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FS KKR Capital: Lots To Like About A 15% Yield And A Wide NAV Discount

Jun. 08, 2020 2:38 AM ETFS KKR Capital Corp (FSK)22 Comments


  • FS KKR discloses a steep NAV decline and cuts the dividend.
  • The stock has sold off excessively and is now on offer at a steep NAV discount.
  • Updated dividend run-rate would entail an attractive c.15% yield, while a narrowing of the NAV discount offers additional upside.
  • Repurchases by the FSK-Franchise co-investment vehicle is a positive catalyst.

FS KKR Capital's (NYSE:FSK) latest quarter was a tough one to justify fundamentally, as the announced 21% dividend cut came right on the heels of a 20% NAV decline. That said, there were also some positives for longer-term investors, with a credit facility amendment and the issuance of a private unsecured note cushioning the downside, while the creation of an investment fund designed to support FSK stock could offset some of the fallout from the dividend cut. The even better news is that the stock is very cheap. Shares currently trade at c. 0.6-0.7x NAV, while offering a c.15% yield, which spells opportunity for long-term investors willing to look through the near-term negatives.

Recapping a Quarter Filled With Headline Negatives

FSK's adjusted NOI per share reached $0.19, with the 1Q distribution largely in-line. Total revenue of $179 million was underwhelming as yield compression, and some inflows to non-accruals weighed on the top line. The average yield of debt investments also declined c. 70 bps to 9% for the quarter, alongside a c. 30 bps decline in the weighted average borrowing cost, reflecting the lower rate environment and a more conservative investment strategy.

Source: FS KKR Earnings Presentation

FSK accelerated capital deployment at c. $1.3 billion for the quarter, with repayments of c. $914 million resulting in net originations of $382 million. The portfolio did, however, decline c. 5.6% Q/Q as a result of unrealized depreciation.

Source: FS KKR Financial Results

While management did exercise some cost control, leading to expenses of $81 million (-19% Y/Y), it was insufficient to offset the portfolio losses for the quarter. The quarter's net asset value (NAV) of $6.09 fell 20% Q/Q, on the back of c. $1.59 of net realized/unrealized losses in the quarter.

Source: FS KKR Earnings Presentation

Net leverage also rose to

This article was written by

Analyst with a keen interest in the global markets, always sifting through company filings in search of compelling opportunities. Approach is heavily centered on the notion that one needs to be non-consensus right in making investment decisions. A keen follower of value investing legends such as Peter Cundill, Seth Klarman, and more recently, Rupal Bhansali.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (22)

dropped after split...do not like it
Squabkiller profile picture
What is the difference between FSK and FSKR?
Ticker Tape Research profile picture
@Squabkiller This article explains the difference seekingalpha.com/...
Reverse split is great for this one. Some brokerages like Merrill edge limit me to 30000 shares per order. When the share price is a higher number, I can purchase all one million $ in one order, instead of having to input say 20 orders. This RS is tailored for the big boys, not the retails.
Today another BDC research service reported that FSK and three other BDCs lent money to an entity known as CSM Bakeries, a provider of baking ingredients. Monroe Capital also a lender and things are difficult for CSM.

I only point this out because any suggestion that FSK or MRCC can be considered better of breed or best of breed BDCs must be dispelled immediately. In this environment why should anyone try to be a hero investing in a BDC with a less than stellar lending track record.... something MRCC and FSK have in common.

There is NOTHING to like about a 15% yield. Mr. Market is signaling that yield is not sustainable and when compared to yields of better and best of breed BDCs should shake any investor unless that investor is knowingly wanting and willing to take huge disproportionate investment risk.
What percentage of the FSK portfolio is CSM Bakeries? Position value of CSM would have to go to zero and represent a roughly 15% position (at 1.2X portfolio leverage) to warrant a 33% discount to NAV, i.e., NAV is 6 and PX at open today was 4. The portfolio position of CSMB is likely closer to sub 1%, meaning not an issue given current margin of error. I have not characterized FSK as best in breed. What I have said is that the real unknown is credit quality of underlying portfolio (i.e., validity of marks). I think the team at KKR is credible at assessing this risk and has better information than any of us. So what are they saying? They have been buying hundreds of millions of dollars of shares in the open market over last few months and are committed to buying hundreds of millions more. That’s a powerful message that we should all pay attention to. Sometimes Mr. Market gets stuck in a rut and needs a push.
I think he was just giving an example of what could be a bad investment, and that that could be representative of other potentially bad investments in their portfolio.
Yes, I understand, and I was just 1) using math to highlight how one might think about single position credit risk in a broadly diversified portfolio, and 2) illustrating how one might be inclined to use the actions of experienced insiders to inform one’s opinion about the accuracy of portfolio marks in an uncertain and opaque world.
Reverse split is solely an accounting move. Has no effect on dividend as a % of share price. Provides no insight into value of underlying business. If you do fundamental research (as opposed to technical research) the reverse split means nothing. It makes sense that a levered business model (as are most financials) would suffer during an unexpected economic shock like the C19 pandemic and the accompanying public policy response. As the economy snaps back, these levered business models (financials) that survive will also snap back. As a financials operator, if you can manage your leverage to stay solvent during declines, then the leverage can be accretive. As an investor, if you are uncomfortable with these sorts of levered models and the increased volatility and insolvency risks, then you should not invest.
TigerMoney profile picture
FSK is up nearly 12% as I write this. Hopefully good news on the horizon, however, most of the views written below don't sound very good.

The thing is, the dividend is now set as 9% of NAV. They make loans. If those loans continue to deteriorate then their NAV will as well, and so will the dividend. The dividend could go from 15% to 6%.
Article was probably written before the Friday night after hours reverse split announcement.
The reverse split has been public well before Friday night. The BOD approved it May 26. This is OLD news. The investment pool to buy shares will be between $100-350mm. This is GREAT insider commitment, by the people that understand the credit nuances of the portfolio the best. Pay attention. They are screaming to the world that the portfolio is undervalued. fskkrcapitalcorp.com/...
More than 90% of stocks that do a reverse split are historically a notoriously poor investment as they then tend to drift back to their 
pre-split levels. Definitely not a positive and usually a warning sign to stay away
Real-Time Retired Guy profile picture
Don't forget 1:4 reverse split coming. Div will become .60.

Didn't you know about this?
it's been a dog ever since I followed it. much better places to stash your money. FCO for example.
or pflt. I assume they do the reverse split and keep the div the same.
daver202 profile picture
With 1 to 4 reverse split occurring soon may make some a little nervous....reverse splits of low priced stocks don’t usually hold up well long term
wbempire profile picture
Hmmmmm......no mention of reverse split???
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