Q3 2021 FS KKR Capital Corp Earnings Call
[music].
Good morning, ladies and gentlemen, welcome to SaaS KKR capital Corp's third quarter 2021 earnings Conference call. Your lines will be in a listen only mode. During the remarks by S. S case management.
Accretion of the Companys remarks, we will begin the question and answer session at which time I'll give you instructions on how to enter the queue.
Please note this conference is being recorded.
At this time Robert Pons.
Investor Relations will proceed with the instructions.
The introductions Mr Park, you may begin.
Okay.
Thank you good morning, and welcome to at Fs KKR Capital Corp's third quarter 2021 earnings Conference call.
Please note that FX KKR capital Corp may be referred to as FX K, 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.
<unk> information is included in our press release that FSA issued on November eight 2021.
In addition, <unk> has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 32021.
A link to todays 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 FSA.
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 FSA or the economy generally.
We ask that you refer to <unk>, most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.
<unk> 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 <unk> third quarter earnings release that was filed with the SEC on November eight 2021.
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 <unk> website.
Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer.
Dan Pietrzak, Chief investment Officer, and co President.
Brian Gerson co President and Steven Lilly Chief Financial Officer.
Also joining us on the phone are co chief operating officers drew O'toole and Ryan Wilson.
I'll now turn the call over to Michael.
Thank you Robert and good morning, everyone welcome to Fas KKR capital Corp's third quarter 2021 earnings Conference call.
Third quarter represented the first full quarter of operational results for the newly combined FX Kay and I am pleased to announce there was a positive quarter across multiple metrics.
Demonstrated by our results, we continue to see strength and stability of the business from both an investing and earnings perspective.
During the quarter, our investment team team originated approximately $2 8 billion.
Of new investments we.
Out earned our target, 9% annualized dividend yield on our net asset value.
And we experienced a 1% increase in our net asset value.
Since the establishment of our current dividend policy in the third quarter of 2021 was the seventh consecutive quarter that we have over earned our target annualized yield.
During the third quarter, our GAAP net investment income was 71 per share our adjusted net income.
Was <unk> 64 per share, which was <unk> <unk> per share above our public guidance of 61 per share at the end of the second quarter.
Net investment income during the quarter was driven by continued strong originations and positive portfolio company performance.
From a liquidity perspective, we ended the quarter with approximately $2 5 billion.
The available liquidity with no meaningful near term debt maturities. Additionally in October we accessed the public debt markets issuing $1 $25 billion of unsecured bonds at a weighted average coupon of two 5%, 4% further enhancing our liquidity and funding profile.
As previously announced our board authorized a $100 million stock buyback program, which went into effect at the end of the third quarter.
Through October 29, 2021, we have repurchased approximately $3 $3 million of shares under this program.
Based on our third quarter financial results, which exceed our public guidance. Our board has declared a distribution of <unk> 62 per share for the fourth quarter as compared to our original expectation of a <unk> 60 per share dividend.
This distribution is consistent with our variable dividend policy, which seeks to provide shareholders with a 9% annualized dividend yield on our net asset value over time.
Looking forward to the fourth quarter, we expect our adjusted net investment income to be 61 cents per share.
While Stephen will cover the details associated with our forward guidance later in the call.
From a summary standpoint, as we begin to focus both on the fourth quarter as well as 2022 I believe <unk> is well positioned to continue building on the theme as highlighted in our recent Investor day presentation.
Excluding moving closer to our target leverage range, optimizing our capital structure and transitioning a portion of our non yielding assets into yielding assets.
And with that I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.
Thanks, Michael as we consider the current economic environment.
Perhaps like many of you are in terms of discussions focused on inflation supply chain dynamics and the availability of labor.
From an inflation standpoint, we continue to believe that many of our current inflationary pressures may well prove to be transitory in nature.
Our view acknowledges the fact that both inflation and supply chain issues have been influenced directly by consumers behavior during the pandemic.
As people are quarantined, a meaningful percentage of stimulus and other disposable dollars.
Have been spent on goods, such as autos furniture, and electronics as opposed to services, such as travel and leisure.
Indeed demand for durable goods recently peaked earlier this year at a level almost 30% higher than the long term trend line.
At the same time manufacturing jobs are still 4% lower than pre pandemic levels.
