Q4 2021 FS KKR Capital Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to Kkr's capital Corp's fourth quarter 2021 earnings Conference call.
Your lines will be in a listen only mode. During remarks by S. S case management.
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 this conference is being recorded.
At this time brother PON head of Investor Relations will proceed with the introduction with Dupont you may begin.
Thank you good morning, and welcome to F. S. KKR capital Corp's fourth quarter 2021 earnings Conference call.
Please note that F. S. KKR capital Corp may be referred to as F. S. 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.
Replay information is included in our press release that F. S. K issued on February 28 2022.
In addition F. S. K has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended December 31 2021.
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 F. S K.
The 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 F. S K or the economy generally.
We ask that you refer to F. S case, most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.
S. K 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 most to the most directly comparable GAAP measures can be found in F. S case fourth quarter earnings release that was filed with the SEC on February 28 2022.
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 will now turn the call over to Michael.
Thank you Robert and good morning, everyone welcome to Fas KKR capital Corp's fourth quarter 2021 earnings Conference call.
From both an operational and a strategic perspective 2021 was a momentous year for F. S. K.
I'm proud of what the team accomplished during.
During the year, we closed out a transformational merger of two publicly traded companies, creating a single BDC with over $16 billion in assets.
Our investment team originated over $8 billion in new investments in 2021, which is our largest origination year since fs KKR became the adviser, resulting in meaningful progress on the reputation of legacy assets are.
Our net asset value increased eight 6% to $27 17 at year end 2021, as compared to 25 point O. Two at year end 2020.
S K paid $2 47 per share and dividends in 2021, equating to a nine 2% yield on our average net asset value and above our long term target yield of 1%.
Finally, we continue to optimize our capital structure by issuing $165 billion of unsecured notes during 2021, and an attractive blended coupon of two 6% and closing on four amendments to approve the terms of various bilateral financing facilities.
These activities contributed to a material decline in our weighted average cost of debt to approximately 3% at December 31, 2021 compared to three 9% at December 31 2020.
In terms of fourth quarter results. We're pleased to conclude 2021 with another positive quarter illustrating the strength and stability of the business during the fourth quarter, our investment team originated approximately $2 $1 billion of new investments.
Our GAAP net investment income was <unk> 66 per share and our adjusted net investment income was 65 per share, which was four cents above our public guidance of 61 per share at the end of the third quarter.
From a liquidity perspective, we ended the quarter with approximately $2 6 billion of available liquidity.
Additionally in January we again accessed the public debt markets issuing $500 million of 325% unsecured bonds.
Further enhancing our liquidity and funding profile.
As previously announced late in the third quarter, we began executing on our $100 million share repurchase program through February 25, 2022, we approach we have repurchased approximately $19 million of shares under the program.
Based on our fourth quarter results. Our board has declared a distribution of <unk> 63 per share for the first quarter.
David will speak more about our quarterly dividend and our overall dividend policy later in the call.
Looking forward to 2022, we believe we are well positioned to continue delivering strong results. Specifically we are pleased with the progress we've made on our net investment income growth opportunities introduced at our analyst and Investor Day last September Dan will provide a more detailed discussion on this progress in summer.
I'm extremely proud of the accomplishments of the team during the past 12 months and I believe we are well positioned for another positive year as we continue to make meaningful progress on our growth opportunities and strategic initiatives 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 contemplate the state of the economy, our posture is that the current economic environment remains generally constructive for credit.
However, like many of you we continue to assess potential macro risks associated with inflation rising interest rates supply chain dynamics and the availability of labor.
As well as impacts from the situation in the Ukraine.
From a portfolio perspective, we have witnessed a return to spending by both businesses and consumers as pent up demand has started to flow through order pipelines and inventories are beginning to return to more normalized levels.
That said, while we are quite pleased with portfolio company performance.
Inflationary and geopolitical pressures are beginning to temporary EBITDA growth rates.
In order to mitigate risk we continue to focus on portfolio diversification.
Having an origination funnel that is as deep and as broad as possible.
Underwriting long term sustainable cash flows with a bias towards larger companies, which possess at least some degree of pricing power.
And investing in other parts of the private credit market, including asset based finance, which we believe provides quite attractive risk adjusted returns.
Yeah.
Turning to FX case investment activity.
During the fourth quarter, we originated approximately $2 $1 billion of investments.
The investments in the quarter were spread across 14, new high quality companies and seven industries and included certain non sponsor and asset based finance transactions.
Of note the average EBITDA of the corporate names. So it's approximately $100 million and the average LTV was 43%.
