FS KKR Capital Corp. (FSK): PESTLE Analysis [Nov-2025 Updated]

You're trying to figure out if FS KKR Capital Corp. (FSK) is a safe bet in this tricky market, and the answer is less about their past and more about the external forces hitting their borrowers right now. Honestly, the biggest factor is the high-rate environment, which is pushing the Federal Funds Rate near 5.50%; that's great for FSK's Net Investment Income, but it's also the primary risk factor for their middle-market loan book as US GDP growth slows to an estimated 1.8% for 2025. We need to look past the dividend yield and focus on the political, economic, and regulatory pressures that will defintely shape FSK's portfolio quality over the next year.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Political factors

You're looking for a clear map of the political landscape that FS KKR Capital Corp. (FSK) must navigate in 2025, and honestly, it's a mixed bag of potential tax breaks and heightened regulatory risk. The political environment is injecting real volatility into FSK's core business-middle-market lending-through trade policy and increased scrutiny on the private credit industry's size.

Shifting SEC oversight on BDC leverage and valuation practices

The Securities and Exchange Commission (SEC) is putting a spotlight on areas directly relevant to BDCs, particularly valuation and leverage. For 2025, the SEC's Division of Examinations has prioritized reviews of funds holding 'Illiquid or hard to value assets' and those employing 'Leveraged products.' This isn't a new rule, but it signals a massive increase in compliance risk for FSK.

The core issue is how FSK values its portfolio companies, as these are private, illiquid loans, not publicly traded stocks. Poor valuation practices can inflate Net Asset Value (NAV) and, critically, impact the calculation of management and performance fees. FSK's current leverage position makes this scrutiny even more pointed. As of June 30, 2025, FSK's net debt to equity ratio stood at 120%, based on $8.0 billion in total debt outstanding and $6.1 billion in stockholders' equity. That's a significant financial leverage position that regulators will watch closely for any signs of stress. One clean one-liner: The SEC is watching the math on illiquid assets.

Potential for new tax legislation impacting investment income or capital gains

Tax policy is a major political variable for BDCs and their investors in 2025. The most significant near-term opportunity is the proposed tax break for BDC dividends. In May 2025, the House of Representatives passed the 'One Big Beautiful Bill Act,' which included a provision to extend the Section 199A deduction-the 20% deduction for qualified business income-to dividends paid by BDCs.

If this measure, estimated to cost the federal government $10.7 billion over a decade, makes it through the Senate and becomes law, it would align BDCs with Real Estate Investment Trusts (REITs) and dramatically increase their attractiveness to retail and institutional investors, driving capital inflows. Conversely, President Biden's FY 2025 budget proposed an increase in the corporate income tax rate from 21% to 28% and an expansion of the Net Investment Income Tax (NIIT), which would hit corporate borrowers and high-net-worth BDC shareholders, respectively. The uncertainty here forces investors to defintely factor in a range of tax outcomes.

Geopolitical instability affecting global supply chains and borrower performance

Geopolitical tensions-from the Russia-Ukraine conflict to the Israel-Hamas war-are no longer distant concerns; they are direct drivers of credit risk for FSK's middle-market borrowers. Chief Risk Officers (CROs) now rank geopolitical conditions as a top-three priority for 2025, up from 12th the year prior. This instability translates to immediate financial pressure on FSK's portfolio companies through:

• Higher input costs due to supply chain disruptions.
• Increased borrowing costs from elevated market volatility.
• Reduced demand in export-sensitive sectors.

Here's the quick math on borrower stress: FSK's investments on non-accrual status, which are loans not generating interest income, rose to 3.0% of the total investment portfolio at fair value as of June 30, 2025, up from 2.1% just three months earlier on March 31, 2025. This 43% jump in non-accruals over one quarter is a clear sign that macro-political instability is translating into tangible credit deterioration.

US trade policy creating uncertainty for middle-market manufacturing borrowers

The re-emergence of aggressive US trade policy, particularly the new tariff landscape in 2025, is creating significant uncertainty for the middle-market manufacturing companies that FSK lends to. New measures, including a 10% baseline tariff on most imports and a 25% tariff on auto imports, have created a contractionary environment.

The Institute for Supply Management's (ISM) Purchasing Managers' Index (PMI) fell to 48.5% in May 2025, a clear signal of contraction in the US manufacturing sector. This uncertainty has resulted in tangible job losses, with the manufacturing sector shedding 42,000 jobs between April and August 2025. For FSK, which has a diversified portfolio of 218 companies across 23 industries, this trade risk is mitigated but not eliminated.

