Q1 2024 FS KKR Capital Corp Earnings Call
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Good morning, ladies and gentlemen, welcome to S. S. KKR capital Corp, first quarter 'twenty 'twenty four earnings conference call. Your lines will be in a listen only mode. During remarks by S. S case management.
At the conclusion of the company's remarks, we will begin the question and answer session at which time I will give you instructions on entering the queue. Please note that this conference is being recorded at this time, Robert PON head of Investor Relations will proceed with the introduction Mr. Pond you may begin.
Robert Paun: Thank you good morning, and welcome to Ipass KKR capital Corp's first quarter 2024 earnings conference call.
Robert Paun: Please note that FX KKR capital Corp may be referred to as FX K, the fund or the company throughout the call.
Robert Paun: Today's conference call is being recorded and an audio replay of the call will be available for 30 days.
Robert Paun: Replay information is included in our press release that <unk>.
Robert Paun: Issued yesterday.
Robert Paun: In addition, FSA has posted on its website a presentation containing supplemental financial information.
Robert Paun: With respect to its portfolio and financial performance for the quarter ended March 31 2024.
Robert Paun: A link to todays webcast and the presentation is available on the Investor Relations section of the company's website under events and presentations.
Robert Paun: Please note that this call is the property of FX okay.
Robert Paun: Any unauthorized rebroadcast of this call in any form is strictly prohibited.
Robert Paun: Today's conference call includes forward looking statements and are subject to risks and uncertainties that could affect FSA or the economy generally.
Robert Paun: We ask that you refer to <unk>, most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.
Robert Paun: <unk> does not undertake to update its forward looking statements unless required to do so by law.
Robert Paun: In addition, this call will include certain non-GAAP financial measures for such measures reconciliation to the most directly comparable GAAP measures can be found in <unk> first quarter earnings release that was filed with the SEC on May eight 2024.
Robert Paun: 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.
Robert Paun: In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies.
Robert Paun: Copies of the company's latest SEC filings, please visit <unk> website.
Robert Paun: Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman.
Robert Paun: Dan Pietrzak, Chief investment Officer, and co President.
Speaker Change: Brian Gerson co President and Steven Lilly Chief Financial Officer.
Speaker Change: Also joining us on the call are co chief operating officers drew O'toole and Ryan Wilson.
Michael Craig Forman: I will now turn the call over to Michael.
Michael Craig Forman: Thank you Robert and good morning, everyone. Thank you all for joining us today for <unk> first quarter 2024 earnings conference call.
Michael Craig Forman: <unk> had a positive start to the year consisting of net investment income totaling 76 per share and adjusted net investment income totaling 73 per share during the quarter. We also made significant progress with regard to three of the investments placed on non accrual during the fourth quarter of last year.
Michael Craig Forman: We experienced increased origination volumes as our investment team originated approximately $1 $4 billion of investments.
Michael Craig Forman: Our net asset value as of the end of the first quarter was 24 32.
Michael Craig Forman: From a liquidity perspective, we ended the quarter with approximately $4 2 billion of available liquidity.
Michael Craig Forman: Finally, we delivered an annualized ROE of 10, 1% for the quarter.
Michael Craig Forman: Based on our positive operating results. Our board has declared a second quarter 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.
Michael Craig Forman: As we mentioned on our third quarter 2023 earnings call. Our board previously declared a special distributions totaling <unk> <unk> per share. The first five per share and as Tom was paid this February and the second <unk> <unk> per share installment will be paid later this month.
Michael Craig Forman: Accounting for this special distribution, our total second quarter distribution will be 75 per share as a result of achieving our operating targets. We believe investors will be able to receive a minimum of the $2 90 per share of total distributions in 2024, which equates to an 11, 9% yield on our March <unk>.
Michael Craig Forman: 31, 2024, net asset value and an annualized yield of approximately 15% based on our recent share price.
Michael Craig Forman: From a forward looking perspective, we remain confident in long term earnings power of FSA, which enables us to continue paying an attractive distribution to our shareholders. We are in.
Michael Craig Forman: Encouraged by the increased level of origination activity and the quality of the deal volume during the first quarter. The private credit markets continue to experience strong tailwind and we believe we are well positioned to take advantage of these opportunities.
Michael Craig Forman: And with that I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.
Daniel Ryan Pietrzak: Thanks, Michael for the past year. It has been our view that inflation will remain elevated.
Daniel Ryan Pietrzak: And the higher interest rate environment will last longer than some market observers expected.
Daniel Ryan Pietrzak: Our view has largely proven accurate and should our views continue to play out we believe floating rate asset structures, coupled with investment strategies focused on large defensive portfolio companies and asset based finance investments directly tied to financial and hard assets will remain attractive.
Daniel Ryan Pietrzak: Looking ahead. It is our expectation that the economy will experience stickier inflation in the near term coupled with continue, albeit slowing overall economic growth.
Daniel Ryan Pietrzak: As Michael highlighted earlier, there are strong tailwind to our business as sponsors continue to utilize private credit solutions for finance transactions.
Daniel Ryan Pietrzak: Origination activity picked up meaningfully in the first quarter compared to the prior few quarters and we expect a material increase in private market transaction activity during 2024.
Daniel Ryan Pietrzak: Given significant private equity dry powder.
Daniel Ryan Pietrzak: Combined with pent up demand from an M&A perspective, and the designer for private equity fund Lps to see a higher level of return of capital.
Daniel Ryan Pietrzak: As we mentioned on our last call the macro backdrop created challenges for a few of our portfolio companies during the fourth quarter of last year.
Daniel Ryan Pietrzak: Our workout team has been active on these names and as Brian will discuss we are pleased to have achieved positive results quickly.
Daniel Ryan Pietrzak: And while there's still work to be done reducing our non income in non accrual investments. We clearly are pleased with the recent progress we have made.
Brian Gerson: Turning to investment activity during the first quarter, we originated $1 $4 billion of new investments.
Brian Gerson: Approximately 75% of our new investments were focused on add on financings to existing portfolio companies and long term taking our relationships.
