FS KKR Capital (FSK) risk factors, FY2024 10-K

Risks Related to Our Business and Structure

1. 01We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses
2. 02the investments made by us. Conversely, periods of economic stability and increased competition among capital providers could increase the difficulty of locating investments that are desirable for us
3. 03Our board of directors may change our operating policies and strategies without prior notice or stockholder approval
4. 04Changes in laws or regulations governing our operations or the operations of our business partners may adversely affect our business or cause us to alter our business strategy
5. 05The SBCA Act allows us to incur additional leverage
6. 06We may invest in derivatives or other assets that expose us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage
7. 07As a public company, we are subject to regulations not applicable to private companies, such as provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect us
8. 08We may experience fluctuations in our quarterly results
9. 09We are subject to risks associated with artificial intelligence and machine learning technology
10. 10We and the Adviser could be the target of litigation
11. 11Our business and operations could be negatively affected if we become subject to stockholder activism, which could cause us to incur significant expense, hinder the execution of our investment strategy or impact our stock price
12. 12Increasing scrutiny from stakeholders and regulators with respect to sustainability matters may impose additional costs and expose us to additional risks

Risks Related to the Adviser and its Affiliates

1. 13The Adviser and its affiliates, including our officers and some of our directors, face conflicts of interest as a result of compensation arrangements between us and the Adviser, which could result in actions that are not in the best interests of our stockholders
2. 14We may be obligated to pay the Adviser incentive compensation on income that we have not received
3. 15There may be conflicts of interest related to obligations the Adviser’s senior management and investment teams have to our affiliates and to other clients
4. 16The Adviser’s liability is limited under each of the investment advisory agreement and the administration agreement, and we are required to indemnify it against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account

Risks Related to Business Development Companies

1. 17Failure to maintain our status as a BDC would reduce our operating flexibility
2. 18We are uncertain of our sources for funding our future capital needs and if we cannot obtain debt or equity financing on acceptable terms, or at all, our ability to acquire investments and to expand our operations will be adversely affected
3. 19The requirement that we invest a sufficient portion of our assets in qualifying assets could preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to maintain our status as a BDC
4. 20Regulations governing our operation as a BDC and a RIC will affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth
5. 21Compliance with these limitations on our ability to raise capital may unfavorably limit our investment opportunities. These limitations may also reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend
6. 22Our ability to enter into transactions with our affiliates is restricted

Risks Related to Our Investments

1. 23Inflation may adversely affect the business, results of operations and financial condition of our portfolio companies
2. 24Our investments in senior secured loans, second lien secured loans, senior secured bonds, subordinated debt and equity of private U.S. companies, including middle market companies, may be risky and there is no limit on the amount of any such investments in which we may invest
3. 25International investments create additional risks
4. 26Our investments in private investment funds, including hedge funds, private equity funds, limited liability companies and other business entities, subject us indirectly to the underlying risks of such private investment funds and additional fees and expenses
5. 27We may acquire various structured financial instruments for purposes of “hedging” or reducing our risks, which may be costly and ineffective and could reduce the cash available to service debt or for distribution to stockholders
6. 28Investing in middle market companies involves a number of significant risks, any one of which could have a material adverse effect on our operating results
7. 29Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
8. 30There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims
9. 31Second priority liens on collateral securing debt investments that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us
10. 32We generally will not control our portfolio companies
11. 33Declines in market values or fair market values of our investments could result in significant net unrealized depreciation of our portfolio, which in turn would reduce our net asset value
12. 34A significant portion of our investment portfolio does not have a readily available market price and is and will be recorded at fair value in accordance with policies and procedures approved by our board of directors and, as a result, there is and will be uncertainty as to the value of our portfolio investments
13. 35We are exposed to risks associated with changes in interest rates
14. 36A covenant breach by our portfolio companies may harm our operating results
15. 37Our portfolio companies may be highly leveraged
16. 38We may not realize gains from our equity investments
17. 39An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies
18. 40A lack of liquidity in certain of our investments may adversely affect our business
19. 41We may not have the funds or ability to make additional investments in our portfolio companies
20. 42Prepayments of our debt investments by our portfolio companies could adversely impact our results of operations and reduce our return on equity
21. 43Our investments may include original issue discount and PIK instruments
22. 44We may from time to time enter into total return swaps, credit default swaps or other derivative transactions which expose us to certain risks, including credit risk, market risk, liquidity risk and other risks similar to those associated with the use of leverage
23. 45A total return swap is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the total return swap and the debt obligations underlying the total return swap. In addition, we may incur certain costs in connection with a total return swap that could in the aggregate be significant
24. 46We may invest through joint ventures, partnerships or other special purpose vehicles and our investments through these vehicles may entail greater risks, and investments in which we have a non-controlling interest may involve risks specific to third-party management of those investments

