UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
Date
of Report (Date of earliest event reported): June 30, 2020
FS
KKR Capital Corp. II
(Exact
name of Registrant as specified in its charter)
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Maryland
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814-00926
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80-0741103
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(State
or other jurisdiction
of
incorporation)
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(Commission
File
Number)
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(I.R.S.
Employer
Identification
No.)
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201
Rouse Boulevard
Philadelphia,
Pennsylvania
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19112
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (215) 495-1150
(Former
name or former address, if changed since last report)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
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☐
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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☐
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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☐
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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☐
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol(s)
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Name
of each exchange
on
which registered
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Common
stock
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FSKR
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New
York Stock Exchange
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Indicate
by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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☐
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Emerging
growth company
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
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Item 5.02.
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Departures
of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain
Officers.
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On
June 30, 2020, the board of directors (the “Board”) of FS KKR Capital Corp. II (the “Company”) appointed
Mr. Zach Chalfant as Treasurer of the Company, effective as of June 30, 2020. In connection with the appointment of Mr. Chalfant,
Mr. William Goebel resigned in his capacity as Treasurer of the Company, effective as of June 30, 2020. Mr. Goebel’s
resignation as Treasurer of the Company was not due to any disagreement with the Company on any matter relating to the Company’s
operations, policies or practices. Mr. Goebel will continue to serve as Chief Accounting Officer of the Company. Mr. Chalfant
has not been appointed to serve as Treasurer pursuant to any agreement or understanding with the Company or any other person.
There is no family relationship between Mr. Chalfant and any of the Company’s directors or other executive officers, and
there are no related party transactions with regard to Mr. Chalfant that are reportable under Item 404(a) of Regulation
S-K. Mr. Chalfant will not receive any direct compensation from the Company.
Set
forth below is biographical information pertaining to Mr. Chalfant:
Mr.
Chalfant, age 36, is an Executive Director of FS Investments, which he joined in September 2012. Previously, Mr. Chalfant was
a Director of Portfolio Management at FS Investments, where his responsibilities were focused on reporting and liability management.
Prior to joining FS Investments, Mr. Chalfant worked in various roles at JPMorgan Chase and City of London Investment Management.
Mr. Chalfant holds a B.S. in Finance from the University of Maryland.
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Item
7.01.
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Regulation
FD Disclosure.
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On
July 1, 2020, the Company is expecting to hold a webinar to provide further information regarding some frequently asked questions
relating to the listing of the Company’s common stock on the New York Stock Exchange (the “NYSE”) by using a
script and presentation, copies of which are attached hereto as Exhibits 99.1 and 99.2, respectively. Except as may be required
by federal securities laws, the Company undertakes no duty or obligation to update or revise the information contained in the
script and presentation.
The
information in this Item 7.01, including Exhibits 99.1 and 99.2 and the information set forth therein, is deemed to have
been furnished to, and shall not be deemed to be “filed” with, the U.S. Securities and Exchange Commission.
Forward-Looking
Statements
This
Current Report on Form 8-K may contain certain forward-looking statements, including statements with regard to future
events or the future performance or operation of the Company. Words such as “believes,” “expects,” “projects”
and “future” or similar expressions are intended to identify forward-looking statements. These forward-looking statements
are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results
to differ materially from those projected in these forward-looking statements. Factors that could cause actual results to differ
materially include changes in the economy, risks associated with possible disruption in the Company’s operations or the
economy generally due to terrorism, natural disasters or pandemics such as COVID-19, future changes in laws or regulations
and conditions in the Company’s operating area, the Company not being able to utilize the additional leverage capacity,
the impact on access to capital due to changes in covenant levels under the Company’s debt agreements and other factors,
unexpected costs, the price at which the Company’s shares of common stock trade on the NYSE and the Company and the investment
funds may not purchase the Company’s shares as anticipated or at all. Some of these factors are enumerated in the filings
the Company makes with the Securities and Exchange Commission. The inclusion of forward-looking statements should not be regarded
as a representation that any plans, estimates or expectations will be achieved. Any forward-looking statements speak only as of
the date of this communication. The Company undertakes no obligation to update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on any of these
forward-looking statements.
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Item 9.01.
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Financial
Statements and Exhibits.