Reflecting our continued focus on the upper end of the middle market.
As well as the broader acceptance of the private credit product to larger issuers.
New investments during the quarter carried a weighted average yield of seven 5%.
In the fourth quarter, approximately 50% of our originations came from opportunities and companies previously invested in by KKR.
Again, illustrating the power of incumbency and our longstanding existing relationships.
Our $2 1 billion of total investments combined with $900 million of net sales and repayments when factoring in sales to our joint venture equated to a net portfolio increase of $1 2 billion during the quarter.
As Michael mentioned earlier during our 2021 analyst and Investor Day, we presented three primary opportunities to potentially enhance our net investment income.
First is rotating out of certain non income producing assets into income producing assets.
Second is operating somewhere closer to the midpoint of our target leverage range.
And third is selectively refinancing certain higher cost unsecured debt on our balance sheet.
At our Investor day, we communicated our view that in total over the next six quarters. These opportunities depending on prevailing interest rates and other factors could generate up to 15 per quarter of additional net investment income.
In addition, we analyze the remaining legacy portfolios contribution to net investment income, which also totaled <unk> 15 per quarter.
With that as a backdrop I would like to provide a progress report of where we stand after two quarters post the investor day.
Yeah.
First at the time of the Investor Day, we identified four cents per share of potential incremental net investment income growth on a quarterly basis, assuming we redeployed certain income certain non income producing assets into income producing assets.
At the end of the fourth quarter. We are pleased to report that we have achieved roughly half or two cents per share of those incremental net investment income growth.
The second opportunity, we identified was operating at our target leverage.
At our Investor Day, we estimated a potential <unk> <unk> per share of quarterly incremental net investment income growth of <unk> <unk> per share was associated with the investment portfolio and <unk> <unk> per share was associated with the expansion of our joint venture.
At that time, <unk> net debt to equity ratio was <unk> nine times and the joint Venture's net debt.
Debt to equity ratio was <unk> 75 times.
Over the last two quarters, we have expanded both our investment portfolio and our joint venture to generate approximately five per quarter of additional run rate net investment income.
The third opportunity that we spoke about related to the right side of the balance sheet.
At the time of our Investor Day, we had the opportunity to refinance approximately $1 billion of unsecured notes.
It would provide an incremental <unk> <unk> per share of quarterly net investment income.
Since the Investor day, we have issued $1 $75 billion of unsecured notes at a blended coupon of two 7%.
By issuing these unsecured notes we are in a favorable favorable position to refinance the remaining unsecured bonds. We highlighted during our investor day during the second quarter of this year.
And while our interest expense will be elevated by approximately <unk> <unk> per share per quarter until we repay the remaining bonds. During the second quarter of this year. We are pleased to have positioned ourselves to achieve the savings in the next few months.
As a result of these activities as of today, we have achieved approximately <unk> <unk> per share of incremental quarterly run rate adjusted net investment income.
Additionally, we are quite pleased to have made substantial progress across each of the three areas we identified.
As we move through the balance of 2022.
We'll continue to update the market on our progress.
Before turning the call to Brian I'd like to take a moment to discuss KKR credit's business and the growth we've seen in private credit over the last several years as well as the importance of the credit business to KKR.
Over the last five years KKR credit has grown from $36 billion.
AUM to $187 billion.
AUM.
And within KKR credit private credit is the fastest growing segment of the business with AUM of approximately $770 billion.
Over the same period of time.
We have invested meaningfully in our teen occur.
Across origination structuring execution portfolio maintenance and monitoring.
In parallel we have also grown our infrastructure and have taken measured steps to institutionalize our platform.
From an operational perspective, we leverage the entire firm and everything we do including origination and underwriting.
In summary credit comprises more than one third of <unk> total assets under management the business is important.
It's growing and.
And it remains a large and key focus for KKR.
With that I'll turn the call over to Brian .
Thanks, Dan.
As of December 31, 2021, our investment portfolio had a fair value of $16 1 billion <unk>.
Consisting of 189 portfolio companies.
This compares to a fair value of $15 8 billion.
And 190 portfolio companies as of September 32021.
At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 19% of our portfolio, which is in line with the end of the third quarter.
We continue to focus on senior secured investments as our portfolio consisted of 67% are first lien loans and 71, 1%.
On your secured debt as of December 31 in.
In addition, our joint venture represented eight 7% of the portfolio and our asset based finance investments represented 13, 9% of the portfolio equating to an additional 22, 6%, which is comprised predominantly of first lien loans, our asset based finance investments, which.
