Q3 2023 FS KKR Capital Corp Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, welcome to the F. S. KKR capital Corp's third quarter 2023 earnings Conference call. Your lines will be in a listen only mode. During remarks by F. S case management.
The company's remarks, we will begin the question and answer session at which time I will give you instructions on entering the queue.
Note that this conference is being recorded at this time, Robert Kwan head of Investor Relations will proceed with the introduction Mr. Cohen you may begin.
Thank you.
And welcome to Ipass KKR capital Corp's third quarter 2023 earnings Conference call.
Please note that KKR capital Corp, maybe referred to as the F. S. K the fund or the company throughout the call.
Today's conference call is being recorded and an audio replay of the call will be available for 30 days.
Replay information is included in our press release.
Issued yesterday.
In addition, S. K has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 32023.
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 SK any unauthorized rebroadcast of this call in any form is strictly prohibited.
Today's conference call includes forward looking statements and are subject to risks and uncertainties that could affect our best K or the economy generally.
We ask that you refer Catholics 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.
For such measures reconciliations to the most directly comparable GAAP measures can be found in <unk> third quarter earnings release that was filed with the SEC on November six 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 Wilson.
I'll now turn the call over to Michael.
Thank you Robert and good morning, everyone I'd like to start by acknowledging the tragedy in the middle East and the loss of innocent lives like so many of you I was shocked by the invasion of Israel.
Many people have had family friends and loved ones impacted by these devastating and tragic events. Our hearts go out to you.
Yeah.
And now turning to <unk> results for third quarter, our financial and operating results showed continued strength as we exceed our earnings guidance and out earned our quarterly base and supplemental distributions.
During the third quarter, we generated net investment income totaling 84 per share and adjusted net investment income totaling <unk> 80 per share as compared to our public guidance of approximately 79 cents and 76 cents per share respectively.
Our net asset value per share at the end of the third quarter was $24 89.
Which is equal to our net asset value per share at the start of the year.
During the third quarter, our net asset value per share increased by approximately 1%.
Yeah.
Based on our positive operating results. Our board has declared a fourth 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 sure sure.
As many of you will recall in May of this year, we declared a series of three special distribution payments totaling 15 per share.
Third.
<unk> per share installment will be paid at the end of this month.
Based on our continued strong performance coupled with our positive earnings outlook I am pleased to announce that our special distribution will continue for the next two quarters, an amount totaling <unk> <unk> per share.
Consistent with our corporate view of sharing additional earnings with our investors on a real time basis.
The distribution, we paid in two equal installments of <unk> <unk> per share in the first and second quarters of 2024 and that will be on top of our quarterly base in supplemental distributions, which currently total 70 per share.
From a forward looking perspective, we continue to be optimistic about the growth in the private credit sector, which provide significant tailwind for our industry in general our portfolio companies have been adjusting well the higher interest rate environment as we have not seen significant increases in credit stress or defaults.
S. K continues to generate strong earnings and has ample liquidity to take advantage of new high quality investments as well to support our existing portfolio of companies to add on investments 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.
In the wake of continued inflationary pressure and higher for longer interest rates private credit continues to be an attractive asset class.
What's directly negotiated transactions.
Predominantly floating rate infrastructures and significant issue of diversification.
As a result of these and other positive attributes private credit is continuing to become an increasing allocation for institutional investors.
As we mentioned on last quarters call. We have seen an increase in deal flow as M&A activity continues to ramp.
In addition, there are recent signs that the syndicated markets are beginning to stabilize with activity picking up in that part of the market as well.
At the same time, we are seeing some pressure on spreads in the upper end of the middle market as spreads have tightened by 25% to 50 basis points during the quarter.
With private equity funds holding more than two trillion dollars of dry powder. We continue to believe sponsors will utilize private credit solutions to finance transactions.
Turning to investment activity during the third quarter, we originated $504 million of new investments.
Over 65% of our investments were focused on add on financings to existing portfolio companies and long term KKR relationships.
Our new investments combined with $386 million of net sales and repayments when factoring in sales to our joint venture equated to a net portfolio increase of $118 million.
In terms of recent deployment opportunities one new investment of note is a partnership with Paypal.
Take care of credit has agreed to purchase approximately 40 billion euros of Paypal consumer receivables originated in Europe.
