FS KKR Capital Corp. II — Investor Presentation (June 2020)
42 slides from FS KKR Capital Corp. II's investor presentation, Jun 3, 2020
Slide 1: FS KKR Capital Corp. II (FSKR) Presentation June 2020
FS KKR Capital Corp. II (“FSKR”) Presentation JUNE 2020 1
Slide 2: Management Team
2 Management Team Michael Forman Chairman and CEO, FS / KKR BDC Franchise • Founder, Chairman, and CEO of FS Investments • Prior experience includes Klehr Harrison Harvey Branzburg LLP • B.A., University of Rhode Island • J.D., Rutgers Law School Brian Gerson Co - President, FS / KKR BDC Franchise •
Slide 3: FS / KKR BDC Franchise — Overview
Size & Scale Market Reach Scope • Two BDCs (FSK and FSKR) totalling $15bn+ in assets integrated within KKR’s $68bn credit platform • Over 130 dedicated KKR Credit investment professionals • Global financial sponsor and corporate borrower relationships • Investment and leadership team with significan
Slide 4: Second Largest BDC Franchise in the U.S.
4 Second Largest BDC Franchise in the U.S. Note : As of March 31 , 2020 . $7.4 $1.4 $1.8 $1.5 $8.2 $1.2 $0.5 $0.6 $15.8 $15.6 $9.4 $5.2 $4.3 $3.1 $2.9 $2.6 $2.6 $2.5 $2.4 $2.3 $2.1 $2.1 $2.1 $1.7 $1.5 ARCC ORCC PSEC GBDC NMFC AINV PNNT & PFLT BCSF MAIN HTGC SLRC & SUNS CGBD OCSL & OCSI TSLX TCPC GSB
Slide 5: Overview of FSKR and FS / KKR Advisor
5 Overview of FSKR and FS / KKR Advisor
Slide 6: FSKR is Core to the FS / KKR BDC Franchise
6 FSKR is Core to the FS / KKR BDC Franchise FSKR is a business development company (BDC) focused on providing customized credit solutions to private middle market companies Externally managed by FS / KKR Advisor, LLC • FS / KKR Advisor, a partnership between KKR and FS Investments, leverages the fu
Slide 7: FSKR is the Result of a Four-Way BDC Merger
FSKR is the Result of a Four - Way BDC Merger 1. As of March 31, 2020. The FS / KKR Advisor partnership was established in April 2018 with the goal of creating the BDC industry’s leading franchise • Four - way BDC merger completed on December 18, 2019 • FSIC II was the surviving entity and was renam
Slide 8: FSKR Corporate Development Update
8 FSKR Corporate Development Update A multi - stage plan designed to maximize shareholder value and create opportunities for long - term value creation Non - traded BDCs merger • Create significant scale for public markets • Ensure equal treatment of shareholders with NAV - for - NAV merger • Enable
Slide 9: FS / KKR Advisor Overview
($ 207 bn AUM) ($23bn AUM) FS / KKR Advisor Overview 1. As of March 31, 2020. 2. As of March 31, 2020. Includes legacy investments in KKR Financial Holdings LLC, a specialty finance vehicle listed on the Ne w Y ork Stock Exchange and various collateralized loan obligation vehicles. x Ability to comm
Slide 10: Established in 1976, KKR is a Leading Investment Firm
Established in 1976, KKR is a Leading Investment Firm with over Four Decades of Investing Experience 20 Offices in 16 countries & 4 continents ~$20bn balance sheet invested in KKR strategies alongside our clients ~470 investment professionals (~130 KKR Credit) results - driven economic incentives wi
Slide 11: Large, Scalable Platform
11 Large, Scalable Platform • $68bn of credit AUM • ~130 dedicated KKR investment professionals across 9 cities and 8 countries • 1,000+ issuers across the KKR credit platform Disciplined Investment Process • “PE - style” KKR - led due diligence standard • Fundamental credit investment philosophy ba
Slide 12: KKR's Proprietary Origination Network
12 KKR’s Proprietary Origination Network Note : Please see “Important Information” at the beginning of this Presentation for further information on KKR’s inside information barrier policies and procedures, which may limit the involvement of personnel in certain investment processes and discussions .
