KBRA affirms the BBB issuer and senior unsecured debt ratings for FS KKR Capital Corp. (NYSE: FSK or “the company”). The Outlook for the ratings is Stable.

Key Credit Considerations

The ratings and Stable Outlook are supported by FS KKR Capital Corp.'s ties to KKR & Co., which has $510 billion of AUM, including $197 billion dedicated to private credit lending, along with FSK's SEC exemptive relief to co-invest among affiliated companies of KKR credit. As of March 31, 2023, FSK had a $15.3 billion well-diversified investment portfolio comprised mostly of senior secured first lien loans (61%) to 189 upper middle market companies within 23 industries. The portfolio company weighted average EBITDA was $114.4 million at 1Q23, a substantial increase from $76.2 million one year prior. FSK focuses primarily on sponsor-backed companies that provide significant equity cush- ion with low LTVs. At 1Q23, the top four portfolio sectors were Software & Services (17%), Capital Goods (15%), Health Care Equipment & Services (13%), and Commercial & Professional Services (12%). The ratings also consider FSK's solid management team that has a long track record of working within the private debt markets with senior members each having decades of experience in leveraged finance. FSK is the second largest publicly traded BDC, which pro- vides solid access to the capital markets evidenced by its $4.7 billion of senior unsecured debt outstanding. FSK's gross leverage (debt/equity) is appropriate at 1.25x with a prudent target net leverage range of 1.00x to 1.20x. KBRA favorably views the high proportion of unsecured debt to total debt of 55%, which allows for more asset un-encumbrance for unsecured noteholders. Asset coverage was 180% with a 20% cushion, which KBRA considers appropriate, allowing FSK to absorb increased market volatility as well as a potential increase in non-accruals as the U.S. economy weakens with rising rates and inflation. Despite the potential for adverse credit headwinds in 2023, KBRA believes the company should weather a more difficult credit environment from management’s long-term experience, solid under- writing with a large portion of its corporate debt with at least one financial covenant, and a large proportion of investments in which FSK is lead, co-lead, or sole originator.

The rating strengths are counterbalanced by the potential risks related to the company’s elevated non-accruals as a percentage of total investments at 5.5% and 2.7% at cost and fair value, respectively, and its relatively high percentage of unsecured, ABL, and equity investments at 30.6% of total investments. Additionally, like it peers, the company's assets are relatively illiquid and its retained earnings are constrained as a Regulated Investment Company (RIC).

FSK is an externally managed, closed-end, non-diversified investment management company that elected to be treat- ed as a Business Development Company (BDC) under the 1940 Act and as a RIC, which, among other things, must distribute to its shareholders at least 90% of the company’s investment company taxable income. The company is formed as a Maryland corporation. The company is managed by FS/KKR Advisor, LLC, a partnership of FS Investments and KKR Credit that was formed in 2018. The KKR Credit platform is a subsidiary of KKR & Co.

Rating Sensitivities

The ratings for FSK are unlikely to be upgraded in the intermediate term. A rating downgrade and/or Outlook change to Negative could be considered if a prolonged downturn in the U.S. economy has material impacts on performance and nonaccruals that significantly affect capital, leverage, and liquidity metrics. An increased focus on riskier investments or a significant change in the current management structure coupled with a negative change in strategy, credit monitoring, and/or originations could also pressure ratings.

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Methodologies

Financial Institutions: Finance Company Global Rating Methodology

ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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