FS KKR CAPITAL CORP. The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and the "Company" refer toFS KKR Capital Corp. and the "Advisor" refers toFS/KKR Advisor, LLC . Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
•our future operating results;
•our business prospects and the prospects of the companies in which we may invest, including our and their ability to achieve our respective objectives as a result of the current COVID-19 pandemic;
•the impact of the investments that we expect to make;
•the ability of our portfolio companies to achieve their objectives;
•our current and expected financings and investments;
•receiving and maintaining corporate credit ratings and changes in the general interest rate environment;
•the adequacy of our cash resources, financing sources and working capital;
•the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with the other funds managed by the Advisor, FS Investments, KKR Credit or any of their respective affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we may invest;
•general economic and political trends and other external factors, including the current COVID-19 pandemic and related disruptions caused thereby;
•our use of financial leverage;
•the ability of the Advisor to locate suitable investments for us and to monitor and administer our investments;
•the ability of the Advisor or its affiliates to attract and retain highly talented professionals;
•our ability to maintain our qualification as a RIC and as a BDC;
•the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, and the rules and regulations issued thereunder;
•the effect of changes to tax legislation on us and the portfolio companies in which we may invest and our and their tax position; and
•the tax status of the enterprises in which we may invest.
In addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:
•changes in the economy;
•geo-political risks;
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•risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or pandemics;
•future changes in laws or regulations and conditions in our operating areas; and
•the price at which shares of our common stock may trade on the
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with theSEC , including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act.
Overview
We were incorporated under the general corporation laws of theState of Maryland onDecember 21, 2007 and formally commenced investment operations onJanuary 2, 2009 . We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated forU.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code.
We are externally managed by the Advisor pursuant to an investment advisory agreement, or the investment advisory agreement, and supervised by our board of directors, a majority of whom are independent.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We seek to meet our investment objectives by:
•utilizing the experience and expertise of the management team of the Advisor;
•employing a defensive investment approach focused on long-term credit performance and principal protection;
•focusing primarily on debt investments in a broad array of private
•investing primarily in established, stable enterprises with positive cash flows; and
•maintaining rigorous portfolio monitoring in an attempt to anticipate and pre-empt negative credit events within our portfolio, such as an event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company.
We pursue our investment objective by investing primarily in the debt of middle marketU.S. companies with a focus on originated transactions sourced through the network of the Advisor and its affiliates. We define direct originations as any investment where the Company's investment adviser, sub-adviser or their affiliates had negotiated the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These directly originated transactions include participation in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions. Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle marketU.S. companies and, to a lesser extent, subordinated loans and certain asset-based financing loans of privateU.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the "over-the-counter" market or directly from our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity, including through a co-investment with a financial sponsor or possibly the restructuring of an investment. In addition, a portion of our portfolio may be comprised of corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps. The Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structures of our portfolio companies or otherwise make opportunistic investments, such as where the market price of loans, bonds or other securities reflects a lower value than deemed warranted by the Advisor's fundamental analysis. Such investment opportunities may occur due to general dislocations in the markets, a misunderstanding by the 82
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market of a particular company or an industry being out of favor with the broader investment community and may include event driven investments, anchor orders and structured products.