Increased scrutiny on private credit's systemic risk by financial regulators

The private credit market, now an estimated $2.5 trillion industry, has attracted the attention of global financial regulators like the Federal Reserve, the International Monetary Fund (IMF), and the Bank for International Settlements (BIS). The primary concern is the potential for systemic risk (risk to the entire financial system) due to the illiquid nature of the assets and the high leverage employed by some funds.

To be fair, the June 2025 Federal Reserve stress tests concluded that private credit and hedge funds do not pose a substantial systemic risk to the banking system. Still, the underlying political and regulatory pressure remains focused on transparency and liquidity mismatches. As a publicly traded BDC, FSK provides retail investors with access to this illiquid asset class, which is exactly the dynamic that regulators are worried about. The increasing size of the market means that FSK and its peers will face continuous political calls for greater disclosure and potential new rules on asset valuation and redemption gates.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Economic factors

Elevated US interest rates boosting NII

You might think the Federal Reserve cutting rates is bad for a floating-rate lender like FS KKR Capital Corp., but the current interest rate environment is still a massive tailwind for Net Investment Income (NII). The Fed lowered the Federal Funds Rate target range to 3.75%-4.00% in October 2025, which is a big drop from the peak, but it remains historically elevated. This high base rate is what drives the cash flow from FS KKR Capital Corp.'s senior secured loans, which are overwhelmingly floating-rate.

The proof is in the yield. As of June 30, 2025, the weighted average annual yield on FS KKR Capital Corp.'s accruing debt investments stood at 10.8%. That's a strong, double-digit gross return. For the second quarter of 2025, the company reported NII of $173 million, or $0.62 per share. The challenge, though, is that the weighted average effective rate on the company's own borrowings was also high at 5.3% in Q2 2025, meaning the net benefit depends on managing that liability side defintely well.

Persistent inflation raising operating costs for portfolio companies

The flip side of the Fed's high-rate fight is the persistent inflation still squeezing middle-market companies. Core Personal Consumption Expenditures (PCE) inflation, the Fed's preferred gauge, is forecast to be around 3.2% by the end of 2025, which is still above the central bank's 2% target. This isn't just a headline number; it translates directly to higher operational costs for FS KKR Capital Corp.'s 218 portfolio companies, especially those exposed to labor and imported goods.

Higher costs erode a borrower's EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which is the primary measure of their ability to service debt. When a portfolio company's cash flow tightens, the risk of a credit event rises. You have to watch this metric closely because it's the first sign of trouble in the credit portfolio.

Slowing US GDP growth increasing default rates

The economic consensus for 2025 points to a significant slowdown, with real US GDP growth projected to be in the 1.7% to 1.9% range for the calendar year. A slower economy means less revenue growth for borrowers, increasing the probability of default. This is where the rubber meets the road for a BDC (Business Development Company) like FS KKR Capital Corp.

We are already seeing the stress in the portfolio. FS KKR Capital Corp.'s investments on non-accrual status-loans that have stopped generating income-increased to 3.0% of the total investment portfolio at fair value as of June 30, 2025, up from 2.1% just three months prior. This is the clearest indicator that the slowing economy is manifesting as credit risk.

Here's the quick math on the default pressure:

• S&P is predicting a leveraged loan default rate of 4.25% for 2025.
• J.P. Morgan is projecting loan defaults to reach 3.25% in the second half of 2025.

Strong demand for private credit as banks pull back from middle-market lending

Despite the economic headwinds, the structural shift in the lending market is a massive opportunity. Banks are still pulling back from middle-market lending due to tighter regulatory capital requirements and a general de-risking trend. This vacuum is being filled by private credit providers like FS KKR Capital Corp.

The direct lending space continues to dominate leveraged buyout (LBO) financings. Over 70% of mid-market transactions were financed by private credit during periods of market turmoil in early 2025. This strong demand, coupled with private equity's record dry powder (estimated at a high of $1.6 trillion at the end of 2024), ensures a robust pipeline of new deal flow for FS KKR Capital Corp..

Widening credit spreads in the leveraged loan market creating better entry points

The market volatility in early 2025, driven by geopolitical and tariff uncertainties, caused an inflection point in pricing. While credit spreads had tightened earlier in the year, lenders became more selective and began repricing risk upward. This is good news for new origination.

