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FS-KKR Capital: IIQ 2020 Results – First Look

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This is the first quarter for FSK since the BDC undertook a 4:1 reverse stock split so all the per share numbers are higher. Nonetheless, the data does suggest that the BDC had a so-so second quarter of 2020. First of all, when most of the multi-billion BDCs saw book value per share increase in the quarter as asset values increased thanks to narrower spreads, FSK saw its NAV Per Share drop (4.1%). That include a series of realized losses of ($70mn) on investments gone bad. Likewise, Net Investment Income Per Share – hurt by a lower portfolio yield; the palpable impact of multiple non-accruing loans and a smaller portfolio – dropped (24%). The drop would have been even greater if FSK had paid an incentive fee. We calculate that NIIPS would have been $0.52 in the second quarter versus the $0.62 reported if all compensation had been charged. This is not a good sign for the recently reduced dividend of $0.60 quarterly, which was cut from $0.76 at the beginning of the crisis. Leverage has been reduced in the quarter to 1.35x gross and 1.29x net of cash. (We believe the former number is more useful). Last quarter leverage was at 1.40x gross. Still, our records indicate FSK was targeting debt to equity of 0.95x. If so, that leaves no room for any portfolio growth; rather the opposite.

Another pressure on the balance sheet, leverage and earnings will be credit quality, those realized losses notwithstanding. The 10-Q shows that FSK’s own management believes $2.94bn – or 44.4% of the portfolio is underperforming. That’s a very high percentage and is even slightly higher than last month. We had a quick look down the latest 10-Q’s Statement Of Investments and identified 20 companies (and many more individual loans) on non accrual out of an entire portfolio of 173 companies. None of these metrics augur well and explain why we rate the BDC’s Credit as POOR.

Speaking of ratings, we believe the IIQ 2020 results were FAIR; Liquidity remains GOOD and the Long Term Outlook – for the moment – continues to be POOR.

When we undertake a full Credit Review, we’ll get an ever clearer picture.

For all the First Look reviews of IIQ 2020 BDC results, check out the BDC Data Table. We are constantly adding new updates as results come in and we undertake an initial survey. Besides these reports, we are also filling in NAV Per Share and investment portfolio size data to compare with prior periods; adding company or BDC Credit Reporter generated data on underperforming companies and assets and affirming or amending our earlier assessments of every BDC’s Liquidity, Credit, Dividend and Long Term Outlook.

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