Brian Gerson: Our new investments combined with $1 $7 billion of net sales and repayments when factoring in sales to our joint venture.
Brian Gerson: Weighted to a net portfolio decrease of $221 million.
Brian Gerson: New originations consisted of approximately 69% in first lien loans, 3% in second lien loans, 3% and other senior secured debt, 1% in subordinated debt and 24% in asset based finance investments.
Brian Gerson: As we mentioned on our last call with regard to new investments, we are continuing to see tighter pricing in the upper end of the middle market.
Brian Gerson: Trade off to the spread compression is still strong documentation and very solid credit profiles.
Brian Gerson: We also continue to be pleased with the quality of the new deals.
Brian Gerson: During the first quarter, our new direct lending investments had a weighted average EBITDA of approximately $243 million.
Brian Gerson: Five seven times leverage through our security and a 47% equity contribution.
Brian Gerson: With a weighted average coupon of approximately sulfur across 570 basis points.
Brian Gerson: One example of a new deal in the quarter was our investment in carrier global manufacturer of active pharmaceutical ingredients will provide contract pharmaceutical development manufacturing packaging and analytical services.
Brian Gerson: Thank you I was the sole lender as we provided $125 million off balance sheet SPV structured trade receivables facility secured by curious U S receivables.
Brian Gerson: Pricing was 625 basis points with a 2% upfront fee <unk> committed $83 million of the $125 million facility.
Brian Gerson: Additionally, in the first quarter KKR affiliates, along with other partners.
Brian Gerson: Green Sky, a point of sale Finance company from Goldman Sachs as part of its divestiture from consumer related businesses.
Brian Gerson: Green Sky was founded in 2006 and focuses on offering home improvement financing alternatives for prime borrowers.
Brian Gerson: S K committed $80 million to the transaction.
Brian Gerson: I also wanted to highlight a sale of the music IP investment and KKR cord IP aggregator that occurred during the first quarter.
Brian Gerson: In connection with the sale <unk> received an $89 million return of capital.
Brian Gerson: S. K court IP aggregator also received a well collateralized seller note that is expected to be repaid during 2024 and <unk>.
Brian Gerson: SK his respective share of the seller note is approximately $30 million.
Brian Gerson: The transaction resulted in a $20 million gain to our net asset value and we expect to realize an IRR of approximately 18% on our position.
Brian Gerson: When we look at the aggregate trends across our portfolio of companies. We have continued to see high single digit EBITDA growth with modest margin pressure due to the continued inflationary environment.
Brian Gerson: Over the coming quarters, while we expect continued revenue growth from our portfolio of companies.
Brian Gerson: We would expect growth to slow modestly as macro trends could potentially lead to a slowdown in economic growth.
Brian Gerson: The weighted average EBITDA of our portfolio companies was $218 million as of March 31, 2024.
Brian Gerson: Additionally, our portfolio of companies reported a weighted average year over year EBITDA growth rate of approximately 7% across companies and what we have invested in since April of 2018.
Brian Gerson: And with that I'll turn the call over to Brian to discuss our portfolio in more detail.
Brian Gerson: Thanks, Dan as of March 31, 2020 for our investment portfolio had a fair value of $14 2 billion.
Brian Gerson: Consisting of 205 portfolio companies.
Brian Gerson: This compares to a fair value of $14 6 billion.
Brian Gerson: And 204 portfolio companies as of December 31, 2023.
Brian Gerson: At the end of the first quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters.
Brian Gerson: We continue to focus on senior secured investments as our portfolio consisted of approximately 57% first lien loans and 65% senior secured debt as of March 31.
Brian Gerson: In addition, our joint venture represented nine 8% of the fair value of our portfolio.
Brian Gerson: As a result, when investors consider our entire portfolio looking through to the investments in our joint venture than first lien loans totaled approximately 66% of our total portfolio and senior secured investments totaled approximately 74% of our portfolio as of March 31.
Brian Gerson: The weighted average yield on our current debt investments was 12, 1% as of March 31 of.
Brian Gerson: A decrease of 10 basis points compared to 12, 2% as of December 31 2023.
Brian Gerson: The decrease was largely driven by spread compression on new deals.
Brian Gerson: As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FX KR.
Brian Gerson: From a non accrual perspective.
Brian Gerson: As of the end of the first quarter.
Brian Gerson: Non accruals represented six 5% of our portfolio on a cost basis, and four 2% of our portfolio on a fair value basis.
Brian Gerson: This compares to eight 9% of our portfolio on a cost basis, and five 5% of our portfolio on a fair value basis.
Brian Gerson: As of December 31, 2023.
Brian Gerson: We believe it will also be helpful to provide the market with information based on the assets originated by KKR credit.
Brian Gerson: As of the end of the first quarter non accruals relating to the 88% of our total portfolio, which has been originated by KKR credit and the <unk> K care advisor or two 3% on a cost basis and 1% on a fair value basis.
Brian Gerson: During the first quarter, we placed one small investment on non accrual with a cost and fair value of $21 million and $19 million respectively. Additionally.
Brian Gerson: Additionally, we removed three investments from non accrual status with a combined cost and fair value of $395 million and $224 million.
Brian Gerson: Winter was one of the names removed from non accrual during the quarter.
Brian Gerson: As we have discussed on prior earnings calls, we placed our second lien loan on non accrual during the first quarter of 2023 as it was facing persistent inflation headwinds as well as a slowdown in construction in China the.
Brian Gerson: The restructuring resulted in our second lien loan being fully <unk> and KKR, taking control of the business.
Brian Gerson: The first lien debt of the company with significantly reduced at the operating company and <unk> existing first lien loan was converted into a $52 2 million euro other senior secured debt position.
Brian Gerson: S K and other funds managed by KKR provided new capital to the company to fund operations.
Brian Gerson: This recapitalization resulted in $122 $5 million of cost and $31 million of fair value of being removed from non accrual status.
Brian Gerson: Additionally, KBS completed its full consensual restructuring during the quarter, which resulted in <unk> of a portion of the non occurring second out loans and SK and other lenders taking control of the company.