For FS KKR Capital Corp., this trend translates to better returns on new loans. The company's new direct lending investment commitments in Q2 2025 had a weighted average coupon of approximately SOFR (Secured Overnight Financing Rate) plus 520 basis points (bps). This wider spread-the premium over the base rate-provides a larger cushion against potential losses and boosts future NII. It's a classic example of a volatile market creating attractive entry points for disciplined capital.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Social factors

Growing institutional investor demand for private credit's yield and low correlation.

You are seeing a massive structural shift in how large institutions allocate capital, and FS KKR Capital Corp. (FSK) is right in the center of it. Private credit is no longer a niche play; it is a core income strategy for pension funds and insurance companies. This is driven by the asset class's attractive yield and its low correlation to volatile public fixed income markets.

In 2025, the global private credit market is estimated to have reached approximately $3 trillion in managed assets, with projections suggesting it could hit $5 trillion by 2029. This scale is what makes the industry a permanent fixture. More than half of institutional investors, specifically 57% of Limited Partners (LPs), plan to increase their private debt allocations over the next 12 months, according to a recent survey. For FSK, this translates to a persistent, deep pool of capital ready to support the Business Development Company (BDC) structure.

Here's the quick math: Pension funds, for example, are leading the way, with 51% expecting to increase their exposure to private debt in 2025, seeking that spread premium and portfolio diversification that traditional bonds just can't deliver anymore.

Increased focus on management's alignment with Environmental, Social, and Governance (ESG) factors.

The social license to operate for large financial institutions like FSK's advisor, KKR, is increasingly tied to demonstrable ESG performance. Investors, especially European and US public pension funds, are demanding transparency on how their capital impacts society and the environment. While public BDCs often lack the granular, public ESG ratings of their larger corporate counterparts, the advisor's commitment is the key indicator.

KKR Credit has integrated an 'ESG Credit 2.0 framework' into its underwriting process for its private credit business, which includes FSK. This is not just a marketing brochure; it is a systematic pre-screening process.

• Gating Issues: KKR Credit utilizes a 'Gating Issues' list to pre-screen potential investments for critical ESG or reputational concerns before due diligence even begins.
• ESG Scorecard: Investment opportunities are scored against a proprietary, materiality-based ESG Scorecard.
• Climate Risk: The framework incorporates climate data and climate risk evaluation into the investment analysis, a crucial step for long-term credit risk mitigation.

What this estimate hides is the challenge of collecting and standardizing ESG data from middle-market private companies. The BDC is dependent on its advisor's ability to embed ESG-related information rights in loan documents and track performance using new reporting templates.

Talent wars in financial services driving up compensation for portfolio management teams.

The private credit sector's explosive growth has ignited a fierce talent war, directly impacting FSK's operating costs via its advisory fee structure. Portfolio management and credit structuring professionals are being aggressively courted, primarily from traditional banks that are retreating from middle-market lending. The reality is, if you want the best talent to manage a $13.4 billion portfolio, you have to pay private equity-level compensation.

In 2025, the median salary budget increase for U.S. financial services is projected to be up 3.7%, but for specialized roles in private credit, the increase is often much steeper. Senior investment management professionals are reporting annual earnings of at least $201k, with 80% receiving a performance bonus that can exceed their base salary. Private credit is a high-demand vertical, and firms that offer competitive long-term incentives, like carry or equity, are winning the top credit risk and structuring talent.

Shift toward remote work impacting commercial real estate and related portfolio loans.

The post-pandemic shift to hybrid and remote work has created a social headwind for Commercial Real Estate (CRE), a sector that FSK has some exposure to. While FSK is primarily a direct corporate lender, its portfolio is not entirely immune to this systemic social change.

As of March 31, 2025, FSK's portfolio exposure to the 'Equity Real Estate Investment Trusts (REITs)' industry sector was approximately 3.5% of its total investments at fair value. While this is a small percentage of the overall $13.4 billion portfolio, the underlying loans in the 'Commercial & Professional Services' sector (10.0% of the portfolio) may also have indirect exposure via office leases or related services. The risk is concentrated in the valuation of office properties, which could lead to covenant breaches and non-accruals in related portfolio companies.

The non-accrual rate for FSK's total investment portfolio stood at 2.9% at fair value as of September 30, 2025, reflecting some stress, though this is primarily driven by company-specific issues in the corporate lending book, not just CRE.

Public perception of private equity and credit influencing political and regulatory sentiment.

