FS KKR Capital Q1 2025 Earnings Report

FS KKR Capital EPS Results

• Actual EPS: $0.65
• Consensus EPS: $0.64
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.62

FS KKR Capital Revenue Results

• Actual Revenue: $400.00 million
• Expected Revenue: $395.22 million
• Beat/Miss: Beat by +$4.78 million
• YoY Revenue Growth: -7.80%

FS KKR Capital Announcement Details

• Quarter: Q1 2025
• Date: 5/7/2025
• Time: After Market Closes
• Conference Call Date: Thursday, May 8, 2025
• Conference Call Time: 9:00AM ET

FS KKR Capital (NYSE:FSK) is a business development company specializing in investments in debt securities. It provides customized credit solutions to private middle market U.S. companies. It invest primarily in the senior secured debt and, to a lesser extent, the subordinated debt of private middle market U.S. companies. It seeks to purchase interests in loans through secondary market transactions or directly from the target companies as primary market investments. It also seeks to invest in first lien senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans, or mezzanine loans. In connection with the debt investments, the firm also receives equity interests such as warrants or options as additional consideration. It also seek to purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of the debt investments or through a co-investment with a financial sponsor. Additionally, on an opportunistic basis, the fund may also invest in corporate bonds and similar debt securities. The fund does not seek to invest in start-up companies, turnaround situations, or companies with speculative business plans. It seeks to invest in small and middle-market companies based in United States. The fund seeks to invest in firms with annual revenue between $10 million to $2.5 billion. It focus on providing customized one-stop credit solutions to private upper middle market companies with annual EBITDA of $50 million to $100 million at the time of investment. It seeks to exit from securities by selling them in a privately negotiated over- the- counter market. For any investments that are not able to be sold within the secondary market, the firm seeks to exit such investments through repayment, an initial public offering of equity securities, merger, sale or recapitalization.

FS KKR Capital Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp. First Quarter twenty twenty five Earnings Conference Call. Your lines will be in a listen only mode during the remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you instructions on entering the queue.

[Operator]

Please note that this conference is being recorded. At this time, Anna Kleinhan, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhan, you may now begin.

[Anna Kleinhenn, SVP - Investor Relations at FS KKR Capital]

Thank you. Good morning, and welcome to FSKKR Capital Corp's First Quarter twenty twenty five Earnings Conference Call. Please note that FSKKR Capital Corp may be referred to as FSK, the Fund, or the Company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for thirty days. Replay information is included in a press release that FSK issued yesterday.

[Anna Kleinhenn, SVP - Investor Relations at FS KKR Capital]

In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended 03/31/2025. 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. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally.

[Anna Kleinhenn, SVP - Investor Relations at FS KKR Capital]

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. FSK does not undertake to update its forward looking statements unless required to do so by law. In addition, this call will include certain non GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC on 05/07/2025. 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.

[Anna Kleinhenn, SVP - Investor Relations at FS KKR Capital]

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 FSK's website. Speaking on today's call will be Michael Foreman, chief executive officer and chairman Dan Peterzak, chief investment officer and co president and Steven Lilly, chief financial officer. 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.

[Michael Forman, Chairman & CEO at FS KKR Capital]

Thank you, Anna, and good morning, everyone. Thank you all for joining us for FSK's first quarter twenty twenty five earnings conference call. I'd like to begin this morning's call with a few comments regarding some of the uncertainties in the world. Since our last earnings call in February of this year, our country's economic outlook, the volatility associated with both debt and equity markets, the major geopolitical risks have all worsened. Not only are investors faced with the task of analyzing new and different risk elements, but they are forced to react to daily headlines regarding the current administration's announcements.

[Michael Forman, Chairman & CEO at FS KKR Capital]

Indeed for investors who value stability, the current market is challenging at best. As Dan will discuss in more detail, we've been taking proactive steps to provide investors with the most accurate information and the best overall investor experience as it relates to FSK during this challenging time. And while no one would have predicted exactly the events which have transpired over these last many weeks, our team did envision that volatility would rise from time to time and 2025 would be the year of transition for interest rates. Those are main reasons we announced in February our board's intention to maintain our 64¢ per share quarterly distribution, and also our $6 per share supplemental distribution for each of the four quarters during 2025. Our goal was and still is to provide investors with both transparency and stability of income from FSK.