Brian Gerson: S. K received $195 million of a new first lien loan $82 $8 million of the new second out first lien loan $48 $3 million of preferred equity and KKR managed funds now on 46% of the company.
Brian Gerson: This restructuring resulted in a $197 $6 million of cost and a $135 $3 million of fair value being removed from non accrual status.
Brian Gerson: Lastly, our first lien position in Sweden, Corporate America was restructured during the first quarter and the company received a $50 million cash injection from the equity sponsor.
Brian Gerson: The first lien debt facility was restructured into a $15 $7 million first lien first out cash paid term loan a.
Brian Gerson: $28 $1 million first lien first out take tranche.
Brian Gerson: 883 million second lien first out and a $24 million second lien second out term loan.
Brian Gerson: This restructuring resulted in $75 3 million of cost and $57 2 million of fair value being removed from non accrual status.
Brian Gerson: The progress we've achieved with regard to these portfolio of companies is an example of the benefits of KKR Credit's investment platform. Our fundamental derisking approach to these credits was evident in our resolution of non accruals this quarter.
Brian Gerson: While we prefer sponsors to continue supporting their portfolio of companies with additional equity we have the resources and capabilities to support companies ourselves when necessary.
Brian Gerson: Taking action quickly, we believe we will significantly improve our chances of receiving a meaningful or even full recovery of our investment capital over time.
Brian Gerson: With that I'll turn the call over to Stephen to go through our financial results.
Stephen: Thanks, Brian.
Stephen: Our total investment income decreased by $13 million quarter over quarter to $434 million primarily.
Stephen: Primarily due to repayments of higher yielding positions and the impact of investments placed on non accrual during the fourth quarter of last year.
Stephen: The primary components of our total investment income during the quarter were as follows.
Stephen: Total interest income was $350 million a.
Stephen: The decrease of $18 million quarter over quarter.
Stephen: Dividend and fee income totaled $84 million.
Stephen: An increase of $5 million quarter over quarter.
Stephen: Our total dividend and fee income during the quarter is summarized as follows.
Stephen: $3 million of recurring dividend income from our joint venture.
Stephen: Other dividends from various portfolio companies totaling approximately $14 million during the quarter.
Stephen: And fee income totaling approximately $17 million during the quarter.
Stephen: Our interest expense totaled $116 million, a decrease of $2 million quarter over quarter.
Stephen: And our weighted average cost of debt was five 4% as of March 31.
Stephen: Management fees totaled $55 million.
Stephen: A decrease of $1 million and incentive fees totaled $43 million, an increase of $2 million quarter over quarter.
Stephen: Other expenses totaled $8 million, a decrease of $2 million quarter over quarter.
Stephen: The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.
Stephen: Our ending <unk> 2023, net asset value per share of $24 46.
Stephen: Was increased by GAAP net investment income of 76 per share.
Stephen: This decreased by <unk> 14 per share due to a decrease in the overall value of our investment portfolio.
Stephen: Our net asset value per share was reduced by a <unk> <unk> per share quarterly distribution.
Stephen: And the $5 per share special distributions.
Stephen: Activities result in our March 31, 2024, net asset value per share of $24 32.
Stephen: From a forward looking guidance perspective, we expect second quarter 2024, GAAP net investment income.
Stephen: The approximate <unk> 74 per share.
Stephen: Our adjusted net investment income to approximate 71 per share deep.
Stephen: Detailed second quarter guidance is as follows.
Stephen: Our recurring interest income on a GAAP basis is expected to approximate $341 million.
Stephen: We expect recurring dividend income associated with our joint venture to approximate $52 million.
Stephen: We expect other fee and dividend income to approximate $34 million during the second quarter.
Stephen: From expense standpoint, we expect our management fees to approximate $55 million, we expect incentive fees to approximate $42 million.
Stephen: We expect our interest expense to approximate $114 million and.
Stephen: And we expect other G&A expenses to approximate $10 million.
Stephen: And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2 90 per share comprised of $2 80 per share quarterly distributions and <unk> per share of special distributions.
Stephen: Our gross and net debt to equity levels were 117% and 109% respectively. At March 31 2024.
Stephen: Compared to 120% and 113% at December 31, 2023.
Stephen: As of March 31, our available liquidity was $4 2 billion.
Stephen: And approximately 65% of our drawn balance sheet and 44% of our committed balance sheet was comprised of unsecured debt.
Stephen: And with that I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
Michael Craig Forman: Thanks, Steven in closing, we're pleased with the positive start to 2024 as our origination activity picked up we made significant progress on certain portfolio names and we continued to fully earn both our base and supplemental distributions on a per share basis.
Michael Craig Forman: Long term earnings power of FSA S. K continues to be strong and we have confidence in our ability to continue to reward shareholders with these attractive distributions and with that operator, we'd like to open the call for questions.
Speaker Change: 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.
Michael Craig Forman: While we compile the Q&A roster.
Michael Craig Forman: Okay.
Michael Craig Forman: Our first question comes from John Hecht with Jefferies. John. Please go ahead with your question.
John Hecht: Morning, guys. Thanks for all the detail on the quarter and thanks for taking my questions.
John Hecht: First one is you had a very active deployment quarter, but then also it was very active in repayments as well.
John Hecht: Dan I'm wondering.
John Hecht: Hi.
John Hecht: Of your outlook for both sides of that picture.
John Hecht: You've talked about an increasing deal market over the course of this year because of private debt private equity fund needs.
Daniel Ryan Pietrzak: And maybe give us an update on your perspective, there and then in addition, what kind of signals should we look for.
Daniel Ryan Pietrzak: For the repayment activity to either stabilize or start to drop and is that a function of call. It the liquid loan markets and different levels of competition in this space.
Speaker Change: Good morning, John.
Speaker Change: Yeah.
John Hecht: Maybe starting with your second question first.
John Hecht: We probably are.
John Hecht: Expecting we'll call it some level of consistent repayments because the syndicated loan market is open and we think that's a good fact, because that just speaks to overall market activity.