We believe have meaningful principal protection.
The weighted average yield on accruing debt investments was eight 4% as of December 31 2021.
As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with Fs KR.
Including the effects of the investment activity, we experienced during the fourth quarter as of December 31, 2021, approximately 86% of our yielding investment portfolio is now comprised of investments originated either by KKR credit or FX KKR adviser. This compares.
As to 84% at the end of the third quarter of 2021 and 79% at December 31 2020.
As Dan mentioned earlier, we are proud of the progress we have made growing our run rate net investment income and continuing to rotate our legacy assets.
During the fourth quarter, excluding the impact of merger accounting, we experienced net portfolio appreciation of $8 million.
The total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was $104 million.
And our realized and unrealized depreciation totaled $96 million during the quarter.
As a result, our net asset value increased <unk> <unk> per share in the fourth quarter as compared to the third quarter.
For the full year, we are very pleased that our net asset value increased eight 6%.
In terms of non accruals during the fourth quarter, our largest nonaccrual sequential brands was restructured and removed from non accrual status. We also removed belk and my chronic first lien loans from non accrual.
These investments totaled $321 million of fair value.
These positive moves were partially offset by a handful of smaller investments, which collectively totaled $62 million of fair value and which were placed on nonaccrual during the quarter.
As a result of the fourth quarter's activity on non accruals have declined to approximately three 9% of our portfolio on a cost basis and one 9% on a fair value basis as of December 31, 2021, compared to five 1% on a cost basis and three 7% on a spin.
Value basis as of September 32021.
In terms of the investment performance metrics for the Fs KKR advisor, which can be seen on slide 11 of our earnings presentation on our website.
The updated information and summarize as follows.
Since the F. S. K care advisor was formed through December 31, 2021, we have originated approximately $17 $2 billion of new investments and have experienced 72 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.
Before turning the call to Stephen I'd like to comment on specific assets first during the fourth quarter Global jet completed tax driven recapitalization of a portion of its balance sheet, whereby approximately 80% of the company's existing subordinated notes were exchanged into not.
New 9% Pik preferred stock.
The balance of our existing subordinated notes remained outstanding.
Both securities were accrued at 9% during the fourth quarter.
The preferred stock contains anti layering provisions so from a structural perspective, the securities are tied together.
Our effective seniority on the entire position has not changed.
Unrelated to the tax driven transaction as you can imagine given the age of this investment.
And overall complexity.
We are actively engaged with the company and our co investment partners regarding ongoing business strategy and capital structure optimization.
Second San United a leading innovator premium high performance audio products for consumers around the world announced on February 15th.
<unk> into a definitive agreement to be acquired.
The transactions to close during the first half of 2022 subject to regulatory approval and other customary closing conditions.
As you may recall during the depths of Covid, we converted our subordinated debt investment into equity and invested new capital in the company to support a highly strategic acquisition.
Our new money was refinanced last year.
We also received a dividend on our equity position.
The transaction closed on its negotiated terms, we expect it will be a positive event for F. S. K during the second quarter of this year.
With that I'll turn the call over to Steven discuss our financial results in more detail.
Thanks, Brian .
During this portion of the call I'll focus on our dividend policy, our financial results are forward looking guidance and our balance sheet.
In terms of our dividend policy I'll make a few comments with the goal of clearing out what appears to be a bit of confusion with certain market participants.
When we instituted our current dividend policy almost two years ago. Our goal was to provide investors with a 9% yield on our net asset value over a sustained period of time.
With the understanding that due to normal fluctuations in our bdcs net asset value on a quarter to quarter basis.
Would be quarters, where our dividend yield would be either above or below an annualized rate of 9% during a specific quarter.
We also told the market that we believe a variable dividend policy would provide the best opportunity to share excess earnings with investors on a real time basis.
Since the announcement of our current dividend policy, we have announced and paid eight quarterly dividends all of which about <unk> 60 per share or higher.
Pursuant to our policy the dividend levels have in certain quarters.
Area to allow us to pay out additional earnings on a real time basis.
To avoid any confusion in the market. We believe it is appropriate for investors to think of <unk> 60 per share as a base quarterly dividend with additional payments in excess of <unk> 60 per share as extra or supplemental.
So using the fourth quarter as an example, we recorded <unk> 65 per share of adjusted net investment income.
And our board has declared a first quarter 2022 <unk> per share supplemental dividend. In addition to the 60.
Our share base dividend for a total dividend of <unk> 63 per share.
