Item 5. Market for Registrant’s Common Equity
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information
Our common stock has been listed on the NYSE since April 16, 2014. Our common stock traded under the ticker symbol FSIC until
December 19, 2018 and has traded under the ticker symbol FSK since December 20, 2018. Prior to April 16, 2014, there was no public market for our common stock. Our shares of common stock have historically traded at prices
both above and below our net asset value per share. It is not possible to predict whether shares of our common stock will trade at, above or below our net asset value in the future. See Risk FactorsRisks Related to an Investment in Our
Common StockOur shares of common stock may trade at a discount to net asset value.
As of February 24, 2022, we had 13,074
record holders of our common stock which does not include beneficial owners of shares of common stock held in street name by brokers and other institutions on behalf of stockholders.
Distributions
Subject to applicable legal
restrictions and the sole discretion of our board of directors, we intend to declare and pay regular cash distributions on a quarterly basis. 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. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our board of directors.
The following table reflects the cash distributions per share that we have declared on our common stock during the years ended
December 31, 2021, 2020 and 2019:
Distribution
For the Year Ended December 31,
Per Share (1)
Amount
2019
$
3.04000
$
393
2020
$
2.56000
$
318
2021
$
2.47000
$
511
(1)
The amount of each per share distribution has been retroactively adjusted to reflect the Reverse Stock Split as
discussed in Note 3 to our consolidated financial statements.
See Item 7. Managements Discussion and
Analysis of Financial Condition and Results of OperationsRIC Status and Distributions and Note 5 to our consolidated financial statements contained in this annual report on Form 10-K for additional
information regarding our distributions and our distribution reinvestment plan.
Stock Repurchase Programs
September 2021 Share Repurchase Program
In November 2020, the Companys board of directors authorized a stock repurchase program, which went into effect in September 2021
following the consummation of the 2021 Merger, or the September 2021 Share Repurchase Program. Under the September 2021 Share Repurchase Program, the Company may repurchase up to $100 in the aggregate of its outstanding common stock in the open
market at prices below the then-current net asset value per share. The timing, manner, price and amount of any share repurchases was determined by the Company based upon the evaluation of economic and market conditions, the Companys stock
price, applicable legal and regulatory requirements and other factors. The September 2021 Share Repurchase Program is expected to be in effect for one year from the effective date, unless extended, or until the aggregate repurchase amount that has
been approved by the Companys board of directors has been expended, or the plan otherwise terminates pursuant to its terms. The September 2021 Share Repurchase Program does not require the Company to repurchase any specific number of shares
and the Company cannot assure stockholders that any shares will be repurchased under the program. The September 2021 Share Repurchase Program may be suspended, extended, modified or discontinued at any time.
During the year ended December 31, 2021, the Company repurchased 586,902 shares of common stock pursuant to the September 2021 Share
Repurchase Program at an average price per share (inclusive of commissions paid) of $21.44 (totaling
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$12). During the period from January 1, 2022 to February 24, 2022, the Company repurchased 268,457 shares of common stock pursuant to the September 2021 Share Repurchase Program at an
average price per share (inclusive of commissions paid) of $21.79 (totaling $6).
Affiliated Purchaser Programs
As previously disclosed, certain affiliates of the owners of the Advisor committed $100 to a $350 investment vehicle that may invest from time
to time in shares of the Company. In September 2021, that investment vehicle entered into a written trading plan with a third party broker in accordance with Rule 10b5-1 and Rule
10b-18 promulgated under the Exchange Act, or the September 2021 Affiliated Purchaser Program, to facilitate the purchase of shares of our common stock pursuant to the terms and conditions of such plan. The
September 2021 Affiliated Purchaser Program provided for the purchase of up to $100 worth of shares of our common stock, subject to the limitations provided therein. The September 2021 Affiliated Purchaser Program has concluded since the aggregate
repurchase amount that was approved by the Companys board of directors has been expended.
In December 2021, that investment vehicle
entered into a written trading plan with a third party broker in accordance with Rule 10b5-1 and Rule 10b-18 promulgated under the Exchange Act, or the December 2021
Affiliated Purchaser Program, to facilitate the purchase of shares of our common stock pursuant to the terms and conditions of such plan. The December 2021 Affiliated Purchaser Program provides for the purchase of up to $70 worth of shares of our
common stock, subject to the limitations provided therein.
During the year ended December 31, 2021, the September 2021 Affiliated
Purchaser Program and the December 2021 Affiliated Purchaser Program purchased 4,775,154 shares of common stock at an average price per share (inclusive of commissions paid) of $21.36 (totaling $102).
