FS KKR Capital Corp (FSK)·Q4 2024 Earnings Summary

Executive Summary

• Q4 results were modestly softer QoQ as base rates declined and several originations slipped into Q1: GAAP NII per share was $0.61 (vs $0.77 in Q3) and Adjusted NII $0.66 (vs $0.74), while total investment income fell to $407M (from $441M) as fee/dividend income and interest income declined with lower base rates and timing of closings .
• Management’s own public guidance for Q4 called for ~$0.63 GAAP NII and ~$0.68 Adjusted NII; reported results were a slight miss on both. Slippage reflected a “handful of deals” that closed in Q1, worth roughly $0.02–$0.03 of fee income per share .
• Credit quality remains contained but ticked up at the margin: non‑accruals rose to 2.2% of FV (from 1.7% in Q3) as Alacrity Solutions and Cubic/Cuba were added; Maverick Natural Resources monetization announced post‑quarter at a price above FSK’s mark .
• 2025 setup: Board declared Q1’25 dividend of $0.70 (base $0.64 + $0.06 supplemental) and guided to at least $2.80 in total 2025 distributions, supported by $4.8B of available liquidity and 2.7 quarters of spillover (targeting ~2.3 by year‑end) .

What Went Well and What Went Wrong

What Went Well

• Liquidity and funding breadth: $4.8B available liquidity and 75% unsecured of $7.4B drawn debt; issued $700M 2030 notes swapped to SOFR +2.17% to ladder maturities .
• Portfolio composition and scale: $13.5B FV portfolio, 58% first lien/64% senior secured; look‑through with JV implies ~67% first lien and ~73% senior secured exposure .
• Shareholder returns and policy clarity: Declared Q1’25 $0.70 dividend and guided to at least $2.80/share for 2025; spillover balance at ~2.7 quarters supports supplemental distributions .
  • “Looking ahead, our $4.8 billion of available liquidity will serve as a significant strength as private market activity continues to build.” — CEO Michael Forman .

What Went Wrong

• Profitability deceleration: Total investment income fell $34M QoQ to $407M; GAAP NII/share declined to $0.61 and Adjusted NII to $0.66 as base rates fell and spreads compressed; several deals slipped to Q1 .
• Slight credit softening: Non‑accruals increased to 2.2% FV (3.7% cost) with Alacrity Solutions (first lien) and Cubic/Cuba (preferred equity) added; partial write‑offs at Miami Medical tied to Chapter 11 .
• Fee income unusually low: Fee income was ~$7M vs a long‑term quarterly average ~$15–$16M; management indicated the quarter was atypical and delayed deals would have lifted fees to ~$10–$11M .

Financial Results

Portfolio KPIs and Mix

• KPIs

• Asset Class Mix (based on FV)

Actuals vs Guidance/Consensus

Note: S&P Global consensus estimates were unavailable due to data access limits; therefore, Street comparison could not be completed.

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• Strategy and positioning: “We are entering 2025 with significant available liquidity… as we expect M&A activity to increase… [and] continue proactively laddering the right side of our balance sheet to maintain and over time enhance our investment‑grade ratings.” — CEO Michael Forman .
• Market backdrop: “Direct lending market fundamentals [remain] strong… interest burdens… reduced from the highs of 2023… borrowers continue to generate revenue and earnings growth.” — CIO Dan Pietrzak .
• Dividend policy: “We currently expect our distributions during the year will total at least $2.80 per share comprised of $2.56 base and $0.24 supplemental.” — CFO Steven Lilly .
• Why Q4 missed guidance: “The difference in our reported financial results as compared to our guidance relates to a few new investment opportunities, which closed after year‑end.” — CEO Michael Forman .

Q&A Highlights

• Dividend sustainability: Spillover equals ~2.7 quarters of total dividends; plan to reduce to ~2.3 by YE’25, targeting ±2 quarters long‑term; supports $2.80 total in 2025 .
• Spread compression and repricing: Market more borrower‑friendly; “regular way” direct lending spreads ~SOFR+4.75–5.0% before fees; repricings concentrated in strong names; total return still ~10% .
• Q4 deal slippage quantification: Delayed originations worth ~2–3 cents of fee income per share moved into Q1 .
• ABF opportunity: ~50‑person team, >$65B AUM platform; ABF seen as next growth wave with corporate partnerships; not linear in cash releases .
• Leverage outlook: Net leverage 104% at YE; expect to trend toward ~115% mid‑range over coming quarters, maintaining discipline .

Estimates Context

• Company guidance comparison: Q4 actuals modestly missed management’s public guidance (~$0.63 GAAP NII vs $0.61 actual; ~$0.68 Adj NII vs $0.66), due primarily to deal timing and lower base rates/fees .
• Street consensus: S&P Global consensus estimates were unavailable due to data access limits; Street vs actual comparisons could not be provided.

Key Takeaways for Investors

• Core earnings moderated with base rate declines and fee timing; Q1’25 guide implies sequential stabilization (GAAP NII ~ $0.66; Adj ~ $0.64) despite lower rates .
• Distributions remain a central pillar: at least $2.80/share targeted for 2025, supported by sizable spillover and liquidity, though down modestly vs 2024’s $2.90 .
• Credit remains manageable but bears watching: non‑accrual FV increased to 2.2% with a few idiosyncratic adds; pipeline of repayments/refis remains active alongside repricings .
• Mix shift toward ABF and incumbency‑driven originations should support deal flow; however, spread compression and policy/tariff uncertainty may temper near‑term M&A timing .
• Liability optimization continues to add flexibility (greater unsecured mix, swapped 2030 notes), positioning FSK to lean into higher‑quality opportunities as markets normalize .
• Potential catalysts: steady dividend declarations, conversion of Q4‑slipped deals in Q1, resolution/monetization events (e.g., Maverick sale above mark), and signs of accelerating M&A activity later in 2025 .