Finally, as many of you have heard before we note that all future dividends are subject to the full discretion of our board and applicable legal restrictions.
Turning to our financial results for the fourth quarter.
Our total investment income increased by $4 million quarter over quarter, largely driven by portfolio growth due to the positive investment activity about which Dan and Brian spoke.
The primary components of our total investment income or as follows.
Interest income increased by $8 million quarter over quarter.
Fee and dividend income totaled $82 million during the quarter a.
A decline of $4 million quarter over quarter.
As we discussed on our last call our fee income was higher than expected during the third quarter based on the elevated level of originations and repayments, we experienced during that quarter.
Our fee and dividend income during the fourth quarter is summarized as follows.
42 million of dividend income from our joint venture.
Other dividends from various portfolio companies of approximately $14 million.
And fee income of approximately $26 million.
Our interest expense increased by $3 million quarter over quarter, and our weighted average cost of debt.
It was 3%.
Management fees were $60 million, an increase of 2 million quarter over quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter.
Incentive fees totaled $19 million in the fourth quarter, which is net of the $15 million incentive fee waiver.
As previously announced the adviser will waive $90 million of incentive fees spread evenly over six quarters.
Which began in the third quarter of 2021 .
And just as a reminder, as we discussed on our prior earnings calls the advisor does not earn an incentive fee on any of the merger related accretion associated with <unk> acquisition of the F. S. K R.
The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.
Starting <unk> 2021, net asset value per share of $27 in 2014.
Was increased by GAAP net investment income of 66 cents per share and was decreased by <unk> <unk> per share due to a decrease in the overall value of our investment portfolio.
Our net asset value per share was reduced by <unk> 62 per share dividend paid during the quarter and was increased by <unk> <unk> per share due to per share repurchases.
So some of these activities results in our December 31, 2021, net asset value per share of $27 17.
From a forward looking guidance perspective, we expect our first quarter 2022, GAAP net investment income to approximate 69 per share.
And we expect our adjusted net investment income to approximate 64 per share.
Detailed first quarter guidance is as follows.
Our recurring interest income on a GAAP basis is expected to approximate $290 million.
We expect recurring dividend income associated with our joint venture to approximate $44 million.
We expect other fee and dividend income to approximate $30 million during the first quarter.
From an expense standpoint, we expect our management fees to approximate $61 million, we expect incentive fees net of the $15 million quarterly waiver to approximate $21 million.
We expect our interest expense to approximate $76 million and we.
We expect other G&A expenses to approximate $10 million.
Five <unk>.
Her share difference between our GAAP net investment income and our adjusted net investment income.
It relates to the expected accretion of our investments during the quarter due to merger accounting.
This difference effects, our recurring interest income.
Other categories of our revenues and expenses are not affected.
In an effort to link the <unk> per share of quarterly run rate adjusted net investment income about which Dan spoke.
From the time of our Investor day in September of last year with our first quarter 2022 guidance. The key inputs are as follows.
First we begin with the 61 per share of adjusted net investment income we provided at our Investor day.
And add <unk> <unk> per share to that number.
Which equates to a quarterly adjusted net investment income of approximately 66 per share.
We then lower that number.
One penny per share due to the reduction in fee income we are expecting during the first quarter as compared to that guidance.
And we lower by another one penny per share due to the fact that the first quarter has two fewer days.
These adjustments result in first quarter adjusted net investment income of 64 per share and therefore, our first quarter guidance of 64 cents per share.
In terms of the right side of our balance sheet, our gross and net debt to equity levels were 119% and 107% respectively. As of December 31 2021.
This compares to gross and net debt to equity of 110% and 103% respectively. At the end of the third quarter.
At December 31, our available liquidity was $2 $6 billion at.
At year end, approximately 51% of our drawn balance sheet and 43% of our committed balance sheet was comprised of unsecured debt and our overall effective average cost of debt was 3%. Additionally.
Additionally in January of 2022, we issued $500 million of 3% to 5% unsecured notes maturing in 2027 further enhancing our balance sheet and liquidity position.
And with that I'll turn the call back to Michael for a fee.
Few closing remarks before we open the call for questions.
Thanks, Steven I'll close by saying that we are continuing to take the appropriate steps to position us for long term success and we are pleased with how our investment portfolio is positioned.
We have taken advantage of our scale experienced management team.
The KKR credit platform and our strong balance sheet to deliver attractive financial results for our shareholders.
We have demonstrated our ability to originate and underwrite through various economic backdrops. Additionally, we've defined three key opportunities and executing on them to generate incremental net investment income, which we believe provides meaningful line of sight guidance for the coming quarters.
