FS KKR Capital Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 20 speakers on the call.

Operator

Morning, ladies and gentlemen. Welcome to FSKKR Capital Corp's Third Quarter 2023 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, Robert Paun, Head of Investor Relations will proceed with the introduction. Mr. Paun, you may begin.

Speaker 1

Thank you. Good morning, and welcome to FS KKR Capital Corp. Q3 2023 earnings conference call. Please note that FS KKR Capital Corp. Maybe referred to as FSK, the Fund or the Company throughout the call.

Speaker 1

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 September 30, 2023. 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.

Speaker 1

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 We'll include certain non GAAP financial measures.

Speaker 1

For such measures, reconciliations to the most directly comparable GAAP measures can be found In FSK's 3rd quarter earnings release that was filed with the SEC on November 6, 2023. 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 Pietrzak, Chief Investment Officer and Co President Brian Gerson, Co President and Stephen Lilly, Chief Financial Officer.

Speaker 1

Also joining us in the room are Co Chief Operating Officers, Drew O'Toole and Ryan Wilson. I will now turn the call over to Michael.

Speaker 2

Thank you, Robert, and good morning, everyone. I'd like to start by acknowledging the tragedy in the Middle East and the loss of innocent lives. Like so many of you, I was shocked by the invasion of Israel. To the many people who have had family, friends and loved ones impacted by these devastating and tragic events, our hearts go out to you. And now turning to FSK's results for the Q3.

Speaker 2

Our financial and operating results showed continued strength as we exceed our earnings guidance and out earn our quarterly base and supplemental distribution. During the Q3, we generated net investment income totaling $0.84 per share and adjusted net investment income totaling $0.80 per share as compared to our public guidance of approximately $0.79 and $0.76 per share respectively. Our net asset value per share at the end of the Q3 was $24.89 which is equal to our net asset value per share at the start of the year. During the Q3, our net asset value per share increased by approximately 1%. Based on our positive operating results, our Board has declared a 4th quarter regular quarterly 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.

Speaker 2

As many of you will recall, in May of this year, we declared a series of 3 special distribution payments totaling $0.15 per share. The 3rd $0.05 per share installment will be paid at the end of this month. Based on our continued strong performance, Coupled with our positive earnings outlook, I'm pleased to announce that our special distribution will continue for the next two quarters, an amount totaling $0.10 per share. Consistent with our corporate view of sharing additional earnings with our investors on a real time basis, this special distribution we paid in 2 equal installments of $0.05 per share in the 1st and second quarters of 2024 and will be on top of our quarterly base and supplemental distributions, which currently total $0.70 per share. From a forward looking perspective, we continue to be optimistic about the growth in the private credit sector, which provides significant tailwinds for our industry.

Speaker 2

In general, our portfolio companies have been adjusting well to the higher interest rate environment as we have not seen significant increases in credit stress or defaults. FSK continues to generate strong earnings And as ample liquidity take advantage of new high quality investments as well as to support our existing portfolio companies through add on investments. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Speaker 3

Thank you, Michael. In the wake of continued inflationary pressure and higher for longer interest rates, Private credit continues to be an attractive asset class due to its directly negotiated transactions, predominantly floating rate infrastructures And significant issuer diversification. As a result of these and other positive attributes, Private credit is continuing to become an increasing allocation for institutional investors. As we mentioned on last quarter's call, we have seen an increase in deal flow as M and A activity continues to ramp. In addition, There are recent signs that the syndicated markets are beginning to stabilize with activity picking up in that part of the market as well.

Speaker 3

At the same time, we are seeing some pressure on spreads in the upper end of the middle market as spreads have tightened By 25 to 50 basis points during the quarter. With private equity funds holding more than $2,000,000,000,000 of dry powder, We continue to believe sponsors will utilize private credit solutions to finance transactions. Turning to investment activity. During the Q3, we originated $504,000,000 of new investments. Over 65% of our investments were focused on add on financings to existing portfolio companies and long term KKR relationships.

Speaker 3

Our new investments combined with $386,000,000 of net sales and repayments when factoring in sales to our joint venture Equated to a net portfolio increase of $118,000,000 In terms of recent deployment opportunities, One new investment of note is a partnership with PayPal. KKR Credit has agreed to purchase approximately EUR 40,000,000,000 Of PayPal's consumer receivables originated in Europe. FSK has committed approximately €80,000,000 towards the transaction. Having the ability to work exclusively with a strategic partner like PayPal is a testament to the strength and maturity of KKR Credit's Asset Based Finance Business. In terms of interest coverage, At the end of the Q3, our portfolio companies had a median interest coverage of 1.5 times.

