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) (NYSE: FSK) is a business development company that provides financing to private middle-market companies, primarily in the United States. The company seeks to support businesses across a range of industries by investing in senior secured loans, subordinated debt and, to a lesser extent, equity securities.

FSK’s portfolio is generally focused on established companies with annual revenues and earnings that may require capital for acquisitions, recapitalizations, growth initiatives, refinancings and other corporate purposes. Its investments are designed to generate current income while providing capital solutions to companies that may not have ready access to traditional bank financing or public debt markets.

The company was formed through the 2018 merger of FS Investment Corporation and Corporate Capital Trust. FSK is externally managed by FS/KKR Advisor, LLC, a partnership between FS Investments and KKR Credit Advisors, part of KKR. Through this relationship, the company draws on the investment and credit expertise of both organizations in managing its middle-market lending portfolio.

FS KKR Capital Q1 2025 Earnings Call Transcript

Key Takeaways

• During Q1, FSK generated $0.67 per share net investment income (adjusted $0.65) and declared a Q2 distribution of $0.70 per share, reflecting a 12% yield on its March 31 NAV.
• Amid heightened volatility and tariff uncertainty, FSK estimates ~8% of its portfolio has direct tariff exposure and has proactively exited two high-risk companies to mitigate potential headwinds.
• FSK originated approximately $2 billion in new investments—its strongest quarter since 2022—with a net portfolio increase of $881 million and a weighted average EBITDA of $255 million.
• Management remains bullish on asset-based finance for its collateral security and diversification benefits, while monitoring consumer exposure in its ABS portfolio.
• As of March 31, FSK held $3.2 billion of available liquidity, completed a $380 million middle market CLO at SOFR+158 bps, and reduced funding costs by amending its credit facility spread to 1.95%.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp's first quarter 2025 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. 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 now begin.

[Anna Kleinhenn, Head of Investor Relations at FS KKR Capital Corp]

Thank you. Good morning and welcome to FS KKR Capital Corp's first quarter 2025 earnings conference call. Please note that FS KKR 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 30 days. Replay information is included in a press release that FSK issued yesterday. 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 March 31st, 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, and the unauthorized rebroadcast of this call in any form is strictly prohibited.

[Anna Kleinhenn, Head of Investor Relations at FS KKR Capital Corp]

Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally. 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 May 7th, 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, Head of Investor Relations at FS KKR Capital Corp]

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 Forman, Chief Executive Officer and Chairman, Dan Pietrzak, 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, CEO and Chairman at FS KKR Capital Corp]

Thank you, Anna, and good morning, everyone. Thank you all for joining us for FSK's first quarter 2025 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, and 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. 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.

[Michael Forman, CEO and Chairman at FS KKR Capital Corp]

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 $0.64 per share quarterly distribution and also our $0.06 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. 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.

[Michael Forman, CEO and Chairman at FS KKR Capital Corp]

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 DOGE exposure, and those analyses have been further refined over the last several weeks. Again, Dan will address this topic during his comments. I would 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.

[Michael Forman, CEO and Chairman at FS KKR Capital Corp]

From a liquidity perspective, we ended the quarter with approximately $3.2 billion 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 $0.06 per share. This total distribution equates to a 12% yield on our March 31st NAV of $23.37 per share. With that, I'll turn the call over to Dan.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Thanks, Michael. As we discussed on our fourth quarter earnings call, our view at the time was that increases in M&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. 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 in impacted countries. Additionally, as we originate new investments, we are evaluating each deal for potential risks related to tariffs or DOGE.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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. While DOGE exposure is more difficult to quantify, we currently estimate low to mid-single-digit DOGE exposure. The industries 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 DOGE are software and services, healthcare equipment and services, and aerospace and defense, which falls within our capital goods classification.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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. 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, ThreeSixty Group, is a company whose products are primarily sourced from China.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

