FS KKR Capital - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp.'s second quarter 2023 earnings call. Your lines will be in listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you instructions on entering the queue. Please note that this conference is being recorded. At this time, Robert Pond, Head of Investor Relations, will proceed with the introduction. Mr. Pond, you may begin.

Robert Paun (Head of Investor Relations)

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s second quarter 2023 earnings conference call. Please note that FS KKR Capital Corp. may be referred to as FSK, the Fund, or the Company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued on August 7th, 2023. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended June 30th, 2023. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events and Presentations. Please note that this call is the property of FSK.

Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements that are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's second quarter earnings release that was filed with the SEC on August 7th, 2023.

Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us in the room are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I will now turn the call over to Michael.

Michael Forman (CEO and Chairman)

Thank you, Robert, and good morning, everyone. Welcome to FS KKR Capital Corp.'s second quarter 2023 earnings conference call. We are pleased to report another quarter of solid results as we exceed our quarterly earnings guidance, rewarded shareholders with a base and supplemental distribution totaling $0.70 per share, and also paid shareholders a special distribution of $0.05 per share. In total, these distributions equated to an annualized distribution of approximately 15% on our stock price. We are also pleased to report, as Dan will discuss in more detail, that deal flow is increasing, which should be positive for us going forward. During the second quarter, we generated net investment income totaling $0.82 per share and adjusted net investment income totaling $0.78 per share, as compared to our public guidance of approximately $0.78 and $0.75 per share, respectively.

Our net asset value per share as of June 30 was $24.69, as compared to $24.89 at the start of the year, and $24.93 as of March 31st, 2023. Excluding the effect of the $0.05 special distribution we paid to shareholders during the quarter, our net asset value per share would have been $24.74. Based on our continued strong operating results, our board has declared a third-quarter regular quarterly distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share.

As a reminder, we expect our quarterly supplemental distribution to total a minimum of $0.06 per share throughout 2023 and possible beyond, equating to a minimum of $0.70 per share per quarter of quarterly distributions during 2023. Additionally, last quarter, we declared a series of special distribution payments totaling $0.15 per share. The first installment of the special distribution was paid in May, and the other two will be paid at the end of the month and in November. In total, we estimate investors will be able to receive a minimum of $2.95 per share of total distributions in 2023, which we continue to believe is quite attractive in today's investment environment.

Based on our experienced team, the significant resources on our platform, and the portfolio rotation work we've accomplished, I believe we are well-positioned not only to continue producing strong financial results but to reward shareholders with an attractive dividend over the long term. With that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you, Michael. The resilience of the labor market and continued strong consumer spending during the first half of 2023, make it unlikely, in our view, that the economy will slow either as soon or as dramatically as some market participants have expected. That being said, over the near term, we continue to expect inflation to remain elevated, and as we have said on prior calls, we believe the higher interest rate environment will persist. While investment activity remained lower during the second quarter compared to historical averages, we continue to see compelling investment opportunities in a strong direct lending environment. We and other private debt investors are able to negotiate attractive pricing, enhanced call protection, and lower overall leverage levels for high-quality companies.

Given the still choppy nature of the syndicated debt markets, we believe private credit is poised to continue to be the primary financing alternative for many sponsors and portfolio companies. As Michael mentioned, recently, we have seen an increase in deal flow as M&A activity appears to be picking up. However, we would remind investors that given the traditional timeline associated with new investments, the recent increase in new investment activity likely will not materially impact our financial results until the fourth quarter of this year or perhaps early next year. Nevertheless, we are pleased to see the increased activity levels. Turning to investment activity, during the second quarter, we originated $363 million of new investments. Not surprisingly, our investments primarily were focused on add-on financings to existing portfolio companies and long-term KKR relationships.

Additionally, during the second quarter, we completed the sale of approximately $500 million of lower-yielding investments. This sale to a third party was proactive on our part as we sought to increase our go-forward investment capacity based on our view of the accelerating M&A environment. As a result, our new investments of $363 million, when combined with $845 million of opportunistic portfolio sales and repayments, equated to a net portfolio decrease of $482 million. In terms of recent deployment opportunities, at the end of the quarter, we closed an account receivable financing facility for Bausch Health Companies. The company develops, manufactures, and markets a range of pharmaceutical, medical device, and over-the-counter products, primarily in the dermatology and eye health space.

We provided the company with a $600 million off-balance sheet financing facility, backed by accounts receivable from their customers, who are investment-grade pharmaceutical distributors. Pricing was SOFR plus 665 basis points, with 2.5% fees upfront and a 75 basis point undrawn fee. FSK committed $120 million to the financing and has funded $70 million to date. This type of transaction is an example of our growing corporate ABL strategy, in which we are finding compelling investment opportunities in the current environment. Additionally, we are seeing meaningful opportunities in our traditional asset-based finance business, particularly given the pressure on regional banks to optimize their balance sheets.

