FS KKR Capital - Q4 2025

Transcript

Operator (participant)

Good gentlemen. Welcome to FS KKR Capital Corp.'s Fourth Quarter and Full Year 2025 Earnings Conference call. Your lines will be in a listen-only mode during remarks by FSK. 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 the conference is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Anna Kleinhenn (Head of Investor Relations)

Thank you. Good morning, welcome to FS KKR Capital Corp.'s fourth quarter and full year 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, 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 December 31st, 2025. A link to today's webcast and the presentation is available on the For Investors 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 fourth quarter earnings release that was filed with the SEC on February 25, 2026.

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.

Michael Forman (Chairman and CEO)

Thank you, Anna, and good morning, everyone. Thank you all for joining FSK's fourth quarter and full year 2025 earnings conference call. I'd like to start today's call by reviewing the goals we set for 2025 and discussing how we performed against those priorities. Our first goal was to originate attractive, well-structured investments, which would be accretive to the quality of our investment portfolio. During 2025, we achieved this goal as our investment team leveraged its deep sponsor relationships to originate $5.6 billion of predominantly first lien and asset-based finance investments. Second, we set out to provide shareholders with $2.80 per share of total distributions through a combination of our quarterly base and supplemental distributions.

Our spillover income, which purposely was increased during the high interest rate environment, allowed us to achieve the objective even against the backdrop of a declining interest rate environment. Our third goal was to continue proactively laddering the right side of our balance sheet. During 2025, we continued to optimize our capital structure by issuing $400 million of new unsecured notes, closing on a new $400 million bilateral lending facility, diversifying our funding sources through two new middle-market CLOs, and further enhancing our liquidity profile through an amendment to our senior secured revolving credit facility that increased our total commitment, extended the maturity, and reduced pricing.

Despite the achievement of these goals, during the second quarter and fourth quarter of 2025, we experienced downward pressure on a few specific investments across our portfolio, which resulted in a decline in our net asset value. We acknowledge that non-investment-grade private debt investing necessarily will result in underperforming assets from time to time. However, we are disappointed by these markdowns. Dan, of course, will discuss these topics in more detail later in the call. Looking ahead to 2026, our goals are as follows: First, we expect to address underperforming assets through restructurings, exits, and continued proactive portfolio monitoring to reduce the number of nonaccruals and non-income producing investments in the portfolio.

Second, we will continue our strategy of focusing on first lien senior secured originations, with the goal of continuing to increase the overall quality and diversification of our investment portfolio, while simultaneously continuing to focus on rotating a portion of our legacy investments. Third, we'll remain focused on preserving our strong liquidity and balance sheet flexibility by keeping net leverage within our target range and maintaining ample revolver capacity to manage volatility and selectively deploy capital. Turning to our fourth quarter results, FSK generated net investment income totaling $0.48 per share and adjusted net investment income of $0.52 per share, as compared to our public guidance of $0.51 and $0.56 per share, respectively. Our net asset value share declined by 5% to $20.89, compared to $21.99 as of the end of the third quarter.

The two primary components of the quarterly change in net asset value are a $0.22 per share decline as a result of our $0.70 per share distribution compared to our GAAP NAI of $0.48 per share, and an $0.87 per share decline as a result of downward pressure on certain investments. From a liquidity standpoint, we ended the quarter with approximately $3.8 billion of available liquidity. Based upon our updated dividend framework and expected operating results, our board declared a total first quarter distribution of $0.48 per share, consisting of our base distribution of $0.45 per share and a supplemental distribution of $0.03 per share. This represents a 100% payout of our GAAP net investment income and a 9.2% yield on our ending fourth quarter net asset value.

With that, I'll turn the call over to Dan to provide additional color on the market and the quarter.

Dan Pietrzak (Chief Investment Officer and President)

Thanks, Michael. I'd like to start by focusing on FSK's recent performance. As Michael noted, our recent underperformance reflects challenges in certain legacy investments, including Production Resource Group, as well as challenges in certain current advisor-originated investments such as Medallia, CubicCorp, KBS, and 48Forty. We are actively engaged in each of these situations and are pursuing company-specific solutions to stabilize performance and maximize recoveries, although we acknowledge each company faces challenges unique to its specific business. We also acknowledge that our nonaccrual assets are higher than we would like, which tempers our near to intermediate-term view from an NII standpoint. Specifically, this means that our 2026 dividend, which we originally believed would equate to approximately 10% of net asset value, may now be more in the range of 9% of net asset value.

Stepping back a bit, focusing on the current advisor's long-term performance. Since the formation of the FS KKR advisor 8 years ago, we have originated $34 billion of investments in FSK, generating an unlevered IRR of 9.1% since inception. While recent nonaccruals have emerged from this body of work, we do believe some level of default is inevitable in a sub-investment-grade portfolio, particularly across various market cycles. Nevertheless, we are focused on the work ahead of us during 2026 and beyond. Not only to establish more stability in our investment portfolio, but also to regain the market's confidence in our ability to deliver more consistent results on a quarter-to-quarter basis. With that, I'll turn to a few specific comments about the quarter.

