8-K: FS KKR Capital Secures New $400 Million Revolving Credit Facility for Portfolio Investments

FS KKR Capital Corp.'s wholly-owned subsidiary, Callowhill Street Funding LLC, has entered into a new $400 million revolving credit facility with Canadian Imperial Bank of Commerce to finance eligible loan asset acquisitions and manage liquidity.

Summary

• Callowhill Street Funding LLC, a wholly-owned special purpose financing subsidiary of FS KKR Capital Corp. (FSK), entered into a new revolving credit facility for up to $400,000,000.
• The facility, with Canadian Imperial Bank of Commerce (CIBC) as administrative agent, has a revolving period ending on June 2, 2028, allowing for borrowing, repayment, and re-borrowing of advances.
• All amounts borrowed under the facility will mature and become due and payable on June 3, 2030.
• Interest accrues at a spread of 1.75% per annum plus a benchmark rate, which can be Daily Simple SOFR or Term SOFR for USD borrowings, Daily Simple SONIA for Sterling, BBSY for Australian Dollars, and Term CORRA for Canadian Dollars.
• A non-usage fee of 0.50% per annum will be paid on the unused facility amount, calculated daily after the three-month anniversary of the closing date, based on the positive difference between aggregate commitments and the greater of advances outstanding or minimum utilization.
• Callowhill's obligations are secured by a first priority security interest in substantially all of its assets, including its portfolio of loans and debt securities.
• The obligations under the facility are non-recourse to FS KKR Capital Corp., with the company's exposure limited to the value of its investment in Callowhill and Callowhill's equity.
• The facility is subject to customary conditions, including maintaining a required borrowing base and compliance with various covenants and reporting requirements.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. The new credit facility provides significant and flexible financing, which is crucial for a BDC's operations. The non-recourse nature to the parent company is a positive risk management aspect. While there are standard fees and covenants, they appear to be within normal industry expectations, indicating a stable and supportive financing environment for the company's investment strategy.

Positives

• The establishment of a new $400,000,000 revolving credit facility provides significant liquidity and financing capacity for Callowhill Street Funding LLC to acquire eligible loan assets.
• The non-recourse nature of the facility to FS KKR Capital Corp. limits the parent company's direct exposure, enhancing its financial risk management.
• The ability to borrow, repay, and re-borrow advances during the revolving period offers flexibility in managing the portfolio and funding new investments.
• The facility allows for financing in multiple currencies (USD, Sterling, Australian Dollars, Canadian Dollars), providing currency diversification for asset acquisition.

Negatives

• A non-usage fee of 0.50% per annum is applicable on the unused portion of the facility, which could incur costs if the facility is not fully utilized.
• The facility is subject to various conditions, covenants, and reporting requirements, which could lead to events of default if not strictly adhered to.
• A Make-Whole Premium of 1.00% is payable if the agreement is terminated or the maximum facility amount is permanently reduced prior to the one-year anniversary of the Closing Date, unless specific exceptions apply.

Risks

• **Borrowing Base Deficiency**: Failure to maintain the required borrowing base could trigger a deficiency, requiring the borrower to deposit cash, repay advances, or sell/pledge additional assets within a short cure period (3 business days, or 12 business days with an Equity Cure Notice).
• **Currency Asset Amount Shortfall**: If advances in a specific currency exceed the corresponding currency asset amount by more than $5,000,000, the borrower must convert advances to Dollars or other available currencies to cure the shortfall within 5-8 business days.
• **Commitment Excess**: If outstanding advances exceed the maximum facility amount by 5% or more, the borrower must eliminate the excess within 12 business days by depositing cash, repaying advances, or an equity cure.
• **Interest Rate Fluctuations**: Borrowings accrue interest at a spread over variable benchmark rates (SOFR, SONIA, BBSY, CORRA), exposing the borrower to interest rate risk.
• **Market Value Declines**: The value of collateral (loan assets) is subject to market fluctuations, which could impact the borrowing base and trigger deficiencies.
• **Servicer Termination Events**: Certain events, including bankruptcy, material misrepresentations, or failure to perform duties by the Servicer (FS KKR Capital Corp.), could lead to a Servicer Termination Event, potentially impacting the facility.
• **Change of Control Event**: A change in ownership or control of the Transferor or Servicer, or the imposition of certain liens on the Borrower's equity, could constitute an event of default.
• **Compliance with Laws**: Non-compliance with applicable laws, including anti-money laundering, anti-corruption, and sanctions laws, could lead to adverse effects or events of default.
• **Litigation and Administrative Proceedings**: Material litigation or administrative proceedings against the Borrower, Transferor, or Servicer could have a Material Adverse Effect on the company or the facility.