The senior secured loans, second lien secured loans and senior secured bonds in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally three to four years. However, we may invest in loans and securities with any maturity or duration. Our debt investments may be rated by a NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by S&P). We may invest without limit in debt or other securities of any rating, as well as debt or other securities that have not been rated by a NRSRO. Revenues The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations. We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold. Expenses Our primary operating expenses include the payment of management and incentive fees and other expenses under the investment advisory agreement and the administration agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate the Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. The Advisor oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. The Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with theSEC . In addition, the Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. Pursuant to the administration agreement, we reimburse the Advisor for expenses necessary to perform services related to our administration and operations, including the Advisor's allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of the Advisor. We reimburse the Advisor no less than quarterly for all costs and expenses incurred by the Advisor in performing its obligations and providing personnel and facilities under the administration agreement. The Advisor allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of directors reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of the Advisor. Our board of directors then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our board of directors considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of directors compares the total amount paid to the Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. We bear all other expenses of our operations and transactions, including all other expenses incurred by the Advisor or us in connection with administering our business, including expenses incurred by the Advisor in performing administrative services for us and administrative personnel paid by the Advisor, to the extent they are not controlling persons of the Advisor or any of its affiliates, subject to the limitations included in the investment advisory agreement and the administration agreement. 83
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In addition, we have contracted withState Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by the Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
Portfolio Investment Activity for the Three Months Ended
Total Portfolio Activity
The following tables present certain selected information regarding our
portfolio investment activity for the three months ended
For the Three Months Ended For the Year Ended
Net Investment Activity March 31, 2023 December 31, 2022
Purchases $ 270 $ 4,642
Sales and Repayments (386) (4,741)
Net Portfolio Activity $ (116) $ (99)
For the Three Months Ended
March 31, 2023
Sales and
New Investment Activity by Asset Class Purchases Percentage Repayments Percentage
Senior Secured Loans-First Lien $ 223 82 % $ (222) 58 %
Senior Secured Loans-Second Lien - - (5) 1 %
Other Senior Secured Debt - - - -
Subordinated Debt 8 3 % - -
Asset Based Finance 29 11 % (147) 38 %
Credit Opportunities Partners JV, LLC - - - -
Equity/Other(1) 10 4 % (12) 3 %
Total $ 270 100 % $ (386) 100 %
(1) Equity/Other includes investments in preferred equity investments. During the three months ended
The following table summarizes the composition of our investment portfolio at cost and fair value as of
March 31, 2023
(Unaudited) December 31, 2022
Amortized Percentage Amortized Percentage
Cost(1) Fair Value of Portfolio Cost(1) Fair Value of Portfolio
Senior Secured Loans-First Lien $ 9,635 $ 9,320 61.0 % $ 9,607 $ 9,278 60.3 %
Senior Secured Loans-Second Lien 1,280 1,172 7.7 % 1,299 1,194 7.8 %
Other Senior Secured Debt 152 107 0.7 % 152 110 0.7 %
Subordinated Debt 399 280 1.8 % 384 265 1.7 %
Asset Based Finance 1,916 1,779 11.7 % 2,024 1,903 12.4 %
Credit Opportunities Partners JV, LLC 1,572 1,397 9.1 % 1,572 1,428 9.3 %
Equity/Other(2) 1,229 1,222 8.0 % 1,276 1,199 7.8 %
Total $ 16,183 $ 15,277 100.0 % $ 16,314 $ 15,377 100.0 %
(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
(2) As of
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The following table presents certain selected information regarding the composition of our investment portfolio as ofMarch 31, 2023 andDecember 31, 2022 :March 31, 2023 December 31, 2022 Number of Portfolio Companies 189 197 % Variable Rate Debt Investments (based on fair value)(1)(2) 69.7% 69.6% % Fixed Rate Debt Investments (based on fair value)(1)(2) 8.3% 8.6% % Other Income Producing Investments (based on fair value)(3) 14.7% 15.0% % Non-Income Producing Investments (based on fair value)(2) 4.6% 4.4% % of Investments on Non-Accrual (based on fair value) 2.7% 2.4% Weighted Average Annual Yield on Accruing Debt Investments(2)(4) 12.3% 12.0% Weighted Average Annual Yield on All Debt Investments(5) 11.4% 11.2% _____________________ (1)"Debt Investments" means investments that pay or are expected to pay a stated interest rate, stated dividend rate or other similar stated return. (2)Does not include investments on non-accrual status. (3)"Other Income Producing Investments" means investments that pay or are expected to pay interest, dividends or other income to the Company on an ongoing basis but do not have a stated interest rate, stated dividend rate or other similar stated return. (4)The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each accruingDebt Investment , multiplied by its par amount, adjusted toU.