The table below provides information concerning purchases of our shares of common stock by or on behalf of the Company or any affiliated
purchaser, as defined by Rule 10b-18(a)(3) promulgated under the Exchange Act during the quarterly period ended December 31, 2021. Dollar amounts in the table below and the related notes are
presented in millions, except for share and per share amounts.
Period
Total Number
of Shares
Purchased
Average Price
Paid per
Share (1)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
Maximum Number
(or Approximate
Dollar Value)
of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
October 1, 2021 through October 31, 2021
641,151
$
22.45
641,151
$
172
November 1, 2021 through November 30, 2021
1,680,781
21.46
1,680,781
136
December 1, 2021 through December 31, 2021
2,451,050
20.80
2,451,050
155
4,772,982
$
21.25
4,772,982
(1)
Amount includes commissions paid.
(2)
Includes amounts pursuant to the September 2021 Share Repurchase Program, the September 2021 Affiliated
Purchaser Program and the December 2021 Affiliated Purchaser Program.
Stock Performance Graph
This performance graph shall not be deemed soliciting material or to be filed with the SEC for purposes of
Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of FS KKR Capital Corp. under the Securities Act.
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The following graph shows a comparison from April 16, 2014 (the date our shares of
common stock commenced trading on the NYSE) through December 31, 2021 of the cumulative total return for our common stock, the S&P 500 Index, the Russell 2000 Financial Services Index and the MVIS US Business Development Companies
Index. The graph assumes that $100 was invested at the market close on April 16, 2014 in our common stock, the S&P 500 Index, the Russell 2000 Financial Services Index and the MVIS US Business Development Companies Index, is based on
historical stock prices and assumes all dividends or distributions are reinvested on the respective dividend or distribution payment dates without commissions. The stock price performance reflected by the following graph is not necessarily
indicative of future stock price performance.
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Item 6.
Reserved.
Omitted pursuant to SEC Final Rule Release No. 33-10890, Managements Discussion and
Analysis, Selected Financial Data, and Supplementary Financial Information , with respect to Item 301, which went effective February 10, 2021.
Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations.
The information contained in this section should be read in conjunction with our consolidated financial statements
and related notes thereto appearing elsewhere in this annual report on Form 10-K.
Forward-Looking Statements
Some of the statements in this annual report on Form 10-K constitute forward-looking
statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K 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 in the Fund Complex, their respective current or
future investment advisers or any of their 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 Act, 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 annual report on Form 10-K involve risks and uncertainties. Our actual results could
differ materially from those implied or expressed in the forward-looking statements for any reason, including those factors set forth in Item 1A. Risk Factors. 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 NYSE.
We have based the forward-looking statements included in this annual report on Form 10-K on information
available to us on the date of this annual report on Form 10-K. 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 the SEC, 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 annual report on Form 10-K 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 the State of Maryland on December 21, 2007 and formally commenced investment
operations on January 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 for U.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 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 U.S. companies, including middle-market
companies, which we define as companies with annual EBITDA of $25 million to $100 million at the time of investment;
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 market U.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 Companys 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. These direct originations include investments originated by FB Income Advisor, GDFM or their affiliates.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S.
companies and, to a lesser extent, subordinated loans and certain asset-based financing loans of private U.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 OTC 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
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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 Advisors
fundamental analysis. Such investment opportunities may occur due to general dislocations in the markets, a misunderstanding by the 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
Moodys 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.
Acquisition of FSKR
On June 16,
2021, we completed the 2021 Merger. Pursuant to the 2020 Merger Agreement, Merger Sub merged with and into FSKR, with FSKR continuing as the surviving company and as a wholly-owned subsidiary of the Company, or the First Merger, and, immediately
thereafter, FSKR merged with and into the Company, with the Company continuing as the surviving company. In accordance with the terms of the 2020 Merger Agreement, (i) each outstanding share of FSKR common stock was converted into the right to
receive 0.9498 shares of the Companys common stock. This exchange ratio was determined based on the closing net asset value, or NAV, per share of $26.77 and $25.42 for the Company and FSKR, respectively, as of June 14, 2021, to ensure
that the NAV of shares investors will own in FSK is equal to the NAV of the shares they held in FSKR. As a result, the Company issued an aggregate of approximately 161,374,028 shares of its common stock to former FSKR stockholders. Following the
consummation of the 2021 Merger, we entered into the investment advisory agreement.