S. K has committed approximately $80 million euros towards the transaction.
Having the ability to work exclusively with a strategic partner like Paypal is a testament to the strength and maturity of KKR Credit's asset based finance business.
In terms of interest coverage at the end of the third quarter our portfolio of companies had a median interest coverage of one five times.
For clarity this calculation users base rates as of June 32023 to align with portfolio company financials.
While the higher rate environment has impacted certain companies overall credit performance continues to be stronger than many market observers anticipated.
As companies in the larger end of the private credit market have demonstrated their ability to pass along price increases.
Simultaneously navigating their labor and other input costs.
Despite the challenging macro environment, we continue to see portfolio company revenue and earnings growth.
We remain focused on large high quality borrowers with strong operating margins and deep equity cushions.
The weighted average EBITDA of our portfolio companies was $212 million as of September 32023.
Additionally, our portfolio companies reported a weighted average year over year EBITDA growth rate of approximately 6% across companies in 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 September 30th 2023, our investment portfolio had a fair value of $14 7 billion.
<unk> 200 portfolio companies. This compares to a fair value of $14 8 billion.
195 portfolio companies as of June 32023.
At the end of the third quarter, our 10 largest portfolio companies represented approximately 19, 5%.
Fair value of our portfolio, which is consistent with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 60% first lien loans and 68% senior secured debt as of September 30th.
In addition, our joint venture represented nine 6% of the fair value of our portfolio.
As a result, when investors consider our entire portfolio looking through to the investment in our joint venture.
First lien loans total approximately 68% of our total portfolio and senior secured investment totaled approximately 76% of our portfolio.
September 30th.
The weighted average yield on accruing debt investments was 12, 2%.
At September 32023, compared to 12, 1% as of June 30.
As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FX KR.
A recent quarters the increase in our weighted average yield during the third quarter was primarily associated with the continued rise in base rates.
Including the effects of our investment activity during the third quarter as of September 32023, approximately 86% of our total investment portfolio is comprised of investments originated either by KKR credit or the FX Kirk yard adviser.
During the third quarter, excluding the impact of merger accounting, we experience net portfolio appreciation on investments of approximately $23 million.
During the quarter, we placed one debt investment on non accrual. The company has named Bowery farming and it is one of the largest vertical farming businesses in the U S.
<unk> is a smaller position in our portfolio as the first lien loan of the cost basis of $62 million.
And a fair value of $13 million as of September 30th.
<unk> received a $15 million paydown at par during the quarter.
As of September 32023, non accruals represented four 8% of our portfolio on a cost basis, and two 4% on a fair value basis compared to four 8% on a cost basis and two 5% on a fair value basis as of June 32023.
We believe it is helpful to provide the market with information based on the assets originated by KKR credit.
As of the end of the third quarter non accruals related to the 86% of our total portfolio, which has been originated by KKR credit and the FX kicked our advisor or two 3% on a cost basis and <unk>, 6% on a fair value basis. Additionally, since the start of the <unk> advisor almost six.
Years ago. The advisor has originated over $22 billion of investments and has experienced an annualized cost basis non accrual rate.
Less than 1%.
With that I'll turn the call over to Stephen to go through our financial results.
Thanks, Brian.
Our total investment income increased by $3 million quarter over quarter to $465 million.
The primary components of our total investment income during the quarter were as follows.
Total interest income was $374 million, a decrease of $2 million quarter over quarter, primarily driven by the $500 million in asset sales, we mentioned last quarter.
Dividend and fee income totaled $91 million, an increase of $5 million quarter over quarter.
Our joint venture experienced approximately $3 million in one time fees and dividends.
Our total dividend and fee income during the quarter is summarized as follows.
$58 million of recurring dividend income from our joint venture.
Other dividends from various portfolio companies totaling approximately $2 1 million during the quarter.
And fee income totaling approximately $12 million during the quarter.
Our interest expense totaled $117 million, a decrease of $1 million quarter over quarter.
Due to the decline in net debt to equity from 113% at June 30.
110% at September 30.
Our weighted average cost of debt was five 3% as of September 30.
Management fees totaled $56 million and incentive fees totaled $47 million, both unchanged quarter over quarter.
Other expenses totaled $11 million during the third quarter, a decrease of $1 million.
The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.
Our ending <unk> 2023, net asset value per share of $24 69.