[Michael Forman, Chairman & CEO at FS KKR Capital]

Our view rests upon the premise that by early next year, the macroeconomic environment will settle down, providing BDCs with a more clear picture of interest rates, tariffs, and other key drivers of economic activity. Our strategy of building a healthy balance of spillover income during periods of higher interest rates enables us to provide stability and confidence in our quarterly distributions during these periods of greater market volatility, regardless of variances in our net investment income on a quarter to quarter basis. Additionally, starting late last year, the team began analyzing our portfolio in terms of both tariffs and those exposure. And those analyses have been further refined over the last several weeks. Again, Dan will address this topic during his comments.

[Michael Forman, Chairman & CEO at FS KKR Capital]

And now I'd like to shift to FSK's first quarter performance. During the first quarter, FSK generated net investment income totaling $0.67 per share and adjusted net investment income totaling $0.65 per share as compared to our public guidance of approximately $0.66 and $0.64 per share respectively. From a liquidity perspective, we ended the quarter with approximately $3,200,000,000 of available liquidity. Consistent with my earlier comments, our board has declared a second quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $06 per share. This total distribution equates to a 12% yield on our March 31 NAV of $0.02 $3.03 $7 per share.

[Michael Forman, Chairman & CEO at FS KKR Capital]

And with that, I'll turn the call over to Dan.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Thanks, Michael. As we discussed on our fourth quarter earnings call, our view at the time was that increases in M and A activity this year would take longer to materialize due to geopolitical uncertainty. That view still holds true even more so now. As expected, the more liquid markets are bearing the brunt of the current volatility, with wider credit spreads and uneven trading. Over the last month, spreads have also begun to widen on certain private direct lending deals due to the market volatility.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

As Michael noted earlier, we have been in close contact with sponsors and management teams and have run extensive analysis in an effort to stay up to date with the latest tariff policies and impacted countries. Additionally, as we originate new investments, we are evaluating each deal for potential risks related to tariffs or Doge. As a result, we believe we have a good understanding of the first order potential tariff impacts on the portfolio. However, we remain cautious as second or third order impacts are still unknown, and depending on the ultimate tariff resolution, may take real time to play out. Based on our current portfolio analysis, we believe approximately 8% of our portfolio could have direct exposure to tariff policies, should they become permanent.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

And while DOGE exposure is more difficult to quantify, we currently estimate low to mid single digit DOGE exposure. The industry is most impacted by potential tariff policies are consumer durables, consumer discretionary, consumer staples and industrials, which falls within our capital goods classification. The industries most impacted by those are software and services, healthcare equipment and services, and aerospace and defense, which falls within our capital goods classification. I would clarify that this information is top down in nature and therefore remains too early to attempt to specifically quantify what impacts these items could have on individual portfolio companies from an EBITDA and free cash flow perspective. The good news is our typical portfolio company tends to be large and a market share leader, and therefore maintains highly diversified customer and supplier relationships.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

As a result, these companies typically enjoy more pricing power, which allows them to pass through price increases compared to smaller companies. Since identifying potential tariff related headwinds in November, we have taken a proactive approach to managing exposure across the portfolio. Notably, during the quarter, we achieved a full exit on two portfolio companies that we believe exhibited more risk from a tariff and cycle standpoint. The first example, three sixty Group, is a company whose products are primarily sourced from China. The second example, Lakeview Farms, is a food products business subject to consumer purchasing behavior.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

We are pleased with both outcomes as the investments were repaid at par. Another bright spot is our asset based finance portfolio, which we view as particularly compelling during periods like this. Traditional secured and unsecured corporate credit investing hinges largely on future earnings forecasts and cash flow assumptions, which are obviously vulnerable to macro shifts. ABS investments by contrast are anchored in contractual structures tied directly to tangible collateral. We would note however, that we are mindful about our consumer related exposure in our ABS portfolio.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Though we are focused almost entirely on secured risk or high FICO score prime borrowers. Overall, we continue to be bullish on ABS positive impact to our portfolio and the diversification benefits it provides. Turning to FSK's investment activity. During the first quarter, we originated approximately $2,000,000,000 of new investments. Approximately 45% of our new investments were focused on add on financings to existing portfolio companies and long term KKR relationships.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Our new investments combined with $1,100,000,000 of net sales and repayments, when factoring in sales to our joint venture equated to a net portfolio increase of $881,000,000 New originations consisted of approximately 63% in first lien loans, 1% in other senior secured debt, 19% in asset based finance, 15% in capital calls to the joint venture, and 2% in equity and other investments. Our new direct lending investment commitments had a weighted average EBITDA of approximately $257,000,000 5 point 5 times leverage through our security, and a weighted average coupon of approximately SOFR plus five zero five basis points. Though the first quarter of the year has traditionally resulted in seasonally slower new originations, this has been our strongest origination quarter from both a total and net deployment perspective since 2022. Despite the sluggishness of The U. S.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