As a result inventory levels of drops and prices have risen and somsak just sharply as businesses have responded to these pressures.
Ultimately, we believe the majority of supply chain issues will be resolved over the coming quarters as demand for durable goods returns to more normalized levels and consumers focus again on travel and leisure.
From a labor standpoint, as we have said on prior calls sectors, which continue to see particularly notable shortages includes healthcare education manufacturing and hospitality.
We expect wage inflation to continue running above pre pandemic levels, given the elevated level of job openings and the constrained availability of workers.
Additionally, our recent wave of retirements creates the need to replace workers as well over time, however, given the lower skill levels frequently associated with these industries, we don't see the current labor issues, leading to runaway levels of future inflation.
From an investing perspective, we view the current macroeconomic environment as a constructive backdrop for credit and overall elevated investment activity.
Though we acknowledge that higher cost associated with inventories freight and labor are beginning to temper EBITDA growth rates.
During the third quarter, we originally to approximately $2 8 billion of investments.
New investments in the quarter was spread across 19 high quality companies and nine industries.
As with prior quarters, our growth continues to leverage <unk> broad capabilities within the private credit market.
New investments during the quarter carried a weighted average yield of seven 3% and were predominantly in first lien senior secured structures.
In the third quarter, approximately 40% of our originations came from opportunities and companies previously invested in by KKR.
Again, illustrating the power of incumbency and our relationships.
Our $2 $8 billion total investments combined with $1 $5 billion of net sales and repayments when factoring in sales to our joint venture equated to a net portfolio increase of one 3 billion during the quarter.
Turning to the investment performance metrics for the first K care advisor.
Which can be seen on slide 11 of our earnings presentation on our website.
The updated information is summarized as follows.
Since the Fs KKR advisor was formed through September 32021, we have originated approximately $15 3 billion.
Of new investments and have experienced 85 basis points of cumulative appreciation.
We continue to be pleased with the investment performance. Our team has been able to deliver and we believe these data points continue to be the best illustration of the manner in which we have taken measurable steps to rotate the investment portfolio.
As we have discussed on prior earnings calls private credit as an asset class continues to grow significantly.
Sponsors and management teams are increasingly depending on larger well funded BDC platforms as traditional sources of financing.
We expect this phenomenon to continue as companies and sponsors value certainty of execution from a single financing partner or small group.
Who better understand its business and offers a more partnership oriented approach to financing.
As a result, we continue to see larger companies, which previously might have focused solely on the syndicated markets choose a private credit market transaction.
In fact during the third quarter, we invested over $600 million across six unit tranche financings that were in excess of $1 billion in size two of which were in excess of $2 $5 billion each.
We view this activity as a tangible example of the growth and attractiveness of our market.
Before turning the call to Brian to discuss the details of our investment portfolio I'd like to comment briefly on one repayment we experienced during the quarter.
As I mentioned on our last call.
During the second quarter. It was announced publicly that home partners of America was acquired.
In the third quarter, we exited our equity and warrant position in home partners, realizing proceeds of approximately $267 million, including the equity position held in the joint venture, which equates to two six times our original cost basis.
We are pleased to have such a successful outcome on this investment.
As a result of this activity at the end of the third quarter, our equity investments represented five 3% of our portfolio compared with six 8% at the end of the second quarter.
And with that I'll turn the call over to Brian.
Thanks, Dan I'd like to start my discussion on the investment portfolio by providing some details around a few of our larger investments during the quarter.
Thank you our credit was lead arranger and committed approximately $475 million to $2 9 billion revolving credit and term loan facility to support our refinancing of insight global for harvest partners.
The company provides a diversified suite of professional staffing and managed services to primarily fortune 1000 companies and Smbs.
And we've historically financed in the syndicated market.
S K committed approximately $290 million of the financing while other KKR credit advised accounts provided the balance of the commitment.
KKR credit was also the joint lead arranger and committed $293 million to a $1 4 billion dollar revolving credit term loan and delayed draw facility to support harvest Partners' acquisition of Affordable Care Act.
The company provides tooth replacement services and is primarily focused on traditional dentures as well as implants to treat late stage periodontal disease.
<unk> committed approximately $173 million of financing while other KKR credit advised accounts provided the balance of the commitment.