Risks Related to Debt Financing

1. 47We currently incur indebtedness to make investments, which magnifies the potential for gain or loss on amounts invested in our common stock and may increase the risk of investing in our common stock
2. 48The agreements governing our debt financing arrangements contain, and agreements governing future debt financing arrangements may contain, various covenants which, if not complied with, could have a material adverse effect on our ability to meet our investment obligations and to pay distributions to our stockholders

Risks Related to an Investment in Our Common Stock

1. 49There is a risk that investors in our common stock may not receive distributions
2. 50Our distribution proceeds may exceed our earnings. Therefore, portions of the distributions that we make may represent a return of capital to stockholders, which will lower their tax basis in their shares of common stock
3. 51Our shares of common stock may trade at a discount to net asset value, and such discount may be significant
4. 52We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions
5. 53A stockholder’s interest in us will be diluted if we issue additional shares, which could reduce the overall value of an investment in us
6. 54Stockholders may experience dilution in their ownership percentage if they do not participate in our distribution reinvestment plan
7. 55Certain provisions of our charter and bylaws as well as provisions of the MGCL could deter takeover attempts and have an adverse impact on the value of our common stock
8. 56Recent court decisions have created uncertainty surrounding the application of MCSAA
9. 57The net asset value of our common stock may fluctuate significantly
10. 58The market price of our common stock may fluctuate significantly
11. 59Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings
12. 60If we issue preferred stock, debt securities or convertible debt securities, the net asset value and market value of our common stock may become more volatile
13. 61Holders of any preferred stock that we may issue will have the right to elect members of the board of directors and have class voting rights on certain matters
14. 62We have obtained the approval of our stockholders to issue shares of our common stock at prices below the then-current net asset value per share of our common stock, and any such issuance could materially dilute our stockholders’ interest in our common stock and reduce our net asset value per share

Risks Related to U.S. Federal Income Tax

1. 63We will be subject to corporate-level income tax if we are unable to qualify as a RIC under Subchapter M of the Code or to satisfy the RIC annual distribution requirements
2. 64Some of our investments may be subject to corporate-level income tax
3. 65We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income
4. 66Our portfolio investments may present special tax issues
5. 67If we do not qualify as a “publicly offered regulated investment company,” as defined in the Code, you will be taxed as though you received a distribution of some of our expenses
6. 68Legislative or regulatory tax changes could adversely affect investors

General Risks

1. 69Capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect the debt and equity capital markets, which may have a negative impact on our business and operations
2. 70Future economic recessions or downturns could impair our portfolio companies and harm our operating results
3. 71Events outside of our control, including public health crises, could negatively affect our portfolio companies and our results of operations
4. 72We are currently operating in a period of capital markets disruption and economic uncertainty
5. 73Uncertainty about federal government initiatives could negatively impact our business, financial condition and results of operations
6. 74Global economic, political and market conditions may adversely affect our business, results of operations and financial condition
7. 75that any portfolio companies, service providers, vendors or certain other parties have material operations or assets in the Middle East or the immediate surrounding areas
8. 76Any of the foregoing events could result in substantial or total losses to the Company in respect of certain investments, which losses will likely be exacerbated by the presence of leverage in a portfolio company’s capital structure
9. 77Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies
10. 78Economic sanction laws in the United States and other jurisdictions may prohibit us and our affiliates from transacting with certain countries, individuals and companies