Q2 2025 FS KKR Capital Corp Earnings Call
Speaker #2: Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp's second quarter 2025 earnings conference call. Your lines will be in a listen-only mode during remarks by FS K's management.
Speaker #2: 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.
Speaker #2: Please note that this conference is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.
Speaker #3: Thank you. Good morning and welcome to FS KKR Capital Corp's second quarter 2025 earnings conference call. Please note that FS KKR Capital Corp may be referred to as FS K, the fund, or the company throughout the call.
Speaker #3: Today's conference call is being recorded. And an audio replay of the call will be available for 30 days. Replay information is included in a press release that FS K issued yesterday.
Speaker #3: In addition, FS K has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter-ended June 30, 2025.
Speaker #3: 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 FS K.
Speaker #3: Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements, and our subject to risks and uncertainties that could affect FS K or the economy generally.
Speaker #3: We ask that you refer to FS K's most recent filings with the SEC for important factors and risks that could use actual results or outcomes to differ materially from these statements.
Speaker #3: FS K does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures.
Speaker #3: For such measures, reconciliations to the most directly comparable GAAP measures can be found in FS K's second quarter earnings release. That was filed with the SEC on August 6, 2025.
Speaker #3: 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.
Speaker #3: In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FS K's website.
Speaker #3: Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman. Dan Pietrzak, Chief Investment Officer and President. And Steven Lilly, Chief Financial Officer.
Speaker #3: Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.
Speaker #4: Thank you, Anna. And good morning, everyone. Thank you all for joining us for FS K's second quarter 2025 earnings conference call. During the second quarter, FS K generated net investment income totaling $0.62 per share and adjusted net investment income totaling $0.60 per share as compared to our public guidance of approximately $0.64 and $0.62 per share, respectively.
Speaker #4: Our net asset value per share declined 6.2% from $23.37 to $21.93 during the quarter. Our operating results this quarter primarily were attributable to company-specific situations impacting four portfolio companies.
Speaker #4: Dan will provide significant detail on each company shortly. Our new investment activity has remained strong despite the still somewhat slow M&A environment. During the first half of 2025, the investment team originated $3.4 billion of investments of which $1.4 billion were originated during the second quarter.
Speaker #4: We continue to find compelling ABF opportunities. And this segment of our portfolio remains a strong performer while also providing enhanced portfolio diversification. Additionally, we've continued to scale our credit opportunities partners to Inventure, which expands our investment funnel and delivers a consistent stream of recurring dividend income on both a quarterly and annual basis.
Speaker #4: On the right side of the balance sheet, we continue to maintain strong liquidity to support our funding needs ending the quarter with $3.1 billion of availability across cash, unsettled trades, and undrawn credit facilities.
Speaker #4: Our 2025 distribution guidance remains in place, and we continue to expect our distributions during the full year will total $2.80 per share comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions.
Speaker #4: Our board has declared a third 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.
Speaker #4: As we previously have stated, our 2025 distribution strategy was designed to provide shareholders with additional distributions from the spillover income that we have accumulated.
Speaker #4: As we approach our target spillover balance range, we expect our 2026 distribution strategy will be based on key factors including prevailing interest rates, our overall portfolio yield, the spread environment with respect to new investments, and the weighted average cost of our liability structure.
Speaker #4: In keeping with our long-held view, of providing as much transparency as possible to market, we plan to provide additional details regarding our 2026 dividend strategy on our third quarter earnings call.
Speaker #4: And with that, I'll turn the call over to Dan. Thanks, Michael. I'll keep my macro and industry remarks brief this quarter and instead focus my time discussing as many specifics as we can with regards to the four companies Michael referenced.
Speaker #4: In recent months, geopolitical tensions regulatory changes, tariffs, and market volatility have combined to increase uncertainty about the timing of the resurgence of M&A transactions.
Speaker #4: While transactions have been getting done, global M&A volume is down close to 10% year over year. Despite these overall declines, our team evaluated more opportunities in Q2 than in any of the previous eight quarters.
Speaker #4: This continued increase in deal screened together with the recent legislative developments supports our cautious optimism that conditions are aligned for an increase in M&A activity later this year and into next year.
Speaker #4: During our first quarter earnings call, we estimated that approximately 8% of our portfolio could have direct exposure to tariffs. Since then, the landscape has continued to evolve, with changes to both the country's impacted and specific tariffs.
Speaker #4: We have remained closely engaged with our portfolio companies and their sponsors. Actively updating our analysis to reflect the latest developments. Based on this updated analysis, we estimate that our direct tariff exposure has declined.
Speaker #4: And now falls within the low to mid-single-digit range. The companies which are either affected or potentially will be affected have been proactive in mitigating potential impacts.
