FS KKR Capital - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 NII per share was $0.62, below both the company’s Q2 guidance ($0.64) and Street consensus ($0.634), while total investment income was $398.0M vs consensus $402.0M; NAV per share fell 6.2% q/q to $21.93, driven by realized/unrealized losses tied to four issuer-specific non‑accruals. EPS/Revenue consensus from S&P Global: $0.634 EPS*, $402.0M revenue*.
• Non‑accruals rose to 5.3% of cost and 3.0% of fair value (vs 3.5%/2.1% in Q1), with PRG, 4840, KBS, and WorldWise added; management highlighted idiosyncratic stresses (post‑COVID normalization, tariffs, competition) and ongoing workout actions.
• Originations remained robust at ~$1.4B, predominantly first lien, and liquidity/capital structure strengthened via a $4.7B revolver amendment (maturity extended to 2030, spread -10 bps); Q3 NII guidance was reduced to ~$0.58 GAAP/$0.57 adjusted, reflecting lower ABF dividends and recurring interest income.
• Dividend policy maintained for 2025 ($2.80/share total), with Q3 declared at $0.70/share (base $0.64 + supplemental $0.06); management will outline the 2026 dividend framework on the Q3 call, a potential near‑term stock narrative catalyst.

What Went Well and What Went Wrong

What Went Well

• Originations of ~$1.4B with ~83% first lien; management emphasized focus on upper middle market and strong sponsor relationships: “During the quarter we originated approximately $1.4 billion of new investments, the vast majority of which were first lien structures”.
• Liquidity and balance sheet actions: availability ~$3.1B and a revolver amendment (to $4.7B, maturity to 2030, -10 bps spread), plus a new $400M bilateral facility (SOFR+175) closed in June.
• ABF and JV contributions: weighted average yield on accruing debt investments remained a healthy 10.6–10.8%, with JV dividends $59M in Q2 and mid‑50s expected over time as investments season.

What Went Wrong

• NAV per share dropped from $23.37 to $21.93, with net realized/unrealized loss of $1.36/share and GAAP loss per share of $(0.75); company‑specific non‑accruals drove valuation pressure.
• Non‑accruals rose to 5.3% of cost/3.0% of FV (vs 3.5%/2.1% in Q1); PRG (first‑lien last‑out), 4840 (first‑lien), KBS (second‑out first‑lien), and WorldWise were added to non‑accruals.
• Yield compression continued: weighted average annual yield on accruing debt investments declined to 10.8% (Q2) from 11.0% (Q1) and 11.3% (Q4), reflecting base rate declines and spread compression on new originations.

Transcript

Speaker 4

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp.'s second quarter 2025 earnings conference call. Your lines will be in a 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, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Speaker 2

Thank you. Good morning and welcome to FS KKR Capital Corp.'s second quarter 2025 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 yesterday. 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 30, 2025. 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 and 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 6, 2025. 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 President; and Steven Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Speaker 0

Thank you, Anna, and good morning, everyone. Thank you all for joining us for FS KKR Capital Corp.'s second quarter 2025 earnings conference call. During the second quarter, FS KKR Capital Corp. generated net investment income totaling $0.62 per share and adjusted net investment income totaling $0.60 per share as compared to our public guidance of approximately $0.64 and $0.62 per share, respectively. Our net asset value per share declined 6.2% from $23.37 to $21.93 during the quarter. Our operating results this quarter primarily were attributable to company-specific situations impacting four portfolio companies. Dan will provide significant detail on each company shortly. Our new investment activity has remained strong despite the still somewhat slow M&A environment. During the first half of 2025, the investment team originated $3.4 billion of investments, of which $1.4 billion were originated during the second quarter.

We continue to find compelling ABF opportunities, and this segment of our portfolio remains a strong performer while also providing enhanced portfolio diversification. Additionally, we've continued to scale our Credit Opportunities Partners joint venture, which expands our investment funnel and delivers a consistent stream of recurring dividend income on both a quarterly and annual basis. On the right side of the balance sheet, we continue to maintain strong liquidity to support our funding needs, ending the quarter with $3.1 billion of availability across cash, unsettled trades, and undrawn credit facilities. Our 2025 distribution guidance remains in place, and we continue to expect our distributions during the full year will total $2.80 per share, comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions.