It was increased by GAAP net investment income of 84 cents per share and was increased by <unk> 11 per share due to an increase in the overall value of our investment portfolio.
Our net asset value per share was reduced by <unk> 70 per share quarterly distribution and the <unk> per share special distribution.
With some of these activities results in our September 32023, net asset value per share of $24 89.
From a forward looking guidance perspective, we expect fourth quarter 2023, GAAP net investment income to approximate 74 per share and we expect our adjusted net investment income to approximate 77 per share.
Detailed fourth quarter guidance is as follows.
Our recurring interest income on a GAAP basis is expected to approximate $377 million.
We expect recurring dividend income associated with our joint venture to approximate $53 million.
We expect other fee and dividend income to approximate $23 million.
We expect normal course asset based finance dividends to be incrementally lower in the fourth quarter.
From an expense standpoint, we expect our management fees to approximate $56 million we.
<unk> incentive fees to approximate $42 million we.
Our interest expense to approximate $117 million.
And we expect our other G&A expenses to approximate $10 million.
During the fourth quarter, we expect our excise taxes will approximate $22 million.
We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting.
Which is why our projected fourth quarter GAAP net investment income <unk> <unk> per share below our anticipated adjusted net investment income.
Our gross and net debt to equity levels were 115% and 110% respectively at September 32023 <unk>.
Compared to 118% and 113% at June 32023.
At September 30, our available liquidity was $3 6 billion.
Approximately 59% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt.
In October we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility.
The amendment provides for among other things an increase in total commitments to $4 $67 billion.
And an extension of the maturity date to the fourth quarter of 2028.
We were very pleased to complete this amendment as it is reflected both the strength of the <unk> platform as well as the long term relationships. We are fortunate to maintain with the investment community.
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 and closing we are pleased with our third quarter results and our year to date performance as our net asset value at the end of the third quarter was flat compared to the start of the year. Our adjusted net investment income in the quarter exceeded both our public guidance as well as our total dividend our underlying portfolio companies are performing well from a credit perspective.
And we deployed capital into compelling new transactions with available liquidity of $3 6 billion and a strong.
Balance sheet, we have ample capital to invest in attractive risk adjusted opportunities we are seeing in the market.
On behalf of the team we thank you we thank you all for joining the call and for your continued support and with that operator, we'd like to open the call for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to 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. Please go ahead.
Hey, guys.
Thanks for taking my question.
One is you guys talked to and I think it's kind of a second time or were you talking about the pipeline activity increasing.
Wondering if you could kind of described.
Heard of.
I guess, some increase in M&A activity and maybe some LBO activity.
I'm wondering can you characterize that.
The kind of sources of the pipeline and then what's the competition around that pipeline is that shifting at all relative to the last four to six months as well.
Good morning, John.
I put it in a couple of different sort of buckets in terms of.
In terms of the pipeline activity.
It's just been.
We'll call it still alive processes.
Albeit that.
It's probably still not maybe to the.
The level that you would expect in any sort of normalized market, but certain amount of green shoots there and then some of it has also been.
We will call. It either early reads are companies that we know are kind of gearing up for a sales process.
As we get further into 'twenty four.
My sense is youre going to see that and we said this on the last call. It will take several quarters for them to kind of get through.
The system, where things kind of actually fund, but I think youll see the majority or at least where we're sitting today the majority of that activity.
And kind of probably Q2 through Q4 of 24 in terms of additional.
Actual closed and funded.
Deal flow.
In terms of competition obviously.
I mean that means kind of who is kind of funding the deals.
I do think the market is.
These really competitive right now.
I think that's a little bit of a technical there just hasn't been a lot of deals and people kind of want to do so in the state funded and get to their target Leverages southern deployment numbers.
But I think the quality of those deals remains very high.
Having the ability to earn kind of 12 plus percent on them.
Good large companies one al.
Sort of risk with good size equity check, we still feel quite constructive on the market opportunity.
Okay. That's helpful. And then second question is.
Just could you give us an update on <unk>.
The asset base financed.
Pocket or a pool and as well as the credit opportunities partners I, just I know, particularly in asset based finance you've been particularly busy this year I wonder is that activity persisting.
Yes.
On the asset based finance side.
Has been a very busy time for us there.
Think our platform is meaningfully build out with the over 50 people dedicated to the space, We've got a fair amount of debt.
