8-K: FS KKR Capital Corp. Closes $150M Preferred Stock Sale

FS KKR Capital Corp. announced the closing of its $150 million issuance of cumulative convertible perpetual preferred stock to KKR Alternative Assets L.P., with proceeds for general corporate purposes.

Summary

• FS KKR Capital Corp. (FSK) has successfully closed a $150 million issuance of Cumulative Convertible Perpetual Preferred Stock, Series A, to KKR Alternative Assets L.P.
• The proceeds from this issuance are intended for general corporate purposes, including potential common stock repurchases or debt repayment.
• The Convertible Preferred Stock carries a dividend rate of 5.00% annually in cash, or 7.00% annually in PIK (payment-in-kind) dividends at the Company's option.
• This dividend rate will increase by 1.00% annually after the 5.5-year anniversary of the issue date.
• The Convertible Preferred Stock ranks senior to common stock but junior to existing indebtedness.
• The Company has the option to redeem the preferred stock at any time in cash, and after three years, can redeem it with common stock if certain stock price conditions are met.
• Holders have the option to convert the preferred stock into common stock after six months, and can demand redemption in cash after six years or upon a change of control.
• The initial conversion price is set at $18.83 per share, subject to adjustments and anti-dilution protections.
• Holders of the Convertible Preferred Stock will have voting rights on an as-converted basis and the right to elect two members to the Board of Directors.
• The issuance was conducted under Section 4(a)(2) of the Securities Act of 1933, meaning it was a private placement not requiring registration.
• Additionally, FS/KKR Advisor, LLC has agreed to waive 50% of the subordinated income incentive fee from the fiscal quarter ending June 30, 2026, through the fiscal quarter ending March 31, 2027.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a neutral to slightly positive development. While the capital raise is beneficial, the issuance of preferred stock introduces a layer of complexity and potential future dilution. The advisor's fee waiver is a positive for current shareholders.

Positives

• Secured $150 million in capital through the issuance of preferred stock, strengthening the company's financial position.
• The issuance provides flexibility for general corporate purposes, including potential share repurchases and debt reduction.
• The advisor, FS/KKR Advisor, LLC, has agreed to waive 50% of its subordinated incentive fee for a defined period, potentially improving near-term profitability.
• The Convertible Preferred Stock includes anti-dilution protections for the holder, ensuring the value of their investment is maintained.
• Holders of the preferred stock gain voting rights and the ability to elect board members, aligning their interests with the company's governance.

Negatives

• The issuance of preferred stock represents a new class of equity that ranks senior to common stock, potentially diluting common shareholder value and rights.
• The cumulative nature of dividends means that any missed payments will accrue and must be paid before common stockholders receive dividends or liquidation distributions.
• The increasing dividend rate after 5.5 years could lead to higher future interest expenses for the company.
• The company is restricted from paying dividends on common stock or other junior securities if full cumulative dividends on the preferred stock are not paid or set aside, and if asset coverage requirements are not met.

Risks

• The Convertible Preferred Stock is junior to all existing indebtedness, meaning debt holders have priority in claims.
• The company may face challenges in meeting its obligations related to the preferred stock dividends and redemption if its financial performance deteriorates.
• The terms of the Convertible Preferred Stock, including redemption and conversion options, could lead to future dilution or cash outflows.
• The company's ability to pay dividends on its common stock may be restricted by the terms of the preferred stock.
• The issuance was conducted under Section 4(a)(2) of the Securities Act, meaning the securities were not registered and may be subject to resale restrictions.

Future Outlook

The company intends to use the $150 million in proceeds for general corporate purposes, which may include funding a common stock repurchase program or repaying debt. The terms of the Convertible Preferred Stock include provisions for future redemptions and conversions, which could impact the company's capital structure and equity.

Management Comments

• The Company intends to use the gross proceeds to the Company of $150.0 million from the sale of Convertible Preferred Stock for general corporate purposes including, without limitation, funding any repurchase program relating to shares of the Companys common stock, or debt repayment.
• FS KKR Capital Corp. (NYSE: FSK), or the Company, today announced it has closed its previously announced $150 million issuance of cumulative convertible perpetual preferred stock (the Convertible Preferred Stock), purchased by KKR Alternative Assets L.P., a subsidiary of KKR.
• The Adviser has agreed to waive 50% of the subordinated income incentive fee that the Adviser would otherwise be entitled to receive from the Company under the Investment Advisory Agreement for each fiscal quarter during the Waiver Period.

Industry Context

StockSavvy.ai notes that this transaction reflects a common strategy for Business Development Companies (BDCs) to raise capital through preferred equity, which offers a more stable and less dilutive alternative to common equity issuance, while also providing flexibility for strategic initiatives like share repurchases or debt management. The fee waiver by the advisor is also a strategic move to enhance near-term shareholder value.

Comparison to Industry Standards

• The dividend rate of 5.00% cash or 7.00% PIK on preferred stock is competitive within the BDC industry, where preferred equity typically carries higher yields than senior debt but lower than common equity dividends.
• The conversion price of $18.83, which is noted as the company's NAV per share as of March 31, 2026, is a standard practice for convertible securities, aiming to align conversion value with underlying asset value.
• The inclusion of anti-dilution provisions and registration rights for the investor (KKR Alternative Assets L.P.) is typical for private placements of this nature, ensuring the investor's ability to eventually monetize their investment without undue disadvantage.
• The advisory fee waiver by FS/KKR Advisor, LLC is a positive signal to shareholders, demonstrating alignment of interests and a focus on enhancing returns during the specified period, a practice seen in other BDCs when market conditions or strategic objectives warrant.

Corporate Governance

Related Party Transactions

• The issuance of $150 million in Cumulative Convertible Perpetual Preferred Stock was made to KKR Alternative Assets L.P., an affiliate of KKR, which is also associated with the investment advisor, FS/KKR Advisor, LLC.
• FS/KKR Advisor, LLC, the investment advisor, has agreed to waive 50% of its subordinated income incentive fee for a specified period.

Stakeholder Impact

• Shareholders: Potential dilution from preferred stock issuance, but also potential benefit from share repurchases funded by the proceeds. The fee waiver by the advisor may improve near-term profitability.
• Creditors: The preferred stock ranks junior to existing indebtedness, meaning creditors' claims remain senior.
• Investment Advisor (FS/KKR Advisor, LLC): Will receive 50% less in subordinated incentive fees during the waiver period, impacting its revenue from FSK.

Next Steps

• The company will utilize the $150 million in proceeds for general corporate purposes, including potential common stock repurchases or debt repayment.
• The company must maintain a continuously effective shelf registration statement on Form N-2 for the Registrable Securities from December 29, 2026, until the Purchaser has sold all Registrable Securities.
• The advisor's fee waiver will be in effect from the fiscal quarter ending June 30, 2026, through the fiscal quarter ending March 31, 2027.

Key Dates

Recommendation

The company has successfully raised significant capital, which can be used strategically for share repurchases or debt reduction. However, the issuance of preferred stock introduces a new layer of capital with specific rights and potential future dilution. The advisor's fee waiver is a positive, but the overall impact on common shareholder value requires further monitoring of the company's execution of its strategic plans and the performance of its investments.

Keywords

FS KKR Capital Corp, FSK, Preferred Stock, Convertible Preferred Stock, KKR Alternative Assets L.P., Capital Raise, BDC, Investment Advisory Agreement, Fee Waiver, Form 8-K