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FS KKR Capital Corp (FSK)·Q2 2025 Earnings Summary

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 .

Financial Results

Income, Earnings, and NAV

MetricQ4 2024Q1 2025Q2 2025
Total Investment Income ($USD Millions)$407 $400 $398
GAAP NII per Share ($)$0.61 $0.67 $0.62
Adjusted NII per Share ($)$0.66 $0.65 $0.60
Net Realized & Unrealized Gain (Loss) per Share ($)$(0.09) $(0.24) $(1.36)
GAAP EPS (Net Increase/Decrease in Net Assets per Share) ($)$0.52 $0.43 $(0.75)
NAV per Share ($)$23.64 $23.37 $21.93

Portfolio and Credit Metrics

MetricQ4 2024Q1 2025Q2 2025
Net Debt-to-Equity (%)104% 114% 120%
Non‑Accrual (% of Cost)3.7% 3.5% 5.3%
Non‑Accrual (% of Fair Value)2.2% 2.1% 3.0%
Weighted Avg Annual Yield on Accruing Debt Investments (%)11.3% 11.0% 10.8%

Segment/Asset Mix (% of Fair Value)

Asset ClassQ4 2024Q1 2025Q2 2025
Senior Secured Loans — First Lien57.8% 58.1% 59.0%
Senior Secured Loans — Second Lien5.1% 4.8% 4.9%
Asset Based Finance15.6% 15.4% 14.7%
Credit Opportunities Partners JV, LLC10.1% 11.8% 12.0%
Equity/Other8.8% 7.8% 7.6%

Operating KPIs

KPI ($USD Millions unless noted)Q4 2024Q1 2025Q2 2025
Interest Income$324 $302 $298
Dividend & Fee Income$83 $98 $100
Interest Expense$116 $113 $125
Management Fees$53 $52 $53
Incentive Fees$35 $39 $36

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
GAAP NII per ShareQ2 2025~$0.64 Actual $0.62 Lower vs guidance
Adjusted NII per ShareQ2 2025~$0.62 Actual $0.60 Lower vs guidance
GAAP NII per ShareQ3 2025n/a~$0.58 New lower run-rate
Adjusted NII per ShareQ3 2025n/a~$0.57 New lower run-rate
Recurring Interest IncomeQ2 2025~$302M Actual $298M Slightly lower
Recurring Interest IncomeQ3 2025n/a~$289M Lower sequentially
JV Dividend IncomeQ2 2025~$56M Actual $59M Above guidance
JV Dividend IncomeQ3 2025n/a~$55M Slightly lower
Other Fee & Dividend IncomeQ2 2025~$43M Actual ~$41M (fee down $3M) Mixed/lower fee
Interest ExpenseQ2 2025~$124M Actual $125M Slightly higher
Interest ExpenseQ3 2025n/a~$116M Lower sequentially
2025 Total DistributionFY 2025$2.80/share $2.80/share maintained Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024 and Q1 2025)Current Period (Q2 2025)Trend
Tariffs/MacroIdentified tariff exposure and macro uncertainty; ~8% of portfolio could have direct tariff exposure (Q1) ; cautious on M&A timing (Q4/Q1) Updated analysis: direct tariff exposure now low-to-mid single digits; proactive mitigation (alt supply chains, pass-through pricing) Exposure modestly reduced; ongoing monitoring
M&A/OriginationsPipeline building; strong Q1 originations ~$2.0B despite sluggish M&A Q2 originations ~$1.4B with 83% first lien; expect more deals screened and cautious optimism for pick‑up later in year/2026 Busy screening; gradual activity recovery
Non‑Accruals/WorkoutsNon‑accruals 3.5% cost/2.1% FV (Q1); several restructurings/removals (JWA, Alacrity, Accuride) Non‑accruals rose to 5.3% cost/3.0% FV; four names added (PRG, 4840, KBS, WorldWise) with issuer‑specific drivers Deterioration this quarter; active workout engagement
ABF/JVABF viewed as diversification; JV recurring dividends ~$46M (Q1) JV dividend $59M; Q3 guide ~$55M; ABF dividends lumpy; timing drove Q/Q changes Ongoing contribution; timing variability
Dividend Policy/Spillover2025 distribution plan $2.80; spillover target ~2 quarters Q3 dividend $0.70; spillover mid‑$400M, gliding toward ~2 quarters; 2026 policy to be outlined on Q3 call Maintaining 2025; potential 2026 reset
Leverage/LiquidityNet D/E at low end; CLO issuance; facility amendments (Q1/Q4) Net D/E 120%; revolver amendment to $4.7B, maturity 2030, spread -10 bps; bilateral $400M facility Proactive laddering; ample liquidity
Portfolio YieldWA yield declined from 11.3% (Q4) to 11.0% (Q1) Further decline to 10.8% (Q2), reflecting base rate/spread normalization Gradual compression