S case outlook for 2022 and beyond is promising.
We look forward to continuing to build on our current progress and as always I'd like to thank our investors for their continued support and with that operator, we would like to open the call for questions.
Thank you and as a reminder, ladies and gentlemen to ask a question simply press star one on your telephone.
The other question press, the pound or hash key that is star one to get into queue.
Your first question comes from John Hecht with Jefferies. Your line is open.
Okay.
Good morning, guys. Thanks for taking my questions and congratulations on achieving.
The goals, we set forth at the analyst day, just a few months back.
First question you guys talked about this but I'm wondering if you can maybe give a little bit of details if you've done any internal analysis on.
What inflation does to any.
Any particular component of the portfolio and then in addition to that maybe distinguish what rising rates would do.
With both of those and thinking about the EBITDA coverage ratios and things of that nature.
Yes, John Good morning, I'm happy to take that and maybe we'll start with the inflation sort of part of it.
Obviously, we've been.
<unk> focused on that for the last several quarters I think we've seen across the portfolio, whether it's wage inflation, whether its relation to commodity is whether it's supply chain issues, whether it's kind of freight costs.
So I think we're seeing that in the portfolio.
I think the good news is we have been focused.
Companies in the upper end of the Middle market, we think those companies have pricing power than they have been able to.
Push that those price increases through and we've also seen really good let's just call. It financial performance on the revenue side of things, which is sort of offsetting this right. So I think all of that being said.
You know when I said this in my prepared comments.
We were probably starting to see EBITDA growth rates, you'll reduce across the portfolio, but we still think this is a good environment for credit.
I think on the rates at a point I'd put that in and maybe sort of two pieces right I think as it relates to the portfolio I don't think we have a lot of worries in.
Terms of rate increases rates have been low for a long time almost all of these loans have floors.
Our interest coverage across the portfolio was in excess of two five times sort of today and even if rates popped a 150 to 100 basis points that number is still in excess of two times. So I think on the portfolio side, we feel pretty good.
Obviously, the investors here could benefit from our floating rate book, you'll like the rest of the market that will be we'll call. Some lag between where we are with the floors.
Where we are with having sort of floating rates of the debt. So I think but over an extended period of time if rates do go up as much as we do believe the portfolio will benefit from those rising rates.
Okay. That's very helpful. Thanks, and then.
Second question, a little bit higher level.
How do you guys think about the mix of the pipeline.
Given given the rate and kind of the forward rate environment outlook.
What happens to refi activity versus new deal activity is there any change in sponsored versus non sponsored type of activity from your perspective.
Yeah, well I mean, maybe there's a couple of different points. There I think from an origination perspective. Our goal has just been to make the funnel is big as possible, but I think we looked at over <unk> hundred deals last year.
In excess of two times, where we would've been three plus years ago, a lot of that is just to how we've grown.
The team both on the sponsor and the non sponsor side.
I think that said I think we're a little bit mindful that active.
Activity could be a bit more muted on on the M&A side, obviously, that's both to do with rates, but whats been going on.
In Ukraine as well.
And I think with what we are expecting in rates I think.
If something did come in the door from an origination perspective that was fixed rate, we'd probably pushed back pretty hard to convert that into floating because we'd rather have that sort of tailwind behind us but.
When you put all that together I think 2021 was a really active year I think we would have always forecast in 'twenty two to be a bit more muted.
That said the team has been busy thus.
Thus far this year.
Wonderful thanks very much.
Thank you John .
Your next question comes from Bryce Rowe with Husky.
Thanks, Good morning.
Was hoping Dan to maybe ask you about kind of competition.
Competition in the market you highlighted a seven 5%.
Weighted average yield on new investments in the fourth quarter.
And kind of was curious.
How that might have trended over the over the last couple of months.
January and February and then.
No. It's early relative to the Russia, Ukraine situation, but any kind of early data points in terms of how markets might have changed relative.
To that I know that says.
That's a tough one, but but but just figured I figured I'd ask.
No that's all that's all fair.
I think in terms of competition I mean for sure there's been a fair a fair amount or a lot of money raised for our private credit.
I think that said, where we positioned ourselves in the upper end of the middle market, while there are definitely.
Players there I think there's less players there than there are in kind of a smaller side. So while we've seen competition.
Sure I think it's a lot of it's the same players and I think that competition.
And somewhat muted by the fact that probably the acceptance that we've seen of the private credit product more and more borrowers more and more sponsors want to use it you've seen I think the market stopped that in these mega unit tranches were seeing a fair.