Our board has declared a third quarter 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 we previously have stated, our 2025 distribution strategy was designed to provide shareholders with additional distributions from the spillover income that we have accumulated. As we approach our target spillover balance range, we expect our 2026 distribution strategy will be based on key factors, including prevailing interest rates, our overall portfolio yield, the spread environment with respect to new investments, and the weighted average cost of our liability structure. In keeping with our long-held view of providing as much transparency as possible to the market, we plan to provide additional details regarding our 2026 dividend strategy on our third quarter earnings call. With that, I'll turn the call over to Dan.

Speaker 3

Thanks, Michael. I'll keep my macro and industry remarks brief this quarter and instead focus my time discussing as many specifics as we can with regards to the four companies Michael referenced. In recent months, geopolitical tensions, regulatory changes, tariffs, and market volatility have combined to increase uncertainty about the timing of the resurgence of M&A transactions. While transactions have been getting done, global M&A volume is down close to 10% year over year. Despite these overall declines, our team evaluated more opportunities in Q2 than in any of the previous eight quarters. This continued increase in deals screened, together with the recent legislative developments, supports our cautious optimism that conditions are aligned for an increase in M&A activity later this year and into next year. During our first quarter earnings call, we estimated that approximately 8% of our portfolio could have direct exposure to tariffs.

Since then, the landscape has continued to evolve with changes to both the countries impacted and specific tariffs. We have remained closely engaged with our portfolio companies and their sponsors, actively updating our analysis to reflect the latest developments. Based on this updated analysis, we estimate that our direct tariff exposure has declined and now falls within the low to mid-single-digit range. The companies which are either affected or potentially will be affected have been proactive in mitigating potential impacts, including exploring alternative supply chain strategies and passing through costs where possible. While our portfolio and the private credit market in general both continue to demonstrate stability, we experienced an increase in non-accruals this quarter due to specific situations with four companies. Three of these companies are larger investments in our portfolio, which accounted for the negative move in our net asset value during the quarter.

Comments regarding the four companies are as follows. Our first lien loans positions in Production Resource Group, or PRG, were added to non-accrual, contributing $198 million of cost and $122 million of fair value collectively. PRG is a legacy investment, which was initially restructured in 2020. Industry-wide stress and heightened competition have led to significant pricing erosion, and as such, the company's performance has significantly underperformed expectations in 2025. As a result, we reduced the value of our investment and placed our first lien loan securities on non-accrual. We are working toward a full restructuring of the business and will provide updates as they become available. Our first lien senior secured positions in 4840 were added to non-accrual during the quarter, contributing $188 million of cost and $91 million of fair value collectively. 4840 is one of the nation's largest wood pallet manufacturers and recyclers.

The company has been negatively impacted by post-COVID normalization trends such as inventory destocking. While the company has continued to make interest payments, we made the decision to place the investment on non-accrual status as we work through next steps with the company and the sponsor. FSK's second out first lien loan to Kleinmeyer-Berntson Services, or KBS, was added to non-accrual, contributing $94 million of cost and $48 million of fair value. KBS is a large provider of janitorial and cleaning services to nationwide retailers and offices. The company completed a consensual restructuring in early 2024 and since then has successfully focused on new business development, value creation, operational improvements, and cost reductions. The company's performance has stabilized, and we have received indications of interest in purchasing the business from strategic third parties. This process is evolving, and we will update the market as we learn more.

Lastly, our first lien and second lien investments in Worldwise were added to non-accrual, contributing $20 million of cost and $11 million of fair value collectively. The company is a pet products provider, which was restructured during the fourth quarter of 2024. In connection with the restructuring, the sponsor contributed $42 million of equity, resulting in a $30 million debt paydown at par across KKR funds. Following the restructuring, the business has faced headwinds from tariffs and softer consumer demand. We are actively implementing strategic initiatives aimed at stabilizing operations and realizing meaningful cost efficiencies. While each of these situations is unique to the issuer, our workout team remains actively engaged and is working closely with our advisors and management teams to effectuate the best outcomes possible. During the second quarter, two companies were removed from non-accrual status.

First, our first lien investment in Bowery Farming that had previously been placed on non-accrual was written off. Second, a legacy investment, JW Aluminum, was amended during the quarter into a perpetual preferred equity position. At the same time, the company's performance has improved in recent periods to the point that earlier this year we received a return of $98 million of capital as the company successfully refinanced and upsized a bond issuance. Turning to our investment activity, during the second quarter, we originated approximately $1.4 billion of new investments. Approximately 72% of our investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $1.1 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $311 million.