Combining our asset-based finance activities with the recent increase for traditional Unitranche financings associated with the improving M&A market, creates an improved outlook as we begin to focus on the second half of the year. In terms of interest coverage, at the end of the second quarter, our portfolio companies had a median interest coverage of 1.6x. For clarity, this calculation uses base rates as of March 31, 2023, to better align with portfolio company financials. From a forward-looking perspective, we continue to believe our portfolio is well-positioned, in part due to our focus on large, high-quality borrowers with strong operating margins and deep equity cushions. These statistics are evidenced by the weighted average EBITDA in our portfolio companies, which was $202 million as of June 30th, 2023.

Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 5% across companies which we have invested in since April of 2018. With that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Brian Gerson (Co-President)

Thanks, Dan. As of June 30th, 2023, our investment portfolio had a fair value of $14.8 billion, consisting of 195 portfolio companies. This compares to fair value of $15.3 billion and 189 portfolio companies as of March 31, 2023. The decline in the fair value of our portfolio is largely due to the sale of lower-yielding assets, which Dan spoke about earlier. At the end of the second quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio. We continue to focus on senior secured investments, as our portfolio consisted of 59.5% first lien loans and 68.3% senior, senior secured debt as of June 30.

In addition, our joint venture represented 9.4% of the fair value of the portfolio, and asset-based finance investments represented 12% which are comprised predominantly of first lien loans or secured asset-based finance investments. It's important to note, looking through to the investments in our joint venture, our portfolio consisted of 76% senior secured debt as of June 30th. The weighted average yield on accruing debt investments was 12.1% as of June 30th, 2023, compared to 11.7% as of March 31st. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the second quarter was primarily associated with the continued rise in base rates, as well as higher yields on new originations during the past few quarters.

Including the effects of the investment activity we experienced during the second quarter, as of June 30, 2023, approximately 86% of our total investment portfolio is now comprised of investments originated either by KKR Credit or the FSKR advisor. During the second quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of approximately $77 million, primarily concentrated in a handful of names, including Witter and NBG Home, both of which we had mentioned on prior earnings calls. This past week, we reached capital for the Witter, with management, the majority of first lien lenders, as well as the equity sponsor, to provide additional liquidity to the company, as well as de-lever its balance sheet. Pursuant to this agreement, the first lien debt will be significantly reduced at the operating company level.

FSK and other funds managed by KKR will provide EUR 85 million of new capital to the company to fund operations. Our second lien loan will be converted into a majority equity ownership stake in the business. The transaction is subject to standard closing conditions and regulatory approvals. We also led a successful restructuring of NBG Home earlier this year. The company emerged from Chapter 11 protection last month. Pursuant to the company's plan of reorganization, FSK and other funds managed by KKR now own new debt securities in the delevered capital structure, as well as majority equity ownership of the surviving company.

As of June 30th, 2023, nonaccruals improved to 4.8% of our portfolio on a cost basis, and 2.5% on a fair value basis, compared to 5.5% on a cost basis and 2.7% on a fair value basis as of March 31, 2023. We believe it is helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the second quarter, nonaccruals related to the 86% of our total portfolio, which have been originated by KKR Credit and the FSKR advisor, were 2.2% on a cost basis and 0.6% on a fair value basis. With that, I'll turn the call over to Steven.

Steven Lilly (CFO)

Thanks, Brian. Our total investment income increased by $6 million quarter-over-quarter to $462 million, driven by increased interest income. The components of our total investment income during the quarter were as follows: Total interest income was $376 million, an increase of $7 million quarter-over-quarter. Dividend and fee income totaled $86 million, a decrease of $1 million quarter-over-quarter. Our dividend and fee income during the quarter is summarized as follows: $55 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $25 million during the quarter, and fee income totaling approximately $6 million during the quarter.

Our interest expense totaled $118 million, an increase of $4 million quarter-over-quarter, due to the impact of rising base rates on our secured debt facilities. Our weighted average cost of debt was 5.2% as of June 30th. Management fees totaled $56 million, a decrease of $2 million quarter-over-quarter. Incentive fees totaled $47 million during the second quarter. Other expenses totaled $12 million during the quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: Our ending first quarter 2023 net asset value per share of $24.93 was increased by GAAP net investment income of $0.82 per share and was decreased by $0.31 per share due to a decrease in the overall value of our investment portfolio.

Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution. The sum of these activities results in our June 30, 2023 net asset value per share of $24.69. Accounting for the $0.05 per share special distribution paid during the quarter, our adjusted net asset value per share was $24.74. From a forward-looking guidance perspective, we expect third quarter 2023 GAAP net investment income to approximate $0.79 per share. We expect our adjusted net investment income to approximate $0.76 per share. Detailed third quarter guidance is as follows: Our recurring interest income on a GAAP basis is expected to approximate $374 million.

Interest income is expected to be relatively flat quarter-over-quarter, primarily due to the portfolio sale Dan mentioned earlier, as well as certain assets which were repaid during the month of July. We expect recurring dividend income associated with our joint venture to approximate $54 million. We expect other fee and dividend income to approximate $25 million, as we expect normal course ABF dividends to be incrementally lower between now and the end of September. From an expense standpoint, we expect our management fees to approximate $56 million. We expect incentive fees to approximate $45 million. We expect our interest expense to approximate $120 million, and we expect other G&A expenses to approximate $10 million.

As a reminder, the $0.03 per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting. This difference affects our recurring interest income. Other categories of revenues and expenses are not affected. Primarily due to the sale of approximately $500 million of assets to a third party during the second quarter, our gross and net debt to equity levels were 118% and 113%, respectively, at June 30, 2023, compared to 125% and 118% at March 31, 2023. At June 30, our available liquidity was $3.5 billion, up from $3 billion at the end of the first quarter.

Approximately 58% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. Our overall effective weighted average cost of debt was 5.2%. With that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Michael Forman (CEO and Chairman)

Thanks, Steven. In closing, I am pleased FSK is continuing to deliver strong earnings, which enables us to reward shareholders with such an attractive distribution. The team has remained diligent and focused on the long-term success of the company by investing in defensive, high-quality companies, proactively managing our available investment capacity, and minimizing losses from challenged assets. We are pleased with our results both during the quarter and on a year-to-date basis, just as we also are pleased to see an overall pickup in deal activity, which clearly is advantageous for FSK. On behalf of the team, we thank you for joining the call and for your continued support. With that, operator, we'd like to open the call for questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. As a reminder, to ask a question, please press Star One, One on your telephone and wait for your name to be announced. To withdraw your question, please press Star One, One again. Please stand by while we compile the Q&A roster. Our first question comes from John Hecht with Jefferies.

John Hecht (Managing Director and Equity Research Analyst)

Morning, guys. Thanks very much. Congratulations on a good quarter. First one is just very high level, and you guys, you guys even touched on some of this during the call here. Yeah, just given, you know, the, the, the recent events in the banking industry and, you know, the likely changes to capital requirements and some of the regulatory framework, you know, do you guys see a long-term or even permanent kind of structural shift in the business? What type of, you know, what type of asset characteristics would that maybe give an edge to you guys, and relative to where we are today going forward?

Dan Pietrzak (Chief Investment Officer and Co-President)

Thanks, John. I mean, I, I think, you know, fair question there, especially considering what's been going on in the market. You know, I do think we expect, you know, this to be probably a longer-term situation in terms of how it plays out. You see new rules as it relates to Basel III. Obviously, there's concerns around liquidity and how banks sort of manage assets. You know, I, I think we've seen this in many ways, you know, starting with the financial crisis and continuing. I do think it's a tailwind for the overall private credit space. I think we'll benefit from that. I, I think it's probably a little bit less of a focus on what, what I'll call the regular direct lending space.

It's probably more of a tailwind for our asset-based finance business, you know, but I think it's something, as, as I said, that will, you know, play out over several years.

John Hecht (Managing Director and Equity Research Analyst)

Okay. That's helpful. Then, you know, maybe just a quick update on Global Jet. I know that's, that's a big asset you guys have been working on. Is there any, any update there?

Dan Pietrzak (Chief Investment Officer and Co-President)

No, I think two things. One, the underlying performance of the assets remains strong, I think both in terms of, you know, the folks paying on the leases, but also just asset values, right? There's been a real tailwind in that space on the other side of COVID. I think the company management team also has done quite a good job as it relates to cost of the business and looking to improve sort of ROE. I think it's been a good story there, you know, for the last several years. I think we're still, you know, working with the team to figure out next steps as it relates to it, but the asset performance remains strong.

John Hecht (Managing Director and Equity Research Analyst)

Great. Thanks very much, guys.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Casey Alexander with Compass Point Research and Trading.