M and A market, during the first quarter, we experienced strong origination activity, driven by our expansive deal funnel, which continues to generate robust diversified deal flow. Our private credit team maintains strong sponsor relationships on a global basis, and our large base of incumbent borrowers remains a consistent and valuable source of repeat opportunities. We remain focused on the upper middle market, or companies with 50,000,000 to $150,000,000 of EBITDA, which tend to have more levers they can pull during challenging periods. In an environment like this, we're acutely focused on investing in high quality companies with strong defensive positions. The weighted average EBITDA of our portfolio companies was $255,000,000 and the median EBITDA was $120,000,000 as of 03/31/2025.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Our portfolio companies reported a weighted average year over year EBITDA growth rate of approximately 10% across companies in which we have invested since April of twenty eighteen. Interest coverage levels remain steady with the median first quarter coverage at 1.7 times, unchanged quarter over quarter. At the end of the first quarter, non accruals represented 3.5% of our portfolio on a cost basis and 2.1% of our portfolio on a fair value basis. This compares to 3.7% of our portfolio on a cost basis and 2.2% of our portfolio on a fair value basis as of 12/31/2024. We also believe it is helpful to provide the market with information based on FSK assets originated by KKR Credit.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Non accruals relating to the 90% of our total portfolio, which has been originated by KKR Credit and the FSKKR Advisor were 2% on a cost basis and 1% on a fair value basis as of the end of the first quarter. This compares to 2% on a cost basis and 0.8% on a fair value basis as of the end of the fourth quarter. During the first quarter, '2 investments were added to nonaccrual status and three investments were removed. Our first lien senior secured position in New Era was added to nonaccrual, contributing $29,000,000 of cost and $23,000,000 of fair value. Additionally, our second lien investment in CUBA Corp was added to nonaccrual, contributing $43,000,000 of cost and $34,000,000 of fair value.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Our position in Alacrity Solutions was restructured during the quarter, which resulted in the $22,000,000 of cost and $16,000,000 of fair value being removed from non accrual. Our position in Accuride was also restructured during the quarter, which resulted in $8,000,000 of cost and $2,000,000 of fair value being removed from non accrual. Our remaining subordinated debt position in Miami Beach Medical was converted to equity in conjunction with the company's wind down, removing $18,000,000 of cost and $12,000,000 of fair value from non accrual. Also during the quarter, JW Aluminum refinanced a $300,000,000 high yield bond with a new $350,000,000 offering. This resulted in a $77,000,000 par paydown on our senior secured bond and a $21,000,000 paydown on our preferred equity position.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Given this investment has been on non accrual since Q4 twenty twenty three, we are pleased with this outcome. Performance at JWA has been strong and the company is a beneficiary of the recent tariff news. In terms of other portfolio updates, Production Resource Group and four thousand eight hundred forty were our two largest markdowns during the first quarter. PRG continues to be impacted by certain tour cancellations and margin pressure, and 4,840 has been impacted by labor costs and excess inventory. Separately, we're pleased to note that the sale of Maverick Natural Resources, a legacy position which has been in the portfolio since 2014, has closed.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

As a result, FSK received $18,000,000 in cash and $25,000,000 of diversified energy company common stock. With that, I'll turn the call over to Stephen.

[Steven Lilly, CFO at FS KKR Capital]

Thanks, Dan. As of 03/31/2025, our investment portfolio had a fair value of $14,100,000,000 consisting of two twenty four portfolio companies. At the end of the first quarter, our 10 largest portfolio companies represented 20% of the fair value of our portfolio compared to 21% as of the end of the fourth quarter. We continue to focus on senior secured investments as our portfolio consisted of approximately fifty eight percent first lien loans and 63% senior secured debt as of March 31. In addition, our joint venture represented 11.8% of the fair value of our portfolio.