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 the SEC. 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.
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Pursuant to the administration agreement, we reimburse the Advisor for expenses necessary to
perform services related to our administration and operations, including the Advisors 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 (without limitation) fees and expenses relating
to:
corporate and organization expenses relating to offerings of our securities, subject to limitations included in
the investment advisory agreement;
the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
investment advisory fees;
fees payable to third parties relating to, or associated with, making investments and valuing investments,
including fees and expenses associated with performing due diligence reviews of prospective investments;
interest payments on our debt or related obligations;
transfer agent and custodial fees;
research and market data (including news and quotation equipment and services, and any computer hardware and
connectivity hardware (e.g., telephone and fiber optic lines) incorporated into the cost of obtaining such research and market data);
fees and expenses associated with marketing efforts;
federal and state registration fees;
federal, state and local taxes;
fees and expenses of directors not also serving in an executive officer capacity for us or the Advisor;
costs of proxy statements, stockholders reports, notices and other filings;
fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;
direct costs such as printing, mailing, long distance telephone and staff;
fees and expenses associated with accounting, corporate governance, government and regulatory affairs activities,
independent audits and outside legal costs;
costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and
state securities laws, including compliance with the Sarbanes-Oxley Act;
brokerage commissions for our investments; and
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.
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In addition, we have contracted with State 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.
COVID-19
Developments
The rapid spread of the COVID-19 pandemic, and associated impacts on the U.S. and
global economies, has negatively impacted, and is likely to continue to negatively impact, the business operations of some of our portfolio companies. We cannot at this time fully predict the continued impact of
COVID-19 and its variants on our business or the business of our portfolio companies, its duration or magnitude or the extent to which it will negatively impact our portfolio companies operating results
or our own results of operations or financial condition. We expect that certain of our portfolio companies may continue to experience economic distress for the foreseeable future and may significantly limit business operations if subjected to
prolonged economic distress. These developments could result in a decrease in the value of our investments.
COVID-19 has already had adverse effects on our investment income and we expect that such adverse
effects may continue for some time. These adverse effects may require us to restructure certain of our investments, which could result in further reductions to our investment income or in impairments on our investments. In addition, disruptions in
the capital markets have resulted in illiquidity in certain market areas. These market disruptions and illiquidity are likely to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic
conditions caused by COVID-19 and its variants can also be expected to increase our funding costs and limit our access to the capital markets. These events have limited our investment originations and have
also had a material negative impact on our operating results.
We will continue to carefully monitor the impact of the COVID-19 pandemic on our business and the business of our portfolio companies. Because the full effects of the COVID-19 pandemic are not capable of being known at this time,
we cannot estimate the impacts of COVID-19 and its variants on our future financial condition, results of operations or cash flows. We do, however, expect that it may continue to have a negative impact on our
business and the financial condition of certain of our portfolio companies.
Portfolio Investment Activity for the Years Ended December 31, 2021
and 2020
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the years ended December 31,
2021 and 2020:
For the Year Ended
Net Investment Activity
December 31,
2021
December 31,
2020
Purchases (1)
$
13,826
$
2,336
Sales and Repayments
(5,575
)
(2,301
)
Net Portfolio Activity
$
8,251
$
35
For the Year Ended
December 31, 2021
December 31, 2020
New Investment Activity by Asset Class (1)
Purchases
Percentage
Sales and
Repayments
Percentage
Purchases
Percentage
Sales and
Repayments
Percentage
Senior Secured LoansFirst Lien
$
9,713
71
%
$
3,704
66
%
$
1,464
63
%
$
1,624
71
%
Senior Secured LoansSecond Lien
1,400
10
%
833
15
%
99
4
%
275
12
%
Other Senior Secured Debt
95
1
%
52
1
%
3
0
%
35
1
%
Subordinated Debt
46
0
%
99
2
%
25
1
%
167
7
%
Asset Based Finance
1,541
11
%
462
8
%
426
18
%
181
8
%
Credit Opportunities Partners JV, LLC
587
4
%
319
14
%
Equity/Other
444
3
%
425
8
%
19
1
%
Total
$
13,826
100
%
$
5,575
100
%
$
2,336
100
%
$
2,301
100
%
(1)
Purchases and new investments for the year ended December 31, 2021 include investments acquired at a cost
of $7,227 in connection with the 2021 Merger.