Speaker #4: Including exploring alternative supply chain strategies and passing through costs where possible. While our portfolio and the private credit market in general both continue to demonstrate stability, we experienced an increase in non-accruals this quarter due to specific situations with four companies.
Speaker #4: Three of these companies are larger investments in our portfolio, which accounted for the negative move in our net asset value during the quarter. Comments regarding the four companies are as follows.
Speaker #4: Our first lien lasso positions in production resource group, or PRG, were added to non-accrual contributing $198 million of cost and $122 million of fair value collectively.
Speaker #4: PRG is a legacy investment which was initially restructured in 2020. Industry-wide stress and heightened competition has led to significant pricing erosion and as such, the company's performance has significantly underperformed expectations in 2025.
Speaker #4: As a result, we reduced the value of our investment and placed our first lien lasso securities on non-accrual. We are working toward a full restructuring of the business and will provide updates as they become available.
Speaker #4: Our first lien senior secured positions in 4840 were added to non-accrual during the quarter, contributing $188 million of cost and $91 million of fair value collectively.
Speaker #4: 4840 is one of the nation's largest wood pallet manufacturers and recyclers. The company has been negatively impacted by post-COVID normalization trends such as inventory destocking.
Speaker #4: While the company has continued to make interest payments, we made the decision to place the investment on non-accrual status as we work through next steps with the company, and the sponsor.
Speaker #4: FSK's second out first lien loan to Kleinmeier Bernitzen Services, or KBS, was added to non-accrual contributing $94 million of cost and $48 million of fair value.
Speaker #4: KBS is a large provider of janitorial and cleaning services to nationwide retailers and offices. The company completed a consensual restructuring in early 2024 and since then has successfully focused on new business development, value creation, operational improvements, and cost reductions.
Speaker #4: The company's performance has stabilized. And we have received indications of interest in purchasing the business from strategic third parties. This process is evolving and we will update the market as we learn more.
Speaker #4: Lastly, our first lien and second lien investments in Worldwise were added to non-accrual. Contributing $20 million of cost and $11 million of fair value collectively.
Speaker #4: The company is a pet products provider which was restructured during the fourth quarter 2024. In connection with the restructuring, the sponsor contributed $42 million of equity, resulting in a $30 million debt paydown at par across KKR funds.
Speaker #4: Following the restructuring, the business has faced headwinds from tariffs and softer consumer demand. We are actively implementing strategic initiatives aimed at stabilizing operations and realizing meaningful cost efficiencies.
Speaker #4: While each of these situations is unique to the issuer, our workout team remains actively engaged and is working closely with our advisors and management teams to effectuate the best outcomes possible.
Speaker #4: During the second quarter, two companies were removed from non-accrual status. First, our first lien investment in Bowery Farming that had previously been placed on non-accrual was written off.
Speaker #4: Second, a legacy investment, JW Aluminum, was amended during the quarter into a perpetual preferred equity position. At the same time, the company's performance has improved in recent periods to the point that earlier this year we received a return of $98 million of capital as the company successfully refinanced and upsized a bond issuance.
Speaker #4: Turning to our estment activity, during the second quarter, we originated approximately $1.4 billion of new investments. Approximately 72% of our investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships.
Speaker #4: Our new investments, combined with $1.1 billion of net sales and repayments—when factoring in sales to our joint venture—equated to a net portfolio increase of $311 million.
Speaker #4: New originations consisted of approximately 83% in first lien loans, 5% in subordinated debt, and 12% in asset-based finance investments. Our new direct lending investment commitments had a ighted average EBITDA of approximately $251 million.
Speaker #4: $5.8 times leverage through our security and a weighted average coupon of approximately SOFR plus $520 basis points. We continue to believe in the strength of our investment strategy, which primarily focuses on upper-middle market companies with EBITDA in the $50 to $150 million range, across a diverse set of industries and sectors.
Speaker #4: As of June 30, the weighted average EBITDA of our portfolio company was $252 million. And median EBITDA was $114 million. Our portfolio companies reported weighted average year-over-year EBITDA growth rate of approximately 8% across companies which we have been invested in since April of 2018.
Speaker #4: Interest coverage levels remain healthy, with the median second quarter coverage at 1.8 times. As of the end of the second quarter, non-accruals represented $5.3% of our portfolio on a cost basis, and 3% of our portfolio on a fair value basis.
Speaker #4: This compares to $3.5% of our portfolio on a cost basis and $2.1% of our portfolio on a fair value basis as of March 31.
Speaker #4: We also believe it is helpful to provide the market with information based on the FSK assets originated by KKR Credit. Non-accruals relating to 91% of our total portfolio which has been originated by KKR Credit and the FS KKR Advisor were $3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter.
Speaker #4: This compares to 2% on a cost basis and 1% on a fair value basis as of the end the first quarter. And with that, I'll turn the call over to Steven.