Speaker 3

For clarity, this calculation uses base rates as of June 30, 2023 to align with portfolio company financials. While the higher rate environment has impacted certain companies, overall credit performance continues to be stronger that many market observers anticipated. As companies in the larger end of the private credit market have demonstrated their ability to pass along price increases, while simultaneously navigating their labor and other input costs. Despite the challenging macro environment, We continue to see portfolio company revenue and earnings growth. We remain focused on large, high quality borrowers With strong operating margins and deep equity cushions.

Speaker 3

The weighted average EBITDA of our portfolio companies was $212,000,000 as of September 30, 2023. Additionally, our portfolio companies reported a weighted average Year over year EBITDA growth rate of approximately 6% across companies in which we have invested in since April of 2018. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Speaker 4

Thanks, Dan. As of September 30, 2023, our investment portfolio had a fair value of $14,700,000,000 consisting of 200 portfolio companies. This compares to a fair value of $14,800,000,000 and 195 portfolio companies as of June 30, 2023. At the end of the Q3, our 10 largest portfolio companies Represented approximately 19.5% as a fair value of our portfolio, which is consistent with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 60% first lien loans And 68% senior secured debt as of September 30.

Speaker 4

In addition, our joint venture represented 9.6% of the fair value of our 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 76 percent of our portfolio as of September 30. The weighted average yield on occurring debt investments was 12.2% As of September 30, 2023 compared to 12.1% as of June 30. As a reminder, The calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Similar to recent quarters, the increase in our weighted average yield during the Q3 was primarily associated with the continued rise in base rates. Including the effects of our investment activity during the Q3, as of September 30, 2023, Approximately 86% of our total investment portfolio is comprised of investments originated either by KKR Credit or the FSKKR adviser.

Speaker 4

During the Q3, excluding the impact of merger accounting, we Net portfolio appreciation on investments of approximately $23,000,000 During the quarter, we placed one debt investment on non accrual. The company is named Bowery Farming and it is one of the largest vertical farming businesses in the U. S. Bowery is a smaller position in our portfolio As the first lien loan has a cost basis of $62,000,000 and a fair value of $13,000,000 as of September 30. We also received a $15,000,000 pay down at par during the quarter.

Speaker 4

As of September 30, 2023, Non accruals represented 4.8 percent of our portfolio on a cost basis and 2.4% on a fair value basis compared to 4.8% on a cost basis and 2.5% on a fair value basis as of June 30, 2023. We believe it is helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the Q3, non accruals related to the 86% of our total portfolio, which has been originated by KKR Credit and the FSK Care Advisor were 2.3% on a cost basis and 0.6% on a fair value basis. Additionally, Since the start of the FSK Care Advisor almost 6 years ago, the advisor has originated over $22,000,000,000 of investments and has experienced an annualized cost basis non accrual rate of less than 1%. And with that, I'll turn the call over Stephen to go through our financial results.

Speaker 5

Thanks, Brian. Our total investment income increased by $3,000,000 quarter over quarter to $465,000,000 The primary components of our total investment income during the quarter were as follows: Total interest income was $374,000,000 a decrease of $2,000,000 quarter over quarter, primarily driven by the $500,000,000 And asset sales we mentioned last quarter. Dividend and fee income totaled $91,000,000 an increase of $5,000,000 quarter over quarter As our joint venture experienced approximately $3,000,000 in onetime fees and dividends. Our total dividend and fee income during Quarter is summarized as follows: $58,000,000 of recurring dividend income from our joint venture, Other dividends from various portfolio companies totaling approximately $21,000,000 during the quarter And fee income totaling approximately $12,000,000 during the quarter. Our interest expense totaled $117,000,000 A decrease of $1,000,000 quarter over quarter due to the decline in net debt to equity from 113% at June 30 To 110% at September 30.

Speaker 5

Our weighted average cost of debt was 5.3% as of September 30. Management fees totaled $56,000,000 and incentive fees totaled $47,000,000 both unchanged quarter over quarter. Other expenses totaled $11,000,000 during the 3rd quarter, a decrease of $1,000,000 The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 2Q 2023 Net asset value per share of $24.69 was increased by GAAP net investment income of $0.84 per share And was increased by $0.11 per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution.

