Q2 2023 FS KKR Capital Corp Earnings Call
Good morning, ladies and gentlemen, welcome to Fas KKR Capital Corps second quarter 2023 earnings call.
<unk> will be in listen only mode during remarks by a best 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, Robert PON 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, Second quarter 2023 earnings Conference call.
Please note that FX KKR capital Corp, maybe referred to.
The fund or the company throughout the call.
Today's conference call is being recorded.
Audio replay of the call will be available for 30 days.
Replay information is included in our press release that <unk>.
Issued on August seven 2023.
In addition, <unk> posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended June 32023.
A link to todays webcast and the presentation is available on the Investor Relations section.
<unk> web site under events and presentations.
Please note that this call is the property of FSA any unauthorized rebroadcast of this call in any form is strictly prohibited.
Today's conference call includes forward looking statements are subject to risks and uncertainties that could affect <unk> or the economy generally.
We ask that you refer to Capex 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.
<unk> does not undertake to update its forward looking statements unless required to do so by law.
In addition, this call will include certain non-GAAP financial measures.
Such measures reconciliations to the most directly comparable GAAP measures can be found in <unk> second quarter earnings release that was filed with the FPP on August seven 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.
To obtain copies of the company's latest SEC filings. Please visit <unk> website.
Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman.
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 welcome.
I will now turn the call over to Michael.
Thank you Robert and good morning, everyone welcome to FX KKR Capital Corp, second quarter 2023 earnings Conference call.
We are pleased to report another quarter of solid results as we exceeded our quarterly earnings guidance rewarded shareholders with a base in supplemental distribution totaling 70 cents per share and also pay shareholders a special distribution of <unk>.
<unk> per share in total these distributions equated to an annualized distribution of approximately 15% on our stock price.
We're also pleased to report as Dan will discuss in more detail that deal flow is increasing which should be positive for us going forward.
During the second quarter, we generated net investment income totaling 82 per share and adjusted net income net investment income totaling 78 per share as compared to our public guidance of approximately 78 and 75 per share respectively, our net asset value.
<unk> per share as of June 30 was $24.69 as compared to $24 89 at the start of the year.
And $24 93 as of March 31, 2023.
Excluding the effect of the five special distributions, we paid to shareholders during the quarter, our net asset value per share would have been $24 and 74 sets.
Based on our continued strong operating results. Our board has declared a third quarter regular quarterly distribution of <unk> 70 per share consisting of our base distribution of <unk> 64 per share and a supplemental distribution of <unk> <unk> per share.
As a reminder, we expect our quarterly supplemental distribution to totally minimal six cents per share throughout 2023 and possible would be odd equating to a minimum of 70 cents per share per quarter of quarterly distributions during 2023.
Additionally, last quarter, we declared a series of special distribution payments totaling <unk> 15 per share.
Firstly dominant a special distribution was paid in may and the other two will be paid at the end of the month and in November in total we estimate investors will be able to receive a minimum of $2 95 per share of total distributions in 2023, which we continue to believe is quite attractive in today's investment environment.
Based on our experienced team significant resources on our platform and our portfolio rotation work. We've accomplished I believe we are well positioned not only to continue producing strong financial results, but to reward shareholders with attractive data dividend over the long term.
And with that I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.
Thank you Michael.
The resilience of the labor market and continued strong consumer spending during the first half of 2023.
Unlikely in our view that the economy will slow either as soon or as dramatically as some market participants have expected.
That being said over the near term we continue to expect inflation to remain elevated and as we have said on prior calls we believe the higher interest rate environment will persist.
While investment activity remained lower during the second quarter compared to historical averages, we continue to see compelling investment opportunities and a strong direct lending environment.
We and other private debt investors are able to negotiate attractive pricing enhanced call protection and lower overall leverage levels for high quality companies.
Given the still choppy nature of the syndicated debt markets. We believe private credit is poised to continue to be the primary financing alternatives for many sponsors and portfolio companies.
As Michael mentioned recently, we have seen an increase in deal flow as M&A activity appears to be picking up.
However, we would remind investors that given the traditional timeline associated with new investments. The recent increase in new investment activity likely will not materially impact our financial results until the fourth quarter of this year or perhaps early next year.