Speaker #5: Thanks, Dan. As of June 30, 2025, FSK's investment portfolio had a fair value of $13.6 billion. Consisting of 218 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio.
Speaker #5: Compared to 20% as of the end of the first quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 59% first lien loans and 64% senior secured debt as of June 30.
Speaker #5: In addition, our joint venture represented approximately 12% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, in first lien loans, total approximately 68% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of June 30.
Speaker #5: The weighted average yield on accruing debt investments was 10.6% as of June 30. A decrease of 20 basis points compared 10.8% as of March 31.
Speaker #5: As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Turning to our quarterly operating results, our total investment income was $398 million.
Speaker #5: For second quarter, which is a decrease of $2 million compared to the first quarter. The quarter-over-quarter change in total income was primarily driven by the decline in interest income as a result of investments that were placed on non-accrual during the quarter.
Speaker #5: Coupled with lower fee income due to a more normalized origination quarter. The primary components of our total investment income during the second quarter were as follows.
Speaker #5: Total interest income was $298 million. A decrease of $4 million quarter-over-quarter. Dividend and fee income totaled $100 million. An increase of $2 million quarter-over-quarter.
Speaker #5: Our total dividend and fee income during the quarter is summarized as follows. $59 million of dividend income from our joint venture. Other dividends from various portfolio companies totaling approximately $32 million during the quarter.
Speaker #5: And fee income totaling approximately $9 million during the quarter. Our total expenses were $225 million during the second quarter, which is an increase of $12 million compared to the first quarter.
Speaker #5: The quarter-over-quarter change in total expenses primarily was driven by an increase in interest expense due to higher leverage utilization during the quarter to grow our joint venture.
Speaker #5: The primary components of our total expenses were as follows. Our interest expense totaled $125 million. An increase of $12 million quarter-over-quarter. Our weighted average cost of debt was $5.3% as of June 30.
Speaker #5: Management fees totaled $53 million. An increase of $1 million dollars quarter-over-quarter. Incentive fees totaled $36 million. A decrease of $3 million dollars quarter-over-quarter. Other expenses totaled $11 million.
Speaker #5: An increase of $2 million dollars quarter-over-quarter. The detailed bridge and our net asset value per share on a quarter-over-quarter basis is as follows. Our starting net asset value per share was $23.37.
Speaker #5: GAAP net investment income increased NAV by $0.62 per share. While net realized and unrealized losses decreased our net asset value by $1.36. Per share.
Speaker #5: Our NAV per share was further reduced by the $0.70 per share total quarterly distribution paid during the quarter. With some of these activities, results in our June 30, 2025 net asset value per share of $21.93.
Speaker #5: From a forward-looking guidance perspective, we expect third quarter 2025 GAAP net investment income to approximate $0.58 per share and we expect our adjusted net investment income to approximate $0.57 per share.
Speaker #5: The detailed components of our third quarter guidance are as follows. Our recurring interest income on a GAAP basis is expected to approximate $289 million.
Speaker #5: We expect recurring dividend income associated with our joint venture to approximate $55 million. We expect fee and other dividend income to approximate $30 million.
Speaker #5: The decrease quarter-over-quarter is due to lower ABF dividends projected in the third quarter. From an expense standpoint, we expect our management fees to approximate $51 million.
Speaker #5: We expect incentive fees to approximate $34 million. We expect our interest expense to approximate $116 million. And we expect other G&A expenses to approximate $10 million.
Speaker #5: Turning to our capital structure, in June we closed on a new five-year $400 million bilateral lending facility with CIBC priced at SOFR plus $175 basis points.
Speaker #5: Thereby further extending our maturity ladder. Additionally, after quarter end, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility.
Speaker #5: The amendment provides for, among other things, an increase of total commitments from $4.6 billion to $4.7 billion. An extension of the maturity date to the third quarter of 2030.
Speaker #5: And a reduction in spread by 10 basis points. As of June 30, our gross and net debt-to-equity levels were 131% and 120%, respectively, as compared to 122% and 114%.
Speaker #5: As of March 31. Our leverage remains within our target range. Of 1 to 1.25 times net debt-to-equity. At the end of the second quarter of our available liquidity, it was $3.1 billion and approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt.
Speaker #5: Our next unsecured debt maturity occurs in the first quarter of 2026. And represents approximately 10% of our committed capital structure. With that, I'll turn the call back to Michael for a few closing comments before we open the line for questions.
Speaker #4: Thanks, Steven. As we look toward the second half of the year, we acknowledge the significant work currently taking place with regard to the four companies Dan mentioned.
Speaker #4: Since its establishment in 2018, investments originated by FS KKR Advisor consistently have performed meaningfully better than the BDC's industry's long-term average non-accrual rate of 3.7%.