The perception of private credit has shifted from an obscure asset class to a major systemic force, a change in social standing that is attracting significant regulatory attention. The sheer size of the market-estimated at $3 trillion in 2025-means that its risks are now viewed through a macro-stability lens by bodies like the Federal Reserve and the International Monetary Fund (IMF).

The 'retailization' of private credit, where products like FSK (a publicly traded BDC) make the asset class accessible to individual investors, is amplifying this scrutiny. Retail capital in the private credit market has climbed to roughly $280 billion over the past decade. This influx raises social concerns about valuation transparency and liquidity mismatches for everyday investors, which in turn fuels political sentiment for tighter oversight. This is defintely a key risk to monitor.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Technological factors

You're operating a massive Business Development Company (BDC) like FS KKR Capital Corp. in a high-stakes, competitive environment. The core technological challenge isn't about inventing a new app; it's about using sophisticated digital tools to maintain an edge in credit underwriting (risk selection) and to manage your vast portfolio and co-investor relationships efficiently. Technology here is an operational necessity, not just a flashy feature.

Use of advanced data analytics for faster, more precise credit underwriting decisions.

The sheer scale of FS KKR Capital Corp.'s advisor, FS/KKR Advisor, LLC, and its parent, KKR, mandates the use of advanced data analytics to maintain its competitive advantage. KKR's broader credit platform, which FSK leverages, deployed $18 billion of alternative capital year-to-date as of Q2 2025, and manages an Asset-Based Finance (ABF) AUM that rose 20% year-over-year to $75 billion in the same period. Handling this volume requires a systematic, data-driven approach to credit selection.

This 'PE Style' due diligence involves underwriting to stress cases-a process that relies heavily on proprietary models that ingest and analyze macroeconomic data, industry trends, and portfolio company financials much faster than traditional methods. The goal is a more precise risk assessment, which is reflected in FSK's improving credit quality. For instance, investments on non-accrual status improved to 2.9% of the total investment portfolio at fair value as of September 30, 2025, down from 3.0% in the prior quarter. That's a direct, measurable benefit of disciplined, data-informed underwriting. The speed of decision-making is the real differentiator here.

Cybersecurity risks demanding significant investment in IT infrastructure and protection.

As a financial institution managing $13.4 billion in total investments as of Q3 2025, FSK faces a constant, high-level threat from cyberattacks. The risk isn't just financial loss; it's also the catastrophic damage to investor trust and regulatory penalties. While FSK does not publicly break out its exact cybersecurity spend, it is an essential part of the Q3 2025 Operating Expenses of -$39 million. You can assume a significant, recurring investment is made to protect the sensitive data of its middle-market portfolio companies and its institutional partners.

The investment is not just in perimeter defense; it extends to due diligence on portfolio companies. FSK and its advisor must ensure their borrowers have adequate cyber resilience, as a breach at a single portfolio company could negatively impact FSK's valuation and, consequently, its Net Asset Value (NAV) per share, which was $21.99 as of September 30, 2025.

Automation of back-office functions reducing operational expense ratio.

Automation is the silent hero for any large-scale financial operation, directly impacting the operational expense ratio (OER). For FSK, the focus is on streamlining the repetitive, high-volume tasks inherent in a BDC's operations, such as loan servicing, compliance reporting, and investor relations. The reduction in operating expenses is a key metric for BDCs.

The year-over-year growth in Operating Expenses was reported as -3% as of Q3 2025, which is a strong indicator of successful cost management, partly driven by technology adoption. This continuous push for efficiency helps keep the cost of managing the $13.4 billion portfolio down, ensuring more of the total investment income-which was $373 million in Q3 2025-flows through to the Net Investment Income (NII) for shareholders.

FinTech disruption creating new lending platforms that compete for deal flow.

FinTech platforms are not just competitors; they are also potential partners or targets for disruption. The most significant FinTech competition comes from new, highly efficient direct lending platforms and, increasingly, from the intersection of technology and consumer finance like Buy Now, Pay Later (BNPL). KKR's own strategy demonstrates this trend, as it renewed a partnership with PayPal to purchase up to $75.4 billion in European BNPL loans. This move highlights how large asset managers are using their scale to acquire FinTech-originated, data-rich assets.

For FSK's core middle-market lending, the disruption means a constant battle for quality deal flow. New platforms, often backed by private equity, can offer faster closing times and more flexible structures. FSK must counter this with the deep due diligence and value-add services provided by the KKR platform, leveraging their global network and operational expertise (KKR Capstone) to win deals over pure-play tech lenders.

