8-K: FS KKR Capital Corp. Announces Q4 and Full Year 2023 Results, Declares $0.75 per Share Q1 2024 Distribution

FS KKR Capital Corp. reported its fourth quarter and full year 2023 results, highlighted by a first quarter 2024 distribution of $0.75 per share.

Summary

• FS KKR Capital Corp. announced its financial results for the quarter and year ended December 31, 2023.
• The company declared a first quarter 2024 distribution of $0.70 per share, which combined with a previously declared special distribution of $0.05 per share, totals $0.75 per share.
• Net investment income for the quarter was $0.71 per share, compared to $0.84 per share in the previous quarter.
• Adjusted net investment income for the quarter was $0.75 per share, down from $0.80 per share in the previous quarter.
• The net asset value per share decreased to $24.46 from $24.89 in the previous quarter.
• The company experienced a total net realized and unrealized loss of $0.39 per share for the quarter, compared to a gain of $0.11 per share in the previous quarter.
• For the full year 2023, net investment income was $3.18 per share, up from $3.05 per share in 2022.
• Adjusted net investment income for the year was $3.11 per share, compared to $2.93 per share in 2022.
• The company had a total net realized and unrealized loss of $0.70 per share for the year, compared to a loss of $2.73 per share in 2022.
• The company's net debt to equity ratio was 113% as of December 31, 2023, compared to 110% as of September 30, 2023.
• The total fair value of investments was $14.6 billion, with 66% invested in senior secured securities.
• The weighted average annual yield on accruing debt investments was 12.7%.

Sentiment

Score: 5

Explanation: The document presents mixed results with some positive year-over-year growth but also concerning quarter-over-quarter declines and an increase in non-accrual investments. The forward guidance is cautiously optimistic.

Positives

• The company's net investment income increased year-over-year, reaching $3.18 per share.
• Adjusted net investment income also increased year-over-year, reaching $3.11 per share.
• The company declared a total first quarter distribution of $0.75 per share.
• The company generated an annual return on equity of 10% in 2023.
• The company expects distributions to total a minimum of $2.90 per share in 2024.

Negatives

• Net investment income per share decreased from $0.84 to $0.71 quarter-over-quarter.
• Adjusted net investment income per share decreased from $0.80 to $0.75 quarter-over-quarter.
• The net asset value per share decreased from $24.89 to $24.46 quarter-over-quarter.
• The company experienced a net realized and unrealized loss of $0.39 per share for the quarter.
• Investments on non-accrual status increased to 5.5% of the total investment portfolio at fair value, up from 2.4% in the previous quarter.

Risks

• The company's performance is subject to economic changes, including inflationary pressures and higher interest rates.
• Some portfolio companies experienced challenges during the quarter.
• There are risks associated with possible disruptions in the company's operations or the economy due to terrorism, natural disasters, or pandemics.
• Future changes in laws or regulations could impact the company's performance.
• The price at which shares of common stock may trade on the New York Stock Exchange is a risk factor.

Future Outlook

FSK expects to see an increase in private market transaction activity in 2024 and anticipates distributions to total a minimum of $2.90 per share.

Management Comments

• 2023 was another successful year for FSK as we generated an annual return on equity of 10% and provided shareholders with $2.95 per share of total distributions, said Michael C. Forman, Chief Executive Officer & Chairman.
• These solid results reflect the portfolio rotation work we have accomplished over the last few years.
• While a few of our portfolio companies experienced challenges during the quarter primarily relating to inflationary pressures and the higher interest rate environment, we believe KKRs experienced workout team is well prepared to handle these investments and generate a positive outcome.

Industry Context

This announcement reflects the performance of a business development company (BDC) in the current economic environment, where interest rates and inflation are impacting portfolio companies. The focus on senior secured debt is typical for BDCs seeking to mitigate risk.

Comparison to Industry Standards

• FS KKR Capital Corp.'s net debt to equity ratio of 113% is within the typical range for BDCs, but it is important to compare this to peers such as Ares Capital Corporation (ARCC) and Main Street Capital (MAIN), which may have different leverage profiles.
• The weighted average annual yield on accruing debt investments of 12.7% is competitive within the BDC space, but it is important to consider the risk profile of the underlying investments.
• The increase in non-accrual investments to 5.5% is a concern and should be compared to the industry average and the performance of peers like ARCC and MAIN, which have historically maintained lower non-accrual rates.
• The company's focus on senior secured debt is a common strategy among BDCs, but the specific allocation to different types of debt (first lien, second lien, etc.) should be compared to peers to assess risk and return.

Stakeholder Impact

• Shareholders will receive a total first quarter distribution of $0.75 per share.
• Shareholders should be aware of the decrease in net asset value per share and the increase in non-accrual investments.
• Employees may be impacted by the company's performance and any potential changes in strategy.
• Customers (portfolio companies) may be affected by the company's investment decisions and any changes in lending practices.
• Creditors should be aware of the company's leverage and debt levels.

Next Steps

• The company will host a conference call on February 27, 2024, to discuss the results.
• The company will pay a first quarter distribution of $0.70 per share on or about April 2, 2024.
• The company will pay a special distribution of $0.05 per share on or about May 29, 2024.

Key Dates

Keywords

Business Development Company, BDC, Net Investment Income, Distribution, Senior Secured Debt, Private Middle Market, Non-Accrual Status, Net Asset Value, Leverage, Credit Solutions