NYSE:FSK FS KKR Capital Q2 2024 Earnings Report $20.02 +0.30 (+1.52%) As of 03:59 PM Eastern Earnings HistoryForecast FS KKR Capital EPS ResultsActual EPS$0.75Consensus EPS $0.71Beat/MissBeat by +$0.04One Year Ago EPS$0.78FS KKR Capital Revenue ResultsActual Revenue$439.00 millionExpected Revenue$426.41 millionBeat/MissBeat by +$12.59 millionYoY Revenue GrowthN/AFS KKR Capital Announcement DetailsQuarterQ2 2024Date8/6/2024TimeAfter Market ClosesConference Call DateWednesday, August 7, 2024Conference Call Time9:00AM ETUpcoming EarningsFS KKR Capital's Q1 2025 earnings is scheduled for Wednesday, May 7, 2025, with a conference call scheduled on Thursday, May 8, 2025 at 9:00 AM ET. Check back for transcripts, audio, and key financial metrics as they become available.Conference Call ResourcesConference Call AudioConference Call TranscriptSlide DeckPress Release (8-K)Quarterly Report (10-Q)Earnings HistoryCompany ProfileSlide DeckFull Screen Slide DeckPowered by FS KKR Capital Q2 2024 Earnings Call TranscriptProvided by QuartrAugust 7, 2024 ShareLink copied to clipboard.There are 13 speakers on the call. Operator00:00:00Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp. 2nd Quarter 2024 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. Operator00:00:21Please note that this conference is being recorded. At this time, Anna Kleinhan, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhan, you may begin. Speaker 100:00:33Thank you. Good morning, and welcome to FS KKR Capital Corp. 2nd quarter 2024 earnings conference call. Please note that FS KKR Capital Corp. May be referred to as FSK, the Fund or the Company throughout the call. Speaker 100:00:50Today'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 June 30, 2024. 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 100:01:29Any 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. Speaker 100:02:05For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's 2nd quarter earnings release that was filed with the SEC on August 6, 2024. 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 100:02:58Also 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. Speaker 200:03:08Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's Q2 2024 Earnings Call. During the Q2, FSK generated net investment income totaling $0.77 per share and adjusted net investment income totaling $0.75 per share as compared to our public guidance of approximately $0.74 and $0.71 per share respectively. As we look at our borrowers operating performance for the quarter, we continue to see strong results as most companies have adjusted to higher base rate environment. We did however see some stress on investments placed on non accrual in the prior quarters. Speaker 200:03:49Our workout investment teams have continued working toward resolutions for these portfolio companies and the team will go into more detail on this later in the call. From a liquidity perspective, we ended the quarter with approximately $4,700,000,000 of available liquidity. Our Board has declared a total 3rd quarter distribution of $0.70 per share consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. We continue to believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to a 12.1% yield on our June 30, 2024 net asset value of $23.95 per share and a yield of approximately 15% based upon our recent share price. As Dan will discuss in more detail during his comments, the market remains competitive as all lenders have experienced some amount of spread compression. Speaker 200:04:50During the first half of twenty twenty four, the investment team originated $2,700,000,000 of investments, of which $1,300,000,000 were originated during the Q2. From a forward looking perspective, despite the expectation that the Fed may begin reducing interest rates as early as September, we believe the elevated rate environment, coupled with our still significant level of spillover income, will continue to drive FSK's earnings and provide support for the attractive base and supplemental distributions we are paying our shareholders. 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 300:05:29Thanks, Michael. The first half of this year has been characterized by a strong economic backdrop. However, recent economic data has surfaced some concerns over the health of the U. S. Economy. Speaker 300:05:43Global markets have evolved and adapted to the current interest rate and inflationary environment. However, the domestic political environment and the international geopolitical situation remain extremely complex. As a result, and with certain recent market moves, we expect market volatility to remain elevated. Regardless of the election outcome, we believe government spending will likely remain elevated regardless of which political party wins the White House. Importantly, productivity in the U. Speaker 300:06:16S. Remains high, which should allow many companies to continue their level of sustained growth despite higher wages and inventory costs. As Michael mentioned, competition for new investments continues to remain elevated as M and A volumes remain below average. That being said, the investment opportunities we have been evaluating continue to be of higher quality as financial sponsors seek to return capital to LPs by monetizing many of their top performing assets. These market inputs have resulted in tighter pricing for new transactions as well as an increased level of requests from existing portfolio companies to amend and reduce pricing related to loans originated over the last 2 to 3 years. Speaker 300:07:06At the same time though, we are starting to see some stabilization in pricing for new deals, which we view positively. We believe the continued uncertainty around both the election and the timing of future rate cuts are the drivers of the still slower M and A environment. However, we still expect to see an increase