New originations consisted of approximately 83% in first lien loans, 5% in subordinated debt, and 12% in asset-based finance investments. Our new direct lending investment commitments had a weighted average EBITDA of approximately $251 million, 5.8 times leverage through our security, and a weighted average coupon of approximately SOFR plus 520 basis points. We continue to believe in the strength of our investment strategy, which primarily focuses on upper middle-market companies with EBITDA in the $50 million to $150 million range across a diverse set of industries and sectors. As of June 30th, the weighted average EBITDA of our portfolio company was $252 million, and median EBITDA was $114 million. Our portfolio companies reported weighted average year-over-year EBITDA growth rate of approximately 8% across companies which we have been invested in since April of 2018. Interest coverage levels remain healthy, with the median second quarter coverage at 1.8 times.

As of the end of the second quarter, non-accruals represented 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis. This compares to 3.5% of our portfolio on a cost basis and 2.1% of our portfolio on a fair value basis as of March 31st. We also believe it is helpful to provide the market with information based on the FSK assets originated by KKR Credit. Non-accruals relating to 91% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor, were 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter. This compares to 2% on a cost basis and 1% on a fair value basis as of the end of the first quarter. With that, I'll turn the call over to Steven.

Speaker 1

Thanks, Dan. As of June 30, 2025, FSK's investment portfolio had a fair value of $13.6 billion, consisting of 218 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio, compared to 20% as of the end of the first quarter. We remained focused on senior secured investments as our portfolio consisted of approximately 59% first lien loans and 64% senior secured debt as of June 30. In addition, our joint venture represented approximately 12% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans total approximately 68% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of June 30.

The weighted average yield on accruing debt investments was 10.6% as of June 30, a decrease of 20 basis points compared to 10.8% as of March 31. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Turning to our quarterly operating results, our total investment income was $398 million for the second quarter, which is a decrease of $2 million compared to the first quarter. The quarter-over-quarter change in total income was primarily driven by the decline in interest income as a result of investments that were placed on non-accrual during the quarter, coupled with lower fee income due to a more normalized origination quarter. The primary components of our total investment income during the second quarter were as follows. Total interest income was $298 million, a decrease of $4 million quarter over quarter.

Dividend and fee income totaled $100 million, an increase of $2 million quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows: $59 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $32 million during the quarter, and fee income totaling approximately $9 million during the quarter. Our total expenses were $225 million during the second quarter, which is an increase of $12 million compared to the first quarter. The quarter-over-quarter change in total expenses primarily was driven by an increase in interest expense due to higher leverage utilization during the quarter to grow our joint venture. The primary components of our total expenses were as follows. Our interest expense totaled $125 million, an increase of $12 million quarter over quarter. Our weighted average cost of debt was 5.3% as of June 30.

Management fees totaled $53 million, an increase of $1 million quarter over quarter. Incentive fees totaled $36 million, a decrease of $3 million quarter over quarter. Other expenses totaled $11 million, an increase of $2 million quarter over quarter. The detailed bridge and our net asset value per share on a quarter-over-quarter basis is as follows. Our starting net asset value per share was $23.37. GAAP net investment income increased NAV by $0.62 per share, while net realized and unrealized losses decreased our net asset value by $1.36 per share. Our NAV per share was further reduced by the $0.70 per share total quarterly distribution paid during the quarter. The sum of these activities results in our June 30, 2025 net asset value per share of $21.93.

From a forward-looking guidance perspective, we expect third quarter 2025 GAAP net investment income to approximate $0.58 per share, and we expect our adjusted net investment income to approximate $0.57 per share. The detailed components of our third quarter guidance are as follows. Our recurring interest income on a GAAP basis is expected to approximate $289 million. We expect recurring dividend income associated with our joint venture to approximate $55 million. We expect fee and other dividend income to approximate $30 million. The decrease quarter over quarter is due to lower ABF dividends projected in the third quarter. From an expense standpoint, we expect our management fees to approximate $51 million. We expect incentive fees to approximate $34 million. We expect our interest expense to approximate $116 million, and we expect other G&A expenses to approximate $10 million.

Turning to our capital structure, in June, we closed on a new five-year $400 million bilateral lending facility with CIBC priced at SOFR plus 175 basis points, thereby further extending our maturity ladder. Additionally, after quarter end, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility. The amendment provides for, among other things, an increase of total commitments from $4.6 billion to $4.7 billion, an extension of the maturity date to the third quarter of 2030, and a reduction in spread by 10 basis points. As of June 30, our gross and net debt to equity levels were 131% and 120%, respectively, as compared to 122% and 114% as of March 31. Our leverage remains within our target range of 1 to 1.25 times net debt to equity.