Slide 13: KKR Provides Speed of Execution and Total Capital Solutions
13 KKR Provides Speed of Execution and Total Capital Solutions …Which has Translated to Strong Growth in Our Sponsor Network …and Financial Intermediary Coverage Core Equity Holdings
Slide 14: KKR Credit Platform: Tangible Results
14 Note: Figures above represent commitments across KKR platform. KKR Credit Platform: Tangible Results • Committed $363mm to an $800mm Second Lien Term Loan • Provided $182mm of a $600mm Preferred Equity Tranche • U.S. residential bridge loan purchasing company • Built de novo platform backing seas
Slide 15: FS / KKR Operating Approach
15 FS / KKR Operating Approach The FS / KKR BDC franchise has direct involvement of over 200 professionals FS / KKR BDC Franchise 19 Board & Executive Team 2 Third Party Valuation Firms 60+ Capital Markets Team 30+ Legal, Accounting & Financial Reporting 5 Dedicated Workout Team¹ 9 Tax Structuring T
Slide 16: FSKR Target Market and Investment Portfolio
16 FSKR Target Market and Investment Portfolio
Slide 17: Overview of U.S. Middle Market Lending
17 Overview of U.S. Middle Market Lending $21.4 $14.1 $6.0 $3.9 $2.9 Leading World Economies ($ tn ) Opportunity U.S. MM x Private transactions allow for better structures than syndicated deals x Pricing 200 - 300 bps above syndicated market x The middle market provides attractive investment yields
Slide 18: Current Lending Environment is Attractive
Current Lending Environment is Attractive Recent market events are rapidly shifting the pendulum toward a more lender - friendly environment 18 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 5.5x 6.0x 2000 2010 2020 First Lien Second Lien Starting Leverage 0.00x 2.50 - 4.50x Total Leverage U
Slide 19: Primary Focus: The Upper Middle Market
19 Primary Focus: The Upper Middle Market Market Participants Competitive Dynamics Lower MM Middle MM Upper MM BSL Market $3 – 25mm EBITDA $25 – 50mm EBITDA $50 – 100mm EBITDA $100mm+ EBITDA • Limited balance sheets • Single scope product offerings • Extreme competition • Highly structured financing
Slide 20: Rigorous Investment Review Process
20 Rigorous Investment Review Process KKR’s investment process combines multiple touchpoints within the firm Screening 1 – 2 Weeks Due Diligence 2 – 6 Weeks Structuring, Documentation & Approval 1 – 2 Weeks Structuring discussions with borrower, legal, accounting and tax Iterations with KKR and BDC
Slide 21: Highly Selective and Disciplined Origination
21 Highly Selective and Disciplined Origination Note : Does not look through to activity within COP . 1. Number of deals funded includes new investments made across KKR private credit funds as well as portfolios and excludes add - ons . 2. Originated investments with more than $ 25 mm of purchases .
Slide 22: FSKR Investment Portfolio Composition
22 FSKR Investment Portfolio Composition Note: All stats as of March 31, 2020 unless otherwise noted. 1. Does not look through to FSKR’s portfolio companies held solely in COP or the TRS. 2. Figure excludes the impact of FSKR’s investment in COP and the TRS. 3. See FSKR’s Quarterly Report on Form 10
Slide 23: FS / KKR Advisor Performance
23 Note: Advisor formed in April 2018. FS / KKR Advisor Performance FS / KKR Advisor’s focused diligence and high - quality underwriting have resulted in significantly improved investment results $356 $300 $500 $490 $353 $538 $1,142 $807 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 202
Slide 24: Exemptive Relief Aligns Stakeholders' Interests
24 Note: All stats as of March 31, 2020 unless otherwise noted. Exemptive Relief Aligns Stakeholders’ Interests Asset Classes Uses of Capital • Senior Secured • First Lien • Second Lien • Asset Based Finance • Growth • M&A • LBOs • Carve - outs • Recapitalizations • SEC exemptive relief across KKR C
Slide 25: Comparable Portfolio Statistics Across Both FSK and FSKR
25 Note: Statistics shown for directly originated investments only. 1. Based on publicly available information and company portfolio data at fair value where applicable. Comparable Portfolio Statistics Across Both FSK and FSKR Average metric FSKR FSK ¹ (for reference) 1 st lien 2 nd lien 1 st lien 2
Slide 26: FSKR Joint Venture Overview
26 Note: All stats as of March 31, 2020. 1. Assumes 1.0x leverage ratio. FSKR Joint Venture Overview Benefits • Strategic partnership with South Carolina Retirement Systems Group Trust (“SCRS”) • Joint Venture creates additional opportunities for FSKR to leverage KKR’s investment platform • Allows f
Slide 27: Key Investment Highlights
27 Key Investment Highlights
Slide 28: Key Investment Highlights
