FS KKR Capital Q1 Earnings Call Highlights

Key Points

• FS KKR Capital’s first-quarter results were weak, with NAV per share falling 9.9% to $18.83 and net investment income at $0.42 per share. Management said the decline was driven by credit issues in several portfolio companies and mark-to-market pressure.
• KKR and FSK announced a shareholder-support package that includes a $150 million tender offer at $11 per share, a $150 million preferred stock investment from KKR, a $300 million buyback program, and a four-quarter fee waiver. Management said the actions are meant to support liquidity, reduce leverage and help stabilize the stock.
• Credit quality deteriorated further, with non-accruals rising to 8.1% of the portfolio at cost from 5.5% at year-end. FSK also said it will shrink the balance sheet over time, focus more on first-lien and asset-based finance investments, and expects annualized net investment income of 8% to 9% of NAV in coming quarters.

FS KKR Capital NYSE: FSK reported a sharp decline in first-quarter net asset value and announced a package of strategic actions aimed at supporting shareholders, improving liquidity and stabilizing the business during what management described as a transition period.

Chief Executive Officer and Chairman Michael Forman said the quarter was “challenging,” with net asset value falling 9.9% per share and net investment income totaling $0.42 per share. Forman said the NAV decline was tied to portfolio company names previously discussed by management, new non-accrual investments and mark-to-market moves across parts of the portfolio.

The company’s board declared a second-quarter distribution of $0.42 per share. Forman said the payout is consistent with FSK’s policy of paying 100% of GAAP net investment income on a per-share basis, and he reiterated that the quarterly distribution level is expected to fluctuate with net investment income.

KKR Announces Tender, Preferred Investment and Fee Waiver

President and Chief Investment Officer Dan Pietrzak said FSK and KKR are taking “immediate and impactful actions” after reviewing the portfolio under potential downside scenarios, including macroeconomic pressures and company-specific events.

The strategic package includes four main components:

• KKR intends to begin a $150 million fixed-price tender offer for FSK stock at $11 per share.
• KKR will make a $150 million investment in FSK through cumulative convertible perpetual preferred stock.
• FSK authorized a $300 million share repurchase program.
• KKR will waive its portion of the subordinated income incentive fee for four quarters, beginning in the second quarter.

Pietrzak said the $11 tender price represented a premium to the prior Friday’s closing price and reflected KKR’s view that the stock was undervalued at that level. In response to an analyst question from Kenneth Lee of RBC Capital Markets about how the tender price was set, Pietrzak said securities law considerations limited further commentary and referred investors to the company’s prepared remarks and press release.

The convertible preferred stock has an initial conversion price of $18.83, equal to FSK’s March 31, 2026 NAV per share. Pietrzak said the preferred carries a starting dividend of 5% in cash or 7% paid in kind at FSK’s option. It is redeemable by FSK under certain circumstances and redeemable by KKR after six years, which Pietrzak noted is beyond the maturity date of FSK’s existing debt.

The $300 million share repurchase program will begin after the tender offer period. Pietrzak said repurchases are expected to occur on a timeline tied to investment repayments while FSK remains mindful of leverage. During that period, he said the company plans to reduce new investment originations and focus on portfolio construction, supporting existing companies, lowering leverage and buying back stock.

NAV Decline Driven by Credit Events and Market Marks

Pietrzak said the first-quarter NAV decline reflected both company-specific credit events viewed as more permanent and credit spread or mark-to-market moves that management does not consider permanent impairments. He said certain 2021 and 2022 vintage loans were affected by inflation, elevated interest rates, lower free cash flow, labor costs and changing customer behavior.

Specific legacy investments ATX and Production Resource Group accounted for approximately 15% of the total NAV decline, according to Pietrzak. Current advisor investments Medallia, Cubic Corp. and Affordable Care represented approximately 33% of the total decline.

Pietrzak said FSK and other lenders, where applicable, are taking steps to support certain businesses through capital infusions, operational resources and management changes. He cautioned that each company faces challenges that will take time to resolve and said individual names could deteriorate further.

Medallia was placed on non-accrual during the quarter and marked down to $0.54, Pietrzak said. Overall non-accruals rose to 8.1% of the portfolio at cost and 4.2% at fair value as of March 31, compared with 5.5% at cost and 3.4% at fair value at year-end.