Dedicated to that space and the ability to kind of play up and down the capital structure.
I think is a real nice competitive advantage for us.
I think we always thinking about that market is having a lot of white space.
We estimate a set of $5 billion today sort of on its way to seven.
So quite positive, but with what's been going on with the regional banks has been.
We also have a tailwind to that either in allowing us to acquire asset portfolios.
Or essentially filled the void from where they've taken a step back.
Yes, so I think we've been quite happy with what we've seen there.
I think on the joint venture.
I think the team's done a good job.
Yes.
Seeing that sort of continue to grow in terms of assets I think we've got quite a strong euro liabilities infrastructure. There I think we like the returns that is still being sort of.
From that are sort of off of that joint venture and then just as a real size if my number might not be perfect here, but.
I think maybe the seventh largest BDC. If we were on a standalone basis, just sort of our joint venture. So I think we like the size and scale, we have there as well.
Great. Thanks very much.
Have a good day.
Thanks.
Thank you one moment for our next question.
Our next question comes from Casey Alexander with Compass Point Research and training. Please go ahead.
Yes, just.
One question, maybe maybe to the you had.
I had a position solera that was picking in the second quarter and we're supposed to pick for two quarters. We've now moved into the fourth quarter has that one reverted now back to cash pay and how is that company doing.
Yes, good morning, Casey the physician has reverted back to cash pay.
That at the end of Q3, but you won't see the impact really will call. It come through the numbers. So thats why the Pik income would have been sort of elevated in the quarter as it was in the second quarter.
You will see that it will move entirely to sort of cash pay and that was I think almost 30%.
Yes.
Total sort of take them out and the company performances is strong in our minds.
Yes, okay great.
Secondly are you willing to add some on balance sheet exposure I mean, most of the exposure that you've added over the last several quarters has all gone to the JV. The JV is now at about 10%.
And maybe you addressed this a little bit but but.
Where can you grow the overall portfolio or do you still have to go to the JV or can you add some to the on balance sheet exposure.
No I think you should expect to see in the on balance sheet number.
So to grow as well.
Yes.
Yes, I think we did add $2 89 to the to the joint venture this quarter I don't think anything went to the joint venture so the last quarter.
I think we're kind of well with inside our target leverage number.
S K I think we're pretty.
Happy with what we see in terms of of.
Dry powder in the entity, including the revolver. So that makes sense. So I think you should expect to see.
While still within that sort of target range also kind of continuing to add assets.
<unk> balance sheet.
As we sort of move forward.
Alright, Thank you for taking my questions.
Have a good day.
Yes.
Thank you one moment for our next question.
Our next question comes from Kenneth Lee with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
In terms of the upper upper middle market segments.
Wonder if you could just talk a little bit more about what youre seeing in terms of.
Trends around covenants or terms for some of the more recent investments in it.
Whether youre seeing any changes there thanks.
Yes, good morning, guys.
I think that that sort of term upper end of the.
The middle market has a pretty sort of broad definition right I think what were sort of talking to folks that's probably more in the $100 million to $150 million of EBITDA, but I think in reset sort of quarters, it's even gone sort of beyond that as the syndicated loan market has been shot and private debt has really been.
I think the only game in town.
I do think we started the year.
As an extremely.
We'll call it lender friendly environment.
I think we've probably come off that a bit and we mentioned about we are seeing a certain amount of spread compression.
That said I think more and more companies continue to access.
Private debt as a financing source.
I think especially doing that in times of volatility and Theyre looking for certainty of financing, but I think just a lot of folks.
Are being drawn to this market versus the broadly syndicated market. The broadly syndicated market is never going to go away I think private thats, just become kind of an equal sort of appear there.
Yeah. So I think we're still seeing very good structures I think the market has had a good amount of discipline.
As it relates to.
Some of the documentation weaknesses that we may have seen in the broadly syndicated markets, but just a little bit tighter on pricing is as we mentioned in our prepared remarks.
Got you that's very helpful. There.
And then.
One follow up.
If I may in terms of the supplemental distributions.
Wonder if you could share some some initial thoughts on.
Visibility.
Confidence.
And the potential line of sight around supplemental for next year. Thanks.
Yes, and I'll start to this and Steven Lowy might want to add to it obviously we've had.