At the end of the second quarter, our available liquidity was $3.1 billion, and approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. Our next unsecured debt maturity occurs in the first quarter of 2026 and represents approximately 10% of our committed capital structure. With that, I'll turn the call back to Michael for a few closing comments before we open the line for questions.

Speaker 0

Thanks, Steven. As we look toward the second half of the year, we acknowledge the significant work currently taking place with regard to the four companies Dan mentioned. Since its establishment in 2018, investments originated by FS KKR Advisor consistently have performed meaningfully better than the BDC industry's long-term average non-accrual rate of 3.7%. We look forward to bringing this quarter's non-accrual rate more in line with this and ultimately below this industry average. We are confident in our team and in our ability to navigate periods of stress, which inevitably occur from time to time. As always, we appreciate your participation on the call today and for your interest in FSK. Operator, we'd like to open the line for questions.

Speaker 4

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask your question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question today comes from Aaron Saganovich with Truist. Your line is open.

Hi, thanks. There's been a lot of discussion about the investing environment picking up in the second half, and you know folks are quite busy in a typically slow August period. What are you seeing on your end, and what are you thinking about in terms of originations in the second half?

Speaker 3

Yeah, and Aaron, it's Dan. Thanks for the question. I think just two things I want to start with. First, clearly this is a bit of a harder quarter for us, right? We know we have some work to do as we go forward, and I want to make sure it's clear the team is focused on that. Before I get to your question, just second, I did want to acknowledge the senseless and tragic events in New York City last week. All the businesses, the people, and the families impacted by these events are in our thoughts and prayers. I think when we get to the investing environment, the way you put it, it's well said. People are busier now, I think, than they've been in some time.

Just from a pure deal count perspective, we've looked at more deals in Q2 than we have in, I think, the prior eight quarters. That was off of a very kind of ugly April on the other side of Liberation Day. I think the key data points hold, right? There is significant pressure from LPs to get cash back from their private equity GPs. We continue to hear that. We know there's a lot of dry powder in kind of newer vintage private equity funds that I think are looking to deploy. I think we've probably seen more activity in names where they don't have to talk about tariffs or sit to worry about tariffs. Definitely a certain amount of green shoots. That said, I am expecting still bouts of volatility to sort of play through, but again, busier this past quarter than we've been for a while.

Great, that's helpful. I appreciate all of the details about the four companies that you have on non-accrual and the information around that. Beyond those four companies, in terms of a watch list, do you have any others that are bubbling up to the top? Maybe you could just talk a little bit about the portfolio performance at a portfolio company level for the rest of the portfolio.

Yeah, I'm happy to do that, and fair question. I think a couple of things, right? I mean, I think we've tried to provide, not just on this call but prior calls, as much detail as we can on certain names. I think each of the issues in some way was unique to the companies we discussed, although there was clearly with Kleinmeyer-Berntson Services and 4840 a bit of a material amount of over-earning kind of driven by COVID, and then companies kind of unlevered on the other side. In terms of watch lists, probably the simplest thing to point to is the risk ratings that we publish. In the QAR bucket three and four, you've got roughly 7% of the portfolio.

I would note a couple of those names, which we've talked about on prior calls, are GlobalJet and JWA, which we've seen some positive momentum on each of those names. The other side of that, there are some things that do worry us, right? The higher rate environment is stressful on companies. Things like DOES or impact to sort of government contracts or government services is definitely on our mind. I think maybe I want to make sure we're cautious and maybe we're a little bit more negative than most on certain things, but the consumer has performed quite well, right? We've seen that in some of the consumer businesses that we lend to or some of the consumer portfolios that we own in the asset-based finance side, although that's been predominantly skewed to higher FICO.

I think you got to be a little bit mindful there as we go into the second half or deeper in the second half of the year and into 2026. Thank you.

Speaker 4

Thank you very much. One moment, please. Our next question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

Hey, everyone. Good morning. We wanted to ask, first about the COP JV. Steven, I think your guide for 3Q of $0.55, that's a touch lower than what you had guided for this quarter, which was $0.56. I know it came in well above that, but you're guiding it down a little bit despite a bit of a ramp there. Seeing what kind of earnings situation and also credit situation, how that has compared to the mothership, BDC. Finally, what I'm getting at is, is the JV in a similar place where, as we go into 2026, you know, and it maybe pays down spillover, perhaps, is that going to also be a lower reset payout? Thank you.