Speaker 5

The sum of these activities results in our September 30, 2023 net asset value per share of $24.89 From a forward looking guidance perspective, we expect Q4 2023 GAAP net investment income to approximate $0.74 per share, and we expect our adjusted net investment income to approximate $0.77 per share. Detailed 4th quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $377,000,000 We expect recurring dividend income associated with our joint venture to approximate $53,000,000 We expect other fee and dividend income to approximate $23,000,000 as we expect normal course asset based finance dividends to be incrementally lower in the 4th quarter. From an expense standpoint, we expect our management fees to approximate $56,000,000 We expect incentive fees to approximate $42,000,000 We expect our interest expense to approximate $117,000,000 and we expect our other G and A expenses To approximate $10,000,000 During the Q4, we expect our excise taxes will approximate $22,000,000 We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting, Which is why our projected 4th quarter GAAP net investment income is $0.04 per share below Our anticipated adjusted net investment income.

Speaker 5

Our gross and net debt to equity levels were 115% and 110%, Effectively at September 30, 2023 compared to 118% 113% at June 30, 2023. At September 30, our available liquidity was $3,600,000,000 Approximately 59% of our drawn balance sheet And 42% of our committed balance sheet was comprised of unsecured debt. In October, 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 And total commitments to $4,670,000,000 and an extension of the maturity date to the Q4 of 2028. We were very pleased to complete this amendment as it is reflected both of the strength of the FSK platform as well as the long term relationships we are fortunate to maintain with the investment community.

Speaker 5

And with that, I'll turn the call back to Michael for a few closing remarks

Speaker 2

Thanks, Stephen. In closing, we are pleased with our Q3 results and our year to date performance As our net asset value at the end of the Q3 was flat compared to the start of the year. Our adjusted net investment income in the quarter exceeded both our public guidance As well as our total dividend, our underlying portfolio companies are performing well from a credit perspective and we deployed capital into compelling new transactions. With available liquidity of $3,600,000,000 and a strong balance sheet, we have ample capital to invest in attractive risk adjusted opportunities we are seeing in the market. On behalf of the team, we thank you all for joining the call and for your continued support.

Speaker 2

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

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from John Hecht with Jefferies. Please go ahead.

Speaker 6

Hey, guys. Good morning and thanks for taking my questions. What as you guys talked, and I think it's kind of the second time in a row where you talked about the pipeline Activity increasing. I'm wondering if you can kind of describe, I mean, we've heard of, I guess, some increase in M and A activity and maybe some LBO activity, I'm wondering can you characterize the kind of sources of the pipeline? And then what's around that pipeline, is that shifting at all relative to the last 4 to 6 months as well?

Speaker 3

Good morning, I put it into a couple of different sort of buckets in terms of the pipeline activity. One of it's just been, we'll call it sort of live processes, albeit that's probably still not Maybe to the level that you would expect in any sort of normalized market, but a certain amount of green shoots there. And then some of it has also been, We'll call it either early reads or companies that we know are kind of gearing up for our sales process as As we get further into 2024, so my sense is you're going to see the and we said this on the last call, it will take, I think, several quarters for this to kind of get through The system where things kind of actually fund, but I think you'll see the majority or at least where we're sitting today, the majority of that activity And kind of probably Q2 through Q4 of 2024 in terms of additional kind of actual closed and funded Deal flow. In terms of competition, I'm assuming that means kind of who's kind of funding the deals. I do think the market is decently competitive right now.

Speaker 3

I think that's a little bit of a technical. There just hasn't been a lot of deals And people kind of want to do some and stay funded and get to their target leverage with sort of deployment numbers. But I think the quality of those deals remains very high and having the ability to earn kind of 12% plus on them for kind of Good large companies 1L sort of risk with good sized equity checks. We still feel quite constructive on the market opportunity.

Speaker 6

Okay. That's helpful. And then second question is maybe just could you give us an update on the asset based financed Pocket or pool and as well as the credit opportunities partners, I just I know particularly the Asset Based Finance you've been particularly busy this year. I wonder Is that activity persisting?

Speaker 3

Yes. I mean, so on the Asset Based Finance side, It has been a very kind of busy time for us there. I think our platform is meaningfully built out with over 50 people dedicated to We've got a fair amount of AUM dedicated to that space and the ability to kind of play up and down the capital structure, Which I think is a real nice competitive advantage for us. I think we always think about that market as having a lot of white space. We estimated sort of $5,000,000,000,000 today sort of on its way to $7,000,000,000 So that's sort of quite positive.

