Q3 2024 FS KKR Capital Corp Earnings Call
To obtain copies of the company's latest SEC filings, please visit FSGA's 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 Stephen Lilly, Chief Financial Officer.
Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson.
I will now turn the call over to Michael.
Michael Forman: Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's third quarter 2024 earnings call.
Michael Forman: FSK's financial and operating results showed continued strength during the third quarter as we again exceeded our earnings guidance and over-earned our quarterly base and supplemental distribution.
Michael Forman: Our net asset value per share at the end of the third quarter was $23.82.
Michael Forman: On October 8th, 2024, we announced that our board declared a total fourth quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share.
Michael Forman: This results in $2.90 per share of total distributions in 2024.
Which equates to a 12.2% yield on our September 30, 2024 net asset value of $0.2382 per share and a yield of approximately 14% based on our recent share price.
As Dan will discuss in more detail during his comments, the FSK Care Advisor continues to maintain its high bar on credit quality and disciplined underwriting process.
Speaker Change: During the third quarter, we originated approximately $1.1 billion of investments, and we ended the quarter with ample liquidity totaling approximately $4.4 billion.
Speaker Change: As we begin focusing on 2025, FSK is well-positioned to capitalize on expected market conditions. First, given the recent reduction in interest rates and assuming some level additional rate cuts over the next 12 months, our portfolio companies should experience improved credit metrics, such as interest and fixed charge coverage ratios.
Michael Forman: Next, based on our expectation for continued improvement in the M&A environment, there should be additional opportunities to rotate out of certain legacy portfolio companies which have positioned themselves favorably over the last several years.
Lastly, we are optimistic about the outlook for new investment opportunities and continue to believe that the KKR credit platform is well positioned to generate differentiated deal flow across private debt and asset-based finance investments.
Michael Forman: And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter. Thank you, Michael, and good morning, everyone. Despite the recent noise surrounding the presidential election, the U.S. economy continues to remain on solid footing.
Speaker Change: Since the Fed began raising rates in early 2022, the U.S. economy has experienced a 6.8% growth rate in real terms.
Dan Pietrzak: Recent economic data, released through September, illustrates that the labor market has remained resilient, boosting income levels for workers, which continues to support consumer spending.
Speaker Change: At the same time, inflation has declined from 9.1% in June of 2022 to approximately 2.4% today.
Speaker Change: Both of these inputs create a favorable backdrop for a sustained economic expansion.
Speaker Change: As Michael alluded in his comments, we believe that M&A activity will increase meaningfully in 2025, as the market has seen interest rates peak and economic sentiment improve.
Speaker Change: In line with this, we have seen greater momentum in middle market deal volumes and our pipeline of new investment opportunities continues to grow.
Speaker Change: The bar remains high when looking for new opportunities to deploy capital.
Speaker Change: The market continues to be competitive, which has resulted in tighter credit spreads and more borrower-friendly terms.
Speaker Change: Nevertheless, we remain prudent and disciplined in our underwriting and have continued to pass on opportunities that do not meet our credit standards.
Speaker Change: We continue to see compelling opportunities in asset-based finance as banks strategically reposition their portfolios, largely due to regulatory requirements.
Speaker Change: As we have discussed previously, our ABF investments are often structured as fixed rates, which helps offset the impact of declining rates in the direct lending portion of our investment portfolio.
Thank you.
Speaker Change: During the third quarter, FSK originated $1.1 billion of new investments.
Speaker Change: Approximately 57% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships.
Speaker Change: Our new investments, combined with $1 billion of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $185 million.
Speaker Change: New Originations consisted of approximately 84% in first lien loans and 16% in asset-based finance investments.
Speaker Change: Our new direct lending investments had a weighted average EBITDA of approximately $211 million, 6.3 times leverage through our security.
Speaker Change: and the weighted average coupon of approximately SOFR plus 505 basis points.
Speaker Change: To our ABF team and the broader KKR network, we have developed deep relationships which allows us to access niche sectors that we find attractive within the ABF market.
Speaker Change: and to structure deals that many market participants are unable to execute on due to transaction size, complexity, or platform capabilities.
Speaker Change: One example of an asset-based finance deal that we originated during the quarter was the purchase of an approximately $10 billion pool of seasoned private student loans from Discover Financial Services.
Speaker Change: This portfolio is focused on prime borrowers or co-signers and has an average FICO score above 750.