During the fourth quarter, approximately 50% of net realized and unrealized losses were attributable to four investments: Production Resource Group, Medallia, Peraton, and CubicCorp. We have spoken about most of these investments in detail in the past. However, I'll give a quick update on each name. PRG, a legacy investment, is a leading provider of integrated entertainment and live event production solutions. PRG continues to be impacted by softer operating performance due to headwinds in their TV, film, and music segments. During the quarter, we incurred approximately $47 million of net losses. Medallia, an enterprise software as a service experience management platform, has faced competitive pressures, which have resulted in the company's recent financial underperformance. This investment contributed $29 million of unrealized losses during the quarter.

Peraton, a provider of technology-focused services and solutions to U.S. government agencies, contributed $23 million of unrealized losses during the quarter. CubicCorp, an existing nonaccrual investment, is a diversified technology provider to defense and civil-related agencies across governments throughout the world. Over recent periods, the company has experienced order and implementation delays, resulting in the current period valuation. CubicCorp contributed $21 million of unrealized depreciation during the quarter. Turning to the investing environment. During 2025, we experienced a 13% increase in the number of investment opportunities we evaluated. I would highlight, we are remaining extremely selective. We are focused on continuing to diversify our portfolio by taking smaller position sizes in a greater number of borrowers.

Additionally, based on the opportunities we are seeing in the market today, we continue to believe the best risk-adjusted returns are in first lien loans and asset-based finance investments. During the fourth quarter, we originated approximately $1.1 billion of new investments. Approximately 80% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $806 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $292 million. New originations consisted of approximately 65% in first lien loans, 15% in asset-based finance investments, 18% in capital calls to the joint venture, and 2% in equity and other investments.

Our new direct lending investment commitments had a weighted average EBITDA of approximately $352 million, 6.2x leverage through our security, and a weighted average coupon of approximately SOFR plus 475 basis points. We continue to focus on upper middle-market companies, with EBITDA in the $50 million-$150 million range across a diverse set of industries and sectors. As of December 31st, the weighted average EBITDA of our portfolio companies was $236 million, and the median EBITDA was $132 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 4% across companies in which we have invested in since April of 2018.

Median interest coverage increased to 1.9x, compared to 1.8x at the end of the third quarter. Software and services currently represents 16% of our investment portfolio, diversified across 50 issuers, with an average position size of 33 basis points of our total investment portfolio. Average and median EBITDA of approximately $162 million and $110 million, and a median LTV of approximately 39%. This segment of our portfolio historically has been one of our best performers and has been underwritten with a particular focus on primary customer relationships and the durability of revenue and cash flow streams attached to those relationships.

We will continue to assess potential future AI risks with each investment we analyze, as our current belief is that widespread AI adoption may result in an overall expansion of the addressable market, even though it likely will negatively impact certain companies which either have not yet achieved meaningful positive cash flows or are less well-positioned from a customer retention standpoint. During the fourth quarter, 5 investments were added to nonaccrual status and 1 was removed. New nonaccrual assets include Alacrity Solutions, AmeriVet Partners, Dental Care Alliance, Gracian, and Lionbridge Technologies. Together, these investments total $255 million of cost and $214 million of fair value across our investment portfolio. As previously disclosed, Production Resource Group was removed from non-accrual status.

As of December 31st, nonaccruals represented 5.5% of our portfolio on a cost basis and 3.4% of our portfolio on a fair value basis. This compares to 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis as of September 30th. Nonaccruals relating to the 90% of our portfolio, which has been originated by KKR Credit, were 5.1% on a cost basis and 3.1% on a fair value basis as of the end of the fourth quarter. This compares to 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter.

While we acknowledge that this nonaccrual rate is above the long-term BDC industry average cost basis, nonaccrual rate of approximately 3.8%, we also recognize that this measure is a point-in-time data point. KKR's long-term average cost basis, nonaccrual rate since April 2018 is 1.2%. In summary, with regard to our investment portfolio, we recognize there's work to be done, which may result in an above-average level of portfolio volatility during certain periods, coupled with lower levels of net investment income as compared to prior estimates. Portfolio metrics do move over time, and we believe our investment and workout team are well equipped to successfully navigate this period of elevated portfolio volatility.

Lastly, subsequent to quarter end, we announced that the aggregate capital commitment to our joint venture with South Carolina Retirement Systems Group Trust increased from $2.8 billion to approximately $2.975 billion, reflecting an additional net $175 million contribution from our partner. Following this transaction, our partner's ownership percentage climbed from 12.5%-21.1%, and our ownership percentage changed from 87.5%-78.9%. We and our partner have been very pleased with the performance of the JV to date, and this incremental capital positions the joint venture to continue scaling while fully leveraging the breadth and depth of the KKR Credit investment platform. With that, I'll turn the call over to Steven to go through our financial results.