[Steven Lilly, CFO at FS KKR Capital]

As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans total approximately 67% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of March 31. The weighted average yield on accruing debt investments was 10.8% as of March 31, a decrease of 20 basis points compared to 11% as of December 31. The decrease primarily is attributable to incremental spread compression on new investments and the decline in base rates. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Our total investment income decreased by $7,000,000 quarter over quarter to $400,000,000 primarily due to two fewer days in the first quarter compared with the fourth quarter, the paydown of higher yielding investments and lower spreads on new originations.

[Steven Lilly, CFO at FS KKR Capital]

The primary components of our total investment income during the quarter were as follows: total interest income was $3.00 $2,000,000 a decrease of $22,000,000 quarter over quarter dividend and fee income totaled $98,000,000 an increase of $15,000,000 quarter over quarter Our total dividend and fee income during the quarter is summarized as follows: $46,000,000 of recurring dividend income from our joint venture other dividends from various portfolio companies totaling approximately $35,000,000 during the quarter and fee income totaling approximately $17,000,000 during the quarter. Our interest expense totaled $113,000,000 a decrease of $3,000,000 quarter over quarter. Our weighted average cost of debt was 5.5% as of March 31. Management fees totaled $52,000,000 a decrease of $1,000,000 quarter over quarter. And incentive fees totaled $39,000,000 an increase of $4,000,000 quarter over quarter.

[Steven Lilly, CFO at FS KKR Capital]

Other expenses totaled $9,000,000 during the first quarter, unchanged quarter over quarter. The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 4Q twenty twenty four net asset value per share of $23.64 was increased by GAAP net investment income of $0.67 per share and was decreased by $0.24 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share total distribution paid during the quarter. The sum of these activities results in our 03/31/2025 net asset value per share of $23.37 From a forward looking guidance perspective, we acknowledge the many factors currently affecting The U.

[Steven Lilly, CFO at FS KKR Capital]

S. Economy. As a result, while we continue to provide guidance in an effort to be as transparent as possible with the investment community, there is the potential for greater variance within our guidance categories than in prior periods. With that said, we expect second quarter twenty twenty five GAAP net investment income to approximate $0.64 per share, and we expect our adjusted net investment income to approximate $0.62 per share. Detailed second quarter guidance is as follows: Our recurring interest income on a GAAP basis is expected to approximate $3.00 $2,000,000 We expect recurring dividend income associated with our joint venture to approximate $56,000,000 We expect other fee and dividend income to approximate $43,000,000 during the second quarter.

[Steven Lilly, CFO at FS KKR Capital]

From an expense standpoint, we expect management fees to approximate $53,000,000 We expect incentive fees to approximate $36,000,000 We expect interest expense to approximate $124,000,000 And we expect other G and A expenses to approximate $10,000,000 And as Michael indicated during his remarks, our 2025 distribution guidance remains in place as we currently expect our distributions during the year will total $2.8 per share comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions. Turning to our capital structure. In March, we closed on our second middle market CLO, raising $380,000,000 of low cost secured debt priced at a weighted average rate of SOFR plus 158 basis points. We are pleased with this financing given it is match funded with no mark to market at an attractive rate. Additionally, in March, we amended our Morgan Stanley funding facility where we reduced the spread from 2.7% to 1.95% and extended the maturity date by two years to November 2028.

[Steven Lilly, CFO at FS KKR Capital]

As of 03/31/2025, our gross and net debt to equity levels were 122114%, respectively, compared to 112104% at 12/31/2024. At March 31, our available liquidity was $3,200,000,000 and approximately 54% of our drawn balance sheet and 41% of our committed balance sheet was comprised of unsecured debt. 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, Chairman & CEO at FS KKR Capital]

Thanks, Stephen. In closing, while the broader environment remains uncertain, we believe that FSK has taken and is continuing to take proactive steps to deliver for our shareholders. Many private credit providers have navigated volatile markets extremely well in the past, and we believe FSK is well positioned to navigate this period of uncertainty as well. Private credit thrives in part because of its consistent ability to generate a steady stream of current income for its investors. We are confident in our business strategy and believe both the breadth of the KKR credit platform and our strong balance sheet will allow us to continue to succeed going forward.

[Michael Forman, Chairman & CEO at FS KKR Capital]

And with that, operator, we'd like to open the line for questions.

[Operator]

Thank you. As a reminder, to ask a question, you will need to press 11 and wait for your name to be announced. Please stand by while we compile the Q and A roster. Your first question comes from the line of John Hecht of Jefferies. John, please go ahead.