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The following table summarizes the composition of our investment portfolio at cost and fair
value as of December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
Amortized
Cost (1)
Fair
Value
Percentage
of Portfolio
Amortized
Cost (1)
Fair
Value
Percentage
of Portfolio
Senior Secured LoansFirst Lien
$
9,695
$
9,765
60.7
%
$
3,597
$
3,449
50.9
%
Senior Secured LoansSecond Lien
1,564
1,557
9.7
%
1,035
880
13.0
%
Other Senior Secured Debt
149
120
0.7
%
127
86
1.3
%
Subordinated Debt
188
111
0.7
%
243
171
2.5
%
Asset Based Finance
2,132
2,245
13.9
%
1,025
951
14.0
%
Credit Opportunities Partners JV, LLC
1,397
1,396
8.7
%
810
713
10.5
%
Equity/Other
932
907
5.6
%
616
530
7.8
%
Total
$
16,057
$
16,101
100.0
%
$
7,453
$
6,780
100.0
%
(1)
Amortized costs represent the original cost adjusted for the amortization of premiums and/or accretion of
discounts, as applicable, on investments.
The following table presents certain selected information regarding the
composition of our investment portfolio as of December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
Number of Portfolio Companies
189
164
% Variable Rate Debt Investments (based on fair value) (1)(2)
69.7
%
63.5
%
% Fixed Rate Debt Investments (based on fair
value) (1)(2)
10.2
%
9.0
%
% Other Income Producing Investments (based on fair value) (3)
13.1
%
16.9
%
% Non-Income Producing Investments (based on fair value) (2)
5.1
%
8.1
%
% of Investments on Non-Accrual (based on fair
value)
1.9
%
2.5
%
Weighted Average Annual Yield on Accruing Debt Investments (2)(4)
9.2
%
8.8
%
Weighted Average Annual Yield on All Debt Investments (5)
8.7
%
7.9
%
(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 accruing Debt Investment, multiplied by its par amount, adjusted to U.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 accruing Debt 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.
(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 each Debt Investment, multiplied by its par amount, adjusted to U.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 Debt 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.
For the year ended December 31, 2021, our total return based on net asset value was
18.47% and our total return based on market value was 41.45%. For the year ended December 31, 2020, our total return based on net asset value was (9.69)% and our total return based on market value was (19.73)%. See footnotes 8 and 9 to the
table included in Note 12 to our audited 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.
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Direct Originations
We define Direct Originations as any investment where the Advisor or its affiliates negotiates the terms of the transaction beyond just the
price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These Direct Originations 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. The following table presents certain selected information regarding our Direct Originations as of December 31, 2021 and 2020:
Characteristics of All Direct Originations held in Portfolio
December 31, 2021
December 31, 2020
Number of Portfolio Companies
167
135
% of Investments on Non-Accrual
1.9
%
2.6
%
Total Cost of Direct Originations
$
15,341.3
$
7,048.4
Total Fair Value of Direct Originations
$
15,433.3
$
6,447.3
% of Total Investments, at Fair Value
95.9
%
95.1
%
Weighted Average Annual Yield on Accruing Debt Investments (1)
8.9
%
8.7
%
Weighted Average Annual Yield on All Debt
Investments (2)
8.5
%
7.8
%
(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 accruing Debt Investment, multiplied by its par amount, adjusted to U.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 accruing Debt 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. Does not include Debt Investments on non-accrual status.
(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 each Debt Investment, multiplied by its par amount, adjusted to U.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 Debt 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.
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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 of December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
Industry Classification
Fair
Value
Percentage of
Portfolio
Fair
Value
Percentage of
Portfolio
Automobiles & Components
$
89
0.5
%
$
104
1.5
%
Banks
15
0.1
%
14
0.2
%
Capital Goods
2,281
14.2
%
799
11.8
%
Commercial & Professional Services
1,615
10.0
%
564
8.3
%
Consumer Durables & Apparel
551
3.4
%
385
5.7
%
Consumer Services
393
2.4
%
145
2.1
%
Credit Opportunities Partners JV, LLC
1,396
8.7
%
713
10.5
%
Diversified Financials
672
4.2
%
467
6.9
%
Energy
241
1.5
%
107
1.6
%
Food & Staples Retailing
296
1.8
%
221
3.3
%
Food, Beverage & Tobacco
256
1.6
%
106
1.6
%
Health Care Equipment & Services
1,613
10.0
%
604
8.9
%
Household & Personal Products
227
1.4
%
190
2.8
%
Insurance
898
5.6
%
208
3.1
%
Materials
211
1.3
%
147
2.2
%
Media & Entertainment
720
4.5
%
36
0.5
%
Pharmaceuticals, Biotechnology & Life Sciences
235
1.5
%
34
0.5
%
Real Estate
876
5.4
%
555
8.2
%
Retailing
288
1.8
%
344
5.1
%
Software & Services
2,698
16.8
%
770
11.3
%
Technology Hardware & Equipment
42
0.3
%
15
0.2
%
Telecommunication Services
128
0.8
%
71
1.0
%
Transportation
360
2.2
%
181
2.7
%
Total
$
16,101
100.0
%
$
6,780
100.0
%
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 Investmentgenerally executing in accordance with plan and there are no concerns about the portfolio companys performance or ability to meet covenant requirements.
