FS KKR Capital Corp 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk We are subject to financial market risks, including changes in interest rates. As of December 31, 2021, 69.7% of our portfolio investments (based on fair value) were debt investments paying variable interest rates and 10.2% were debt investments paying fixed interest rates while 13.1% were other income producing investments, 5.1% consisted of non-income producing investments, and the remaining 1.9% consisted of investments on non-accrual status. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to the Advisor with respect to our increased pre-incentive fee net investment income. Previously, the U.S. Federal Reserve and other central banks have reduced certain interest rates in response to the COVID-19 pandemic and market conditions. A prolonged reduction in interest rates may reduce our net investment income. Pursuant to the terms of the Ambler Credit Facility, CCT Tokyo Funding Credit Facility, Darby Creek Credit Facility, Dunlap Credit Facility, Meadowbrook Run Credit Facility, Senior Secured Revolving Credit Facility and the CLO-1 Notes, we borrow at a floating rate based on a benchmark interest rate. Under the indentures governing the 4.750% notes, the 5.000% notes, the 4.625% notes, the 4.125% notes, the 4.250% notes, the 8.625% notes, the 3.400% notes, the 2.625% notes, the 1.650% notes and the 3.125% note we pay interest to the holders of such notes at a fixed rate. To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments. The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangements in effect as of December 31, 2021 (dollar amounts are presented in millions): Basis Point Change in Interest Rates Increase (Decrease) in Interest Income (1) Increase (Decrease) in Interest Expense Increase (Decrease) in Net Interest Income Percentage Change in Net Interest Income Down 21 basis points $ (1 ) $ (9 ) $ 8 0.9 % No change — — — — Up 100 basis points 35 45 (10 ) (1.0 )% Up 300 basis points 258 135 123 13.3 % Up 500 basis points 481 225 256 27.6 % (1) Assumes no defaults or prepayments by portfolio companies over the next twelve months. We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may 67 Table of Contents include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the years ended December 31, 2021, 2020 and 2019 we did not engage in interest rate hedging activities. Foreign Currency Risk From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as amounts translated into U.S. dollars for inclusion in our consolidated financial statements. The table below presents the effect that a 10% immediate, unfavorable change in the foreign currency exchange rates (i.e. strengthening of the U.S. dollar) would have on the fair value of our investments denominated in foreign currencies as of December 31, 2021, by foreign currency, all other valuation assumptions remaining constant. In addition, the table below presents the par value of our investments denominated in foreign currencies and the notional amount of foreign currency forward contracts in local currency in place as of December 31, 2021 to hedge against foreign currency risks. Investments Denominated in Foreign Currencies As of December 31, 2021 Economically Hedged As of December 31, 2021 Cost in Local Currency Cost in US$ Fair Value Reduction in Fair Value as of December 31, 2021 if 10% Adverse Change in Exchange Rate (1) Net Foreign Currency Hedge Amount in Local Currency Net Foreign Currency Hedge Amount in U.S. Dollars Australian Dollars A$ 121.5 $ 88.3 $ 90.2 $ 9.0 A$ 5.2 $ 3.8 British Pounds Sterling £ 113.9 154.3 173.7 17.4 £ 19.6 26.4 Canadian Dollars C$ 47.0 37.1 39.0 3.9 C$ 8.7 6.8 Euros € 447.7 509.4 326.3 32.6 € 73.5 83.6 Icelandic Krona ISK 1,297.3 10.0 10.3 1.0 — — Norwegian Krone NOK 392.9 44.6 52.3 5.2 NOK 59.4 6.8 Swedish Krona SEK 750.2 83.0 68.6 6.9 SEK 750.2 83.0 Total $ 926.7 $ 760.4 $ 76.0 $ 210.4 (1) Excludes effect, if any, of any foreign currency hedges. As illustrated in the table above, we use derivative instruments from time to time, including foreign currency forward contracts and cross currency swaps, to manage the impact of fluctuations in foreign currency exchange rates. In addition, we have the ability to borrow in foreign currencies under our Senior Secured Revolving Credit Facility, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and U.S. dollar and reduces our exposure to foreign exchange rate differences. We are typically a net receiver of these foreign currencies as related for our international investment positions, and, as a result, our investments denominated in foreign currencies, to the extent not hedged, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar. As of December 31, 2021, the net contractual amount of our foreign currency forward contracts totaled $261.2, $210.4 of which related to hedging of our foreign currency denominated debt investments. As of December 31, 2021, we had outstanding borrowings denominated in foreign currencies of €260, CAD40, £130 and AUD116 under our Senior Secured Revolving Credit Facility. In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.” 68 Table of Contents