Speaker #4: We look forward to bringing this quarter's non-accrual rate more in line with this and ultimately below this industry average. We are confident in our team and in our ability to navigate periods of stress, which inevitably occur from time to time.
Speaker #4: As always, we appreciate your participation on the call today and for your interest in FSK. Operator, we'd like to open the line for questions.
Speaker #6: Thank you. At this time, we will conduct the question and answer session. As a reminder to ask your question, you will need to press star 11 on your telephone and wait for your name to be announced.
Speaker #6: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question today comes from Aaron Saganovich with Truest Securities.
Speaker #6: Your line is open.
Speaker #7: Hi, thanks. There's been a lot of discussion about the investing environment picking up and the second half. And you ow folks are quite busy in a typically slow August.
Speaker #7: What are you seeing on your end and what do you think about in terms of originations in the second half?
Speaker #4: Yeah. And Aaron, it's Dan. Thanks for the question. I think just two things I want to start with. You know first, you know clearly this is a bit of a harder quarter for us, right?
Speaker #4: So we ow we have some work to do as we go forward. And I want to make re it's clean or clear the team is focused on that.
Speaker #4: And before I to your question, just second. I an, I did want to acknowledge you know the senseless and tragic events in New York City last week.
Speaker #4: All the businesses, the people, and the families impacted by these events are in our thoughts and prayers. Yeah. I think when we get to the investing environment, you know I think the way you put it is well said.
Speaker #4: I an, people are busier now. I think than they've in some time. You know just from a pure you know deal count perspective, we looked at more deals in Q2 than we have in, I think, the prior eight quarters.
Speaker #4: You know that was off of a very kind of ugly April on the other side of liberation day. You know so I think that you know the key data points hold, right?
Speaker #4: There is significant pressure from LPs to get cash back from their private equity GPs. You know we continue to hear that. We know there's a lot of dry powder in kind newer vintage private equity funds.
Speaker #4: That I think is looking to deploy. I think we've probably seen more activity in names that you know where they don't have to talk about tariffs or sort of worry about tariffs.
Speaker #4: but you know definitely a certain amount of of green shoots you know that said, I I I am expecting still bouts of volatility to sort of play through.
Speaker #4: But again, busier. You know this past quarter than we've been for a ile.
Speaker #7: Great. That's helpful. and then I appreciate all of the the details about the four companies that you you have on non-accrual and and information around that.
Speaker #7: beyond those four companies, in terms of like a watch list, do you do you have any others that are you ow bubbling up to the to the top or or maybe you could just talk a little bit about the the portfolio performance at a portfolio company level for the rest of the the portfolio?
Speaker #4: Yeah. And happy to do that. And and and fair question. You know I I think a couple of things, right? I an, we we I think we've tried to provide you know on not just this call but prior calls you know as as much detail as we can on certain names.
Speaker #4: you know I think each of the the issues in some way was unique to the companies we discussed. Although there was you know I think clearly with with KBS and 4840 a bit of you ow material amount of of over-earning kind of driven by COVID and then companies kind of unlevered on the other side.
Speaker #4: You know in terms of of watch list, I think the probably simplest thing to point to is kind of the risk ratings that we publish.
Speaker #4: You know in in kind of the the QAR bucket three and four, you've got roughly seven you know odd percent of the portfolio. you ow I would note you know a uple of those names which we've ked about on prior calls.
Speaker #4: You know our Global Jet and JWA, which we've seen some positive momentum on on each of those names. You know the other side of that, there are some things that that do worry us, right?
Speaker #4: The higher rate environment is stressful on companies. You know things like Doze or Impact to sort of government contracts or government services is kind of you know definitely on our mind.
Speaker #4: And I ink you ow maybe I want to make sure we're cautious and and maybe we're a little bit more negative than most on on certain things.
Speaker #4: But you know the consumer has performed quite well. Right? We've seen that in in some of the consumer businesses that we lend to or some of the consumer portfolios that we own in the asset-backed e.
Speaker #4: Although that's been predominantly skewed to kind of higher FICO. But you know I think you got to be a little bit mindful there as we go into the you ow second half or deeper in second half of the year and and into '26.
Speaker #4: Thank ou.
Speaker #6: Thank you very much. One moment, please. Our next question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.
Speaker #8: Hey, everyone. Good morning. We wanted to ask first about the the COP JV. Steven, I think your guide for for 3Q of '55 that's a touch lower than what ou had guided for this Q.
Speaker #8: Which was '56? I know it came in well above that. but you're guiding it down a little bit. Despite a bit of a ramp there, so seeing what kind earnings situation and also credit situation how that has compared to the the the mothership BDC.
Speaker #8: And then sort of finally, what 'm getting at is is the JV in a similar place where as we go into '26, you know and it maybe pays down spillover perhaps, is that going to also be a lower reset payout?