Speaker Change: KKR Credit and another large manager jointly led and structured the multi-billion dollar deal with FSK committing $94 million.
Speaker Change: The trend of well-performing portfolio companies proactively seeking repricings continued during the third quarter.
Speaker Change: We have also experienced instances of companies seeking overly aggressive price reductions or structural amendments, which don't align with our return or risk thresholds.
In those situations, we have proactively chose to be repaid.
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Speaker Change: When we look at aggregate trends across our portfolio companies, we observed a 13% year-over-year EBITDA growth rate at portfolio companies in which we have invested in since April of 2018.
Speaker Change: Additionally, the weighted average and median EBITDA of our portfolio companies was $237 million and $121 million, respectively, as of September 30, 2024.
Speaker Change: As of the end of the third quarter, non-accruals represented 3.8% of our portfolio on a cost basis.
and 1.7% of our portfolio on a fair value basis.
Speaker Change: This compares to 4.3% of our portfolio on a cost basis, and 1.8% of our portfolio on a fair value basis as of June 30, 2024.
Brian will provide further details on this during his comments.
Speaker Change: We also believe it is helpful to provide the market with information based on the FSK assets originated by KKR Credit.
Speaker Change: Non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor, were 2.2% on a cost basis and 50 basis points on a fair value basis as of the end of the third quarter.
Speaker Change: This compares to 2.4% on a cost basis and 60 basis points on a fair value basis as of June 30, 2024.
Speaker Change: And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.
Brian Gerson: Thanks, Dan. At the end of the third quarter, our investment portfolio had a fair value of $13.9 billion, consisting of 217 portfolio companies.
Brian Gerson: This compares to a fair value of $14.1 billion in 208 portfolio companies as of June 30, 2024.
Brian Gerson: Our net leverage remained flat quarter over quarter, and the decline in our investment portfolio's fair value was primarily driven by unrealized depreciation relating to three investments, Production Resource Group, Miami Beach Medical Group, and WorldWise.
Brian Gerson: PRG continues to be impacted by the lingering effects of the writer's strike and its corresponding impact on TV and film, as well as softness in its live performance business due to the delay of certain artists' tours.
Brian Gerson: Miami Beach recently filed for Chapter 11 as part of its anticipated sale to Humana.
Brian Gerson: Over the coming months, should this transaction close, we will exit our position in full.
Brian Gerson: WorldWise has experienced headwinds in its core pet-fed business due to increased competition from low-cost foreign suppliers.
Brian Gerson: We are actively engaged with the sponsor WorldWise to negotiate a potential restructuring, and we will provide additional updates as we learn more.
Brian Gerson: At the end of the third 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 60% first lien loans and 67% senior secured debt as of September 30th
Brian Gerson: In addition, our joint venture represented 9.9% 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, then first lien loans total approximately 69% of our portfolio, and senior secured investments total approximately 76% of our portfolio as of September 30th.
Brian Gerson: The weighted average yield on occurring debt investments was 11.5% as of September 30th, a decrease of 50 basis points compared to 12% at the end of the second quarter.
Brian Gerson: The decrease is primarily a trivial to lower spreads on new investments, the repayment of certain higher yielding investments during the quarter, and portfolio company repricings.
Brian Gerson: As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR.
Brian Gerson: During the third quarter, GlobalJet returned $76 million of capital to FSK, which is used to further reduce our position.
Brian Gerson: This distribution brings our total capital received to $205 million over the last two and a half years, and we continue to be pleased with the performance of the company.
Brian Gerson: During the quarter, one investment was added to non-accrual status and three investments were removed. Our subordinated delay draw position in Miami Beach Medical was added to non-accrual status, contributing $17 million of cost and $8 million of fair value.
Brian Gerson: And with that, I'll turn the call over to Stephen to go through our financial results.
Stephen Lilly: Thanks, Brian. Our total investment income increased by $2 million during the third quarter to $441 million.
Speaker Change: The primary components of our total investment income during the quarter were as follows.
Speaker Change: Federal interest income was $356 million, representing an increase of $3 million quarter-over-quarter.
Speaker Change: A component of interest income, PIC interest, was $66 million as three portfolio companies, ACX, ERG, and KBS, paid their interest in the form of PIC.
Speaker Change: Dividend and fee income totaled $85 million, a decrease of $1 million quarter over quarter.
Speaker Change: Our total dividend and fee income during the quarter is summarized as follows.
Speaker Change: $46 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $18 million during the quarter, and fee income totaling approximately $21 million during the quarter.