Speaker 3

But what's been going on with the regional banks Has been a real sort of tailwind to that either in allowing us to acquire asset portfolios Or essentially fill the void from where they've taken a step back. So I think we've been quite happy with what we've seen there. I think on the joint venture, I think the team has done a good job of And seeing that sort of continue to grow in terms of assets, I think we've got quite a strong liability sort of structure there. I think we like the returns that is still being sort of put from that or sort of off of that joint venture. And it just has real size.

Speaker 3

And my number might not be perfect here, But it would be, I think, maybe the 7th largest BDC if we were on a standalone basis, just sort of our joint venture. So I think we like the size and scale we have there as well. Great.

Speaker 6

Thanks very much.

Speaker 2

Thanks, Nathan.

Speaker 3

Have a good day. Thanks. Thank

Operator

you. One moment for our next question. Our next question comes from Casey Alexander with Compass Point Research and Trinity. Please go ahead.

Speaker 7

Yes. Just one question, maybe 2. You had a position in Solera that was picking in the second Quarter and we're supposed to pick for 2 quarters. We've now moved into the 4th quarter. Has that one reverted now back to cash pay?

Speaker 7

And how is that company doing?

Speaker 3

Yes. Good morning, Casey. The position has reverted back to cash pay. It did that at the end of Q3, But you won't see the impact kind of really, we'll call it, come through the numbers. That's why the PIK income would have been sort of elevated In the quarter as it was in the Q2.

Speaker 3

You will see that it will move entirely to sort of cash pay and that was I think almost 30% are out of the sort of total sort of pick amount and the company performance is strong in our mind.

Speaker 7

Yes. Okay, good. Great. Secondly, are you willing to add some on balance sheet exposure? I mean most of the exposure that you've added over the last several quarters It's all gone to the JV.

Speaker 7

The JV is now at about 10%. And maybe you addressed this a little bit, but Where can you grow the overall portfolio? Do you still have to go to the JV or can you add some to the on balance sheet exposure?

Speaker 3

No, I think you should expect to see the on balance sheet number, sort of grow as well. Just Yes. I think we did add $289,000,000 to the joint venture this quarter. I don't think anything went to the joint venture sort of last quarter. I think we're kind of well inside our target leverage number at FSK.

Speaker 3

I think we're pretty You're happy with what we see in terms of dry powder in the entity, including the revolver sort of extended. So I think you should expect to see, While still within inside that sort of target range, us kind of continuing to add assets on FSK's balance sheet As we sort of move forward.

Speaker 7

All right. Thank you for taking my questions.

Speaker 3

Have a good day,

Speaker 7

Casey. Yes.

Operator

Thank you. One moment for our next question. Our next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Speaker 8

Hi, good morning. Thanks for taking my question. In terms of the upper middle market segment, Wondering if you could just talk a little bit more about what you're seeing in terms of trends around covenants or terms for some of the more recent investments and So, whether you're seeing any change there? Thanks.

Speaker 3

Yes. Good morning, Ken. I think that So the term upper end of the middle market has a pretty sort of broad definition, right? I think when we're sort of talking to folks, That's probably more in the $100,000,000 to $150,000,000 of EBITDA. But I think in recent sort of quarters, Even gone sort of beyond that as the syndicated loan market has been shut and private debt has really been I think the only game in town.

Speaker 3

I do think we started the year as an extremely, We'll call it lender friendly environment. I think we've probably come off that a bit and we mentioned about We're seeing a certain amount of spread compression. That said, I think more and more companies continue to access Private debt is a financing source. I think especially doing that in times of volatility And they're looking for certainty of sort of financing. But I think just a lot of folks are being sort of drawn to this market versus The broadly syndicated market is never going to go away.

Speaker 3

I think private debt has become kind of an equal sort of peer there. Yes. So I think we're still seeing very good structures. I think the market has had a good amount of discipline as it relates to Some of the documentation weaknesses that we may have seen in the broadly sort of syndicated market, but just a little bit tighter on pricing as we mentioned in our prepared remarks.

Speaker 8

Got you. Very helpful there. And then one follow-up, if I may. In terms of the supplemental I wanted to share some initial thoughts on visibility, confidence And the potential line of sight around supplementals for next year. Thanks.

Speaker 3

Yes. And I'll start to this and Steve and Lily might want to add Obviously, we've had the sort of base in the supplemental and then we had the $0.15 of special For 2023, I think that that is a good story in our mind. We've told the market we were going to pay Sort of additional earnings as they were sort of earned by sort of FSK, I think that will put roughly at $2.95 of sort of total dividends paid for the year, which I think is quite attractive for our investors and obviously a big sort of focus for ours. We felt confident to extend that special. That's the $0.10 that was mentioned in the prepared remarks.

