FS KKR Capital Q2 2025 Earnings Report

FS KKR Capital EPS Results

• Actual EPS: -$0.60
• Consensus EPS: $0.63
• Beat/Miss: Missed by -$1.23
• One Year Ago EPS: $0.75

FS KKR Capital Revenue Results

• Actual Revenue: $398.00 million
• Expected Revenue: $402.00 million
• Beat/Miss: Missed by -$4.00 million
• YoY Revenue Growth: N/A

FS KKR Capital Announcement Details

• Quarter: Q2 2025
• Date: 8/6/2025
• Time: After Market Closes
• Conference Call Date: Thursday, August 7, 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 Q2 2025 Earnings Call Transcript

Key Takeaways

• Negative Sentiment: FSK reported Q2 net investment income of $0.62 per share vs. guidance of $0.64 and saw NAV per share drop 6.2% to $21.93, driven by specific non-accruals.
• Positive Sentiment: Originations remained strong in Q2 with $1.4 billion in new investments and $3.4 billion year-to-date, led by the asset-based finance segment and growth in the credit opportunities joint venture.
• Negative Sentiment: Four portfolio companies were moved to non-accrual status, representing over $500 million of cost exposure, though the in-house workout team is actively pursuing restructurings and strategic solutions.
• Positive Sentiment: The company maintained a $3.1 billion liquidity buffer across cash, undrawn credit facilities, and unsettled trades while keeping leverage within its 1.0–1.25× net debt-to-equity target range.
• Neutral Sentiment: FSK affirmed Q3 distribution of $0.70 per share and full-year 2025 guidance of $2.80, with plans to outline its 2026 dividend strategy on the Q3 earnings call.

Presentation

[Operator]

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp's Second Quarter twenty twenty five Earnings Conference Call. Your lines will be in a listen only mode during 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.

[Operator]

At this time, Anna Kleinhan, Head of Investor Relations, proceed with the introduction. Ms. Kleinhan, you may begin.

[Anna Kleinhenn, SVP & Head - IR at FS KKR Capital]

Thank you. Good morning, welcome to FSKPR Capital Corp. Second Quarter twenty twenty five Earnings Conference Call. Please note that FSKPR Capital Corp. May be referred to as FSK, the Fund, or the company throughout the call.

[Anna Kleinhenn, SVP & Head - IR at FS KKR Capital]

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. 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 06/30/2025. 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.

[Anna Kleinhenn, SVP & Head - IR at FS KKR Capital]

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. 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.

[Anna Kleinhenn, SVP & Head - IR at FS KKR Capital]

For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's second quarter earnings release that was filed with the SEC on 08/06/2025. 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. 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 Petrzak, Chief Investment Officer and President and Steven Lilly, Chief Financial Officer.

[Anna Kleinhenn, SVP & Head - IR at FS KKR Capital]

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 second quarter twenty twenty five earnings conference call. During the second quarter, FSK generated net investment income totaling $0.62 per share and adjusted net investment income totaling $0.60 per share as compared to our public guidance of approximately $0.64 and $0.62 per share respectively. Our net asset value per share declined 6.2% from $23.37 to $21.93 during the quarter. Our operating results this quarter primarily were attributable to company specific situations impacting four portfolio companies.

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

Dan will provide significant detail on each company shortly. Our new investment activity has remained strong despite the still somewhat slow M and A environment. During the 2025, the investment team originated 3,400,000,000.0 of investments, of which 1,400,000,000.0 were originated during the second quarter. We continue to find compelling ABF opportunities, and this segment of our portfolio remains a strong performer while also providing enhanced portfolio diversification. Additionally, we've continued to scale our credit opportunities partners joint venture, which expands our investment funnel and delivers a consistent stream of recurring dividend income on both a quarterly and annual basis.

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

On the right side of the balance sheet, we continue to maintain strong liquidity to support our funding needs, ending the quarter with $3,100,000,000 of availability across cash, unsettled trades, and undrawn credit facilities. Our 2025 distribution guidance remains in place, and we continue to expect our distributions during the full year will total $2.80 per share, comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions. Our board has declared a third quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $06 per share. As we previously have stated, our 2025 distribution strategy was designed to provide shareholders with additional distributions from the spillover income that we have accumulated. As we approach our target spillover balance range, we expect our 2026 distribution strategy will be based on key factors, including prevailing interest rates, our overall portfolio yield, the spread environment with respect to new investments, and the weighted average cost of our liability structure.

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

In keeping with our long held view of providing as much transparency as possible to the market, we plan to provide additional details regarding our 2026 dividend strategy on our third quarter earnings call. And with that, I'll turn the call over to Dan.