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(d)
Exhibits
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
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FS
KKR Capital Corp. II
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Date:
July 1, 2020
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By:
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/s/
Stephen Sypherd
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Stephen
Sypherd
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General
Counsel
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FS
KKR Capital Corp. II 8-K
Exhibit
99.1
FSKR
post-listing shareholder call 7.01.20
DATE:
Wednesday, July 1, 2020
TIME: 11:00
AM ET
PRESENTERS
Robert
Paun
Brian
Boulerice
Rob
Hoffman
Section
I: Introduction and HOUSEKEEPING (BOULERICE)
Slides
1 & 2: Housekeeping / Cover slide
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Explanation
of Q&A format, etc.
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Slide
3: Agenda
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Goal
is to address the most frequently asked questions we have received since listing
FS KKR Capital Corp. II’s common shares on the New York Stock Exchange.
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We
will refer to FS KKR Capital Corp. II as FSKR throughout the call.
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Section
II: frequently asked questions (PAUN)
Slide
4: Transition slide / Why list now?
Slide
5: FSKR is the result of a four-way BDC merger
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Before
discussing the strategic rationale of the listing, let me first start with perspective
on how the FS/KKR BDC platform was established.
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FSKR
was created through the mergers of FSIC II, FSIC III, FSIC IV and CCT II in December
of last year. With the listing on June 17, FSKR trades on the NYSE under the ticker FSKR.
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FSKR
is now the third largest BDC in the market based on assets as of March 31, 2020.
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Prior
to the listing of FSKR, FS KKR Capital Corp. (Ticker: FSK) was the sole publicly traded
BDC managed by the FS/KKR Advisor. FSK was formed through the merger of FSIC and CCT
in 2018.
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Between
the two BDCs, FS/KKR Advisor manages over $15B in BDC assets. We believe the size and
scale created through the mergers is a significant competitive advantage, particularly
in today’s market environment.
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Slide
6: Listing creates optionality for all stakeholders
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On
the next few slides, we recap the strategic rationale and answer the question of “why
now”?
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To
summarize slide 6, a listing creates optionality for all stakeholders.
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The
listing serves as a catalyst for us to execute on several strategic options for our shareholders,
FSKR and our portfolio companies.
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The
listing not only provided investors the option for liquidity, it provided a way for us
to unlock over $1 billion of capital by accepting shareholder approval to increase regulatory
leverage to 2:1 which we can use in ways that we believe will ultimately help maximize shareholder
value and provide a path to enhancing the fund’s dividend yield and return on equity
over the long-term.
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This
capital could be strategically deployed in an effort to support FSKR’s existing
portfolio companies and take advantage of opportunities created by the current market
disruption due to, among other things, COVID-19.
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Especially
in today’s market, liquidity is king and we want to ensure that this capital is
available to support our existing portfolio companies and, in turn, maximize value for
our shareholders.
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We
also believe that the environment will present opportunities to selectively add highly
accretive investments to the portfolio due to the market dislocation.
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Slide
7: Responding to rising investor demand for liquidity
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Another
consideration for the listing was that we recognized that even prior to the COVID-led
volatility, there was strong investor demand for liquidity based on investors’ participation
in the predecessor funds’ quarterly tenders.
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The
tenders were suspended in Q2 2019 ahead of the mergers based on regulatory requirements
and remained suspended in anticipation of the listing.
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The
number of shares requested for repurchase steadily increased since Q1 of 2017 and the
pro-rata amounts declined in parallel. The percentage of shares tendered has averaged
approximately 5-10% of total shares outstanding at the time of repurchase.
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Slide
8: Transition slide / How was the initial trading price determined?
Slide
9: IPO vs. listing
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One
of the most common questions we have received from shareholders is how the direct listing
of FSKR’s shares differed from a traditional initial public offering, or IPO. So,
let me start there.
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Unlike
a traditional IPO in which a company typically raises equity capital by issuing new shares
to investors within a predetermined price range, FSKR listed its existing shares held
by current shareholders on the NYSE.
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The
trading price was ultimately determined based on supply/demand for the shares as opposed
to a predetermined listing price.
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We
conducted dozens of virtual meetings, in a similar fashion to a traditional roadshow,
with prospective institutional investors in the weeks prior to the listing to help build
demand for FSKR’s shares at and following the listing.
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The
investors were a mixture of mutual fund managers, private wealth management firms, hedge
funds and other institutions. In addition, we have spoken to many equity research firms,
including those that currently provide research on FSK’s stock.
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We
believe these efforts will ultimately helped build awareness for FSKR’s stock in
the public markets and may continue to do so.
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Slide
10: 4:1 reverse stock split
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Before
getting into the specifics of the first day of trading, it’s important to remember
that FSKR executed a 4:1 reverse stock split shortly prior to the listing.
