FS KKR Capital Corp SEC 10-K Report

FS KKR Capital Corp, a leading business development company specializing in debt investments in private U.S. middle-market companies, has released its 2024 10-K report. The report provides a comprehensive overview of the company's financial performance, business operations, strategic initiatives, and the challenges it faces in the current market environment.

Financial Highlights

• Total Investment Income: $1,721 million, reflecting a decrease from $1,830 million in 2023, primarily due to lower interest income and dividend income.
• Net Investment Income: $813 million, a decrease from $892 million in 2023, attributed to lower investment income and higher excise taxes.
• Net Increase (Decrease) in Net Assets Resulting from Operations: $585 million, down from $696 million in 2023, driven by lower net investment income and realized losses.
• Net Realized Gain (Loss) on Investments: $(476) million, compared to $(323) million in 2023, due to realized losses on non-controlled/unaffiliated and controlled/affiliated investments.
• Net Change in Unrealized Appreciation (Depreciation) on Investments: $248 million, an increase from $130 million in 2023, primarily due to improved valuations of certain portfolio companies.
• Net Income Per Share: $2.09, a decrease from $2.48 in 2023, reflecting the overall decrease in net investment income and realized losses.

Business Highlights

• Investment Strategy: The company focuses on debt investments in private U.S. middle-market companies, primarily through senior secured loans and second lien secured loans. The investment approach is defensive, emphasizing long-term credit performance and principal preservation.
• Portfolio Composition: As of December 31, 2024, the investment portfolio primarily consisted of senior secured loans, with a significant portion in first lien loans. The portfolio also includes asset-based finance and equity investments.
• Direct Originations: The company engages in direct originations, negotiating terms such as financial covenants and interest rates. This strategy includes participation in transactions with third parties or banks acting as intermediaries.
• Geographical Performance: The company invests primarily in U.S. companies, focusing on stable enterprises with positive cash flows.
• Operational Performance: The company maintains rigorous portfolio monitoring to anticipate and pre-empt negative credit events, such as insolvency or bankruptcy of portfolio companies.
• Future Outlook: The company plans to continue its focus on middle-market U.S. companies, adapting its investment focus as market conditions evolve. It aims to maintain its qualification as a RIC and BDC, leveraging its management team's expertise.
• Revenue Segments: The company generates revenue primarily from interest income on debt investments, along with fees from commitment, closing, origination, and other services. Dividend income also contributes to total investment income.
• Management and Advisory: The company is externally managed by an adviser, which oversees day-to-day operations, including investment identification, evaluation, and monitoring. The adviser is compensated through management and incentive fees.
• Operational Expenses: Primary expenses include management and incentive fees, interest expenses from financing arrangements, and administrative costs. The company reimburses the adviser for administrative services and related expenses.
• Investment Portfolio Activity: During 2024, the company experienced net portfolio activity with purchases and sales of investments, focusing on senior secured loans and asset-based finance.
• Risk Management: The company uses an investment rating system to monitor portfolio performance, categorizing investments from performing to underperforming based on execution and repayment concerns.

Strategic Initiatives

• Liquidity Management: The company has focused on maintaining a robust liquidity position by managing its cash flows from investment income, principal repayments, and sales of investments. It has also employed leverage strategically, with a reduction in the asset coverage requirement from 200% to 150% effective June 15, 2019, allowing for greater flexibility in capital deployment.
• Capital Management: The company has engaged in several capital management activities, including maintaining a diverse range of financing arrangements such as revolving credit facilities and unsecured notes. As of December 31, 2024, the company had $7.4 billion in senior securities outstanding with an asset coverage of 190%. The company declared regular quarterly distributions totaling $2.90 per share in 2024, reflecting its commitment to returning capital to shareholders. Additionally, the company has not engaged in any stock repurchases in 2024, following a $32 million repurchase in 2023.
• Future Outlook: Looking ahead, the company plans to continue its strategy of leveraging its strong liquidity position to fund new investment opportunities while maintaining its focus on debt reduction. The company has declared a regular quarterly distribution of $0.70 per share for April 2025, indicating its ongoing commitment to shareholder returns. The company also plans to redeem its 8.625% Notes due 2025 in full by March 16, 2025, as part of its debt management strategy.

Challenges and Risks

• Economic and Geopolitical Risks: The company faces several forward-looking risks that could impact its future performance, including changes in the general economy, geopolitical risks, and disruptions due to terrorism, natural disasters, or pandemics.
• Regulatory Risks: The company is exposed to risks from changes in laws or regulations and conditions in its operating areas. Additionally, maintaining its qualification as a RIC and as a BDC poses ongoing challenges.
• Credit Risk: The company's investment strategy focuses on debt investments in middle-market U.S. companies, which exposes it to credit risk, particularly in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of a portfolio company.
• Market Risk: Interest rate risk is a significant concern, as 65.8% of the company's portfolio investments are in variable rate debt. A rise in interest rates could lead to higher interest income but also increase interest expense on floating rate borrowings, potentially reducing net investment income. The company uses interest rate swap strategies to hedge against these risks.
• Foreign Currency Risk: The company holds investments denominated in foreign currencies. Fluctuations in exchange rates could affect the fair value of these investments. The company uses foreign currency forward contracts and cross-currency swaps to manage this risk.
• Risk Management Strategies: The company is actively managing these risks through strategic hedging and maintaining a diversified investment portfolio. However, the inherent uncertainties in the market and regulatory environment continue to pose challenges to its operations and financial performance.

SEC Filing: FS KKR Capital Corp [ FSK ] - 10-K - Feb. 26, 2025