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

Thanks, Michael. I'll keep my macro and industry remarks brief this quarter and instead focus my time discussing as many specifics as we can with regards to the four companies Michael referenced. In recent months, geopolitical tensions, regulatory changes, tariffs and market volatility have combined to increase uncertainty about the timing of the resurgence of M and A transactions. While transactions have been getting done, global M and A volume is down close to 10% year over year. Despite these overall declines, our team evaluated more opportunities in Q2 than in any of the previous eight quarters.

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

This continued increase in deals screened together with the recent legislative developments supports our cautious optimism that conditions are aligned for an increase in M and A activity later this year and into next year. During our first quarter earnings call, we estimated that approximately 8% of our portfolio could have direct exposure to tariffs. Since then, the landscape has continued to evolve with changes to both the countries impacted and specific tariffs. We have remained closely engaged with our portfolio companies and their sponsors, actively updating our analysis to reflect the latest developments. Based on this updated analysis, we estimate that our direct tariff exposure has declined and now falls within the low to mid single digit range.

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

The companies which are either affected or potentially will be affected have been proactive in mitigating potential impacts, including exploring alternative supply chain strategies and passing through costs where possible. While our portfolio and the private credit market in general both continue to demonstrate stability, we experienced an increase in non accruals this quarter due to specific situations with four companies. Three of these companies are larger investments in our portfolio, which accounted for the negative move in our net asset value during the quarter. Comments regarding the four companies are as follows. Our first lien last out positions in Production Resource Group or PRG were added to non accrual, contributing $198,000,000 of cost and $122,000,000 of fair value collectively.

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

PRG is a legacy investment, which was initially restructured in 2020. Industry wide stress and heightened competition has led to significant pricing erosion and as such, the company's performance has significantly underperformed expectations in 2025. As a result, we reduced the value of our investment and placed our first lien last out securities on non accrual. We are working toward a full restructuring of the business and we'll provide updates as they become available. Our first lien senior secured positions in 4840 were added to nonaccrual during the quarter, contributing $188,000,000 of cost and $91,000,000 of fair value collectively.

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

4,840 is one of the nation's largest wood pallet manufacturers and recyclers. The company has been negatively impacted by post COVID normalization trends such as inventory destocking. While the company has continued to make interest payments, we made the decision to place the investment on nonaccrual status as we work through next steps with the company and the sponsor. FSK second out first lien loan to Kleimier Bernersen Services or KBS was added to non accrual, contributing $94,000,000 of cost and $48,000,000 of fair value. KBS is a large provider of janitorial and cleaning services to nationwide retailers and offices.

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

The company completed a consensual restructuring in early twenty twenty four and since then has successfully focused on new business development, value creation, operational improvements and cost reductions. The company's performance has stabilized and we have received indications of interest in purchasing the business from strategic third parties. This process is evolving and we will update the market as we learn more. Lastly, our first lien and second lien investments in WorldWise were added to non accrual, contributing $20,000,000 of cost and $11,000,000 of fair value collectively. The company is pet products provider, which was restructured during the 2024.

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

In connection with the restructuring, the sponsor contributed $42,000,000 of equity, resulting in a $30,000,000 debt pay down at par across KKR funds. Following the restructuring, the business has faced headwinds from tariffs and softer consumer demand. We are actively implementing strategic initiatives aimed at stabilizing operations and realizing meaningful cost efficiencies. While each of these situations is unique to the issuer, our workout team remains actively engaged and is working closely with our advisors and management teams to effectuate the best outcomes possible. During the second quarter, two companies were removed from nonaccrual status.

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

First, our first lien investment in Bowery Farming that had previously been placed on nonaccrual was written off. Second, a legacy investment, JW Aluminum, was amended during the quarter into a perpetual preferred equity position. At the same time, the company's performance has improved in recent periods to the point that earlier this year we received a return of $98,000,000 of capital as the company successfully refinanced and upsized a bond issuance. Turning to our investment activity. During the second quarter, we originated approximately $1,400,000,000 of new investments.

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

Approximately 72% of our investments were focused on add on financings to existing portfolio companies and long term KKR relationships. 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 $311,000,000 New originations consisted of approximately 83% in first lien loans, 5% in subordinated debt and 12% in asset based finance investments. Our new direct lending investment commitments had a weighted average EBITDA of approximately $251,000,000 5.8 times leverage through our security and a weighted average coupon of approximately SOFR plus five twenty basis points. We continue to believe in the strength of our investment strategy, which primarily focuses on upper middle market companies with EBITDA in the 50,000,000 to $150,000,000 range across a diverse set of industries and sectors. As of June 30, the weighted average EBITDA of our portfolio company was $252,000,000 and median EBITDA was $114,000,000 Our portfolio companies reported weighted average year over year EBITDA growth rate of approximately 8% across companies, which we have been invested in since April 2018.