Speaker #8: Thank you.
Speaker #4: Steven, it's Steven. I'll take your the first part of your question and then hand the second part over to to Dan. the the difference in the in the anticipated dividend from COP for the third quarter versus what we received in the second is really driven by the timing of certain ABF dividends.
Speaker #4: We received a bit higher dividends in the second quarter. And correspondingly, we'll have a bit lower dividends in the third. as as you certainly know, and and others know, you know dividend payers in the ABF portfolio it tends to be a little bit lumpy.
Speaker #4: It's not spread evenly over four quarters of the year. So you ow kind of somewhat normal and customary there. But you know we would expect the JV over time to, because we are have expanded it to your point, you know to be at that sort of mid-50s or even a little better level over time as those investments you know season in that portfolio.
Speaker #4: Yeah. And good ning. maybe just to to add to those points. You know and and I think you've you spent enough time with us on the asset base finance base that you've got to get that.
Speaker #4: But just to be clear on those deals, that was more of a timing issue than any type of of performance point. you know we do have a desire to to continue to to ramp this but with inside the guise of you know probably 50% max that we discussed.
Speaker #4: You know the only other point that I probably would note is and I don't have this in my fingertips so we can circle back if we have to.
Speaker #4: I do expect that the the joint venture has a higher percentage of floating rate debt than fixed rate debt than is in kind of the parent company.
Speaker #8: Okay. that's that's helpful. Thank you. And just next question. So you ow portfolio conditions today given this quarter probably mean that you're you're below book for a little while.
Speaker #8: seeing your view on the buyback and something you could put in place to you know potentially take advantage of that at a point where say the the stock becomes cheap and and you become you know confident in in portfolios stability.
Speaker #4: Yeah. I'll take that, Finn. I think you know a couple of points there, right? I mean, we have historically been active in buybacks, as you know.
Speaker #4: You know, I think we'll have to balance that with, you know, what we see as the market opportunity and where we are vis-à-vis a target leverage ratio.
Speaker #4: You know I think the the target leverage ratio is kind of important to us. We're ind of with inside our our sort of band now.
Speaker #4: But you know my guess is we're ably you ow very little bit sort of above, maybe recent historical average. I think we have to just factor all those you know pieces together.
Speaker #4: As we play it ward.
Speaker #8: Thanks so much.
Speaker #4: Okay. Have a od day.
Speaker #6: Thank you. The next question is from Sean Paul Adams with B Riley Securities. Your line is open.
Speaker #9: Hey, guys. Good morning. on the new non-accruals, it ems like they've largely been legacy troubled assets that had proactive restructuring. However, continued to have further subsequent headwinds.
Speaker #9: When you're looking over the past troubled assets that have undergone some of that proactive intervention, how many are you currently monitoring for situations like this?
Speaker #9: You know out of Worldwise, Keller Meyer, and Alacrity, it seemed that there was a significant change in quarter-over-quarter marks so just if you could ide any more color on that.
Speaker #4: Yeah. No, I'm happy to do that. And I think just for the sake of clarity, you know you are correct in the sense that you ow KBS has been you ow for lack of a better word, going on for a period of time.
Speaker #4: PRG would be the same. You know PRG had an initial restructuring in '20, but that in the depth of COVID. You know it's a it's a business that focuses on you know broadway and sort of entertainment.
Speaker #4: So obviously, revenue you know went to zero. And quite frankly, it was probably over-levered going into that. but just to you know the KBS 4840 and Worldwise were you know regular way sort of KKR originations.
Speaker #4: What we do what we call something legacy would have been kind of prior advisor that would have been PRG. You know I I think our workout team's done a good ob.
Speaker #4: You know we've we've got a a strong group of people from you know the leadership of that team to the various folks along the you ow with skill sets of financial financial kind of modeling/financial restructuring skills, bankruptcy lawyers, you know even down to some PE experience to where we have to sort of run these.
Speaker #4: you know and and I do think in some ways that workout term is probably a little bit of a misnomer, right? You know that team is getting involved the moment something goes on the watch list.
Speaker #4: And in some ways, some of the most value that gets added from that is is is kind of at that stage because we can tighten up documents you know try to de-risk the position.
Speaker #4: I think we talked one of those names on our last call when we had a repayment of a company called 360, which was probably the biggest tariff exposure we had in the entire portfolio.
Speaker #4: But that was gone on for an extended period of time. You know I I think each of these is in a spot. Sean Paul, like the the PRG name's been ongoing for some extended period of time.
Speaker #4: You know the lender group on KBS is working hard. You know that initial restructuring is probably only a year old. You know 4840 is still paying interest so clear.
Speaker #4: You know I think just our expectation is that's where it's sort of trending. so the team's prepared to spend a significant ount of time.
Speaker #4: to try to maximize the outcome and kind of maximize the return on capital.