Steven Lilly (CFO)

Thanks, Dan. As of December 31, 2025, FSK's investment portfolio had a fair value of $13 billion, consisting of 232 portfolio companies. At the end of the fourth 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 third quarter. We remain focused on senior secured investments, as our portfolio consisted of approximately 58% first lien loans and 62% senior secured debt as of December 31st. In addition, our joint venture represented approximately 15% of the fair value of our portfolio as of the end of the fourth quarter.

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 72% of our portfolio as of December 31st. The weighted average yield on accruing debt investments was 10% as of December 31st, a decrease of 50 basis points compared to 10.5% as of September 30th. 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 $348 million for the fourth quarter, a decrease of $25 million compared to the third quarter.

The primary components of our total quarterly investment income were as follows: Total interest income was $256 million, representing a decrease of $29 million quarter-over-quarter. The decline in interest income was driven by investments placed on nonaccrual during the quarter, lower base rates, and the repayment of higher-yielding investments. Dividend and fee income totaled $92 million, an increase of $4 million quarter-over-quarter. Our total dividend and fee income is summarized as follows: $58 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $28 million during the quarter, and fee income totaling approximately $6 million during the quarter. Our total expenses were $213 million during the fourth quarter, a decrease of $1 million compared to the third quarter.

The primary components of our total expenses were as follows: Our interest expense totaled $110 million, a decrease of $6 million quarter-over-quarter, and our weighted average cost of debt was 5.1% as of December 31st. Management fees totaled $50 million, a decrease of $1 million quarter-over-quarter, incentive fees totaled $28 million, a decrease of $5 million from the third quarter. Other expenses totaled $7 million, a decrease of $3 million quarter-over-quarter. Lastly, excise tax totaled $18 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 3rd quarter 2025 net asset value per share of $21.99 was increased by GAAP net investment income of $0.48 per share and was decreased by $0.87 per share due to a decrease in the overall value of our investment portfolio. We experienced a $0.01 per share reduction in net asset value from realized loss on extinguishment of debt and a $0.70 per share reduction as a result of the total quarterly distribution paid during the quarter. The sum of these activities results in our December 31, 2025 net asset value per share of $20.89.

From a forward-looking guidance perspective, we expect first quarter 2026 GAAP net investment income to approximate $0.45 per share, and we expect our adjusted net investment income to approximate $0.44 per share. The detailed components of our first quarter guidance are as follows: Our recurring interest income on a GAAP basis is expected to approximate $226 million. We expect recurring dividend income associated with our joint venture to approximate $60 million. We expect fee and other dividend income to approximate $29 million. From an expense standpoint, we expect our management fees to approximate $48 million. We expect incentive fees to approximate $26 million. We expect interest expense to approximate $104 million, and we expect other G&A expenses to approximate $9 million Structure.

In December, we closed our third middle-market CLO, raising $363 million of low-cost, secured debt priced at a weighted average rate of SOFR plus 157 basis points. We are pleased with this financing, given it is match funded with no mark-to-market at an attractive rate. As of December 31st, our gross and net debt to equity levels were 130% and 122%, respectively, compared to 120% and 116% at September 30th. Our leverage remains within our target range of 1 to 1.25 times net debt to equity. At the end of the 4th quarter, our available liquidity was $3.8 billion, and approximately 62% of our drawn balance sheet and 43% of our committed balance sheet was comprised of unsecured debt.

Pro forma for the $1 billion unsecured bonds that matured on January 15th, 2026, 49% of our drawn balance sheet and 38% of our committed balance sheet was comprised of unsecured debt. Our next balance sheet maturity is a $400 million bond in January 2027. With that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Michael Forman (Chairman and CEO)

Thank you, Steven. As we enter 2026, we actively are focused on working through the portfolio-related items Dan discussed in detail.

Our new and recent originations are performing well. The vast majority of our portfolio continues to perform in line with our original expectations. As a result, we believe our scale, experience, and proactive portfolio management will enable us to maximize recoveries and to continue providing shareholders with an attractive level of current income relative to the risk-free rate. As always, we appreciate you joining us today. With that, operator, please open the line for questions.

Operator (participant)

Thank you. We'll conduct the question and answer session. To ask a question, you'll need to 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 our question and answer roster. Your first question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is now open.

Finian O'Shea (Director)

Hi. Hey, everyone. Good morning. just to start, like, big picture, FSK is shrinking, which makes it worse and likely stuck below book. Do you ever think about, like, a grand bargain, or say, the FS side allows for a lower fee, and then the KKR side puts in some balance sheet money to inject life into the BDC and ultimately show that the partnership model can work?