The second example, Lakeview Farms, is a food products business subject to consumer purchasing behavior. 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. ABF 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 ABF portfolio, though we are focused almost entirely on secured risk or high FICO-scored prime borrowers. Overall, we continue to be bullish on ABF's 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 billion of new investments.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Approximately 45% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. 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 $881 million. 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 million, 5.5x leverage through our security, and a weighted average coupon of approximately SOFR + 505 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.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Despite the sluggishness of the U.S. M&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 million-$150 million 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 million, and the median EBITDA was $120 million as of March 31st, 2025.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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 2018. Interest coverage levels remain steady, with the median first quarter coverage at 1.7x, 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 December 31st, 2024. We also believe it is helpful to provide the market with information based on FSK assets originated by KKR Credit.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Non-accruals relating to the 90% of our total portfolio, which has been originated by KKR Credit and the FS KKR 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, two investments were added to non-accrual status, and three investments were removed. Our first lien senior secured position in New Era was added to non-accrual, contributing $29 million of cost and $23 million of fair value. Additionally, our second lien investment in Cubi Corp was added to non-accrual, contributing $43 million of cost and $34 million of fair value.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Our position in Alacrity Solutions was restructured during the quarter, which resulted in the $22 million of cost and $16 million of fair value being removed from non-accrual. Our position in Accuride was also restructured during the quarter, which resulted in $8 million of cost and $2 million 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 million of cost and $12 million of fair value from non-accrual. Also, during the quarter, JW Aluminum refinanced their $300 million high-yield bond with a new $350 million offering. This resulted in a $77 million par paydown on our senior secured bond and a $21 million paydown on our preferred equity position. Given this investment has been on non-accrual since Q4 2023, we are pleased with this outcome.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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 48Forty were our two largest markdowns during the first quarter. PRG continues to be impacted by certain tour cancellations and margin pressure, and 48Forty 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. As a result, FSK received $18 million in cash and $25 million of diversified energy company common stock. With that, I'll turn the call over to Steven.

[Steven Lilly, CFO at FS KKR Capital Corp]

Thanks, Dan. As of March 31, 2025, our investment portfolio had a fair value of $14.1 billion, consisting of 224 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 58% first lien loans and 63% senior secured debt as of March 31st. In addition, our joint venture represented 11.8% 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, then first lien loans total approximately 67% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of March 31st.

[Steven Lilly, CFO at FS KKR Capital Corp]

The weighted average yield on accruing debt investments was 10.8% as of March 31st, a decrease of 20 basis points compared to 11% as of December 31st. 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 million quarter-over-quarter to $400 million, 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. The primary components of our total investment income during the quarter were as follows. Total interest income was $302 million, a decrease of $22 million quarter-over-quarter. Dividend and fee income totaled $98 million, an increase of $15 million quarter-over-quarter.

[Steven Lilly, CFO at FS KKR Capital Corp]

Our total dividend and fee income during the quarter is summarized as follows: $46 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $35 million during the quarter, and fee income totaling approximately $17 million during the quarter. Our interest expense totaled $113 million, a decrease of $3 million quarter-over-quarter. Our weighted average cost of debt was 5.5% as of March 31st. Management fees totaled $52 million, a decrease of $1 million quarter-over-quarter, and incentive fees totaled $39 million, an increase of $4 million quarter-over-quarter. Other expenses totaled $9 million 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.

[Steven Lilly, CFO at FS KKR Capital Corp]

Our ending 4Q 2024 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 March 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.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.

[Steven Lilly, CFO at FS KKR Capital Corp]

With that said, we expect second quarter 2025 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 $302 million. We expect recurring dividend income associated with our joint venture to approximate $56 million. We expect other fee and dividend income to approximate $43 million during the second quarter. From an expense standpoint, we expect management fees to approximate $53 million. We expect incentive fees to approximate $36 million. We expect interest expense to approximate $124 million, and we expect other G&A expenses to approximate $10 million.

[Steven Lilly, CFO at FS KKR Capital Corp]

As Michael indicated during his remarks, our 2025 distribution guidance remains in place as we currently expect our distributions during the year will total $2.80 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 million of low-cost secured debt priced at a weighted average rate of SOFR + 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. As of March 31, 2025, our gross and net debt-to-equity levels were 122% and 114% respectively, compared to 112% and 104% at December 31, 2024.

