KBRA Assigns Ratings to FS KKR Capital Corp.'s $600 Million Senior Unsecured Notes Due 2029

KBRA assigns a rating of BBB to FS KKR Capital Corp.'s (“FSK” or “the company”) $600 million, 6.875% senior unsecured notes due August 15, 2029. The rating Outlook is Stable. The proceeds will be used for general corporate purposes and for repayment of existing indebtedness.

Key Credit Considerations

The ratings and Stable Outlook are supported by FS KKR Capital Corp.’s ties to KKR’s $578 billion AUM investment platform, including a $232 billion credit platform (“KKR Credit”) that provides SEC exemptive relief to co-invest among affiliated KKR Credit companies along with the credit platform's solid resources, deep industry relationships, and highly regarded advisory teams that provide sourcing of investments. As the second largest publicly traded BDC, FSK had a diversified $14.2 billion investment portfolio at fair value, comprised of 205 portfolio companies across 23 sectors, exclusive of investments in JVs, mostly in first lien senior secured (57%) and first priority asset-based finance (“ABF”) (15%) to upper-middle market companies as of March 31, 2024. The top four portfolio sectors are Software & Services (18%), Capital Goods (15%), Commercial & Professional Service (15%), and Health Care Equipment & Services (13%). Also supporting the ratings is the company's solid access to the capital markets with a diversified funding mix of secured bank facilities, unsecured senior debt, and CLOs, enhanced by its affiliation with the larger KKR Credit platform. The company's liquidity is sufficient with $3.6 billion of bank line availability, $234 million of cash set against $3.1 billion of unsecured debt maturities within two years, and $2.3 billion of unfunded commitment,s of which the majority is subject to performance tests and/or the approval of FS/KKR Advisor, LLC ("the Advisor"). At 1Q24, the ratio of unsecured debt to total debt outstanding was high at approximately 65%, providing financial flexibility and solid unencumbered collateral for the benefit of the unsecured noteholders. As of March 31, 2024, the company’s gross and net leverage were adequate at 1.17x and 1.14x, respectively, which were within the company's target net leverage range of 1.0x to 1.25x. Asset coverage is adequate at 185% when considering its 150% regulatory asset coverage, providing the company the ability to withstand additional market volatility.

Rating strengths are counterbalanced by FSK’s elevated percentage (25%) of non-qualifying investments comprised of equity, JV, and investments in non-U.S. based companies and in U.S. public companies. However, the company's JV, which comprises 10% of FSK's investment portfolio, is comprised primarily of first lien senior secured debt to upper middle market EBITDA portfolio companies outside the U.S. Leverage at the JV remains in line with the BDC at 1.13x. FSK's non-accruals have remained consistently higher than peers. On March 31, 2024, FSK had 13 companies on non-accrual status, comprising 4.2% and 6.5% of the total investments at fair value and cost, respectively. However, the majority of non-accruals originated from the legacy portfolio prior to the current Advisor taking over in 2018, and the two largest portfolio company non-accruals comprise more than two thirds of total non-accruals at fair value. The company believes that these non-accruals will be successfully restructured with minimal additional marks to its current valuations. Further counterbalancing the strengths are the potential risks related to FSK’s illiquid assets, retained earnings constraints as a Regulated Investment Company (RIC), and uncertain economic and geopolitical risks.

FSK is an externally managed, closed-end, non-diversified investment management company that elected to be treated as a Business Development Company (BDC) under the 1940 Act and as an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment taxable income. The company is formed as a Maryland corporation. The company is managed by FS/KKR Advisor, LLC, a partnership of FS Investments and KKR Credit that was formed in 2018. The KKR Credit platform is a subsidiary of KKR & Co.

Rating Sensitivities

The ratings are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has material impacts on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

To access rating and relevant documents, click here.

Methodologies