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Many
public BDCs issued shares through an IPO at an initial public offering price of $25.00
while most non-traded BDCs, including FSKR prior to its listing, issued shares through
a continuous offering based on an initial price of $10 per share.
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The
reverse split helped align FSKR’s net asset value per share with its public peers
as the FSKR’s adjusted net asset value per share as of March 31, 2020 was $24.68.
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On
the right hand side of this slide we provide a simple example of the reverse split. As
you can see, there was NO change to underlying shareholder value and that was not the
intent of the split.
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The
goal was simply to align FSKR’s net asset value with its large public BDC peers,
which generally range between $15 to $25 per share.
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We
also believe that having a publicly traded stock with a market price above $10 will attract
more institutional money into the stock, as some funds have internal policies that do
not allow the purchase of a company’s shares that trade in the single digits.
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As
we will discuss in the next section, BDCs may trade above or below their net asset value
depending on a number of factors.
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Slide
11: Determining the initial price
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I’ll
turn to the next slide and walk through how the initial trading price was determined.
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Prior
to the listing, FSKR’s last publicly disclosed net asset value was $24.68 per share,
after adjusting for the reverse stock split. And, as I noted on the earlier slide, $24.68
was not the predetermined listing price.
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The
initial trading price was based on the supply of shares available for sale and demand
for those shares.
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On
the morning of the listing, FSKR’s third-party market specialist aggregated buy
and sell orders as part of the price discovery process.
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Keep
in mind June 17 was the very first day that the stock traded publicly on the exchange
so the public market for FSKR shares was being created for the first time as buyers and
sellers got to their seats and placed their orders that morning.
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Initial
indications of interest filtered in throughout the morning. That’s the technical
term for buyers indicating the prices at which they would have interest in purchasing
FSKR shares. And, of course, certain shareholders were seeking to sell their shares that
first day of trading.
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As
the bid-ask spread narrowed, meaning the gap between the prices at which buyers were
willing to pay for shares and the price that sellers were offering their shares came
closer together and, ultimately held in a tight range, the first trade was executed at
approximately 12:15 p.m. at $13.75 per share.
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Financial
advisors and our shareholders have asked whether they missed the opportunity to sell
at $24.68 or prices other than the initial trading price and the answer is no. The trading
price was based on the supply and demand in the market.
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The
shares closed at $14.30 per share, or approximately 57% of the FSKR’s net asset
value, on the day of listing.
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With
that, I’ll now turn it back to Brian.
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Slide
12: Transition slide / Why did the shares trade below FSKR’s net asset value?
Slide
13: Short term technical pressure not reflective of portfolio quality
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There
are many factors that can contribute to a BDC trading at either a premium or discount
to its net asset value per share, including supply and demand for the BDC’s shares.
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BDCs
are said to trade at a premium when the trading price is higher than net asset value
per share and at a discount when the trading price is lower than net asset value per
share.
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While
we understand investors’ desire for liquidity, we believe many investors have sought
liquidity irrespective of FSKR’s net asset value.
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For
example, based on FSKR’s closing price of $14.30 per share on June 17, FSKR’s
dividend yield was approximately 17%, based on the annualized amount of FSKR’s second
quarter distribution of $0.60 per share.
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This
trading price would imply that approximately 20% of FSKR’s portfolio has no value.
We do not believe that is a true reflection of fundamental performance.
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For
context, non-accruals, which are investments where there is a reasonable doubt that the
interest income will not be collected, were 5.7% as of March 31, 2020 based on fair value.
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We
continue to work with the management teams and equity owners of these companies to maximize
shareholder value for our investors. This can be achieved in a few ways, including working
with the companies’ equity owners to provide additional capital, extending the maturity
of debt, providing additional financing or restructuring our investment.
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Slide
14: Transition slide / What is secondary market support?
Slide
15: Significant secondary market support exists across the FS/KKR Advisor platform
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FSKR
and affiliates and employees of the owners of FS/KKR Advisor have committed capital that
may be deployed from time to time to purchase FSKR’s and FSK’s shares in the
secondary market.
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There
are three main sources of secondary support:
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The
first is a $100 million FSKR share repurchase plan.
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This
means FSKR will use its own capital to repurchase and retire the shares. FSKR will disclose
the amount of shares repurchased through its quarterly filings with the SEC along with
the average transaction price.
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The
parameters of the share repurchase plan are not publicly disclosed in order to prevent
“front running” of the plan. As disclosed in our public materials, we expect
these purchases may be made at prices below net asset value so that the purchases are
accretive to FSKR and our shareholders.