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

Interest coverage levels remain healthy with the median second quarter coverage at 1.8 times. As of the end of the second quarter, non accruals represented 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis. This compares to 3.5% of our portfolio on a cost basis and 2.1% of our portfolio on a fair value basis as of March 31. We also believe it is helpful to provide the market with information based on the FSK assets originated by KKR Credit. Non accruals relating to 91% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor were 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter.

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

This compares to 2% on a cost basis and 1% on a fair value basis as of the end of the first quarter. And with that, I'll turn the call over to Stephen.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

Thanks, Dan. As of 06/30/2025, FSK's investment portfolio had a fair value of $13,600,000,000 consisting of two eighteen portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio compared to 20% as of the end of the first quarter. We remain focused on senior secured investments as our portfolio consisted of approximately fifty nine percent first lien loans and 64% senior secured debt as of June 30. In addition, our joint venture represented approximately 12% of the fair value of our portfolio.

[Steven Lilly, Chief Financial Officer 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 68% of our total portfolio, and senior secured investments total approximately 73% of our portfolio as of June 30. The weighted average yield on accruing debt investments was 10.6% as of June 30, a decrease of 20 basis points compared to 10.8% as of March 31. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Turning to our quarterly operating results. Our total investment income was $398,000,000 for the second quarter, which is a decrease of $2,000,000 compared to the first quarter.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

The quarter over quarter change in total income was primarily driven by the decline in interest income as a result of investments that were placed on nonaccrual during the quarter, coupled with lower fee income due to a more normalized origination quarter. The primary components of our total investment income during the second quarter were as follows: Total interest income was $298,000,000 a decrease of $4,000,000 quarter over quarter. Dividend and fee income totaled $100,000,000 an increase of $2,000,000 quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows: $59,000,000 of dividend income from our joint venture other dividends from various portfolio companies totaling approximately $32,000,000 during the quarter and fee income totaling approximately $9,000,000 during the quarter. Our total expenses were $225,000,000 during the second quarter, which is an increase of $12,000,000 compared to the first quarter.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

The quarter over quarter change in total expenses primarily was driven by an increase in interest expense due to higher leverage utilization during the quarter to grow our joint venture. The primary components of our total expenses were as follows: our interest expense totaled $125,000,000 an increase of $12,000,000 quarter over quarter our weighted average cost of debt was 5.3% as of June 30 Management fees totaled $53,000,000 an increase of $1,000,000 quarter over quarter. Incentive fees totaled $36,000,000 a decrease of $3,000,000 quarter over quarter. Other expenses totaled $11,000,000 an increase of $2,000,000 quarter over quarter. The detailed bridge and our net asset value per share on a quarter over quarter basis is as follows.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

Our starting net asset value per share was $23.37 GAAP net investment income increased NAV by $0.62 per share, while net realized and unrealized losses decreased our net asset value by $1.36 per share. Our NAV per share was further reduced by the $0.70 per share total quarterly distribution paid during the quarter. But some of these activities results in our 06/30/2025 net asset value per share of $21.93 From a forward looking guidance perspective, we expect third quarter twenty twenty five GAAP net investment income to approximate $0.58 per share, and we expect our adjusted net investment income to approximate $0.57 per share. The detailed components of our third quarter guidance are as follows. Our recurring interest income on a GAAP basis is expected to approximate $289,000,000 We expect recurring dividend income associated with our joint venture to approximate $55,000,000 We expect fee and other dividend income to approximate $30,000,000 The decrease quarter over quarter is due to lower ABF dividends projected in the third quarter.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

From an expense standpoint, we expect our management fees to approximate $51,000,000 We expect incentive fees to approximate $34,000,000 We expect our interest expense to approximate $116,000,000 And we expect other G and A expenses to approximate $10,000,000 Turning to our capital structure. In June, we closed on a new five year $400,000,000 bilateral lending facility with CIBC priced at SOFR plus 175 basis points, thereby further extending our maturity ladder. Additionally, after quarter end, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility. The amendment provides for, among other things, an increase of total commitments from 4,600,000,000 to $4,700,000,000 an extension of the maturity date to the 2030 and a reduction in spread by 10 basis points. As of June 30, our gross to net debt to equity levels were 131 percent and 120 percent, respectively, as compared to 122114% as of March 31.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

Our leverage remains within our target range of one to 1.25 times net debt to equity. At the end of the second quarter, our available liquidity was $3,100,000,000 and approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. Our next unsecured debt maturity occurs in the 2026 and represents approximately 10% of our committed capital structure. With that, I'll turn the call back to Michael for a few closing comments before we open the line for questions.

