Q4 2022 FS KKR Capital Corp Earnings Call
The conference will begin shortly.
Reason to lower your hand during Q&A, you can dial star one one.
[music].
Good morning, ladies and gentlemen, welcome to S. F K K R capital Carbs spot.
20 twenty-two earnings conference call.
Your lines will be in a listen only mode.
During remarks by F. S case management at the conclusion of the company's remarks, we will begin to question and answer session at which time I'll give you instructions on entering the queue.
Please note that this call is being recorded.
At this time, Robert pawn head of Investor Relations will proceed within to adoption. Mr. Upon you may begin.
Good morning, and.
You're welcome to upsize.
Fourth quarter and full year.
2022 earnings conference call.
Please note that I bet.
May be referred to as that that's K.
Or the company.
Today's conference call is being recorded and an audio replay of the call will be available for 30 days.
Information is included in the press release issued.
On February 27th 2023.
In addition at that's K as Pows.
[noise] on its web site the presentation containing supplemental financial information with respect to its portfolio and financial performance.
<unk> ended.
31 2022.
The latest today's webcast 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 that that's K.
Any unauthorized rebroadcast of this call in any form is strictly.
Strictly prohibited.
Today's conference call includes forward looking statements that are subject to risks and uncertainties that could affect efforts K or the economy generally.
We ask that you referred to adverse case, most recent filings with the SEC are important factors and risk that could could.
Could cause actual results or outcomes to differ materially from these statements.
Hi, Becka does not undertake to update forward looking statements unless required to do so by law.
In addition, this call will include certain non-GAAP financial measures.
Such measures reconciliation for the most directly comparable GAAP measures can be found at F. S case fourth quarter earnings release that was filed with the SEC on February 27th 2023.
non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for their related financial information prepared in accordance with gap.
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> web site.
Speaking on today's call will be Michael Foreman, Chairman and Chief Executive Officer.
Damn Pietrzak, Chief investment Officer and co President.
Brian Gerson co president.
Steven Lilly Chief Financial Officer.
Also joining us in the room or 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. Thank you all for joining US breath test case fourth quarter and full year 20 twenty-two earnings conference call.
This past year is the year of significant accomplishments for F. S. K.
We continued rotating our investment portfolio into Fas KKR originated assets as our investment team originated over four $5 billion in new investments.
We achieved the strategic goals outlined in our September 2021 analyst and Investor Day.
We hosted the other successful Investor day this past November .
And we issued $500 million up three and a quarter unsecured notes in January of 2022.
These efforts as well as a positive impact of rising interest rates have resulted in meaningful earnings growth.
As our adjusted net investment income per share for the full year grew over 10% as compared to 2021.
While 2022 is also a year of market volatility and economic uncertainty. We are pleased to have concluded the year with strong results as we exceeded our quarterly guidance each quarter.
Awarded shareholders with both an attractive base and a supplemental dividend every quarter.
In terms of our fourth quarter results, we generated net investment income totaling 80 per share and adjusted net investment income totaling 81 per share as compared to our public guidance of 74, and 75 cents per share respectively.
Our net asset value declined 1.6% quarter over quarter as our investment portfolio decline was offset slightly by out earning are 68 cents per share dividend an accretive share repurchases.
During the fourth quarter or investment team originated approximately $863 million of new investments.
Finally from a liquidity perspective, we ended the quarter with approximately $3 billion of available liquidity.
Through February 24, 2023, we have repurchased $87 billion, a share is under $100 million share repurchase program and.
In the fourth quarter, we repurchased $23 billion of shares and subsequent to quarter and we purchased $19 million of shares.
As of February 24, we had $13 million remaining under the 100 million dollar program.
Based on our positive fourth quarter financial results are bored is declared a first quarter total distribution of 70 cents per share.
As part of this distribution. We're also pleased to be raising our quarterly based dividend to 64 cents per share, which represents approximately 5% increase over our last quarter's 61 per share based dividend and approximately a 7% increase in our base dividend from a year ago.
The increase quarterly based dividend reflects our positive outlook on the long term earnings power of the confidence. Additionally, based on the overall strength of the company's earnings power, we expect our quarterly supplemental distribution to total a minimum of six cents per share throughout 2023, and possibly possibly be odd.
Equating to a minimum of 70 cents per share per quarter of quarterly distributions during 2023.
On an annualized basis, our first quarter distribution represents an attractive 11.3% annualized yield on our December 31, 20, twenty-two net asset value and an annualized yield of approximately 414.3% based on our share price.
I'm extremely proud of the accomplishments of the team during the past 12 months based.
Based on an experienced team and the significant resources of our platform I believe we are well positioned for 2023 and beyond.
Before I conclude my remarks, I would like to comment briefly on the recently announced merger between F S investments and portfolio advisors.
While the transaction is a significant one for F as investments accelerating the growth of our firm.
It is important to note that the transaction has no impact on F. S K and the <unk> Fas KKR advisor.
With that I'll turn the call over to dad and the team provide additional color on the market in the quarter.
Thanks, Michael.
As I reflect on the times since the establishment of the <unk> take care advisor I take great pride in the growth and capabilities of our investment team as.
As we have originated over $21 billion of new investments and F. S. K.
As Michael mentioned, we are pleased with the performance of these originated assets and how we have positioned F. S. K to provide an attractive dividend yield to our investors.
In terms of the market and economic environment as.
As we enter 2023, we continue to expect above average levels of volatility over the near term given.
Given the federal Reserve's continued focus on fighting inflation.
As well as continued geopolitical issues certain remaining supply chain constraints and margin pressures on companies of all sizes.
There's still a lot of uncertainty over the direction of inflation and rates and the broader economy, and we believe the macroeconomic environment will likely remain challenging throughout 2023.
While we continue to exercise caution with respect to new originations. We believe the increased volatility and economic uncertainty has created a compelling investment opportunities for us and other large scale private debt investors.
Sponsors continue to turn to large stable direct landing platforms as alternatives to the more volatile syndicated debt markets.
Additionally, the economics and return opportunities on new originations are extremely attracted to us.
Even by spread widening and the increase in based in base rates.
Compared to a year ago spreads on new originations are approximately 100 basis points higher with enhanced call protection and attractive leveraged levels for high quality companies.
With that said, we believe M&A transaction volumes will remain below average until investors can gain confidence that inflation has stabilized and there was more clarity on what the broader economic landscape might look like going forward.
In terms of portfolio company performance, we continue to see positive financial results from the majority of our portfolio companies.
We attribute these results to our focus on larger companies at the upper end of the middle market companies with strong competitive physicians Brazilian cash flows and businesses and non cyclical industries.
Our portfolio companies reported a weighted average year over year EBITDA growth rate of approximately 15% across companies and which we have invested in since April of 2018.
In addition to this EBITDA growth by continuing to focus on larger companies. We have increased the weighted average EBITDA of our portfolio companies to $204 million as of the end of the fourth quarter as compared to $164 million at the end of 2021.