Speaker 3

Send it, Steven. I'll take the first part of your question and hand the second part over to Dan. The difference in the anticipated dividend from CFD for the third quarter versus what we received in the second is really driven by the timing of certain ABF dividends. We received a bit higher dividends in the second quarter, and correspondingly, we'll have a bit lower dividends in the third. As you certainly know, and others know, dividend payers in the ABF portfolio, it tends to be a little bit lumpy. It's not spread evenly over four quarters of the year. Kind of somewhat normal and customary there. We would expect the JV over time to, because we have expanded it to your point, to be at that sort of mid-50s or even a little better level over time as those investments season in that portfolio.

Speaker 1

Yeah, Ben, good morning. Maybe just to add to those points, you know, and I think you've spent enough time with us on the asset-based finance space that you've got to get that. Just to be clear on those deals, that was more of a timing issue than any type of a performance point. You know, we do have a desire to continue to ramp this, but within the guise of, you know, probably 15% max that we discussed. The only other point that I probably would note is, and I don't have this at my fingertips, so we can circle back if we have to, I do expect that the Detroit Metro has a higher percentage of floating rate debt than fixed rate debt than is in kind of the parent company.

Okay, that's helpful. Thank you. Next question. Portfolio conditions today, given this quarter, probably mean that you're below book for a little while. Seeing your view on the buyback and something you could put in place to potentially take advantage of that at a point where, say, the stock becomes cheap and you become confident in portfolio stability.

Speaker 3

Yeah. I'll take that, Finian. I think, you know, a couple of points there, right? I mean, we have historically been active in buybacks, as you know. I do think we'll have to balance that with what we see as the market opportunity and where we are vis-à-vis a target leverage ratio. I think the target leverage ratio is kind of important to us. We're kind of inside our sort of band now, but my guess is we're probably very little bit sort of above maybe recent historical average. I think we have to just factor all those pieces together as we play it forward.

Speaker 1

Thanks so much.

Speaker 3

Yeah, have a good day.

Speaker 4

Thank you. The next question is from Sean Paul Adams with B. Riley Securities. Your line is open.

Hey, guys. Good morning. On the new non-accruals, it seems like they've largely been legacy troubled assets that had proactive restructuring, however, continued to have further subsequent headwinds. When you're looking over the past troubled assets that have underwent some of that proactive intervention, how many are you currently monitoring for situations like this? You know, out of Worldwise, Kleinmeyer-Berntson Services, and Alacrity, it seemed that there was a significant change in quarter-over-quarter marks. Just if you could provide any more color on that.

Speaker 3

Yeah, no, I'm happy to do that. I think just for the sake of clarity, you are correct in the sense that KBS has been, for lack of a better word, going on for a period of time. PRG would be the same. PRG had an initial restructuring in 2020, but that was in the depth of COVID. It's a business that focuses on Broadway and sort of entertainment, so obviously, revenue went to zero, and quite frankly, it was probably over-leveraged going into that. Just to clarify, KBS, 4840, and Worldwise were regular way sort of KKR originations. When we call something legacy, it would have been kind of prior advisor; that would have been PRG. I think our workout team's done a good job.

We've got a strong group of people from the leadership of that team to the various folks along with skill sets of strong financial modeling slash financial restructuring skills, bankruptcy lawyers, even down to some PE experience to where we have to sort of run these. I do think in some ways that workout term is probably a little bit of a misnomer, right? That team is getting involved the moment something goes on the watch list. In some ways, some of the most value that gets added from that is kind of at that stage because we can tighten up documents, try to de-risk the position. I think we talked about one of those names on our last call when we had a repayment of a company called 360, which was probably the biggest tariff exposure we had in the entire portfolio.

That was going on for an extended period of time. I think each of these is in a different spot, Sean Paul. The PRG name has been ongoing for some extended period of time. The lender group on KBS is working hard. That initial restructuring is probably only a year old. 4840 is still paying interest, so clear. I think just our expectation is that's where it's sort of trending. The team's prepared to spend a significant amount of time to try to maximize the outcome, kind of maximize the return account.

Got it. Very helpful. Thank you.

Speaker 4

Thank you. The next question is from Robert Dodd with Raymond James. Your line is open.