That's sort of a base in the supplemental and then we had the 15 cents of specials.
For 2023, yes, I think that that is a good story in our mind. We've told the market we were going to pay sort of additional earnings.
As you know.
They were sort of earned by sort of SK I think that'll put roughly.
$2 95 steps of sort of total dividends paid for the year, which I think is quite attractive for investors and obviously, a big focus for ours.
We felt confident to extend that special.
That's the 10th.
That was mentioned in the prepared remarks, I think by definition that means we feel confident about the supplemental as well kind of in the near term I think you should expect the base and supplemental to remain.
In the coming quarters.
Great very helpful. There. Thanks again.
Thank you.
Thanks, Amit next question.
Our next question comes from Ryan Lynch with <unk>. Please go ahead.
Hey, good morning.
I had several questions on kind of the transaction with <unk>.
Paypal consumer.
Loans I know, it's kind of a small transaction, but it's definitely definitely interesting. So I guess first off.
Where are those loans being placed on.
Your balance sheet I saw a small.
Equity investments of $2 million, but.
Are those all just going to be directly placed on your balance sheet or they are going to be in some sort of like.
Like SBB.
Entity.
Yes, and Ryan happy.
Happy to talk about that.
I don't think it was actually a small investment considering we're going to buy 40 billion euros.
Yes.
Over the coming years, obviously this was a strategic transaction for both us and for Paypal, There's a fair amount of.
I think public statements out there.
That we can kind of point to I think that said the receivables are short, which is why that $40 billion number does seem high.
The book will probably turn six times per year.
The 80 million euros as Scott had mentioned in the script.
<unk> share of the overall sort of deal.
And the deal.
As the receivables are essentially going into an SPV.
<unk> bank's providing financing to that to that SPD, and then S. K and the other KKR credit accounts are providing the remainder of the capital that $2 million piece was just the initial funding, but you should expect it to ramp fully over the coming quarters.
Okay, and then so the $80 million to $80 million, that's going to escape that was just kind of I was talking about the smallest is that expected to grow over time or how do you. How do you kind of view your or your overall exposure.
To these loans and maybe it's too early to tell and then I guess also what should we expect and what's sort of the.
It sounds like it turns over a lot, which would make sense what are sort of the return expectation for for these types of loans.
Yes, I mean, I think you should expect that number to be sort of the target at least for the near and medium term.
It might very well sort of grow from grow from there as the program.
Continues to.
To take off.
Yes, I think like most things that are asset based finance bucket, we view them as extremely attractive from oil.
I will call it.
A downside protection basis, we think because these are either secured receivables are short duration receivables, we have a great amount of confidence in and there were premium profile, but that we're generally trying to do deals inside this strategy.
Let's call it mid teens plus right. So.
We view it as great diversification to our corporate credit book.
Well protected from from when we think about sort of the downside and effectively return enhancing versus just regular way direct lending.
Okay and then.
<unk>.
One last one on it.
Are these sort of loans that were previously going to annualize I know, it's Europe. Some so maybe it's not relevant but im thinking you mentioned earlier that.
Kind of.
The slowdown of regional banks.
Are these the types of loans that would fit into like regional bank. These consumer financing type loans that this is the reason that KKR is kind of stepping in to fill that void or wherever these loans.
<unk> been going.
That wouldn't have been the case for a transaction like this.
So you don't have the same regional banking model in Europe that you have in the U S.
So that sort of concept is generally not the same.
As we've talked about a bunch of it.
Paypal side. This was all funded on Paypal balance sheet before this deal.
Okay.
Got you.
And then I just had one question outside of the Paypal, Yes.
Yes discussion.
You talked about a lot.
Companies in deal sort of gearing up now that.
We will take a while to sort of incubate and could come to fruition, maybe in the second quarter and beyond in 2024 I'm just curious.
What sort of do you think assumptions that these companies are making in order for these deals to transact in.
Maybe said differently.
Are these deals dependent on sort of rate cuts or stabilizing base rates or is the current environment. If it just stays steady with rates stay where they are the environment sort of stays stable do you think that that is good enough to have these deal sort of come to fruition just from a high level I know every deal.
Specific, but just kind of high level no.
It's a fair question.
I think just sort of stable will be.
We'll call it enough.
<unk> market conditions to allow that to get done.