Certain companies in our portfolio has been impacted by a combination of inflation supply chain issues and increasing interest rates, which contributed to a meaningful portion of our portfolio depreciation during the fourth quarter.
While Brian will speak about specific names in more detail later, we continue to closely monitor.
Financial performance and the positioning of our portfolio companies leaning.
Leaning on the resources of our experienced investment team and portfolio monitoring unit.
We are extremely proud of the work we have done to rotate the portfolio over the last several years and we remain focused on continuing this rotation in 2023.
Turning to our quarterly investment activity during the fourth quarter, we resonated $863 million of investments.
Similar to the prior few quarters. These primarily focused on fundings and add on financings to existing portfolio companies.
Approximately 70% of our originations came from opportunities and companies previously invested in bye take care.
During the fourth quarter, our new corporate lending opportunities carried a weighted average coupon of sulfur plus 660 basis points and a weighted average LTV of 40%.
Our new investments combined with $1.1 billion of net sales in repayments when factoring in our sales to our joint venture equated to a net portfolio decrease of $221 million during the fourth quarter.
One new financing worth noting is our new investment in the party foods, a specialty in branded food distributor the sources manufacturers and distributors into the U S grocery market with an emphasis on the primer of the store products.
In January 2019 at best K and other funds managed by kick care provided a $615 million a unit traunch and DDT L financing to support the buy out of the company.
Benefiting from our incumbency physicians during the fourth quarter of 2022, we led a $790 million Unitranche and DDT financing to support the acquisition of the company by a new sponsor was more attractive economics, and a lower leverage points than our original investment.
In terms of interest coverage at the end of the fourth quarter, our portfolio companies had a medium interest coverage of one nine times.
And while we have seen a slight uptick in amendment activity. We would note in situations where amendments have occurred we are seeing seeing meaningful equity support from our financial sponsors due to to both the long term viability of the business models of the companies of which we have invested in in the recent vintage of funds from what.
The sponsors have contributed the equity capital.
With that I'll turn the call over to Brian to discuss our portfolio in more detail.
Thanks, Dan as of December 31, 2022, our investment portfolio had a fair value of $15 for $1 billion, consisting of 197 portfolio companies.
This compares to a fair value of $15 $8 billion and 195 portfolio companies as of September 30th 2022.
At the end of the fourth quarter or 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio.
We continue to focus on senior secured investments as our portfolio consisted of 63% first lien loans and 68.8% senior secured debt as of December 31.
In addition, our joint venture represented nine 3% of the fair value of the portfolio and acid base finance investments represented 12, 4% equating an additional 21.7% which is comprised predominantly at first lien loans were secured asset base finance <unk>.
Estimates.
Weighted average yield on occurring that investments was 11.4% as of December 31, 2022, compared to 10.4% as of September 30th.
As a reminder, the weighted average yields adjusted to exclude the accretion associated with the merger with Fas KR.
The increase in our weighted average yield during the fourth quarter with primarily associated with the continued rise in base rates as well as higher yields on new origination during the past few quarters.
During the fourth quarter, excluding the impact of merger accounting.
We experienced net portfolio depreciation on investments of approximately $105 million.
The largest negative movers in our portfolio, which were impacted by credit performance related issues during the quarter or pure fishing and KBS.
Pure fishing is a leading global supplier fishing equipment and gear that experienced weaker results due to retailers destocking as well as inflationary pressures.
KBS as a provider of janitorial into civilian maintenance services to a variety of then markets typically under Mel for a year contracts.
Performance has been negatively impacted by labour inflation and the roll off of Covid related work at.
At this point, we were characterize the performance issues with both companies as transitory nature.
I'd also like to comment on another investment open door.
The company is an online real estate platform facilitating the purchase and sale of single family homes.
In October of 2021, we've let an investment and a 2.2 billion dollar assets secured mezzanine debt facility, which has since been reduced to $1 billion through a combination of undrawn commitment amount cancellations and debt repayments at par plus the related prepayment premiums, which.
Meaningfully reduce our exposure.
As of December 31, 2022 F. S. K as total investment had funded principal amount of $71.1 million only compared to a principal amount of $106 $6 million and undrawn commitment amount of $53.4 million as of September 30th 2000.
22.
In terms of Nonaccruals as of December 31, 2022, Nonaccruals totaled 4.9% of our portfolio on a cost basis, and two 4% on a fair value basis compared to 5% on a cost basis and 2.5% on a fair value based.
As of September 30th 2022.
And with that I'll turn the call over to Steven.
Thanks, Brian .
As Michael mentioned earlier, we are pleased to be able to reward shareholders with an increase in our base dividend.
As well as to communicate the company's positive view, but.
That are supplemental distribution should equate to a minimum of six cents per share per quarter during 2023, and possibly longer resulting in a total minimum distribution of 70 cents per share per quarter.
On an annualized basis or distribution total is $2.80 per share representing an 11.3% yield on our December 31, 20, twenty-two net asset value of $24.89 per share.
Turning to our financial results for the fourth quarter total investment income increased by $38 million quarter over quarter.
Driven by increased interest income.
The components of our total investment income during the quarter, we are as follows.
Total interest income was $360 million, an increase of $42 million quarter over quarter.
[laughter].
Dividend in fee income totaled $89 million, a decrease of $4 million quarter over quarter.
Dividend in fee income during the fourth quarter with summarized as follows 50.
$53 million, a recurring dividend income from our joint venture other.
Other dividends from various portfolio companies totaling approximately $24 million in fee income totaling approximately $12 million.
Our interest expense totaled $109 million, an increase of $13 million quarter over quarter.
Largely due to the impact of rising base rates on our secured debt facilities.
Are weighted average cost of that was four 8% at December 31.
Management fees totaled $59 million, a decrease of $2 million quarter over quarter incense.
Incentive fees totaled $27 million during the fourth quarter, which is net of the 15 million dollar incentive fee waiver.
As previously noted is part of the <unk> merger, which closed in June of 2021.
Advisor agreed to waive $90 million of incentive fees spread evenly over six quarters, which began during the third quarter of 2021 is.
As a reminder of the fourth quarter of 2022 represents the final quarter of the incentive fee waiver.
So detailed bridge in our net asset value per share on a quarter over quarter basis is as follows.
<unk> three Q2 thousand 22, net asset value per share of $25.30.
Was increased by GAAP net investment income of 80 per share and was decreased by 56 cents per share due to a decrease in the overall value of our investment portfolio.
Our net asset value per share was reduced by our 68.
Per share dividend paid during the quarter and increased by three per share.
Due to share repurchases.
Some of these activities results in our December 31, 2022, net asset value per share of $24.89.
From a forward looking guidance perspective.
We expect first quarter of 2023, GAAP net investment income to approximate 77 per share and we expect our adjusted net investment income to approximate 74 per share deep.
Detailed first quarter guidance is as follows.
Recurring interest income on a gap basis is expected to approximate $365 million.
We expect recurring dividend income associated with our joint venture.
<unk> approximate $53 million.
We expect other fee and dividend income to approximate $29 million.
From an expense standpoint, we expect our management fees to approximate $58 million.
