FSK looks to gain additional borrowing capacity

FS Investment Corporation successfully voted for and later rescinded an increase in allowable leverage in 2018, prior to its merger with Corporate Capital Trust.

FS KKR Capital Corporation (FSK) is looking to increase its leverage capacity.

The business development company announced on Tuesday that it is seeking to increase its maximum amount of leverage by decreasing its asset coverage requirement from 200 percent to 150 percent. This is conditional on a successful shareholder vote at its mid-June shareholder meeting, according to documents filed with the Securities and Exchange Commission.

FSK’s board of directors recommends shareholders support the measure, which would let the firm borrow $2 for every $1 in equity – an increase from its current ability to borrow $1 for every $1 in equity.

If the measure is approved, the BDC will also slightly change its fee structure by reducing its annual base management fee from 1.5 percent to 1 percent on all assets acquired after the leverage increase, according to the SEC documents.

The BDC doesn’t have any plans to change its strategy if the increase is approved, a source familiar with the situation told Private Debt Investor.

FSK declined to comment.

While FSK has not previously proposed an increase in leverage, FS Investment Corporation’s (FSIC) board voted to increase its leverage in March 2018, only to rescind it less than a month later – before its merger with Corporate Capital Trust (CCT) later in the year.

The reason for cancelling the leverage increase was a change in S&P’s ratings dynamics, FSIC said on its 2018 first-quarter earnings call. S&P announced at the beginning of April 2018 that it would put certain BDCs, including FSIC, on its “credit watch” list because of the leverage increase. That meant a potential downgrade of its investment-grade rating, Michael Forman, FSIC’s then-chairman and chief executive said on that earnings call.

FSK’s other half, CCT, did not try to increase its leverage prior to the merger.

FSK was formed in December 2018 through the merger of FSIC and CCT. The newly-formed BDC has more than $7.7 billion in total assets. The BDC will report its first quarter earnings on 8 May.