Dan Pietrzak (Chief Investment Officer and President)

Good morning, Finian. I mean, that's probably a bit of a complicated question, but I think if you take a step back, you know, I think, you know, we have been, I think, both sides quite happy with just the partnership. I mean clearly, this has been a harder quarter, you know, but if you do think about, you know, we have originated $34 billion of investments into FSK in the last eight years. You know, the last quarter has felt bumpy, but, you know, we're to the 9.1% sort of IRRs against those. I think we've got some work to do, clearly on the portfolio. I think we got some work to do, to your point, about, you know, how to either, you know, grow this thing or create some levers as it relates to income growth.

You know, the short, or the low-hanging fruit there is we do have too many non-income producing assets, right? We're roughly 9.5% there. I think we've been stuck with that for a while because that, you know, really started with some of the older assets that were here. You know, I think us, as a team, have gone through, you know, I'd say, a laundry list of things as I would think about kind of a forward operating plan as we evolve this thing for 2026 and 2027. I don't think this is a quarterly sort of discussion as we, as we work on that evolution.

Finian O'Shea (Director)

Okay. Sorry about that. A follow-on the performance fee. One of your peers yesterday, Blackstone, you know, they had a few write-downs. They got a little bit less of an incentive fee. The stock was fine. Do you think that makes sense to revisit again? The look back, that is.

Dan Pietrzak (Chief Investment Officer and President)

I mean, I think we're, you know, kind of quite cognizant of fee structures and, you know, constantly sort of mapping that to the market or at least where we sit versus other to the market. Also, you know, thinking about where we sit vis-a-vis sort of dividend numbers, right? I think at the, you know, $0.48 odd number, we're sort of roughly, 9.2%. I think, you know, that we'll call it evaluation, you know, we as a team, and we're constantly sort of thinking about we'll, you know, be discussing those sort of matters.

I think we're, you know, in a lot of ways, focused on the total earnings sort of here in that 9.2%, which, you know, probably, you know, lower than we want to be today, but probably above kind of historical average.

Finian O'Shea (Director)

Thanks, Dan.

Dan Pietrzak (Chief Investment Officer and President)

Thanks.

Operator (participant)

Thank you. Your next question comes to the line of Ethan Kaye with Lucid Capital Markets. Your line is now open.

Ethan Kaye (VP of Equity Research)

Hey, guys. wondering if there's anything you can kind of point to, any, you know, common thread or common denominator here across, you know, the positions that, you know, drove the underperformance this quarter?

Dan Pietrzak (Chief Investment Officer and President)

Yeah, Ethan, and thanks for the question. you know, maybe I'll put it in a, in a, you know, couple of buckets, right? you know, if you do look at the, you know, the five names that were added to nonaccruals, you know, two of those are, in the sort of medical or sort of healthcare roll-up space, right? That's one, you know, area we are kind of keeping an eye on. you know, I think we've seen a lot of names performing well there, but that has been a space where wage inflation sort of has mattered, you know, retention has mattered. That's been across kind of dental as well as the vet area. you know, so that is probably, you know, what I'd say, one, you know, common theme out there on, you know, the nonaccrual side.

I think the other names where we've seen some of the marks, and when we went through the script, four names drove 50 odd % of that. One of them is PRG, which has been a tough name for a long time. We've got a lot of resources sort of attached to that, but that's very much idiosyncratic to that name. The rest of it, I would just probably put in the camp of, we'll call it, operational sort of underperformance. There's a little bit of DOGE or government sort of contract risk embedded in there. I think that still plays through the system with somewhat like a Peraton or sort of a Cubic.

There are, you know, on one hand, some themes with the medical roll-ups, on some hand, some themes with, you know, kind of the DOGE or the government sort of points, and then, you know, some of it just boils down to operational performance.

Ethan Kaye (VP of Equity Research)

Got it. I guess, you know, the 3 kind of other non-legacy names you mentioned, as well as at least I think one of the new nonaccrual names seem to be either, you know, software-centric or software adjacent, if I'm not mistaken. I'm just curious if there's any kind of. You know, we're obviously hearing a lot about the emergence of AI and the risks that poses to, you know, software companies. Wondering if, you know, any kind of pressure from that dynamic?

Dan Pietrzak (Chief Investment Officer and President)

No, it's a very fair question, considering what's, you know, going on news-wise. I mean, the overall portfolio from software for us is about 16%. You know, I think we have been evaluating what I would call AI risk in that portfolio for some time, you know, not just on the back of the recent news flow. You know, we do have the benefit of working with our private equity colleagues and have come up with this sort of, what I'll call framework, looking at 20 different, you know, data points to assess, you know, what might be high risk or not.

You know, I think from an investing perspective, we have focused on what I would call mission-critical products, you know, those that are sort of hard to rip out, or have focused on the, you know, those businesses that, you know, in our opinion, truly have proprietary data. You know, I think we have not been active in the ARR space, right? You know, we do have one ARR loan left, which is Medallia, which we sort of talked about. You know, I think when you put all that together, you know, when we look at our portfolio, we got sort of roughly 2% of the names that we think have a, you know, a high AI risk attached to them.