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruingDebt Investment ; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as ofMarch 31, 2023 , and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as ofMarch 31, 2023 . (5)The Weighted Average Annual Yield on All Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of eachDebt Investment , multiplied by its par amount, adjusted toU.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of eachDebt Investment ; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as ofMarch 31, 2023 , and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as ofMarch 31, 2023 . For the three months endedMarch 31, 2023 , our total return based on net asset value was 2.97% and our total return based on market value was 9.72%. For the year endedDecember 31, 2022 , our total return based on net asset value was 1.40% and our total return based on market value was (4.61)%. See footnotes 5 and 6 to the table included in Note 11 to our unaudited consolidated financial statements included herein for information regarding the calculation of our total return based on net asset value and total return based on market value, respectively. Direct Originations
The following table presents certain selected information regarding our Direct
Originations as of
Characteristics of All Direct Originations held in Portfolio March 31, 2023 December 31, 2022 Number of Portfolio Companies 178
183
% of Investments on Non-Accrual (based on fair value) 2.7%
2.4%
Total Cost of Direct Originations$15,493.3
Total Fair Value of Direct Originations$14,718.0
% of Total Investments, at Fair Value 96.3%
96.8%
Weighted Average Annual Yield on Accruing Debt Investments(1) 12.3%
12.0%
Weighted Average Annual Yield on All Debt Investments(2) 11.4% 11.2% _____________________ (1)The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each accruingDebt Investment , multiplied by its par amount, adjusted toU.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruingDebt Investment ; divided by (ii) the total amortized cost of Debt Investments 85 -------------------------------------------------------------------------------- Table of Contents included in the calculated group as of the end of the applicable reporting period. Does not include Debt Investments on non-accrual status. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as ofMarch 31, 2023 , and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as ofMarch 31, 2023 . (2)The Weighted Average Annual Yield on All Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of eachDebt Investment , multiplied by its par amount, adjusted toU.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of eachDebt Investment ; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as ofMarch 31, 2023 , and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as ofMarch 31, 2023 .
Portfolio Composition by Industry Classification
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as ofMarch 31, 2023 andDecember 31, 2022 : March 31, 2023 (Unaudited) December 31, 2022 Fair Percentage of Fair Percentage of Industry Classification(1) Value Portfolio Value Portfolio Automobiles & Components $ 8 0.1 %$ 25 0.2 % Capital Goods 2,357 15.4 % 2,366 15.4 % Commercial & Professional Services 1,776 11.6 % 1,670 10.9 % Consumer Discretionary Distribution & Retail 282 1.8 % 282 1.8 % Consumer Durables & Apparel 239 1.6 % 235 1.5 % Consumer Services 200 1.3 % 189 1.2 % Consumer Staples Distribution & Retail 106 0.7 % 103 0.7 % Credit Opportunities Partners JV, LLC 1,397 9.1 % 1,428 9.3 % Energy 230 1.5 % 272 1.8 % Equity Real Estate Investment Trusts (REITs) 307 2.0 % 336 2.2 % Financial Services 801 5.2 % 844 5.5 % Food, Beverage & Tobacco 207 1.4 % 226 1.4 % Health Care Equipment & Services 1,951 12.8 % 1,963 12.8 % Household & Personal Products 238 1.6 % 242 1.6 % Insurance 969 6.3 % 974 6.3 % Materials 227 1.5 % 197 1.3 % Media & Entertainment 730 4.8 % 695 4.5 % Pharmaceuticals, Biotechnology & Life Sciences 240 1.6 % 231 1.5 % Real Estate Management & Development 130 0.9 % 156 1.0 % Software & Services 2,525 16.5 % 2,591 16.8 % Technology Hardware & Equipment 2 0.0 % 1 0.0 % Telecommunication Services 73 0.5 % 76 0.5 % Transportation 282 1.8 % 275 1.8 % Total$ 15,277 100.0 %$ 15,377 100.0 % ____________ (1)S&P Dow Jones recently updated the Global Industry Classification Standard (GICS) structure. As a result, certain investments categorization as ofDecember 31, 2022 have been updated to reflect their new classification in the above table, for comparability purposes. 86
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Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The Advisor uses an investment rating scale of 1 to 4. The following is a description of the conditions associated with each investment rating:
Investment
Rating Summary Description 1 Performing investment-generally executing in
accordance with plan and there are no
concerns about the portfolio company's performance or ability to meet covenant
requirements.