We expect incentive fees to approximate $44 million.
We expect our interest expense to approximate $117 million and.
And we expect other G&A expenses to approximately 11 million.
As a reminder, the three cents per share difference between our GAAP net investment income and are adjusted net investment income.
The lights to be expected accretion of our investments during the quarter due to merger accounting.
This difference effects are recurring interest income all other categories of our revenues and expenses are not affected.
In an effort to link our fourth quarter of 2022 results through our first quarter of 2023 guidance. The primary considerations are as follows.
Starting with our 81 per share of four Q adjusted net investment income, we subtract five per share of adjusted net investment income to account for the exploration of the fee waiver.
We subtract two per share of adjusted net investment income.
To account for the fact that in the first quarter has two fewer days than the fourth quarter.
The expected incremental growth and investment portfolio earnings during the first quarter due in part to higher interest rates is expected to be counterbalanced by lower fee and dividend income is certain dividend paying portfolio companies tend to pay dividends later in the year.
We hope this information is helpful to investors and analysts in terms of creating an accurate starting point for 2023.
In terms of the right side of our balance sheet are gross and net debt to equity levels were 125% and 118% respectively. At December 31 2022.
This compares to gross and net debt to equity of 128% and 119% respectively. At the end of the third quarter of 2022 at.
At December 31 are available liquidity was $3 billion at the end of the fourth quarter, approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt and.
And our overall effective average cost of depth was 4.8%.
And with that I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
Thanks, Stephen in closing I'd like to thank our team for its continued strong execution.
2022, despite the challenging macroeconomic environment that led to significant market volatility during the year as.
As we look forward. We continue to believe we are well positioned with respect to our investment portfolio strong capital structure committed liquidity position an experienced team.
We are optimistic about the company's future and have confidence in our ability to generate strong results for our shareholders, including the continued strategy of sharing outperformance with shareholders on a real time basis through supplemental quarterly distributions.
As a result, we believe the solid opportunity for the shareholders is extremely attractive.
Thank you all for joining the call and for your continued interest and support with that operator, we'd like to open the call for questions.
And can Nathan gentlemen question, you would need to press Star One line on your account balance and wait for your needs to be announced should we giant question. Please press one one again, please stand by while we can.
<unk>.
And our first question coming from them announced Martinez.
Mine is open.
Yeah. Thank you very good or good morning.
If we could do that.
Area, where interest rates are higher for longer.
The deal activity pick up I mean expectations good fit properly in the markets are clear.
More dependent on the for interest rates to slow down before you start to see more more.
More deals happen.
Yeah, Good morning Martin.
It's an interesting question I I I think I think the.
Market from a set of M&A perspective is looking for some comfort that inflation is under control, but I think it was a <unk>.
Still are seeing interest.
Interest rate increases, which we are expecting I think you'll you'll be able to believe that the fed has an accomplished the mission that they've.
Are trying to sort of do that said I think you start to see a little bit of upgrade shifts.
Just called last couple of weeks, but the year started off with some level of sort of normalcy. So.
I think our belief is M&A is going to continue to be slow for the near term and you probably saw pickup in the latter half of the year.
Then the instead of the after the.
Expiration of the waiver.
Is there anything about the trajectory from here is.
We should think about might be unusual or that kind of footage hugo's depending on.
Performance in the portfolio.
Yeah, it should be more as the furniture goes point.
Steven tried to lay out some some pretty decent guidance. There is a related Q1, but it also building the bridge from Q1 back to Q4.
And hopefully that provides a good starting point for you to consider how you think the the rest of the year rolls forward.
Thank you.
Thank you.
Thank you one moment.
And my next question coming from the lineup acts liquid grab the line or something.
Thank you. Good morning, first just wanted to start as I looked at the.
Composition portfolio or the increased quarter over quarter, an asset based finance.
How you view the opportunity to continue I think in that.
Arena today, and whether you would expect that to continue to grow or kind of stay in the car.
Current range of its current composition.
Polio.
Hi, good morning, and thank you for the questions I do believe we remain confident from an investing perspective is one of the more interesting parts of the market.
Like the.
The collateral we liked generally front cash flow as we think the risk adjusted returns.
Quite strong.
That said I think as it relates to F. S. K, specifically, we've talked to the market about 10% to 15% sort of allocation too.
<unk>, we're sort of smack in the middle of that range. I think you should probably expect us to stay there sort of plus or minus a percentage point or two but again, we do feel.
Quite strongly about the attractiveness of it as a as an asset class to investments.
I appreciate the color of their.
And if I could move to just looking at slide 10 of the presentation and you mentioned there are some pretty strong improvement and portfolio company EBITDA certainly the second half of the year looking at that graph, but just due to higher interest rates the interest coverage coming down and that blue bar in the second half. So if we could get to a period where.
EBITDA is materially impacted if we get into a a recessionary environment.
It seems like that would put additional pressure on that interest coverage ratios should just curious you know how how you.
View that that possibility and how you would manage that the portfolio. Some of these companies start to be more stressed from our interest coverage than potentially operating environment.
Yeah, that's a good question.
I do I think we are quite happy about that 15% number that we talked about and a call. That's year on year EBITDA sort of gross numbers I think when you think about that from a practical perspective, though that's really.
<unk> 930, 21 to 930, so the 22. So I think we are pretty mindful that that is a backward looking number and being risk managers were were very focused.
Forward.
So I think that's sort of top of mind.
You'll get a meaningful recessionary environment, you, probably do have some correlation with rights coming back down.
So I think you could be net net flat from an interest coverage risk factors.
That said I mean, these all of these numbers that we sort of talk about here are averages.
Yeah, we don't run the portfolio based upon average I guess, that's great data to provide but we have to be focused on.
The ones that sort of may or may not be.
May be sort of problematic and you asked about how do we deal with these things.
We build our team pretty meaningful out of Alaska.
Five plus years, specifically as it relates to managing the portfolio sort of posts any new deal.
We've got 22 people, who have no arguably new deal responsibility, but are entirely focused monitoring the portfolio dealing with challenged credits.
A extremely important part of our investment team and will do what's the case by case to generate the best outcome possible.
Thanks for taking my question.
Thank you have a good day.
Thank you and after minor lane Saint gentlemen, black to ask a question. Please press star one on your telephone.
Mommy.
One moment finances.
And our next question coming from the lineup spinal Lynch that can't be definitely helping.
Hey, good morning.
First question I had as you mentioned a slight uptick in an ermine activity, which is not surprising in this environment.
They expect it to continue going forward.
Just be curious to hear your thoughts on.
And this is going to be difficult, but but.
What is really driving that increasing amendment activity would you consider it these businesses not able to adjust to the rapid increase in rising rates and support that higher level of interest burden or is it more.
That there's something fundamentally wrong.
Weaker in that business and then I'd also be curious to hear you mentioned, you're seeing support from the Pe's sponsor does.
Does that mean that they are injecting capital or explain what exactly that you meant by that.
Yeah, Good morning, Ryan.
I think we are seeing that slight uptick, but but I think you are right. It's more normal course of business that.