Speaker Change: Our interest expense totaled $118 million, an increase of $3 million quarter over quarter, and our weighted average cost of debt was 5.5% as of September 30th.
Speaker Change: Management fees totaled $54 million, unchanged quarter over quarter. And incentive fees totaled $44 million, a decrease of $1 million quarter over quarter.
Other expenses totaled $10 million dollars, unchanged quarter over quarter.
Speaker Change: The detailed bridge and our net asset value per share on a quarter of a quarter basis.
Speaker Change: is as follows, our ending 2Q2024 net asset value per share of $23.95.
Speaker Change: Our net asset value per share was reduced by our $0.70 per share total quarterly distribution paid during the quarter.
Speaker Change: The sum of these activities results in our September 30, 2024 net asset value per share of $23.82.
Speaker Change: From a forward-looking guidance perspective, we expect fourth quarter 2024 GAAP net investment income to approximate $0.63 per share, and we expect our adjusted net investment income to approximate $0.68 per share. Detailed fourth quarter guidance is as follows.
Speaker Change: Our recurring interest income on a gap basis is expected to approximate $332 million. We expect recurring dividend income associated with our joint venture to approximate $52 million, an increase of approximately $6 million quarter over quarter.
Speaker Change: The expected increase is a result of the recent sale of $370 million of assets to the joint venture from FSK's balance sheet.
Speaker Change: We expect other fee and dividend income to approximate $31 million due to lower non-occurring fee income within our investment portfolio.
Speaker Change: From an expense standpoint, we expect our management fees to approximate $53 million. We expect incentive fees to approximate $36 million. We expect our interest expense to approximate $117 million.
And we expect other G&A expenses to approximate $10 million.
Speaker Change: During the fourth quarter, we expect our excise taxes will approximate $24 million.
Speaker Change: We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting.
Speaker Change: The primary drivers of the change from FSK's third quarter adjusted net investment income of $0.74 per share to our expected fourth quarter
Speaker Change: Adjusted Net Investment Income Guidance of $0.68 per share are the reduction in interest rates by the Federal Reserve in September and lower fee income in the fourth quarter as compared to the third quarter.
Speaker Change: According to our capital structure, our gross and net debt-to-equity levels were 121% and 109%, respectively, at September 30, 2024, as compared to 119% and 109% at June 30, 2024.
Speaker Change: As of the end of the third quarter, our available liquidity was $4.4 billion, and approximately 66% of our drawn balance sheet and 46% of our committed balance sheet was comprised of unsecured debt.
Speaker Change: As a team, we are very focused on managing the right side of a balance sheet and optimizing our capital structure through multiple funding sources.
Speaker Change: Like certain other BDCs which took advantage of the lower rate environment in 2019 and 2020, FSK has some lower cost debt maturing next year.
Speaker Change: In 2025, FSK has approximately $1.2 billion of unsecured notes maturing, representing approximately 10% of our total debt commitments and carrying a weighted average cost of 5.1%.
Speaker Change: FSK has been a frequent issuer in the unsecured market with a focus on well-laddered maturities.
Speaker Change: We will continue to opportunistically assess the unsecured market, and we have over $3.5 billion of undrawn capacity under our Senior Secured Revolving Credit Facility to utilize, should we desire, to aid with timing differences.
Michael Forman: And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
Michael Forman: Thank you, Stephen. In closing, we are pleased with FSK's third quarter performance as we have further reduced our non-accrual investments and are continuing to see significant new investment opportunities.
Speaker Change: As we look toward 2025, we believe the next several quarters could yield meaningful opportunities for FSK as the M&A market continues to improve.
Speaker Change: As we actively pursue well-structured new investments and focus on rotating legacy investments, we believe that 2025 has the potential to be a very active year for FSK. And with that, Operator, we'd like to open the call for questions.
Speaker Change: Now opening the floor for question and answer session. If you'd like to ask a question, please press star followed by number one on your telephone keypad. Your first question comes from Bryce Rowe from B Riley Securities. Your line is now open.
Speaker Change: Thanks a lot. Good morning to everyone. I wanted to maybe start on just on yields and and what you're seeing there in the market. You know obviously you called out
Speaker Change: Yield compression within the portfolio in the quarter of 50 basis points. Just wanted to wanted to try to understand, you know, the, the impact from lower rates and.