Of the names you kind of referred to, you look at, you know, the ones that, you know, were talked about as it relates to driving the mark. I don't think that they actually had anything to do with AI. As it relates to, you know, underperformance, it's really more in that operational camp. You know, the one that did would be Lionbridge, right? You know, that business is a language translation business and sort of a gaming business. You know, the language business has, you know, in our opinion, had some headwinds from that. We think the gaming business is quite attractive, I think for a, you know, for a long time, and I think we still likely could be covered from that gaming business.

you know, really not AI driven is the summary point.

Ethan Kaye (VP of Equity Research)

Thanks very much for that.

Operator (participant)

Thank you. Your next question comes from the line of Arren Cyganovich with Truist Securities. Your line is now open.

Arren Cyganovich (Specialty Finance Senior Analyst)

Thanks. The 2026 goal of kind of dealing with the problem credits, maximizing value can, you know, often take a while to unfold. You know, how are you kind of approaching this, you know, to try to both quickly, you know, address these, but also, you know, maximize the value that you're gonna get from, you know, potential restructures?

Dan Pietrzak (Chief Investment Officer and President)

Yeah, the line's not great, but I think the question was around sort of maximizing value. If I don't answer it fully, please add to it. You know, I think we did talk about our 2026 goals, right? I mean, clearly addressing these underperforming assets has to be top of that list. You know, I think the other parts of it relate to getting more diversification in the portfolio. That's been a big focus and needs to continue to be, then, you know, obviously, thinking about liquidity. You know, we've, you know, got a deep and solid, you know, investment, specifically those who function on the work outside. You know, we've got 25 odd people focused on portfolio monitoring.

You know, I do think, Arren, it's a little bit of a case-by-case basis. I think there are some things that I would expect to be, you know, multiyear events. You know, and, you know, some like PRG's been multiyear already. I think there are some where we think there could be a, you know, either faster sale process, either because it'd be accretive or sort of a risk management point. You know, in several of these businesses, we have replaced management teams, you know, brought in new senior leadership, you know, used our senior advisor network. You know, it will be case by case. I, I would caution to say that, you know, it's not an overnight thing, right? We do believe it will take some time.

That's why we're talking about things, you know, over kind of a longer period, which I would call sort of 2026 and 2027.

Arren Cyganovich (Specialty Finance Senior Analyst)

Got it. And maybe you could just provide a little more details on the JV equity, you know, changes there and, you know, what drove that and how much of a drag will that be from the dividend income associated with that?

Dan Pietrzak (Chief Investment Officer and President)

Yeah, you know, fair question. You know, we've been happy with the joint venture. I think that's the starting point, right? We've talked about a lot on prior calls about getting that towards its target number of, you know, roughly 10%-15%. It's been at the upper end of that range. You know, we do want to see it continue to grow over time, which that was really the driver here. South Carolina has been a great partner for us. You know, them putting additional capital in, I think it can just equate to, you know, FSK kind of selling a portfolio or an asset, sort of that, you know, kind of the mark, and then you can use that, those proceeds to reinvest into other places.

There's some offset to that, to your question around, you any sort of dividend reduction. The point and the purpose of it was, you know, to allow the entity to grow. You know, my guess is, you know, over time, you will see our percentage, potentially sort of tick back up as we could continue to put additional sort of capital in there. You know, that's not necessarily automatically will happen, but it's something that sort of could happen. It's about trying to, you know, continue to grow. I think it will have a certain amount of an impact out of the gate. I think we're mindful about that, but I think we were pretty happy, you know, to continue this good partnership with South Carolina.

Arren Cyganovich (Specialty Finance Senior Analyst)

Thank you.

Dan Pietrzak (Chief Investment Officer and President)

Great.

Operator (participant)

Thank you. Your next question comes from the line of Casey Alexander with Compass Point Research & Trading. Your line is now open.

Casey Alexander (Managing Director and Senior Equity Analyst)

Yeah, hi, good morning. Thank you for taking my questions. I have one question and one follow-up. My first question is. Look, I hate to bring up what might seem like a tired, old refrain, but at the moment, you know, the stock is trading at 55% of book, and that's, you know, kind of screams not to invest in new loans, but to take repayments and start buying the stock. Could you guys give us some feeling for your temper in regards to beginning to initiate, you know, meaningful stock repurchases? I know. Look, I know the employees have bought the stock, I know the advisors bought the stock, but at this point in time, your only road to increasing NAV at this point in time is accretive share repurchases at such a dramatic discount to book value.

Dan Pietrzak (Chief Investment Officer and President)

Yep. Good morning, Casey. Thanks for the questions. You know, I think we understand the point there. You know, I think as the entity, you know, these numbers might not be perfect, but I think we have historically bought back $350 million of stock. That's probably more than sort of most out there. It is something that we do have to consider. I think the only thing on the other side of that I just need to be mindful about is, you know, the market noise and, or volatility. You know, I do believe some of that is overdone out there broadly, but that's kind of top of mind and then where we're at vis-à-vis, sort of, leverage and target leverage.