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

Thanks, Steven. As we look toward the second half of the year, we acknowledge the significant work currently taking place with regard to the four companies Dan mentioned. Since its establishment in 2018, investments originated by FS KKR Advisor consistently have performed meaningfully better than the BDC's industry's long term average non accrual rate of 3.7%. We look forward to bringing this quarter's non accrual rate more in line with this, and ultimately below this industry average. We are confident in our team and in our ability to navigate periods of stress, which inevitably occur from time to time.

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

As always, we appreciate your participation on the call today and for your interest in FSK. Operator, we'd like to open the line for questions.

[Operator]

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask your question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q and A roster.

[Operator]

Our first question today comes from Aaron Cyganovich with Truth Securities. Your line is open.

[Arren Cyganovich, Senior Analyst - Specialty Finance at Truist]

Hi, thanks. There's been a lot of discussion about the investing environment picking up in the second half and folks are quite busy in a typically slow August period. What are you seeing on your end? And what are you thinking about in terms of originations in the second half?

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

Yes. Aaron, it's Dan. Thanks for the question. I think just two things I want to start with. First, clearly, this is a bit of a harder quarter for us, right?

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

So we know we have some work to do as we go forward. And I want to make sure it's clean or clear the team is focused on that. And before I get to your question, just second, I mean, I did want to acknowledge you have the senseless and tragic events in New York City last week. All the businesses, the people and the families impacted by these events are in our thoughts and prayers. I think when we get to the investing environment, I think the way you put it, it's well said.

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

I mean people are busier now, I think than they've been in some time. Just from a pure deal count perspective, we've looked at more deals in Q2 than we have in, I think, the prior eight quarters. That was off of a very kind of ugly April on the other side of Liberation Day. So I think that the key data points hold, right? There is significant pressure from LPs to get cash back from their private equity GPs.

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

We continue to hear that. We know there's a lot of dry powder in kind of newer vintage private equity funds that I think is looking to deploy. I think we've probably seen more activity in names that where they don't have to talk about tariffs or sort of worry about tariffs. But definitely a certain amount of green shoots. That said, I am expecting still bouts of volatility to sort of play through, but again busier this past quarter than we've been for a while.

[Arren Cyganovich, Senior Analyst - Specialty Finance at Truist]

Great. That's helpful. And then I appreciate all of the details about the four companies that you have on non accrual and information around that. Beyond those four companies in terms of like a watch list, do you have any others that are bubbling up to the top? Or maybe you could just talk a little bit about the portfolio performance at a portfolio company level for the rest of the portfolio?

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

Yes. And I'm happy to do that and fair question. I think a couple of things, right. I mean, we I think we've tried to provide on not just this call, but prior calls as much details we can on certain names. I think each of the issues in some way was unique to the companies we discussed, although there was I think clearly with KBS and 4840 a bit of material amount of over earning kind of driven by COVID and then companies kind of unlevered on the other side.

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

In terms of watch list, I think probably the simplest thing to point to is kind of the risk ratings that we publish in kind of the QAR bucket three and four, you've got roughly 7% odd of the portfolio. I would note a couple of those names, which we've talked about on prior calls, our Global Jet and JWA, which we've seen some positive momentum on each of those names. The other side of that, there are some things that do worry us, right? The higher rate environment is stressful on companies. Things like those are impact to sort of government contracts or government services is kind of definitely on our mind.

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

And I think maybe I want to make sure we're cautious and maybe we're a little bit more negative than most on certain things. But the consumer has performed quite well, right? We've seen that in some of the consumer businesses that we lend to or some of the consumer portfolios that we own in the asset backed side, although that's been predominantly skewed to kind of higher FICO. But I think you got to be a little bit mindful there as we go into the second half or deeper in the second half of the year and into 2026.

[Arren Cyganovich, Senior Analyst - Specialty Finance at Truist]

Thank you.

[Operator]

Thank you very much. One moment please. Our next question comes from Finian O'Shea with Wells Fargo Securities. Your line is open.

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

Hey, everyone. Good morning. We wanted to ask first about the Kop JV. Stephen, I think your guide for 3Q of 55,000,000 that's a touch lower than what you had guided for this Q, which was 56,000,000 I know it came in well above that. But you're guiding it down a little bit despite a bit of a ramp there.

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

So seeing what kind of earnings situation and also credit situation, how that has compared to the mothership BDC? And then sort of finally, what I'm getting at is, is the JV in a similar place where as we go into 2026 and it maybe pays down spillover perhaps, is that going to also be a lower reset payout? Thank you.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

Stan, it's Steven. I'll take your the first part of your question and hand the second part over to Dan. The difference in the anticipated dividend from COB for the third quarter versus what we received in the second is really driven by the timing of certain ABF dividends. We received a bit higher dividends in the second quarter and correspondingly we'll have a bit lower dividends in the third. As you certainly know and others know, dividend payers in the ABF portfolio, it tends to be a little bit lumpy.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

It's not spread evenly over four quarters of the year. So kind of somewhat normal and customary there, but we would expect the JV over time to because we are have expanded it to your point to be at that sort of mid-50s or even a little better level over time as those investments season in that portfolio.