Nevertheless, we are pleased to see the increased activity levels.
Turning to investment activity during the second quarter, we originated $363 million of new investments not surprisingly our investments primarily we're focused on add on financings to existing portfolio companies and long term care care relationships.
Additionally, during the second quarter, we completed the sale of approximately $500 million of lower yielding investments. This sale to a third party was proactive on our part as we sought to increase our go forward investment capacity based on our view of the accelerating M&A environment.
As a result, our new investments of $363 million when combined with the $845 million of opportunistic portfolio sales and repayments equated to a net portfolio decrease of $482 million.
In terms of recent deployment opportunities at the end of the quarter. We closed an account receivable financing facility for Bausch Health company.
The company develops manufactures and markets a range of pharmaceutical medical device and over the counter products, primarily in the dermatology and eye health space.
We provided the company with a $600 million off balance sheet financing facility backed by accounts receivable from their customers, who are investment grade pharmaceutical distributors.
Pricing was sulfur plus 665 basis points with two five.
Percent fees upfront at a 75 basis point Undrawn fee.
S K committed $120 million to the financing and is funded $70 million to date.
This type of transaction is an example of our growing corporate ABL strategy, and which we are finding compelling investment opportunities in the current environment.
Additionally, we are seeing meaningful opportunities in our traditional asset based finance business, particularly given the pressure on regional banks to optimize their balance sheets.
Combining our asset based finance activities with the recent increase for traditional unit tranche financings associated with the improving M&A market creates an improved outlook as we begin to focus on the second half of the year.
In terms of interest coverage at the end of the second quarter, our portfolio of companies had a median interest coverage of one six times.
For clarity this calculation used as base rates as of March 31, 2023 to better align with portfolio company financials.
From a forward looking perspective, we continue to believe our portfolio is well positioned in part due to our focus on large high quality borrowers with strong operating margins and deep equity cushions.
These statistics are evidenced by the weighted average EBITDA in our portfolio companies, which was $202 million as of June 32023.
Additionally, our portfolio companies reported a weighted average year over year EBITDA growth rate of approximately 5% across companies, which we have invested in since April of 2018.
And with that I'll turn the call over to Brian to discuss our portfolio in more detail.
Thanks, Dan.
As of June 32023, our investment portfolio had a fair value of $14 8 billion.
Consisting of 194 portfolio companies.
This compares to a fair value of $15 3 billion.
At 189 portfolio companies as of March 31, 2023 with.
The decline in the fair value of our portfolio is largely due to the lower to the sale of lower yielding asset extent of that earlier.
At the end of the second 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 59, 5% first lien loans and 68, 3% being senior.
Senior secured debt as of June 30.
In addition, our joint venture represented nine 4% of the fair value of the portfolio and asset based finance investments represented 12%.
Sure comprised predominantly of first lien loan or secured asset based finance.
It is important to note looking through to the investment in our joint venture our portfolio consisted of 76% senior secured debt as of June 30.
The weighted average yield on accruing debt investments was.
12, 1% as of June 32023, compared to 11, 7% as of March 31.
As a reminder, the calculation of weighted average yield is Josh.
The accretion associated with the merger with FX KR.
The increase in our weighted average yield during the second quarter was primarily associated with the continued rise in base rates as well as higher yields on new originations during the past few quarters.
Including the effects of the investment activity, we experienced during the second quarter as of June 32023, approximately 86% of our total investment portfolio is now comprised of investment originated either by KKR credit.
The FX KKR adviser.
During the second quarter, excluding the impact of merger accounting, we experience net portfolio depreciation on investments of approximately $77 million.
Primarily concentrated in a handful of names, including winter and MTG home both of which we had mentioned on prior earnings call.
This past week.
Capital.
There was a winter with management the majority of first lien lenders as well as the equity sponsor to provide additional liquidity to the company as well as delever its balance sheet.
Pursuant to this agreement the first lien debt will be significantly reduced at the operating company level at the K and other funds managed by KKR will provide 85 million euros of new capital to the company to fund operations and our second lien loan will be converted into a majority.