2 Performing investment-no concern about repayment of both interest and our cost
basis but company's recent performance or trends in the industry require closer
monitoring.
3 Underperforming investment-some loss of interest or dividend possible, but still
expecting a positive return on investment.
4 Underperforming investment-concerns about the recoverability of principal or
interest.
The following table shows the distribution of our investments on the 1 to 4
investment rating scale at fair value as of March 31, 2023 and December 31,
2022 :
March 31, 2023 December 31, 2022
Fair Percentage of Fair Percentage of
Investment Rating Value Portfolio Value Portfolio
1 $ 11,376 74 % $ 11,565 75 %
2 2,979 20 % 2,899 19 %
3 296 2 % 452 3 %
4 626 4 % 461 3 %
Total $ 15,277 100 % $ 15,377 100 %
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended
Revenues
Our investment income for the three months endedMarch 31, 2023 and 2022 was as follows: Three Months Ended March 31, 2023 2022 Percentage of Percentage of Amount Total Income Amount Total Income Interest income$ 327 71.7 %$ 261 65.9 % Paid-in-kind interest income 42 9.2 % 43 10.9 % Fee income 5 1.1 % 29 7.3 % Dividend income 82 18.0 % 63 15.9 % Total investment income(1)$ 456 100.0 %$ 396 100.0 % ___________ (1)Such revenues represent$399 and$332 of cash income earned as well as$57 and$64 in non-cash portions relating to accretion of discount and PIK interest for the three months endedMarch 31, 2023 and 2022, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The level of interest income we receive is generally related to the balance of income-producing investments, multiplied by the weighted average yield of our investments. Fee income is transaction based, and typically consists of amendment and consent fees, 87
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prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.
The increase in interest income during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 can be primarily attributed to the rising interest rate environment. The decrease in fee income for the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 can primarily be attributed to reduced structuring activity during the three months endedMarch 31, 2023 . The increase in dividend income during the three endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 can primarily be attributed to the increase in dividends paid in respect to our investment inCredit Opportunities Partners JV, LLC . Expenses Our operating expenses for the three months endedMarch 31, 2023 and 2022 were as follows: Three Months Ended March 31, 2023 2022 Management fees $ 58$ 62 Subordinated income incentive fees 46
40
Administrative services expenses 3
4
Accounting and administrative fees 1 1 Interest expense 114 77 Other expenses 5 7 Total operating expenses 227 191 Incentive fee waiver - (15) Net operating expenses 227 176
The following table reflects selected expense ratios as a percent of average net
assets for the three months ended
Three Months Ended
2023 2022
Ratio of operating expenses to average net assets 3.21 % 2.46 %
Ratio of incentive fee waiver to average net assets(1) - % (0.20) %
Ratio of net operating expenses to average net assets 3.21 % 2.26 %
Ratio of net incentive fees, interest expense and excise taxes to average net assets(1)
2.26 % 1.31 %
Ratio of net operating expenses, excluding certain expenses, to
average net assets 0.95 % 0.95 %
__________(1)Ratio data may be rounded in order to recompute the ending ratio of net operating expenses to average net assets or net operating expenses, excluding certain expenses, to average net assets.
The increase in expenses during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 can primarily be attributed to an increase in subordinated income incentive fees and interest expense as a result of the rising rate environment.
Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors.