Casey Alexander (Managing Director and Senior Equity Analyst)

Hi, good morning. I have a couple of questions here. I'm looking at the asset mix of ABF at 12% and the JB at 9%. There's, there's room in this bucket, and given kind of your discussion about ABF, should we expect that ABF percentage to rise as a percentage of the total portfolio as you put some of the proceeds of these sales to work?

Dan Pietrzak (Chief Investment Officer and Co-President)

Good morning, Casey. Well, I think we've been consistent with the market in talking about, you know, sort of a 10%-15% range there, for our ABF sort of bucket. I think we're in the middle of that range. I think, you know, some quarters it will sort of trend up, because there are certain deals in there that are continuing to ramp, in, in terms of, you know, adding assets. I think it's fair to assume that, you know, it will sort of, you know, make its way towards that sort of 15, but I think it's, I would expect the range over the long term to be that 10%-15%.

Casey Alexander (Managing Director and Senior Equity Analyst)

Okay. In relation to the portfolio sale, what was the average price of the sale as a percentage of par value?

Dan Pietrzak (Chief Investment Officer and Co-President)

I mean, upper 90s. You know, yeah, sort of approaching $0.99. I mean, these were performing assets. You know, I think we were, you know, honestly excited and sort of proud to sort of get it done, and we want to create some capacity inside of FSK. You know, the assets themselves, you know, slightly lower yielding. We just sold a strip of assets that we own, right? These assets, you know, are not just, you know, remain inside of FSK, but other sort of accounts that we manage. This was not a credit story. This was managing, you know, future investment capacity. I think we've always been, you know, clear with what our target leverage range was for FSK.

I think using, you know, this as a moment to bring it down to 1.13x, looking at an M&A market that's picking up, you know, made a lot of sense to us.

Casey Alexander (Managing Director and Senior Equity Analyst)

Well, perhaps you can explain to me the rationale of selling what you consider to be good assets at a discount to par in order to reinvest them at par loans. I understand the higher yielding loans on the new stuff, but you're receiving less principal value for the loans that you sold. You know, kind of what's the rationale for the mix there?

Dan Pietrzak (Chief Investment Officer and Co-President)

Well, Casey, I'd remember two things, right? The, the loans themselves, you know, you're always originating loans at, at a slight sort of discount because there's fees and sort of OID that's sort of generated, right? I would keep that sort of in mind, one. You know, two, I, I think the, the market today is, you know, let's call it, you know, 50 basis points plus wide on a spread level. You know, the upfront fees have kind of held it at probably three points with sort of better call pro. It's just a little bit of a portfolio rotation. I think, you know, our fee income number has been sort of lower than usual. Steven Lilly mentioned that in, in his prepared remarks. I think that number sort of picks up.

I think we've been able to generate, you know, the net income numbers you've seen was sort of about that. I, I would focus on those, those points.

Casey Alexander (Managing Director and Senior Equity Analyst)

Okay. Then my last question is, there's reasonably meaningful bump up in PIK income in the quarter. Can you walk us through the change in that component, please?

Dan Pietrzak (Chief Investment Officer and Co-President)

Sure. Entirely related to one name, Solera. You know, this is a well-performing company, you know, north of $1 billion of EBITDA. A very strong equity sponsor who's got, you know, meaningful sort of dollars in there. I would put this as a one-off case, where certain earn-outs and other nonrecurring sort of cash items were happening during, you know, the first half of the year. You know, they requested two quarters of PIK. There was, you know, change in sort of rate on the other side that we thought was attractive, both, you know, during the PIK period, but then sort of post the loan, going back to sort of cash pay. This is not a challenged credit situation. I would think about it as a two-quarter move.

Casey Alexander (Managing Director and Senior Equity Analyst)

All right, great. Thank you for taking my questions. I appreciate it.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you. Have a good day.

Operator (participant)

One moment for our next question. Our next question comes from Ryan Lynch with KBW.

Ryan Lynch (Managing Director of Equity Research)

Hey, good morning. First question I had was on the portfolio sale of $500 million. I think that makes a lot of sense, just selling off some older assets, to get more exposure to this current vintage. My question on that was, is that something that you guys are looking to explore more of those sort of portfolio sales or strips of portfolio sales going forward, or is this purely sort of a one-off opportunity? I know you said there were lower yielding investments of that portfolio. I don't know if I missed it or not, but could you provide what was sort of the weighted average spread on that $500 million of investments sold?

Dan Pietrzak (Chief Investment Officer and Co-President)

Sure. Good morning, Ryan. You know, in terms of the portfolio sale itself, I think we're always, you know, focused on being active in terms of portfolio management. I think we're fortunate to, to be part of a platform that's got, you know, a lot of different market participants. We have relationships, you know, investors or sort of otherwise. You know, I, I wouldn't think about it as, you know, something that we would, you know, repeat consistently, as a part of normal course. You know, that said, I think we're quite pleased, as I said, to get it done.

