KBRA Publishes Initial Rating Report for FS KKR Capital Corp. II

NEW YORK--()--Kroll Bond Rating Agency (KBRA) assigned BBB issuer and senior unsecured debt ratings with a Stable Outlook for FS KKR Capital Corp. II (NYSE: “FSK II” or “the Company”), a business development company (BDC) on January 22, 2020.

Formed in December 2019 as the result of a merger among four non-traded BDCs, FS Investment Corp. II, FS Investment Corp. III, FS Investment Corp. IV and Corporate Capital Trust II, FS KKR Capital Corp. II is the third largest BDC with an $8.6 billion investment portfolio comprised of 213 portfolio companies across 23 industries as of Dec. 31, 2019. The Company is a non-traded closed-end BDC externally managed by FS/KKR Advisor, LLC (FS/KKR), a partnership between FS Investments and KKR Credit Advisors LLC.

FSK II’s initial intention was to list the Company’s shares on the NYSE during first half 2020. However, with the market turmoil resulting from COVID-19 pandemic the timing of the listing is uncertain. The Company has withdrawn its filing to issue perpetual preferred stock at this time. In order to increase financial flexibility, the Company has asked stockholders to allow FSK II to issue stock below net asset value (NAV) and to allow for reduced regulatory asset coverage to 150% from 200% which would be adopted following the Company’s listing. While the Company’s overall risk metrics will increase with higher leverage, KBRA believes FSK II’s target leverage of approximately 0.85 times equity is appropriate and within the range of similarly rated peers by KBRA.

FSK II’s BBB issuer and senior unsecured debt ratings reflect the Company’s large and diversified $8.6 billion investment portfolio comprising mostly of senior secured loans (79%) to 213 portfolio companies across 23 industries, a solid external investment advisor which is an affiliate of KKR & Co., Inc., and appropriate leverage of 0.76 times. These strengths are counter-balanced by FSK II’s potential risks related to the Company’s business as a regulated BDC, illiquid nature of the asset, more limited financial flexibility as a private company, and high non-accruals relative to its peers.

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Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

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 U.S. Information Disclosure Form 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 U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. 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 and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

Contacts

Analytical

Boris Alishayev, Senior Director
+1 (646) 731-2484
balishayev@kbra.com

Teri Seelig, Director (Lead Analyst)
+1 (646) 731-2386
tseelig@kbra.com

Marjan Riggi, Senior Managing Director (Rating Committee Chair)
+1 (646) 731-2354
mriggi@kbra.com

Business Development

Nish Kumar, Senior Director
+1 (646) 731-3372
nkumar@kbra.com

Contacts

Analytical

Boris Alishayev, Senior Director
+1 (646) 731-2484
balishayev@kbra.com

Teri Seelig, Director (Lead Analyst)
+1 (646) 731-2386
tseelig@kbra.com

Marjan Riggi, Senior Managing Director (Rating Committee Chair)
+1 (646) 731-2354
mriggi@kbra.com

Business Development

Nish Kumar, Senior Director
+1 (646) 731-3372
nkumar@kbra.com