Need for robust digital communication with KKR's co-investment partners.

The co-investment model is crucial for FSK to manage its balance sheet and participate in larger transactions. In Q3 2025, FSK executed a significant joint venture transaction of $450 million, indicating active portfolio management and liquidity generation with its partners, such as the Credit Opportunities Partners JV, LLC.

Managing these complex co-investment relationships requires a robust, secure digital infrastructure. You can't run a multi-billion dollar joint venture with email and spreadsheets. The technology platform must provide real-time, transparent reporting on performance, valuations, and capital calls to multiple institutional partners. This digital communication is essential for:

• Accelerating deal closing timelines.
• Providing real-time performance data to co-investors.
• Ensuring regulatory compliance and audit trails.
• Managing the flow of capital for transactions like the $1,142 million in total purchases FSK executed in Q3 2025.

The platform's reliability is defintely a core competency, as any failure in reporting could jeopardize future co-investment opportunities, which are vital for FSK's growth strategy.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Legal factors

Compliance with the 1940 Investment Company Act and BDC specific rules.

You need to understand that FS KKR Capital Corp. is not a typical bank; it's a Business Development Company (BDC), which means its entire operational framework is governed by the Investment Company Act of 1940 (the 1940 Act). This is the bedrock of its legal compliance. As a BDC, the company must adhere to specific rules regarding its investment focus, predominantly lending to middle market U.S. companies, and its capital structure. The SEC periodically examines the company for compliance with these rules, which is a constant, high-stakes audit. Honestly, a BDC's legal team is defintely as important as its credit team.

Maintaining the required asset coverage ratio (e.g., 200% minimum) to manage leverage.

The most critical legal constraint on a BDC's financial flexibility is the asset coverage ratio, which directly limits how much debt it can take on. Under the 1940 Act, FS KKR Capital Corp. is currently permitted to maintain an asset coverage ratio of at least 150% after each issuance of senior securities (debt), which translates to a maximum debt-to-equity ratio of 2-to-1. If the company were to fail to comply with certain disclosure requirements, this ratio would legally revert to 200%, significantly decreasing its leverage capacity.

As of September 30, 2025, the company's net debt-to-equity ratio stood at 116%. This is a healthy buffer below the regulatory maximum of 200% (which corresponds to a 100% net debt-to-equity ratio) or the statutory 150% minimum (which corresponds to a 200% net debt-to-equity ratio). The company's own Third Amended and Restated Senior Secured Revolving Credit Facility, which was amended in July 2025, also contractually requires it to maintain the 150% asset coverage ratio.

Evolving disclosure requirements from the Securities and Exchange Commission (SEC).

The SEC's focus on investor protection means disclosure requirements are always evolving, demanding constant vigilance. FS KKR Capital Corp. is subject to the Securities Exchange Act of 1934, requiring timely and accurate filing of Form 10-K (Annual), Form 10-Q (Quarterly), and Form 8-K (Current Report) for unscheduled material events.

Plus, the Sarbanes-Oxley Act mandates that the Chief Executive Officer and Chief Financial Officer personally certify the accuracy of the financial statements (Rule 13a-14). This certification process is a major legal risk point; any misstatement, even unintentional, can lead to severe penalties. For example, the company filed multiple critical Form 8-Ks in 2025, including one on July 22, 2025, detailing the amendment of its $4.7 billion Senior Secured Revolving Credit Facility, and another on September 22, 2025, regarding the sale of $400 million in 6.125% Notes due 2031.

Complex cross-border lending regulations for portfolio companies with international operations.

While FS KKR Capital Corp. primarily focuses on U.S. middle market lending, its operations are not exclusively domestic. The legal complexity rises when portfolio companies have international operations or when the BDC itself engages in cross-border financing.

The company explicitly states it may invest in non-U.S. securities, including those denominated in foreign currencies. Its revolving credit facility, which was upsized to $4.7 billion in July 2025, allows for borrowings in U.S. dollars and 'certain agreed upon foreign currencies,' which introduces a layer of regulatory and legal risk regarding:

• Foreign exchange controls and repatriation of capital.
• Compliance with local anti-money laundering (AML) and Know Your Customer (KYC) laws in multiple jurisdictions.
• Enforcement of loan covenants and security interests under differing international legal systems.

Litigation risk related to loan restructuring and borrower bankruptcies.

Litigation is an inherent risk in private credit, especially when a portfolio company faces distress. FS KKR Capital Corp. must be prepared for 'workout, restructuring, enforcement of remedies, bankruptcy proceedings or litigation' on an ongoing basis.