That I think anything else.
I don't think it is necessarily anything fundamentally wrong with some of these companies.
Activity.
Does kick in that said you know a lot of times, they're they're very well could be.
A supply chain issue there could be a.
Sort of inflationary pressure point like wages.
Quite frankly, you know the majority of the deals in here do have covenants covenants to step down over time.
You're forced to southern company sort of Delevers. So there is some financial performance metrics that I think is usually driving that and add a lot of time. So it will be some of the more credit metrics, but on the other side of it could just be.
The literal regular way kind of step down below.
Think in terms of support we've seen we've we've been happy with that I mean, we.
Focus the business on.
Lending to companies in the upper end to develop market, we think the value of those.
The value proposition of those companies remains strong.
I think we filled out our origination footprint to have real relationships with these financial sponsors.
That doesn't mean it at any sort of periods or just kind of a Jack capital N for the sake of it.
But I do think there is a longer term sort of relationship in mind and then the one thing we have seen.
Not just where we sit today, but.
The last several.
Several years plus.
More likely I think that a financial sponsors supporting.
A more recent.
New origination is probably in the current funding probably have dry powder available and I think that's just much simpler than if it was in a fund that was 789 years old.
But it's usually in the form of equity dollars right to the point.
Okay. That's helpful.
Backdrop.
The other question I had you mentioned the two loans this quarter that receives sort of a credit related markdown pure fish and kgs.
And you gave a background of why those businesses were.
Feeling some pressure, but then you ended it was saying that you consider both of these that both of the problems with these businesses are experienced seemed to be transitory and it wasn't clear to me why you thought that those issues were transitory and so if you could explain.
Your thought process behind that comment that'd be helpful.
And I'll have to jump, Brian might Wanna add to it I mean I.
I think what we're saying is we believe in the strength of these companies the size and scale of these companies.
Probably between the two of them, there's an average of five.
$500 million or sell a set of equity sort of beneath the laws with the laws are sort of made so I think on we've seen this in other retailers just.
Or a bit of a glass of inventory.
People over bought during some of the euphoria forward, we think that sort of works its way out we think those real brands there.
And I think an update yesterday, we think it's so it's a very large high quality business that.
Fairly so the tough times with wage inflation et cetera. So we think that we think they worked ourselves out is the point.
We are reflecting the caribou style and the marks which is why we're raising it on the call.
Okay.
That that's helpful.
That's all for me today I appreciate your time.
Right. Thank you have a good day.
You too.
And our next question coming from the lineup Casey Alexander with Compass point.
Okay.
Yeah good morning.
Thanks for taking my question.
If we could focus a little bit going back to slide number 10.
As you said you don't manage to averages and I'm, a little curious about sort of the tales of the portfolio could you.
Share with us what percentage of the portfolio is currently under one time interest coverage and sort of what I.
I know you guys do a lot of forecasting and are good at math kind of at the at the terminal expected right sort of what percentage of the portfolio would it then at that point in time likely be under one time interest coverage.
Yeah, no thanks, Casey and good morning.
And just a handful of names would be under sort of one time today I think it's 2% to 3% of the total value of the portfolio.
I don't think I have off the top of my head if we fast forward it to.
The terminal right point, and I think you're right I don't think.
I think the the information on slide 10 is I think very important for someone to understand how the portfolio has evolved right, but I do think you ended up being much more focus on the individual line items that said to put it in context, I think that one nine times that you see there on slide 10, if you looked at the Max forward curve with no change.
And sort of earnings that one nine goes to 164.
So maybe that handful dance goes up a couple more names that may be it pops up a couple of more percent.
<unk> I.
I think the other point to recognize.
That is great go higher from here on a percentage basis looking at the base rate plus the coupon.
Change is getting smaller and smaller city impact is less.
On a go forward basis versus what it was in the past.
Mmk. Thank you. So my next question is in sort of a broader context.
The folks operating your portfolio companies are not operating in a vacuum they they see the news they understand what's going on in the environment.
How do you feel like your portfolio companies.
They must be adjusting to an inflationary environment. So even if inflation sticks around for longer how do you think your portfolio companies are adjusting to that.
And their ability to manage forward and don't you think that would ultimately companies successfully adjusting to that begin to enhance the M&A environment.
Yeah, I think it will enhance the M&A environment, I mean, I think the m&a's sort of environment probably needs.
That catalysts first.
My God is that catalyst is.
Some view from from the broader Investor community that the world is at equilibrium.
At a minimum wage stop the big inflation moves upward I think that just gets into the simple idea of.
Finding that willing seller and finding that willing buyer, yes, we are still seeing some M&A activity out there.
I think honestly, it's probably skewed more towards.
The best in class businesses, because people want those businesses people are willing to still pay mulch.
Multiples for them that are strong or or sort of high had been related to maybe the multiples that would've existed for that business.
A year plus ago and in terms of the management teams I mean, I think one thing we have seen focused on this larger borrow or the top right in the middle market, we probably got about our CEO better CFO better governance sort of better controls more support from the board I think that's a positive but what have we seen we've seen a fair.
Amount of pricing increases go through you know we've seen one company do it nine times.
I think we are a little bit mindful or may be concerned that pricing increases are sort of that their last legs.
But we've seen companies being able to do that.
I think you look people have looked for where they can take costs out.
Something I think pretty normal in a time like this I think those companies that have had some supply chain issues are looking to diversify.
The supplier base I think that's a broader theme in the overall market. So I think we've seen.
Management teams do a very good job try to be very forward leaning I think just the reality is maybe two things one yoga moves a bit faster meaningful right as it relates.
To raise obviously the waves pressure has been building up for some time, but the waves pressure, we think is very real across the market.
And.
I think I think they've been doing a good job I expect that to continue it hopefully enhance value for the top based on forward.
I didn't need a chuckle, but when you said the world at equilibrium all that could occur to me was after 40 years in this business I'm not sure what the world in equilibrium means I think it is always in sort of a state of change blocks. So we're always asking that's out there that that's the one that popped in my mind at the time so [laughter].
Alright, Thanks for taking my questions I appreciate it thanks.
Thank you have a good day.
And again last time gentlemen, as a reminder to ask a question. Please press star one line.
Okay mummy.
I see no further questions at this time I will now turn to call back about you Mister Dan penis any closing remarks.
Well, thank you to everyone.
Hum.
Sorry, one just came out would you like me to take that question.
Yeah sure one moment please.
And our next question coming from the lineup.
Mainland James.
Hi, guys.
<unk> nothing.
<unk> <unk>.
Following actually providing customer my question in terms of the amendment activity.
You talked about a slight uptick.
<unk>.
Any more you can give them that on.
Thematic.
Primarily on second liens.
Rather than the capital structure or is it <unk>.
In just any industry group that.
There's a little bit more exposure to like you know maybe.
Something like that or is it just totally idiosyncratic across the portfolio depending on individual business.
Probably a little bit and thanks for the question, probably a little bit more idiosyncratic.