Management Commentary

  • CEO: “During the second quarter FSK generated $0.60 per share of Adjusted Net Investment Income… our operating results and corresponding net asset value were impacted by company specific issues affecting four portfolio companies” .
  • CEO: “We originated approximately $1.4 billion of new investments… In July we closed an amendment to our Senior Secured Revolving Credit Facility… increased to $4.7 billion… maturity… 2030… borrowing rate reduced by 10 basis points” .
  • CIO: Detailed non‑accrual adds with drivers: PRG (industry pricing erosion; restructuring underway), 4840 (post‑COVID inventory destocking; placed on non‑accrual), KBS (post‑restructuring stabilization; strategic interest emerging), WorldWise (tariffs/softer demand; cost efficiencies in progress) .
  • CFO: “Our total investment income was $398,000,000… dividend and fee income totaled $100,000,000… interest expense totaled $125,000,000” and Q3 GAAP/adjusted NII guidance of ~$0.58/$0.57 with component drivers (lower ABF dividends) .

Q&A Highlights

  • Non‑accrual portfolio detail: Analysts probed legacy troubled assets and watch‑list; management emphasized issuer‑specific issues and proactive workout actions across PRG, 4840, KBS, WorldWise .
  • JV dividends and ABF timing: Guidance adjusted due to ABF dividend timing; JV expected mid‑50s $M overtime as ramp continues; JV has higher floating‑rate debt share than parent .
  • Capital allocation/buybacks: Team balanced potential buybacks against leverage targets and market opportunities; focus remains within 1.0–1.25x net D/E .
  • Dividend policy trajectory: 2026 framework to be communicated on Q3 call; discussions around base plus supplemental structure tied more directly to NII .
  • Spillover income: Now in mid‑$400M, targeting ~two quarters of dividends by year‑end; Q3 payout is $196M total, implying further glide path .

Estimates Context

MetricStreet Consensus (Q2 2025)Actual (Q2 2025)Result
EPS (Primary, $)$0.63425*$0.62 Slight miss
Revenue ($USD)$402.00M*$398.00M Slight miss
EPS – # of Estimates10*n/a—
Revenue – # of Estimates9*n/a—

Values marked with * retrieved from S&P Global.

Post‑print, Street models likely cut NII run‑rate and portfolio yield assumptions and raise non‑accrual expectations modestly, consistent with management’s Q3 guidance and disclosed issuer events .

Key Takeaways for Investors

  • NII miss vs guidance/consensus and NAV drawdown are largely tied to four idiosyncratic non‑accruals; track workout milestones (PRG restructuring, 4840/KBS outcomes, WorldWise stabilization) for credit trend inflection .
  • Forward run‑rate earnings reset lower (Q3 GAAP/adj NII ~$0.58/$0.57); near‑term dividend remains $0.70/share, but 2026 policy will be re‑baselined to NII—an event catalyst on the Q3 call .
  • Liquidity and funding are robust, with extended revolver and added bilateral lines; supports originations and JV ramp while maintaining leverage within target .
  • Yield compression persists; underwriting discipline and senior secured mix (~59% first lien on balance sheet; ~68% looking through JV) help defend returns and recovery prospects .
  • ABF/JV contributions are durable but timing‑lumpy; model mid‑50s $M JV dividends normalized, with ABF distributions variable Q/Q .
  • Non‑accruals elevated this quarter (5.3% cost/3.0% FV); monitor risk ratings and watch‑list disclosures for early signals of improvement back toward long‑term averages .
  • Near‑term narrative catalysts: workout updates, M&A pipeline acceleration in late‑2025/2026, 2026 dividend framework announcement, and potential capital return balance vs leverage targets .

Appendix: Additional Q2 Details

  • Distribution declared: Q3 2025 $0.70/share (base $0.64 + supplemental $0.06); record 9/17, payable ~10/2 .
  • Portfolio fair value: $13.648B; senior secured securities 64.1%; top‑10 exposure 19% .
  • Leverage/liquidity: Net D/E 120%; cash/FX $312M; financing availability $2.4B; weighted average effective interest rate 5.34% .
  • Income breakdown: Interest income $298M; dividend income (including JV) and fees $100M; expenses $225M (interest $125M; mgmt $53M; incentive $36M) .