Speaker 3

I think by definition that means we feel confident about the supplemental as well kind of in the near term. And I think you should expect You have the base and supplemental to remain in the coming quarters.

Speaker 8

Great. Very helpful there. Thanks again.

Speaker 3

Thank you.

Speaker 9

Thanks. We'll take

Operator

a moment for our next question. Our next question comes from Ryan Licht with KBW. Please go ahead.

Speaker 10

Hey, good morning. I had several questions on kind of the transaction with the PayPal consumer loans. I know it's kind of a small transaction, but it's definitely interesting. So I guess first off, how are those loans being placed On your balance sheet, I saw a small equity investment of $2,000,000 but are those loans going to be Directly placed on your balance sheet or they're going to be in some sort of like SPV

Speaker 3

Yes. And Ryan, happy to talk about that. I mean, I don't think it was actually a small investment Considering we're going to buy €40,000,000,000 over the coming years, obviously, this was a strategic transaction For both us and for PayPal, there's a fair amount of, I think, public sort of statements out there That we can kind of point to. I think that said, the receivables are short, which is why that $40,000,000,000 number does seem high. The book will probably turn 6 times per year.

Speaker 3

The €80,000,000 that's kind of mentioned in the script Was FSK share of the overall sort of deal and the deal The receivables are essentially going into an SPB. There are certain banks providing financing to that SPB and then FSK and the other KKR credit accounts are providing the remainder of the capital. That $2,000,000 piece It was just the initial funding, but you should expect it to ramp fully over the coming quarters.

Speaker 10

Okay. And then so The $80,000,000 that's going to FSK, that was just kind of I was talking about the smallish. Is that expected to grow over time? Or How do you kind of view your overall exposure to these loans? And maybe it's too early to tell.

Speaker 10

And then I guess also what should we expect when sort of the it sounds like it turns over a lot, which would make sense. What are sort of the return Expectation for these types of loans?

Speaker 3

Yes. I mean, I think you should expect that number to be sort of the target at least So then the year is sort of medium term. It might very well sort of grow from there as the program It continues to take off. Yes, I think like most things that our asset based finance bucket, we view them As extremely attractive from, we'll call it, a downside protection basis, we think because these are Either secured receivables or short duration receivables, we have a great amount of confidence in the repayment profile. But then we're generally trying to do deals Inside this strategy, it kind of let's call it mid teens plus, right?

Speaker 3

So view it as great diversification to a corporate credit book, Well protected from when we think about sort of the downside and effectively return enhancing versus just regular rate direct money.

Speaker 10

Okay. And then one last one on it. Are these sort of Loans that were previously going to I know it's Europe, so maybe it's not relevant. But I'm thinking you mentioned earlier that Kind of the slowdown of regional banks, sort of lending. Are these the types of loans that would fit into like Regional Bank, these consumer financing type loans that this is the reason that KKR is kind of stepping in to fill that void or where were these loans have previously Yes,

Speaker 3

that wouldn't have been the case for a transaction like this. I mean, you don't have the same regional banking model In Europe that you have in the U. S, so that sort of concept is generally not the same. Yes. That's what I talked about a bunch on sort of the PayPal side.

Speaker 3

This was all funded on PayPal's balance sheet before this deal.

Speaker 10

Okay. Got you. And then I just had one question outside of the PayPal discussion. You talked about a lot of Companies and deals sort of gearing up now that will take a while to sort of incubate and could come to fruition maybe in the 2nd quarter and beyond in 2024. I'm just

Speaker 3

curious,

Speaker 10

what sort of do you think assumptions that these companies Are making order for these deals to transact and maybe said it differently, are these deals dependent on sort of Rate cuts or stabilizing base rates or is the current environment if it just stays steady with rates stay where they are, the environment sort of stays stable. Do you think that that's good enough to have these deals sort of come to fruition just from a high level? I know every deal is specific, but just kind of high level.

Speaker 3

No, it's a fair question. I think just sort of stable will be, We'll call it enough of a catalyst or market conditions to allow that to get done. I think you've had Valuation mismatches for some time now between kind of the seller and sort of the buyer, I think those have, We'll call it started to narrow. I think at least sort of our view is we're in an environment of higher rates for longer. And I don't think the inflation story is done, but I think it's become, we'll call it much more manageable and sort of under control.