2
Performing investmentno concern about repayment of both interest and our cost basis but companys recent performance or trends in the industry require closer monitoring.
3
Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment.
4
Underperforming investmentconcerns about the recoverability of principal or interest.
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The following table shows the distribution of our investments on the 1 to 4 investment
rating scale at fair value as of December 31, 2021 and 2020:
December 31, 2021
December 31, 2020
Investment Rating
Fair
Value
Percentage of
Portfolio
Fair
Value
Percentage of
Portfolio
1
$
12,602
78
%
$
4,538
67
%
2
2,468
15
%
1,537
23
%
3
748
5
%
349
5
%
4
283
2
%
356
5
%
Total
$
16,101
100
%
$
6,780
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
Years Ended December 31, 2021, 2020 and 2019
Revenues
Our investment income for the years ended December 31, 2021, 2020 and 2019 was as follows:
Year Ended December 31,
2021
2020
2019
Amount
Percentage of
Total Income
Amount
Percentage of
Total Income
Amount
Percentage of
Total Income
Interest income
$
687
63.6
%
$
444
69.5
%
$
610
78.3
%
Paid-in-kind
interest income
107
9.9
%
66
10.3
%
60
7.7
%
Fee income
91
8.4
%
33
5.2
%
42
5.4
%
Dividend income
196
18.1
%
96
15.0
%
67
8.6
%
Total investment income (1)
$
1,081
100.0
%
$
639
100.0
%
$
779
100.0
%
(1)
Such revenues represent $915, $563 and $705 of cash income earned as well as $166, $76 and $74 in non-cash portions relating to accretion of discount and PIK interest for the years ended December 31, 2021, 2020 and 2019, 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 prepayment fees and structuring 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 year ended December 31, 2021 compared to the
year ended December 31, 2020 can primarily be attributed to the increase in assets resulting from the 2021 Merger.
The increase in
fee income during the year ended December 31, 2021 compared to the year ended December 31, 2020 can primarily be attributed to structuring fees and prepayment fees received in connection with increase investment and repayment activity
during the current period.
The increase in dividend income during the year ended December 31, 2021 compared to the year ended
December 31, 2020 can be primarily attributed to the increase in dividends paid in respect to our investment in Credit Opportunities Partners JV, LLC, and a one-time dividend of $20 from one of our equity
investments during the year ended December 31, 2021.
The decrease in investment income during the year ended December 31, 2020
compared to the year ended December 31, 2019 can be primarily attributed to the repayment of higher yielding assets replaced by lower yielding assets, the impact of the decline in LIBOR on our floating rate investments and the increase in our
investment in Credit Opportunities Partners JV, LLC during the year ended December 31, 2020. A portion of each of these factors was impacted by the current COVID-19 pandemic.
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The increase in dividend income during the year ended December 31, 2020 compared to the
year ended December 31, 2019 can be primarily attributed to the increase in dividends paid in respect to our investment in Credit Opportunities Partners JV, LLC during the year ended December 31, 2020, compared to the year ended
December 31, 2019.
Expenses
Our
operating expenses, together with excise taxes, for the years ended December 31, 2021, 2020 and 2019 were as follows:
Year Ended December 31,
2021
2020
2019
Management fees
$
173
$
106
$
115
Subordinated income incentive fees
77
57
Administrative services expenses
12
7
9
Accounting and administrative fees
3
2
2
Interest expense
231
170
170
Other expenses
19
13
9
Total operating expenses
$
515
$
298
$
362
Incentive fee waiver
(30
)
Net operating expenses before taxes
485
298
362
Excise taxes
12
10
7
Total net expenses, including excise taxes
$
497
$
308
$
369
The following table reflects selected
expense ratios as a percent of average net assets for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31,
2021
2020
2019
Ratio of operating expenses and excise taxes to average net assets
9.35
%
9.71
%
9.09
%
Ratio of incentive fee waiver to average net
assets (1)
(0.53
)%
Ratio of net operating expenses to average net assets
8.82
%
9.71
%
9.09
%
Ratio of incentive fees, interest expense and excise taxes to average net assets (1)
5.15
%
5.67
%
5.77
%
Ratio of net operating expenses, excluding certain expenses, to average net assets
3.67
%
4.04
%
3.32
%
(1)
Ratio data may be rounded in order to recompute the ending ratio of net operating expenses, excluding certain
expenses, to average net assets.
