Income-focused investors have a wide variety of assets to invest in today. Treasury bonds are still offering a 4% return while boomer candly ETFs like JEPI and JEPQ are offering over 7% and a large potential for growth.
The FS KKR Capital Corp (FSK) has become one of the highest-yielding companies in Wall Street, with a forward return of 14.13%. That return means that, all factors held constant, a $10,000 investment will have gross returns of $1,400.
FSK stock has dropped by almost ten percent in the past three years. With its dividends included, it has risen by almost 40%, a performance similar to the S&P 500 index. The iShares Short Term Treasury Bond ETF (SHV) has risen by 10% in the same period.
What is FS KKR Corp?
KKR Capital Corp is a company, partially owned by KKR Credit, a company with over $220 billion in assets under management. KKR Credit, on the other hand, is a subsidiary of KKR & Co, one of the biggest names in the private equity industry with over $601 billion in AUM.
It is also operated by FS Investments. Its approach is to provide credit solutions to companies, mostly in the United States. According to its website, it has provided financing to 184 companies with a median EBITDA of $64 million.
Most of its investments are senior secured loans, first lien, which account for 54.4% of its portfolio. These are loans that are secured by collateral, and give the lender the first priority for repayment.
13.1% of its loans are senior secured second lien, which are a bit lower than the first ones. In this case, when a default happens, the second lien only receives payment after first lien creditors are paid.
The othe big part of its portfolio is asset-based finance, which accounts for 11.2% of its business. It has als invested in other senor secured debt, subordinated debt, and even equity investments.
Most of its investments are in industries like capital goods, software & services, health care equipment, and diversified financials.
Interest rates implications
FS KKR and other similar companies have done well in the past few years, helped by higher interest rates. The company does well when rates rise because its financing is usually on a variable basis.
Its most recent financial results showed that FS KKR’s net interest income rose to $205 million, a small increase from the $212 million it made in the same period in 2023.
The results also showed that its total fair value of its investments was $14.1 billion, 6% of which were in senior secured securities. They also revealed that it was doing well as the private credit business does well.
The challenge for FS KKR, however, is that it faces some steep maturities in the coming years. Most of these maturities will happen in 2028, when over $5.3 billion will mature. However, the company still has the ability to make these payments because it has an investment grade rating by Moody’s, Fitch, amd Kroll.
Is FSK KKR a good investment?
A widespread default in the United States is the biggest risk that FSK faces. Such a situation would happen when there is a deep downturn in the economy as it happened during the Global Financial Crisis.
Most analysts were expecting more bankruptcies as the Fed hiked interest rates to their highest level in over two decades.
However, these defaults never came, and the situation will likely improve now that rates have started coming down, making FSK a relatively good investment for income investors.
The concern is that its net interest income will start falling in the coming quarters. The other issue is that, while it has a big dividend yield, its total return over the long term is smaller than that of KKR and the S&P 500 index.
For example, in the last five years, FSK KKR stock’s total return was 100% while the SPY and the KKR stocks have risen by 110% and 445%, respectively.
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