John Hecht: And a lot of these companies have been held by the sponsors for some extended period of time, so that could very well be sold all of that said I think the incumbency positions do have.
John Hecht: Real value for us.
John Hecht: <unk> seen that sort of quarter after quarter.
John Hecht: We were happy to start to see some level of additional sort of pickup in the market you can see that in our deployment numbers some of that is loan extensions.
John Hecht: With some of those loan extensions Cambria pricing is I think we touched on that during the call as well.
John Hecht: We do remain pretty confident though that.
John Hecht: There are a we'll call it a bunch of tax that goes out there that are going to push this M&A market to more fully reopen.
John Hecht: There is pressure from the Lps there is a lot of dry powder on the sidelines.
John Hecht: And I do think that valuation mismatch that we saw for most of kind of the second half of 'twenty, two and 'twenty three is definitely narrowed.
John Hecht: So I think that should make for a productive kind of Q2 or second half of the year.
John Hecht: Okay.
Speaker Change: Okay, and then second question Thats helpful by the way and second question is that you mentioned spreads.
Speaker Change: Yeah, a little bit under pressure just because of the market dynamics, where do you think those are gone.
Speaker Change: And.
Speaker Change: What where.
Speaker Change: Where are you finding opportunity in the market, where maybe the spreads are getting quite it's pressured.
Speaker Change: Yes, that's a very fair question considering.
Speaker Change: What everybody has been seeing out there spreads are definitely tightened.
Speaker Change: I would say they've tightened.
Speaker Change: 75 odd basis points and maybe the last six months.
Speaker Change: I think there.
Speaker Change: There is a bit of that market technical out there in my mind.
Speaker Change: While even though we're starting to see some level of activity, it's not that normalized level and for some of the pools of capital a decent amount of money has been raised that's looking to get deployed.
Speaker Change: My sense is that does change.
Speaker Change: With the comments I made to your prior question John So if the market is kind of living in a.
Speaker Change: Probably 500 to $5 50 now.
Speaker Change: I think youre going to get back to probably where you are we'll call. It pre all the right moves I think the market was kind of a $5 50 to 600 market from a spread perspective.
Speaker Change: The one point I would make though is even with some of the re pricings.
Speaker Change: We are getting the benefit of extending the call protection I would say, we're extending that for one to two years on average and we are getting the.
Speaker Change: <unk>.
Speaker Change: Probably more more than more times than not are actually charging an upfront fee in conjunction with that so there's some offsets to that which is helpful.
Speaker Change: And then just your last point I mean, we've talked about some of the deals.
Speaker Change: That we did in the quarter on the call.
Speaker Change: Some of the trade receivable stopped some of the other asset based finance stuff is providing additional return to the portfolio, which we're happy to see.
Speaker Change: Great. Thanks very much.
Speaker Change: Have a good morning.
Speaker Change: Standby for our next call.
Speaker Change: Okay.
Speaker Change: Our next call comes from Kenneth Lee with RBC capital markets.
Kenneth S. Lee: Kenneth go ahead with your question.
Kenneth S. Lee: Hi, Good morning, Thanks for taking my question just one on the asset based finance opportunities there.
Kenneth S. Lee: Wondering if you could just talk about the.
Kenneth S. Lee: Current outlook for such opportunities and perhaps talk a little bit more about the competitive landscape that you're seeing and whether youre seeing any kind of impact from from new entrants into the space. Thanks.
Speaker Change: Sure. Good morning, Thanks for the question.
Speaker Change: It is a sector that we're pretty excited about and we feel like there is a lot of white space there.
Speaker Change: And Ken I think I was a little bit to your comment. It is a very kind of large market and we estimate that market is north of five trillion dollars that makes it bigger than the direct lending market.
Speaker Change: The syndicated loan market and the high yield bond market combined.
Speaker Change: I think that's a good fact.
Speaker Change: I think it's in the early days of kind of capital formation. So.
Speaker Change: There's just not a lot of scale capital players out there.
Speaker Change: And then there have been some market somatic set.
Speaker Change: I have given some pretty good tailwind to this business. Obviously, there has been certain challenges with the regional banks Theres been bank selling assets.
Speaker Change: <unk> committing maybe less capital than they did to certain <unk>.
Speaker Change: Somebody has to come there and fill that void.
Speaker Change: Those are capital like ours that we are managing here with FSA or sort of otherwise, we're able to sort of do that so.
Speaker Change: I think all of that lines up with.
Speaker Change: Big market not a lot of scale capital some good sort of tailwind and I think we really like the opt out of the risk profile and the relative value. So I think we will continue to be active there.
Speaker Change: Got you very helpful. There and then one follow up if I may really appreciate the details around.
Speaker Change: The restructuring boom being those three portfolio companies I'm wondering if you could just talk a little bit more at a higher level around the general approach.
Speaker Change: The FSA has around.
Speaker Change: Potential derisking, what kind of options are available and how do you choose the course of action.
Speaker Change: For our particular portfolio companies. Thanks.
Speaker Change: Sure happy to do that I imagine we were pleased to see.
Speaker Change: Progress on these names I think we are fortunate from a.
Speaker Change: Human capital or a staffing perspective to have a very strong restructuring and workout team.
Speaker Change: It's a dedicated team.
Speaker Change: A woman Lauren Kruger runs that team.
Speaker Change: In addition to running that same she sits on the investment committee for the regular way business. So she is active across the board.
Speaker Change: No.
Speaker Change: I would say, it's a very bottoms up approach in many ways right and this is the comments that sort of Brian made I mean, obviously, we would prefer.
Speaker Change: Sure.
Speaker Change: The sponsor support the companies directly.
Speaker Change: We are obviously willing to work with the sponsors to do that from time to time that won't be an option and we need to be prepared to take control. We're not afraid to do that we've got the resources of the entire firm sort of behind us.
Speaker Change: But maybe just kind of one of example of this is.
Speaker Change: While KBS was.
Speaker Change: I think.
Speaker Change: The duration that consensual deal I think it will help kind of drive longer term value we brought other resources.
Speaker Change: From the firm including.
