FS KKR Capital (US:FSK)2021-11-07 16:00PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for FS KKR Capital Corp as of September 30, 2021, and for the three and nine months then ended, reflecting a significant increase in assets and liabilities primarily due to the FSKR merger in June 2021 Consolidated Balance Sheets As of September 30, 2021, total assets significantly increased to $16.62 billion from $7.24 billion at December 31, 2020, primarily due to the FSKR merger, leading to a rise in total stockholders' equity to $7.74 billion and NAV per share to $27.14 Consolidated Balance Sheet Highlights (in millions, except per share data) | Metric | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Investments, at fair value | $15,824 | $6,780 | | Total Assets | $16,620 | $7,237 | | Total Liabilities | $8,884 | $4,141 | | Total Stockholders' Equity | $7,736 | $3,096 | | Net Asset Value per share | $27.14 | $25.02 | - The substantial increase in assets, liabilities, and equity between December 31, 2020, and September 30, 2021, is primarily attributable to the merger with FSKR, which was completed on June 16, 2021145339 Unaudited Consolidated Statements of Operations For Q3 2021, total investment income was $360 million, resulting in a net increase in net assets of $270 million, while for the nine months ended September 30, 2021, total investment income was $717 million, leading to a net increase in net assets of $1.33 billion, a significant turnaround from the prior year Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $360 | $147 | $717 | $476 | | Net Investment Income | $201 | $78 | $395 | $253 | | Total Net Realized and Unrealized Gain (Loss) | $69 | $132 | $939 | $(801) | | Net Increase (Decrease) in Net Assets | $270 | $210 | $1,334 | $(548) | | Earnings (Losses) per Share | $0.95 | $1.70 | $7.13 | $(4.40) | Unaudited Consolidated Statements of Changes in Net Assets For the nine months ended September 30, 2021, net assets increased by $4.64 billion, driven by a $1.33 billion net increase from operations and a $3.64 billion increase from capital share transactions, primarily the FSKR merger, partially offset by $335 million in distributions Changes in Net Assets for the Nine Months Ended September 30, 2021 (in millions) | Category | Amount | | :--- | :--- | | Net Assets at beginning of period | $3,096 | | Net increase from operations | $1,334 | | Distributions to stockholders | $(335) | | Issuance of common stock (FSKR Merger) | $3,642 | | Repurchases of common stock | $(1) | | Net Assets at end of period | $7,736 | Unaudited Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities was $306 million, while net cash provided by financing activities was $356 million, resulting in a total increase in cash of $50 million for the period Consolidated Cash Flows for the Nine Months Ended September 30 (in millions) | Cash Flow Category | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(306) | $559 | | Net cash provided by (used in) financing activities | $356 | $(529) | | Total increase (decrease) in cash | $50 | $30 | - A significant non-cash activity during the period was the FSKR merger, where the company issued $3.65 billion in common stock to acquire $7.23 billion in investments and assume $3.79 billion in debt28 Consolidated Schedules of Investments As of September 30, 2021, the total investment portfolio had a fair value of $15.82 billion, with Senior Secured First Lien loans comprising the largest portion at 61.2%, and the schedule provides detailed listings of each investment Portfolio Composition by Investment Type (September 30, 2021) | Investment Type | Fair Value (in millions) | Percentage of Portfolio | | :--- | :--- | :--- | | Senior Secured Loans—First Lien | $9,689 | 61.2% | | Senior Secured Loans—Second Lien | $1,669 | 10.6% | | Asset Based Finance | $1,999 | 12.6% | | Credit Opportunities Partners JV, LLC | $1,399 | 8.8% | | Equity/Other | $839 | 5.3% | | Other Debt | $229 | 1.5% | | Total | $15,824 | 100.0% | Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial results, covering the FSKR merger, related party transactions, share repurchase programs, investment portfolio composition, fair value measurements, financing arrangements, and subsequent events Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q3 2021 financial performance, emphasizing the FSKR merger's impact on portfolio size and composition, with 94.9% of the portfolio in directly originated investments and net investment income increasing to $201 million for the quarter - The company's investment strategy focuses on directly originated transactions, which comprised 94.9% of the total portfolio by fair value as of September 30, 2021381 - The acquisition of FSKR on June 16, 2021, significantly impacted the company's financial position and results, leading to a substantial increase in the size of the investment portfolio363 - Management notes that the COVID-19 pandemic has negatively impacted some portfolio companies and may continue to do so, potentially affecting investment income