 | | Available Borrowings | $2,727 | | Total Debt Outstanding | $7,740 | | Unfunded Commitments (Debt, Equity, JV) | $1,756.1 | - The company's asset coverage ratio was 199% as of June 30, 2021, compliant with the 150% minimum requirement for BDCs[396] Item 3. Quantitative and Qualitative Disclosures About Market Risk Exposed to interest rate and foreign currency risks, with 68.0% of the portfolio in variable-rate debt, a 100 basis point rate increase could decrease annual net interest income by $11 million - As of June 30, 2021, 68.0% of the portfolio's fair value was in variable-rate debt investments, while 9.0% was in fixed-rate debt[435] Interest Rate Sensitivity Analysis (in millions) | Basis Point Change in Interest Rates | Change in Annual Net Interest Income | | :--- | :--- | | Down 15 bps | $4 | | Up 100 bps | $(11) | | Up 300 bps | $111 | | Up 500 bps | $233 | - The company manages foreign currency risk through derivative instruments and by borrowing in foreign currencies[443] As of June 30, 2021, it had $190.7 million in notional foreign currency forward contracts[444] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[446] - No material changes in internal control over financial reporting occurred during the three-month period ended June 30, 2021[448] 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 material legal proceedings being threatened against it - FS KKR Capital Corp reports no material legal proceedings as of the filing date[450] Item 1A. Risk Factors No material changes from prior risk factors, except for a new risk concerning the potential inability to realize anticipated benefits from the 2021 merger with FSKR - A new risk factor has been added regarding the potential failure to realize anticipated benefits from the 2021 Merger with FSKR, including cost savings and successful integration of the investment portfolio[452][453] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Affiliated Purchaser did not purchase any shares of the company's common stock during the six months ended June 30, 2021 - The Affiliated Purchaser, an investment vehicle associated with the Advisor's owners, made no purchases of the company's common stock in the first half of 2021[454] Item 3. Defaults upon Senior Securities Not applicable, the company reports no defaults upon its senior securities Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information Not applicable Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including merger agreements, articles of amendment, indentures, credit agreements, and officer certifications