Speaker Change: Spread compression, you know with within that 50 basis points and then the guide
Speaker Change: that you're giving here for the fourth quarter of lower interest income from rates. Is that all lower rates or is there some spread compression kind of baked into that assumption too?
You know, direct lending deal is probably
Speaker Change: You know, 500 basis points to 550 basis points, and that's before kind of fees and OID, you know, we have seen some repricings across the book. I think we called that out in our prepared comments. I think for names that we're comfortable with.
Speaker Change: And we like the risk, you know what we could be supportive of those, you know, we we have used a couple of those opportunities to just get repaid
You know what it is?
You know
Speaker Change: I think a little bit of a harder market these days.
Right, the M&A volumes that everybody's been forecasting, including ourselves.
Speaker Change: have been, you know, a little bit slow to return. I think we've been happy with our deployment numbers, but there's, you know, a bit of an imbalance in terms of available capital and kind of deal flow, which I think is driving some of that. You know, all that being said...
Speaker Change: You know, I think what you are earning on these loans in totality is still north of ten percent and Considering I think the quality of the company that we are seeing considering, you know, the LTV or the equity checks below us You know, that is that is one comforting fact in terms of total return on these deals
Okay. All right. That's helpful.
Speaker Change: You've got you guys have plenty of spillover income. So I think you all have communicated in the past that
Speaker Change: You know that spillover income is certainly sufficient, you know, to bridge any gaps. Kind of curious where you'd like, you know, the spillover to kind of base out so to speak.
Speaker Change: Do you want to try to reserve or keep two quarters of spillover versus what you have right now in roughly three?
Speaker Change: No, that's a fair question. I think your estimates there are, you know, pretty much on point.
Speaker Change: You know, I do think that this, you know, the spillback income is, is, you know, quite beneficial in, you know, in the environment that we're in, you know, I would kind of note, I mean, our starting point.
Speaker Change: earnings perspective is strong. I think 12.2% on NAV from a yield perspective is attractive. I think we are, as Stephen talked about, forecasting lower fee income in Q4.
Speaker Change: I think the one thing that we're going to watch play out is we do believe increased activity in 2025 will occur. That should be beneficial to that fee income line and provide some offset, but yes, the
Unknown Speaker 0.
Thank you guys. Thank you. Thank you.
Speaker Change: Hi, good morning. The income generation in the quarter was better than most of us expected, but there was a meaningful, especially over the last two quarters, increase in PIC income. Can you give us some sense of how you expect that to develop next quarter and in some of the succeeding quarters?
Yeah, good morning, Casey.
Speaker Change: You know, I think in terms of the pick, I kind of frame it in
Speaker Change: One way and then maybe Brian will talk about some of the specific deals.
Brian Gerson: While it's a smaller part of our portfolio, we have been active in certain junior debt deals. Athena Health would be an example of that. So of the PIC income, roughly half of that
Speaker Change: is what I'll call regular way, kind of new business, you know, a lot of those companies end up being kind of a larger size, which we like from a risk perspective. I think when we did the Athena deal, as an example, it was like a billion dollars of EBITDA. You know, the rest of it is, as Stephen called out, was related to, you know, a handful of names.
Speaker Change: And those names, you know, we're using that as they were, you know, reinvesting dollars into kind of growth activities, which I think were, you know, supportive of them doing.
Speaker Change: You know, you're probably in and around that range, you know, my guess would be for the next couple of quarters, but Brian, you might want to add to that.
Brian Gerson: Yeah, look, I think when you step back, you know, as it relates to these three names, when we restructure businesses, we always size the debt capacity to the current projecting earnings part of the business.
Speaker Change: They've lacked strategic guidance. They often need management upgrades. They may have been under-invested in SG&A or CapEx.
Speaker Change: And we structure these loans, this new debt, with a pick option, which gives option management flexibility to address these underperformance issues.
Speaker Change: And, you know, gives us, but we do have sign off on all the budgeting since we're on the board.
So, you know, I do think.
They're not surprising, they were intentionally structured.
Speaker Change: And, you know, I think the currently the deals that do have that option are utilizing it. You know, that may address your question about future. But again, there's there's a lot of thought that goes into how we structure these deals and really focusing on the ultimate outcome.
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Speaker Change: You know how you sort of intended to manage the dividend for 2024, and it ended up getting broken into kind of three components.
Speaker Change: I'm curious if you have any view of how you think the board expects to handle it, especially against, you know, A, rate compression, B, declining base rates.