Speaker 3

I do think you have the other sort of point out there. In the private equity community, I think there is a growing amount of pressure For realizations and money to be returned to LPs and then there's also a lot of dry powder sort of sitting on the sidelines, Right. So that's why I think if we can just stay in a, we'll call it, a stable type kind of macro, Which obviously is a lot going on, so maybe that will be sort of hard. But I think we say that that will be the catalyst to get that done. We'll get these deals coming to market as we get through 2024.

Speaker 10

Okay. That's helpful. That's all for me today. I appreciate it.

Speaker 3

Yes. Have a good day, Matt.

Operator

Thank you. One moment for our next question. Our next question comes from Melissa Weddle with JPMorgan. Please go ahead.

Speaker 11

Good morning. I was hoping to follow-up on a couple of the comments that were made, I believe, during the prepared remarks, one speaking to the Strength of the opportunity set in Asset Based Finance, but then I think Stephen also mentioned expecting lower Asset Based Finance dividend income in 4Q. I was hoping we could just dig into that a little bit.

Speaker 3

Yes. It's a good and fair question. I would probably separate the 2 just for one second. I think the market opportunity or the investing opportunity It's quite strong. It's a thematic that we believe a lot in, and this place that we've been kind of very sort of, We'll call it focused on.

Speaker 3

I think each of the deals is a little bit different. Sometimes the deals, when deployed, have to get Scale before they can start to pay a dividend. So you can have a certain, we'll call it, sort of timing mismatch. And then there's a handful of deals that Yes, we are looking to, we'll call it, do certain positive things on the liability or sort of financing which will kind of restart that process where dividends might be slower. But I think about it more in terms of a timing mess and match than a permanent sort of point on the dividend side.

Speaker 11

Got it. That's helpful. Thank you. I was also hoping we could touch on one Portfolio company, I believe, Gracent was on the non accrual list previously. It looks like it was removed And Mark, that back to par in 3Q.

Speaker 11

I was hoping we could just touch on that. Was that a restructuring? Did they Get current. Could you give us some detail there?

Speaker 3

Yes. I mean, it's been probably a multi pronged restructuring Over the last probably 24 months and Brian might want to sort of add to this, but I think we've reached We'll call it the next phase of that. This was a legacy advisor position that had, sort of a meaningful amount of challenges. The business has kind of shrunk sort of materially. And I think there was some additional sort of capital put into it As it relates to this quarter as well, which kind of triggered it sort of going off that non accrual list, but it's pretty small position at this point.

Operator

Our next question comes from Robert Dodd with Raymond James. Please go ahead.

Speaker 9

Hi, guys. Going back to the ABS, the dividend income for Q4, obviously, I mean, TRAC or whatever it's supposed to call it these days, the dividend went down this quarter. Is any of the relatively lower still very helpful, the number of dividends from the asset backed finance So connected to the real estate market, it's going to be see exposure indirectly there. Or is there something else just That's not normally seasonal in Q4. And that's obviously to your point, and that's the timing issues and things like that.

Speaker 9

But is there a real estate back to the plant?

Speaker 3

Yes. And I mean, I'll answer the question, but if I miss something, let me know because it's a little bit hard to hear a couple of the points in there. I think on the example of sort of Torek, I mean Torek, the underlying loan performance has been quite strong. And I think we've been sort of happy to see that, but like a lot of sort of asset classes out there right now that would fall onto one where The cost of financing sort of generally has gone up more than the yields on the underlying loans. So that has had put some sort of, we'll call it, stress on net income or sort of ROE there.

Speaker 3

They do have the benefit of Having been a very frequent issuer and having the ability to those deals revolve, so as loans repay, they can continue to add to those. But I think this goes a little bit to Melissa's question. As we think about kind of forward financing, some of those structures might kind of trap cash And the entities for sort of longer period of time. So I'd say it's not seasonal. We try to run that book as neutral as we can Sort of a rates perspective, but there'll be some amount of kind of refinancing risk there or sort of term out sort of points that we have to be mindful of.

Speaker 9

Understood. Thank you. And that does answer the question for me. On yes, one more. You talked about obviously, there's a little bit of spread compression now.

Speaker 9

The syndicated market seems to be showing some signs of life, not all the way back yet by a long stretch. I mean, what are your thoughts over the give me a more conceptual over the next 12 months call. Is there a risk To spreads in the private credit market that if the syndicated market comes back more aggressively, that puts meaningful spread compression Risk in the private credit side, given base rates are so high, you can obviously that could be handled without a problem. Does that create A dynamic where the spread compression risk is maybe elevated if the syndicated market comes back while base rates are very high?