The increase in expenses during the year ended December 31, 2021 compared to the
year ended December 31, 2020 can primarily be attributed to the increased management fee as a result of the higher asset base from the 2021 Merger, the increased subordinated income incentive fee pursuant to the terms of the investment advisory
agreement following the 2021 Merger and increased interest expense resulting from the higher debt outstanding due to the 2021 Merger.
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 $584 ($2.76 per share), $331 ($2.66 per share) and $410 ($3.16 per share) for the years ended December 31, 2021, 2020 and 2019, respectively.
The increase in net investment income during the year ended December 31, 2021 compared to the year ended December 31, 2020 can
primarily be attributed to higher investment income during the year ended December 31, 2021 as discussed above. The decrease in net investment income for the year ended December 31, 2020 compared to the year ended December 31, 2019
can be attributed to lower investment income as discussed above.
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Net Realized Gains or Losses
Our net realized gains (losses) on investments, financial instruments and foreign currency for the years ended December 31, 2021, 2020 and
2019 were as follows:
Year Ended December 31,
2021
2020
2019
Net realized gain (loss) on
investments (1)
$
171
$
(490
)
$
(81
)
Net realized gain (loss) on swap contracts
(11
)
Net realized gain (loss) on foreign currency forward contracts
0
12
Net realized gain (loss) on foreign currency
(7
)
(6
)
2
Total net realized gain (loss)
$
164
$
(496
)
$
(78
)
(1)
We sold investments and received principal repayments, respectively, of $2,258 and $3,317 during the year ended
December 31, 2021, $1,232 and $1,069 during the year ended December, 31, 2020 and $1,252 and $1,602 during the year ended December 31, 2019.
Realized Losses from Extinguishment of Debt
During the years ended December 31, 2021, 2020 and 2019, we recorded a net realized loss from the extinguishment of debt of $(3), $0 and
$0, respectively. Refer to Note 9 to our consolidated financial statements contained in this annual report on Form 10-K for additional information.
Net Change in Unrealized Appreciation (Depreciation)
Our net change in unrealized appreciation (depreciation) on investments, financial instruments and unrealized gain (loss) on foreign currency
for the years ended December 31, 2021, 2020 and 2019 were as follows:
Year Ended December 31,
2021
2020
2019
Net change in unrealized appreciation (depreciation) on investments
$
728
$
(221
)
$
(83
)
Net change in unrealized appreciation (depreciation) on swap contracts
16
Net change in unrealized appreciation (depreciation) on foreign currency forward
contracts
12
(3
)
(2
)
Net change in unrealized gain (loss) on foreign currency
30
(16
)
(17
)
Total net change in unrealized appreciation (depreciation)
$
770
$
(240
)
$
(86
)
During the year ended December 31, 2021, the net change in unrealized appreciation (depreciation) on our
investments was driven primarily by $628 of appreciation resulting from the merger accounting associated with the 2021 Merger. During the year ended December 31, 2020, the net change in unrealized appreciation (depreciation) on our investments
was driven primarily by mark to market declines across the portfolio resulting from uncertainty related to the COVID-19 pandemic. During the year ended December 31, 2019, the net change in unrealized
appreciation (depreciation) on our investments was primarily driven by mark to market declines in certain debt investments.
Net Increase (Decrease) in
Net Assets Resulting from Operations
For the years ended December 31, 2021, 2020 and 2019, the net increase (decrease) in net
assets resulting from operations was $1,515 ($7.16 per share), $(405) ($(3.26) per share) and $246 ($1.90 per share), respectively.
This
Results of Operations section should be read in conjunction with COVID-19 Developments above.
Financial Condition, Liquidity and Capital Resources
Overview
As of December 31, 2021, we
had $377 in cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $1,609 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of
December 31, 2021, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of December 31, 2021, we had unfunded debt investments with aggregate unfunded commitments of
$1,724.1, unfunded equity/other commitments of $576.9 and unfunded commitments of $350.2 of COPJV. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.