Net Investment Income
Our net investment income totaled$229 ($0.81 per share) and$220 ($0.77 per share) for the three months endedMarch 31, 2023 and 2022, respectively. The increase in net investment income during the three months endedMarch 31, 2023 compared to the three months endedMarch 31, 2022 can primarily be attributed to higher investment income during the three months endedMarch 31, 2023 as discussed above. 88
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Net Realized Gains or Losses
Our net realized gains (losses) on investments, foreign currency forward
contracts and foreign currency for the three months ended
Three Months Ended
2023 2022
Net realized gain (loss) on investments(1) $ (58) $ (32)
Net realized gain (loss) on foreign currency forward contracts 3 5
Net realized gain (loss) on foreign currency 1 1
Total net realized gain (loss) $ (54) $ (26) ______________
(1)We sold investments and received principal repayments, respectively, of$228 and$158 during the three months endedMarch 31, 2023 and$994 and$679 during the three months endedMarch 31, 2022 .
Net Change in Unrealized Appreciation (Depreciation)
Our net change in unrealized appreciation (depreciation) on investments, foreign forward currency forward contracts and unrealized gain (loss) on foreign currency for the three months endedMarch 31, 2023 and 2022 were as follows: Three Months EndedMarch 31, 2023 2022
Net change in unrealized appreciation (depreciation) on investments
$ 31 $ 27
Net change in unrealized appreciation (depreciation) on foreign currency forward contracts
(4) 1
Net change in unrealized gain (loss) on foreign currency (3) 3
Total net change in unrealized appreciation (depreciation) $ 24 $ 31
The net change in unrealized appreciation (depreciation) during the three months
ended March 31, 2023 was driven primarily by depreciation on several specific
assets in the portfolio, partially offset by appreciation on several assets in
the portfolio. The net change in unrealized appreciation (depreciation) during
the three months ended March 31, 2022 was driven primarily by significant
appreciation on several assets in the portfolio, partially offset by
depreciation on several specific assets in the portfolio.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months endedMarch 31, 2023 , the net decrease in net assets resulting from operations was$199 ($0.71 per share) compared to a net increase in net assets resulting from operations of$225 ($0.79 per share) during the three months endedMarch 31, 2022 .
Financial Condition, Liquidity and Capital Resources
Overview
As ofMarch 31, 2023 , we had$250 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and$2,577 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As ofMarch 31, 2023 , we also held broadly syndicated investments and opportunistic investments that we believe could be sold to create additional liquidity. As ofMarch 31, 2023 , we had unfunded debt investments with aggregate unfunded commitments of$941.9 , unfunded equity/other commitments of$497.3 and unfunded commitments of$560.2 ofCredit Opportunities Partners JV, LLC . We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise. We currently generate cash primarily from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments. To seek to enhance our returns, we also employ leverage as market conditions permit and at the discretion of the Advisor, but in no event will leverage employed exceed the maximum amount permitted by the 1940 Act. Prior toJune 14, 2019 , in accordance with the 1940 Act, we were allowed to borrow amounts such that our asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. EffectiveJune 15, 2019 , our asset coverage requirement applicable to senior securities was reduced from 200% to 150%. As ofMarch 31, 2023 , the aggregate amount outstanding 89
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of the senior securities issued by us was
Prior to investing in securities of portfolio companies, we invest the cash received from fees, interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments primarily in cash, cash equivalents, including money market funds,U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