Speaker 3

Yes. I mean, it's a very fair question. I don't think so, but I don't think so for a couple of reasons. I think There's a bit of a floor level to where this market sort of Mineberry won't get to. Now part of that is driven by a bunch of the pools of capital that sort of invest here might be, sort of levered pools, but I think you're always going to have a certain amount of a gap between the private debt market and the syndicated market.

Speaker 3

I think We've talked about this on some prior calls. I think if you looked at deals that were done, the beginning of kind of 'twenty The market spread was probably $575,000,000 kind of on average. I think that would have gapped out in In the beginning part of this year to probably 675 on average. And that's a pretty big move considering The benchmark also jumped almost 4.50 plus basis points. And that's I'm just comparing that basis Number versus the floor that was in kind of the deals.

Speaker 3

So now I think you're back down, to you're looking at deals today that are probably Yes, it was kind of $6,000,000 to sort of $6,200,000,000 But I

Speaker 12

think that's I think those are I think it will

Speaker 3

be range bound generally in there. And I think it will be somewhat subject to deal volumes, the desire for people sort of to deploy capital and then There's been maybe excess capital raised that's looking to get deployed quickly.

Speaker 9

Got it. Thank you.

Speaker 3

Thanks. Have a good day.

Operator

Thank you. One moment for our next question. Our next question comes from Bryce Roe with B. Riley. Please go ahead.

Speaker 13

Thanks. Good morning. Wanted to start with Some questions on just the non accrual bucket and some of the specific non accruals. I think last quarter you talked about Witter and NBG going through A restructuring or bankruptcy process, can you provide us an update on those as you look at the kind of the non accrual List, not much change in either one of those from a fair value and cost perspective, at least within that non accrual category.

Speaker 3

Yes, happy to, Bryce, and Brian might want to add to these as well. But I think on the winter side, We announced on the last call this kind of agreement reached as it relates to a restructuring. Those processes take time. I think we do expect that to get done hopefully at some point in Q4 sort of early sort of Q1. But that's progressing along I think as we would expect, I think we've been

Speaker 14

happy with what we've seen

Speaker 3

in terms of Stable performance at the company level. I think the NVG process is pretty much complete, but anything you want Yes.

Speaker 15

At MBG, we restructured that business around their lighting fixtures business, which has historically been a relatively Strong performer within their portfolio. That's really the basis of our investment going forward. Working closely with the management team on optimizing results, working through costs, working through sales, all those So that's sort of gone through the restructuring. Now we're on the other side and now it's going to come down to execution.

Speaker 13

Okay. Okay. That's helpful. And then maybe one more on the non accruals. I mean Global Jet Dominate the non accrual list.

Speaker 13

I think it's 60% plus of the non accruals fair value marked at a relatively High 75% to 80%. I mean, Dan, what would it take to get that account back to accrual status? Any kind of update you can

Speaker 3

Yes, I think you're spot on, on your numbers. I mean, it is 40% of the cost number, and I think it's 65% of the fair market value. We've talked about the name a couple of different points on the calls. I think the management team inside the company has done a very nice job. I think the underlying asset class Private Jets has had a fair amount of tailwinds, no pun intended, on the other side of COVID.

Speaker 3

And remember, there are it's a leasing business mainly, but a lending business as well. Their obligors are both high net worth, but also some of the larger So the book performance has been, I think, quite strong. We've actually taken a fair amount of cash dividends out of the company, And that's been a return of capital over the last handful of quarters. I think that's probably more likely the path forward For 2024, but I don't think the book has a delinquency in it right now. Yes.

Speaker 3

So I think the question or maybe the harder thing for that business has just been who their And what the available ROE has been. But again, I think they've done a really good job to get to where they are today.

Speaker 15

Yes. I'd just add, I think specifically their ROE has improved significantly several years ago in sort of low single digits. Now it's In the high single digits,

Speaker 2

still would like it to be

Speaker 15

a little bit better, but it's certainly come a long way, and we're pleased to see the performance of the book.

Speaker 13

Got it. That's a great update. Appreciate it. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Eric Zwick with The Hovde Group. Please go ahead.

Speaker 16

Good morning. First question for me. Just curious about your thoughts on the outlook for the weighted average yield for the portfolio going forward, just given your comments about some Spread compression for new originations and I guess if interest rates stay kind of in this general range here, is have we kind of seen are we near the peak for this cycle? Or Is there opportunity to realize a little bit more as some older vintages with lower yields and lower spreads kind of Roll out, you replaced them with new ones. Just curious on any thoughts there.