Speaker Change: A handful of KKR advisors to bear to that situation, which will be helpful. So.
Speaker Change: In some ways all of the options around the table, we're going to pick what we think is the best for that current situation, but I think it's just important to have the resources that are available. So I think we are happy to see these non accruals down.
Speaker Change: Quarter over quarter, I think we do still remain happy with the <unk>.
Speaker Change: 88% of the portfolio is that KKR sort of originated piece on the non accruals of two 3% and 1%.
Speaker Change: It's just an important factor to understand out there.
Speaker Change: Hey, Dan the one thing I would add to this Ken it's Brian.
Brian Gerson: That can situations like this time is not always your friend, so I think our products to sort of address things quickly.
Brian Gerson: And deliberately is really important.
Speaker Change: Because sometimes.
Speaker Change: We never believe in kicking the can down the road.
Speaker Change: Because situations get worse not better.
Speaker Change: Those circumstances.
Speaker Change: So we want to drive to a resolution.
Speaker Change: Clearly, we do prefer the sponsor to support continue to support their portfolio companies.
Speaker Change: Often do.
Speaker Change: When they don't.
Speaker Change: We just don't want to close our eyes and hope for that we need to be getting in there and preparing to.
Speaker Change: Maximize value for our investors.
Speaker Change: Got you very very helpful. There. Thanks again.
Speaker Change: Our next question.
Speaker Change: Our next question comes from Bryce Rowe with B Riley.
Bryce Wells Rowe: Price go ahead with your question.
Bryce Wells Rowe: Thanks, a bunch.
Bryce Wells Rowe: Good morning, I appreciate you taking the question here.
Bryce Wells Rowe: Wanted to kind of did have some of the comments around.
Bryce Wells Rowe: The information around the restructuring resolutions super helpful and certainly.
Bryce Wells Rowe: Pleasantly surprised to see the pace at which you.
Bryce Wells Rowe: They made those happen.
Bryce Wells Rowe: Maybe shifting to the.
Bryce Wells Rowe: The capital structure might have talked about this in past calls, but but but Steven maybe you could speak to the opportunity to refinance or at least address some of the maturities you have coming up in 'twenty, four and 'twenty five, especially in light of how open the dip.
Bryce Wells Rowe: Debt capital markets are today.
Bryce Wells Rowe: Brian Thanks for the question.
Steven C. Lilly: I think from our perspective, we took.
Brian Gerson: Took care of our July maturity last fall, when we issued $400 million of unsecured notes.
Speaker Change: Certainly agree with your point the markets are open.
Speaker Change: Appear to be active so yes, that's certainly a good thing I think we'll evaluate things in the normal course, as we have been a frequent issuer I think will continue to be.
Steven C. Lilly: Over time.
Steven C. Lilly: Certainly getting having a very nice start to the year like this quarter.
Steven C. Lilly: Very clean positive quarter for us.
Speaker Change: I will take all of those things in consideration.
Steven C. Lilly: But I think the.
Steven C. Lilly: The way the capital structure of the way we have ladder it over the last several years.
Steven C. Lilly: Really de risks us from from that standpoint, just in terms of being sort of methodical.
Steven C. Lilly: <unk> issuer on the <unk>.
Steven C. Lilly: Year to year basis.
Speaker Change: That's helpful.
Speaker Change: And then maybe just one follow up on the restructuring to the resolutions.
Speaker Change: Obviously took care of some here in the first quarter, but curious.
Speaker Change: Assume that workout group continues to kind of work hard on the other situations.
Speaker Change: Can you can you speak to maybe the pace of those potential resolutions and kind of maybe maybe an update on Miami Beach was one of the one of the larger.
Speaker Change: Non accruals that were added in the fourth quarter. Thanks.
Speaker Change: Yes happy to.
Speaker Change: I mean, obviously that the team will remain busy there.
Speaker Change: And kind of focus for the resolutions and I thought the point that Brian made was a very good one.
Speaker Change: I think we continue to make progress on Miami Beach, probably a little bit more of a.
Steven C. Lilly: A complicated situation complicated set of industry.
Steven C. Lilly: More too.
Steven C. Lilly: Talk about there in the coming quarters, there was a handful of other names that may be.
Steven C. Lilly: Are either on the non accrual or the non income producing list that.
Steven C. Lilly: We're kind of watching M&A markets closely.
Steven C. Lilly: Probably preparing for or thinking about kind of 24 early 'twenty five set of exits there and then maybe just one of the larger names. So youll have it as global jet.
Steven C. Lilly: I think as you know roughly 44% of the non accrual balance I think we've been very happy with what management has done of late I think they've done a really nice job.
Steven C. Lilly: That book is at the overall company level on the asset side is north of $2 billion.
Steven C. Lilly: I don't believe Theres, one credit issue in that portfolio.
Steven C. Lilly: They recently accessed the capital markets from a financing perspective.
Steven C. Lilly: And.
Steven C. Lilly: We would've received roughly 130 odd million dollars of distributions as that business continues to rightsize its equity base. So I think the team's done a really nice job there working with the management team.
Steven C. Lilly: And the other sort of sponsors to push that business forward, but those are probably some highlights for you Russ.
Russ: Excellent. Thanks.
Speaker Change: Thanks, Dan I appreciate it thanks have.
Speaker Change: Have a good day.
Speaker Change: Thanks, Our next question.
Steven C. Lilly: Yeah.
Steven C. Lilly: Our next question comes from Casey Alexander with Compass Point Research and trading Casey go ahead with your question.
Casey Jay Alexander: Hi, Good morning couple of questions stand one.
Casey Jay Alexander: In relation to the.
Casey Jay Alexander: New underwriting environment.
Casey Jay Alexander: Are we seeing repays with higher yields.
Casey Jay Alexander: <unk> do spread compression should we be thinking about a drag on weighted average yields as the year goes along.
Speaker Change: And that's just it.
Speaker Change: I think a general question, but I'm curious how you feel about that.
Speaker Change: Hey, good morning Casey.
Casey Jay Alexander: Yes, I think.
