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Rating Action:

Moody's assigns Baa3 issuer and senior notes ratings to FS KKR Capital Corp.

20 Jun 2019

New York, June 20, 2019 -- Moody's Investors Service ("Moody's") assigned a Baa3 issuer rating to FS KKR Capital Corp (FSK), a publicly traded business development company (BDC) managed by FS/KKR Advisor, LLC (FS/KKR). Moody's also assigned Baa3 ratings to FSK's senior unsecured notes maturing July 2019, January 2020, May 2022 and June 2022. FSK's issuer outlook is stable.

Assignments:

..Issuer: FS KKR Capital Corp

.... Issuer Rating, Assigned Baa3

.... Senior Unsecured Regular Bond/Debenture, Assigned Baa3

Outlook Actions:

..Issuer: FS KKR Capital Corp

.... Outlook, Stable

RATINGS RATIONALE

Moody's ratings are based on FSK's competitive positioning as one of the largest BDCs, its conservative capital management, strong combined record of profitability of its predecessor companies, the diversity of its lending portfolio, and its well-distributed debt maturities. As an additional strength, FSK is closely affiliated with KKR Credit Advisors and Franklin Square Holdings through its external manager, providing the company access to strong new transaction opportunities and well-established underwriting and risk management expertise. FSK's ratings are constrained by its high reliance on secured financing which limits its financial flexibility, a higher proportion of junior investments than certain peers which could result in higher earnings volatility, and the uncertainty of its future performance given the recent change in its external advisor to FS/KKR.

The Baa3 rating of FSK's senior notes reflects their priority in the company's total capitalization. Though FSK's investments are pledged to secured creditors, asset coverage and expected recovery in the event of default of the senior notes is strong.

At March 31, 2019, FSK had total assets of $7.7 billion, making it the second largest public BDC behind Ares Capital Corp. FSK was formed in December 2018 as a result of the merger of FS Investment Corporation and Corporate Capital Trust Inc., which had been in operation since 2009 and 2010, respectively. FS/KKR was appointed investment advisor in April 2018.

FSK's oversight by FS/KKR allows the company to access the strong origination and portfolio management expertise of KKR Credit, which has over $65 billion of assets under management across several credit platforms. The combined scale of the FS/KKR managed BDC platforms enables FSK to focus on upper middle market transactions, a less competitive segment than syndicated loans and smaller middle market segments, while also maintaining good investment granularity. Moody's expects that FSK will be selective in its investment strategy, which will be beneficial to the company's portfolio risk composition and long-term financial and operational stability.

FSK's profitability, measured as the ratio of net income to average assets, has averaged about 5%, moderately stronger than Moody's rated peer average. FSK's portfolio granularity and investment diversity should result in lower return volatility and strong earnings quality over the long term. However, the company is not immune to competition among lenders that has increased downward pressure on margins.

FSK expects to transition to a debt to equity leverage ratio ranging between .9x and 1.25x, with an initial target of .95x. This will result in a strong cushion against its newly adopted 150% regulatory asset coverage requirement of 20% to 40%. This compares with a cushion of 12% under its former 200% asset coverage requirement. FSK on June 14 obtained shareholder approval to adopt the revised 150% regulatory minimum asset coverage requirement applying to BDCs under an election permitted by the Small Business Credit Availability Act passed in early 2018. Moody's expects that FSK will also amend its bank credit agreement to revise its minimum asset coverage covenant to 150%, to align with the lowered regulatory requirement.

At March 31, 2019, 74% of FSK's investments were senior secured loans, including 54% of first lien secured loans, comparable to long-established peers Ares Capital and Prospect Capital. Junior investments including subordinated debt and equity are a higher percentage than certain peers, which could increase the volatility of asset fair values should economic conditions worsen. An offsetting consideration is that FSK's investment portfolio is less concentrated than most peers, with the top-ten customers comprising about 19% of the total portfolio.

FSK's debt maturity profile has fewer of the maturity concentrations observed among smaller, more recently formed BDCs, and as a consequence, FSK's refinancing risk is lower than most peers. FSK's highest concentration is in 2023 when 36% of its debt matures (its syndicated revolving credit facility). Moody's expectation is that FSK will maintain an adequately frequent cadence for renewing its syndicated facility, which is an important aspect of our assessment of the firm's liquidity management strength.

Moody's expects that FSK's ratio of secured debt to tangible assets will reflect a high reliance on secured debt. The high mix of secured debt will encumber a high proportion of the company's loans, constraining its financial flexibility.

Moody's could upgrade FSK's rating if the company 1) significantly reduces the proportion of secured debt in its capital structure, resulting in a ratio of secured debt to tangible assets of not more than 20%, while maintaining well-laddered debt maturities; 2) maintains a ratio of debt to tangible net worth of not more than 1.0x; 3) reduces the proportion of potentially more volatile junior investments; 4) generates profitability that consistently compares well with BDC peers, taking into consideration differences in investment strategies; and 5) enhances financial flexibility by obtaining prior shareholder consent to issue shares at a price below net asset value.

Moody's could downgrade FSK's ratings if the company 1) increases the ratio of debt to tangible net worth to more than 1.25x, resulting in a decline in its capital cushion versus the 150% asset coverage requirement to less than 20%; 2) materially increases the proportion of junior investments without decreasing leverage; 3) pays dividends that exceed net investment income on a regular basis; 4) increases the proportion of secured debt in the company's funding structure; or 5) generates profitability or realized losses that are worse than expected compared to peers.

The principal methodology used in these ratings was Finance Companies published in December 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark L. Wasden
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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