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

Yes. Ben, morning. Maybe just to add to those points. And I think you've spent enough time with us on the asset base finance space that you've got to get that. But just to be clear on those deals, that was more of a timing issue than any type of performance point.

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

We do have a desire to continue to ramp this, but with inside the guise of probably 15% max that we discussed. The only other point that I probably would note is, and I don't have this at my fingertips, so we can circle back So I do expect that the joint venture has a higher percentage of floating rate debt than fixed rate debt than is in kind of the parent company.

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

Okay. That's helpful. Thank you. And next question. So portfolio conditions today, given this quarter, probably mean that you're below book for a little while.

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

Seeing your view on the buyback and something you could put in place to potentially take advantage of that at a point where, say, the stock becomes cheap and you become confident in portfolio stability?

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

Yes. I'll take that, Fin. I think a couple of points there, right? I mean, we have historically been active in buybacks, as you know. I do think we'll have to balance that with what we see as the market opportunity and where we are vis a vis a target leverage ratio.

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

I think the target leverage ratio is kind of important to us. We're kind of with inside our sort of band now. But my guess is we're probably very little bit sort of above maybe recent historical average. I think we have to just factor all those pieces together as we play it forward.

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

Thanks so much.

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

Have a good day.

[Operator]

Thank you. The next question is from Sean Paul Adams with B. Riley Securities. Your line is open.

[Sean-Paul Adams, Equity Research Analyst at B. Riley Securities]

Hey guys, good morning. On the new nonaccruals, it seems like they've largely been legacy troubled assets that have proactive restructuring, however, continue to have further subsequent headwinds. When you're looking over the past troubled assets have underwent some of that proactive intervention, how many are you currently monitoring for situations like this? Out of worldwide, Keller Meyer and Alacrity, it seems that there was a significant change in quarter over quarter marks. So just if you could provide any more color on that?

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

Yes. No, I'm happy to do that. And I think just for the sake of clarity, you are correct in the sense that KBS has been, for lack of better word, going on for a period of time. PRG would be the same. PRG had an initial restructuring in 2020, but that was in the depth of COVID.

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

It's a business that focuses on Broadway and sort of entertainment. So obviously, went to zero and quite frankly, was probably over levered going into that. But just the KBS four thousand eight hundred forty and WorldWise were regular way sort of KKR originations. What we do what we call something legacy would have been kind of prior advisor that would have been PRG. I think our workout team has done a good job.

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

We've got a strong group of people from the leadership of that team to the various folks along with skill sets of financial kind of modelingfinancial restructuring skills, bankruptcy lawyers, even down to some PE experience to where we have to sort of run these. And I do think in some ways that workout term is probably a little bit of a misnomer, right? That team is getting involved the moment something goes on the watch list. In some ways, some of the most value that gets added from that is kind of at that stage because we can tighten up documents, try to derisk the position. I think we talked about one of those names on our last call when we had a repayment of a company called three sixty, which was probably the biggest tariff exposure we had in the entire portfolio.

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

That was gone on for an extended period of time. I think each of these is in a different spot, Jean Paul, like the PRG and A has been ongoing for some extended period of time. The lender group on KBS is working hard. That initial restructuring is probably only a year old. Forty eight-forty is still paying interest, so clear.

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

I think just our expectation is that's where it's trending. So the team is prepared to spend a significant amount of time to try to maximize the outcome, kind of maximize the return on capital.

[Sean-Paul Adams, Equity Research Analyst at B. Riley Securities]

Got it. Very helpful. Thank you.

[Operator]

Thank you. The next question is from Robert Dodd with Raymond James. Your line is open.

[Robert Dodd, Director - Finance at Raymond James Financial]

Hi guys and kind of a follow-up to Sean. When we look at these assets that have kind of re defaulted if you will, it does seem to be from what I'm looking at, it's becoming a bit more common and not just in your portfolio, right? There are other assets around the space where we've seen the same kind of thing. I mean, is there a theme or anything? Mean, obviously, yes, it's like you point out for each individual asset, it's idiosyncratic, but there are increasingly, like, you know, redefaults rather than new defaults, if if you will, where struggling assets been restructured and then they're they're continuing to have problems.

[Robert Dodd, Director - Finance at Raymond James Financial]

And the ones that didn't have problems to start with, get up up doing okay. So, I mean, is there is there a is there a theme or anything that's that's leading to that? And it kinda ties into the, like, should should re initial restructurings be more aggressive? Is there a problem? Would you have liked to have been more aggressive, but the lender group didn't want to be? I mean, any thoughts there?