Casey: Its rational to think that right I mean, I think this is not just an FSA point, but people's books will get rotated.
Casey: Those rotations could go into.
Speaker Change: Lower yielding assets.
Speaker Change: But I think.
Speaker Change: Lower yield will be driven obviously by the benchmark bye bye.
Speaker Change: The spreads as well I do think though there'll be some offset to transaction fees.
Speaker Change: That will sort of benefit kind of earnings and maybe sort of smooth that out a little bit.
Speaker Change: There's been extraordinary light amount of volume for probably the past eight quarters.
Speaker Change: So I think you can probably go back and look at kind of across the industry at that so I think thats.
Speaker Change: A bit of a balance and then I think we come back to a price discussion was.
Speaker Change: We're working pretty hard on some of these non accrual or non income producing names that rotating that into income producing will be quite beneficial to the bottom line and we're still a little bit.
Speaker Change: We're within our target leverage range, we still got a little bit of room, there, which should help.
Speaker Change: Thank you for that secondly on the ABL side.
Speaker Change: KKR has I believe set up a real effort.
Speaker Change: Sure.
Speaker Change: To attack Abl's, not just withstanding the BDC.
Speaker Change: So that's.
Speaker Change: That's clearly a focus at KKR, so what percentage of the portfolio would you be willing to take abl's too in in the BDC and where do origination yields there sit relative to direct origination private credit.
Speaker Change: And is that also a way to potentially offset some drag on weighted average yields.
Speaker Change: Yes, no. Thanks for that so we do have a real effort. There we have north of 50 people dedicated to that space, we have north of $50 billion of Av.
Speaker Change: Total AUM in that space.
Speaker Change: The nomenclature point, we call it asset based finance.
Speaker Change: More focused on portfolios of financial it hard assets in the market historically used.
Speaker Change: We use the ABL is just receivables only but it is a broad effort for us.
Speaker Change: We do as I mentioned like the downside protection, but specifically Casey to your point, we're probably seeing deals anywhere kind of a 100 basis points to kind of 400 basis points wide of of your regular way.
Speaker Change: Direct lending deal.
Speaker Change: I think we are.
Speaker Change: Kind of it within the range that we've talked about historically for asset based financing side there.
Speaker Change: Of SK, we obviously have the benefit of our joint venture to kind of help there, but I think you should continue to expect us to be active there rotating in new deals with some of these other deals will continue to to sell.
Speaker Change: Self liquidate herself amortize.
Speaker Change: Okay great.
Speaker Change: The other constraint, it's just non EPC.
Speaker Change: ABF investments are usually non EPC and we have to stay within the 30% bucket and we also have the JV. So.
Speaker Change: That's a bit of a constraint, but as Dan mentioned, we can also put ABF into the JV.
Speaker Change: To basically increase our buying power and non EPC.
Speaker Change: Alright, okay.
Speaker Change: Great color. Thank you for taking my question.
Speaker Change: Thanks, guys.
Speaker Change: Standby for our next question.
Speaker Change: Sure.
Speaker Change: Our next question comes from Melissa Wedel of J P. Morgan Melissa go ahead with your question.
Melissa Wedel: Thanks, and good morning.
Melissa Wedel: Wanted to touch on I think it is really a follow up to the first question.
Melissa Wedel: About sort of investment activity levels.
Speaker Change: Lee.
Melissa Wedel: The elevated repayment activity in the first quarter, we saw leverage in the portfolio has come down a bit.
Melissa Wedel: Given it's sort of middle of the target range right now.
Melissa Wedel: I'm curious how you feel about that level of service portfolio leverage, especially in the context of your comments about expecting portfolio company growth.
Melissa Wedel: On the revenue side, and I think on the EBITDA side as well to start to decelerate.
Melissa Wedel: In the back half of the year.
Speaker Change: Yes, Thanks Boston.
Boston: Good morning.
Boston: I think I think we're pretty comfortable with where we sit right now right.
Speaker Change: We've historically given that kind of a one to one and a quarter times range.
Speaker Change: Probably the midpoint of or sort of the target of kind of the 115, so maybe slightly below that.
Speaker Change: I think we like how much available liquidity, we have I think we like the maturity ladder, we have on the liability side I think we are.
Speaker Change: Fair to kind of operate within that range.
Speaker Change: Considering we have that level of dry powder.
Melissa Wedel: I think on the other comment I mean I think.
Melissa Wedel: Like the overall.
Melissa Wedel: Market has taken the view, maybe almost too aggressively.
Melissa Wedel: The hard landing concept is removed from the equation and we are in this more kind of a soft landing perspective, I think we are expecting some slowdown though.
Melissa Wedel: At the consumer side more of a sort of broadly which will impact some of the names here and maybe reduce that kind of year on year EBITDA growth. It is our job for these companies to be a little bit glass half empty, but we got a little bit of of of room to work on the leverage side and what are good liquidity position. So we feel good about that.
Speaker Change: Okay I appreciate that and then following up on the funding there are a decent number.
Melissa Wedel: Our pending maturities and you guys have done.
Melissa Wedel: We have always approached your unsecured issuances.
Melissa Wedel: Credibly ladder.
Melissa Wedel: And well diversified, but there are some maturities coming up in 'twenty, four and 'twenty five given the rate environment, given the spread environment.
Melissa Wedel: Or are you thinking about sort of.
Melissa Wedel: Funding those upcoming maturities and.
Melissa Wedel: Are you.
Melissa Wedel: What's the appetite for further diversification versus sort of using the available capacity on our revolver.
Speaker Change: No no. It does I think Steven may have touched on some of the so Stephen if theres something that here. Please do but we did we did do that deal in November essentially pre funding the upcoming.
Speaker Change: Maturity in the summer obviously, we've got the $4 2 billion of available liquidity.
Melissa Wedel: We've got I think 65% of our balance sheet is funded today from unsecured I think you should expect us to be a very active.
Melissa Wedel: Issuer there.
Melissa Wedel: And.