I do like, you know, having the additional capacity in the entity where, you know, we can, you know, maybe be more active in, in, in this current vintage, you know, or if there's additional sort of volatility in the market. I would, I would think about it in, in sort of that context. In terms of spread, roughly 6% in terms of the spread on the assets.

Ryan Lynch (Managing Director of Equity Research)

Okay. That's helpful. My other question was, you mentioned, and it's been, been talked about and asked about kind of the increased activity in the asset-based finance, sort of vertical. You know, that spreads across a lot of different underlying investments. I would just love to hear, is there any specific, sort of like, subsector or specific assets that you guys are seeing increased deal opportunity across? Or is it just across the whole spectrum? The second part to that was, you know, when I look at your asset-based finance portfolio, you know, there's a lot of different investment yields in that portfolio. Some are, you know, based on SOFR, some are fixed rate.

I would just love to hear, in the current marketplace, if you're seeing more deals on of that asset-based finance vertical, what sort of either net yields are you guys looking at in the current pipeline or, or spreads, if they're floating rate investments?

Dan Pietrzak (Chief Investment Officer and Co-President)

If you recall, you know, and we have taken, you know, what I'll call a multi-sector or multi-asset class approach to the space. I think that's important. You know, we want the team to be focused on the best risk-adjusted returns that, that are available here. You know, we've generally put it in, in the following buckets: consumer, mortgage, commercial finance, contractual cash flows, and, and hard assets. There's, you know, let's call it 25 kind of subsectors below those. I think we're able to do that, right? We've got a very large team. We got over 50 people that are directly involved in the business. We've got a capital base that's quite large, at north of $40 billion of AUM.

I, I think we're, we're quite pleased with where we stand from, let's call it, how we're competing in the market. You know, I, I think all of those assets have certain things that are, you know, what I would call interesting today. You know, that business is a little bit more opportunistic and thematic than what I would say the, the, the more traditional, you know, direct lending business, where you're forced to cover clients sort of daily. I think the one thing that has probably been the most interesting there, this year, you know, specifically over the last four or five months, is some of the tailwinds we've seen from the regional bank space, who are, they're looking to either clean up asset portfolios or dispose of certain assets. You know, I think there is a good tailwind there.

I think you are right. I mean, every deal is a little bit different. Some deals might be floating, some deals might be fixed. I would think about it from a broad stroke. You know, we're really targeting to do deals in that space that are, you know, roughly from a base case perspective, kind of 15% sort of IRRs. That's probably the simplest way to think about it.

Ryan Lynch (Managing Director of Equity Research)

Okay. Just one follow-up on that point. You know, you mentioned kind of the pullback from the regional banking space, creating new, you know, deal opportunities just because, you know, there's less competition. Are you guys looking or seeing any sort of inbound opportunities from regional banks looking to sell off entire portfolios? Is that something you would be interested in, in onboarding?

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah. I mean, the short answer is yes. You know, I think some of that has been quite public with some of the, you know, SVB or First Republic or, or, you know, Signature sort of assets. You know, the team is having sort of constant dialogues there. I, I think we are looking to, you know, partner with banks on several of these transactions. You know, some of that could be buying portfolios in whole, some of that could be, you know, buying sort of parts of different portfolios. We're, we're very active in that space. You know, honestly, that is a cornerstone of the business in kind of normal markets, but just more active today.

You know, the one thing that I think is, is probably even more interesting today is, you know, a lot of these banks would be acquiring kind of assets on a flow perspective from Fincos that are, you know, originating those. A lot of those banks are taking a step back from that, specifically on certain fixed rate assets. I think we're able to come in and fill the void there as well. We've done that on a couple of portfolios. I, I think we're, you know, excited by the opportunities that present themselves there. Again, it's, it's across all these different sort of asset types, so I think you need the team to be able to, to, to prosecute that. You know, I'm expecting that, the, the folks to be busy for the, for the coming quarters, coming years.

Ryan Lynch (Managing Director of Equity Research)

That's, that's interesting, the comment on the, the deal flow from the, these Fincos and stepping in for that void. That's all for me. I appreciate the time today.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thanks. Have a good day.

Operator (participant)

One moment for our next question. Our next question comes from Kenneth Lee with RBC Capital Markets.

Kenneth Lee (Managing Director and Senior Equity Research Analyst)

Hi, good morning. Thanks for taking my question. Sounds like the terms and pricing is still favorable for, for origination activity. Wonder if you could just talk a little bit more about what you're seeing in terms of competitive activity, more recently? Thanks.