[John Hecht, Managing Director at Jefferies Financial Group]

Good morning, guys. Thanks very much

[John Hecht, Managing Director at Jefferies Financial Group]

for taking my

[John Hecht, Managing Director at Jefferies Financial Group]

questions. First one is just, I guess, kind of, I guess, from a modeling perspective, the timing of deployments last quarter. And then also, is the full effect of rate changes in the run rate from last quarter? Or should we expect some more adjustments coming into this quarter from an asset yield perspective?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Good morning, John. Maybe Stephen will comment on some of the modeling points. I think we were happy with the origination number. Think a couple of things to point out. We talked about in the last call, right?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

There was some carryover slippage from the prior quarter, deals we thought were going to get done in December. On the other side of that, I think from a diversification of deployment, we're also pretty happy, right? We're growing the JV. That was a focus area for us. We continue to deploy into our asset based finance activities, and we are also focused on getting some additional non U.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

S. Exposure, right? So, those three buckets were probably half of the total $2,000,000,000 My guess is from a modeling perspective, it's probably pretty balanced and thinking about kind of the ins and the outs. Stephen, do you mind if would add?

[Steven Lilly, CFO at FS KKR Capital]

Yeah, John, it's most of the declining rates is flowed through now, as of the end of the first quarter. But as you know from the comments on the call, you know, we went down from 11% down to 10.8% on a weighted average yield basis. So, you know, that flow through in the portfolio will affect us and that's effectively why the guidance that we gave, our interest income is, the recurring interest income is effectively flat at around $300,000,000 for the first quarter and then also guidance for the second quarter.

[John Hecht, Managing Director at Jefferies Financial Group]

Okay. And then, Dan, you give some color around the fact that some of the high activity in 1Q was kind of a catch up. But I'm wondering when you think about your pipeline now and activity overall within your own platform, it's clear that you guys had a much more active first quarter than I guess the overall market. So I'm wondering, there certain categories of assets or characteristics of transactions that you guys, as FSK and attached to KKR are maybe gaining market share? Or is there anything that you could talk about that's a reflection of the competitive environment that's given you guys incremental opportunities?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah. And think, John, maybe a couple of sort of pieces there. One, you know, I do, you know, kind of like that we're kind of sourcing from different pieces and really giving, you know, FSK access to everything we're doing in private credit, you could probably give the benefit to, as I said, you know, a couple of deals out of Europe and the activity in our asset based finance business. You know, I think in terms of just broader activity levels, think we were definitely, you know, walking into the year feeling like it was going to be a very active and busy '25. That started to slow down a little bit.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

That's why we commented in February, we were kind of pushing that M and A thesis out a little bit. It definitely slowed down in Q2, right? I think everybody hit a general pause button post April 2. I think we will continue to benefit from a large existing book. I think we'll continue to benefit from those diversified origination sources or channels.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

But I think there's going need to be some more certainty out there before you see more regular way transactions, is my guess.

[John Hecht, Managing Director at Jefferies Financial Group]

Okay. Really appreciate the color. Thank you.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Thank you.

[Operator]

Excuse me. One moment for your next question. The next question comes from the line of Casey Alexander of Compass Point Research and Trading. Casey, please go ahead.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Hi. Good morning, and, thank you for taking my questions. Dan, this is, for you. You know, KKR has a really highly regarded macro group. And and I wanna take this opportunity to ask, you know, how does the macro group, which is feeding you information, see the odds of recession changing with what's happening now?

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

And how does the macro group see it impacting private credit going forward?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, good morning, Casey. Think you'll make Henry McVeigh and team happy with that comment. So thank you. You know, we are lucky, you know, being part of KKR to have access to those resources. I mean, Henry sits, you know, probably less than 30 feet from me.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

You know, we have almost a monthly call with his team and the broader private credit team where, you know, we hear what's on their mind, they actually get hear what's kind of on our mind here, what's kind of going on in the portfolio sort of feeding in the views that actually happened yesterday this month. So there is an active dialogue there. And I don't want to speak sort of fully framed, but I'll give you kind of, you know, the starting point was kind of good, right? The sense of the health of the economy, the health of the corporates where the consumer sat, you know, uncertainty is bad. I think the initial tariff numbers that came out post liberation day were much wider than any kind of forecast.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

You know, I think there's a general consensus that the chances of a recession are what I will say probably more likely than not, albeit that could very well be a technical one, or one that's fairly muted. You know, I think we're trying to spend more and more time on what we'd see as the tail risk to that, like where it could, you know, sort of get worse. But, you know, we do use that team a lot. The dialogue is sort of strong and, you know, that said, there has been a fair amount of uncertainty and kind of moves out there. Obviously, was, I don't know if it's been formally announced, but I saw the headlines this morning with kind of the first sort of quote unquote big trade deal being signed.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