Speaker Change: Would it be your expectation that in 2025 investors should think more in terms of the base dividend and then see how things develop through 2025?
Speaker Change: Yeah, and thanks for that Casey. I think we Try to be pretty transparent the way we've thought about dividend policy and you are correct. We broke it into kind of three pieces
Speaker Change: We wanted to reward shareholders for what's called outperformance on the income side. That was the five cents that was the additional that I think we paid for five straight quarters. We have broken it down into the 64 and the six, you know, to get to the 70.
Speaker Change: You know, I think what we do talk about with this with the board.
Speaker Change: You know, I think we'll continue to evaluate that with the board of, you know, I think you had an interesting piece out yesterday.
Speaker Change: You know as it relates to the potential impact of the presidential election You know our our I think our initial gut is while rates will continue to trend down
It probably will be a little bit slower.
Speaker Change: Daniel, then maybe we would or 60 days ago. we have to kind of watch we have to watch the deal to see what that does to But I would go back to
Speaker Change: You know, we're at the upper end of the range on the spill back and that's available to support that 70 cent number We've been paying out
Speaker Change: And just to be clear and put a fine point on it, the five cents was the spillover that we were paying after five quarters and the six cents was what reflected the higher rate environment that we've been operating in.
Right. Right.
All right. Great. Thank you for taking my questions.
Thank you, Casey.
Speaker Change: Thanks very much for taking my questions. Actually a couple just were asked, but I'm wondering, on the investment pipeline, I mean, Dan, it sounded like there's more activity, but maybe...
Speaker Change: The kind of pipeline of activity growth isn't quite as much as you would have expected. I guess my question is, is you looking at 2025 given the forward curve?
Speaker Change: and some anticipated maybe deregulation. Do you think that the M&A pipeline and the investment pipeline will grow over the course of the next few quarters or is kind of where we are where we are?
Yeah, thanks, John. You know, I think we do believe that it will grow.
Right, you have the continued fact out there that
Speaker Change: You know, the holding period for a bunch of these deals that are sponsor-owned has been probably longer than intended. You do have, I think, a continued focus from LPs to get capital back out of these funds. So I think there is, you know, a certain amount of pressure.
Speaker Change: to sell some of these companies. There's a lot of dry powder on the private equity side that's, you know, arguably getting kind of further down the road inside of fund life. So you have the capital there to, you know,
you know, be involved or acquire these companies. So I think that set up kind of remains.
You know, I think we did out of a view that, you know, to make the bid-ask kind of difference narrow.
Speaker Change: You needed kind of market participants to get their arms around inflation being under control, rates being, let's call it more stable, and, you know, kind of the hard landing being removed from people's kind of minds.
Speaker Change: You know, I think that all happened, but I think we have seen more and more people anticipating these rate reductions. So it has been kind of slower. You know, now, all that said,
When I do look at the pipeline and I do look at activity of the deal teams, it's been the highest it's been since the start of 22. So I think that's positive. So I think we do expect that to play out as we get into 2025.
Speaker Change: Okay, that's helpful context. And then maybe, maybe just from a credit outlook perspective, is there anything to talk about or maybe call out in terms of EBITDA or revenue trends within the portfolio at the company level?
Speaker Change: You know, I think two things. I mean, number one, we've still seen revenue and EBITDA growth. I think that's positive. I would say that, you know, revenue and EBITDA growth has been slower than we would have seen, you know, maybe in the years prior. So I think we are kind of watching that.
You know, I think and I think all market participants would probably say this, but you know, we we are
Speaker Change: Unknown Executive, Brian Gerson, Daniel Pietrzak, Michael Forman, Robert Paun, Robert Paun, Unknown
The issues that we have seen either in the portfolio or in the market have been more idiosyncratic to the particular name than anything That's you know more widespread. Yeah, and really you know the combo effector is
that we've been seeing underperforming over the course of the year sort of
continue to be, you know, anything that's sort of touching old retail, which we have very little exposure to, but, you know, consumer product companies.
Speaker Change: are being, you know, are down because the retail assistance are carrying much lower levels of inventory.
Speaker Change: People keep talking about de-stocking. I don't know how you de-stock for two years.
but I think you're talking about just a lower inventory model. And then within industrial, there's certain pockets of weakness given, I think, you know, this year there was more of a conservative outlook on capital spend.
Speaker Change: You know, in a low rate environment, you know, that should, that should be positive.
Great. Thanks very much. Thanks, Jeff.