Equity ownership stake in the business.
The transaction subject to standard closing conditions and regulatory approvals.
We also led a successful restructuring of LPG home earlier this year and the company emerged from chapter 11 protection last month.
The company's plan of reorganization FSA and other funds managed by KKR now owned <unk> got security energy Levered capital structure as well as the majority equity ownership.
<unk> company.
As of June 32023, non accruals approved by improved to four 8% of our portfolio on a cost basis, and two 5% on a fair value basis compared to five 5% on a cost basis.
And two 7% on a fair value basis as of March 31, 2023.
We believe it is helpful to provide the market with information based on the originated by KKR credit.
As of the end of the second quarter non accruals related to the 86% of our total portfolio, which have been originated by KKR credit and the efforts KKR advisor were two 2% on a cost basis and <unk>, 6%.
On a fair value basis.
With that I'll turn the call over to Steven.
Thanks, Brian .
Total investment income increased by $6 million quarter over quarter to $462 million driven by increased interest income.
<unk> of our total investment income during the quarter, whereas follows.
Total interest income was $376 million.
An increase of $7 million quarter over quarter.
Dividend and fee income totaled $86 million.
A decrease of $1 million.
Quarter over quarter.
Our dividend and fee income during the quarter is summarized as follows.
$5 million of recurring dividend income from our joint venture other.
Other dividends from various portfolio companies totaling approximately $25 million during the quarter.
And fee income totaling approximately $6 million during the quarter.
Our interest expense totaled $118 million, an increase of $4 million quarter over quarter.
Due to the impact of rising base rates on our secured debt facilities.
Our weighted average cost of debt was five 2% as of June 30.
Management fees totaled $56 million.
A decrease of $2 million quarter over quarter.
And incentive fees totaled $47 million during the second quarter.
Other expenses totaled $12 million during the quarter.
The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.
Ending first quarter 2023, net asset value per share of $24 93.
With increased by GAAP net investment income of 82 per share.
And was decreased by <unk> 31 per share due to a decrease in the overall value of our investment portfolio.
Our net asset value per share was reduced by our 70 <unk> per share quarterly distribution and the <unk> <unk> per share special distribution.
Some of these activities.
Results in our June 32023, net asset value per share of $24 69.
Accounting for the <unk> <unk> per share special distributions paid during the quarter, our adjusted net asset value per share was $24 74.
From a forward looking guidance perspective, we expect third quarter 2023, GAAP net investment income to approximate <unk> 79 per share.
And we expect our adjusted net investment income to approximate 76 per share.
Detailed third quarter guidance is as follows.
Our recurring interest income on a GAAP basis is expected to approximate $374 million.
Interest income is expected to be relatively flat quarter over quarter.
Early due to the portfolio sale, Dan mentioned earlier as well as certain assets, which were repaid during the month of July .
We expect recurring dividend income associated with our joint venture to approximate $54 million.
We expect other fee and dividend income to approximate $25 million as we expect normal course, ABF dividends to be incrementally lower between now and the end of September .
From an expense standpoint, we expect our management fees to approximate $56 million, we expect incentive fees to approximate $45 million.
We expect our interest expense to approximate $120 million.
We expect other G&A expenses to approximate $10 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.
Difference affects our recurring interest income other categories of revenues and expenses are not affected.
Primarily due to the sale of approximately $500 million of assets to a third party during the second quarter, our gross and net debt to equity levels were 118% and 113% respectively at June 32023, compared to 125% and 118%.
March 31 2023.
At June 30, our available liquidity was $3 5 billion.
Up from $3 billion at the end of the first quarter.
Approximately 58% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt and our overall effective weighted average cost of debt was five 2%.
And with that I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
Thanks Steven.
Closing I am pleased S. K is continuing to deliver strong earnings which enables us to reward shareholders with such an attractive distributions.
Team has remained diligent and focused on the long term success the company by investing in defensive high quality companies proactively managing our available investment capacity and minimizing losses from challenged assets were.
We are pleased with our results both during the quarter and on a year to date basis. Just as we also are pleased to see an overall pickup in deal activity, which clearly is advantageous perhaps SK <unk>.
