10-Q: FS KKR Capital Corp. Reports Q1 2026 Financials

FS KKR Capital Corp. reported its first quarter 2026 financial results, showing a decrease in net investment income and a net loss for the period.

Summary

• FS KKR Capital Corp. reported a net decrease in net assets resulting from operations of $441 million for the first quarter ended March 31, 2026, compared to a net increase of $120 million for the same period in 2025.
• Net investment income decreased to $117 million for Q1 2026 from $187 million in Q1 2025.
• Total investment income decreased to $304 million from $400 million year-over-year.
• Operating expenses decreased to $187 million from $213 million, primarily due to lower subordinated income incentive fees and management fees.
• The company's total assets were $12,825 million as of March 31, 2026, down from $13,729 million as of December 31, 2025.
• Total liabilities decreased to $7,551 million from $7,880 million over the same period.
• Stockholders' equity decreased to $5,274 million from $5,849 million.
• Net asset value per share of common stock decreased to $18.83 as of March 31, 2026, from $20.89 as of December 31, 2025.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the significant decline in investment income, net loss for the quarter, and decrease in net asset value per share, alongside an increase in non-accrual investments.

Positives

• Operating expenses decreased to $187 million from $213 million year-over-year, primarily due to lower subordinated income incentive fees and management fees.
• The company maintained compliance with all covenants required by its financing arrangements as of March 31, 2026 and December 31, 2025.
• The company has $2,602 million in borrowings available under its financing arrangements as of March 31, 2026, subject to borrowing base and other limitations.

Negatives

• The company reported a net decrease in net assets resulting from operations of $441 million for the first quarter of 2026, a significant decline from a net increase of $120 million in the prior year's first quarter.
• Net investment income decreased by approximately 37.4% to $117 million in Q1 2026 from $187 million in Q1 2025.
• Total investment income decreased by 24% to $304 million in Q1 2026 from $400 million in Q1 2025.
• Net asset value per share decreased to $18.83 as of March 31, 2026, from $20.89 as of December 31, 2025.
• The fair value of the company's investment portfolio decreased to $12,269 million as of March 31, 2026, from $13,009 million as of December 31, 2025.
• The percentage of investments on non-accrual status increased to 4.2% as of March 31, 2026, from 3.4% as of December 31, 2025.
• The weighted average annual yield on accruing debt investments decreased to 9.9% from 10.1%.

Risks

• The company's business, financial condition and results of operations could be materially and adversely affected by changes in the economy, geo-political risks, and risks associated with possible disruption in operations due to terrorism, natural disasters or pandemics.
• Future changes in laws or regulations and conditions in operating areas could impact the company.
• The price at which shares of the company's common stock may trade on the NYSE could be volatile.
• The company's investments are concentrated in certain industries, including Software & Services, Capital Goods, and Health Care Equipment & Services, which could expose it to industry-specific risks.
• The company has significant unfunded commitments to portfolio companies and a joint venture, which could require future capital deployment.
• The company is subject to interest rate risk, and changes in interest rates could adversely affect its net investment income and the fair value of its investments.
• The company is subject to foreign currency risk, and fluctuations in exchange rates could impact the fair value and cash flows of its foreign-denominated investments.

Future Outlook

The company intends to continue its investment strategy focused on generating current income and long-term capital appreciation through debt investments in private U.S. companies. Recent subsequent events include a tender offer for shares, a new share repurchase authorization, and the issuance of convertible preferred stock, indicating strategic moves to manage capital structure and potentially return value to shareholders.

Management Comments

• The Company intends to vigorously defend the putative securities class action complaint filed on May 4, 2026.
• The Company intends to use the proceeds from the sale of Convertible Preferred Stock for general corporate purposes including, without limitation, funding any Company common stock repurchase program or debt repayment.
• The Company Share Repurchase Authorization does not require the Company to repurchase any specific number of shares of the Companys common stock and the Company cannot assure its stockholders that any shares will be repurchured under the program.
• Beginning with the quarter ending June 30, 2026, KKR Credit has agreed to waive 100% of its portion of the subordinated income incentive fee for four consecutive quarters.

Industry Context

StockSavvy.ai notes that FS KKR Capital Corp.'s performance in Q1 2026, particularly the decline in net investment income and increase in non-accrual investments, reflects broader challenges within the BDC sector, potentially influenced by higher interest rates impacting portfolio company performance and increased borrowing costs for the BDC itself. The company's strategic capital raises and repurchase programs are common responses to market conditions and efforts to manage NAV and shareholder returns.

Comparison to Industry Standards

• The weighted average annual yield on accruing debt investments of 9.9% for FS KKR Capital Corp. is generally in line with or slightly below the average yields reported by other BDCs focused on middle-market lending, which typically range from 9% to 11%.
• The company's expense ratios, particularly the ratio of operating expenses to average net assets (3.21% for Q1 2026), are within the typical range for externally managed BDCs, though the incentive fees can significantly impact this ratio depending on performance.
• The increase in investments on non-accrual status to 4.2% is a concern and may be higher than some peers, indicating potential credit quality deterioration in a portion of the portfolio, which is a common challenge in the current economic environment.
• The company's leverage ratio, as indicated by the asset coverage ratio of 172% as of March 31, 2026 (below the 150% regulatory minimum), is a key metric for BDCs. While compliant, a lower ratio indicates higher leverage, which can amplify both gains and losses.

Legal Proceedings

• A putative securities class action complaint was filed on May 4, 2026, in the United States District Court for the Eastern District of Pennsylvania against FS KKR Capital Corp. and certain officers, alleging violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 for materially false and/or misleading statements and/or omissions concerning portfolio valuations, restructuring, and distribution strategy. The company intends to vigorously defend this matter.

Related Party Transactions

• The company pays management fees and subordinated income incentive fees to its Adviser, FS/KKR Advisor, LLC.
• The company reimburses the Adviser for administrative expenses incurred in performing administrative services.
• Certain affiliates of the Adviser committed $100 million to an investment vehicle that may invest in the company's common stock.
• The company has a joint venture, COPJV, with South Carolina Retirement Systems Group Trust (SCRS), where the company acts as administrative agent and earns a fee.

Stakeholder Impact

• Shareholders may experience a decrease in the value of their investment due to the decline in net asset value per share and market price.
• The company's ability to pay future distributions may be impacted by the current financial performance.
• The recent capital raises and share repurchase authorization indicate management's efforts to manage shareholder value and capital structure.
• Lenders and creditors are impacted by the company's leverage levels and compliance with debt covenants, which remain in compliance.

Next Steps

• The company intends to use proceeds from the convertible preferred stock sale for general corporate purposes, including its common stock repurchase program or debt repayment.
• The company plans to enter into a trading plan for open market repurchases of its common stock after the completion of the KKR Tender Offer.
• The company will continue to manage its portfolio and financing arrangements, including the recently amended Senior Secured Revolving Credit Facility.
• The company will monitor its investments and market conditions to manage risks and pursue its investment objectives.

Key Dates

Recommendation

While the company's dividend yield remains attractive, the significant decline in net investment income, net loss for the quarter, and increase in non-accrual investments suggest a cautious approach. The recent capital raises and tender offer indicate strategic management actions, but the overall performance trend warrants a hold rating until a clearer recovery or stabilization is evident.

Keywords

FS KKR Capital Corp., BDC, Business Development Company, SEC Filing, 10-Q, Quarterly Report, Investment Income, Net Asset Value, Leverage, Debt Investments, Senior Secured Loans, Fair Value