Melissa Wedel: Do that with some level of consistency, but also do it in a bit on an opportunistic basis. When markets are open and then I think we'll also look at other tools like Cielo is a set of otherwise to make sure we're kind of fully <unk>.
Melissa Wedel: <unk> from a from a liability perspective, Stephen anything you want either.
Stephen: Thank you covered it well.
Melissa Wedel: Yeah.
Speaker Change: Thank you.
Speaker Change: Standby for your next question.
Speaker Change: Our next question comes from Robert Dodd with Raymond James Robert. Please go ahead with your question.
Robert James Dodd: Good morning, guys.
Robert James Dodd: On the forward outlook in terms of.
Robert James Dodd: Economic risk of macro mix, how much of that concern stems from overall demand revenue.
Robert James Dodd: This is versus margin, but we're hearing mixed messages from some bdcs generally bdcs Milwaukee software margins go up because software companies slashing sales expense, but.
Melissa Wedel: On your companies how much of the kind of the cost cutting or margin management tools.
Melissa Wedel: <unk> been expended so to speak.
Melissa Wedel: Over the last several years, because obviously, it's been a theme for a lot of companies for many years.
Melissa Wedel: Running out of tune on that front do you think.
Speaker Change: Yes, good morning, Robert It's fair question.
Speaker Change: Our biggest.
Speaker Change: Sector exposure as sort of software.
Speaker Change: Just focused on the.
Speaker Change: The largest set of software names that were more.
Speaker Change: EBITDA focused and then.
Speaker Change: Recurring revenue sort of structures.
Speaker Change: We have seen out there that the.
Melissa Wedel: Ability to just blindly push through prices probably kind.
Melissa Wedel: Kind of abated and.
Melissa Wedel: It'll be more challenging just to just to do that so I think that is one point in.
Melissa Wedel: Almost in line with I think what Youre thoughts are there.
Melissa Wedel: I think where we've seen probably the most.
Melissa Wedel: Or the.
Melissa Wedel: The most challenged in certain situations is when a company when theyre kind of expense line is heavily driven by wages ranks the wage inflation remains a real sort of point out there when you couple that with.
Melissa Wedel: Just a higher rate environment and as we've talked about for multiple quarters now we expect rates to remain higher for longer. So those are probably a little bit more of the.
Melissa Wedel: The things, we do have our eye on.
Melissa Wedel:
Melissa Wedel: So.
Melissa Wedel: I think we're mindful about that sort of revenue piece I think that's partly why we're talking about expecting to see just got a slower sort of EBITDA growth in the coming quarters.
Speaker Change: Got it. Thank you and then just you guys.
Melissa Wedel: Activity levels in the second half of the year.
Melissa Wedel: Lots and lots of expectation that to the point you outlined.
Melissa Wedel: Lps want their money back.
Melissa Wedel: How is it.
Melissa Wedel: Is the bid ask between buyers and sellers on this.
Melissa Wedel: The piece that is the actually beginning to close or is does that obviously been a factor activity levels remain low.
Melissa Wedel: And do you think that's going to close sufficiently this year for that should be a pickup a material pick up in activity in the second half or are people still planned chicken on that front.
Speaker Change: No I think the short answer is yes, I think it has close meaningfully or will it kind of.
Speaker Change: Close enough to get the transaction levels up.
Speaker Change: I do think you had a.
Speaker Change: A bunch of let's call it different factors in play I think we even going back to last summer, we saw a little bit more activity a little bit more books coming around our sort of chatter about deals then the events and in Israel and the middle East that have happened in October Thats sort of we'll call. It put in most things on hold and then the market was forecasting the six.
Speaker Change: Rate cuts.
Speaker Change: Going into the year I think people wanted to hold assets with a view that at a lower rate environment, They would sort of get better prices, but I think there is a decent.
Speaker Change: Consensus out there that rates are going to be higher for longer. So that's kind of off the table and I think there's also a decent consensus that.
Speaker Change: While there might be certain bumps in the road or sort of challenges.
Speaker Change: This.
Speaker Change: As I said the conversation around.
Speaker Change: Heartland is off the table at all.
Speaker Change: Pretty muted in terms of sort of I think challenges in People's mind, albeit I think we're a little bit more cautious on that.
Speaker Change: I think all of that is coming together and then Robert you said it I mean people are looking for capital back on the LP side and on the other side Theres a lot of dry powder.
Speaker Change: Got it thank you.
Speaker Change: Thanks.
Speaker Change: And my next question.
Speaker Change: Our next question is from Erik Zwick of Degroup. Eric go ahead with your question.
Erik Edward Zwick: Thank you and good morning, everyone I wanted to start.
Erik Edward Zwick: First with the question regarding the pipeline I'm curious if you could provide any commentary in terms of how that looks today in terms of the mix of new investments versus add on opportunities as well as if there are any particular industry segments that you are finding that are either kind of more active or more attractive from your perspective.
Speaker Change: Yes, I would say, it's almost in line with with what you'd probably expect right we've been probably overweight.
Speaker Change: Add on in the <unk> condensate, so I think you're always going to see a large chunk of that considering the size of the platform, but some of that will be regular way.
Speaker Change: Kind of new deals so I think it's pretty balanced.
Speaker Change: I think the pipeline.
Speaker Change: As is decent right now.
Speaker Change: I think the level of deals that I see being screened were making their way through investment committee is definitely up more.
Speaker Change: On quarter or up more than maybe what we saw last year.
Speaker Change: They will take it will take a little while to play out the right cause some of the conversations here or just people are gearing up for this that means it's a multiple month process in a multiple months kind of close.
Speaker Change: But constructive.
Speaker Change: Yes, I mean, the one thing I'd add Eric is that just because the company is being sold doesn't necessarily mean, it's going to go out of our portfolio.
Speaker Change: We are always in active dialogue with sponsors looking to sell companies about providing financing to the new buyer and because we have the incumbency position.
Speaker Change: That gives us a bit of an advantage over some of our competitors.
Speaker Change: So clearly that's a focus for us.
Speaker Change: That's helpful. Thank you and then.
Speaker Change: Second question for me it was just interesting to notice on <unk>.