Financing Arrangements
The following table presents summary information with respect to our outstanding
financing arrangements as of
As of March 31, 2023
(Unaudited)
Amount Amount
Arrangement Type of Arrangement Rate Outstanding Available Maturity Date
Ambler Credit Facility(2) Revolving Credit Facility SOFR+2.15%(1) $ 150 $ 50 November 22, 2025
Burholme Prime Brokerage Prime Brokerage Facility SOFR+1.35%(1) - - September 26, 2023
Facility(2)
CCT Tokyo Funding Credit Revolving Credit Facility L+1.90% - 2.05%(1)(3) 285 15 June 2, 2026
Facility(2)
Darby Creek Credit Revolving Credit Facility SOFR+2.90%(1) 240 10 February 26, 2025
Facility(2)
Dunlap Credit Facility(2) Revolving Credit Facility SOFR+2.90(1) 467 33 February 26, 2025
Meadowbrook Run Credit Revolving Credit Facility SOFR+2.05%(1) 300 - November 22, 2024
Facility(2)
Senior Secured Revolving Revolving Credit Facility SOFR+1.75% - 1.88%(1)(4) 2,174(5) 2,469(6) May 17, 2027
Credit Facility(2)
4.625% Notes due 2024(7) Unsecured Notes 4.63% 400 - July 15, 2024
1.650% Notes due 2024(7) Unsecured Notes 1.65% 500 - October 12, 2024
4.125% Notes due 2025(7) Unsecured Notes 4.13% 470 - February 1, 2025
4.250% Notes due 2025(7) Unsecured Notes 4.25% 475 - February 14, 2025
8.625% Notes due 2025(7) Unsecured Notes 8.63% 250 - May 15, 2025
3.400% Notes due 2026(7) Unsecured Notes 3.40% 1,000 - January 15, 2026
2.625% Notes due 2027(7) Unsecured Notes 2.63% 400 - January 15, 2027
3.250% Notes due 2027(7) Unsecured Notes 3.25% 500 - July 15, 2027
3.125% Notes due 2028(7) Unsecured Notes 3.13% 750 - October 12, 2028
CLO-1 Notes(2)(8) Collateralized Loan L+1.85% - 3.01%(1) 352 - January 15, 2031
Obligation
Total $ 8,713 $ 2,577
___________
(1)The benchmark rate is subject to a 0% floor.
(2)The carrying amount outstanding under the facility approximates its fair
value.
(3)The spread over the benchmark rate is determined by reference to the amount
outstanding under the facility.
(4)The spread over the benchmark rate is determined by reference to the ratio of
the value of the borrowing base to the aggregate amount of certain outstanding
indebtedness of the Company. In addition to the spread over the benchmark rate,
a credit spread adjustment of 0.10% and 0.0326% is applicable to borrowings in
U.S. dollars and pounds sterling, respectively.
(5)Amount includes borrowing in Euros, Canadian dollars, pounds sterling and
Australian dollars. Euro balance outstanding of €242 has been converted to U.S.
dollars at an exchange rate of €1.00 to $1.09 as of March 31, 2023 to reflect
total amount outstanding in U.S. dollars. Canadian dollar balance outstanding of
CAD22 has been converted to U.S dollars at an exchange rate of CAD1.00 to $0.74
as of March 31, 2023 to reflect total amount outstanding in U.S. dollars. Pounds
sterling balance outstanding of £30 has been converted to U.S dollars at an
exchange rate of £1.00 to $1.24 as of March 31, 2023 to reflect total amount
outstanding in U.S. dollars. Australian dollar balance outstanding of AUD79 has
been converted to U.S dollars at an exchange rate of AUD1.00 to $0.67 as of
March 31, 2023 to reflect total amount outstanding in U.S. dollars.
(6)The amount available for borrowing under the Senior Secured Revolving Credit
Facility is reduced by any standby letters of credit issued under the Senior
Secured Revolving Credit Facility. As of March 31, 2023 , $12 of such letters of
credit have been issued.
(7)As of March 31, 2023 , the fair value of the 4.625% notes, the 1.650% notes,
the 4.125% notes, the 4.250% notes, the 8.625% notes, the 3.400% notes, the
2.625% notes, the 3.250% notes and the 3.125% notes was approximately $387 ,
$460 , $445 , $446 , $254 , $899 , $337 , $424 and $615 , respectively. These
valuations are considered Level 2 valuations within the fair value hierarchy.
(8)As of March 31, 2023 , there were $281.4 of Class A-1R notes outstanding at
L+1.85%, $20.5 of Class A-2R notes outstanding at L+2.25%, $32.4 of Class B-1R
notes outstanding at L+2.60% and $17.4 of Class B-2R notes outstanding at
3.011%.