<unk> also invested approximately $50 million and the company's preferred equity to support the transaction.
Finally, KKR credit was the lead arranger and sole lender for $282 million revolving credit and term loan facility to support TPG capitals acquisition of <unk> Group, Inc.
Medical communications and healthcare marketing firm for larger pharmaceutical companies.
S K committed approximately $188 million of the financing while other KKR credit managed accounts provided the balance of the commitment.
Turning to the portfolio.
As of September 30, our investment portfolio had a fair value of <unk>.
$15 8 billion.
Consisting of 190 portfolio companies. This compares to a fair value of $14 7 billion.
And 195 portfolio companies as of June 32021.
At the end of the third quarter, our top 10 largest portfolio companies represented approximately 20% of our portfolio, which is in line with the end of the second quarter.
We continue to focus on senior secured investments as our portfolio consisted of 61, 2% of first lien loans and $72, 7% senior secured debt as of September 30th.
In addition, our joint venture represented eight 8% of the portfolio and our asset based finance investments represented 12, 6% of the portfolio equating to an additional 21, 4%, which is comprised predominantly of first lien loans, our asset based finance investments, which we believe have mean.
Full principal protection.
The weighted average yield on accruing debt investments was eight 1% as of September 32021, as compared to eight 5% at June 32021.
As a reminder, the weighted average yield in the third quarter is adjusted to exclude the accretion associated with the merger with <unk>.
The decline in our weighted average yield during the quarter was primarily associated with the repayment of higher yielding assets during the quarter and new lower yielding investments, which closed during the quarter.
Including the effects of the investment activity, we experienced during the quarter as of September 30th approximately 84% of our yielding investment portfolio is now comprised of investments originated either by KKR or the Fs KKR adviser.
During the third quarter, excluding the impact of merger accounting, we experienced net portfolio appreciation of $89 million.
Total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was $243 million and our realized and unrealized depreciation totaled $154 million during.
During the quarter.
During the third quarter, we placed our investment in sequential brands on non accrual and we took a portion of our investment in <unk> off of non accrual.
On August 31 sequential brands filed for chapter 11 protection with the intention of running a 363 sale process for essentially all of the company's assets.
On October 29, the company announced successful bidders for its active division as well as the Jessica Simpson brand Joe's jeans and William Rast.
On November 3rd Judge approved the sales without objections.
We expect closing for the various sales to occur before November 14th.
Proceeds will be used to pay back a 100% of the dip loans, we and another lender provided fund the wind down in reserve and provide a recovery on our loan.
Pursuant to the contemplated transactions, we expect to receive a combination of cash as well as newly structured debt and equity and the buyer of the active division.
ATX, which was placed on non accrual status in the second quarter.
We completed an out of court restructuring of its balance sheet, where at SK and the other first lien lenders took control of the company and converted the existing first lien term loan into a combination of new first lien subordinated debt and equity.
The new first lien security was placed back on accrual during the quarter.
As a result of the third quarter's activity our non accruals represented approximately five 1% of our portfolio on a cost basis and three 7% of our portfolio on a fair value basis as of September 30th compared to four 4% on a cost basis and three person.
On a fair value basis as of June 32021.
And with that I'll turn the call over to Steven to discuss our financial results in more detail.
Thanks, Brian.
On our last earnings call, we provided a detailed discussion regarding the accounting requirements associated with <unk> merger with Fs KR.
Utilizing our previously described financial reporting framework.
We report to the market, our third quarter GAAP net investment income, which includes the effects of merger accounting.
And our adjusted net investment income, which normalizes, our net investment income for the effects of the merger and other onetime items.
Presentation of net investment income and adjusted net investment income is reconciled on page 13 of our earnings supplement.
As Michael mentioned, the third quarter represented our first full quarter of activity as a combined company.
As a result quarter over quarter comparisons are impacted by the fact that second quarter results only included the combined company. Following the June 16th closing date of the merger.
Therefore, our discussion of our quarterly results I will focus less on quarter over quarter comparisons and more on the details of the current quarter.
Our total investment income of $360 million was impacted by the following.
Our total interest income of $274 million was aided by the investment activity about which Dan and Brian spoke.
Our fee and dividend income totaled $86 million during the quarter.
