FSCO: A High-Yield Beacon in a Rising Rate World

Investors seeking income in a high-rate environment often face a stark choice: chase yield or prioritize safety. FS Credit Opportunities Corp. (FSCO), however, appears to defy this binary. With its July 2025 distribution announcement—a 59.5% increase since its 2022 NYSE debut—FSCO has positioned itself as a compelling income play, leveraging its floating-rate portfolio and disciplined credit strategy to navigate rising rates. Let's dissect what makes this closed-end fund (CEF) worth considering, despite its risks.

The July Distribution: A Testament to Yield Stability

FSCO's July 2025 distribution of $0.0678 per share marks another step in its upward trajectory. With an annualized yield of 11.1% (based on NAV) and 11.2% (market price), this fund is among the highest-yielding CEFs in its sector. Critically, distributions have been fully covered by net investment income in 2025, avoiding the pitfalls of return-of-capital payouts that erode principal.

This consistency is no accident. Since its listing in late 2022, FSCO has raised its payout four times in 24 months, a reflection of its robust income generation. The fund's focus on senior secured debt (81% of its portfolio) and floating-rate assets (54% as of March 2024) creates a steady cash flow engine, insulated from interest rate volatility.

Portfolio Resilience: Floating Rates and Senior Debt as Shields

FSCO's 54% allocation to floating-rate assets (e.g., loans tied to benchmarks like SOFR) is its secret weapon in a rising-rate environment. Unlike fixed-rate bonds, these instruments reset periodically, ensuring income keeps pace with rate hikes. This strategy has already paid dividends: through June 2025, FSCO's NAV rose 7.6% year-to-date, outperforming peers.

The fund's emphasis on senior secured debt (81% of the portfolio) adds another layer of safety. These loans rank highest in corporate capital structures, meaning investors get priority repayment in defaults. While not immune to economic downturns, this focus on high-quality credits has historically minimized losses.

The Risks: High Costs and Leverage

No investment is without trade-offs. FSCO's 8.3% annual operating expense ratio (as of 2023) is steep, nearly double the average for credit-focused CEFs. High fees can erode returns over time, especially in low-growth environments.

Leverage is another concern. FSCO employs 32.19% of its assets via borrowings, amplifying both gains and losses. While this boosts yield, it also magnifies volatility. A sharp market correction could strain the fund's performance.

Why FSCO Still Wins for Income Hunters

Despite these risks, FSCO's strengths outweigh its drawbacks for risk-tolerant income investors. Here's why:

1. Yield Stability in a Volatile World: With central banks likely to keep rates elevated for longer, floating-rate exposure is a defensive move. FSCO's portfolio is primed to thrive here.
2. Proven NAV Growth: Its 7.6% YTD NAV return (as of June 2025) suggests the fund isn't just paying out dividends—it's growing principal.
3. Disciplined Strategy: FSCO's focus on senior secured debt and event-driven opportunities (e.g., mergers, restructurings) targets areas where credit spreads widen, creating buying opportunities.

Investment Takeaways

• Buy if: You're seeking high, reliable income and can tolerate volatility. FSCO's double-digit yields are rare in today's market.
• Avoid if: You're risk-averse or prefer low-fee options. FSCO's expenses and leverage make it a niche pick.

While FSCO isn't without risks, its combination of floating-rate resilience, senior debt safety, and proven distribution growth makes it a standout income vehicle for investors willing to accept some risk.

As always, proceed with caution. Monitor FSCO's distribution coverage ratio and leverage levels to ensure its strategy remains intact. In a world of low yields, this fund is worth watching closely.

Disclaimer: Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.