[Steven Lilly, CFO at FS KKR Capital Corp]

At March 31, our available liquidity was $3.2 billion, and approximately 54% of our drawn balance sheet and 41% of our committed balance sheet was comprised of unsecured debt. With that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

[Michael Forman, CEO and Chairman at FS KKR Capital Corp]

Thanks, Steven. 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. 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 star 11 and wait for your name to be announced. Please stand by while we compile the Q&A roster. Your first question comes from the line of John Hecht of Jefferies. John, please go ahead.

[John Hecht, Managing Director at Jefferies]

Morning, guys. Thanks very much for taking my 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?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Good morning, John. Maybe Steven will comment on some of the modeling points. I think we were happy with the origination number. I think a couple of things to point out. We talked about it in the last call, right? There was some carryover slippage from the prior quarter deals we thought we were going to get done in December. On the other side of that, I think from a diversification of deployment, we were 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 were also focused on getting some additional non-U.S. exposure, right? Those three buckets were probably half of the total $2 billion. My guess is from a modeling perspective, it's probably pretty balanced in thinking about kind of the ins and the outs.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Steven, you might want to add.

[Steven Lilly, CFO at FS KKR Capital Corp]

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

[John Hecht, Managing Director at Jefferies]

Okay. And then, Dan, you did give some color around the fact that some of the high activity in 1Q was kind of a catch-up. 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. I'm wondering, are 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?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. I think, John, maybe a couple of sort of pieces there. One, I do kind of like that we're kind of sourcing from different pieces and really giving FSK access to everything we're doing in private credit. You could probably give the benefit to, as I said, a couple of deals out of Europe and the activity in our asset-based finance business. I think in terms of just broader activity levels, I think we were definitely walking into the year feeling like it was going to be a very active and busy 2025. That started to slow down a little bit. That's why we commented in February we were kind of pushing that M&A thesis out a little bit. It definitely slowed down in Q2, right? I think everybody hit a general pause button post-April 2nd. I think we will continue to benefit from the large existing book.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

I think we'll continue to benefit from those diversified origination sources or channels. I think there's going to need to be some more certainty out there before you see more regular way transactions is my guess.

[John Hecht, Managing Director at Jefferies]

Okay. Really appreciate the color. Thank you.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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, Managing Director and Senior Equity Analyst at Compass Point Research and Trading]

Hi, good morning. Thank you for taking my questions. Dan, this is for you. KKR has a really highly regarded macro group. I want to take this opportunity to ask, how does the macro group, which is feeding you information, see the odds of recession changing with what is happening now? How does the macro group see it impacting private credit going forward?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. Good morning, Casey. I think you'll make Henry McVey and team happy with that comment. So thank you. We are lucky being part of KKR to have access to those resources. I mean, Henry sits probably less than 30 feet from me. We have almost a monthly call with his team and the broader private credit team where we hear what's on their mind. They actually hear what's kind of on our minds, hear what's kind of going on in the portfolio, sort of feeding in the views. That actually happened yesterday this month. There is an active dialogue there. I don't want to speak sort of fully for him, but I'll give you kind of the starting point was kind of good, right, in the sense of the health of the economy, the health of the corporates, where the consumer sat. Uncertainty is bad.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

I think the initial tariff numbers that came out post-Liberation Day were much wider than any kind of forecast. I think there is 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 is fairly muted. I think we are trying to spend more and more time on what we would see as the tail risks of that, like where it could sort of get worse. We do use that team a lot. The dialogue is sort of strong. That said, there has been a fair amount of uncertainty and kind of moves out there. Obviously, there was—I do not know if it has been formally announced, but I saw the headlines this morning with kind of the first sort of quote-unquote big trade deal being signed.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

We got to stay on top of that.