Speaker Change: Slide 10 meeting interest coverage for your company. It has been pretty stable for about a year and actually ticked up a little bit in <unk>, which.
Speaker Change: Makes sense given that base rates have been pretty stable and given the fact that you said you've kind of seen high single digit EBITDA growth over the past year. So I guess, if we assume that rates stay here or even potentially come down and you continue to see some EBITDA growth is that a fair assumption that we've kind of seen that.
Speaker Change: The bottom of kind of a trough for this.
Speaker Change: Particular metric for this cycle.
Speaker Change: Yes that would be our view in terms of the trough.
Speaker Change: Now theres, a little bit driven off the fact of while we don't believe that.
Speaker Change: Rates are necessarily coming down anytime soon I don't think.
Speaker Change: I don't think theyre going up either right.
Speaker Change: Or is it probably more leaning to over the next several years kind of these rate reductions.
Speaker Change: You did see that kind of uptick a bit I think to be fair. It's it probably wasn't all or the entire sort of 0.1 I think some of it may have just been kind of a rounding there, but it definitely improves kind of quarter on quarter.
Speaker Change: Thanks for the confirmation there. Thanks, so much for taking my questions today.
Speaker Change: No problem.
Speaker Change: And my next question.
Speaker Change: Our next question comes from Maxwell Richer choose security next we'll go ahead with your question.
Maxwell Richer: Hi, good morning, I'm, calling in for Mark Hughes.
Maxwell Richer: Broader question about the economy.
Maxwell Richer: Is there any sector in particular that youre seeing cracks and we're staying away from or are there any credit issues and this is industry wide not just in your portfolio.
Speaker Change: These credit issues more idiosyncratic.
Speaker Change: Yes.
Maxwell Richer: And I think we've talked about those on some of the prior calls I mean, I think we have.
Maxwell Richer: Tried to build the portfolio staying away from the secular decliners right. So that's been sort of a positive out of the gate, but.
Maxwell Richer:
Maxwell Richer: That has those I think in many ways would continue to be challenged I think we have seen.
Maxwell Richer: Businesses.
Maxwell Richer: In the healthcare space, probably be a little bit more challenged I think some of that has had to do with and this is an industry not just anything with us.
Maxwell Richer: Some of it has to do with with the revenue side and how people are getting reimbursed.
Maxwell Richer: We're seeing some of the discretionary spend.
Maxwell Richer: Names kind of struggle. Some of these rollouts are sort of struggling so healthcare, which historically has been viewed as a defensive asset class has probably been a little bit more mixed.
Speaker Change: And I think that probably continues for some time.
Speaker Change: But Brian anything else you want to ask.
Brian Gerson: And then I think you saw.
Brian Gerson: Set up pretty well I mean, we've been focusing on industries that we think are more defensive like software, we like consumer driven health care related consumer we like we like professional services business services those have all been pretty resilient.
Speaker Change: Energy retail consumer products, we've just tended to stay away from.
Speaker Change: Yeah look I think we're continuing to see pretty solid earnings growth across the book as evidenced by that 7% number that focus, but that's clearly an average.
Speaker Change: So.
Speaker Change: I would tell you that.
Speaker Change: There is nothing right now, where we could say semantically beyond what Dan said there are certain industries that are that are interest in having real trouble.
Speaker Change: It's been somewhat.
Speaker Change: Specific situations specific with some of our non accruals and problem credits.
Speaker Change: And I think we just need to continue to be cautious about the overall economy, and whether we have a soft landing or not.
Speaker Change: Got it. Thank you and then switching gears to second lien investments.
Speaker Change: Are you still seeing good opportunities there obviously in the new lenders.
Speaker Change: Focusing are emphasizing there.
Speaker Change: First lien, which you do have the majority of your portfolio.
Speaker Change: Understandable, but any insight on the second liens, what youre seeing there in terms of spreads or yields et cetera, how youre looking at this.
Speaker Change: Yes.
Speaker Change: Margaret I think about it.
Speaker Change: So sorry, I, probably think about a little bit broader is kind of.
Speaker Change: Junior debt as a whole category right thinking about second lien or things that might be.
Speaker Change: More sort of as like.
Speaker Change: Obviously, our activity has been kind of muted there for several years because that is generally driven by even.
Speaker Change: They have a more active M&A market.
Speaker Change: We have seen a handful of deals get done of late there have been probably top decile businesses of there has been second lien in those structures those structures were actually pretty darn tight from a spread perspective.
Speaker Change: Our sense is as the M&A volumes do pick up there's going to be more opportunity in that junior debt space.
Speaker Change: I think that'll be an interesting opportunity as well.
Speaker Change: Considering that business I think we view is a little bit more cyclical. So the time to kind of get in there is when the M&A picks back up in the financing markets are going to need someone to kind of help fill that void.
Speaker Change: And those can be pretty attractive structures from a yield or a total return.
Speaker Change: Perspective.
Speaker Change: Now all that being said I think we're quite mindful about portfolio construction here.
Speaker Change: And making sure we've got a.
Speaker Change: A fair balance of kind of really.
Speaker Change: Leading with which is a focus of this is that the kind of.
Speaker Change: Firstly in or unit tranche senior secured risk.
Speaker Change: And then we have a pretty high bar for junior capital.
Speaker Change: Talk about the weighted average EBITDA of the.
Speaker Change: Portfolio being call it 20 give or take.
Speaker Change: If you look at our junior debt investments on average EBITDA is probably twice that.
Speaker Change: So when we do go junior they tend to be in much larger businesses. They tend to be businesses, where sponsors have written a $1 billion plus checks or multiple billion dollar tax.
Speaker Change: That's typically driven by new deal activity is damaged.
Speaker Change: That's helpful. Thank you.
Speaker Change: Okay.
Speaker Change: Showing no further questions I would now like to turn it back over to Dan Pietrzak for closing remarks.
Daniel Ryan Pietrzak: Thank you all for joining the call today, we're always available for any follow up points that you might have and we look forward to talking with you again next quarter have a good day.
Daniel Ryan Pietrzak: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
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