Management Reviews Software and AI Exposure

Pietrzak also provided details on FSK’s software and services exposure and its assessment of artificial intelligence-related risk. He said the company completed a portfolio-wide AI risk review using a 19-metric framework developed with KKR’s private equity team.

Based on that review, Pietrzak said approximately 86% of the portfolio was categorized as low AI risk, 11% as medium risk and 3% as high risk. Software and services represented 16% of FSK’s investment portfolio across 52 issuers.

Management said the software and services portfolio is generally concentrated in businesses with proprietary or sensitive data, highly regulated industries, mission-critical embedded software or competitive moats. Pietrzak said the software exposure had average EBITDA of about $165 million, median EBITDA of about $118 million and a median loan-to-value ratio of approximately 38%.

He said FSK remains comfortable with those credit metrics but is mindful of slower growth and potentially lower valuation multiples in software, which could lengthen holding periods and require additional capital in some cases.

Financial Results and Balance Sheet

Chief Financial Officer Steven Lilly said FSK’s investment portfolio had a fair value of $12.3 billion as of March 31 and included 236 portfolio companies. The 10 largest portfolio companies accounted for approximately 20% of fair value, compared with 19% at the end of the fourth quarter.

Lilly said the portfolio remained focused on senior secured investments, with approximately 60% in first-lien loans and 64% in senior secured debt. Including look-through exposure from the joint venture, first-lien loans totaled approximately 69% of the portfolio, while senior secured investments totaled approximately 73%.

Total investment income was $304 million, down $44 million from the fourth quarter. Interest income fell $32 million to $224 million, which Lilly attributed to lower base rates and investments placed on non-accrual. Dividend and fee income totaled $80 million, down $12 million from the prior quarter.

Total expenses were $187 million, down $26 million from the fourth quarter. Interest expense was $105 million, management fees totaled $48 million and income incentive fees totaled $25 million.

FSK’s NAV per share declined from $20.89 at the end of 2025 to $18.83 at March 31. Lilly said the change reflected $0.42 per share of GAAP net investment income, a $2.00 per-share decrease in portfolio value and a $0.48 per-share reduction from the quarterly distribution.

Gross and net debt-to-equity levels were 138% and 131%, respectively, at quarter-end, compared with 130% and 122% at Dec. 31. Lilly said the company expected net repayments in excess of $500 million in the second quarter, though timing differences could cause some portfolio rotation activity to occur after June 30.

Portfolio Rotation and Outlook

Management said FSK expects to operate with a smaller balance sheet over time while reducing leverage and focusing on portfolio rotation. Pietrzak said the company will emphasize first-lien securities, asset-based finance and other accretive investments sourced through KKR’s origination platform.

Over the next 12 to 18 months, Pietrzak said the advisor and KKR credit team will focus on reducing new portfolio company investments, maintaining liquidity for existing portfolio companies, supporting the buyback program, rotating certain assets and pursuing strategic sales of portfolio companies where FSK has meaningful influence.

Lilly said FSK currently expects net investment income to be in the range of 8% to 9% of net asset value on an annualized basis over the coming quarters, depending on factors including geopolitical risks, the U.S. economy and portfolio health.

During the question-and-answer portion, analysts asked about the tender offer, portfolio rotation, spillover income, leverage, performance issues and governance considerations related to the KKR and FS partnership. Pietrzak said FSK expects to be active in trimming larger positions, lower-yielding assets and certain asset-based finance exposures. He also said the company will evaluate additional buyback activity after executing the newly announced program.

Forman said the strategic initiatives followed extensive discussions with the board and reflected what management believes is in the best interest of the fund and shareholders. Pietrzak closed the call by saying management recognizes the amount of information provided and remains available for follow-up questions.

About FS KKR Capital NYSE: FSK

FS KKR Capital Corp NYSE: FSK is a closed-end, externally managed business development company that primarily invests in private middle-market U.S. companies. The firm seeks to generate current income and capital appreciation by structuring investments in floating-rate senior secured loans, unitranche financings, second lien debt and mezzanine instruments. As a business development company, FSK provides financing solutions designed to support growth initiatives, acquisitions, leveraged buyouts and recapitalizations for privately held enterprises.

Established in 2018 through a strategic partnership between FS Investment Corporation and KKR Credit Advisors, a division of global investment firm KKR & Co Inc, FSK combines the credit underwriting capabilities of KKR’s global platform with FS’s expertise in private credit markets.

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