[Casey Alexander, Managing Director and Senior Equity Analyst at Compass Point Research and Trading]

My second question is, you talked about the weighted average yield came down to 10.8%. When I look at the new money yields of 9.50%, 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.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. Okay. It's not an unfair sort of point. I mean, I think the number is probably closer to 9.8% or sort of 10%, especially when you factor in some of the OID and sort of potential fee income. I think we are very focused on risk, right? We want to get paid as much as we can on any individual loan. I think we're also prepared to walk away from loans if it sort of doesn't make sense. I am happy we got some growth into the joint venture. We've been talking about that for some time. I do think at some point we will see that M&A market sort of return, albeit I think we're probably done sort of predicting that in some ways, right? That's the longer probably side of it. You'll get some additional sort of fee income generated.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yes, I think you could continue to have some downward pressure on that 10.8%.

[Casey Alexander, Managing Director and Senior Equity Analyst at Compass Point Research and Trading]

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 normally sits in private credit, or am I mistaken about that?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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. I think people have gotten more comfortable with it. I think historically, I feel like people used 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. We've always had a thesis the loan market and the bond market will continue to exist. I do continue, though, to see growth kind of here, more companies accessing it.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

In times of volatility, hopefully able to sort of step in and lend against some attractive sort of companies. We did make a comment in our prepared remarks. We saw spreads widen a bit, probably not as much as we would have liked to seen if we're honest about that. I'm not sure the volatility is done. We are going to continue to focus on providing solutions if the market does struggle on the syndicated side.

[Casey Alexander, Managing Director and Senior Equity Analyst at Compass Point Research and Trading]

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

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Thanks. Have a good day.

[Operator]

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

[Ken Lee, VP at RBC Capital Markets]

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

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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 1x-1.25x, end of the quarter at 1.14, end of the quarter with north of $3 billion of available liquidity. I don't think there's really a change in range there. I think as important as the range is, I think your activity on just your liability side generally, right? We were happy with the execution on the CLO. 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.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

I think the management team on the FSK side and a lot of folks from the broader deal teams who spent real time on the financing facility stuff have done a really nice job. I think we're feeling quite good with where we sit from a liability perspective today.

[Ken Lee, VP at RBC Capital Markets]

Great. Very helpful there. One follow-up, if I may, just on the asset-based finance 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.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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 ABF 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 kind of either loans to homeowners or other sort of short-duration loans. Maybe just two examples for you because we've talked about them on prior calls. One would be PayPal, the European deal. That is a portfolio that effectively turns every 90 days. I think that's a good risk mitigant to it.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

We talked about Discover in the past, which is a private student loan portfolio, but it's mainly parent co-signers. I think the average FICO score there is like 760, right? I think the starting point of the consumer makes us kind of 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 by definition, in my mind, tariffs will put additional sort of cost into the system that somebody has to pay for.

[Ken Lee, VP at RBC Capital Markets]

Great. Very helpful there. Thanks again.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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. Finnean, please go ahead.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

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? Thanks.

[Steven Lilly, CFO at FS KKR Capital Corp]

Yeah. 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. We are a little bit lighter there in terms of guidance for the second quarter. But that's made up, if you will, almost exactly within a million dollars or so of additional dividends or growth in dividends from the joint venture, as Dan mentioned in his comments, have continued to scale that.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Is it just fee income that's supposed to jump?

[Steven Lilly, CFO at FS KKR Capital Corp]

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

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Maybe Finn, we'll make sure we can follow up with you after the tip to kind of tie that out because I want to make sure you have the right numbers.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Okay. Sure. And 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 the way it is, is this maybe from your senior high-grade style group, or is this the way it is going for you overall in ABF?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. Finn, I think what you're picking up there is the receivables and inventory deals we've been doing. The market has generally called that more ABL, but it's included within our kind of ABF sort of classification here. That's generally to a company. Sometimes it's senior secured. Sometimes it's done in an SPV. I think we're getting good overall return pickup there versus direct lending because you're usually north of 500, and there's pretty significant kind of upfront fee income and/or exit fee income. I would probably separate that from what I would call the traditional ABF deals that I'm talking about, like the Discover or PayPal or the stuff we've been doing in aviation leasing, which would be still higher than that. The high-grade business that you sort of referenced, that is a very large activity for us.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

It does keep the ABF team sort of active in addition to their more regular way or sort of opportunistic deals. Those high-grade deals are generally an IG Plus product that would not be part of the FSK portfolio. I think you're picking up the receivables and inventory stuff.