Speaker #9: Got it. Very helpful. Thank ou.
Speaker #6: Thank ou. The next question is from Robert Dodd with Raymond James. Your line is open.
Speaker #10: Hi, guys. And kind of a follow-up to Sean's. When we look at these assets that have kind of redefaulted, if you will, it does seem to be from what I'm looking at, it's becoming a bit more common and not in your portfolio, right?
Speaker #10: There are other assets around the space where we've en the same kind of thing. I mean, is there a theme or anything? I mean, obviously, yes, it's like you point out, for each individual asset, it's idiosyncratic.
Speaker #10: But there are increasingly like ou know redefaults rather than new defaults, if you will, where struggling assets can restructure and then they're continuing to have problems.
Speaker #10: And the ones that didn't have problems to start with are, you know, doing okay. So, I mean, is there a theme or anything that's leading to that?
Speaker #10: And it kind of ties into the, like, should initial restructurings be more aggressive? Is there a problem? Would you have liked to have been more aggressive?
Speaker #10: But the lender group didn't want to be? I mean, any thoughts there?
Speaker #4: Well, it's an esting question. I'm not sure there's a theme Robert. I an, and to be to be clear on the names here, I mean, you know there there is another restructuring expected on PRG.
Speaker #4: You know KBS is more of a valuation point. And even though the company stabilized, I think that it's just been sort of delayed. And I think that the the churn numbers we've seen there have taken you know a sort of time period to to maybe stabilize in a manner that we're sort of happy with or satisfactory to us and and the lender group.
Speaker #4: You know I I do think the one point you said in there is correct. And and each of these situations is probably specific is you know are you able to you know restructure it you know sort of quote-unquote enough?
Speaker #4: you know we have seen some names where you none of these are either left in portfolio or would be extremely diminimus amounts. Like you you know are you able to get and it's probably a high more highly correlated to if there's a larger one L group in there.
Speaker #4: You know get the position you know to a spot that you feel the go-forward is is self-sufficient versus maybe the capital structure sort of being too unlevered or too levered.
Speaker #4: so I don't think there's any themes. I ink each of these is specific. But just to your specific point, the the only name that we're talking about you know actually you know sort of quote-unquote restructuring again of those four is is PRG.
Speaker #4: The others are just downside versus you know kind of prior market. And it's.
Speaker #10: Got it. Understood. let's flipping flipping the topic. On on the you know you you you you mentioned you you've seen more deals to review than any time in the last eight quarters.
Speaker #10: I an, like how realistic now given you know we're in August and there's only four months left in the ar. is it for any of those to to or to a material number of ose?
Speaker #10: to close this year? I you know I mean, is is the optimism you know should we be looking more at '26? Is there enough time for the end of this year to actually see a real rebound in activity?
Speaker #4: Yeah. I mean, I think from the numbers perspective, I think you're correct. Right? Because deals being reviewed now you know would go through kind of the regular way investment process for you know four, six, eight weeks.
Speaker #4: And they probably take you know on average two months to close. Some things could be faster. Some ings could have a longer sort of tail.
Speaker #4: I mean, I ink you you you did see some of that from our you ow reduced fee income of you saw this quarter versus last quarter.
Speaker #4: You know I think that is a spot on a go-forward basis that we would expect to see you ow upside at least from the the Q2 number.
Speaker #4: You know the only word of caution there is I think upfront fees and OID on new loans is you know decently tighter now than it was a year ago.
Speaker #10: Got it. Thank ou.
Speaker #4: Thank you.
Speaker #6: And our next question comes from Casey Alexander with Compass Point Research and Trading. Your line is open.
Speaker #11: Yeah. Good morning. Thank you for taking my questions and Dan, I echo your sentiments to our friends in Midtown. It's a really difficult situation for a lot of folks.
Speaker #11: And our heart goes out to them. It looks like it's pretty clear that the company is going to be you know to a certain extent restating its dividend philosophy.
Speaker #11: And at one point in time, the company had what you could describe as a modified variable dividend you ow based upon earnings and then you kind of got away from that for a year and a half or two years as you were working on the spillover.
On the unsecured side, you know, I think the the we like our maturity ladder a lot but you know, where we were able to issue, those deals was in a very different rate environment. So we will be looking to leave Finance there. So I think all of that, you know, is going to get put forward in in kind of our views. Now there are certain offsets their right, you know, there could be additional deal volume.
You know, we we do have, um, kind of more non-income producing assets, than than we sort of, you know, would like so there's, you know, a couple of levers there but the, the where I would focus you and kind of folks, I think we're really going to be kind of knee LED here, right? So where we see kind of forward earnings spitting out is where we're going to talk about kind of dividend levels, but, you know, we as well, like kind of the, the point of really
You know, that variability, you know, with tying into sort of knee and then trying to make sure everyone's comfortable that there's a steady base, but we'll keep all that in mind for sure.