It is, yes, something that we will be talking about.

Casey Alexander (Managing Director and Senior Equity Analyst)

I, the fact that maybe some of the movement in the stock is related to broader market noise would argue even more, I would think, to buying it here, because some of that will then be relieved by the absence of the market noise, and this would be the most accretive level. My second question is, you know, there have been multiple reports of, you know, pretty material dislocation in the fix and flip market, and FSK has a significant investment in Toorak. I was wondering if you could remind us what the structure of the Toorak investment is and how it's performing.

Dan Pietrzak (Chief Investment Officer and President)

Yeah. Yeah, if you go back, I mean, that investment was initially made in 2016. You know, it in a lot of ways, started out in, you know, probably thinking about it almost as a trade, right? Meaning that, you know, there was no institutional footprint out there, we wanted to capitalize on that. You know, when we did the deal, you know, back in 2016, I probably would have been happy with, you know, if we did kind of $1 billion-$2 billion of loans. You know, I think when we do look at it today, right, we've done $12.5 billion of loans.

you know, I think the cumulative losses for the entity over the 10 years have been kind of roughly $100 million, so that's, you know, held up pretty well. you know, I think we have seen, and I don't think your point's wrong, Casey. I'll come back to the other side of that. I think we have seen some positive sort of points there. There, you know, direct origination business did almost $800 million, or $820 million last year. They do have a business in the U.K. that's been quite effective or, and quite strong. You know, I think we have seen higher delinquencies in the U.S., you know, roughly 10%, you know, although that's been to, you know, sort of stabilizing. I think we have seen ROEs challenged, right?

Some of that relates to the delinquency numbers, some of that relates to the rate environment, where the interest rate on the loans did not move anywhere near the financing cost did, right? That has had an impact on us, right? Our dividends out of Toray, you know, which have historically been, you know, roughly 10% per year, have been lower. You know, we've seen some impact to the mark there. But, you know, arguably, over the ten-year period, it's been a positive story. You know, it is treated like a portfolio company, meaning it is an active originator on a direct basis, as well as a buyer of loans in the U.S. and the U.K.

You know, we can either be the benefactor of those cash flows, or, you know, it's a partnership with the management team, you could look for a monetization event down the road. I think you're not wrong about the noise. I think there's been, you know, a little bit of, you know, let's call it, you know, LTV-type risk against some of the loans that have originated, especially from some of the smaller guys. Fortunately, Tawarak hasn't had, really any, or, you know, de minimis exposures to things like that, but I think the ROE has been the bigger one.

Casey Alexander (Managing Director and Senior Equity Analyst)

Great. Thank you for taking my question.

Dan Pietrzak (Chief Investment Officer and President)

Thanks.

Operator (participant)

Thank you.

Casey Alexander (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

Your next question comes to the line of Rick Shane with JPMorgan. Your line is now open.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Hey, guys. Thanks for taking my questions this morning. Look, Casey really covered, I think, as far as I'm concerned, the most important structural issue in terms of repurchasing shares. Look, you guys had over $5 billion come in last year, $5 billion the year before that. Presumably, the run rate in terms of repayments will be similar this year, which should provide a fair amount of liquidity for repurchases. You know, I haven't listening to all the BDC calls, I haven't heard anybody make a super compelling case for, wow, there's this incredible dislocation, this opportunity to deploy capital, into new loans that's so attractive. What is out there that's actually, you know, more accretive to both earnings and, again, to NAV than repurchasing shares at this point?

Dan Pietrzak (Chief Investment Officer and President)

Yeah. Yeah, thanks for the question, Rick. I think the, you know, the investing environment has been, you know, maybe the right word is interesting over the last handful of years, right? There's been a lot of, you know, different forms of market events. You know, the market, I think on the direct lending side, to be fair, has felt, you know, decently tight in terms of you have seen spread compression. You know, I think a lot of that has had to do with the fact of, you know, inflows were high. I do think the inflows from the wealth channel was a driver of that, and that was, you know, really coupled with, let's call it, lower than normal M&A volumes.

You can talk about a little bit of a, of a market technical out there. You know, I think the offset to that is, you know, I think the quality of the companies that have been accessing the market has been, you know, strong. I think the size of the companies that have been accessing the market has been good. You know, I think we prefer to lend to those larger companies. You know, I think the thing we have tried to focus on is getting diversification in the book, right? That was, you know, growing the joint venture was one form of that. You know, we got up to the target number. You know, we have seen some compelling opportunities in the asset-based finance. Talked about some of those on prior deals, on-site prior calls.

You know, the either the Harley-Davidson or the PayPal, but I understand the point. I think we need to take all that into consideration, as we move forward.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Sure.