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See Note 9 to our unaudited consolidated financial statements included herein for additional information regarding our financing arrangements.
RIC Status and Distributions
We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the tenth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains in excess of capital losses, or "capital gain net income" (adjusted for certain ordinary losses), for the one-year period endingOctober 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid noU.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our stockholders, onDecember 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. Subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to authorize, declare and pay regular cash distributions on a quarterly basis. We will calculate each stockholder's specific distribution amount for the period using record and declaration dates and each stockholder's distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of directors. During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a stockholder's investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months endedMarch 31, 2023 or 2022 represented a return of capital. We intend to continue to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those stockholders who receive their distributions in the form of shares of our common stock under the DRP. Any distributions reinvested under the plan will nevertheless remain taxable to aU.S. stockholder. The following table reflects the cash distributions per share that we have declared on our common stock during the three months endedMarch 31, 2023 and 2022: Distribution For the Three Months Ended Per Share Amount Fiscal 2022 March 31, 2022$ 0.63 $ 179 Total$ 0.63 $ 179 Fiscal 2023 March 31, 2023$ 0.70 $ 196 Total$ 0.70 $ 196
See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions.
Recent Developments
Darby Creek Credit Facility and Dunlap Funding Credit Facility Merger
OnApril 27, 2023 ,Darby Creek LLC ("Darby Creek"), our wholly-owned subsidiary, entered into the Twelfth Amendment to the Loan Financing and Servicing Agreement and Omnibus Amendment to the Transaction Documents (the "Twelfth Amendment"), 91
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which amends the Loan Financing and Servicing Agreement, dated
The Twelfth Amendment, among other things, (i) extends the maturity date toFebruary 26, 2027 , (ii) extends the end of the revolving period toFebruary 26, 2025 , (iii) increases the interest rate applicable to advances to 2.65% per annum, plus term SOFR (or the relevant reference rate for any foreign currency borrowings), (iv) increases the total facility commitment to$750 , and (v) extends the period in which the prepayment premium will be payable on certain reductions or terminations of the commitments toOctober 27, 2024 . OnApril 27, 2023 , concurrent with the closing of the Twelfth Amendment,Dunlap Funding LLC ("Dunlap Funding"), our wholly-owned subsidiary, merged with and into Darby Creek (the "Merger") pursuant to an Agreement and Plan of Merger, with Darby Creek surviving the Merger. Upon consummation of the Merger, the Loan Financing and Servicing Agreement, dated as ofDecember 2, 2014 , among Dunlap Funding, as borrower, Wells Fargo, as collateral agent and collateral custodian, the lenders from time to time party thereto, and DB, as facility agent, was terminated and all outstanding borrowings were assumed into the Darby Creek Funding Facility.
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming the estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in "Note 2. Summary of Significant Accounting Policies" in our consolidated financial statements. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We have identified one of our accounting policies, valuation of portfolio investments, specifically the valuation of Level 3 investments, as critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
Our board of directors is responsible for overseeing the valuation of our
portfolio investments at fair value as determined in good faith pursuant to the
Advisor's valuation policy. As permitted by Rule 2a-5 of the 1940 Act, our board
of directors has designated the Advisor as our valuation designee with
day-to-day responsibility for implementing the portfolio valuation process set
forth in the Advisor's valuation policy.
Accounting Standards Codification Topic 820, Fair Value Measurements and
Disclosure, or ASC Topic 820, issued by the FASB clarifies the definition of
fair value and requires companies to expand their disclosure about the use of
fair value to measure assets and liabilities in interim and annual periods
subsequent to initial recognition. ASC Topic 820 defines fair value as the price
that would be received from the sale of an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.
ASC Topic 820 also establishes a three-tier fair value hierarchy, which
prioritizes the inputs used in measuring fair value. These tiers include: Level
1, defined as observable inputs such as quoted prices in active markets; Level
2, which includes inputs such as quoted prices for similar securities in active
markets and quoted prices for identical securities where there is little or no
activity in the market; and Level 3, defined as unobservable inputs for which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.