But, you know, we got to stay on top of

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

My second question is, you know, you talked about the weighted average yield came down to 10.8%. When I look at the new money yields of 9.5%, is it reasonable to expect some additional yield compression as the portfolio churns because it's very likely that your repays are significantly yielding materially higher than where your new money yields are.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Casey, it's not an unfair sort of point. I mean, I think that the number is probably closer to nine, eight or sort of 10. When you especially when you factor in some of the OID and sort of potential fee income, you know, I think, you know, we are very focused on risk, right? You know, we want to get paid as much as we can on any individual loan. But I think we're also prepared to walk away from loans if it sort of doesn't make sense.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

You know, I am happy we, you know, got some growth into the joint venture. We've been talking about that for some time. You know, and I do think it's at some point, we will see, you know, that M and A market sort of return, albeit I think we're probably done sort of predicting that in some ways, right? But that's the longer probably side of it. And you'll get some additional sort of fee income generated.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

But yes, I think you continue to have some downward pressure on that 10.8.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

Just slipping in one last one, we're hearing about loans spilling over from the broadly syndicated market into the private credit market. Wouldn't those generally be associated with somewhat lower new origination yields as compared to stuff that just sits in private creditor, am I mistaken about that?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

It's probably a fair point. I mean, you could probably argue there's a pretty high correlation between quality and size of business and where the spread might sort of land. I think almost as a tailwind for private credit from the COVID activity, I do think more and more companies and or sponsors have been willing to use it as a lending tool, think people have gotten more comfortable with it. I think historically, I feel like people use direct lending or private credit for certainty of execution. I do think that's extended to including kind of really wanting to know your lender.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

You know, we've always had a thesis, the loan market and the bond market will continue to exist. I do continue though to see, you know, growth kind of here more companies accessing it. And then in times of volatility, hopefully able to sort of step in and lend against some attractive sort of companies. You know, we did make a comment in our prepared remarks, we saw spreads widen a bit, you know, probably not as much as we'd have liked to see if we're honest about that. But, you know, I'm not sure the volatility is done.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

So, we're going to be, you know, continue to focus on providing solutions if the market, you know, does struggle on this syndicated time.

[Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC]

All right. Thank you for taking my questions. I appreciate it.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Thanks. Have a good day.

[Operator]

One moment for your next question. The next question comes from the line of Ken Li of RBC Capital Markets. Ken, please go ahead.

[Kenneth Lee, Vice President at RBC Capital Markets]

Hey, good morning. Thanks for taking my question. Just given the views for continued macro uncertainty there, any updated thoughts on where preferred leverage ranges could go over the near term there? Thanks.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, good morning, Ken. I think we've built our target range on leverage kind of thinking about sort of all markets, right? And we've always talked about sort of one times to 1.25 times, ended the quarter at 1.14, ended the quarter with north of $3,000,000,000 of available liquidity. So I don't think there's really a change in range there. I as important as the range is I think your activity on just your liability side generally, We were happy with the execution on the CLO.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

We think it's another diversified funding source for companies like this. I think we were happy with what we kind of commented on the Morgan Stanley sort of facility, I think the management team on the FSK side and a lot of folks, you know, from the broader deal teams who have spent real time on the financing facility, so have done a really nice job, I think we feel quite good with where we sit from a liability perspective today.

[Kenneth Lee, Vice President at RBC Capital Markets]

Great, very helpful there. And then one follow-up, if I may, just on the asset based financing side, the ABF portfolio, I think in the prepared remarks, you mentioned that there could be some retail oriented risks there. Maybe you could just remind us again which particular investments you think that this could center on? And maybe just remind us again some of the downside protection in a lot of these ABF investments there? Thanks.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, no, I think we wanted to make the point fair during our prepared remarks, right? We are still very excited about the broader opportunity in the ABS sort of space. I did call out specifically, we're just mindful about the consumer risk we do have. That is a small percentage of FSK, it's roughly 3% of total size. I think when we have been active in the consumer space, we've generally targeted either secured risk, higher FICO score type risk, or what I call, you know, kind of either loans to homeowners or other sort of short duration loans.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

You know, maybe just two examples for it, as we've talked about on prior calls, you know, one would be PayPal, the European deal, but that is a portfolio that, you know, effectively turns, you know, every 90 days. So, I think that's a good risk mitigating into it. And then we talked about Discover in the past, which is a private student loan portfolio, but it's mainly, you know, parent cosigners, I think the average FICO score there is like seven sixty, right? So, I think the starting point of the consumer makes us kind of, you know, feel good that even with the tariff noise, even with other things, they're going to continue to perform. I think we're worried a little bit more about the non prime or the sub prime consumer, because I think, you know, by definition in my mind, you know, tariffs will put additional sort of cost into the system that somebody has to pay for.