Speaker Change: and many more. Thank you for watching. Please subscribe to our channel. And if you like our videos, please click the like button. And if you have any questions, please leave them in the comments.
Speaker Change: Your next question comes from Mark Hughes from Truist. Your line is now open.
Yeah, thanks. Good morning.
Speaker Change: All right. The repricing activity you've seen portfolio companies looking for better terms. How has that trended over the last few months? Is that kind of a step function? You see the rates change or is that just flow with the...
Day-to-day interest rates and spreads.
Speaker Change: You know, I think it's probably, you know, maybe a little bit more nuanced than that, right?
Thank you. Bye.
Speaker Change: You know, so, you know, the one what's called positive thing of the repricings would be a high correlation to well-performing businesses.
Speaker Change: I think we would have a thesis, Mark, that, you know, as rates do fall, I think that will put some, a little bit of pressure on spreads to widen.
Speaker Change: and you've seen some spread reduction since January 22. So I think it is sort of case by case, but I think we would expect as rates fall, you know, a bit of movement, you know, wider on spreads.
Speaker Change: Okay. And then have you seen any change in the trajectory on that activity in the recent months or has it been reasonably steady?
Unknown Executive, Brian Gerson, Daniel Pietrzak, Michael Forman, Robert Paun, Robert Paun, Daniel
Speaker Change: You know, kind of that, you know, that sort of, you know, bottom point.
Speaker Change: Yeah, yeah. And then you talked about passing on more deals.
Speaker Change: You know, based on the pricing issue, you're maintaining your discipline. When you think about the kind of you when you do pass credit versus competition What's the usual dynamic there? And you know, maybe you can't separate those because they're interrelated but
Speaker Change: How significant is that when you get the little tighter mark? How much harder is it to see the origination activity in your usual ratios?
Speaker Change: Yeah, I'll probably answer it a little bit differently, but tell me if it makes sense. You know, I think we have...
Speaker Change: You know, as I mentioned, been, you know, happy to see, you know, what's called an uptick of activity. I think the larger lenders like us do benefit from these, you know, you know, existing portfolios. You can maintain that incumbency position.
Speaker Change: You know, there are deals we won't play in because of, you know, where it's priced, you know, versus where we think it should be priced. You know, that said, I think our primary focus is on credit.
Speaker Change: and you know then there are structural pieces right I mean there are you know certain asks on certain deals that we think is a step too far you know for private debt or a liquid credit and you know we've we've walked away from certain deals you know after having done a lot of work on it because we're not comfortable with the structure
Speaker Change: Look, and I think the other thing to note is that our leverage is currently in the middle of our target range.
Speaker Change: So, you know, there's no pressure to deploy. I mean, we do, you know, benefit as insets from those incompetency positions. And, you know, we need, you know, when repricings occur, if we like the credit, we maintain it.
Marks: And maybe one last point, Marks, I think it is important.
Speaker Change: You know, I think we're very focused on maintaining kind of that broad origination funnel, right? We've always talked about...
Speaker Change: You know, being active in the upper end of the middle market, you know, we probably classify that as as 50 to 150 million dollars, but, you know, obviously, when the syndicated loan markets were shut.
Speaker Change: You know, in 22 and 23, we had the opportunity to participate in some larger deals.
Speaker Change: I think those were kind of very, very good risk reward. You know, we are prepared to go down, you know, to a lower number than that 50. You know, the floor is probably 25. But there's a very high bar for that it would be an industry or a sector that we really like, we're probably lending to one of their competitors.
Speaker Change: So we've got a real view in it that it's going to grow, but we do think it's important to have a broad kind of funnel there. We've got a very active non-sponsor business.
We have people dedicated to that.
Speaker Change: We think that's helpful. We've been active in some of the ABL activity, let's call that receivables and inventory.
Speaker Change: We find those deals quite interesting from a risk-adjusted return perspective. And then our asset-based finance business remains active. We talked about Discover in our prepared remarks, but those deals are generally returning several hundred basis points wide.
Speaker Change: of what we're seeing in direct lending. So I think that broad funnel is an advantage to us and the ability to deploy across different companies, sponsor, non-sponsor, in things like asset-based finances is quite important.
Yeah, yeah. Thanks for that perspective. Appreciate it.
Have a good day.
Thank you.
Speaker Change: Hey, good morning. Thanks for taking my question. Just one follow-up on that last comment around the asset-based finance opportunities there.