Dan Pietrzak (Chief Investment Officer and President)

You know, I would say one thing: I probably am expecting a, you know, more lender-friendly environment as we go through the course of 2026. You know, I think that will very much, you know, skew debate upon, you know, how open the capital markets is, which it is pretty open right now. I think, you know, I think you'll see the flows, you know, maybe sort of temper a bit, and then you'll have to see what happens in the capital markets as the sort of, you know, probably primary driver of that. But, you know, our eyes are focused on it.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Yeah, I appreciate the answer. Look, I. You know, there's the old curse, "May you live in interesting times." I'm not sure about you guys, but I'm tired of interesting times.

Dan Pietrzak (Chief Investment Officer and President)

Yeah.

Rick Shane (Managing Director and Senior Equity Research Analyst)

That's it for me. Thanks, guys.

Operator (participant)

Thank you.

Dan Pietrzak (Chief Investment Officer and President)

Thank you.

Operator (participant)

Your next question comes to the line of Robert Dodd with Raymond James. Your line is now open.

Robert Dodd (Director)

Excuse me. Sorry, I'm recovering from laughing at Rick's line because I agree with him on that one. A couple of questions on credit, not surprising. On the main markdowns this quarter, I mean, PRG, Medallia, Peraton, I mean, Cubic's already on non-accrual. Those are the three. I mean, PRG just came off non-accrual, its markdown. I mean, looking at the scale of the marks, I got a question whether, you know, is there a high probability that those businesses end up on non-accrual as well, or large segments of them? Do they have to go through aggressive restructurings where even if they don't go on non-accrual, you equitize a bunch of the debt and, you know, and those, you know.

Is there an incremental risk in addition, obviously, to the five new ones this quarter, those three, you know, PRG, which has been a multi-process already, but the first restructuring didn't stick? You know, is there a material risk that there's more earnings loss to come from those assets?

Dan Pietrzak (Chief Investment Officer and President)

Yeah. You know, Robert, thank you for that. I, you know, I think on each of those names, you know, there's what I would call, you know, some level of active dialogue or sort of active sort of monitoring. I mean, you know, Peraton's, is probably as much of, you know, over time, it's evolved to as much as of a Level 2 asset as sort of Level 3. I think that's some of that component in there. You know, I, I think as you look, go down the list of those, right, I think we're trying to make significant changes on the PRG. You know, there is a large chunk of, you know, more sort of equity-like risk that's in the non-income producing bucket.

You know, I think the lenders have been doing a lot of work on the Cubic side, but there still is, quite frankly, some headwinds from the government. I think Peraton had some good news, right, during Q4, related to a big contract win. I think, you know, we're going to spend time with the other lenders, and I'm sure discussions with the sponsor on Medallia. there's a lot of capital below us in Medallia, but performance has been, you know, more difficult. Really operational, though, not AI. They're all live situations.

Robert Dodd (Director)

Got it. Thank you. Then on to the You mentioned this in response to another question. I mean, the healthcare, and the roll-up issue, right? I mean, a few years ago, physician office roll-up. I'm not just talking about your portfolio at this point, right? Then it became dental. I mean, you've got DCA, but a lot of other people are at DCA, and two other dental businesses went back on medical this quarter elsewhere. I mean, obviously, that's been an evolving theme. The roll-up issue within the healthcare space has become it doesn't seem to be getting fixed, right, broadly across space. Is there, you know, this continues to spiral?

I mean, there's still plenty of dental businesses that aren't currently feeling those pressures across in your portfolio and elsewhere. The same thing, like, with vets and, you know, what's the next shoe to drop on the roll-up strategy kind of breaking down as it exists in your portfolio as a lender, obviously?

Dan Pietrzak (Chief Investment Officer and President)

Yeah, I mean, I think that is a fair question, and I think you're correct. It, it was for, you know, some period of time, probably one of the darlings of both PE and direct lending. You know, it is an emerging theme in our mind, or it has been for, you know, the last handful of quarters. You know, I think we saw it initially on things that were, let's call it, consumer discretionary sort of focused, right? They were sort of struggling. We have seen, as I talked about before, kind of the wage inflation remains sort of a challenge there. You know, we have seen, we'll call it, very different performance, you know, even within the dental space on certain names.

You know, some of that goes to, we'll call it, structure of business, or how the employees are getting compensated, you know, whether they own part of their individual practice or whether everybody, you know, owns something sort of up top. You know, it is, it is a little case specific. You know, I think for us, you know, we're 5.7% of the portfolios in these medical sort of roll-ups. You know, 3.3% of that is dental. You know, DCA went on nonaccrual. You know, it got sort of marked down this quarter. I think we feel pretty good about that business, that team. You know, I think we were in, we'll call it, live discussions with the junior debt holders and sponsors there.

You know, it feels like it's gonna be a 1L lead solution. You know, that business is actually, you know, doing, we'll call it, broadly okay, or at least in line with plan, but I think being a 21 investment at a different rate environment, just over-levered. You know, we have seen some other names out there that have, you know, inside of this quarter, you know, struggled a bit more in the dental space, right? We have one of those in Affordable Care. It is a bit of a hotspot right now and one that we're focused on.