The clearest indicator of this risk is the level of non-accrual investments-loans where interest payments are significantly past due. As of June 30, 2025, the fair value of investments on non-accrual status represented 3.0% of the total investment portfolio, up from 2.1% just three months earlier. This rise in non-accruals suggests an increase in troubled assets that are likely to require complex, and often litigious, restructuring efforts. The company's Q2 2025 results were specifically impacted by company-specific issues affecting four portfolio companies, which led to a net realized and unrealized loss of $1.36 per share during that quarter. Restructuring a loan is a legal battle.

FS KKR Capital Corp. (FSK) - PESTLE Analysis: Environmental factors

You need to look past the immediate credit cycle, because the climate transition risk is already a core credit underwriting factor. FS KKR Capital Corp. (FSK) benefits from the robust, institutional-grade environmental, social, and governance (ESG) framework of its advisor, KKR Credit, which is actively mapping climate-related risks and opportunities across its $13.4 billion portfolio of investments as of September 30, 2025.

Pressure to assess and disclose climate-related financial risks in the loan portfolio.

The pressure to quantify climate risk is no longer a fringe issue; it is a regulatory and investor mandate, especially for a large Business Development Company (BDC) like FS KKR Capital Corp. The advisor's parent firm, KKR & Co. Inc., publishes a TCFD and SASB Annex (Task Force on Climate-related Financial Disclosures and Sustainability Accounting Standards Board), which demonstrates a commitment to integrating climate factors into investment decisions. This top-down governance means FS KKR Capital Corp. must increasingly assess how a carbon tax or new energy efficiency rules (transition risks) would impact the cash flow of its 224 portfolio companies. You defintely need to track this disclosure to anticipate future write-downs.

Opportunities in financing the energy transition and green infrastructure projects.

The energy transition represents a massive opportunity for private credit providers, and FS KKR Capital Corp. is positioned to capitalize through its affiliation with KKR Credit. KKR has deployed more than $44 billion since 2010 into climate and environmental sustainability investments, including a dedicated Global Impact strategy with a key focus on 'climate action.' This scale gives FS KKR Capital Corp. a direct pipeline to finance middle-market companies that are part of the green supply chain, such as those in renewable energy components or energy-efficient technology services. This is a clear path to generating new, high-quality assets, especially in the Asset Based Finance segment, which currently accounts for 14.4% of the portfolio's fair value.

Increased due diligence on portfolio companies' carbon footprints and sustainability.

Due diligence is now moving beyond just financial covenants to include environmental performance metrics. The new standard requires FS KKR Capital Corp. to look deeper into a borrower's carbon footprint (Scope 1, 2, and 3 emissions) before underwriting a loan. For a portfolio with a median company EBITDA of $115 million, a sudden rise in carbon-related operating costs could quickly erode the interest coverage cushion. The focus is on identifying 'brown' assets that face obsolescence and penalizing them with tighter terms, or conversely, offering better terms to companies with clear decarbonization plans.

Here is a snapshot of the portfolio's credit profile, which is now subject to environmental risk assessment:

Physical risks (e.g., extreme weather) impacting collateral value and business continuity.

Physical risks are immediate and material. Extreme weather events, like major hurricanes or prolonged droughts, can directly impact the value of collateral securing the 63.2% of the portfolio invested in senior secured securities. A facility located in a flood-prone area, for instance, faces higher insurance costs and potential business interruption, which directly threatens the borrower's ability to service its debt. FS KKR Capital Corp. needs to model the geographic concentration of its portfolio against climate-vulnerability maps to truly understand the risk to its investment base.

Investor preference for BDCs that integrate Task Force on Climate-related Financial Disclosures (TCFD) standards.

Institutional investors and funds of funds are increasingly prioritizing BDCs that align with TCFD (which provides a framework for disclosing climate-related risks and opportunities). This is a competitive advantage in a sector where assets under management (AUM) have grown significantly. FS KKR Capital Corp.'s association with KKR's TCFD-aligned reporting structure gives it a clear edge in attracting capital from ESG-focused limited partners. If you don't disclose, you get penalized on your cost of capital.

• Integrate KKR's TCFD methodology into FSK's quarterly reporting.
• Prioritize new loan originations in the 'climate action' sector.
• Mandate climate-risk assessments for all new loans over $50 million.

Finance: Monitor the weighted average interest coverage ratio of the loan portfolio monthly.