The largest components of our fee and dividend income included 42 million of dividend income from our joint venture during the quarter.
Which we view as recurring income.
Other dividends from various portfolio companies totaled approximately $13 million during the quarter.
Finally fee income totaled $31 million during the quarter.
Which was driven by our origination and repayment activity in the quarter.
Our interest expense totaled $70 million during the third quarter and our weighted average cost of debt was three 2%.
Management fees were $58 million during the quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter.
Incentive fees totaled $20 million in the third quarter.
Which is net of a $15 million incentive fee waiver associated with the merger.
As previously announced the adviser will waive $90 million of incentive fees spread evenly over six quarters, which began this quarter.
And just as a reminder, as.
As we discussed on our second quarter earnings call.
Advisor does not earn an incentive fee on any of the merger related accretion.
Associated with <unk> acquisition of <unk>.
KR.
The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.
Our starting <unk> 2021, net asset value per share of $26 84.
It was increased by GAAP net investment income of 71 per share.
Was increased by 24 per share due to an increase in the overall value of our investment portfolio.
Our net asset value per share was reduced by <unk> 65 per share dividend.
With some of these activities results in our September 32021, net asset value per share of $27 in 2014.
From a forward looking guidance perspective, we expect our fourth quarter GAAP net investment income to approximate 61 per share and we expect our adjusted net investment income also to approximate 61 per share.
Our GAAP net investment income and our adjusted net investment income are expected to equal each other during the fourth quarter as the effects of merger related accretion and excise taxes and other one time items offset each other.
The details of our fourth quarter guidance are as follows.
Our recurring interest income on a GAAP basis is expected to approximate $274 million.
Net of merger related accretion our recurring interest income is expected to approximate $258 million.
Our expected fourth quarter recurring interest income net of merger related accretion is expected to grow by $4 million from our third quarter level of $254 million as a result of portfolio growth.
All set by a decline from eight 5% to eight 1% and the weighted average yield associated with our investment portfolio.
We expect recurring dividend income associated with our joint venture to approximate $44 million.
We expect other fee and dividend income to approximate $31 million during the fourth quarter.
As we have discussed our fee income was higher than we expected during the third quarter based on the elevated level of originations and repayments we experienced during the quarter.
Our fourth quarter guidance reflects our view of a more normal quarter from both an origination and a repayment perspective.
The $13 million difference between our third quarter actual fees and other dividends of $44 million and our fourth quarter expected level of $31 million.
<unk> to approximately <unk> <unk> per share of net investment income.
From an expense standpoint, we expect our management fees.
Approximately $61 million.
We expect incentive fees net of the $15 million quarterly waiver to approximate $16 million.
We expect our interest expense to approximate $73 million.
And we expect other G&A expenses to approximate $10 million.
During the fourth quarter, we expect our excise taxes will approximate $12 million.
As many of you know our spill back level is currently between one and two quarters worth of dividends, which we believe represents a healthy balance of having some spill back cushion while at the same time, not allowing our spill back balance to grow too large.
During the fourth quarter, we expect our we expect to incur nonrecurring early extinguishment of debt cost and the amount of $3 million relating.
Relating to a debt facility, which was repaid with a portion of the proceeds from the unsecured notes offering we completed in October.
The unsecured notes offering and the repayment of the debt facility will result in a reduction in our cost of debt capital on a go forward basis of approximately 14 basis points.
From a forward looking dividend perspective, as Michael indicated our fourth quarter dividend will be 62 per share with the quarter's dividend being tied directly to the additional net investment income we generated during the third quarter.
All else being equal given that we expect our fourth quarter adjusted net investment income to approximate 61 per share.
But currently believe it is reasonable for investors to expect that should we achieve our adjusted net investment income guidance for the fourth quarter, but our first quarter 2022 dividend would be <unk> 60 per share.
However, I should note that dividends are subject to the discretion of our board and applicable legal requirements and thus forward guidance, while intended to be helpful to investors should not be interpreted as a formal dividend announcements.
In terms of the right side of our balance sheet, our gross and net debt to equity levels were 110% and 103% respectively as of September 32021.
This compares to gross and net debt to equity of 101% and 90% respectively. At the end of the second quarter.