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah, good morning, Ken. I, I think there's been, in many ways, and you've heard us talk about on the call today or, or prior quarters, you know, the, the general M&A volumes have been lower. You know, I think you'd expect that. I think the, you know, there's been some sort of articles that, that was lower due to the lack of available financing. I don't think that's correct. I think it's been, been entirely driven by, we'll call it, valuation mismatches or, or the lack of ability to agree on valuation between the seller of a company and, and, and the buyer thereof. You know, I think we're starting to see that thaw. You know, the, the pipeline has, you know, been dramatically more active in the last handful of weeks.

I think we're hearing the M&A advisor community kind of ramping up, whether they're at, you know, boutique firms or, or some of the larger sort of bulge brackets. I think the volume, you're gonna see, you know, pick up, and I think the, the market has the capital available to do the deals. I think the competitive market, the competitive environment has remained, you know, would you'd imagine, as there are sort of active players here who are prepared to kind of step into these deals. I, I think you're gonna see this pick up in volume, which, you know, we're excited about.

Kenneth Lee (Managing Director and Senior Equity Research Analyst)

Gotcha. Very helpful there. Then one follow-up, if I may. Stepping back, wonder if you could just talk about thoughts around the current share price and perhaps what additional actions or options could you consider that could help narrow the discount shares of trading to NAV over time? Thanks.

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah, I think a couple of points there. You know, one, you know, the share price is obviously of a clear sort of focus of ours. I think we've tried to be quite transparent, as you can see in these, in these earning calls with, you know, Steven going through the quarter and sort of going through the guidance. I think we have, you know, been quite pleased with what we've put up in terms of operating results. I think we, you know, we're happy to announce that special dividend. You know, that $2.95 a share, we think is quite attractive, even more attractive. I mean, I think it's quite attractive just thinking about it in terms of NAV, but obviously even more attractive, when you think about it in terms of stock price.

You know, the team is spending a lot of time on the road, meeting with investors, doing as many calls as, as we can. We need to continue to, I think, to perform, you know, put up these numbers, kind of meet, you know, the guidance numbers that we're sort of putting out there. You know, I think the market has struggled for a little while on, on the legacy portfolio. I think we've tried to give guidance, you know, consistently with, you know, that's only now 14% of the portfolio. It's really, you know, focused on a handful of names. We've got some more work to do on those, but we, you know, hope to continue to push and sort of bring that down. In, in some ways, kind of it's all the above.

Kenneth Lee (Managing Director and Senior Equity Research Analyst)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

One moment for our next question. Our next question comes from Robert Dodd with Raymond James.

Robert Dodd (Director)

Hi, guys, and congratulations on the quarter. A question on kind of the restructuring environment, if you will. When we look at Wintec and NBG, I mean, you've talked about those on prior calls. Made progress on restructuring one and, you know, one just come out of Chapter 11, et cetera. The valuations of those obviously came down this quarter. That would tend to imply that the outcomes there may have been slightly worse than you were expecting, say, three months ago. Can you give us any color on what's driving that? Is the recovery environment worse?

Is, a lender groups being less cooperative, or, or was it just incremental deterioration of those businesses that, that, that drove that, that slightly lower fair value today than three months ago, when, the, the restructuring issues were known and ongoing at that point?

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah. Good morning, Robert. Brian might want to add to this as well. I mean, I, I think we were quite pleased to get those, you know, restructurings done. I think just to be clear in our remarks in our prepared remarks, you know, the Witter, the Witter was announced. It's still subject to, you know, we'll call final regulatory approvals, et cetera, but I think we were glad to get that done. You know, I think we're fortunate that we've got, you know, a dedicated team, you know, focused on this space. You know, I think that really helps in these situations. You know, I, I, I don't think the environment is necessarily more difficult, or I probably wouldn't, you know, probably, you know, read too much into this.

I think NBG was, was, was more of a difficult situation and probably got more difficult as it went along. You know, that was, you know, arguably a name that really did not have any level of, you know, pricing power or, or other things. You know, part of that business ended up being liquidated, and then part of it ended up being sort of reconstituted as a standalone business. You know, Wintec itself is a, is a strong company with a good footprint in a bunch of jurisdictions, globally. You know, it was a complicated process, and I think that process yielded the, the numbers that you see as it relates to the marks.

