Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- FS KKR Capital Corp (FSK, Financial) generated net investment income of $0.77 per share, exceeding public guidance.
- The company ended the quarter with approximately $4.7 billion of available liquidity.
- FS KKR Capital Corp (FSK) declared a total third-quarter distribution of $0.70 per share.
- The investment team originated $2.7 billion of investments in the first half of 2024, with $1.3 billion in the second quarter.
- Nonaccruals represented 4.3% of the portfolio on a cost basis, down from 6.5% in the previous quarter.
Negative Points
- Some investments placed on nonaccrual in prior quarters continue to show stress.
- The market remains competitive, leading to spread compression.
- The fair value of the investment portfolio declined due to unrealized depreciation in certain investments.
- Weighted average yield on accruing debt investments decreased by 10 basis points to 12%.
- The domestic political environment and international geopolitical situation remain complex, contributing to market volatility.
Q & A Highlights
Q: Can you talk about the spillover picture and what plans you have with that?
A: We aim to maintain two to three quarters of spillover income, currently at the middle to upper end of that range. This provides a cushion for dividend coverage if rates fall. The recent $0.05 per quarter special distribution reduced our spillover to about 2.8 quarters of dividend coverage.
Q: Is the lower income on the Asset-Based Finance (ABF) book due to market dynamics or idiosyncratic factors?
A: The lower income is due to the timing of highly structured deals, not market dynamics. These deals are not as consistent in dividends on a quarter-by-quarter basis but perform well over their lifespan.
Q: Were you more selective with refinancings this quarter due to spread issues and competition?
A: Yes, we used opportunities to lighten positions or get repaid if we were negative on a sector or company. For well-performing credits, we marked them to market from a pricing perspective, often seeking upfront fees or extending call protection.
Q: How do you see opportunities in Asset-Based Finance (ABF) currently?
A: The ABF market is large and growing, with few scaled players like us. We see strong opportunities, especially in buying loan portfolios from banks, and remain constructive on the space.
Q: Have you noticed any material changes in your portfolio companies due to recent economic turbulence?
A: While recent market volatility has increased focus, we remain cautious. Our portfolio companies show good EBITDA growth, but higher rates mean less free cash flow, posing challenges if there are bumps in the road.
Q: Can you clarify the average EBITDA on new originations and the overall portfolio?
A: The average EBITDA for new originations was $127 million, aligning with the median EBITDA of the entire portfolio. This reflects our focus on the upper end of the middle market, typically $50 million to $150 million in EBITDA.
Q: Do you expect the trend of lower EBITDA originations to continue?
A: Yes, we expect to continue focusing on the $50 million to $150 million EBITDA range. Larger companies have more options now, making them less attractive. We believe volatility will provide opportunities for private debt providers.
Q: Should we expect any more downside in Keller Meyer despite positive progress?
A: While small movements in EBITDA can significantly impact equity marks, we are optimistic about Keller Meyer's long-term prospects and have a new value-creation plan in place.
Q: How much of the current spread compression is due to higher quality companies versus competitive pressure?
A: Spread compression is partly due to higher quality companies being sold by sponsors and partly due to market dynamics. Spreads have tightened as inflation concerns eased, but we still see attractive risk-adjusted returns.
Q: What is the outlook for the supplemental dividend if rates and earnings decrease?
A: We aim to maintain the total $0.70 dividend for an extended period, supported by spillover income. We are focused on leveraging capacity and reducing non-income-producing assets to sustain earnings.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
