KBRA Releases Surveillance Report for FS KKR Capital Corp.
21 Jun 2023 | New York
On May 26, 2023, KBRA affirmed the BBB issuer and senior unsecured debt ratings for FS KKR Capital Corp. (NYSE: FSK or "the company"). The Outlook for the ratings is Stable.
The ratings and Stable Outlook are supported by FS KKR Capital Corp.'s ties to KKR & Co., which has $510 billion of AUM, including $197 billion dedicated to private credit lending , along with FSK's SEC exemptive relief to co-invest among affiliated companies of KKR Credit. As of March 31, 2023, FSK had a $15.3 billion well-diversified investment portfolio comprised mostly of senior secured first lien loans (61%) to 189 upper middle market companies within 23 industries. The portfolio company weighted average EBITDA was $114.4 million at 1Q23, a substantial increase from $76.2 million one year prior. FSK focuses primarily on sponsor-backed companies that provide significant equity cushion with low LTVs. At 1Q23, the top four portfolio sectors were Software & Services (17%), Capital Goods (15%), Health Care Equipment & Services (13%), and Commercial & Professional Services (12%). The ratings also consider FSK's solid management team that has a long track record of working within the private debt markets with senior members each having decades of experience in leveraged finance. FSK is the second largest publicly traded BDC, which provides solid access to the capital markets evidenced by its $4.7 billion of senior unsecured debt outstanding. FSK's gross leverage (debt/equity) is appropriate at 1.25x with a prudent target net leverage range of 1.00x to 1.25x. KBRA favorably views the high proportion of unsecured debt to total debt of 55%, which allows for more asset un-encumbrance for unsecured noteholders. Asset coverage was 180% with a 20% cushion, which KBRA considers appropriate, allowing FSK to absorb increased market volatility as well as a potential increase in non-accruals as the U.S. economy weakens with rising rates and inflation. Despite the potential for adverse credit headwinds in 2023, KBRA believes the company should weather a more difficult credit environment from management’s long-term experience, solid underwriting with a large portion of its corporate debt with at least one financial covenant, and a large proportion of investments in which FSK is lead, co-lead, or sole originator.
The rating strengths are counterbalanced by the potential risks related to the company’s elevated non-accruals as a percentage of total investments at 5.5% and 2.7% at cost and fair value, respectively, and its relatively high percentage of unsecured, ABL, and equity investments at 30.6% of total investments. Additionally, like it peers, the company's assets are relatively illiquid and its retained earnings are constrained as a Regulated Investment Company (RIC).
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 a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company is formed as a Maryland corporation. The company is managed by FS/KKR Advisor, LLC, a partnership of FS Investment Corporation and KKR Credit that was formed in 2018. The KKR Credit platform is a subsidiary of KKR & Co.
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