On behalf of the team we thank you for joining the call and for your continued support and with that operator, we'd like to open the call for questions.
Thank you we will now conduct a question and answer session.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Our first question comes from John Hecht with Jefferies.
Good morning, guys. Thanks, very much congratulations on a good quarter.
First one is just very high level and you guys.
You guys even touched on some of this during the call here, but just given the recent.
Recent events in the banking industry.
Likely changes to capital requirements and some of the regulatory framework.
Do you guys see a long term or permanent kind of structural shift in the business and what type of.
What type of asset characteristics would that maybe give an edge to you guys and relative to where we are today going forward.
Thanks, John .
I mean, I think fair question, there, especially considering what's been going on in the market.
I do think we expect this to be.
Probably a longer term situation in terms of how it plays out do you see new rules as it relates to Basel III, obviously, those concerns around liquidity and how banks sort of managed assets.
No I think we've seen this in many ways.
Starting with the financial crisis, and continuing I do think it is a tailwind for.
For the overall private credit space I think we will benefit from that.
It's probably a little bit less of a focus on what I'll call. The regular direct lending space, it's probably more of a tailwind for our asset based finance business.
But I think its something as I said that will play.
Play out over several years.
Okay. That's helpful.
And then.
Maybe just a quick update on global jet I know Thats, a big asset you guys have been working on or is there any any update there.
I think two things one the underlying performance of the assets remained strong.
Both in terms of the folks paying on the leases, but also just asset values right theres been a real tailwind in that space on the other side of Covid I think the company management team also has done quite a good job as it relates to costs at the business and looking to improve sort of Roe.
I think it's been a good story there for the last several years I think we're still.
Working with the team to figure out next steps as it relates to the asset performance remained strong.
Great. Thanks, very much guys.
Thank you.
One moment for our next question.
And our next question comes from Casey Alexander with Compass point research and trading.
Hi, good morning.
I have a couple of questions here Im looking at the asset mix of of ABF at 12% and the JV at 9%. So there is there is room in this bucket and given kind of your discussion about ABF should we expect that ABF percentage.
<unk> to rise as a percentage of the total portfolio as you put some of the proceeds of these sales to work.
Good morning, guys.
I think we've been consistent with the market and talking about sort of a 10% to 15% range there.
For our ABF sort of bucket I think we are in the middle of that range I think some quarters. It will sort of trend up and there are certain deals in there that are continuing to ramp.
In terms of adding assets. So I think it's fair to assume that it will sort of.
Make its way towards that sort of 15, but I think I would expect the range over the long term to be that 10% to 15%.
Okay.
Two.
The portfolio sale, what was the average price of the sale as a percentage of par value.
Upper 90 now.
Sort of.
Approaching 99 sort of sense on these were performing assets I think we were.
Honestly excited and sort of proud to sort of get it done and we want to create.
Some capacity inside of <unk>.
<unk> themselves slightly lower yielding we just saw the strip of assets that we own right. So these assets are not just remain inside of FSA, but other set of accounts that we manage so this was not a credit story this was managing.
Future investment capacity I think we've always been.
Clear with what our target leverage range was wrap SK using.
This is a moment to bring it down to $1 one three times looking out in.
And M&A market, that's picking up made a lot of sense to us.
But perhaps you can explain to me the rationale.
Selling what you consider to be good assets at a discount to par in order to reinvest them at par loans I understand the higher yielding loans.
On the new stuff, but you're receiving less principal value for the loans that you sold so.
What's the rationale for the mix there.
Okay. So I'd remember two things right now.
It allows themselves youre always originating loans at a slight discount because there's fees instead of OID that sort of generated.
So I would keep that sort of in mind one.
Two I think the market today.
As you know, let's call it 50 basis points, plus a wide on a spread level. The upfront fees have kind of held it at probably three points was sort of better call pro so.
It's just a little bit of a portfolio rotation I think.
Our fee income number has been sort of lower than usual as Stephen mentioned that in his prepared remarks, I think that number sort of picks up I think we've been able to generate the net income numbers, you've seen was sort of about that so.
I would focus on those points.
Okay and then my last question is there.