I think <unk> had.
Valuation mismatches for some time now between kind.
Out of the cellar and sort of the buyer I think those have.
We'll call it started to narrow I think.
At least our view is we're in an environment of higher rates for longer.
And I don't think the inflation story is done, but I think it's become a much more manageable sort of under control.
And I do think you have the other sort of point out there.
And the private equity community I think there is a growing amount of pressure for realizations and money to be returned to Lps and then Theres also a lot of dry powder, so to sitting on the sidelines right. So that's why I think if we could just stay on.
We'll call it.
Our stable type.
Kind of macro.
Obviously, there's a lot going on so maybe that'll be sort of hard, but I think we say that that will be the catalyst to get that done.
The deals coming to market as we get through 'twenty four.
Okay.
That's helpful. That's all for me today I appreciate it.
Have a good day.
Thank you one moment for our next question.
Our next.
Comes from Melissa Wedel with Jpmorgan. Please go ahead.
Good morning.
Hoping to follow up on a couple of the comments that were made I believe during the prepared remarks.
Speaking to the strength of the opportunities that in asset based finance, but then I think Stephen also mentioned expecting lower asset based finance dividend income in four Q I was hoping we could just dig into that a little bit.
Yes.
Good and fair question.
I would probably separate the two set us for one second I think the.
The market opportunity or the investing opportunity.
Is.
Is is quite strong it's a thematic that we believe a lot in.
And despite that we've been kind of very sort of.
We'll call it focused on I think each of the deals is a little bit different sometimes the deals.
When deployed half to get to scale before they can start to pay a dividend.
Can have a certain well costs at a timing mismatch and then there was a handful of deals that we are looking to.
Well costs do certain positive things on the liability or sort of financing side, what drove kind of restart that process, where dividends might be slower.
Think about it more in terms of a timing mismatch that a permanent sort of points.
On the dividend side.
Got it that's helpful. Thank you.
I was also hoping we could touch on one.
Portfolio Company I believe was.
Was on the nonaccrual list previously it looks like it was removed and Mark got back to par and <unk> I was hoping we could just touch on that was that a restructuring today.
Get current could you give us some detail there.
Yes.
And then probably a multi pronged.
Restructuring.
Over the last probably 24 months and then Brian might want to sort of add to this but I think we've reached well call. It the next phase of that.
One is a legacy advisor position that had.
Sort of a meaningful amount of challenges the business has got a strong sort of materially.
And I think there was some additional sort of capital put into it as it relates to this quarter as well, which kind of triggered it sort of going off that non accrual list.
But it's pretty small position at this point.
Thank you our next question.
Our next question comes from Robert Dodd with Raymond James. Please go ahead.
Hi, guys going back to the the avs the dividend income.
For Q4, obviously I mean.
<unk>.
Let's call it the <unk>.
Dividend went down this quarter.
Is any of the.
The.
Relatively low still.
Dividends from the asset backed finance.
And connected to the real estate market, because obviously you have exposure to there.
Something else yes.
Normally seasonal in Q4.
Obviously to your point tenants, the timing issues and things like that but is there a real estate taxes.
Yeah and.
I mean I'll answer the question, but if I Miss something let me know if there is a little bit hard to hear a couple of points in there I think the on the example of sort of tour tour at the <unk>.
Underlying loan performance has been quite strong.
And I think we've been sort of happy to see that but like a lot of sort of asset classes out there right now that would follow on to one where the cost of financing sort of generally has gone up.
More than the yields on the underlying loans. So that has had put some sort of we'll call. It stress on on net income or sort of row. There. They do have the benefit of having been a very frequent issuer and having the ability to those deals revolve so as loans repay they can.
To add to those but I think this goes a little bit to melissa's question. As we think about kind of forward financing some of those structures might kind of trapped cash and the entities for sort of a longer period of time, So I would say it's not seasonal.
And we try to run that book is as neutral as we can from sort of a rates perspective, but there'll be some amount of kind of refinancing risk there or sort of term out sort of pointed to gasoline demand.
Understood. Thank you and that does answer the question on.
You talked about obviously, there's a little bit of spread compression now the syndicated market seems to be showing some signs of life.
APAC, yet by a long stretch.
What are your thoughts over the.
Give me more conceptual over the next 12 months.
Is there a risk to spread some of the private credit market.