Future Outlook

The revolving credit facility provides FS KKR Capital Corp. with a flexible and substantial financing mechanism to continue its strategy of acquiring eligible loan assets and managing its investment portfolio through its special purpose subsidiary, Callowhill Street Funding LLC, for the next three years, with a final maturity in 2030.

Management Comments

• Stephen Sypherd, General Counsel, signed the 8-K filing on behalf of FS KKR Capital Corp.
• William Goebel, Chief Financial Officer and Treasurer, signed the Loan and Servicing Agreement on behalf of Callowhill Street Funding LLC.
• William Goebel, Chief Accounting Officer, signed the Loan and Servicing Agreement on behalf of FS KKR Capital Corp. as Servicer and Transferor.

Industry Context

This new revolving credit facility is a standard financing tool for Business Development Companies (BDCs) like FS KKR Capital Corp. It provides access to capital for originating and acquiring middle-market loans and other debt securities, which is central to the BDC business model. The multi-currency capability reflects the increasing globalization of private credit markets. The non-recourse structure to the parent company is a common risk mitigation strategy in structured finance, aligning with industry practices for special purpose vehicles.

Comparison to Industry Standards

• The $400 million facility size is substantial and comparable to financing lines secured by other large BDCs for their investment activities, providing ample capacity for portfolio growth.
• The interest rate structure (benchmark rate + 1.75% spread) is in line with current market conditions for secured revolving credit facilities in the private credit sector, reflecting prevailing liquidity and credit risk premiums.
• The non-usage fee of 0.50% is a common feature in such facilities, incentivizing efficient capital deployment while compensating lenders for committed but undrawn capital.
• The collateral quality tests, such as Weighted Average Spread (>= 4.00%) and Weighted Average Life (<= 7.0 years, or 5.0 years), are typical metrics used in structured finance to ensure the quality and liquidity of the underlying loan portfolio supporting the facility.
• The Portfolio Interest Coverage Test (>= 1.30:1.00) is a standard financial covenant designed to ensure sufficient cash flow from the portfolio to cover interest payments on the facility, comparable to benchmarks seen in similar BDC financing arrangements.
• The non-recourse nature to the parent company (FS KKR Capital Corp.) is a standard and favorable structure for BDCs utilizing special purpose vehicles for asset-backed financing, isolating risk to the specific collateral pool.

Corporate Governance

Related Party Transactions

• The facility allows for the sale or substitution of Loan Assets to the Transferor (FS KKR Capital Corp.) or its Affiliates, provided certain conditions are met, including being at arm's-length and for fair market value, except for repurchases or substitutions of Warranty Loan Assets under the Sale Agreement.

Stakeholder Impact

• **Shareholders (FS KKR Capital Corp.)**: The non-recourse nature of the facility limits direct financial risk to the parent company, potentially protecting shareholder value from defaults within the subsidiary's portfolio. It also provides capital for continued investment, which could drive future earnings.
• **Lenders (Canadian Imperial Bank of Commerce and others)**: The facility provides a new revenue stream through interest and fees, secured by a first-priority lien on Callowhill's assets, offering a structured and secured investment opportunity.
• **Employees**: No direct impact on employment is indicated, but a stable financing environment supports the company's overall operations.
• **Customers (Obligors of Loan Assets)**: The facility ensures continued access to capital for the underlying companies that borrow from Callowhill, supporting their growth and operational needs.
• **Suppliers/Creditors**: No direct impact on suppliers or other creditors of FS KKR Capital Corp. is indicated, as the facility is non-recourse to the parent.

Next Steps

• Callowhill Street Funding LLC will utilize the facility to finance the purchase or origination of eligible loan assets.
• The company will continue to comply with ongoing reporting requirements, including monthly servicing reports, borrowing base certificates, and financial statements of the Transferor and Obligors.
• The company will manage its portfolio to ensure compliance with collateral quality tests and borrowing base requirements throughout the revolving and amortization periods.

Key Dates

Keywords

Revolving Credit Facility, Secured Financing, Loan Assets, FS KKR Capital Corp., Callowhill Street Funding LLC, Canadian Imperial Bank of Commerce, SEC Filing, 8-K, Corporate Finance, Debt Facility, Portfolio Financing, Non-Recourse Debt, Borrowing Base, SOFR, SONIA, BBSY, CORRA