Scott Kennedy’s BDC Earnings Series: FS KKR Capital’s And Capital Southwest’s Performance For Q1 2024
Summary
This earnings assessment article reviews FSK’s and CSWC’s NAV and NII performance during Q1 2024 and compares results to expectations. Earnings remain a driver to stock performance.
FSK’s NAV slightly exceeded my/our expectations (within range; very minor decrease) while its adjusted NII was nearly an exact match (within range; very minor decrease).
FSK was busy “cleaning up” some non-accrual loans via restructurings and partial write-offs (not ideal). No change in percentage recommendation ranges or risk/performance rating. FSK is deemed appropriately valued (HOLD).
CSWC’s NAV slightly underperformed my/our expectations (within range; unchanged) while its NII was nearly an exact match (within range; minor decrease). An average quarter for CSWC in my opinion.
No change in CSWC’s percentage recommendation ranges or risk/performance rating. CSWC is currently “very pricey”. While a well-run BDC, CSWC is currently very expensive to own.
Formatting Change to this Article Series
We have recently changed the format of this earnings-related article series (less wording, more visual images). This process remains ongoing and future changes will likely occur.
1) FSK:
Commentary
Quarterly NAV Fluctuation: Minor Outperformance (1.3% Variance).
Adjusted NII: Nearly an Exact Match ($0.012 Per Share Variance).
A slightly outperforming quarter regarding FS KKR Capital’s FSK 0.00%↑ NAV in my opinion. FSK reported a very minor quarterly NAV decrease while I projected a minor quarterly NAV decrease. As such, FSK’s underlying portfolio company valuations (both realized and unrealized) slightly exceeded my expectations. FSK reported a combined net realized loss and unrealized appreciation of ($39) million during Q1 2024. In comparison, I projected a combined net realized loss and unrealized depreciation of ($120) million. FSK’s total investment portfolio size was $14.2 billion as of 3/31/2024. There were a couple modest, positive surprises regarding quarterly FMV fluctuations within FSK’s 205 portfolio companies during Q1 2024. This included, but was not limited to, Belk Inc. (“Belk”), Tangoe LLC (Tangoe), and JW Aluminum Co. (JW Aluminum).
A largely “as expected” quarter regarding FSK’s adjusted NII in my opinion. My preference is to use adjusted NII as this indicates FSK’s “truer” operational performance (backs out discount accretion from the prior affiliated merger and adds back excise tax; better indication of net ICTI). FSK reported a very minor quarterly adjusted NII decrease which matched my expectations. Still, let us briefly discuss this metric.
First, when excluding FMV fluctuations, FSK decreased the company’s investment portfolio size by ($0.4) billion during Q1 2024. This was due to $1.44 billion of quarterly loan originations being more than offset by ($1.86) billion in prepayments/repayments/exits. In comparison, I projected FSK would decrease the company’s investment portfolio size by ($0.5) billion. As such, a slightly larger investment portfolio size.
Second, FSK reported a weighted average annualized yield of 12.70% and 12.50% during Q4 2023 and Q1 2024, respectively (0.20% decrease). This past quarter, this matched my expectations. As stated 2 quarters ago, I continue to believe this metric began to plateau towards the end of 2023. I continue to project a gradual decrease over time which is already factored in my/our modeling and percentage recommendation ranges. In addition, it should be noted the higher LIBOR/SOFR/PRIME rose (over 500 basis points [bps] in 1.5 years), the more underlying credit risk (non-accruals) needs to be respected (and monitored). This will have heightened importance as we head through 2024. This especially holds true with FSK as this particular BDC has already experienced heightened credit risk (5 new non-accruals during Q4 2023).
I believe FSK reported an “average” quarter (not great, not horrible). Additional reasoning on this assessment will be provided in a bit. A risk/performance rating of 4.5 for FSK remains appropriate in the current environment/over the foreseeable future.