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In
addition, there is a $350 million co-investment vehicle for FSKR and FSK, with $100 million
initially allocated to purchase FSKR shares. The vehicle is funded by $100 million in
commitments from affiliates of FS Investments and KKR, with $250 million provided by
a single institutional investor.
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And
finally, there is a $124 million co-investment vehicle that may purchase shares of FSKR
and/or FSK, with $18 million in commitments from affiliates of FS Investments and KKR
and over $100 million provided by institutional investors.
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The
timing of purchases for the co-investment vehicles are not public nor will the purchases
be made public as these are not FSKR-sponsored programs.
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There
can be no assurance as to the timing or amount of purchases of FSKR’s shares by
FSKR or the investment funds, or whether FSKR or either of the investment funds will
purchase any shares of FSKR at all.
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For
additional context, FSK completed a $200 million buyback this year and funds advised
by FS/KKR advisor repurchased nearly $500M in total across our BDC platform.
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Slide
16: Transition slide / Next steps and considerations
Section
II: What are my options & resources (BOULERICE)
Slide
17: What are my options
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Sell:
Investors who wish to sell their shares may do so through their broker or by following
the instructions noted above for directly held shares.
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Hold:
There is no requirement to take action. Investors may continue to hold their shares.
If they do so, investors will remain entitled to receive any distributions that the Fund
may declare in the future.
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Buy:
Finally, investors may also purchase shares through their broker or, if the shares
are held directly, can use the information provided in a Direct Registration Transaction
Advice form to move shares to a brokerage account. DRTA forms have been mailed to investors.
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We
would encourage all shareholders to visit www.FSproxy.com for additional resources.
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Slide
18: Resources
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Before
opening it to questions, I’d remind everyone on the call today that we have posted
investor-friendly resources at www.FSproxy.com.
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FSproxy.com
will remain live for the full duration of the listing process.
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With
that, we will take just a short pause to aggregate questions. Thanks for your patience.
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FS KKR Capital Corp. II 8-K
Exhibit 99.2
1 Thank you for joining • Please submit your questions using the Q&A box. • Google Chrome is the optimal browser for viewing this webinar. • If you are experiencing difficulties viewing the slides please refresh your browser and ensure that you have enabled Adobe Flash Media Player. • If you are experiencing difficulties with audio, listen by phone using the dial - in number on the bottom left - hand side of the screen. To learn more Call 877 - 628 - 8575 visit www.fsinvestments.com
FS KKR Capital Corp. II NYSE: FSKR JULY 2020
3 1 Why list now? 2 How was the initial listing price determined? 3 Why did the shares trade below FSKR’s net asset value? 4 Will there be any secondary market support for FSKR’s stock? 5 What are my options? Frequently asked questions
4 Why list now?
FSKR is the result of a four - way BDC merger 1. As of March 31, 2020. • Four - way BDC merger completed on December 18, 2019 • FSIC II was the surviving entity and was renamed FS KKR Capital Corp. II • Combined entity (FSKR) is listed on the NYSE FSKR 1 FSIC IV CCT II FSIC III FSIC II Total AUM $8.2B Total equity $4.2B FS Investments KKR • The merger between FSIC and CCT was completed on December 19, 2018 • Combined entity (FSK) is listed on the NYSE FSIC FSK (publicly listed) 1 CCT Total AUM $7.4B Total equity $3.0B KKR FS Investments 5
6 Listing creates optionality for all stakeholders 1 List on NYSE • Provides full liquidity for shareholders outside of quarterly tenders • Received shareholder approval to increase regulatory leverage to 2:1 (debt - to - equity) • Provides middle market companies with capital to finance operations 2 Increase borrowing capacity • Ability to increase regulatory leverage helps unlocks over $1 billion in borrowing capacity • Provides sufficient liquidity to support our middle market portfolio companies ‒ Take advantage of investment opportunities created by current market dislocation 3 Strategically deploy capital • Stabilizes NAV by supporting portfolio companies • Goal to enhance long - term dividend yield • Potential to increase return on equity over long term Shareholder benefits extend beyond just liquidity Based on fair value. Only includes debt investments.