That said, obviously a lot of the amendment conversations that you would come back to the table on what relate to.
Financial Covenant leverage covenants that is something that generally exists in the first lane is that the unit traunch deal we wouldn't be doing a second lien deal. If there was a covenant in front of us. So I think it would be skewed to that part of the capital structure, but that's because where I think that test.
Sort of.
So to come into play.
You could argue it's it could be impacting folks across set of all industry is just depending on.
A certain challenge that they may have been sort of having but again I think it's been a slight uptick.
I'm not surprised by it I think that will sort of continue but it's nothing like the amendment activity that we would have seen in 2020 just to be clear.
Got it thank you.
Thank you I will go to send it back to Mister <unk>.
I will thank you to everyone for your time today and I was always were available for any follow up points, but thank you again have a good day.
Ladies and gentlemen that that some kind of conference.
Conference for today. Thank you for your participation you may now disconnect.
The conference will begin to.
To raise and lower Johan during Q&A, you can dial 911.
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Good morning, ladies and gentlemen, welcome to KKR capital Corp's fourth quarter and full year 2022 earnings conference call.
Your lines will be in a listen only mode.
During remarks by F. S case management at the conclusion of the Companys remarks, we will begin the question and answer session at which time I'll give you instructions on entering the queue.
Please note that this conference is being recorded.
At this time, Robert Kwan head of Investor Relations will proceed with the introduction Mr. Pond, you may begin.
Thank you good morning, and welcome to Ipass KKR capital Corp's fourth quarter and full year 2022 earnings conference call.
Please note that FX KKR capital Corp may be referred to as SK, 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 the press release that <unk> issued on February 27, 2023 and.
In addition at this Guy 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 2022.
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 S. K.
Any unauthorized rebroadcast of this call in any form it strictly.
Strictly prohibited.
Today's conference call includes forward looking statements and are subject to risks and uncertainties that could affect <unk> or the economy generally.
We ask that you refer to adverse case, most recent filings with the SEC for important factors and risks that could cause.
Could cause actual results or outcomes to differ materially from these statements.
<unk> does not undertake to update 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> fourth quarter earnings release that was filed with the SEC on February 27 2023.
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.
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.
And Steven Lilly Chief Financial Officer.
Also joining us in the room 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. Thank you all for joining us for <unk> fourth quarter and full year 2022 earnings conference call.
This past year was a year of significant accomplishments for <unk>.
We continued rotating our investment portfolio into FX KKR originated assets as our investment team originated over $4 $5 billion in new investments.
We achieved the strategic goals outlined in our September 2021 analyst and Investor Day.
We hosted another successful Investor day this past November .
We issued $500 million of three and a quarter unsecured notes in January of 2022.
These efforts as well as the positive impact of rising interest rates have resulted in meaningful earnings growth.
Our adjusted net investment income per share for the full year grew over 10% as compared to 2021.
While 2022 was also a year of market volatility and economic uncertainty. We are pleased to have concluded the year with strong results as we exceeded our quarterly guidance each quarter and rewarded shareholders with both an attractive base and a supplemental dividend every quarter.
In terms of our fourth quarter results, we generated net investment income totaling <unk> 80 per share and adjusted net investment income totaling 81 per share as compared to our public guidance of 74 and 75 per share respectively.
Our net asset value declined one 6% quarter over quarter as our investment portfolio decline was offset slightly by out, earning our 68 per share dividend on accretive share repurchases.
During the fourth quarter, our investment team originated approximately $863 million of new investments.
Finally from a liquidity perspective, we ended the quarter with approximately $3 billion of available liquidity.
Through February 24, 2023, we have repurchased $87 million of shares under our $100 million share repurchase program in the fourth quarter, we repurchased $23 million of shares and subsequent to quarter end, we purchased $19 million of shares.
As of February 24, we had $13 million remaining under the $100 million program.
Based on our positive fourth quarter financial results. Our board has declared a first quarter total distribution of <unk> 70 per share.
As part of this distribution. We're also pleased to be raising our quarterly base dividend to <unk> 64 per share, which represents approximately a 5% increase over our last quarter's 61 per share base dividend and approximately a 7% increase in our base dividend from a year ago.
The increased quarterly base dividend reflects our positive outlook on the long term earnings power of the company. Additionally, based on the overall strength of the Companys earnings power, we expect our quarterly supplemental distribution to total a minimum of <unk> per share throughout 2023, and possibly possibly be odd.
Equating to a minimum of 70 <unk> per share per quarter of quarterly distributions during 2023.
Annualized basis, our first quarter distribution represents an attractive 11, 3% annualized yield on our December 31, 2022, net asset value and an annualized yield of approximately 414.
<unk> 14, 3% based on our share price.
I am extremely proud of the accomplishments of the team during the past 12 months.
Based on our experienced team and the significant resources of our platform I believe we are well positioned for 2023 and beyond.
Before I conclude my remarks, I'd like to comment briefly on the recently announced merger between FX investments and portfolio advisors.
While the transaction is a significant one for FX investments accelerating the growth of our firm. It is important to note that the transaction has no impact on <unk> and the Fas Fas KKR advisor.
And with that I'll turn the call over to Dan and the team provide additional color on the market in the quarter.
Thanks, Michael as I reflect on the times since the establishment of the <unk> take care advisor I take great pride in the growth and capabilities of our investment team.
As we have originated over $21 billion of new investments in FSA.
As Michael mentioned, we are pleased with the performance of these originated assets and how we have positioned <unk> to provide an attractive dividend yield to our investors.
In terms of the market and economic environment as we enter 2023, we continue to expect above average levels of volatility over the near term.
Given the federal Reserve's continued focus on fighting inflation.
As well as continued geopolitical issues certain remaining supply chain constraints and margin pressures on companies of all sizes.
There's still a lot of uncertainty over the direction of inflation and rates and the broader economy, and we believe the macroeconomic environment will likely remain challenging throughout 2023.
While we continue to exercise caution with respect to new originations, we believe the increased volatility and economic uncertainty has created compelling investment opportunities for us and other large scale private debt investors.
Sponsors continue to turn to large stable direct lending platforms as alternatives to the more volatile syndicated debt markets.
Additionally, the economics and return opportunities on new originations are extremely attractive to us driven by spread widening and the increase in base and base rates.
Compared to a year ago spreads on new originations are approximately 100 basis points higher with enhanced call protection and attractive leverage levels for high quality companies.
With that said, we believe M&A transaction volumes will remain below average until investors can gain confidence that inflation has stabilized and there is more clarity on what the broader economic landscape might look like going forward.
In terms of portfolio company performance, we continue to see positive financial results from the majority of our portfolio companies.
We attribute these results to our focus on larger companies at the upper end of the middle market.
Companies with strong competitive positions resilient cash flows and businesses and non cyclical industries.
Our portfolio companies reported a weighted average year over year EBITDA growth rate of approximately 15% across companies in which we have invested in since April of 2018.
In addition to this EBITDA growth by continuing to focus on larger companies. We have increased the weighted average EBITDA of our portfolio companies to $204 million as of the end of the fourth quarter as compared to $164 million at the end of 2021.