At September 30, our available liquidity of $2 5 billion equates to approximately 16% of the value of our investment portfolio.
Which is a very comfortable percentage and allows for meaningful future portfolio growth.
At September 30, approximately 43% of our drawn balance sheet was comprised of unsecured debt and our overall effective average cost of debt was three 2%.
In October we issued $500 million of 162, 5% unsecured notes maturing in 2024.
$750 million of 312, 5% unsecured notes maturing in 2028.
The collective $1 billion to $5 billion bond offerings has a blended coupon of two 5% or 4%.
Including the effects of the bond offerings and subsequent use of proceeds approximately 52% of our drawn balance sheet is comprised of unsecured debt.
Additionally, pro forma for these recent unsecured debt offerings and subsequent use of proceeds our weighted average cost of debt is now three 1%.
And with that I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
As we begin focusing on 2022 and beyond <unk> is well positioned.
We have a healthy investment portfolio mean.
Meaningful liquidity to pursue additional quality investments.
And a strong balance sheet under guarding our activities.
We have near term opportunities to continue to optimize our balance sheet move closer to our target leverage range and to rotate a portion of our non income producing investments into income generating investments.
Take pride in what our team has accomplished during 2021 and I am optimistic about the future and with that operator, we would like to open the call for questions.
Thank you.
Yeah.
To ask a question you will need to press star one on your telephone to withdraw your question press. The pound key again, if you would like to ask a question press. The Star then the one key on your Touchtone telephone.
Our first question comes from Casey Alexander with Compass point Your line is open.
Yeah, Good morning, I have a.
Couple of questions for you first of all just in terms of mix portfolios.
The highest percentage of first lien.
Than it's ever been.
A very high personally and generated.
New investments.
Is that just mix of what was presented to you how does Q4 shape up with Q4 seeing more balanced.
Menu of originations.
And.
And how do you view that mix over time.
Yes, Casey good morning.
I think I would think about a couple of ways right from a from a risk taking or an underwriting perspective.
I believe we are trying to be cautious on that front.
That said.
This was a.
In a moment in time this was this specific quarter.
It is what was originated by us during this quarter. So I wouldn't think about that is as a permanent change in any way I think the portfolio construction that we would have laid out on our investor day remains consistent I think you will see some.
We'll call it more subordinate pieces of the capital structure.
Forward now as examples of that I think we are probably more willing to lean in on the subordinate part of our capital structure on names. We know you would've saw that.
Portable care that Brian spoke of in the prepared remarks, you can see that in something like apex, where we actually transition to a.
Two a two well from what al but I would think about it as just more of this quarter, that's how it turned out.
Alright. Thank you my second question is for.
Michael Michael.
The BDC is basically strung together.
Five really pretty solid quarters in a row.
Yet it still has the lowest price to NAV.
The BDC and the greater than $1 billion market cap group.
It has a solid dividend yield has a portfolio of it seems to be performing well the team seems to be performing well how frustrating is it.
It also seems that <unk> seems to be more subject to.
Some level of misinformation out in the marketplace as well how frustrating is that what other measures can you take to start to amortize that discount and does that include potentially additional share repurchases.
Thank you Casey I think tomorrow perspective.
We just need to remain focused and patient I'm extremely proud.
Of what we accomplished over the last 24 months.
If you go back to.
To go back to 2017 2018.
This adviser the KKR MFS advisor and.
Inherited a pretty difficult book.
Has cleaned up that book, we've accomplished all of the mergers. We're now one vehicle and we started to trade better, but not certainly as well as we would like.
But I think we need to judge our performance on.
Exactly what we delivered in this quarter and we've delivered that in a number of consecutive quarters I'm hopeful we can continue to do that.
We're not going to make any take any rash actions, we're going to continue to just deliver and regain folks confidence and we think we've got we've come a long way, but lots of folks who've made a.
Fair amount of money with US who believed in us and bought when the stock traded significantly down its recovered I suspect there's still some technical pressure.
Some people are exiting that bought at lower prices and we're just going to continue to execute in the market will I am sure catch up to the quality of this team, which I think is very very high.
Alright, great. Thank you for taking my questions. If I have anymore I'll come back into queue later on.
Thank you Casey.
Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.
Good morning, guys. Thanks for taking my question.