Okay, thank you for that. Secondly, to extend on the conversation of the high level of activity that you're seeing, um, you know, there's not unlimited room in the target range of your leverage ratio. Do you have some line of sight to a level of repayments that will, uh, allow you to take on some of this activity or
Or, or is, you know, I'm not sure how much capacity there is for the JV. I know you increased your equity commitment to the JV last quarter, but you down streamed a fair amount of paper to the JV Discord.
How do you manage the inflow? Unless there's some outflow?
Yeah, and and I think the maybe there's 2 points there, I mean, there is room for the JV to grow, um, even with the assets that, you know, we're sort of put down. And I think you'll continue to see that. I think that's been a great partnership. Um,
I think those two things will help offset that, and
You know, like I said, I think we're happy with the amount of deals. We were able to screen, you know, in in you know, this prior sort of quarter. It's not kind of where I think we will be, you know, 4 quarters from now from. And so, I'm expecting more, but I think the correlation of of repayments with New Deal flow remain on.
All right. Thank you for taking my questions. Dan.
Have a good day case.
Thank you.
The next question is from Paul Johnson with KBW, your line is open.
Yeah, good morning. Thanks for taking my questions. Just um, you know, broadly on, you know, activity potentially picking up here. Um,
So you're even, uh, you're meeting even if it says 140 million. You guys focus on the upper middle market.
Obviously there's there's a lot of competition.
Um, in that part of the market. I mean, how much it do you expect of any sort of pickup and activity to go into the vssl market uh, for private credit.
Yeah, it's a good question. Um,
You know, if I take one step back, my sense is...
And what we communicate to kind of our investors kind of broadly is you know we are focused on the upper end of the Middle Market. We're probably defining that you know, really in the you know, 50 to 150 range. Um you know we're there on purpose because we've you know, historically seen
better management teams, you know, Less customer supplier concentrations, you know, there's more leverage to pull a certain
to go wrong. I think at times of Market volatility, we're probably able to lean into larger companies more because the, you know, the syndicated loan Market is shut. I think we have seen a bunch of larger names who prefer to be in the private markets. Um,
You know, all that being said, I, I think we are trying to make sure that our origination funnel is as broad as possible. So in addition to covering, you know, the 250 sponsors out there. We've got a dedicated non-sponsored team. Um, we've probably been a little cautious on it, but, you know, we're prepared to, you know, play in in, in certain Junior debt deals. But the, the those businesses is higher. Obviously, we've got an active kind of asset base Finance pipeline in here to sort of bring that together and and we will go 50 million dollars. I mean, I don't think we're going to go below 25 to be blunt and there's probably a higher bar, um,
For that size of the company. We're trying to make sure our origination aperture um, is as big as it can be. And we just haven't seen at least on our side that you're getting paid enough to be in the 10 15, 20 million dollar range, doesn't mean there's anything wrong with those loans, so it's just not where we're spending time.
Got it, appreciate that. Dan, that's very helpful. Um, one on the JV; I mean, you guys dropped quite a few assets in the JVs quarter.
It looked like there might have been a little bit of a fair value loss of this quarter or write down on the investment.
Um,
Can you just provide maybe a little bit of color on?
What drove that was that just some of the same Investments on balance sheet that are on the JV that we're, we're written down? Was there? You know what? What are the current non-accrual level levels in the JB, anything that kind of
provide killer on that.
Yeah, no. And then you're, you're correct. I mean, we did kind of drop, you know, sort of assets down in there. I think we've been, you know, pretty happy with our Inception to date performance, um, on the joy Venture and you, you are correct as well. You know, 1 of the, we'll call it quote unquote, you know, Mark to Market moves this quarter, uh, would have been the JB itself. That would have been more correlated though, um, more consistent with with some of the same names that we talked about. Um,
yeah, we the JB has been more regularly used for
um, accessing other parts of the, um, KKR sort of origination funnel than regular way, you know, kind of us direct lending but, um, some parts of KBS 4840 in World wise, were in their
Got it. Thanks again.
That's very helpful there. Um and last question for me was just, you know, as you guys are evaluating the
dividend going.
Forward next year. Um, I was just wondering, you know, what's what all is, you know, completely on this table here.
Considering any sort of shareholder protection, you know, dividend downside protection.
uh, potentially with the new dividend, um, any sort of fee waivers that sort of thing, or is it just
Interest rates at the time. Yeah. I mean, obviously there's a couple of sort of points within their right and we've um,
You know, we have, I think, historically been on the, you know,
of dividends sort of being paid, um,
You know, I think it's important for us to, you know, kind of be in line with any sort of Market or or historical sort of Industry averages. Um
You know, obviously we'll, you know, kind of, you know, think about if we need to adjust the portfolio or otherwise just sort of get there. You know, I think the point that Casey raised in a prior question was an interesting 1, right? You know, we've talked about um,
You know, our giving a policy now for some time is kind of a basin supplemental concept, um, the supplemental either being just, you know, being able to be paid in the future or having it in a fixed place.