28 Key Investment Highlights Platform Scale Provides Distinct Competitive Advantages 1 Access to Leading and Differentiated Origination Pipeline 2 Disciplined Portfolio Construction and Risk Management 3 Growth Opportunities Provide Attractive Return Upside 4
Slide 29: Sustainable Competitive Advantages
29 Sustainable Competitive Advantages $15bn+ of assets in the combined FS / KKR BDC franchise KKR Credit platform has ability to make individual investments up to $1bn Direct access to full KKR investment network Lead, Co - lead or Sole Lender in 92% of total deals¹ Cumulative KKR Credit commitments
Slide 30: Compelling Deal Flow and Origination Pipeline
$2.6bn $2.4bn $3.1bn $3.1bn $3.3bn $5.3bn $8.8bn $3.0bn $0.9bn $0.5bn $0.7bn $0.8bn $0.5bn $0.9bn $2.1bn $0.7bn $1.7bn $1.9bn $2.4bn $2.3bn $2.8bn $4.4bn $6.7bn $2.3bn 2013 2014 2015 2016 2017 2018 2019 Q1 2020 30 Compelling Deal Flow and Origination Pipeline 2 Private Opportunistic Credit Direct Le
Slide 31: Diverse and Differentiated Sourcing Channels
31 Diverse and Differentiated Sourcing Channels • Access to KKR’s global relationship footprint • Investment Team has strong relationships with network of 150+ diversified sponsors • Relationships across 300+ portfolio companies • Work closely with sponsors to source investment opportunities and mon
Slide 32: Thoughtful Portfolio Construction and Proactive Risk Management
32 Thoughtful Portfolio Construction and Proactive Risk Management 1 2 3 4 Visualize our portfolio composition and characteristics at all times Elevate our thinking from asset - level to portfolio - level Effectively model and isolate our macro risks Model different asset types and blend into one se
Slide 33: Holistic Approach to Portfolio Management
33 Holistic Approach to Portfolio Management Note : As of March 31 , 2020 . Please see Important Information at the beginning of this presentation for additional disclosure regarding KKR’s internal information barrier policies and procedures, which may limit the involvement of personnel in certain i
Slide 34: Underlevered Capital Structure Poised for Growth
34 Note: Financial data as of March 31, 2020. Currently reviewing near - term maturities to determine path forward; no other immediat e changes expected to capital structure. 1. Figures reflecting revolver capacity before Q4 2019 are pro forma calculations to reflect merger of FSKR, FSIC III, FSIC I
Slide 35: Potential Growth Opportunities
Potential Growth Opportunities 35 • Assuming approval of 150% asset coverage ratio, FSKR will unlock between $1.0bn and $2.0bn of portfolio growth potential • At a weighted average investment yield of 10.0%, this potential equates to additional investment income of ~$100mm to $200mm • Additional cos
Slide 36: Potential for Meaningful Return Upside
36 Potential for Meaningful Return Upside 4 12.2% 11.5% 11.1% 10.8% 10.5% 10.4% 10.3% 9.9% 9.7% 9.6% 9.5% 8.5% 7.9% 7.5% 6.9% 6.2% Peer 1 Peer 2 Peer 3 Peer 4 Peer 5 Peer 6 Peer 7 Peer 8 FSKR Peer 9 Peer 10 Peer 11 Peer 12 Peer 13 Peer 14 Peer 15 Annualized Dividend Yield as of Q2 2020 (as a % of NA
Slide 37: In Summary
37 In Summary Disciplined Portfolio Construction and Risk Management Diversified, secured, directly - originated portfolio constructed with a late cycle mentality 3 Growth Opportunities Provide Attractive Return Upside Material return upside potential from achieving target leverage and cost synergie
Slide 38: Appendix
38 Appendix
Slide 39: FS / KKR BDC Franchise Sits Alongside Broader KKR Credit Accounts
39 FS / KKR BDC Franchise Sits Alongside Broader KKR Credit Accounts BDC franchise has access to the same KKR Credit investment opportunities as other client accounts • Through SEC exemptive relief, the BDC franchise receives a pro rata allocation of deals that fit each BDC’s mandates • Legal and co
Slide 40: Summary Operating Results
40 Note: On May 27, 2020, FSKR announced that it expects to implement a 4 to 1 reverse stock split. Per share metrics in the tab le above have not been adjusted to give effect to the reverse stock split. 1. Pro forma results presented as if the merger occurred on December 31, 2018. Summary Operating
Slide 41: Summary Balance Sheet
41 Summary Balance Sheet As of (Dollar amounts in millions, except per share data) 3/31/20 Assets Total investments, at fair value $7,464 Cash 225 Foreign currency, at fair value 7 Collateral held at broker for interest rate swaps 59 Due from counterparty 4 Receivable for investments sold and repaid
Slide 42: Note on Forward-Looking Statements
42 Note on Forward - Looking Statements This presentation may contain certain forward - looking statements, including statements with regard to future events or the future performance or operations of FSKR. Words such as “believes,” “expects,” “projects,” “future” and “pro forma” or similar expressi
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