The Advisor determines the fair value of our investment portfolio each quarter.
Securities that are publicly-traded with readily available market prices will be
valued at the reported closing price on the valuation date. Securities that are
not publicly-traded with readily available market prices will be valued at fair
value as determined in good faith by the Advisor. In connection with that
determination, the Advisor will prepare portfolio company valuations which are
based on relevant inputs, including, but not limited to,
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indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party pricing and valuation services.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
•our quarterly fair valuation process begins by the Advisor facilitating the delivery of updated quarterly financial and other information relating to each investment to an independent third-party pricing or valuation service; •the independent third-party pricing or valuation service then reviews and analyzes the information, along with relevant market and economic data, and determines proposed valuations for each portfolio company or investment according to the valuation methodologies in the Advisor's valuation policy and communicates the information to the Advisor in the form of a valuation range for Level 3 assets; •the Advisor then reviews the preliminary valuation information for each portfolio company or investment and provides feedback about the accuracy, completeness and timeliness of the valuation-related inputs considered by the independent third-party pricing or valuation service and any suggested revisions thereto prior to the independent third-party pricing or valuation service finalizing its valuation range; •the Advisor then provides the valuation committee with its valuation determinations and valuation-related information for each portfolio company or investment, along with any applicable supporting materials; and other information that is relevant to the fair valuation process as required by the Advisor's board reporting obligations;
•the valuation committee meets with the Advisor to receive the relevant quarterly reporting from the Advisor and to discuss any questions from the valuation committee in connection with the valuation committee's role in overseeing the fair valuation process; and
•following the completion of its fair value oversight activities, the valuation committee (with the assistance of the Advisor) provides our board of directors with a report regarding the quarterly valuation process. In circumstances where the Advisor deems appropriate, the Advisor's internal valuation team values certain investments. When performing the internal valuations, the Advisor utilizes similar valuation techniques as an independent third-party pricing service would use. Such valuations are approved by an internal valuation committee of the Advisor, as well as the valuation committee of the Board, as described above. Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, the Advisor may use any independent third-party pricing or valuation services for which it has performed the appropriate level of due diligence. However, the Advisor is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information sourced by the Advisor or provided by any independent third-party valuation or pricing service that the Advisor deems to be reliable in determining fair value under the circumstances. Below is a description of factors that the Advisor and any independent third-party valuation services may consider when determining the fair value of our investments. The valuation methods utilized for each portfolio company may vary depending on industry and company-specific considerations. Typically, the first step is to make an assessment as to the enterprise value of the portfolio company's business in order to establish whether the portfolio company's enterprise value is greater than the amount of its debt as of the valuation date. This analysis helps to determine a risk profile for the applicable portfolio company and its related investments, and the appropriate valuation methodology to utilize as part of the security valuation analysis. The enterprise valuation may be determined using a market or income approach. Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Advisor may incorporate these factors into discounted cash flow models to arrive at fair value. Various methods may be used to determine the appropriate discount rate in a discounted cash flow model.
Other factors that may be considered include the borrower's ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing the debt investments.
For convertible debt securities, fair value generally approximates the fair
value of the debt plus the fair value of an option to purchase the underlying
security (i.e., the security into which the debt may convert) at the conversion
price. To value such an option, a standard option pricing model may be used.
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Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. The Advisor subsequently values these warrants or other equity securities received at their fair value.
See Note 8 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.
Contractual Obligations
We have entered into agreements with the Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets (excluding cash and cash equivalents) and (b) an incentive fee based on our performance. The Advisor is reimbursed for administrative expenses incurred on our behalf. See Note 4 to our unaudited consolidated financial statements included herein for a discussion of these agreements and for the amount of fees and expenses accrued under these agreements during the three months endedMarch 31, 2023 and 2022.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
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