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

Well, it's an interesting question. I'm not sure there's a theme, Robert. I mean, and to be clear on the names here, I mean, there is another restructuring expected on PRG. KBS is more of a valuation point. And even though the company stabilized, think that it's just been sort of delayed.

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

And I think the churn numbers we've seen there have taken longer sort of time period to maybe stabilize in a manner that we're sort of happy with or satisfactory to us and the lender group. I do think the one point you said in there is correct and each of these situations is probably specific is, are you able to restructure it sort of enough. We have seen some names where none of these are either left in the portfolio or would be extremely diminimous amounts. You able to get and it's probably more highly correlated to if there's a larger 1L group in there. You'll get the position to a spot that you feel the go forward is self sufficient versus maybe the capital structure sort of being too unlevered or too levered.

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

So I don't think there's any themes. Think each of these are specific. But just to your specific point, only name that we're talking about actually sort of restructuring again of those four is PRG. Others are just downside versus kind of prior

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

Got market and it.

[Robert Dodd, Director - Finance at Raymond James Financial]

Understood. Flipping the topic. On the you mentioned you've seen more deals to review than any time in the last eight quarters. I mean, like how realistic now given we're in August and there's only four months left in the year.

[Robert Dodd, Director - Finance at Raymond James Financial]

Is it for any of those to a material number those to close this year? I mean, is the optimism, should we be looking more at 26? Is there enough time for the end of this year to actually see a real rebound in activity?

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

Yes. I mean, I think from the numbers perspective, I think you're correct, right? Because deals being reviewed now would go through kind of the regular way of investment process for four, six, eight weeks and they probably take on average two months to close. Some things could be faster, some things could have a longer sort of tail. But I think you did see some of that from our reduced fee income that you saw this quarter versus last quarter.

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

I think that is a spot on a go forward basis that we would expect to see upside at least from the Q2 number. The only word of caution there is I think upfront fees and OID on new loans is decently tighter now than it was a year ago.

[Robert Dodd, Director - Finance at Raymond James Financial]

Got it. Thank you.

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

Thank you.

[Operator]

And our next question comes from Casey Alexander with Compass Point Research and Trading. Your line is open.

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

Yes, good morning. Thank you for taking my questions. And Dan, I echo your sentiments to our friends in Midtown. It's a really difficult situation for a lot of folks and our heart goes out to them. It looks like it's pretty clear that the company is going to be to a certain extent restating its dividend philosophy.

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

And at one point in time, the company had what you could describe as a modified variable dividend based upon earnings. And then you kind of got away from that for a year and a half or two years, as you were working on the spillover. Is that what we should think about you going back to, which is maybe a base and some supplemental that toggles with earnings or how does the company see reformulating that dividend policy?

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

Yes, I mean, Casey, it's a fair question. I think we want to address that a bit in kind of our prepared remarks in terms of coming out kind of formally we're on the call for sort of Q3. And you're correct, I mean, we did kind of lean into that sort of variable dividend policy point. I think we tried to evolve or maybe thread the needle a little bit differently based upon a feedback from maybe the market broader. Because if you do recall, our base used to be 60%, then we upped it to 64%, then we put the supplemental in place to almost get to that variable sort of point.

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

And then we actually added a special on top for a handful of quarters. I do think I think we need to kind of acknowledge and I'm sure, Casey, you get this in reading your reports, spread environment is down, right? The yield on our accruing assets is down, I think, 140 basis points over the past year. That's picking up a little bit of benchmark. But spreads, I think it's more likely than our rates do go down in the near term.

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

I mentioned kind of that fee income point, but maybe with rates coming down, we could see a little bit of spread widening to sort of offset that, but it will not be kind of basis point for basis point in my mind. I think we've been very happy with what we've done on the liability side of our balance sheet. As Steve had mentioned, we're 54% on the unsecured side. I think that we like our maturity ladder a lot, but where we were able to issue those deals was in a very different rate environment. So we will be looking to refinance there.

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

So I think all of that is going to get put forward in kind of our views. Now there are certain offsets there, right? There could be additional deal volume. We do have kind of more non income producing assets than we sort of would like. So there's a couple of levers there.

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

But where I would focus you and kind of folks, I think we're really going to be kind of NII led here, right? So where we see kind of forward earnings spitting out is where we're going to talk about kind of dividend levels. But we as well like kind of the point of really that variability tying into to sort of NII, but then trying to make sure everyone's comfortable that there's a steady base, but we'll keep all that in mind for sure.

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

Okay. Thank you for that. Secondly, to extend on the conversation of the high level of activity that you're seeing, there's not unlimited room in the target range of your leverage ratio. Do you have some line of sight to a level of repayments that will allow you to take on some of this activity or is I'm not sure how much capacity there is for the JV. I know you increased your equity commitment to the JV last quarter, but you down streamed a fair amount of paper to the JV this quarter.