Our amount of those we either ladder participated in 13 deals were north of $1 billion.
So I think when you have that acceptance coupled with just how much money has been raised for middle market private equity.
Think the almost the supply of deals has gone about weighing the demand there. So that's been positive.
Yeah.
Like I did mentioned I think we would expected 'twenty two to be a bit slower.
And in 'twenty, one some deals that were just pushed from COVID-19 or maybe sort of a certain companies that outperformed during COVID-19 and there was a transaction for the for the owner of that business to do.
I think it's probably a little bit early to your point in terms of what happens on with what we're seeing with Russia and Ukraine.
I think I think on the unit tranche product, which is most probably the most prevalent product for where were playing and where others are playing.
We saw in 2021.
Yields or spreads reduced let's call. It 50 to 75 basis points I think youre regular way deal.
It was on average LIBOR, plus let's say 600 that range was probably $5 50 to 650.
I think you've seen that.
Let's call it.
Sort of bottom out I think you'll probably see a trend back the other way.
It was syndicated markets become softer, which I think they probably do on the back of what we're seeing in Europe , you'll see that sort of bleed into the illiquid private credit market. It just takes a little bit of time.
Okay.
Alright, I'll jump back in queue I appreciate the answer.
Alright, thank you.
Your next question comes from Ryan Lynch with J B W.
Hey, good morning, Thanks for taking my question.
I just had two the first one.
Did you guys mentioned that.
On United.
Entered an agreement to be.
Bought sometime in the second half.
Half of 2022 I was just curious you guys currently have the equity investment market about $77 5 million I think you guys said there would be upside if that.
Yesterday after the proposed price what would that mean for an exit value.
Signing some United.
Yeah, Good morning, Ryan.
They did sign a deal in the middle of this month, we wanted to make sure. We noted it inside our prepared remarks.
Recall this is a.
Our high end speaker business.
It did.
Convert our existing position to equity during the dark days of Covid, we did inject new dollars into the company.
Alongside the sponsor to allow them to do an M&A.
Transaction that we think was fairly accretive the company has done really well there are products are great.
The deal is signed it just subject to customary conditions, but I think in our estimates.
We'd expect sort of upside in excess of $50 million on that position in Q1.
So 50 million upside on one where you have some remarks.
Yes, okay.
That's helpful. And then just the other one I had I noticed that <unk>. It looked like you got.
I sold down some of your position in there of the cost went down pretty meaningfully.
In the quarter I'm, just curious what was going on with that sell down number one and then kind of a side.
Second part question to that is just.
With the increase in mortgage rates and I guess, just broadly would that business have you seen any material slowdown and kind of the velocity.
Deal activity I would just think of the higher rates and the slowdown.
Kind of the business activities.
Date.
On that business as well.
<unk>.
Why that position with.
In the quarter.
Yeah, no happy to do that I think that.
The position was sold down into the joint venture as we continue to grow the JV. So it didn't leave the system.
Theres no other party in that deal I think it's an important part it's a good pickup but it was just sold down to the joint venture.
I think the company continues to do extremely well.
Volumes have.
I think actually picked up a bit during the course of 'twenty one obviously.
They're core or main product is bridge lending a lot of the slowdown there was material inside of 2020 on the back of Covid.
There was also a fair amount of delays I think the company did an excellent job.
Obligating that so you know there are volumes.
Exceeded budgets in 'twenty, one I would expect the same in 'twenty two.
Okay.
Thanks for the color on <unk> and that clarification on hardware.
I appreciate the time today.
Thank you Rob.
Thank you. Your next question comes from Casey Alexander with Compass point.
Hi, good morning.
May be a little off topic, but.
I noted that KKR invested in.
And purchased a different ABL lender during Q1.
Does that ABL lender, having a place in the BDC and if so how does it complement the other ABL investments the Bdcs made.
Yeah. Good morning case, you're talking about merchants.
Yes, yes.
Yes, so just to clarify merchants looks.
From a product perspective.
I think about ABL, that's usually inventory and receivables merchants.
Another bridge lending sort of platform on the real estate side.
That's just an asset class that we continue to like going back to sort of Ryan's question. You know merchants is a business that's been.
Around for 50 plus years, we had a really good relationship with the management team they've actually been known to tour Act for some time. So we had a little bit of a of an angle there and it was a part of the country from a geographical perspective, we didn't have a lot of exposure. So that does have a place.
Inside of S. K and you will see that.
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And as on a go forward basis.
Alright, great. Thank you that's my only question I appreciate it.