Actually, um, you know, pay out number. Uh, so I think, you know, we're going to have to go through all that, uh, as we got to understand where the rate environment is kind of trending. You know, we did pay out 70 on purpose this year, right? We had this EXO excess bill over number that we wanted to guide down to a more target range. I think going into the year, we probably expected, you know, more rate.
Moves. And we've seen thus far and we wanted to give investors
You know, consistency for 25, kind of take something off the table. Um, but as I said, you know, you know, the the factors of where we stand vesa, vierikko the market and otherwise we'll we'll factor into how we look at at the dividend on a go forward basis.
Appreciate it. That's all for me. Thank you.
Thanks.
Thank you.
All right. Next question is from Melissa widle with JP Morgan. Your line is open.
Good morning. Thanks for taking my questions. Most of them have already been asked and answered. Um, but wanted to follow up, briefly on the level of spillover income, I might have missed it, but can you give us a refresher memory on, on where that stands on a? For sure, basis, after this quarter
Yeah, Melissa. It's Stephen uh this is just to refresh, you know, we started the year uh with a rough numbers about 525 million of of spillover. Um and then through the year through uh June we had
Uh, reduced that number down to, I'd call it the high 400s and then with the current quarter, uh, dividend that we just announced, you know, we'll reduce it a little more to, you know, somewhere in call it the, um, you know, the, the mid 400s. Um, and we'll publish obviously, you know, intra-year you, you, you're the teams making estimates because we don't have all the appropriate.
Information, you know, tax wise, and, and other, uh, items, you know. So we'll publish again in the, uh, 10-K, you know, at the end of the year. But, you know, we're sort of in that, call it, uh,
You know, somewhat a plus or minus before the 50 range. I guess I would call it, uh, today. And then when you perform a, for the, uh, you know, dividend that we just announced today, you know, you'd be somewhere, you know, call it below $450, with certainly, you know, well above $400. And when you think about, in today's world, you know, a current dividend just in total dollars it's about $196 million on a quarterly basis at the full $0.70, you know. So we're, you know, still above that kind of 2 quarters' worth of dividends and as you know, certainly from covering us for a while, our, you know, our long-term target there is, you know, plus or minus 2 quarters' worth of dividends. So we sort of see ourselves gliding, you know, right down to, you know, kind of that level as we, as we get to the end of the year.
Thanks for that update. Um, my other question, goes back to sort of the ABS opportunities that you're seeing and I know that's been an area where you've been investing for a while you. I think there was a reference earlier on the call to some of the more consumer oriented um ABF opportunities. I was hoping you could give a quick recap of kind of your your allocation across asset classes within ABS. Um,
Give us an update on on historically where you've invested versus the current opportunity. Thanks.
yeah, I'm happy to
A large dedicated 50% team here. Um, I think we we've taken the tact of investing um sort of on a multi-asset class. So the global basis. So we're playing in a lot of different parts of the market.
Over side, we have definitely targeted, uh, more of the the higher. Um, FICO borrower, I think you've seen that in some of the larger deals that we've done of late. Um, would have been, you know, discover or or a recent deal with, with Harley-Davidson, um, you know, or we're playing in deals that are targeting homeowners. We've got a more positive bias too as it relates to to credit performance or or other forms of security deals like Auto. So, you know, net net. Pretty small sort of balanced Diversified under a bunch of names. You know, we have been active in the
You know, resi mortgage space. We've been active in the hard asset space probably, you know, with the main focus on, um, Aviation or equipment leasing, that's probably roughly another, you know, 2% of the portfolio. Um, you know, we've done historically some more, you know, esoteric things. Um, like investing in music IP which was a position inside of of FSK, which we did and has since been, um, sort of sold. So we're trying to create that, you know, broad footprint. We're trying to enable the team with that footprint to Pivot, where they see the best risk adjusted returns. Um,
yeah, we're we're probably
At, um, you know, a little bit more of the top end of the range on ABS exposure inside of FSK. As we think about, you know, most deals in there would be, you know, under the non-EBC bucket. But we think we.
I should say we've been happy with the diversification and additional return profiles, and it's given.
Thank you.
This does conclude our question and answer session, I would now like to turn it back to Dan pet for closing remarks.
I want to thank everyone for taking the time to join us on the call today. If you do have any follow-up points or questions, please do not hesitate to reach out. Wishing you a good end to the summer. Thank you.
Thank you for your participation.
This conference does conclude the program, and you may now disconnect.