Hi, guys. A short follow-up to Sean's. When we look at these assets that have redefaulted, if you will, it does seem to be, from what I'm looking at, it's becoming a bit more common, and not just in your portfolio, right? There are other assets around the space where we've seen the same kind of thing. I mean, is there a theme or anything? Obviously, yes, it's like you point out for each individual asset, it's idiosyncratic, but there are increasingly, like, you know, redefaults rather than new defaults, if you will, where struggling assets have been restructured and then they're continuing to have problems. The ones that didn't have problems to start with are doing okay. I mean, is there a theme or anything that's leading to that? It kind of ties into the, like, should initial restructurings be more aggressive? Is there a problem?

Would you have liked to have been more aggressive, but the lender group didn't want to be? Any thoughts there?

Speaker 3

It's an interesting question. I'm not sure there's a theme, Robert. To be clear on the names here, there is another restructuring expected on PRG. KBS is more of a valuation point. Even though the company stabilized, I think it's just been sort of delayed. I think the churn numbers we've seen there have taken a longer sort of time period to maybe stabilize in a manner that we're sort of happy with or satisfactory to us and the lender group. I do think the one point you said in there is correct, and each of these situations is probably specific. Are you able to restructure it, sort of quote-unquote enough? We have seen some names where none of these are either left in the portfolio or would be extremely dim in some amounts.

Like, are you able to get, and it's probably more highly correlated to if there's a larger one L group in there, get the position to a spot that you feel the go-forward is self-sufficient versus maybe the capital structure sort of being too unlevered or too levered. I don't think there's any themes. I think each of these is specific. Just to your specific point, the only name that we're talking about actually sort of quote-unquote restructuring again of those four is PRG. The others are just downside versus kind of price and interest market.

Got it. Understood. Let's flip the topic. You mentioned you've seen more deals to review than any time in the last eight quarters. How realistic now, given we're in August and there's only four months left in the year, is it for any of those, or a material number of those, to close this year? Is the optimism, should we be looking more at 2026? Is there enough time for the end of this year to actually see a real rebound in activity?

Yeah, I mean, I think from the numbers perspective, I think you're correct, right? Because deals being reviewed now would go through the regular way investment process for, you know, four, six, eight weeks, and they probably take, on average, two months to close. Some things could be faster. Some things could have a longer sort of tail. I think you did see some of that from our reduced fee income of use on this quarter versus last quarter. I think that is a spot on a go-forward basis that we would expect to see upside, at least from the Q2 number. The only word of cost in there is, I think, upfront fees and OID on new loans is decently tighter now than it was a year ago.

Got it. Thank you.

Thank you.

Speaker 4

Our next question comes from Casey Alexander with Compass Point Research and Trading. Your line is open.

Yeah, good morning. Thank you for taking my questions. Dan, I echo your sentiments to our friends in Midtown. It's a really difficult situation for a lot of folks, and our heart goes out to them. It looks like it's pretty clear that the company is going to be, to a certain extent, restating its dividend philosophy. At one point in time, the company had what you could describe as a modified variable dividend, based upon earnings. You kind of got away from that for a year and a half or two years, as you were working on the spillover. Is that what we should think about you going back to, which is maybe a base and some supplemental that toggles with earnings, or how does the company see reformulating that dividend policy?

Speaker 3

Yeah, I mean, Casey, it's a fair question. I think we wanted to address that a bit in our prepared remarks in terms of coming out formally when we're on the call for sort of Q3. You're correct. I mean, we did kind of lean into that variable dividend policy point. I think we tried to evolve or maybe thread the needle a little bit differently based upon feedback from maybe the market broader. Because if you do recall, our base used to be $0.60, then we upped it to $0.64, then we put the supplemental in place to almost get to that variable sort of point. Then we actually added a special on top for a handful of quarters. I do think we need to kind of acknowledge, and I'm sure, Casey, you get this in reading your reports. Spread environment is down, right?

The yield on our accruing assets is down, I think, 140 basis points over the past year. That's picking up a little bit of the benchmark, but spreads, I think it's more likely than not rates do go down in the near term. I mentioned that fee income point, but maybe with rates coming down, we could see a little bit of spread widening to sort of offset that, but it will not be basis point for basis point in my mind. I think we've been very happy with what we've done on the liability side of our balance sheet. Steven mentioned we're 54% on the unsecured side. I think that we like our maturity ladder a lot, but where we were able to issue those deals was in a very different rate environment, so we will be looking to refinance there.

I think all of that is going to get put forward in our views. Now, there's certain offsets there, right? There could be additional deal volume. We do have more non-company-inducing assets than we would like. So there's a couple of levers there, but where I would focus you and folks, I think we're really going to be NII-led here, right? Where we see forward earnings spitting out is where we're going to talk about dividend levels. We as well like the point of really, you know, that variability, you know, tying it to sort of NII, but then trying to make sure everyone's comfortable that there's a steady base. We'll keep all that in mind for sure.