Alright, thank you.
Your next question comes from Robert Dodd with Raymond James.
Hi, guys congratulations on the quarter and congratulations on good sequential bands, we structured it back on accrual my couple of questions on own commented about credit.
The five new non accruals small 60 million in total, but looking at the names it looks to me.
I didn't know recognize for the five.
Having been on previous non accruals and restructured back on accrual.
Now back on nonaccrual. So is there are any.
Okay.
Is there anything else.
And we should watch out for any concerns about how the workout process maybe has been done in the past.
Some of these again small assets are back on non accrual after being restructured once before.
Okay.
No.
I'm happy to go through that and thanks for the words sequential the team did an excellent job there to generate the results that we did.
I think and Robert just to put a bigger perspective, and I think the outcome on sequential and then the outcome that we're seeing on sound and United quite frankly is due to the strength of the team that we have.
I think on the names that you sort of did mention there.
There was sort of five I think there's probably no common theme about them other than you know, they're all originated kind of pre 2018, a handful of them.
Did go back on accrual, but there was very specific reasons why we ended up putting them on non accrual during this quarter as an example, and BG home was performing.
Extremely well on the other side of Covid supply chain supply chain challenges, where real there.
Hence we felt it appropriate to go back on on non accrual and then we are looking at.
Potentially sort of exits on on amtech.
Which is the name quite frankly that had a fair amount of green shoots COVID-19 sort of impact of that pretty pretty materially, but its sort of timed exit. So some of those were sort of catalysts from there, but nothing really beyond that and I think youre correct its $62 million.
Fair market value and I think we're pretty happy with.
The reduction that we've seen.
Now to one 9% on fair value from three seven quarter over quarter.
I appreciate that color. Thank you own on global.
Capital I understand that the restriction for the anti narrowing.
Provisions et cetera.
If I move on I mean, its business jets rather than commercial.
She has tended to do quite well.
Can you give us any color on where those are I mean.
Are there a bunch of business jets.
Moscow airports for example.
Eddie any missed to sanction so anything to its portfolio or is that just not a factor right now.
Yeah, that's a good question.
I would put it in the not a factor camp right they've predominantly focused on.
The U S are very developed geographies.
Not that was not just from a historical risk perspective and.
In view I mean, our entire business here has been focused on.
Places like the U S and Western Europe .
But they do use the capital markets to finance themselves that lead you to have a pretty vanilla book from a geographical perspective, I think you are correct.
You know there have been no tailwind no pun intended.
For the private jet or sort of business jet space I think we've been quite proud of what the management team has been able to sort of do during this period I think the challenge in that business.
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That we've talked about on sort of prior calls is just the competitive nature of the market you look at their sort of top competitors. Most of those are our our banks are deposit taking institutions.
It's been sort of harder for them to.
To compete from a cost of funds perspective, so that's something we're pretty mindful about.
Okay understood. Thank you.
Thank you.
And your next question comes from Finian O'shea with Wells Fargo.
Hey, everyone. Good morning.
Wanted to gather any thoughts you could provide on the newer non traded BDC market.
The first side is obviously, a pioneer on that end and major major private credit platforms are racing to set these up and so forth so any.
Any color on how you view the opportunity.
For the advisor and the BDC platform.
Yeah good morning.
Yeah, I think couple of things number one and I think.
We've said this on some prior calls we have been focused on our.
Our existing platform and F. S. K I think we're pretty pleased with what we've been able to accomplish.
During the course of this year, Michael laid out a bunch of things in his prepared remarks, I think the things that we've done on invest post investor day. Those three levers are pretty sort of happy with I think getting it down to one publicly traded name.
Where we started at six effectively three years ago, that's been the most important thing.
All that being said, it's we obviously are seeing sort of what's out there. It is something that we.
Our considering I think there were sort of mindful about.
And I think we'll see how we.
Take that forward in the coming months of the coming quarters.
I think it is a little bit of a statement and I think in a good way about how private credit continues to be more expected or accepted and the investors have a community because I think youre seeing that on the deal volume perspective, but you are seeing from the investor side as well with I think there is a continued sort of hunt for yield out there so on.
Our mind for sure but.
And I guess I have been really focused on making sure. We're in a good spot on that first day.
Sure that's helpful. Thanks, so much.
Thanks, Matt.
Your next question comes from Kenneth Lee with RBC capital markets.
Hi, good morning, Thanks for taking my question.
Just one on the dividend policy.
In terms of thinking of the 60 cents per share as a base dividend plus the excess or supplemental dividend.