Brian Gerson (Co-President)

Yeah, I mean, look, I, think these, these restructurings tend to take a long and winding road. You know, things change over the course of negotiations. I think in the case of both companies, you know, we own the majority equity of both businesses. That means we have control of the board, the company, strategic direction, management, all those sorts of things, where we can hopefully create some value and, and hopefully, you know, some real appreciation, the value of that stock. You know, time will tell on those things, but when you look at other companies where we've done sort of similar things, like a PRG or an APX, yeah, I think our team has really had some great outcomes in those situations.

Dan Pietrzak (Chief Investment Officer and Co-President)

Just to be clear on Brian's comments, we, we will own those post the restructurings getting done, own the equity, not today.

Brian Gerson (Co-President)

Yeah.

Robert Dodd (Director)

Got it. Thank you. Thank you for the, the clarity on that. On the, the, the kind of the pie slide down, I mean, the indication, I think you're, that, that maybe the bid-ask spread on valuation, is, is narrowing finally. Should we expect more, you know, more, more platform activity and, and new portfolio companies, rather than necessarily, you know, maybe maturity dividend refinancings? I wouldn't expect a lot of dividend recaps, but can you give us any color on what the type of mix of things you're seeing in, in that pipeline, as, as activities?

Dan Pietrzak (Chief Investment Officer and Co-President)

No, happy to. I think you're, I think you're correct. You should expect new portfolio names. You know, I, I think the add-on business or the add-on environment will continue. I, I think those are some of the better loans that you can do since you know the company so well. These are, you know, I would think about, you know, new situations. They're usually M&A sort of driven. I mean, we were looking at the numbers sort of last night and sort of today. I mean, there's, there's north of $2 billion of transactions that we have committed to. That's across the entire sort of private credit platform for us. You know, FSK is, is, is obviously a big sort of piece of that.

There's no guarantees that all those close, but, you know, the, the, the activity level has definitely sort of picked up. The one thing I did mention in, in, in my remarks is, is, you know, those deals won't necessarily all close in, you know, Q3, or maybe not even some of them, Q4. Some of these deals have, you know, approvals required to get done, but you should expect new line items in the portfolio.

Robert Dodd (Director)

Got it. Thank you.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Mark Hughes with Truist Securities.

Mark Hughes (Managing Director and Senior Equity Research)

Yeah, thanks. Good morning.

Dan Pietrzak (Chief Investment Officer and Co-President)

Good morning.

Mark Hughes (Managing Director and Senior Equity Research)

In thinking about the banks and their participation in the asset-backed financing, do you think that's just kind of a slowdown in the near term as the banks figure out their capital requirements? Or do you think that'll be a permanent shift, perhaps away from the banks?

Dan Pietrzak (Chief Investment Officer and Co-President)

It's probably a little bit of both. I, I think there is some sort of near-term sort of points. You know, I, I would expect, you know, probably a certain amount of consolidation in the space. I think you have to wait until the regulatory environment, sort of evolves. I mean, banks are a cornerstone of, of, of the U.S., and I think that's gonna, you know, clearly sort of continue. I, I think for certain asset classes, it just might not be as attractive from a capital perspective, or even how they're sort of forced to manage liquidity. It's probably a bit of both.

Mark Hughes (Managing Director and Senior Equity Research)

Yeah. Then when you think about your portfolio, you see the deal activity is ramping up. Do you think payoffs will be ramping up in parallel?

Dan Pietrzak (Chief Investment Officer and Co-President)

We do. I mean, there's probably, you know, maybe a little bit of a mismatch on some of those. You know, there's, there's been a couple of deals that we've just gotten refied out of, so that's more of an immediate thing. As I mentioned to you before, some of the new deal activity, while we might commit, would take, you know, several months or maybe even several quarters to sort of close. I, I think we're expecting it on, on, both sides.

Mark Hughes (Managing Director and Senior Equity Research)

I'm just curious, you seem to have a pretty, informed, strong opinion about the interest rates, maybe higher for longer. Any spicy view on what you think the Fed will do? Will they recognize that and not cut, or how do you think they'll behave in this environment?

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah, I think it's always tough to predict what the Fed's going to do. I think the comment more about higher for longer is, is just, you know, the, the economy seems to be, you know, doing, you know, quite frankly, quite well. I think if you asked me that a year ago, I would have probably had a slightly different view of how it would have played out. The consumer seems to be in a good, in good shape. People seem to be continuing to spend, sort of money. Airports are crowded, you know, restaurants are crowded. It, it, it doesn't feel like you're gonna see this kind of quick snapback.

You know, there was two comments I read this morning from two different Fed governors out sort of last night, you know, giving kind of their views. I'm not too sure how many more, you know, rate hikes there would be, if any, but it feels like they'll just be higher for longer.