But just in terms of the yield drift in the quarter. Maybe can you can you bridge that can you talk about that.
The yields on the assets that paid off versus new yields what you see in the market how much of it might be tied to investing higher up the capital structure.
Just your general thoughts going forward, given the overall rate and competitive market.
Sure John Good morning.
I mean, I think you had a couple of the points in there I mean going back to Casey you said in a prior question. Obviously, we were very weighted.
First lean during this quarter.
That clearly had an impact on on new originations.
I think we were very happy with the deals we have done.
And certain of the items that have repaid or sort of higher yielding so I think you can put a combo of those two things together you get from that 85 to the eight one.
On the other side of that though I think the market continues to evolve in many ways in our favor.
I think the macroeconomic backdrop is constructive both from deals happening, which we need that to be the case for us too.
Being in the market deploying capital, but also just from what we're seeing from a performance perspective and.
Then you would take that maybe just step further private credit itself. I think has just become a much more accepted asset class you look at borrowers who we interact with their sponsors so we interact with.
Continue to look to this market as a solution which is providing.
Certainty of execution good partnership on the lending side. So I think we like the tailwind there.
I think you can see that by the size of some of these deals that have gotten done.
Both call it the Mega unit tranche kind of thing.
But I think the numbers this quarter somewhat skewed by just the the first liens and sort of did go in versus we didn't get a fair amount of repayments this quarter as well.
Okay. Thanks, and then Dan just tuck ins, you mentioned kind of how private debt markets have expanded.
To kind of to your favor in terms of more reliable sources of capital I'm wondering can you can you flesh it out in terms of does that help.
I assume that increases your opportunity set amount more what does it do for that what does it do what does it mean for the competitive environment.
And do you think this is kind of a permanent shift or is there is there anything that we might look to you in the future that would that would cause a change in the overall development of this market.
Yes, so what I would maybe start with your last question I do think it is it is permanent in nature.
I think if I went back.
Three or four years ago, there would be deals that would go above a certain size that I think would automatically go into more of a syndicated market.
I think what has changed since then is.
Folks like ourselves have become larger have been able to deploy larger dollars.
Individual deals that changed the dynamic with our conversations with sponsors and borrowers. But then you go back to that acceptance more than I think people are just sort of more comfortable with us.
Products that are generally and we are offering something vitamin.
We can't compete with us in the market day in and day out on a pure pricing perspective, we're not sort of trying to do that but for companies that are looking to grow or for companies, who truly value a quick turnaround time or certainty of execution.
Can offer that we can offer that delayed draw term loan maybe it's a carve out.
Hence sort of ratings would be hard to get and not needed by us. So I think we're just giving a real value proposition and what the size of the capital base.
I believe it to be permanent.
Great. Thanks, very much guys.
Thank you.
Thank you. Our next question comes from Melissa Wedel with Jpmorgan. Your line is open.
Good morning, Thanks for taking my questions today.
First I wanted to just confirm what I think I heard you talk about earlier in terms of repurchases so far in the third quarter.
At $3 $3 million in October.
It would've been in the last few days of September, but really October I guess, we do those under a <unk> one.
<unk> period from after a window opens to widen it sort of starts so it really started at the very end of Q3.
Okay, Okay got it and so as we think about how that repurchase authorization will be deployed.
Going forward.
Would seem like perhaps the third quarter level of deployment would be indicative.
Sort of that repurchase activity.
At least in the near term at current valuations.
I think there is maybe sort of two points in there to make sure I got some sort of a question right I mean I think the.
On the share repurchase activity.
As I said before it was really sort of starting at the.
At the end of September probably just a handful of sort of days, we've done that historically under <unk> one.
That purchase amount ends up being sort of variable I think we've obviously bought back a lot of share sort of over time I think we've been sort of proud of that I think your other question was around sort of deployment.
Thinking about that as necessary.
Linear concept of how that <unk> want to setup.
That makes sense.
Hi.
I think there.
The discretionary piece on the SNB pipelines.
Just in terms of.
Setting expectations going forward it seems like there is.
Strong commitment King continued share repurchases, particularly at current levels.
Yes, and just to be clear.
I think you used the word discretionary where we're doing this and we've always done this under a <unk> five that will sort of file in advance. So it's sort of not discretionary in nature I have always talked about historically.