Should we also view this as the.
As S K, achieving additional confidence and visibility into into the sustainable earnings power of the portfolio just given all the the range of achievements.
Cheap so far in terms of the growth levers on the NII side. Thanks.
Yeah, I'll, let Stephen sort of add to this.
I mean I appreciate the words I think we have been happy with those.
Start for those three levers that we should have talked about that at Investor day.
More to do there, but I think a pretty sort of clear path.
I think we've gotten some very good feedback in the market on.
The idea of the variable dividend policy I think we also got some questions, though about if the market was going to be perceive. It. If we were at 64, one quarter 63 in the next quarter.
And sort of reading a fair amount into that so I think we spent some time.
Trying to figure out a way to make sure we're crisp and clear on sort of that base in the supplemental that Steven laid out, but I think that was the main focus to make sure. It just all the market participants are all on the same page, but Steve anything to add there.
No Ken I. Appreciate your question the only thing I would add is when we did come out with a policy about two years ago then.
One of the things we were mindful of at that time was.
Bdcs that did have a base in supplemental.
Structure with their dividend at that time, one of the issues that people talked about was that some of the services who.
Track companies dividends et cetera.
Truck only the base and not the supplemental and so that was an incumbent in our thinking of what we're announcing just a number every quarter then.
As much as we can with the overage of earnings in that.
Put us in a very good spot in the services would track it more accurately.
Dan alludes to there were certain people and marketers cycle, youre going up and down a little bit and so is there a base.
Talk to people say, well, yes, I kind of think of it as <unk>.
Just wanted to be sure people are clear on that.
But it's really no more complicated than that but I. Appreciate the kind words and we do think we are closing that line of sight. If you will towards the balance of 2022.
Raised with the accomplishments since the Investor day certainly.
Great very helpful. There.
Just one follow up if I may just wondering if you could just comment on what youre seeing in terms of current opportunities within the asset based finance side. Thanks.
Yeah happy to take that.
You know I think that continues to be an area that we find quite.
Quite attractive.
If you think about it.
Where we are.
So the macro wise, we're staring at some some noise and inflation sort of rising rates you know things that you can get.
Essentially access to collateral access to early.
Sort of front loaded to the cash flows I think we find those two things sort of quite attractive I think it's a space where scale capital has not been raised we've got 35 investment professionals focused on that it's been a core investment theme for us for you know five plus years now so.
We've been excited about what we've done there and I think we are.
You know, we would expect that that trend to continue on the forward quarters I think in terms of inside of F. S. K. So you do have it.
We talked about merchants you know a handful of sort of questions ago, you know things like that things like toric, we have found really attractive.
We did have a really good result during 2021.
With the sale of a single family rental platform called home partners of America.
We have sort of pivoted and you know one of the new deals in the quarter was another platform that we're backing there called my community home. So.
You couple that with outside of of global jet we've done some other things in the private sort of jet space.
We've been active in certain sort of esoteric assets.
Like music IP, but I think the overall investing in environment for asset based finance remains quite attractive, but like I said not a lot of scale capital our scaled players and we think we are I mean, we've got a nice competitive advantage there.
Gotcha, great very helpful. Thanks again.
Thank you.
And your next question comes from Lisa Gill with JP Morgan.
Good morning, appreciate you taking my questions today.
Looking at the pickup in portfolio yield quarter over quarter and I'm curious, how you sort of do the attribution on that increase is it do you think it was driven by some of that elevated activity.
And prepayments.
Or is it sort of attributable to the reduction in non accruals or what's the split between us.
Yeah, no good good morning listen and.
A fair question.
I think the attributions of little bit of a couple of things right. It's just the simple summary of certain assets that got repaid versus where some of the new assets came on and then certain of the assets that did move to non accrual and some of them were sort of lower yielding versus some of those assets that weren't sort of back on accrual. So it was just that.
Really the handful of those levers changed from the 81 to 84.
Okay and could you.
Kind of what the yield on exited investments ones during the quarter.
And that's it for me thanks.
Melissa Steve and I think on the exited it was around.
Seven nine.
Got it thanks, so much.
Sure.
Yeah.
Thank you and this concludes our Q&A session I will turn the call back to Dan Pietrzak for his final remarks.
Well. Thank you everyone for spending time with us today.
We are pleased with our 2021 results and believe we're well positioned going into 2022.
If you do have any additional questions. Please do not hesitate to reach out and have a good day.
And with that ladies and gentlemen, we conclude today's program. Thank you for your participation and you may now disconnect.
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