and valuations373374 Portfolio and Investment Activity For the nine months ended September 30, 2021, total investment purchases were $11.76 billion, including $7.23 billion from the FSKR merger, while sales and repayments totaled $3.72 billion, leading to a portfolio fair value of $15.82 billion across 190 companies Portfolio Summary | Metric | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Number of Portfolio Companies | 190 | 164 | | Total Fair Value of Investments | $15,824 million | $6,780 million | | % of Investments on Non-Accrual | 3.7% | 2.5% | | Weighted Avg. Yield on Accruing Debt | 9.1% | 8.8% | - Based on an internal investment rating system, 77% of the portfolio was rated '1' (performing as expected) and 14% was rated '2' (performing, but requires closer monitoring) as of September 30, 2021386 Results of Operations For Q3 2021, total investment income significantly increased to $360 million from $147 million in Q3 2020, primarily due to the larger portfolio post-merger, resulting in net investment income of $201 million and a net increase in net assets from operations of $270 million Results of Operations Comparison (Three Months Ended Sep 30) | Metric (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Total Investment Income | $360 | $147 | | Total Net Expenses | $159 | $69 | | Net Investment Income | $201 | $78 | | Net Realized/Unrealized Gain (Loss) | $69 | $132 | | Net Increase in Net Assets | $270 | $210 | - The increase in investment income was primarily attributed to the larger asset base following the FSKR merger Fee income also rose due to higher structuring and prepayment fees from increased investment activity389390 Financial Condition, Liquidity and Capital Resources As of September 30, 2021, the company maintained strong liquidity with $241 million in cash and $1.92 billion available under financing arrangements, while total outstanding debt was $8.51 billion and the asset coverage ratio stood at 191%, exceeding regulatory requirements Liquidity and Capital Resources (as of September 30, 2021) | Metric | Amount (in millions) | | :--- | :--- | | Cash and Foreign Currency | $241 | | Available Borrowings | $1,921 | | Total Outstanding Debt | $8,511 | | Unfunded Commitments | $2,175.2 | - The company's asset coverage ratio was 191% as of September 30, 2021, comfortably above the required 150% minimum403 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks, primarily interest rate and foreign currency risks, with 69.2% of its portfolio in variable-rate debt, and it uses derivatives and foreign currency borrowings to hedge foreign currency exposure - As of September 30, 2021, 69.2% of the investment portfolio at fair value consisted of variable-rate debt, while 9.3% was fixed-rate debt439 Interest Rate Sensitivity Analysis (Annual Impact in millions) | Basis Point Change in Interest Rates | Change in Net Interest Income | | :--- | :--- | | Up 500 basis points | $230 | | Up 300 basis points | $106 | | Up 100 basis points | $(18) | | Down 13 basis points | $5 | - The company manages foreign currency risk through derivative instruments and by borrowing in foreign currencies As of September 30, 2021, it had $202.7 million in notional foreign currency forward contracts449450 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period452 - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls453 PART II—OTHER INFORMATION 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 against the company as of the filing date456 Risk Factors There have been no material changes from the risk factors previously disclosed in the company's most recent Annual Report on Form 10-K and subsequent quarterly reports - The company states there are no material changes to the risk factors disclosed in its most recent Form 10-K457 Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities, including the activation of a $100 million share repurchase program in September 2021 and an affiliated purchaser's separate $100 million program, under which 589,074 shares were repurchased in Q3 - In November 2020, the board authorized a $100 million stock repurchase program, which became effective in September 2021458 - An affiliated purchaser also began a program in September 2021 to buy up to $100 million of the company's common stock460 Share Repurchases in Q3 2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jul 1 - Jul 31, 2021 | — | $— | | Aug 1 - Aug 31, 2021 | — | $— | | Sep 1 - Sep 30, 2021 | 589,074 | $22.32 | Defaults upon Senior Securities Not applicable Mine Safety Disclosures Not applicable Other Information Not applicable Exhibits This section lists all exhibits filed with the quarterly report, including merger agreements, articles of incorporation, bylaws, indentures for various note offerings, investment advisory and administration agreements, and various credit facility agreements - Key exhibits filed include the Amended and Restated Investment Advisory Agreement dated June 16, 2021, and various supplemental indentures related to recent note offerings469471473