Indicated market comes back more aggressively that puts meaningful spread compression.
In the private credit side given base rates are so high you cannot receive that could be handled without a problem does that creator.
Dynamic where.
The spread compression risk as maybe elevated if the syndicated market comes back while base rates are very high.
Yes.
I mean, it's a very fair question I don't think so.
But I don't think so for a couple of reasons I think there is a bit of a floor level.
This market sort of might very well get to now part of that is driven by a bunch of the pools of capital that sort of invest here.
Might be.
Sort of lever tolls, but I think you're always going to have a certain amount of a gap between the private debt market in the syndicated market.
I think I think we've talked about this on some prior calls I think if you looked at deals that were done.
The beginning of kind of 22, the market spread was probably $5 75 kind of on average.
That would have gapped out in the in the beginning part of this year to probably 60 75.
On average.
That's a pretty big move considering the the benchmark also jumps.
Almost 450 plus basis points.
Yes, Im just comparing that basis point number versus the floor that was in kind of the deals.
Now I think youre back down.
So youre looking at deals today that are probably.
It's kind of 6% to 625%.
But I think Thats I think those are you going to be range bound generally in there and I think it will be somewhat subject to deal volumes.
The desire for people to deploy capital on that.
There has been maybe excess capital raise that is lucky to get deployed quickly.
Got it thank you.
Thanks.
Yes.
One moment for our next question.
Our next question comes from Bryce Rowe with B Riley. Please go ahead.
Thanks, Good morning.
I wanted to start with some questions on just the non accrual bucket and some of the specific non accruals I think last quarter you talked about.
And BG going through.
Our restructuring or bankruptcy bankruptcy process can you provide us an update.
On those as you look at the kind of the non accrual list not much change in either one of those from a fair value and cost perspective at least within within that non accrual category.
Yeah happy to Brian.
Ryan might want to add to this as well, but I think on the winter side.
We announced on the last call those kind of agreement reached as it relates to our restructuring those processes take time I think we do expect that to get done.
Hopefully at some point in Q4 sort of early Q1, but that's progressing along.
I think as we would expect that I think we've been.
You are happy with what we've seen in terms of stable performance at the company level.
I think the <unk> process is pretty much complete but anything you want to yes.
B G.
We restructured that business around their lighting fixtures business.
Which has historically been a relatively strong performer within their portfolio.
And that's really the basis of our investments going forward.
Working closely with the management team.
On optimizing results were.
Working through cost working through sales.
Sales all those sorts of things.
So that's sort of gone through the restructuring now where on the other side and now it's going to come down to execution.
Okay. Okay. That's helpful.
And then maybe maybe one more on the non accruals and global jet.
Dominates nonaccrual list I think at 60% plus of the non accruals fair value Mark at a relatively high 75% to 80%.
What would it take to get that that account back to accrual status any kind of update you can provide there. Thanks.
Yes, I think youre spot on on your numbers.
I mean, it is 40% of the cost number and I think it's 65%.
The fair market value.
We've talked about the name a couple of different points on the calls I think the management team.
Inside the company has done.
Very nice job I think the underlying asset class.
Private Jets has had a fair amount of tailwind no pun intended.
On the other side of Covid as a member there.
It's a leasing business, mainly but our lending business as well.
Obligor as are both high net worth but also some of the larger corporates in the world.
So the bump performance has been I think quite strong.
Actually taken a fair amount of cash dividends out of the company and Thats been a return of capital over the last handful of quarters I think that's probably more likely the path forward.
For 'twenty four but.
I don't think the book has a delinquency in it right now.
So I think the question or the maybe the harder thing for that business has just been.
No.
Their competition has been and what the available ROE has been but again I think they've done a really good job to get to where they are today.
<unk>.
I think specifically their ROE has improved significantly.
Several years ago, and sort of low single digits.
In the high single digits.
Still would like it to be a little bit better, but it's certainly come a long way.
And we're pleased to see the performance of the book.
Got it that's a great update I appreciate it.
Thanks.
Thank you one moment for our next question.
Sure.
Our next question comes from Erik Zwick with the Citi Group. Please go ahead.
Hi, Good morning first question for me just curious about your thoughts on the outlook for the weighted average yield for the portfolio going forward just given your comments about some spread compression for for new originations and I guess the.