Certain companies in our portfolio has been impacted by a combination of inflation supply chain issues and increasing interest rates, which contributed to a meaningful portion of our portfolio depreciation during the fourth quarter.
While Brian will speak about specific names in more detail later, we continue to closely monitor financial.
Performance and the positioning of our portfolio companies leaning.
Leaning on the resources of our experienced investment team and portfolio monitoring yet.
We are extremely proud of the work we have done to rotate the portfolio over the last several years and we remain focused on continuing this rotation in 2023.
Turning to our quarterly investment activity during the fourth quarter, we originated $863 million of investments.
And similar to the prior few quarters. These primarily focused on fundings and add on financings to existing portfolio companies.
Approximately 70% of our originations came from opportunities and companies previously invested in by KKR.
During the fourth quarter, our new corporate lending opportunities carried a weighted average coupon of sulfur plus 660 basis points and a weighted average LTV of 40%.
Our new investments combined with $1 $1 billion of net sales and repayments when factoring in our sales to our joint venture equated to a net portfolio decrease of $221 million during the fourth quarter.
One new financing worth, noting is our new investment in the <unk> foods, a specialty and branded food distributor that sources manufactures and distributes into the U S grocery market with an emphasis on the primer of the store products.
In January 2019, SK and other funds managed by KKR provided of $615 million unit tranche and DDT L financing to support the buyout of the company.
Benefiting from our incumbency position during the fourth quarter of 2022, we led a $790 million unit tranche and DDT financing to support the acquisition of the company by a new sponsor with more attractive economics, and a lower leverage point than our original investment.
In terms of interest coverage at the end of the fourth quarter our portfolio of companies had a median interest coverage of one nine times.
And while we have seen a slight uptick in amendment activity. We would note in situations where amendments have occurred we are seeing seeing meaningful equity support from our financial sponsors due to both the long term viability of the business models of the companies in which we have invested in and the recent vintage of funds from <unk>.
The sponsors have contributed their equity capital.
With that I'll turn the call over to Brian to discuss our portfolio in more detail.
Okay.
Thanks, Dan as of December 31, 2022, our investment portfolio had a fair value of $15 4 billion.
Consisting of 197 portfolio companies.
This compares to a fair value of $15 $8 billion and 195 portfolio companies as of September 32022.
At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio.
We continue to focus on senior secured investments as our portfolio consisted of 63% first lien loans and $68, 8% senior secured debt as of December 31.
In addition, our joint venture represented nine 3% at the fair value of the portfolio and asset based finance investments represented 12, 4% equating to an additional 21, 7%, which is comprised predominantly of first lien loans were secured asset based finance.
The weighted average yield on accruing debt investments was 11, 4% as of December 31, 2022, compared to 10, 4% as of September 30th.
As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FX KR.
The increase in our weighted average yield during the fourth quarter was primarily associated with the continued rise in base rates as well as higher yields on new originations during the past few quarters.
During the fourth quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of approximately $105 million the largest negative movers in our portfolio, which were impacted by credit performance related issues.
During the quarter were pure fishing and KBS.
Your fishing is a leading global supplier fishing equipment and gear that experienced weaker results due to retailer destocking as well as inflationary pressures.
<unk> is a provider of janitorial and facility maintenance services to a variety of end markets typically under multiyear contracts.
Performance has been negatively impacted by labor inflation and the roll off of Covid related work.
At this point, we would characterize the performance issues with both companies as transitory in nature.
I'd also like to comment on another investment open door.
The company has an online real estate platform facilitating the purchase and sale of single family homes. In October of 2021, we led an investment and a $2 2 billion dollar asset secured mezzanine debt facility, which has since been reduced to $1 billion through a combination of that.
Undrawn commitment amount cancellation and debt repayments at par plus the related prepayment premiums, which has meaningfully reduced our exposure.
As of December 31, 2022.
<unk> total investment had a funded principal amount of $71 1 million only compared to a principal amount of $106 6 million and undrawn commitment amount $53 4 million as of September 32022.
In terms of non accruals as of December 31, 2022, non accruals totaled four 9% of our portfolio on a cost basis, and two 4% on a fair value basis compared to 5% on a cost basis and two 5% on a fair value basis.
As of September 32022, and.
Thanks, Brian .
As Michael mentioned earlier, we are pleased to be able to reward shareholders with an increase in our base dividend as well as to communicate the company's positive view that.
In our supplemental distribution should equate to a minimum of six cents per share per quarter during 2023, and possibly longer resulting in a total minimum distribution of 70.
On an annualized basis, our distribution totaled $2 80 per share representing an 11, 3% yield on our December 31, 2022, net asset value of $24 89 per share.
Turning to our financial results for the fourth quarter total investment income increased by $38 million.
Quarter over quarter, driven by increased interest income.
The components of our total investment income during the quarter were as follows.
Total interest income was $360 million, an increase of $42 million quarter over quarter.
Okay.
Dividend and fee income totaled $89 million, a decrease of $4 million quarter over quarter.
Our dividend and fee income during the fourth quarter is summarized as follows.
$3 million of recurring dividend income from our joint venture.
Other dividends from various portfolio companies totaling approximately $24 million.
Fee income totaling approximately $12 million.
Our interest expense totaled $109 million, an increase of $13 million quarter over quarter.
Largely due to the impact of rising base rates on our secured debt facilities.
Our weighted average cost of debt was four 8% at December 31.
Management fees totaled $59 million, a decrease of $2 million quarter over quarter.
Incentive fees totaled $27 million during the fourth quarter, which is net of the $15 million incentive fee waiver.
As previously noted as part of the <unk> merger, which closed in June of 2021.
<unk> agreed to waive $90 million of incentive fees spread evenly over six quarters, which began during the third quarter of 2021.
As a reminder, the fourth quarter of 2022 represents the final quarter of the incentive fee waiver.
The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows our.
Our ending <unk> 2022, net asset value per share of $25 30.
Was increased by GAAP net investment income of <unk> 80 per share and was decreased by 56 per share due to a decrease in the overall value of our investment portfolio.
Our net asset value per share was reduced by <unk> 68 per share dividend paid during the quarter and increased by <unk> <unk> per share.
Due to share repurchases.
With some of these activities results in our December 31, 2022, net asset value per share of $24 89.
From a forward looking guidance perspective.
We expect first quarter 2023, GAAP net investment income to approximate 77 per share and we expect our adjusted net investment income to approximate 74 per share.
Detailed first quarter guidance is as follows.
Our recurring interest income on a GAAP basis is expected to approximate $365 million.
We expect recurring dividend income associated with our joint venture.
We expect other fee and dividend income to approximate $29 million.
From an expense standpoint, we expect our management fees to approximate $58 million.
We expect incentive fees to approximate $44 million.
We expect our interest expense to approximate $117 million and we.
Other G&A expenses to approximate $11 million.
As a reminder, the <unk> per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting.
This difference effects, our recurring interest income all other categories of our revenues and expenses are not affected.