[Kenneth Lee, Vice President at RBC Capital Markets]

Great. Very helpful there. Thanks again.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Okay, thanks. Have a good day.

[Operator]

One moment for your next question. The next question comes from the line of Finian O'Shea of Wells Fargo Securities. Finian, please go ahead.

[Finian O’Shea, Analyst at Wells Fargo]

Hey, everyone. Good morning. Thanks. Steven, I think the guide for non JV and other fee was 43. Does that imply a sort of continued strength in the ABF group or other fee income?

[Finian O’Shea, Analyst at Wells Fargo]

Thanks.

[Steven Lilly, CFO at FS KKR Capital]

Yes, in the first quarter, we were a little heavier on ABF dividends, distributions and as you know, that business can be a little bit lumpy quarter to quarter or it varies quarter to quarter. So we're a little bit lighter there in terms of guidance for the second quarter, but that's made up, if you will, you know, almost exactly within a million dollars or so of additional dividends from or growth in dividends from the joint venture. As Dan mentioned in his comments, continued to scale that.

[Finian O’Shea, Analyst at Wells Fargo]

So is it other, is it just fee income that's supposed to jump?

[Steven Lilly, CFO at FS KKR Capital]

No. Fee income is down, I think, $3,000,000 quarter over quarter.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

And maybe, Finn, we'll make sure we can follow-up with you after the tip kinda tie that out, because I wanna make sure you you have the the right numbers.

[Finian O’Shea, Analyst at Wells Fargo]

Okay, sure. Then, Dan, one on ABF, sort of tying to perhaps Casey's question on yields. A lot of the new ABF, maybe with the exception of Opendoor looks like senior debt below 500 type spreads. Is this way it's is this maybe from your senior high grade style group or is this the way it's going, for you overall in ABF?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, and then I think what you're picking up there is the receivables, and inventory deals we've been doing. So, know, and the market has generally called that more ABL, but it's included within our kind of ABF sort of classification here. So that's generally, you know, to a company. Sometimes it's senior secured, sometimes it's done, you know, in an SPV. You know, I think we're getting good overall return pick up there versus direct lending, because you're usually, you know, north of 500 and there's pretty significant kind of upfront fee income and or exit fee income.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

I would probably separate that from, you know, what I would call the traditional, you know, ABF deals that I'm talking about, like the Discover, or like, you know, PayPal or the stuff we've been doing in aviation leasing, which would be still higher than that. And then, know, the high grade business that you sort of referenced, like that is a very, you know, large, you know, activity for us, you know, it does keep the ABF team sort of active in addition to the, you know, more regular way or sort of opportunistic deals, but those high grade deals are generally an IG plus product that wouldn't be part of the FSK portfolio. I think you're picking up the receivables and inventory stuff.

[Finian O’Shea, Analyst at Wells Fargo]

Very helpful. Thanks so much.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Have a good day.

[Operator]

One moment for your next question. The next question comes from the line of Robert Dodd of Raymond James. Robert, please go ahead.

[Robert Dodd, Analyst at Raymond James]

Thank you. You got it right the second time, Dodd. Hi, guys. Two questions. I'm gonna talk out of both sides of my mouth here.

[Robert Dodd, Analyst at Raymond James]

One on JW Aluminum. And to your point, it it it should be a beneficiary. I mean, locally sourced scrap, domestic producer, etcetera, paying down debt. The bond investors on the refinance obviously think they're gonna get repaid. The PIC preferred still on non accrual, but there's a lot of positive trends there.