[Finian O'Shea, Director of WFS Research at Wells Fargo Securities]

Very helpful. Thanks so much.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Have a good day.

[Operator]

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

[Robert Dodd, Director at Raymond James]

Thank you. Got it right the second time. Dodd. Hi, guys. Two questions. I'm going to talk out of both sides of my mouth here. One on JW Aluminum. And to your point, it should be a beneficiary. I mean, locally sourced scrap, domestic producer, etc., paying down debt. The bond investors on the refinance obviously think they're going to get repaid. The pick preferred's still on non-accrual, but there's a lot of positive trends there. I mean, how close do you think that asset—and 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 tranche, which may indicate it's collectible at par and maybe worth taking into income?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. I mean, I appreciate the question. I think the deal team has done kind of great work, I think, on this name over the last several years. It's traditionally been in what I'll call a hard industry. We're kind of a minority there, but I think the overall ownership group has been well coordinated as well. I think, Robert, we're very happy to get that bond deal done, right? Very happy to effectively take some money off the table on the bottom parts of the capital structure. Earnings we have seen there have been strong. I think that there is definitely what I would call the tailwind for what's going on as a benefit. I think we're happy about that. I think we're going to be pretty thoughtful, though, or pretty conservative about putting something back on accrual. I think time will tell.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

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, Director 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. I'm looking at the chart on page 10 of the presentation, and it shows over the last two quarters, kind of median leverage in the portfolio has gone down 4/10. Over the same time period, the average borrower cost, i.e., income yield to you, has gone down like 70 basis points. But the interest coverage has gone up a tiny bit, but not much. It looks like there's some kind of divergence between the interest coverage trends and 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 going on there, why interest coverage isn't improving at a faster pace given portfolio leverage is falling and rates are falling?

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. I'll just bring it up to the page 10 here. I do think you've 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 0.1, 0.2 sort of numbers that could also include some rounding. We'll do a little bit of work on the other side and circle back. My sense is it's probably more of a lag.

[Steven Lilly, CFO at FS KKR Capital Corp]

Yeah. It's primarily a lag, Robert. When interest rates were rising, there were lots of questions on BDC calls, ours included, of how are people calculating interest coverage and those types of things. Is it trailing? Is it forward? Is it a mix? Basically, the answer to your question is it's a little bit of a lag.

[Robert Dodd, Director at Raymond James]

Okay. Got it. Thank you.

[Operator]

One moment.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

I think that.

[Operator]

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

[Maxwell Fritscher, Equity Research Associate at Truist]

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

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Yeah. Good morning. We're having a little bit of a hard time hearing you, but I think I got you. You could probably make a case that some of the activity in the larger company size could be more muted because it does probably rely on a more active M&A market, including kind of sponsor-to-sponsor sales. 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 [audio distortion].

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

[audio distortion]

[Maxwell Fritscher, Equity Research Associate at Truist]

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

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

[audio distortion]

[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.

[Dan Pietrzak, CIO and Co-President at FS KKR Capital Corp]

Dan Pietrzak back here. Thank you. Everyone, thank you for taking the time today and your questions. We will wish everybody a good summer. We look forward to talking to you again in August. If there are any follow-up points, though, please do not hesitate to reach out to the team. Thanks. Have a good day.

Participants

Executives

• Dan Pietrzak, CIO and Co-President
• Anna Kleinhenn, Head of Investor Relations
• Steven Lilly, CFO
• Michael Forman, CEO and Chairman

Analysts

• Ken Lee, VP at RBC Capital Markets
• Finian O'Shea, Director of WFS Research at Wells Fargo Securities
• Casey Alexander, Managing Director and Senior Equity Analyst at Compass Point Research and Trading
• Robert Dodd, Director at Raymond James
• Maxwell Fritscher, Equity Research Associate at Truist
• John Hecht, Managing Director at Jefferies