FS KKR Capital Q2 Earnings Call Highlights

Key Points

• FSK reported second-quarter adjusted net investment income of $0.43 per share, exceeding guidance, and declared a third-quarter distribution of $0.44 per share. NAV declined 2.8% sequentially to $18.30 per share, primarily due to portfolio valuation losses.
• The company continued to shrink and reposition its portfolio, recording $1.3 billion in sales and repayments against $590 million of originations. FSK has repurchased approximately $40 million of shares and plans to continue the $300 million buyback program through 2026 and 2027.
• Credit metrics improved as non-accruals fell to 7.1% of the portfolio at cost and 3.8% at fair value, while debt-to-equity declined to 1.27x. Management expects annualized net investment income of 8% to 9% of NAV for the rest of 2026 and aims to emerge as a smaller, higher-quality fund.

FS KKR Capital NYSE: FSK reported second-quarter 2026 net investment income of $0.44 per share and adjusted net investment income of $0.43 per share, while net asset value declined 2.8% sequentially to $18.30 per share.

Chief Executive Officer and Chairman Michael Forman said the company’s quarterly net investment income equated to an annualized yield of 9.6% based on its June 30 net asset value, exceeding prior guidance of 8% to 9%. The board declared a third-quarter distribution of $0.44 per share, in line with FSK’s policy of distributing 100% of prior-quarter GAAP net investment income per share.

Forman said the distribution level may fluctuate with quarterly net investment income. He also said the company has made progress on strategic actions announced during its first-quarter call, while acknowledging that more work is needed to stabilize the portfolio, improve consistency and regain market confidence.

Portfolio Rotation and Strategic Actions

Chief Investment Officer and President Dan Pietrzak said FSK continued to reduce new originations while conducting its share repurchase program and rotating parts of its portfolio. The company originated about $590 million of new investments during the quarter, nearly all of which were tied to previously committed transactions or add-on financings for existing portfolio companies.

FSK recorded $1.3 billion of net sales and repayments, including net sales to its joint venture, resulting in a net portfolio decrease of $735 million during the quarter. The company sold about $500 million of investments to third parties at prices in line with first-quarter valuations, Pietrzak said. Global Jet, described as a legacy investment, returned $50 million of capital to FSK, allowing the company to further reduce its position.

Responding to analysts, Pietrzak characterized the loan sales as largely ordinary-course portfolio management, including efforts to reduce larger exposures and sell high-quality assets where market pricing was attractive. He said there was no specific industry or loan-type theme behind the sales.

FSK also completed several strategic capital actions during the quarter:

• A KKR subsidiary completed a $150 million tender offer, purchasing FSK shares at $11 per share after the offer expired June 11.
• FSK issued $150 million of cumulative convertible perpetual preferred stock to a KKR subsidiary on June 29.
• The preferred stock carries dividends of 5% annually in cash or, at FSK’s option, 7% annually in payment-in-kind dividends, with either rate increasing by 1 percentage point beginning on the five-and-a-half-year anniversary of issuance.
• FSK launched its $300 million common-stock repurchase program on June 29 and repurchased about 377,800 shares, or roughly $4 million, in the second quarter.

Since the start of the third quarter, the company has repurchased 3.3 million additional shares for about $36 million. Cumulative repurchases reached $40 million at a weighted average purchase price of $10.73 per share, Pietrzak said.

Beginning in the second quarter, KKR also agreed to waive its portion of FSK’s subordinated income incentive fee for four consecutive quarters. The waiver added $11 million to second-quarter net investment income, according to management.

Portfolio Performance and Credit Quality

As of June 30, FSK’s investment portfolio had a fair value of $11.4 billion across 232 portfolio companies. The company said 59% of the portfolio consisted of first-lien loans and 63% consisted of senior secured debt. Including investments held through its joint venture, first-lien loans accounted for about 69% of the broader portfolio and senior secured investments represented about 73%.

The weighted average yield on accruing debt investments was 9.8%, down from 9.9% in the first quarter. The portfolio companies in which FSK has invested since April 2018 reported weighted average year-over-year EBITDA growth of approximately 6%, while median interest coverage stood at about 1.9 times.

Two investments, Heniff Transportation Systems and Alacrity Solutions Group, were added to non-accrual status. Together, they represented $104 million of cost and $91 million of fair value. Dental Care Alliance and Affordable Care were removed from non-accrual status after being restructured during the quarter.

Non-accruals represented 7.1% of the portfolio at cost and 3.8% at fair value as of June 30, compared with 8.1% and 4.2%, respectively, at March 31.

During the analyst question-and-answer session, Pietrzak said valuation declines were primarily driven by a handful of investments: PRG, ATX, Wittur, Peraton, Lionbridge and Medallia.

Income, NAV and Leverage

Total investment income was $290 million, down $14 million from the first quarter. Interest income declined $7 million to $217 million, primarily due to a smaller investment portfolio and assets placed on non-accrual in the prior quarter. Dividend and fee income fell $7 million to $73 million, including $45 million of dividend income from the joint venture.

Net expenses declined $19 million sequentially to $168 million. Interest expense fell $4 million to $101 million, while management fees declined $4 million to $44 million. Net income incentive fees totaled $12 million after the KKR fee waiver, down $13 million from the first quarter.

Chief Financial Officer Steven Lilly said NAV per share fell from $18.83 at the end of the first quarter to $18.30 at June 30. GAAP net investment income added $0.44 per share, but portfolio valuation changes reduced NAV by $0.56 per share. The $0.42 quarterly dividend reduced NAV, while share repurchases added $0.01 per share.

FSK issued $900 million of 7.5% unsecured notes due 2031 during June, then swapped the notes to a floating rate of SOFR plus 3.488%. Debt-to-equity was 127% at quarter-end, while net debt-to-equity was 122%, improving from 138% and 131%, respectively, at March 31.

Lilly said net debt-to-equity had returned to FSK’s target range of 1.0 to 1.25 times. Available liquidity stood at $3.5 billion at quarter-end. Management expects annualized net investment income to range from 8% to 9% of NAV for the remainder of 2026, subject to economic conditions, geopolitical risks and portfolio performance.

Pietrzak said FSK intends to complete the share repurchase program while managing liquidity and leverage, and expects the effort to extend through 2026 and 2027. He said the company expects to become a smaller fund as it executes the strategy, but aims to emerge as a higher-quality portfolio with less emphasis on second-lien and junior debt.

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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