[Robert Dodd, Analyst at Raymond James]

I mean, how close do you think that asset, it's a pretty big one obviously, is to that preferred going back on accrual given all the positive trends and the fact that obviously you just got partially repaid at par on that trench, which may indicate it's collectible at par and maybe worth taking into income.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, I mean, and appreciate the question. You know, I think the deal team has done kind of great work, think on this name, you know, over the last, you know, several years. It's traditionally been in a, what I'll call, a hard industry. You know, we're kind of a minority there, but I think the overall ownership group has been well coordinated as well. I think, you know, Robert, we're very happy to get that bond deal done, right?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Very happy to effectively take some money off the table on the bottom parts of the capital structure. You know, earnings we have seen there have been strong. You know, I think that there is definitely the what I will call the tailwind for what's going on as a benefit. So, I think we're happy about that. I think we're going to be pretty thoughtful though, we're pretty conservative about putting something, you know, back on accrual.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

But, you know, I think time will tell. And I think we're going to continue to be active with the name to see if we can capitalize on the current market environment that again, I think is a tailwind for the business.

[Robert Dodd, Analyst at Raymond James]

Got it. Got it. Thank you on that. And congratulations on the work done on that asset. Second question, kind of the opposite side.

[Robert Dodd, Analyst at Raymond James]

I'm looking at the chart on page 10 of the presentation and it shows, you know, over the last two quarters kind of median leverage in the portfolio has gone down four tenths. Over the same time period, the average borrower cost, I. E. The income yield to you, has gone down like 70 basis points. But the interest coverage has gone up a tiny bit, but not much.

[Robert Dodd, Analyst at Raymond James]

It looks like there's some kind of diversion divergence between the interest coverage trends and, you know, the portfolio yield and the leverage in the portfolio. So can you I mean, I'm probably missing something, but can you kind of explain what's what's going on there? Why interest coverage isn't isn't improving at a faster pace given portfolio leverage is falling and rates are falling?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah, I'll just bring it up to the page 10 here. I do think you probably got a little bit of a lag effect, number one. And number two, while I kind of can see the trend sort of the point you're putting, I think we're all talking about just kind of like, point one, zero point two sort of numbers that could also include some rounding. We'll do a little bit of work on the other side and circle back, but my sense is probably more of a lag.

[Steven Lilly, CFO at FS KKR Capital]

Yes, primarily the lag, Robert. When rates were going, interest rates were rising, there were lots of questions on BDC calls, ours included, you know, is how are people calculating interest coverage and those types of things, you know, is it is it trailing? Is it forward? Is it a mix? And so, you know, some of it basically the answer to your question is just a little bit of a lag.

[Robert Dodd, Analyst at Raymond James]

Okay, got it. Thank you.

[Operator]

One moment for your next question. The next question comes from the line of Maxwell Fritcher of Truist. Maxwell, please go ahead.

[Maxwell Fritscher, Equity Research Associate at Truist Securities]

Thank you. Good morning. I'm on for Mark Hughes. Given the assumption of economic uncertainty persisting through 2025 in a possible recession case, Do you anticipate any material difference in deal activity in the upper middle market or the target upper market that you're operating in versus maybe the core middle and lower middle market?

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Yeah. And and good morning. We're having a little bit of a hard time hearing you, I think I gotcha. You know, I you could probably make a case, that some of the activity in in the larger company size could be more muted because it does probably rely on a more active M and A market, including kind of sponsor to sponsor sales. I think that said, I think the benefit that we have, and I think a lot of the other large players have, of this kind of incumbent

[Maxwell Fritscher, Equity Research Associate at Truist Securities]

Thank you. I think I'm having a little technical difficulties on my side, so I'll leave it there. Appreciate the answers.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Okay. Have a good day.

[Operator]

One moment for your next question. Actually, I am showing no further questions, so I would now like to turn it back over to Pete for closing remarks.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

Dan, thank you. Everyone, thank you for taking the time today and your questions. We're wishing everybody a good summer. We look forward to talking to you again in August. If there are any follow-up points, though, please don't hesitate to reach out to the team.

[Daniel Pietrzak, Co-President & Chief Investment Officer at FS KKR Capital]

So thanks, have a good day.

Participants

Executives

• Anna Kleinhenn, SVP - Investor Relations
• Michael Forman, Chairman & CEO
• Daniel Pietrzak, Co-President & Chief Investment Officer
• Steven Lilly, CFO

Analysts

• John Hecht, Managing Director at Jefferies Financial Group
• Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
• Kenneth Lee, Vice President at RBC Capital Markets
• Finian O’Shea, Analyst at Wells Fargo
• Robert Dodd, Analyst at Raymond James
• Maxwell Fritscher, Equity Research Associate at Truist Securities