FS KKR Capital Corp (FSK)·Q3 2025 Earnings Summary

Executive Summary

• Q3 2025 was operationally stable with GAAP NII of $0.57/share and total investment income of $373M, essentially in line with guidance, while NAV/share ticked up to $21.99 on positive valuation marks .
• Modest misses vs S&P Global consensus: Primary EPS (NII/share) $0.57 vs $0.577* and revenue $373M vs $374.8M*; management guided Q4 GAAP NII to ~$0.51/share and Adjusted NII to ~$0.56/share, implying some deceleration as base rates drift lower .
• Credit quality trends improved: non‑accruals fell to 2.9% of FV (5.0% cost) from 3.0% (5.3%) in Q2, with restructuring progress on key names (PRG closed post‑quarter; New Era removed from non‑accrual) .
• 2026 distribution framework announced: base ~$0.45/share per quarter plus supplemental tied to NII; aim for ~10% annualized yield on NAV, with Q1’26 total distribution ~ $0.55/share, subject to rate/liability outcomes .

What Went Well and What Went Wrong

• What Went Well

  • NAV/share rose to $21.99 (+$0.06 q/q) on $0.19/share net gains; adjusted net realized/unrealized gains were $0.21/share .
  • Non‑accruals improved to 2.9% of FV (5.0% cost) from 3.0% (5.3%) q/q; New Era restructured off non‑accrual; PRG restructuring closed post‑quarter with improved governance/control .
  • Strong liquidity and balance sheet actions: $400M 6.125% 2031 unsecured notes issued/swapped to SOFR+274.8 bps; net debt/equity down to 116% from 120%, liquidity $3.5–$3.7B available .
  • Quote: “For 2026, we expect FSK’s total distribution to equate to an annualized yield on our net asset value of approximately 10%… quarterly base of approximately $0.45 per share” .

• What Went Wrong

  • Total investment income declined to $373M (Q2: $398M; Q3’24: $441M) on lower base rates, lower fee/dividend income timing, and flow‑through of prior non‑accruals .
  • GAAP NII/share fell to $0.57 (Q2: $0.62; Q1: $0.67) and was a hair below consensus $0.577*; fee income remained muted given mix and fewer amendments/prepayments .
  • Forward NII guide implies near‑term pressure (Q4 GAAP NII ~$0.51/share; Adjusted ~$0.56/share) as rates normalize and prior low‑coupon debt gets refinanced .

Financial Results

Quarterly results

Per‑share income and NAV (current year)

Q3 2025 actuals vs S&P Global consensus

Values marked with * retrieved from S&P Global.

Portfolio mix (fair value)

Key BDC KPIs

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO on resilience and dividends: “We expect FSK’s total distribution to equate to an annualized yield on our net asset value of approximately 10%… a base distribution of approximately $0.45 per share [with] supplemental [varying with NII]” .
• CFO on Q4 outlook: “We expect fourth quarter 2025 GAAP net investment income to approximate $0.51 per share, and… adjusted net investment income to approximate $0.56 per share” .
• CIO on credit progress: “No investments were added to non‑accrual status, and one company was removed… New Era Technology… resulted in $29 million of cost and $18 million of fair value being removed from non‑accrual… Pro forma for the PRG restructuring… non‑accrual rate would be 1.9% FV” .
• CFO on drivers of lower income: “Decline in interest income was driven by lower base rates, the repayment of higher‑yielding investments, and the flow‑through of assets previously placed on non‑accrual… dividend and fee income decreased due to timing” .

Q&A Highlights

• Dividend mechanics and payout: Management aims to pay ~100% of GAAP NII annually; quarterly mismatches may occur; base + supplemental structure designed for transparency in a lower‑rate regime .
• Buybacks: Historically active (~$500M over years); buybacks remain under consideration but balanced against leverage targets and macro .
• Funding and maturities: $400M 2031 notes issued ahead of near‑term maturities; ample liquidity (~$3.7B) to bridge revolver/market timing as needed .
• ABF/market events: Recent high‑profile defaults seen as idiosyncratic; ABF portfolio reviewed with no broad competitive dislocation; investor diligence may elongate timelines .
• Pipeline/fees: Activity improving with more new issuers; potential fee tailwind as volumes rise, but upfront fees/OIDs narrower with tighter spreads .

Estimates Context

• Q3 2025 vs S&P Global: Primary EPS (NII/share) $0.57 vs $0.577* and revenue $373M vs $374.8M*; both slight misses. Management’s Q4 NII guidance implies near‑term consensus may drift lower as rates normalize and fee income remains timing‑dependent .
• 2026 distribution framework (base ~$0.45 + supplemental) may prompt estimate models to incorporate a lower base rate path, more variable supplemental component, and ongoing improvement in non‑accruals .
  Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

• Near‑term NII pressure acknowledged: Q4 GAAP NII ~$0.51/share and Adjusted ~$0.56/share guidance embeds lower base rates and recent portfolio mix; expect modest estimate revisions .
• Credit trend improving: sequential decline in non‑accruals with restructuring progress; pro‑forma non‑accruals would be meaningfully lower post‑PRG .
• Distribution reset framed constructively: 2026 base ~$0.45/share plus supplemental targets ~10% NAV yield; variable component aligns shareholder payouts with earnings power through cycles .
• Liquidity and capital markets access remain strengths: $400M 2031 notes, large revolver, and $3.5–$3.7B liquidity provide flexibility for originations and liability management .
• Pipeline building: evaluated deals +30% y/y with more new issuers; upside to fee income if activity sustains, though upfront economics remain tighter with narrower spreads .
• Watch items: rate path (impact on NII), fee/dividend timing from ABF/JV, tariff/government‑related exposures (currently low single‑digits), and execution on remaining workouts .
• Medium‑term: If M&A tailwinds persist and non‑accruals normalize, portfolio yield/fee income could stabilize, supporting supplemental distributions alongside the base payout .