In an effort to link our fourth quarter 2022 results through our first quarter 2023 guidance. The primary considerations are as follows.
Starting with our <unk> 81 per share.
<unk> <unk> adjusted net investment income, we subtract <unk> <unk> per share of adjusted net investment income to account for the exploration of the fee waiver.
We subtract <unk> <unk> per share of adjusted net investment income to.
To account for the fact that the first quarter has two fewer days than the fourth quarter.
The expected incremental growth and investment portfolio earnings during the first quarter due in part to higher interest rates is expected to be counterbalanced by lower fee and dividend income as certain dividend paying portfolio companies tend to pay dividends later in the year.
We hope this information is helpful to investors and analysts in terms of creating an accurate starting point for 2023.
In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 118% respectively. At December 31 2022.
This compares to gross and net debt to equity of 128% and 119% respectively. At the end of the third quarter of 2022 at December 31, our available liquidity was $3 billion at the end of the fourth quarter, approximately 54% of our drawn balance sheet.
And 42% of our committed balance sheet was comprised of unsecured debt and our overall effective average cost of debt was four 8%.
With that I will turn the call back to Michael for a few closing remarks before we open the call for questions.
Yeah.
Thanks, Steven in closing I'd like to thank our team for its continued strong execution throughout 2022, despite the challenging macroeconomic environment led to significant market volatility during the year.
As we look forward. We continue to believe we are well positioned with respect to our investment portfolio strong capital structure committed liquidity position and experienced team.
We are optimistic about the company's future and have confidence in our ability to generate strong results for our shareholders, including the continued strategy of sharing our outperformance with shareholders on a real time basis through supplemental quarterly distributions.
As a result, we believe the forward opportunity for the shareholders is extremely attractive.
Thank you all for joining the call and for your continued interest and support with that operator wed like to open the call for questions.
Thank you, ladies and gentlemen to ask a question you will need to press star one one on your telephone and wait for your name to be announced do we Julians question. Please press star one again placed on Bob will be compile the Q&A roster.
And our first question coming from the line of Mark Hughes with Joey Xu Your line is open.
Yes, Thank you very good.
Morning.
If we could.
The area, where interest rates are higher for longer.
Deal activity pick up I mean do expectations, good set properly and the markets are clear.
We are more dependent on that.
For interest rates to slow down before you start to see more and.
Yes, it's an interesting question I think I think the market from sort of M&A perspective is looking for some comfort that inflation is under control, but I think it was <unk>.
Still are seeing interest rate increases, which we are expecting I think you'll be able to believe that the fed has accomplished submission that they've.
So to do that.
I think you're starting to see a little bit of green shoots.
Just a call last couple of weeks, but the year started off with some level of normalcy. So I think our belief is M&A is going to continue to be slow for the near term and you'll probably see some pickup in the latter half of the year.
Okay.
<unk> incentive fees after the.
Exploration of the waiver.
Is there anything about the trajectory from here.
<unk>.
We should think about it might be unusual or is that kind of steady as she goes depending on.
I think Stephen tried to layout some some pretty decent guidance. There is a related to Q1, but that also building a bridge from Q1 back to Q4.
And hopefully that provides a good starting point for you to consider how you think the rest of the year rolls forward.
Thank you.
Thank you.
Thank you one moment please.
And our next question coming from the line of Erik Zwick with Softbank Group. Your line is now open.
Thank you good morning, first I just wanted to start as I looked at the.
Competition portfolio, there was an increase quarter over quarter in asset based finance just curious how you view the opportunity to continue in that.
Arena today, and whether you would expect that to continue to grow or kind of stay in the.
Our current range of its current composition of the portfolio.
Hey, good morning, Eric and thank you for the question, Yes I.
I do believe we remain confident from an investing perspective, it's one of the more interesting parts of the market.
Right.
The collateral we liked.
Generally front end is the cash flows we think the risk adjusted returns.
Quite strong.
That said I think as it relates to FX case, specifically, we've talked to the market about 10% to 15% sort of allocation to asset based finance or a set of smack in the middle of that range. I think you should probably expect us to stay there.
Yes, or minus a percentage point or two but again, we do feel.
Quite strongly about the attractiveness of it as as an asset class to investments.
I appreciate the color there.
And if I could move to just looking at slide 10 of the presentation and you mentioned there are some pretty strong improvement and portfolio company EBITDA certainly the second half of the year looking at that graph, but just due to higher interest rates.
Interest coverage coming down and that Blue bar in the second half. So if we could get to a period, where EBITDA is materially impacted if we get into a recessionary environment. It.
It seems like that would put additional pressure on that interest coverage ratio. So just curious how how are you.
View that profitability and how you manage the portfolio. Some of these companies start to be more stressed from a interest coverage and potentially operating environment.
Yes, good question.
I do I think we are quite happy about that 15% number that we talked about on the call.
$930 21 to $9 30 sort of 'twenty. Two so I think we are pretty mindful that that is a backward looking number and being risk managers.
Forward.
So I think that's sort of top of mind, you do get a meaningful recessionary environment, you probably do have some correlation with rates coming back down.
Right. So I think you could be net flat from an interest coverage perspective.
That said I mean, these all of these numbers that we sort of talk about here are averages right and we don't run the portfolio based upon average I guess thats great data to provide but we have to be focused on.
Some of the ones that sort of may or may not be.
Maybe sort of problematic and you asked about how do we deal with these things.
We've built our team pretty meaningful over the last.
We've got 22 people, who have no arguably new deal responsibility, but are entirely focused on monitoring the portfolio dealing with challenged credits.
Extremely important part of our investment team and we will do on a case by case to generate the best outcome possible.
Thanks for taking my question.
Thank you have a good day.
And our next question coming from the line of Ryan Lynch with <unk>. Your line is open.
Hey, good morning.
First question I had is you mentioned.
<unk> uptake and amendment activity, which is not surprising in this environment likely expect it to continue going forward.
I would just be curious to hear your thoughts on.
What is really driving that increase in amendment activity would you consider at these businesses not able to adjust to the rapid increase in rising rates and support that higher level of interest burden.
Is it more.
There's something fundamentally.
Weaker in that business and then I'd also be curious to hear you mentioned youre seeing support from the PE sponsor.
I think we are seeing that slight uptick, but but I think youre right. It's more normal course of business.
I think anything else.
I don't think this necessarily anything fundamentally wrong with some of these companies.
That activity, yes, it does.
Does kick in that set.
A lot of times, there very well could be.
The supply chain issue there could be a.
Sort of inflationary pressure point light wages or quite frankly, the majority of the deals in here do have covenants in those covenants do step down over time.
Certainly you're forced with us so the company just sort of Delever. So there is some financial performance metric that I think is usually driving that and add a lot of times there will be some of the more credit metrics, but on the other side of it could just be.
The literal regular way kind of stepped out of below.
In terms of support we've seen we've been happy with that I mean, we've.
Focus the business on.
Lending the companies in the upper end of the middle market, we think the value of those.
The value proposition of those companies remains strong.