Speaker 3

Yes. I'm not sure, Eric, your instinct is entirely wrong in terms Probably being kind of near a peak. I think kind of quarter on quarter, there's probably a little bit of, We'll call it further upside if you just look at kind of spot SOFR at June 30 and spot SOFR at kind of 9:30 And some of these loans have kind of reset periods that might be sort of 90 days. So it takes a little while for it to go through the system. I think on the other side of that, maybe to the positive, you I I think once we do start to see repayment, some of that could be on the lower yielding stuff that was sort of maybe put on Lower yielding sort of inside the confines of the book or maybe it gets refinanced for some of the companies that are highly performing.

Speaker 3

But then I do think we're in this environment of rates higher for longer. I think that's got a great tailwind, for income for FSK, Yes, which we're sort of quite happy about, but I'm not expecting, we'll call it, meaningful upticks from here and as it relates to kind of short term or so for rates.

Speaker 16

That's helpful. And then one last one for me and I may have missed it in the prepared remarks. Can you update us on your current spillover position?

Speaker 3

Yes. Stephen, you want to take that?

Speaker 17

Yes. Eric, we're continuing to be north of 2.5 A quarter's worth of dividends, which is one of the we sort of hit that target we've said on prior calls, which was the impetus for our Special distribution, that we started during earlier this year in 2023 and, obviously, We just announced in conjunction with earnings that that will continue for at least another two quarters during the first half of twenty twenty four. So pleased to have met that target. It's another we think of as a sort of nice asset to have and then share that excess with shareholders.

Speaker 16

Great. Thanks for taking my questions today.

Operator

Thank you. One moment for our next question. Our next question comes from Mark Hughes with Turits. Please go ahead.

Speaker 18

Yes, thanks. Good morning. Just one question. Any material change in the prospects to generate the fee income once the market loosens up? You've been holding the loans longer, you and everyone else, and presumably, the prepayment fees would Yes.

Speaker 18

How sensitive is that income stream to the passage of time here?

Speaker 3

I mean, it's an interesting point, Mark. And one, I mean, clearly, origination volumes, I think, for us in the industry broadly have been Sort of lower, right? I think you can see that in the fee incomes numbers that you see. But if you do look back Kind of to the same quarter a year ago, I think your fee income was 2 or 2.5 times the size of sort of where it is today. So I do think that's a nice, Let's call it natural.

Speaker 3

Even if we do see a certain amount of repayments, those repayments could generate, Yes, depending on when the loan was put on, a certain amount of exit fees, but then the new deals will generate a certain amount of kind of new deal fees as well. And I don't think that I think the current quarter was $12,000,000 of fee income. I think that's lower than any kind of normal historical sort of average. So There is a bit of balance there. I think it's a very

Speaker 2

good point.

Speaker 18

Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from Jordan Watson with Wells Fargo Securities. Please go ahead.

Speaker 19

Hi. Can you just give us some context On the decision to keep Pure Fishing's 2nd lien on accrual last quarter, it looks like that June 30 mark might have been informed by some discussions about Existing that position at a loss.

Speaker 3

Yes. And Jordan, just can you repeat the question because you faded out a bit at the end?

Speaker 19

Last quarter, you kept pure fishing second lien on accrual. It looks like this quarter, you exit that at a loss. And that market June 30 may have been informed by discussions with the sponsor about exiting that position at a loss. So I'm just curious, Basically, why did you keep that asset on accrual last quarter? Is there any Yes.

Speaker 12

I think there's I think

Speaker 3

there's sort of 2 points. So number 1, you are correct. Probably most importantly, we have exited that position. I think that was In many ways, a good sort of outcome or a good result at the end of the day and I think a bit of a testament to how we kind of risk manage The book, I think we were the asset continued to sort of pay cash. I do think the long term prospects of that business will be, we'll call it positive.

Speaker 3

I think it's got Real sort of brands kind of attached to it. I think those were the drivers of the kind of accrual points and then the drivers of the sale was just kind of prudent risk management. But it's an exited position now.

Speaker 8

Okay. Thank you.

Operator

I'm showing no further questions at this time. I'd now like to turn it back to Dan Pietrzak for closing remarks.

Speaker 3

Well, thank you, everyone, for taking the time to join the call today. We're available for any follow-up points as needed, and we wish you and your families a happy and healthy holiday season. Thanks again.

Operator

Thank you for your participation in today's conference. This concludes the program. You may now disconnect.

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Earnings Conference Call
FS KKR Capital Q3 2023
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