Reasonably meaningful bump up in pick income in the quarter can you walk us through the change in that component. Please.
Sure.
Entirely related to one name solera.
Well performing company North of $1 billion of EBITDA are very strong of equity sponsor, who has got a meaningful sort of dollars in there I would put this as a one off case, where certain earn outs and other non recurring sort of cash items were happening during the first half of the year.
Year.
They requested.
Two quarters of pick there was change in sort of right on the other side that we thought was attractive.
Both during the peak period, but then it sort of post alone going back to sort of cash pay. So this is not.
<unk> situation I would think about it as a two quarter move.
Alright, great. Thank you for taking my questions I appreciate it.
Thank you have a good day.
One moment for our next question.
And our next question comes from Ryan Lynch with K B W.
Hey, good morning.
First question I had was on the portfolio sale of $500 million I think that that makes a lot of sense just sign off some older assets to get more exposure to this current vintage.
Question on that was.
Is that something that you guys are looking to explore more of those the sort of portfolio sales or strips of portfolio of sales going forward or was this purely sort of a one off opportunity and then I know you said there were lower yielding investments of that portfolio I don't know if I missed it or not but could you provide what was sort of the way.
The average spread on that $500 million of investment sold.
Sure Good morning, Ryan.
In terms of the portfolio sale itself I think we're always focused on being active in terms of portfolio management.
I think we're fortunate to be part of a platform. That's got a lot of different market participants we have relationships.
Investors are sort of otherwise.
I wouldn't think about it as something that we would.
<unk> consistently.
As a as a part of normal course that said I think we're quite pleased as I said to get it done.
Do like having the additional capacity and the entity where we can.
Maybe you'd be more active in this current vintage or if theres additional sort of volatility.
In the market.
I would I would think about it.
Sort of that context in terms of spread roughly 6%.
In terms of the spread on the assets.
Okay.
That's helpful.
My other question was.
You mentioned and it's been talked about and asked about kind of the increased activity in the asset based finance.
Sort of vertical.
That spreads across a lot of different underlying investments I would just love to hear is there any specific.
Sort of like sub sector or specific assets that you guys are seeing increased deal opportunity across or is it just across the whole spectrum and then.
The second part to that was when I look at your asset based finance portfolio.
There's a lot of different investment yields in that portfolio of summer summer based on so for summer fixed rate I would just love to hear in the current marketplace.
If you are seeing more deals.
That asset based finance vertical.
What sort of either net yields are you guys looking at in the current pipeline or spreads if they are floating rate investments.
But if you recall.
We have taken what I'll call a multi sector, our multi asset class approach to this space I think that's important.
We want the team to be focused on the best risk adjusted returns that are available here, we've generally put it in the following buckets.
Consumer mortgage and commercial finance.
Contractual cash flows in hard assets and those assets.
Call It 25 kind of Subsectors below those.
Yes, I think we're able to do that right. We've got a very large team. We got over 50 people that are directly involved in the business. We've got a capital base that is quite large at north of $40 billion.
So I think we're quite pleased with where we stand from.
Let's go to how we're competing in the market.
I think all of those assets have certain things that are what I'll call interesting today that business is a little bit more opportunistic.
And somatic then what I would say the more traditional direct lending business, where you are forced to cover clients of the daily I think the one thing that has probably been the most interesting there. This.
This year, specifically over the last four or five months as some of the tailwind as we've seen from the regional bank space, who are looking to either clean up asset portfolios or dispose of certain assets. So.
Yes, I think theres a good tailwind there I think you are.
Right I mean every deal is a little bit different some deals might be floating some deals might be fixed.
I would think about it from a broad stroke, we are really targeting to do deals in that space that are rough.
Roughly from a base our base case perspective kind of 15% sort of IRR.
That's probably the simplest way to think about.
Okay, and then just one follow up on that point.
You mentioned kind of the pullback from from the regional banking space, creating new.
Deal opportunities just because from a less there's less competition, but.
Are you guys.
Looking or seen any sort of inbound opportunities from regional banks looking to sell off entire portfolios and is that something you would be interested in onboarding.
Yes, I mean, the short answer is yes.
Yes.