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

How do you manage the inflow unless there's some outflow?

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

Yes. And I think maybe there's two points there. I mean, is room for the JV to grow even with the assets that were sort of put down. And I think you'll continue to see that. I think that's been a great partnership with our partner there.

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

And I think we have almost $600 plus million of uncalled sort of equity capital there. That's on one side. I think you have a very, very high correlation between new deal flow and repayments. And with the syndicated loan market picking up, we've seen some deals being refinanced by sort of that market as well. So I think we do have the levers.

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

That said, you are not incorrect. I operating inside of our target leverage band is paramount to us. But I think those two things will help offset that. And like I said, I think we're happy with the amount of deals we were able to screen this prior sort of quarter. It's not kind of where I think we will be four quarters from now from us.

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

I'm expecting more, but I think the correlation of repayments with new deal flow remain high.

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

All right. Thank you for taking my questions, Dan.

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

Have a good day, Casey.

[Operator]

Thank you. The next question is from Paul Johnson with KBW. Your line is open.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Yes, good morning. Thanks for taking my questions. Just broadly on activity potentially picking up here. Your EBITDA your immediate EBITDA is $114,000,000 You guys focus on the upper middle market. Obviously, there's a lot of competition in that part of the market.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

I mean, much do you expect of any sort of pickup in activity to go into the BSL market versus private credit?

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

Yes, it's a good question. I take one step back. My sense is and what we communicate to kind of our investors kind of broadly is we are focused on the upper end of the middle market. We're probably defining that really in the 50 to 150 range. We're there on purpose because we've historically seen better management teams, less customer or supplier concentrations, there's more levers to pull if certain things do go wrong.

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

I think in times of market volatility, we're probably able to lean into larger companies more because the syndicated loan market is shut. I think we have seen a bunch of larger names who prefer to be in the private markets. All that being said, I think we are trying to make sure that our origination funnel is as broad as possible. So in addition to covering the two fifty sponsors out there, we've got a dedicated non sponsor team. We've probably been a little cautious on it, but we're prepared to play in certain junior debt deals, but the EBITDA of those businesses is higher.

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

Obviously, we've got an active kind of asset based finance pipeline in here to sort of bring that together. And we will go below $50,000,000 I mean, I don't think we're going to go below 25,000,000 to be blunt. And there's probably a higher bar for that size of the company. We're trying to make sure our origination aperture is as big as it can be. We just haven't seen at least on our side that you're getting paid enough to be in the $10,000,000 15,000,020 million dollars range.

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

It doesn't mean there's anything wrong with those loans, but just not where we're spending time.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Got it. Appreciate that Dan. That's very helpful. One on the JV, I mean you guys dropped quite a few of assets in the JV this quarter. It looked like there might have been a little bit of a fair value loss this quarter or write down on the investment.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Can you just provide maybe a little bit of color on what drove that? Was that just some of the same investments on FSK's balance sheet that around the JV that were written down? Was there what are the current nonaccrual levels in the JV? Anything that kind of provide color on that?

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

Yes. No, and then you're correct. I mean, we did kind of drop sort of assets down in there. I think we've been pretty happy with our inception to date performance on the joint venture. You are correct as well.

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

One of the, we'll call it mark to market moves this quarter would have been the JV itself. That would have been more correlated though, more consistent with some of the same names that we talked about. The JV has been more regularly used for accessing other parts of the KKR origination funnel than regular way, kind of U. S. Direct lending, but some parts of KBS 04/1940 and worldwide were in there.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Got it. Thanks again. Very helpful there. And last question for me was just as you guys are evaluating the dividend going forward next year, I was just wondering what all is completely on the table here considering any sort of shareholder protection, dividend downside protection, potentially with the new dividend, any sort of fee waivers, that sort of thing? Or is it just fitting the distribution kind of into the future earnings power and sort of trailing interest rates at the time?

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

Yes. I mean, obviously there's a couple of sort of points within there, right? We have I think historically been on the wider end of dividends that are being paid. I think it's important for us to kind of be in line with any sort of market historical sort of industry averages. Obviously, we'll kind of think about if we need to adjust the portfolio or otherwise to sort of get there.

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

I think the point that Casey raised in a prior question was an interesting one, We've talked about given a policy now for some time is kind of a base and supplemental concept. The supplemental either being just being able to be paid in the future or having it in a fixed actually payout number. So I think we're going have to go through all that as we kind of understand where the rate environment is kind of trending. We did pay out 70,000,000 on purpose this year, right? We had this excess spillover number that we wanted to guide down to a more target range.