Robert Dodd (Director)

Got it. Thank you.

Dylan Hines (Analyst)

Thank you. Your next question comes to the line of Dylan Hines with B. Riley Securities. Your line is now open.

Hey, how's it going? Thanks for taking the question. I know we talked about this quite a little bit here, but I guess what would be inflection point coming from last quarter's expectations of decreasing nonaccruals? You know, there was the pro forma guide of 3.6% on cost and 1.9% on fair value after PRG restructuring. I guess, like, Yeah, what was the, you know, the breaking point coming from that to where we are now?

Dan Pietrzak (Chief Investment Officer and President)

Yeah, you know, again, another fair question. I do think, just to be fair, I think the 3.6% was just kind of giving a pro forma, knowing that PRG had sort of fallen off. It wasn't trying to sort of necessarily guide, but if that was the impression, we'll work better on communication there. You know, I think that if you look at the nonaccruals, really the three of the names are quite small from a market value perspective. You know, the real drivers are really DCA and Lionbridge. You know, I just talked about DCA on the prior call. You know, that was a live conversation with those who are subordinate to us.

You know, it's, it's going a different way than I think we would've assumed or thought it was going. On Lionbridge Technologies, we were in an active sales process. You know, we do think parts of that business are still interesting, and that was the one space in the portfolio where there was some direct, in my mind, kind of AI impact, not just performance, but to kind of overall mood around the business. Which I think made that sort of sales process hard. I think the events, you know, relating to what, you know, were at DCA and Lionbridge Technologies were the, were the drivers.

Dylan Hines (Analyst)

Got it. Thank you.

Operator (participant)

Thank you.

Arren Cyganovich (Specialty Finance Senior Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is now open.

Finian O'Shea (Director)

Hey, everyone. Good morning. Appreciate the follow. I'll be less abstract this time.

Dan Pietrzak (Chief Investment Officer and President)

Yeah, no problem.

Finian O'Shea (Director)

I wanted to get an update. I know you talked about the dividend a little bit, but part of the sort of lead up to the finality here was the spillover item. Can you give us an update there? Did you, like, reach your target range, and/or should we anticipate, specials, like, on top of the supplemental program? Thanks.

Dan Pietrzak (Chief Investment Officer and President)

Finn, I'll let Steven, kind of go through that. I think just for everybody's benefit on the call, just as a reminder, right, we did change the dividend, you know, effect of the dividend policy in the last call to be more sort of base and supplemental, you know, the $0.45 base, the supplemental sort of thereafter. Steven, do you want to?

Steven Lilly (CFO)

Yeah, Finn, we ended the year. I think the number in the 10-K is, the estimate's $464 million or so of spillover. As you will certainly note, based on the current dividend, that's, you know, sort of three and a half quarters or so. You know, what I would say in that is, we have, what we've seen kind of during late 2024 and through 2025, as the ABF portfolios continue to ramp, international structured investments and partnerships and things, you know, we're making estimates at this point in the year of what tax could be, then in certain investments, you know, whether or not cash is received, there's, if they're, quote, or paper profits, then, you know, we are allocated our portion of tax, which would go into spillover.

There can be some timing differences on that. We will know much more in the kind of August, September time frame. I think, you know, we stand by what we've, you know, said before, which is, you know, if we need to make a payment, you know, later in the year, we will certainly do that. I think it's too early to tell if some of these reversals could happen or, you know, where the final partnership tax returns will come in over the summer months. It's a little bit of wait and see, you know, certainly when there's news to announce it, we'll announce it.

Finian O'Shea (Director)

It's not like last year, where it's overpaying, like the 45 is your true, like, NOI target?

Steven Lilly (CFO)

Yeah, I think what we've said in terms of the dividend is, as GAAP net investment income, you know, moves quarter to quarter, then the dividend will move as well. You know, and then if we need to make an additional payment later in the year to satisfy something from a spillover related basis, we will do that. Which is, as I think you're pointing out, you know, different than the concept last year of effectively guaranteeing the market of we're going to pay $0.70 for all four quarters of 2025. You know, because for other reasons, more over earning reasons and the higher interest rate period, the spillover balance had, you know, had grown.

Finian O'Shea (Director)

Awesome. Appreciate that, Steven. Thanks.

Steven Lilly (CFO)

Thanks, Finn.

Dan Pietrzak (Chief Investment Officer and President)

Thanks, Finn.

Operator (participant)

Thank you.

Arren Cyganovich (Specialty Finance Senior Analyst)

Thank you.

Operator (participant)

This concludes the question and answer session, and I would now like to turn it back to Dan Pietrzak for closing remarks.

Dan Pietrzak (Chief Investment Officer and President)

Thank you, everyone, for your time on the call today. We very much appreciate it. We are available for any follow-up questions as needed, and if not, we look forward to speaking with you on our Q1 call. Thank you.

Operator (participant)

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