Speaker Change: Wondering which benchmark rates are they typically Keyed off given that their fixed rates and it sounds like the spreads are pretty wide right now Just you know any kind of additional color there around that. Thanks. Yeah, no happy to give you know it is
Speaker Change: It is a different, let's call it, return profile in a lot of ways than what you're seeing in direct lending.
You know, I think you could either have
Speaker Change: loan portfolios that you're buying, that the underlying loans themselves are fixed rate.
Speaker Change: You know, that, you know, more kind of stable or almost fixed rate return profile.
Speaker Change: In that part of the market, you know, I don't think we think about it entirely like spreads. You're acquiring, you know, these asset portfolios, you know, thinking about making a kind of targeted return on it. You know, that's generally in kind of the mid-teens type context.
Speaker Change: You know, we remain quite bullish on the market opportunity there.
Speaker Change: You know, we think that market is approaching, you know, seven trillion dollars of market size. You know, that doesn't mean everything's for us, but that does mean there's a lot of white space because there has not necessarily been a lot of scaled capital raised.
Speaker Change: We're fortunate to have 50 people dedicated to that space. There's some pretty good tailwinds there that we expect to continue to be quite active in.
Speaker Change: Gotcha, very helpful there. And just one follow-up, on the comments around the PIC income and the earlier comments you made there, just want to clarify how much of the PIC income was originally underwritten as PIC versus electing?
Thanks. Roughly half.
Okay, gotcha.
That's all I had. Thanks again.
Thank you.
Speaker Change: Your next question comes from Melissa Wedel from JP Morgan. Your line is now open.
Good morning. Thanks for taking my questions.
just to follow up on the theme of PIC.
Speaker Change: definitely take your points that those were those fields are structured to give some flexibility during perhaps a return around.
Speaker Change: I'm curious, you know, how PICC versus cash paying income will impact, sort of, if it impacts and to what extent it impacts your fair value marks over time, particularly if you see in certain deals PICC persisting longer than you would have originally expected.
Speaker Change: Yeah, good morning Melissa. Yeah, I would say, and Brian you might want to add to this, it's probably...
Thank you.
Speaker Change: You know, it's going to be very much on a case-by-case basis. I think you could probably make a correlation that if a company is, you know, forced to pick for an extended period of time, you know, the company could be you know, underperforming. But on the other side of that, you know, you could have, you know,
Speaker Change: I think you are independently valuing these businesses based upon what their financial performance is and all the other inputs that would go into the valuation model. So this is probably not kind of the perfect answer, but you know, it's...
Speaker Change: and Brian, feel free to add to that. Yeah, I mean, look...
Brian Gerson: So I mean that sort of goes to the commentary of flexibility because we are very much focused on the long-term exit and all of these
Brian Gerson: and like it's going to be performance related in terms of it and capital decision-making related decisions as we go forward in terms of what the companies continue to pick or not.
https://www.kenhub.com
Speaker Change: Okay, and then to your comments about rates likely to trend lower, but the initial thought is maybe they won't go as low or as quickly as we would have thought a few months ago.
Brian Gerson: A natural trade-off on that would be a bit more, you know, distressed or default activity. Thanks.
Speaker Change: It's a fair question, and I think our thoughts on this are probably evolving as obviously there was some pretty big market moves in the last couple of days. You know, I think we...
Speaker Change: I think we've always expected, you know, the Fed to be kind of disciplined as they've, you know, bring down kind of rates. I think the Fed's done a, you know, a nice job of getting inflation under control. You know, I think there are certain things that, um...
Brian Gerson: It could happen in this Republican administration that could be viewed as inflationary.
Speaker Change: I think the big focus of the election was to make sure inflation is under control so I think it will be balanced there. I don't think that slower pace though, Melissa, is that long to have a real impact to credit.
Speaker Change: I just, you know, if you were thinking that there was going to be, you know, three or four rate cuts in the next, let's call it, you know, 12, 18 months, you know, maybe you're just kind of one slower than that, or one less than that, but it's, it's,
Speaker Change: Yeah, I think it'll be interesting to watch how that kind of plays out in the coming months in the coming quarters
Brian Gerson: I'd add is, you know, where it's less constructive is to the equity in these deals. You know, higher rates extended the whole period for companies that had less cash in on debt, which is how an LDO works.