I think some of that has been quite public with.
Some of the SCB or first republic or or <unk>.
Signature sort of assets.
The team is having sort of constant dialogues there.
I think we are looking to partner with banks on several of these transactions some of that could be buying portfolios and hold some of that could be.
Buying sort of parts of different portfolios, but we're very active in that space honestly that is a cornerstone of the business and kind of normal markets, but just more active today.
The one thing that I think is probably even more interesting today is a lot of these banks would be acquiring kind of assets on a flow perspective from a fish codes that are.
Originating those a lot of those banks for taking a step back from that specifically on certain fixed rate assets. So I think we're able to come in and fill the void there as well we've done that on a couple of portfolios.
I think we are excited by the opportunities that present themselves there and again, it's across all of these different set of asset types. So I think you need the team to be able to prosecute that but.
Yes, im expecting that the folks to be busy for the coming quarters coming years.
That's interesting the comment on the deal flow from the eastern coast and stepping in for that void.
That's all from me I appreciate the time today.
Thanks have a good day.
One moment for our next question.
And our next question comes from Ken Lee with RBC capital markets.
Hi, good morning, Thanks for taking my question.
It sounds like.
Terms and pricing is still favorable for for origination activity wondering if you just talk a little bit more about what youre seeing in terms of competitive activity more recently thanks.
Yes, good morning, Ken.
So I think there has been in many ways and you've heard us talk about on the call today or prior quarters. The general M&A volumes have been lower I think you'd expect that.
I think the.
There's been some sort of articles that that was lower due to the lack of available financing I don't think thats correct.
And entirely driven by we'll call it valuation mismatches or the lack of ability to agree on valuation between the seller of a company and the buyer thereof.
I think we're starting to see that that saw.
The pipeline has been dramatically more active in the last handful of weeks I think were hearing the M&A advisor community kind of wrapping up whether they're a boutique firms or some of the larger sort of bulge bracket, so either volume or youre going to see.
Pick up and I think the market has the capital available to do the deals I think the competitive market the competitive environment has remained.
Yes.
What you'd imagine as there are sort of active players here, who are prepared to kind of step into these deals, but I think youre going to see this pickup in volume, which we're excited about.
Gotcha very helpful. There.
And then one follow up if I may.
Just stepping back I Wonder if you just talk about thoughts around around the current share price and perhaps what additional actions or options could you consider that could help narrow the discount shares are trading to NAV over time. Thanks.
I think a couple of points there one.
The share prices is obviously of a clear sort of focus of ours.
We've tried to be quite transparent as you can see in these in these earning calls with Stephen going through the quarter and sort of going through the guidance I think we have.
I'm quite pleased with what we've put up in terms of operating results.
We're happy to announce that special dividend, that's $2 95, a share we think is quite attractive.
Even more attractive.
Just thinking about it in terms of NAV, but obviously even more attractive.
When you think about it in terms of stock price.
The team is spending a lot of time on the road meeting with investors doing as many calls as we can.
We need to continue to.
I think to perform put out these numbers kind of meet the guidance numbers that were sort of putting out there and I think the market.
<unk> has struggled for a little while on the legacy portfolio.
I think we've tried to give guidance.
Consistently with that is only now 14% of the portfolio. It's really focused on a handful of names. We've got some more work to do on those.
We hope to continue to push and sort of bring that down.
So in some ways, it's all the above.
Gotcha very helpful. There. Thanks again.
One moment for our next question.
Okay.
And our next question comes from Robert Dodd with Raymond James.
Hi, guys congratulations on the quarter a question on kind of.
The the restructuring environment.
Winter in NPG.
You've talked about this on prior calls.
<unk>.
Make progress on restructuring London once you come out of a checkpoint.
The valuations of those obviously came down this quarter.
So that would tend to imply.
There may have been slightly worse than youre expecting let's say three months ago. So can you give us any color on on.
What's driving that is the recovery environment worse as a lender groups being less cooperative or was it just incremental deterioration in those businesses.
With that.
That slightly.
Today than three months ago.
Yes.
The restructuring issues with NOLA ongoing.
