KBRA assigns a rating of BBB to FS KKR Capital Corp.'s (“FSK” or “the company”) $600 million, 6.875% senior unsecured notes due August 15, 2029. The rating Outlook is Stable. The proceeds will be used for general corporate purposes and for repayment of existing indebtedness.

Key Credit Considerations

The ratings and Stable Outlook are supported by FS KKR Capital Corp.’s ties to KKR’s $578 billion AUM investment platform, including a $232 billion credit platform (“KKR Credit”) that provides SEC exemptive relief to co-invest among affiliated KKR Credit companies along with the credit platform's solid resources, deep industry relationships, and highly regarded advisory teams that provide sourcing of investments. As the second largest publicly traded BDC, FSK had a diversified $14.2 billion investment portfolio at fair value, comprised of 205 portfolio companies across 23 sectors, exclusive of investments in JVs, mostly in first lien senior secured (57%) and first priority asset-based finance (“ABF”) (15%) to upper-middle market companies as of March 31, 2024. The top four portfolio sectors are Software & Services (18%), Capital Goods (15%), Commercial & Professional Service (15%), and Health Care Equipment & Services (13%). Also supporting the ratings is the company's solid access to the capital markets with a diversified funding mix of secured bank facilities, unsecured senior debt, and CLOs, enhanced by its affiliation with the larger KKR Credit platform. The company's liquidity is sufficient with $3.6 billion of bank line availability, $234 million of cash set against $3.1 billion of unsecured debt maturities within two years, and $2.3 billion of unfunded commitment,s of which the majority is subject to performance tests and/or the approval of FS/KKR Advisor, LLC ("the Advisor"). At 1Q24, the ratio of unsecured debt to total debt outstanding was high at approximately 65%, providing financial flexibility and solid unencumbered collateral for the benefit of the unsecured noteholders. As of March 31, 2024, the company’s gross and net leverage were adequate at 1.17x and 1.14x, respectively, which were within the company's target net leverage range of 1.0x to 1.25x. Asset coverage is adequate at 185% when considering its 150% regulatory asset coverage, providing the company the ability to withstand additional market volatility.

Rating strengths are counterbalanced by FSK’s elevated percentage (25%) of non-qualifying investments comprised of equity, JV, and investments in non-U.S. based companies and in U.S. public companies. However, the company's JV, which comprises 10% of FSK's investment portfolio, is comprised primarily of first lien senior secured debt to upper middle market EBITDA portfolio companies outside the U.S. Leverage at the JV remains in line with the BDC at 1.13x. FSK's non-accruals have remained consistently higher than peers. On March 31, 2024, FSK had 13 companies on non-accrual status, comprising 4.2% and 6.5% of the total investments at fair value and cost, respectively. However, the majority of non-accruals originated from the legacy portfolio prior to the current Advisor taking over in 2018, and the two largest portfolio company non-accruals comprise more than two thirds of total non-accruals at fair value. The company believes that these non-accruals will be successfully restructured with minimal additional marks to its current valuations. Further counterbalancing the strengths are the potential risks related to FSK’s illiquid assets, retained earnings constraints as a Regulated Investment Company (RIC), and uncertain economic and geopolitical risks.

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 an RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment taxable income. The company is formed as a Maryland corporation. The company is managed by FS/KKR Advisor, LLC, a partnership of FS Investments and KKR Credit that was formed in 2018. The KKR Credit platform is a subsidiary of KKR & Co.

Rating Sensitivities

The ratings are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has material impacts on performance and non-accruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

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Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1004522

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