Okay. Thank you for that. Secondly, to extend on the conversation of the high level of activity that you're seeing, you know, there's not unlimited room in the target range of your leverage ratio. Do you have some line of sight to a level of repayments that will allow you to take on some of this activity, or is, you know, I'm not sure how much capacity there is for the JV. I know you increased your equity commitment to the JV last quarter, but you downstreamed a fair amount of paper to the JV this quarter. How do you manage the inflow unless there's some outflow?

Yeah, I think maybe there's two points there. I mean, there is room for the JV to grow, even with the assets that were sort of put down. I think you'll continue to see that. I think that's been a great partnership with our partner there. I think we have almost $600 million of uncalled sort of equity capital there. That's on one side. I think you have a very, very high correlation between new deal flow and repayments. With the syndicated loan market picking up, we've seen some deals being refinanced by that market as well. I think we do have the levers. That said, you are not incorrect. I mean, operating inside of our target leverage band is paramount to us. I think those two things will help offset that.

Like I said, I think we're happy with the amount of deals we were able to screen in this prior sort of quarter. It's not kind of where I think we will be four quarters from now, so I'm expecting more. I think the correlation of repayments with new deal flow will remain high.

All right. Thank you for taking my questions, Dan.

Have a good day, Casey.

Speaker 4

Thank you. The next question is from Paul Johnson with KBW. Your line is open.

Yeah, good morning. Thanks for taking my questions. Just broadly on activity potentially picking up here. Your EBITDA, your immediate EBITDA is $140 million. Do you guys focus on the upper middle market? Obviously, there's a lot of competition in that part of the market. I mean, how much do you expect of any sort of pickup in activity to go into the BSL market versus private credit?

Speaker 3

Yeah, it's a good question. I take one step back. My sense is, and what we communicate to our investors broadly is, we are focused on the upper end of the middle market. We're probably defining that really in the $50 million to $150 million range. We're there on purpose because we've historically seen better management teams, less customer-supplier concentrations, and there's more levers to pull if certain things do go wrong. I think in times of market volatility, we're probably able to lean into larger companies more because the syndicated loan market is shut. I think we have seen a bunch of larger names who prefer to be in the private market. All that being said, I think we are trying to make sure that our origination funnel is as broad as possible. In addition to covering the 250 sponsors out there, we've got a dedicated non-sponsor team.

We've probably been a little cautious on it, but we're prepared to play in certain junior debt deals where the EBITDA of those businesses is higher. Obviously, we've got an active asset-based finance pipeline in here to sort of bring that together. We will go below $50 million. I mean, I don't think we're going to go below $25 million, to be blunt, and there's probably a higher bar for that size of the company. We're trying to make sure our origination aperture is as big as it can be. We just haven't seen, at least on our side, that you're getting paid enough to be in the $10 million, $15 million, $20 million range. It doesn't mean there's anything wrong with those loans. It's just not where we're spending time.

Got it. Appreciate that, Dan. That's very helpful. One on the JV, I mean, you guys dropped quite a few of assets into the JV this quarter. It looked like there might have been a little bit of a fair value loss this quarter or write down on the investment. Can you just provide maybe a little bit of color on what drove that? Was that just some of the same investments on FSK's balance sheet that are on the JV that were written down? Was there, you know, what are the current non-accrual levels in the JV? Anything that kind of provide color on that?

Yeah. No, and you're correct. I mean, we did kind of drop, you know, sort of assets down in there. I think we've been pretty happy with our inception-to-date performance on the joint venture. You are correct as well. One of the, we'll call it quote-unquote, mark-to-market moves this quarter would have been the JV itself. That would have been more correlated, though, or consistent with some of the same names that we talked about. The JV has been more regularly used for accessing other parts of the KKR sort of origination funnel than regular way, you know, kind of U.S. direct lending. Some parts of Kleinmeyer-Berntson Services, 4840, and Worldwise were in there.

Got it. Thanks again. That's very helpful. The last question for me was just, as you guys are evaluating the dividend going forward next year, I was just wondering, what's all completely on the table here? Considering any sort of shareholder protection, dividend downside protection, potentially with the new dividend, any sort of fee waivers, that sort of thing, or is it just fitting the distribution into the future earnings power and prevailing interest rate at the time?