Yeah, Good morning, Robert and Brian might want to add to this as well I mean, I think we were quite pleased to get those.
Restructuring is done and I think just to be clear in our remarks on <unk>.
In our prepared remarks, the winter the winter it was announced that still subject to final regulatory.
Tori approvals et cetera, but I think we were glad to get that done I think we're fortunate we've got a dedicated team focused on this space.
I think that really helps in these situations.
I don't think the environment is necessarily more difficult or I probably wouldn't.
Probably.
Read too much into this I think <unk> was more of a difficult situation and probably got more difficult as it went along.
Sure.
That was arguably a name that really did not have any level of pricing power or other things and part of that business ended up being liquidated and then part of it ended up being sort of reconstituted as a standalone business.
Winter itself as a strong company with a good footprint in a bunch of jurisdictions globally.
It was it was a complicated process and I think that process yield of the numbers that you see as it relates to the box.
Yes, I mean look I think these restructurings tend to take a long and winding road.
Things change over the course of negotiations.
In the case of both companies.
We own the majority equity.
Both businesses that means we have control of the board the company strategic direction management, all those sorts of things.
Where we can hopefully create some value in.
And hopefully some real appreciation in the value of that stock.
Time will tell on those things, but when you look at other companies, where we've done sort of similar thing with like a <unk> and <unk>, Yes, I think our team has really had some great outcomes in those situations.
And just to be clear Brian .
We will all of those post the restructuring is getting on the equity not to that.
Got it. Thank you. Thank you Paul County on the on the.
Part of the pie slide.
The indication I think.
And then maybe the bid ask spread on valuation.
We can finally.
So should we expect more.
Yes.
Platform activity in a new portfolio of companies rather than necessarily maybe maturity different refinancings I wouldn't expect a lot of dividend recaps, but can you give us any color on.
What kind of what the type of mix of things you're seeing.
In.
In that pipeline.
Yes.
No happy to I think I think you are correct you should expect new portfolio names.
I think the add on.
Business or the add on environment. We will continue I think those are some of the better lines that you can do since you know the company so well, but these are.
I would think about new situations they are usually <unk>.
<unk> sort of driven I mean, we were looking at the numbers.
Last night in sort of today I mean, there's there's north of a couple of billion dollars of transactions that we have committed to that's across the entire set of private credit platform for us but S. K is obviously, a big set of piece of that.
There is no guarantees that all those close.
But.
The activity level is definitely sort of picked up the one thing I did mentioned in.
In my remarks is.
Those deals won't necessarily all close in Q3 or maybe not even some of that in Q4. Some of these deals.
Approvals required to get done, but you should expect new line items in the portfolio.
Got it thank you.
Thank you.
One moment for our next question.
And our next question comes from Mark Hughes with <unk> Securities.
Yeah. Thanks, good morning.
Good morning, thinking about the bank and their participation in the asset backed financing do you think that's just kind of a slowdown in the near term.
Figure out their capital requirements or do you think that'll be a permanent shift perhaps.
And the bank.
It's probably a little bit above.
I think there is some sort of a near term sort of points.
I would expect.
Probably a certain amount of consolidation in the space.
And then I think you have to wait until the regulatory environment.
<unk> evolves.
A cornerstone of our.
The U S and I think thats going to clearly so to continue but I think for certain asset classes. It just might not be as attractive from a capital perspective.
Or even how they're sort of forced to manage liquidity, but it's probably a bit above.
And then when you think about your portfolio.
<unk> activity is ramping up.
You think payoffs will be ramping up in parallel.
We do I mean, there's probably.
Maybe a little bit of a mismatch on some of those.
Theres been a couple of deals that we've just gotten refi Ed out of so thats more of an immediate thing and as I mentioned to you before some of the new deal activity, while we might commit would take.
Several months or maybe even several quarters to sort of close but I think we're expecting it on on.
Both sides.
I'm just curious.
Pretty good.
<unk> strong opinion about the interest rate may be higher for longer.
The spicy view on what do you think <unk> will do.
Well, they recognize that and not cut or how do you think they will behave in this environment.
Yes, I think it's always tough to predict what the fed's going to do.
I think the comment more about higher for longer is just.