3.4 4.5 6.5 12.2 16.1 16.8 19.1 19.8 22.5 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 7 Total number of shares requested for repurchase (millions) Data shown is for FS KKR Capital Corp. II (formerly known as FSIC II), which was the surviving entity in the NAV - for - NAV mergers of FSIC II, FSIC III, FSIC IV and CCT II. Responding to rising investor demand for liquidity Q2 2019 – PRESENT Quarterly tenders suspended prior to mergers/listing Represented 6.9% of total shares outstanding (325M shares)
8 How was the initial trading price determined?
9 Initial public offering (IPO) vs. Direct Listing Initial public offering Listing Issuance of newly issued shares Listing of existing shares Price range determined ahead of IPO Price determined by supply and demand for shares Conduct road show with prospective investors
10 Rationale The reverse stock split helped align FSKR’s net asset value (NAV ) per share with its peers. – Many public BDCs issued shares through an initial public offering (IPO) based on an initial share price of $25 per share – Most non - traded BDCs issued shares through a continuous offering based on an initial share price of $10 per share Since BDCs tend to trade in relation to NAV, the reverse split brought FSKR’s NAV per share and stock price closer in line with its peers. HYPOTHETICAL EXAMPLE 4:1 reverse stock split NAV per share Shares Total value Pre - split $6.17 1,000 $6,170 Post - split $24.68 250 $6,170 The full Q2 distribution of $0.60 per share (when adjusting for the reverse stock split) was paid on June 8.
11 For illustrative purposes only. Determining the initial share price Buyers Sellers $13.75 I nitial trading price
12 Why did the shares trade below FSKR’s net asset value?
13 Illustrative dividend yield (NAV) based on a range of valuations Based on net asset value as of March 31, 2020. 1. Implied loss rate refers to the decline in asset value necessary to equate to the assumed price - to - book value. Short - term technical pressure is not reflective of portfolio quality 9.7% 10.2% 10.8% 11.4% 12.2% 13.0% 13.9% 15.0% 16.2% 17.7% 19.4% Price/Book (NAV) 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Implied loss rate 1 -- 2.6% 5.1% 7.7% 10.2% 12.7% 15.3% 17.9% 20.5% 23.1% 25.5% $24.68 $23.45 $22.21 $20.98 $19.74 $18.51 $17.28 $16.04 $14.81 $13.57 $12.34
14 Will there be any secondary market support for FSKR’s stock?
15 Significant secondary market support across FS/KKR platform $ 120 M+ C o - investment vehicle $100M Fund share repurchase program $ 350 M Co - investment vehicle
16 What are my options? Sell Hold Buy
17 Resources FSPROXY.COM FORMS / OPERATIONAL SUPPORT WEBINAR REPLAYS FAQs FSKKRADVISOR.COM
Questions?
19 Securities offered through FS Investment Solutions, LLC (member FINRA/SIPC). FS Investment Solutions, LLC is an affiliated br oke r - dealer that serves as the wholesaling distributor of non - traded funds sponsored by FS Investments. An investment in any fund sponsored by FS Investments involves a high degree of risk and may be con sidered speculative. Investors are advised to consider the investment objectives, risks, and charges and expenses of the applicable fund carefully before investing. The applicable fund’s prospect us contains this and other information. Investors may obtain a copy of the applicable fund’s prospectus free of charge at www.fsinvestments.com or by contacting FS Investments at 201 Rouse Blvd., Philadelphia, PA 19112 or by phone at 877 - 628 - 8575. Investors should read a nd carefully consider all information found in the applicable fund’s prospectus and other reports filed with the U.S. Securities and Excha nge Commission before investing. Forward - Looking Statements This presentation may contain certain forward - looking statements, including statements with regard to future events or the futur e performance or operations of FSKR. Words such as “believes,” “expects,” “projects,” “future” and “pro forma” or similar expressions are intended to identify forward - looking statements. These forward - l ooking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward - lo oking statements. Some factors that could cause actual results to differ materially include changes in the economy, risks associated with possible disruption in FSKR’s operations or the economy generally due t o t errorism, natural disasters or pandemics such as Covid - 19, future changes in laws or regulations and conditions in FSKR’s operating area, FSKR not being able to utilize the additional leverage capacity , the impact on access to capital due to changes in covenant levels under FSKR’s agreements and other factors, FSKR’s investment yield being less than 10 %, the price at which FSKR’s shares trade on the New York Stock Exchange, FSKR and the investment funds may not purchase FSKR’s shares as anticipated or at all, and cost saving opportunities not materializing in the amounts expected or at all. Other factors are enumerated in the filing s F SKR makes with the U.S. Securities and Exchange Commission. The inclusion of forward - looking statements should not be regarded as a representation that any plans, estimates or expectations will be achieved. FSKR undertakes no obligation to update or revise any forward - looking statements, whether as a result of new information, future events or otherwise. Disclosures