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

I think going into the year, we probably expected more rate moves than we've seen thus far and we wanted to give investors consistency for 2025 kind of take something off the table. But as I said, the factors of where we stand vis a vis the market and otherwise will factor into how we look at the dividend on a go forward basis.

[Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)]

Appreciate it. That's all for me. Thank you.

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

Thanks, Paul.

[Operator]

Thank you.

[Operator]

Our next question is from Melissa Weil with JPMorgan. Your line is open.

[Melissa Wedel, VP - U.S. Equities Research at JP Morgan]

Good morning. Thanks for taking my questions. Most of them have already been asked and answered. But wanted to follow-up briefly on the level of spillover income. I might have missed it, but can you give us a refresher memory on where that stands on a per share basis after this quarter?

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

Yes. Melissa, it's Stephen. Just to refresh, we started the year with rough numbers about $525,000,000 of spillover. And then through the year, through June, we had reduced that number down to, I'd call it the high 400s. And then with the current quarter dividend that we just announced, we would reduce it a little more to somewhere and call it the mid-400s.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

And we'll publish obviously intra year, the team is making estimates because we don't have all the appropriate information tax wise and other items. So we'll publish again in the 10 ks at the end of the year. But we're sort of in that, call it, somewhat plus or minus the $450,000,000 range, I guess, would call it today. And then when you pro form a for the dividend that we just announced today, you'd be somewhere, call it below $450,000,000 but certainly well above 400,000,000 And when you think about in today's world, our current dividend just in total dollars, it's about $196,000,000 on a quarterly basis at the full $0.70 So we're still above that kind of two quarters worth of dividends. And as you know, certainly from covering us a while, our long term target there is plus or minus two quarters worth of dividends.

[Steven Lilly, Chief Financial Officer at FS KKR Capital]

So we sort of see ourselves gliding right down to kind of that level as we get to the end of the year.

[Melissa Wedel, VP - U.S. Equities Research at JP Morgan]

Thanks for that update. My other question goes back to sort of the ABS opportunities that you're seeing. And I know that's been an area where you've been investing for a while. I think there was a reference earlier on the call to some of the more consumer oriented ABF opportunities. I was hoping you could give a quick recap of kind of your allocation across asset classes within ABF.

[Melissa Wedel, VP - U.S. Equities Research at JP Morgan]

You can give us an update on historically where you've invested versus the current opportunity. Thanks.

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

Yes, I'm happy to take that Melissa. It has been a space we spent a lot of time on, right. We've got a large dedicated 50 person team here. I think we've taken the tact of investing sort of on a multi asset class sort of global basis. We're playing in a lot of different parts of the market.

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

To answer the consumer's point specifically, it's roughly kind of 2%, 2.5% of the portfolio diversified in a couple of names. I would say on the consumer side, we have definitely targeted more the higher FICO borrower. I think you've seen that in some of the larger deals that we've done of late would have been Discover or a recent deal with Harley Davidson. Or we're playing in deals that are targeting homeowners who've got a more positive bias too as it relates to credit performance or other forms of secured deals like auto. So net net, pretty small sort of balanced diversified under a bunch of names.

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

We have been active in the resi mortgage space. We've been active in the hard asset space probably with the main focus on aviation or equipment leasing. That's probably roughly another 2% of the portfolio. We've done historically some more esoteric things like investing in music IP, which was a position inside of FSK, which we did and has since been sort of sold. So we're trying to create that broad footprint.

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

We're trying to enable the team with that footprint to pivot where they see the best risk adjusted returns. We're probably at a little bit more of the top end of the range on ABS exposure inside of FSK as we think about most deals in there would be under the non EPC bucket. But we think we I should say, we've been happy with the diversification and additional return profile that it's given.

[Operator]

Thank you. This does conclude our question and answer session. I would now like to turn it back to Dan Peterzak for closing remarks.

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

I want to thank everyone for taking the time to join us on the call today. If you do have any follow-up points or questions, please do not hesitate to reach out. Wishing you a good end of the summer. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.

Participants

Executives

• Anna Kleinhenn, SVP & Head - IR
• Michael Forman, Chairman & CEO
• Daniel Pietrzak, President & Chief Investment Officer
• Steven Lilly, Chief Financial Officer

Analysts

• Arren Cyganovich, Senior Analyst - Specialty Finance at Truist
• Finian O'shea, Director, WFS Research at Wells Fargo Securities
• Sean-Paul Adams, Equity Research Analyst at B. Riley Securities
• Robert Dodd, Director - Finance at Raymond James Financial
• Casey Alexander, Senior Vice President & Research Analyst at Compass Point Research & Trading LLC
• Paul Johnson, Vice President at Keefe, Bruyette & Woods (KBW)
• Melissa Wedel, VP - U.S. Equities Research at JP Morgan