Yes.
The economy seems to be doing.
Quite frankly quite well I think if you asked me that a year ago I would have probably had a slightly different view of how to play it out but the consumer seems to be in a good in good shape.
People seem to be continuing to spend.
So the money airports are crowded restaurants are crowded.
So it doesn't feel like Youre going to see this kind of quick snapback Theres a couple of comments I read this morning from a couple of different fed governors out sort of last night.
Given kind of their views but.
Got it.
<unk>.
I'm not too sure how many more rate hikes, there would be if any but it feels like it will just be higher for longer.
Understood I appreciate it.
Thank you.
One moment for our next question.
And our next question comes from Melissa Wedel with JP Morgan.
Good morning, Thanks for taking my questions.
Lot of them have actually already been asked and answered I was hoping we could go back to at your comments earlier on the dividend.
<unk> mentioned sort of a 295 at a minimum of a dividend payout for the full year 2003 was hoping you could just remind us what the spillover income level is.
The second quarter.
Yes, Melissa it's Steven.
It's sort of between 450 and $480 million.
We published that once a year in the 10-K and so it's.
Assortment estimate during the year.
So that puts us still north of two quarters.
Between two and three quarters of dividends, so I feel.
Very good about where we are I think we can areas have kind of at the highest levels in the.
Industry so.
It's a nice.
Nice level for us.
And Melissa remember the dividend buildup is the 64 sort of base. The six so to supplemental and then the 15 that we declared the special.
Yes, I'm wondering given the level of spillover income and sort of the two quarters of coverage that Stephen just mentioned is that something that you intend to revisit around sort of year end timing for potential special.
Or I should say.
Sure number one we have not had a conversation with the board to this date of extending the Apple wanted to get further into this year.
It's also the fact that we've not had the conversation yet does not preclude us from having that conversation with the board.
We will have to wait and see how it comes out.
<unk> of that conversation were to occur would be the earliest would be in our November meeting latest would probably be in our February meeting of next year. So.
A little more to come there.
I appreciate it thanks Steven.
Thank you.
And one moment for our next question.
And our next question comes from Bryce Rowe with B Riley.
Thanks, Good morning.
Wanted to maybe start on just on the dynamic of lower lower net balance sheet leverage both at the at the BDC and within the JV.
Just curious with the <unk>.
<unk> debt to equity going going down similar dynamic to what youre seeing.
Within within the BDC and then maybe a follow up to that just kind of thinking about how how that might.
Re lever back up and over what level of time.
Yes, and good morning, I wouldn't try to tie the two together sort of a linkage there.
I think it's normal course of business I think that's at one nine times.
I think for both of these were within as I said before that sort of target range and there'll be some new deals getting sort of funded there'll be some sort of pay downs.
But I think if we can operate where we're at and continue to generate.
The net income and the operating set of ROE there, it's nice to have the dry powder.
Okay, That's fair Dan.
And maybe switching gears, a little bit we've seen debt capital markets kind of open back up here recently.
Got quite a bit of time until Youre 24 maturities, but just curious if you are.
If youre thinking about.
Trying to trying to get active there.
And how do you kind of think about maybe mix of debt capital relative to what it looks like right now.
Year year year, and a half from now thanks.
Okay.
No it's been good to see the markets reopen there.
Clearly, it's something that we as a team sort of always talked about it I think we've been quite pleased with what we've done with the capital structure over the last handful of years I mean, the revolver north of four $5 billion. That's out to 2007 today Youre right Theres no maturities over the next four quarters the 24 mature.
<unk>, what's your $900 million are all the second half of the year.
So I think it puts us in a pretty strong position Steven mentioned some of the bilateral sort of financings that.
We did extend.
I think we've been active in this market I think we will continue to be active.
And we're going to continue to probably keep the mix as you kind of see today from.
Sort of unsecured.
Sort of revolvers perspective.
Excellent great. Thanks for taking the questions.
Thank you.
I am showing no further questions at this time I would now like to turn the conference back to Dan Pietrzak for closing remarks.
Thank you all for your time today and all the great questions and we hope you enjoy the rest of your summer I'll speak with you next quarter. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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