On calls like this is that is kind of skewed by.
Based on our levels of where the stock trades and then we're constantly.
Reevaluate on a either quarterly or semiannual basis, those that would be by one month.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from Ryan Lynch with K B W. Your line is open.
Hey, good morning, Thanks for taking my questions first of all I do appreciate you guys.
Breaking out there.
The accretion merger accounting that's definitely helpful. Just kind of see the core earnings run rates are definitely definitely helpful.
One question I did have was.
I think you said you expect fee income to kind of return down to more normal levels in the fourth quarter.
And that would kind of.
I think indicate that you guys expect portfolio activity to also return to more normalized levels. After you guys have had some very robust.
Quarters in Q2 and Q3.
Is that because the general market is sort of slowing down and activity is slowing down or is that something that you guys are choosing to do slow down.
One of your originations and then.
You guys would just expect that yes. It is.
See slower repayments as well.
Yeah, Ryan good morning.
Maybe a couple of points in there.
One I don't see us slowing down I mean, I think we've got the same view about risk in our process and how we sort of underwrite deals and if those deals we like.
And want to do we're going to look to lean into those and if those deals were concerned about we're going to sort of lean out.
You are right we've had two very good quarters over the last.
Six months I think we've been pretty proud when you even look back to April 2008 that 15 plus billion dollars number. So I would just do it a little bit more of a normalization.
But I think you also have to think about it as it does involve pre.
Prepayment penalties as well inside that number and I think we've been fortunate with some good.
Amounts that are fall into that bucket as well. So I think it's just normalizing it for those two sort of combined but we do see market activity quite strong we've had a very busy October and I think we continue to expect that for the rest of the quarter and the rest and going into 2022.
Okay.
Fair enough and then the other question I had was on Slide 10, you guys show your portfolio Company median EBITDA.
And for the Bdcs and the platforms that can participate in that upper middle market Mega tranche market.
We've seen this EBITDA actually continued to decline higher which you would expect because those companies are cigna.
Our significant size and there is more and more frequency of tapping that market. You guys are actually the opposite you are meeting EBITDA is trending lower.
Can you help explain that.
Yeah.
It's interesting.
We talked about that ourselves so number one I'm not sure. If you saw the footnote at the bottom of page 10 it talks.
The average EBITDA of the portfolio is actually $159 million.
And I think we've historically shown the median for probably to remove sort of some of the outliers.
But I think it continues to take.
A handful of the larger deals to move you from a BD perspective.
So I think we're happy with the median number there, but I think we've put into the market. The weighted average EBITDA is 159 spot too in the footnote there I'm sorry, it's probably very small on page 10.
That makes sense that would that would be the answer to the question and I think that's all for me.
Thank you Rob.
Thank you. Our next question comes from Kenneth Lee with RBC capital markets. Your line is open.
Hi, Good morning, Thanks for taking my question just on the liability side.
Post the recent debt issuance it looks like the unsecured debt mix is getting close to or at least within your targeted range.
Just wondering how you view the funding mix and do you anticipate any further optimizations and changes in the near term. Thanks.
Yes, good morning, I'm going to let Ryan sort of add to this I think we've been pretty happy with what we've done there.
Over the last handful of quarters. This was clearly one of the benefits of the merger and I think you can see that in the caliber of the October sort of bond deal was done, but Ryan why don't you add to them.
Sure as we mentioned on our Investor day.
Do you think there is there is continued opportunity here.
There are a few bonds that are either mature next year are callable next year and a few other spots in the capital structure that we can.
Do you see opportunity.
The refinancing.
<unk> as a percentage of unsecured.
I think we're comfortable with the level that we're at but again in the Investor day, we quoted.
40% to 60% of unsecured is a comfortable range for us on a committed basis and were at the lower end of that range today, and so I think theres room to grow there should the opportunity present itself.
Great.
And just one follow up.
I may in terms of the the leverage.
Once again within the targeted range at this point.
Is it fair to say that leverage could you just go up and down just based on the timing of either paydowns or originations or do you suppose there could be some some potential.
<unk> or <unk>.
Further movement in the leverage in the near term. Thanks.
Yes, I think Youre right I think it goes up and down.