Yeah. I mean, obviously, there's a couple of sort of points within there, right? We've, you know, we have, I think, historically been on the, you know, wider end of dividends that are being paid. I think it's important for us to, you know, kind of be in line with any sort of market or historical sort of industry averages. Obviously, we'll, you know, kind of think about if we need to adjust the portfolio or otherwise to sort of get there. I think the point that Casey raised in a prior question was an interesting one, right? We've talked about our dividend policy now for some time as kind of a base and supplemental concept. The supplemental either being just, you know, being able to be paid in the future or having it at a fixed, you know, actually, you know, payout number.

I think we're going to have to go through all that as we kind of understand where the rate environment is kind of trending. We did pay out $0.70 on purpose this year, right? We had this excess spillover number that we wanted to guide down to a more target range. I think going into the year, we probably expected more rate moves than we've seen thus far. We wanted to give investors consistency for 2025 to kind of take something off the table. As I said, the factors of where we stand vis-à-vis the market and otherwise will factor into how we look at the dividend on a go-forward basis.

Appreciate it. That's all for me. Thank you.

Thanks.

Speaker 4

Thank you. Our next question is from Melissa Waddle with J.P. Morgan. Your line is open.

Good morning. Thanks for taking my questions. Most of them have already been asked and answered, but wanted to follow up briefly on the level of spillover income. I might have missed it, but can you give us a refresher memory on where that stands on a per-share basis after this quarter?

Speaker 1

Yeah. Melissa, it's Steven. Just to refresh, you know, we started the year with rough numbers, about $525 million of spillover. Through the year, through June, we had reduced that number down to, I'd call it, the high $400 million. With the current quarter dividend that we just announced, we'll reduce it a little more to somewhere, call it, the mid-$400 million. We'll publish, obviously, intra-year, the team's making estimates because we don't have all the appropriate information, tax-wise and other items. We'll publish again in the 10-K at the end of the year. We're sort of in that, call it, somewhat a plus or minus the $450 million range, I guess I would call it today. When you perform a fourth of the dividend that we just announced today, you'd be somewhere, call it, below $450 million, but certainly well above $400 million.

When you think about in today's world, a current dividend just in total dollars, it's about $196 million on a quarterly basis at the full $0.70. We're still above that kind of two quarters' worth of dividends. As you know, certainly from covering us a while, our long-term target there is plus or minus two quarters' worth of dividends. We sort of see ourselves gliding right down to kind of that level as we get to the end of the year.

Thanks for that update. My other question goes back to the ABF opportunities that you're saying. I know that's been an area where you've been investing for a while. I think there was a reference earlier on the call to some of the more consumer-oriented ABF opportunities. I was hoping you could give a quick recap of your allocation across asset classes within ABF and give us an update on historically where you've invested versus the current opportunity. Thanks.

Speaker 3

Yeah, I'm happy to take that, Melissa. It has been a space we've spent a lot of time on, right? We've got a large dedicated 50-person team here. I think we've taken the tact of investing sort of on a multi-asset class global basis. We're playing in a lot of different parts of the market. To answer the consumer's point specifically, it's roughly kind of 2% to 2.5% of the portfolio, diversified in a couple of names. I would say on the consumer side, we have definitely targeted more the higher FICO borrower. I think you've seen that in some of the larger deals that we've done of late, would have been Discover or a recent deal with Harley Davidson, or we're playing in deals that are targeting homeowners. We've got a more positive bias too as it relates to credit performance or other forms of secured deals like Grono.

Net-net, pretty small balance diversified under a bunch of names. We have been active in the resi mortgage space. We've been active in the hard asset space, probably with the main focus on aviation or equipment leasing. That's probably roughly another 2% of the portfolio. We've done historically some more esoteric things, like investing in Music IP, which was a position inside of FS KKR Capital Corp., which we did and has since been sold. We're trying to create that broad footprint. We're trying to enable the team with that footprint to pivot where they see the best risk-adjusted returns. We're probably at a little bit more of the top end of the range on ABF exposure inside of FS KKR Capital Corp. as we think about most deals in there would be under the non-EPC bucket.

We think we've been happy with the diversification and additional return profile that it's given.

Speaker 4

Thank you. This does conclude our question and answer session. I would now like to turn it back to Dan Pietrzak for closing remarks.

Speaker 3

I want to thank everyone for taking the time to join us on the call today. If you do have any follow-up points or questions, please do not hesitate to reach out. Wishing you a good end of the summer. Thank you.

Speaker 4

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.