Interest rates stay kind of in this general range here as we can.
Kind of scenery near the peak for the cycle or is there opportunity to realize a little bit more on some older vintages with lower yields and lower spreads kind of rollout and you replace them with new wins, just curious on any thoughts there.
Okay.
Yes, I am not sure Eric your your instinct is entirely wrong in terms of probably being kind of near a peak.
I think kind of quarter on quarter, there is probably a little bit of Av.
We'll call. It further upside if you just look at kind of spot.
So for June 30th spot so for.
930, and some of these volumes.
Reset periods.
Might be sort of 90 days so it takes a little while for it to go through the system.
On the other side of that.
Maybe to the positive.
Hugh.
I think once we do start to see repayments some of that could be on the lower yielding stuff that was.
Maybe you put on.
Lower yielding sort of inside the confines of the book or maybe it gets refinanced for some of the companies that are highly performing but then.
I do think we are in this environment of rates higher for longer I think that's got a great tailwind.
For income for S. K.
Which we're quite happy about but I'm not expecting.
Not.
Meaningful upticks from here.
It relates to kind of short term or sell through rates.
That's helpful. And then one last one for me and I may have missed it in the prepared remarks can you update us on your current spillover position.
Yes, Stephen you want to take that.
Yes, Eric.
We continue to be north of two and a half a quarter's worth of dividends, which is what we sort of hit that target. We've said on prior calls.
Was the impetus for our special distribution.
That we started during earlier this year in 2023.
Obviously, we just announced in conjunction with the earnings of that will continue for at least another two quarters.
The first half of 2024.
So pleased to have met that targeted.
Another we think of as sort of a nice asset to have and then share that excess with shareholders.
Great. Thanks for taking my questions.
Yeah.
Thank you one moment for our next question.
Yeah.
Our next question comes from Mark Hughes with tourists. Please go ahead.
Yeah. Thanks. Good morning, one question any material change in the prospect could generate fee income once the market loosens up.
You've been holding the loans longer you and everyone else.
Presumably the prepayment fees would be correspondingly lower.
And could it move.
That.
Income stream through the passage of time here.
I mean, it's an interesting point mark in one and clearly origination volumes I think for us in the industry broadly have been sort of a lower right. I think you can see that in the fee incomes numbers that you see but if you do look back.
Kind of to the same quarter a year ago I think your fee income was.
Two or two five times the size of sort of where it is today. So I do think thats, a nice let's call it natural.
Even if we do see a certain amount of repayments those repayments could generate depending on when the lowest but on a certain amount of exit fees, but then the new deals will generate a certain amount of kind of new deal fees as well.
I don't think I think the current quarter was $12 million of fee income I think thats lower than any kind of normal historical sort of average. So there is a bit of a balance there I think it is a very good point.
Thank you very much.
Thank you one moment for our next question.
Our next question comes from Jordan <unk> with Wells Fargo Securities. Please go ahead.
Can you just give us some context on the decision to keep pure fishing second lien on accrual last quarter. It looks like that June 30 March might have been informed by some discussions about exiting that position at a loss.
And Jordan just to can you repeat the question because you paid it out of it at the end.
Last quarter you.
You kept pure fishing second lien on accrual.
Looks like this quarter, you exited that at a loss.
And that market June 30 may have been informed by discussions with the sponsor about exiting that position at a loss. So I'm just curious.
Basically why.
You just keep that asset on accrual.
This quarter.
Is there any yes.
I think there's I think there's sort of two point. That's the number one you are correct, probably most importantly, we have exited that position.
I think that was.
In many ways a good set of outcomes very good result at the end of the day.
I think a bit of a testament to how we got to risk manage the.
Book.
I think we were.
The asset continue to sort of pay cash I do think the long term prospects of that business.
We'll be we'll call. It positive I think it's got some real sort of brands kind of attached to it I think those were the drivers of the kind of accrual appliances on the drivers of the sale was just got a prudent risk management, but it's.
It's an exited position now.
Okay. Thank you.
I am showing no further questions at this time I would now like to turn it back to Dan Pietrzak for closing remarks.
Well. Thank you everyone for taking the time to join the call today, we are available for any follow up points as needed and we wish you and your families a happy and healthy holiday season. Thanks again.
Thank you for your participation in today's conference. This concludes the program you may now disconnect.
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