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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 to June 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. Effective June 15, 2019, our asset coverage requirement applicable to senior securities was reduced from 200% to 150%. As of December 31, 2021, the aggregate amount outstanding of the senior securities
issued by us was $9.2 billion. As of December 31, 2021, our asset coverage was 184%. See Financing Arrangements.
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.
This Financial
Condition, Liquidity and Capital Resources section should be read in conjunction with COVID-19 Developments above.
Financing Arrangements
The following
table presents summary information with respect to our outstanding financing arrangements as of December 31, 2021:
As of December 31,
2021
Arrangement
Type of Arrangement
Rate
Amount
Outstanding
Amount
Available
Maturity Date
Ambler Credit Facility (2)(9)
Revolving Credit Facility
SOFR+2.15% (1)
$
150
$
50
November 22, 2025
Burholme Prime Brokerage
Facility (2)(9)
Prime Brokerage Facility
L+1.25% (1)
June 28, 2022
CCT Tokyo Funding Credit Facility (2)
Revolving Credit Facility
L+1.75%-2.00% (1)(3)
300
January 2, 2025
Darby Creek Credit Facility (2)(9)
Revolving Credit Facility
L+1.85% (1)
250
February 26, 2025
Dunlap Credit Facility (2)(9)
Revolving Credit Facility
L+1.85% (1)
485
15
February 26, 2025
Meadowbrook Run Credit
Facility (2)(9)
Revolving Credit Facility
SOFR+2.05% (1)
300
November 22, 2024
Senior Secured Revolving Credit
Facility (2)
Revolving Credit Facility
L+1.75%-2.00% (1)(4)
SONIA+0.0326% (1)(4)
2,647
(5)
1,544
(6)
December 23, 2025
4.750% Notes due 2022 (7)
Unsecured Notes
4.75%
450
May 15, 2022
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)(9)
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
3.125% Notes due 2028 (7)
Unsecured Notes
3.13%
750
October 12, 2028
2019-1
Notes (2)(8)
Collateralized Loan Obligation
L+1.85%-3.01% (1)
352
January 15, 2031
Total
$
9,179
$
1,609
(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.
(5)
Amount includes borrowing in Euros, Canadian dollars, pounds sterling and Australian dollars. Euro balance
outstanding of 260 has been converted to U.S. dollars at an exchange rate of 1.00 to $1.14 as of December 31, 2021 to reflect total
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amount outstanding in U.S. dollars. Canadian dollar balance outstanding of CAD40 has been converted to U.S dollars at an exchange rate of CAD1.00 to $0.79 as of December 31, 2021 to reflect
total amount outstanding in U.S. dollars. Pounds sterling balance outstanding of £130 has been converted to U.S. dollars at an exchange rate of £1.00 to $1.35 as of December 31, 2021 to reflect total amount outstanding in U.S.
dollars. Australian dollar balance outstanding of AUD116 has been converted to U.S dollars at an exchange rate of AUD1.00 to $0.73 as of December 31, 2021 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 December 31, 2021, $9 of such Letters of Credit have been issued.
(7)
As of December 31, 2021, the fair value of the 4.750% notes, 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 and the 3.125% was approximately $455, $421, $491, $492, $497, $276, $1,016, $395 and $747, respectively. These valuations are considered Level 2 valuations
within the fair value hierarchy.
(8)
As of December 31, 2021, 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%.
(9)
As of June 16, 2021, the Company assumed all of FSKRs obligations under its notes and credit
facilities, and FSKRs wholly-owned special purpose financing subsidiaries became wholly-owned special purpose financing subsidiaries of the Company, in each case, as a result of the consummation of the 2021 Merger.
See Note 9 to our 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 ninth 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 ending October 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 no U.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, on December 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 stockholders specific distribution amount for the period using record and declaration dates and each stockholders 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 stockholders 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 tax years ended December 31, 2021, 2020 or 2019 represented a return of
capital.
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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 our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless
remain taxable to a U.S. stockholder.
The following table reflects the cash distributions per share that we have declared on our common
stock during the years ended December 31, 2021, 2020 and 2019:
Distribution
For the Year Ended December 31,
Per Share (1)
Amount
2019
$
3.04000
$
393
2020
$
2.56000
$
318
2021
$
2.47000
$
511
(1)
The amount of each per share distribution has been retroactively adjusted to reflect the Reverse Stock Split as
discussed in Note 3 to our unaudited consolidated financial statements included herein.
