FS KKR Capital Corp (FSK) stock intrinsic value fair value estimate & owner earnings analysis

FS KKR Capital Corp is a business development company: a publicly traded lending fund that borrows money and lends it, mostly to mid-sized private companies owned by private-equity firms. It is run by an outside adviser, FS/KKR Advisor, which collects a base fee of 1.50% a year on gross assets (1.00% on assets financed by borrowing beyond one dollar of debt per dollar of equity) plus an incentive fee on income. In 2025 those two fees equalled about 3.2% and 2.1% of shareholders' equity. At the end of 2025 the portfolio was worth $13.0 billion at fair value across 232 companies: 57.8% first-lien senior loans, 4.2% second-lien loans, 13.0% asset-based finance, 15.1% a joint venture (Credit Opportunities Partners JV), and 8.5% equity and other holdings. About 6% of the portfolio is in loans denominated in British pounds, euros, Swedish krona and Australian dollars; the rest is in US dollars. How we measure earnings. A lending fund's cash-flow statement mostly reflects loans being bought and repaid, so it says little about what owners earn. We instead count what the company earns on its loans after interest and fees (net investment income), minus the credit losses it actually takes, whether realized or marked down. Credit losses are the lender's equivalent of equipment wearing out: a real cost of staying in business. Leaving them out would badly overstate earnings here. Net asset value per share fell from $31.35 at the end of 2018 to $18.30 at June 30, 2026, even though shareholders received $20.28 per share in distributions over that time. The distributions came from net investment income, but credit losses kept eating into capital. On that basis, earnings per share from 2018 through 2025 were -$2.45, $1.89, -$3.19, $4.61, $0.31, $2.48, $2.08 and $0.05. The 2021 figure excludes an accounting effect of the 2021 merger with FS KKR Capital Corp. II: it produced a paper gain that was cancelled out the same year by a $2.20-per-share dilution from the shares issued in the merger. The eight years cover a full cycle, including the 2020 pandemic losses and the 2022 markdowns. In the median year the fund earned about 3.6% on its net asset value. Net investment income ranged from 8.8% to 12.8% of net asset value. Credit losses ran at a median of about 6.9% of net asset value a year and exceeded 15% in 2018 and 2020. Because the fund is now much smaller per share, we measure the business on today's capital base rather than on per-share figures from when each share held more assets. The current picture is weaker. Loans on non-accrual (not paying as agreed) rose from 2.2% of fair value at the end of 2024 to 3.4% at the end of 2025. The yield on performing debt fell from 11.3% to 10.1%. Net investment income per share fell from $3.18 in 2023 to $2.90 in 2024 and $2.34 in 2025, then to $0.85 in the first half of 2026 (about $1.70 a year, or 9.3% of net asset value). In the first half of 2026 the fund lost another $2.55 per share on its investments. At June 30, 2026 the portfolio was carried 9.4% below cost. The quarterly distribution went from $0.48 in the first quarter of 2026 to about $0.42 in the second. How we value it. Owners are paid through distributions, which track net investment income. Credit losses shrink the capital base, and net investment income shrinks with it, so we value the stream of distributions as it declines with the capital. The fund carries debt of $6.64 billion against $5.12 billion of equity (about 1.3 times). That debt is already paid for inside net investment income, because interest is deducted before it, so we do not subtract it again. We discount everything at 6%. Base case: net investment income stays at today's 9.3% of net asset value. Credit losses run at 9% a year for the next two years, reflecting the elevated losses of the last four quarters and the rise in non-accruals, and then return to the 2018-2025 median of 6.9%. Net asset value falls to about $8.55 per share after ten years. No growth is credited: the fund has not grown its per-share capital, and no named driver says it will. Value: $12.71 per share. Bear case: losses of 14% a year for two years, close to the pace of the past twelve months, then 9.2% a year, the 2018-2025 average excluding the 2021 recovery. Net investment income falls to 8% of net asset value from the second year, extending the 2025 fall in portfolio yields and the rise in non-accruals. With borrowing at 1.3 times equity, deeper losses would force the fund to shrink, which is why the bear case carries higher losses and lower income together. Value: $9.07 per share. Bull case: non-accruals are worked out, losses are 6.9% in the first year and then fall to about 3.5% a year, the rate the fund achieved in 2019, 2023 and 2024. Net investment income holds at 9.3% of net asset value. Value: $17.34 per share. Even this case is below net asset value. After fees, borrowing costs and normal credit losses, the fund has not earned more than a 6% return on its capital in most years. What the shares appear to be worth: about $12.71 in the base case, within a range of $9.07 to $17.34. The estimate is most sensitive to credit losses. Each percentage point of lasting annual losses moves the value by roughly a dollar per share. The estimate would be too low if the fund's lending returned to the loss rates of 2023-2024 for good. It would be too high if losses stayed near the pace of the first half of 2026, when the fund lost about 12% of its net asset value in six months. Margin-of-safety price: $7.60. This is a leveraged, externally managed credit fund with rising problem loans and a record of losing capital, so the margin of safety needs to be wide. The margin-of-safety price is about 40% below the base value and below even the bear value. At that price the current distribution rate implies roughly a 22% yield while it lasts. We could not review the company's mid-2026 quarterly report narrative. Figures for 2026 come from its reported financial data only.