Based upon the origination and repayment number I think we're still at the lower end of that range, we've talked about historically.
One to one and a quarter times.
Probably got more optimal level level of one one times and then if you do take a look through to the JV you actually see we're pretty.
Under Levered there versus targets. So I think we have some growth to do there.
But as you get maybe inside of these ranges you are correct. It will just toggle a little bit by timing of certain deal flow at certain repayments.
Great very helpful. Thanks again.
I forgot that.
And we have a question from Robert Dodd with Raymond James Your line is open.
Hi, guys.
Hum.
The credit side, obviously, I mean, non accruals up a tick.
You flagged the sequential the inverse.
Dave pretty pretty solidly so take that out.
Down.
Fairly meaningfully and I don't think you've flagged ATX.
Getting getting restructured at the Investor day, So is there anything to read into that that maybe some of these restructurings.
The progress on the <unk>.
Troubled credits.
And faster.
<unk> is there anything we should read into to that for resolution of some of these credits or some of the other legacy.
Yes.
And.
Fair question.
I don't necessarily think about it as an accelerating I mean, you've heard us talk about before and you would've saw us.
So to get into a bit of the weeds on this during our Investor day, I think we've been really proud of the team that we've built.
On our side to deal with these.
Trouble situations I think as Michael mentioned, we've done a tremendous amount of portfolio transition here.
We've hired really well for those seats.
<unk> team has performed exceptionally well honestly I think the ACX thing just kind of been a bit of a materiality point, but we definitely I think.
Played a key role in getting that done I go back to your sequential upon you're correct I mean, our non accrual is.
Three 7% on fair value novel, if you do strip that out, which we expect that to be removed in Q4 based upon how the court case has gone you're down to two 2% on fair value. So we think that's actually a pretty good number.
And even on the cost basis, it's five one to sort of three seven.
But I think youll see that flow through in Q4.
Got it got it I appreciate that one more if I can on the JV I mean, it kind of ties into the.
Yes.
<unk> maybe.
Ken, but I mean, the guidance for the dividend from the JV next quarter of $44 million.
The dividend this quarter was 42, but youre economic share of its earnings closer to call. It 30 35.
Is that an indication that either there is some catch up because they are under distributed in the first half of the year or is.
Is it good indicators.
You are expecting substantial capital deployment in that vehicle in in Q4 to drive its earnings power.
Yeah, well, maybe a couple of points there.
I think you are correct in the sense that you should see a ramp up.
Inactivity, I think they're over this quarter and sort of the coming quarters.
That is below our target allocation.
We talked about sort of 10%, maybe even as much as 12, 5% of that I think we were sort of eight 8% at the end of Q3, that's a little bit of a timing mismatch in my mind, because we did merge two JV together.
That said, we did experience a fair amount of of repayments as well, which has driven some of the asset side reduction there.
I think your point around the <unk> 42 in the 35 I think that's just a little bit of a normalization.
During this quarter, but I think youll see that sort of growth contributed to get us up to the $44 million and I think actually higher on a go forward basis.
Got it I appreciate it thank you.
Thank you.
Thank you. Our next question comes from Bryce Rowe with hub group. Your line is open.
Thanks, Good morning.
We're going to also ask about the JV some of that some of the thoughts that Robert had.
Wanted to ask about the.
The unsecured notes offering and kind of the structure of that with seven years, the three year thrown in there.
Do you expect as we as we look forward at some of the future opportunities from a refinancing perspective.
To me.
A little bit here from a from a debt maturity perspective or do you see.
The new debt might might continue to take.
To carry that five year type of type of mature maturity.
Yes, and Ryan.
Add to this as well.
I think going back.
Quite happy with the execution on the three year and the seven year that we sort of did in October I think if you think about that.
I think we're in the.
Risk management game rights do we think about the same thing on the liability side I think we want to have a a fairly spread out let's call it maturity ladder.
I think this market continues to evolve though.
It was all really centered in a five year. We were we were happy to get the seven done we've seen the market accept even a bit longer so.
I think the team has done an excellent job on the IR side with the fixed income investors I think thats enabled us to achieve the success that we've had but I think that will also continue to give us options as we go forward to manage our liability mix, but Brian please feel free to add anything.
The only thing I would add is I think we expect the five.