Mark Hughes (Managing Director and Senior Equity Research)

Understood. Appreciate it.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Melissa Wedel with J.P. Morgan.

Melissa Wedel (VP of US Equities Research)

Good morning. Thanks for taking my questions. A lot of them have actually already been asked and answered. I was hoping we could go back to your comments earlier on the dividend. You mentioned sort of a $2.95 at a minimum of a dividend payout for the full year of 2023. Was hoping you could just remind us what the spillover income level is as of second quarter?

Steven Lilly (CFO)

Yeah, Melissa, it's Steven. It's sort of between $450 million and $480 million. You know, we, we publish that once a year in the 10-K, and so it's, you know, sort of an estimate during the year. Yeah, that puts us still north of two quarters, between two and three quarters of dividends. Feel very good about where we are. I think we and Ares have kind of the, the highest levels in the industry. It's a nice, nice level for us.

Dan Pietrzak (Chief Investment Officer and Co-President)

Melissa, remember, the, the dividend buildup is the $0.64 sort of base, the $0.06 sort of supplemental, and then the, the $0.15 that we declared there was the special.

Melissa Wedel (VP of US Equities Research)

Yep. I'm wondering, given the level of spillover income and sort of the, the two quarters of coverage that Steven just mentioned, is that something that you intend or you expect the board to revisit around sort of year-end timing for potential specials? Or I should say additional-

Steven Lilly (CFO)

Sure. Number one, we, we have not had a conversation with the board to this date of extending that. We wanted to get, you know, further into this year. It, it also the fact that we've not had the conversation yet, does not clearly preclude us from having that conversation with the board. You know, we'll have to wait and see how it comes. I would think the, the bookends of that conversation, were it to occur, would be, you know, the earliest would be in our November meeting. The latest would probably be in our February meeting of next year. A little more to come there.

Melissa Wedel (VP of US Equities Research)

Appreciate it. Thanks, Steven.

Steven Lilly (CFO)

Thank you.

Operator (participant)

One moment for our next question. Our next question comes from Bryce Rowe with B. Riley.

Bryce Rowe (Senior Equity Research Analyst)

Thanks. Good, good morning. Wanted to maybe start on just on the dynamic of lower, lower net balance sheet leverage both at the BDC and within the JV. Just curious, you know, with the JV's debt to equity going, going down, similar dynamic to what you're seeing, you know, within the BDC, and then maybe a follow-up to that, just kind of thinking about how, how that might, you know, re-lever back up and over what level of time?

Dan Pietrzak (Chief Investment Officer and Co-President)

Yeah. Good morning. I, I wouldn't try to tie the two together or find sort of a linkage there. You know, I think it's, I think it's normal course of, of business. I think it's at 1.09x. You know, I think for both of these, we're, we're within, as I said before, that sort of target range. You know, there'll be some, you know, new deals getting sort of funded, there'll be some sort of pay downs. I, I think if we can operate, you know, where we're at and, and continue to generate, you know, the, the net income and the operating sort of ROE there, it's, it's, it's nice to have the dry powder.

Bryce Rowe (Senior Equity Research Analyst)

Okay. That's fair, Dan. Maybe switching gears a little bit, we've seen debt capital markets kind of open back up here recently. You've got quite a bit of time until your 2024 maturities, just curious if you're thinking about, you know, you know, trying to get active there, you know, how to kind of think about maybe mix of debt capital relative to what it looks like right now, you know, year and a half from now? Thanks.

Dan Pietrzak (Chief Investment Officer and Co-President)

No, it's been good to see the, the markets reopen there. You know, clearly, it's, it's, it's something that, you know, we as a team sort of always talk about. I, I think we've been quite pleased with what we've done, you know, with the capital structure over the last handful of years, in the revolver north of $4.5 billion. That's out to 2027 today. You know, you're right, there's, there's no maturities over the next four quarters. The 2024 maturities, which are, you know, $900 million, are all the second half of the year. I think it puts us in a pretty strong, you know, position. You know, Steven mentioned some of the bilateral sort of financings that, you know, we did extend. I think, I think we've been active in this market.

I think we will continue to be active, and we're gonna continue to probably keep the mix as you kind of see today from a sort of unsecured, and sort of revolvers perspective.

Bryce Rowe (Senior Equity Research Analyst)

Excellent. Great. Thanks for taking the questions.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you.

Operator (participant)

I'm showing no further questions at this time. I would now like to turn the conference back to Dan Pietrzak for closing remarks.

Dan Pietrzak (Chief Investment Officer and Co-President)

Thank you all for your time today and all the great questions. We hope you enjoy the rest of your summer, and we'll speak with you next quarter. Thank you.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.