Brian Gerson: Unknown Executive, Brian Gerson, Daniel Pietrzak, Michael Forman, Robert Paun, Robert Paun
Brian Gerson: That concludes our question and answer session. I'd now like to hand back over to Dan Pietrzak for further remarks.
Dan Pietrzak: Well, thank you everyone for your time today. We're always available for any follow-up points as needed. We do wish everyone a great holiday season and we'll talk with you next quarter. Thank you.
Brian Gerson: Thank you for attending today's call. You may now disconnect. Have a wonderful day.
The End
[inaudible]
Brian Gerson: and Michael Forman and Robert Paun and Daniel Pietrzak and Robert Paun and Michael Forman and Daniel Pietrzak and Robert Paun
Brian Gerson: Some of the members of the Foundation do not contribute to the island of Haiti. They are not Players. There are no �Perceptions� of Haiti. They are Theater Players.
& Jason Moore
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Speaker Change: Good morning, ladies and gentlemen, welcome to FSKKR Capital Corp's 3rd Quarter 2024 EARNINGS CONFERENCE CALL. Your lines will be in a listen-only mode during remarks by FSKKR.
Cases Management,
Speaker Change: 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 Dookyu. Please note that this conference is being recorded. At this time, Anna Kauhai, Head of Investor Relations, will proceed with the introduction. You may now begin.
Anna Kauhai: Thank you, good morning, and welcome to FSKPR Capital Corp's third quarter 2024 Earnings Conference call.
Anna Kauhai: Please note that FSKPR Capital Corp. may be referred to as FSK, the fund, or the company throughout the call.
Anna Kauhai: Today's conference call is being recorded and an audio replay of the call will be available for 30 days.
Speaker Change: Replay information is included in a press release that FSK issued yesterday.
Speaker Change: In addition, FSKS posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30, 2024.
Speaker Change: A link to today's 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 FSK.
Speaker Change: Any unauthorized rebroadcast of this call in any form is strictly prohibited.
Speaker Change: Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally.
Speaker Change: We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.
Speaker Change: FSK does not undertake to update its forward-looking statements unless required to do so by law.
Speaker Change: To obtain copies of the company's latest SEC filings, please visit FSGA's website.
Speaker Change: 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 Stephen Lilly, Chief Financial Officer.
Speaker Change: Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson.
I will now turn the call over to Michael.
Michael Forman: Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's third quarter 2024 earnings call.
Michael Forman: FSK's financial and operating results showed continued strength during the third quarter as we again exceeded our earnings guidance and over-earned our quarterly base and supplemental distribution.
Michael Forman: Our net asset value per share at the end of the third quarter was $23.82.
Michael Forman: On October 8, 2024, we announced that our board declared a total fourth quarter distribution of 70 cents per share, consisting of our base distribution of 64 cents per share, and a supplemental distribution of 6 cents per share.
Speaker Change: This results in $2.90 per share of total distributions in 2024.
Speaker Change: which equates to a 12.2% yield on our September 30, 2024 net asset value of $0.2382 per share and a yield of approximately 14% based on our recent share price.
Speaker Change: As Dan will discuss in more detail during his comments, the FSK Care Advisor continues to maintain its high bar on credit quality and disciplined underwriting process.
Speaker Change: During the third quarter we originated approximately 1.1 billion dollars of investments and we ended the quarter with ample liquidity totaling approximately 4.4 billion dollars.
Speaker Change: As we begin focusing on 2025, FSK is well-positioned to capitalize on expected market conditions.
Speaker Change: First, given the recent reduction in interest rates and assuming some level of additional rate cuts over the next 12 months, our portfolio companies should experience improved credit metrics such as interest and fixed charge coverage ratios.
Speaker Change: Next, based on our expectation for continued improvement in the M&A environment, there should be additional opportunities to rotate out of certain legacy portfolio companies which have positioned themselves favorably over the last several years.
Speaker Change: Lastly, we are optimistic about the outlook for new investment opportunities and continue to believe that the KKR credit platform is well positioned to generate differentiated deal flow across private debt and asset-based finance investments.
Speaker Change: And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.
Thank you, Michael, and good morning, everyone.
Dan Pietrzak: Despite the recent noise surrounding the presidential election, the U.S. economy continues to remain on solid footing.
Dan Pietrzak: Recent economic data, released through September, illustrates that the labor market has remained resilient, boosting income levels for workers, which continues to support consumer spending.
Dan Pietrzak: At the same time, inflation has declined from 9.1 percent in June of 2022 to approximately 2.4 percent today.