See Note 5 to our consolidated
financial statements contained in this annual report on Form 10-K for additional information regarding our distributions, including a reconciliation of our GAAP-basis net investment income to our tax-basis net investment income for the years ended December 31, 2021, 2020 and 2019.
Recent Developments
On January 18, 2022, the Company entered into the Eleventh Supplemental Indenture in connection with the 3.250% Notes. For
additional discussion of the 3.250 % Notes, see Note 14 to our consolidated financial statements included herein.
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 managements 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
We determine the net asset value of our investment portfolio each quarter. Securities are valued at fair value as determined in good faith by
our board of directors. In connection with that determination, the Advisor provides our board of directors with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like
securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.
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.
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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 providing financial and operating information with
respect to each portfolio company or investment to our independent third-party valuation service providers;
our independent third-party valuation service providers review this information, along with other public and
private information, and provide the Advisor with a valuation range for each portfolio company or investment;
the Advisor then discusses the independent third-party valuation service providers valuation ranges and
provides the valuation committee of the board of directors, or the valuation committee, with a valuation recommendation for each investment, along with supporting materials;
preliminary valuations are then discussed with the valuation committee;
our valuation committee reviews the preliminary valuations and the Advisor, together with our independent
third-party valuation service providers and, if applicable, supplements the preliminary valuations to reflect any comments provided by the valuation committee;
following the completion of its review, our valuation committee recommends that our board of directors approves
the fair valuations determined by the valuation committee; and
our board of directors discusses the valuations and determines the fair value of each such investment in our
portfolio in good faith based on various statistical and other factors, including the input and recommendation of the Advisor, the valuation committee and our independent third-party valuation service providers.
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, our board of directors may use any approved independent
third-party pricing or valuation services. However, our board of directors 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 obtained from the
Advisor or any approved independent third-party valuation or pricing service that our board of directors deems to be reliable in determining fair value under the circumstances. Below is a description of factors that the Advisor, any approved
independent third-party valuation services and our board of directors may consider when determining the fair value of our investments.
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, we may incorporate these factors into discounted cash flow
models to arrive at fair value. Other factors that may be considered include the borrowers 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 our 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.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of directors, in its
determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the
particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
The Advisor, any approved independent third-party valuation services and our board of directors may also consider private merger and
acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Advisor, any approved
independent third-party valuation services and our board of directors may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the
higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as
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our board of directors, in consultation with the Advisor and any approved independent third-party valuation services, if applicable, may consider relevant in assessing 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. Our board of directors
subsequently values these warrants or other equity securities received at their fair value.
The fair values of our investments are
determined in good faith by our board of directors. Our board of directors is responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation
process. Our board of directors has delegated day-to-day responsibility for implementing our valuation policy to the Advisor, and has authorized the Advisor to utilize
independent third-party valuation and pricing services that have been approved by our board of directors. The valuation committee is responsible for overseeing the Advisors implementation of the valuation process.
See Note 8 to our consolidated financial statements included herein for additional information regarding the fair value of our financial
instruments.
Merger Accounting
On
June 16, 2021, we completed the 2021 Merger. Pursuant to the 2020 Merger Agreement, Merger Sub merged with and into FSKR, with FSKR continuing as the surviving company and as a wholly-owned subsidiary of the Company, or the First Merger, and,
immediately thereafter, FSKR merged with and into the Company, with the Company continuing as the surviving company. The 2021 Merger was considered a tax-free reorganization.
The 2021 Merger was accounted for in accordance with the asset acquisition method of accounting as detailed in Accounting Standards
Codification 805-50, Business CombinationsRelated Issues . The fair value of the consideration paid by the Company in the 2021 Merger was allocated to the assets acquired and liabilities assumed
based on their relative fair values as of the date of acquisition and did not give rise to goodwill.
See Note 13 to our unaudited
financial statements included herein for additional information regarding the 2021 Merger.
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 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 years ended December 31, 2021, 2020 and 2019.
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Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic
848) , which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts,
hedging relationships, and other transactions that reference London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) , which expanded the scope of Topic 848 to include derivative instruments impacted by discounting transition. ASU
2020-04 and ASU 2021-01 are effective for all entities through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract
modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through
the end of the hedging relationship. The Company is currently evaluating the impact of the adoption of ASU 2020-04 and 2021-01 on its consolidated financial statements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.