FSK credit losses drag down earnings in Q4

The BDC, created after FS Investment Corporate acquired Corporate Capital Trust, posts earnings riddled with losses for the quarter and the year.

FS KKR Capital Corp (FSK) posted subpar earnings for the quarter that ended mere weeks after the merger of FS Investment Corporation (FSIC) and Corporate Capital Trust (CCT) officially closed.

The New York-based business development company posted losses across almost every category to round out 2018. The merger between FSIC and CCT officially closed on 19 December.

The BDC ended the quarter and the year with a net asset value per share of $7.84, which is down 9 percent from the end of the third quarter ($8.64), down $0.08 from when the merger closed ($7.92). However, $7.84 falls in line with the vehicle’s prediction of NAV per share landing somewhere between $7.82 and $7.86 for the end of the fourth quarter. The NAV per share at the end of 2017 was $9.30.

The vehicle’s net investment income fluctuated slightly during the year and ended at $0.19 per share, down from $0.23 at the end of the third quarter and $0.21 at the end of 2017. Despite the decrease, the BDC had a dividend coverage ratio of 109 percent for the fourth quarter.

With the acquisition of CCT, the portfolio of FSIC – FSK’s predecessor – more than doubled. The vehicle had $3.70 billion in total assets at the end of the third quarter and ended the fourth quarter with more than $7.71 billion.

The portfolio growth also came partially from investments during the quarter from FSIC, CCT and FSK. FSK originated $220 million in investments during the fourth quarter, and FSIC and CCT invested a combined $530 million prior to the merger.

There was $173 million in net realised and unrealised losses during the quarter, which amounted to a loss of $0.62 per share – much higher compared to the $67 million of losses recorded at the end of the third quarter amounting to $0.28 a share. Earnings for the fourth quarter stood at a $0.43-a-share loss.

The portfolio is now comprised of 54.2 percent senior-secured first-lien loans, 15.1 percent senior-secured second-lien loans, 8.9 percent asset-based finance, 7.4 percent equity, 5.8 percent subordinated debt, 4.6 percent “other” senior-secured debt and 4 percent is the Strategic Credit Opportunities Partners joint venture with Conway Capital.

The portfolio is 79.8 percent floating-rate loans and 20.2 percent fixed-rate. Only 1 percent of the portfolio is on non-accrual status.

FSK was formed in December of 2018. The vehicle is advised by FS KKR advisors, which oversees a mix of five public and private BDCs. The firms oversee more than $17 billion in assets under management, including private BDCs.