I think we built out our origination footprint to have real relationships with these financial sponsors that doesn't mean that at any sort of period. They just got to inject capital and for the sake of it.
But I do think there is a longer term sort of relationship in mind and then the one thing we have seen.
All of our not just where we sit today, but over the last several years sort of plus.
It is more likely I think that a financial sponsor is supporting.
A more recent.
New origination is probably in the current fund they probably have dry powder available and I think thats just much simpler than if it was in a fund that was 789 years old.
But it's usually in the form of equity dollars volume through the plant.
Okay. That's helpful.
Backdrop.
The other question I had you mentioned the two loans this quarter that receive sort of a credit related markdown pure fish in kgs.
And you gave a background of why those businesses were.
Feeling some pressure, but then you ended it was saying that you consider both of these both of the problems of these businesses are experienced seem to be transitory and it wasn't clear to me why you thought that those issues were transitory and so if you could explain.
Your thought process behind that comment that would be helpful.
Yes, I'll have Brian might want to add to it.
I think what we're saying is we believe in the strength of these companies the size and scale of these companies.
Probably between the two.
An average of five.
$500 million ourselves set of equity sort of beneath the loans, where the loans are sort of abate. So I think we've seen this in other retailers just.
Yes.
A bit of a glut of inventory.
People over Bob during some of the Euphoria code, we think that sort of works its way out we think theres real brands there.
And I think I'll caveat, saying, we think it's a very large high quality business that.
Fairly sort of tough times with wage inflation et cetera. So we think that we think they work themselves out is the point.
Obviously, we are reflecting the caribou sell on the box, which is why we're raising it on the call.
Okay.
That's helpful. That's all for me today I appreciate the time.
Good Brian Thank you if I get that.
Thank you.
Thank you and our next question coming from the line up Casey Alexander with Compass point. Your line is open.
Yes, good morning.
Thanks for taking my question.
If we could focus a little bit go back to <unk>.
Slide number 10.
As you said you don't manage to averages and I'm, a little curious about sort of the tails of the portfolio.
<unk>.
Share with us what percentage of the portfolio is currently under one times interest coverage and sort of what.
You guys do a lot of forecasting and are good at math kind of at the at the terminal expected rate sort of what percentage of the portfolio would it then at that point in time likely be under onetime interest coverage.
Yeah, Thanks, Stacy and good morning.
And just a handful of names would be under sort of one time today I think it's 2% to 3% of the total value of the portfolio.
I don't think I have off top my head if we fast forward it to.
Out of the terminal rate point, and I think you are right I don't think.
I think the information on slide 10 is I think very important for someone to understand how the portfolio has evolved right, but I do think you end up being much more focused on the individual line items that said to put in context, I think that one nine times that you see there on slide 10, if you looked at the Max forward curve with no change.
And sort of earnings that one nine goes to $1 64.
So maybe that handful of names. It goes up a couple more names that may be it pops up a couple of more percent.
This is Brian I think the other point to recognize.
That is great.
Higher from here on a percentage basis looking at the base rate plus the coupon the change gets smaller and smaller so the impact is less.
On a go forward basis versus what it was in the past.
Okay. Thank you for that.
The folks operating your portfolio companies are not operating in a vacuum.
See the news they understand what's going on in the environment. How do you feel like your portfolio of companies I mean, they must be adjusting to an inflationary environment. So even if inflation sticks around for longer how do you think your portfolio companies are adjusting to that.
And their ability to manage forward and don't you think that would ultimately companies successfully adjusting to that begin to enhance the M&A environment.
Yes, I think it will enhance the M&A environment, I mean, I think the M&A sort of environment probably needs that.
That catalyst first.
My gut is that catalyst as.
Some view from from the broader investor community that the world is that equilibrium.
Yes.
Minimum wage just stop the big inflation moves sort of upward I think that just gets into the simple idea of.
Finding that willing seller finding that willing buyer, yes, we are still seeing some M&A activity out there.
I think honestly, it's probably skewed more towards the.
The best in class businesses, because people want those businesses people are willing to still pay multi.
Multiples for them that are strong our gross of Hyatt relate to maybe the multiples that would've existed for that business.
A year plus ago in terms of the management teams.
One thing we have seen a focus on this larger borrower. This upper end of the middle market, we've probably got a better CEO better CFO better governance sort of better controls more support from the board I think thats a positive but what are we seen we've seen a fair amount of pricing increases go through.
We've seen one company do at nine times.
I think we are a little bit mindful or may be concerned that pricing increases are sort of out there last legs.
But we've seen companies being able to do that.
I think you look people look for where they can take cost out.
Something I think pretty normal in a time like this I think those companies that have had some supply chain issues are looking to diversify.
The supplier base I think that's a broader theme in the overall market. So I think we've seen.
Management teams do a very good job trying to be very forward leaning I think just the reality is maybe two things one the moves have been fast a meaningful right as it relates.
So rates, obviously, the wage pressures that building up for some time, but the wage pressure, we think is very real across the market.
Yes.
Like I said I think we've I think they've been doing a good job and we expect that to continue and hopefully enhance value for these companies going forward.
I didn't mean to chuckle, but when you said the world at equilibrium all that could occur to me was after 40 years in this business I'm not sure what the world at equilibrium means I think its always in sort of a state of change blocks. So we're always asking yourself here.
The Pops in my mind at the time.
Yes.
Alright, Thanks for taking my questions I appreciate it alright. Thank you have a good day.
And again, ladies and gentlemen, as a reminder to ask a question. Please press star one one.
We'll give it a mummy.
I see no further questions at this time I will now turn the call back over to Mr. Dan Pietrzak for any closing remarks.
Well, thank you Ralph.
Yeah.
Sorry, one just queue up would you like me to take that question.
Yes, sure one moment please.
And our next question coming from the line of Robert Dodd with Raymond James.
Hi, guys.
Right.
Following up actually to one more question in terms of the amendment activity.
You talked about slight uptick.
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Any more color you can give on that.
Thematic.
Is it primarily on second lien.
If we look at where it is in the capital structure or is it.
In any industry group.
There is a little bit more exposure to long maybe capital goods on something like that or is it just totally idiosyncratic across the program depending on the individual business.
Probably a little bit and thanks for the question, probably a little bit more idiosyncratic.
That said, obviously a lot of the amendment conversations that you would come back to the table that would relate to.
Financial Covenant leverage covenant that is something that generally exists in a first lien unit tranche deal.
We wouldn't be doing a second lien deal. If there was a covenant in front of us. So I think it will be skewed to that part of the capital structure, but that's because we're I think that test.
Sort of.
So to come into play I think you could argue it's it could be impacting folks across sort of all industry is just depending on.
Certain challenge that they may have been sort of having but again I think it's been a slight uptick.
But im not surprised by it I think that will sort of continue but it's nothing like the amendment activity that we would have seen in 2020 just to be clear.
Got it thank you.
Thank you I will now turn it back to Mr. Dan Pietrzak.
Well, thank you to everyone for your time today and as always we're available for any follow up points, but thank you again.
Good day.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.