in M and A activity over the coming months. During the Q2, we originated $1,260,000,000 of new investments. Approximately 70% of our new investments were focused on add on financings to existing portfolio companies and long term KKR relationships. Speaker 300:07:46Our new investments combined with $1,340,000,000 of net sales and repayments equated to a net portfolio decrease of $76,000,000 New originations consisted of approximately 81% in 1st lien loans, 2% in other senior secured debt, 1% in subordinated debt and 16% in asset based finance investments. Asset Based Finance Investments were a smaller portion of our 2nd quarter deployment activity, primarily due to the fact that the ABF investments still tend to be more opportunistic in nature than traditional direct lending. KKR has approximately $60,000,000,000 in ABF assets under management with a team of more than 50 people dedicated to the strategy. We believe that size and scale matter and that our approach is differentiated, which is why we have invested in building out the team and the infrastructure to support it. Our target for ABF investments in FSK remains 10% to 15% of the company's total portfolio. Speaker 300:08:54We continue to be pleased with the quality of new investments. During the Q2, our new direct lending investments had a weighted average EBITDA of approximately 100 and $27,000,000 5.1x leverage through our security and a weighted average coupon of approximately SOFR plus 5.50 dollars One example of a new deal originated by our non sponsor backed effort during the quarter was Rockefeller Capital Management, a financial services firm serving high net worth and ultra high net worth individuals. KKR Credit was co lead on the deal to refinance the existing capital structure and FSK as well as other KKR funds committed $100,000,000 of a $700,000,000 unitranche loan. Another investment to highlight is our investment in Cadence Education, a leading provider of early childhood education services in the U. S. Speaker 300:09:50KKR Credit was co lead on the new deal to refinance the existing capital structure. And FSK as well as other KKR funds committed $198,000,000 of the $680,000,000 total financing. While we look at aggregate trends across our portfolio companies, we observed 12% year over year EBITDA growth at portfolio companies in which we have invested in since April of 2018. Additionally, the weighted average and median EBITDA of our portfolio companies was $225,000,000 100 and $24,000,000 respectfully as of June 30, 2024. As of the end of the second quarter, nonaccruals represented 4.3% of our portfolio on a cost basis and 1.8% of our portfolio on a fair value basis. Speaker 300:10:45This compares to 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31, 2024. Brian will provide further details on the driver of the reduction of our non accrual rate later in the call. We also believe it is helpful to provide the market with information based on FSK's assets originated by KKR Credit. Non accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor were 2.4% on a cost basis and 0.6% on a fair value basis as of June 30, 2024. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail. Speaker 400:11:40Thanks, Dan. At the end of the second quarter, our investment portfolio had a fair value of $14,100,000,000 consisting of 208 portfolio companies. This compares to a fair value of $14,200,000,000 205 portfolio companies as of March 31, 2024. Leverage remained relatively flat quarter over quarter and the decline in our investment portfolio's fair value was primarily driven by unrealized depreciation relating to 3 investments, Miami Beach Medical Group and BioRefirming, which has been on non accrual and Keller Meyer Bergenson Services, which was restructured in the Q1. While smaller investments from a cost and fair value perspective, Miami Beach and Bowery continue to be under pressure and we are working with both companies to maximize our recovery. Speaker 400:12:30We are pleased with the progress that KBS is making under our collective ownership and are optimistic about its future prospects. At the end of the Q2, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 58% 1st lien loans and 66% senior secured debt as of June 30. In addition, our joint venture represented 9.8% of the fair value of our portfolio. As a result, when investors consider our entire portfolio looking through to the investments in our joint venture, then 1st lien loans totaled approximately 67% of our portfolio and senior secured investments totaled approximately 74% of our portfolio as of June 30. Speaker 400:13:24The weighted average yield on recurring debt investments was 12% as of June 30, a decrease of 10 basis points compared to 12.1% as of March 31, 2024. The decrease is primarily attributable to lower spreads on new investments and the repricing of certain investments during the quarter. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. During the Q2, we amended our investment in Global Jet Capital, which simplified and enhanced the company's capital structure. As we have discussed on prior earnings calls, we have been pleased with the accomplishments of GlobalJets' management team during recent years as the company made a strategic shift to be more selective with originations and increase return targets, while also reducing SG and A to drive a higher ROE. Speaker 400:14:17Importantly, the company's approximately $2,000,000,000 jet lease and loan portfolio has no delinquencies and is experiencing attractive renewal or sale opportunities on assets that are coming off lease. Speaker 300:14:29The business is in Speaker 400:14:30a stable and competitive position and has generated an ROE approaching 10% in each of the last 2 years. Additionally, the company has returned $130,000,000 of capital to FSK over roughly the last 2 years. The business continues to execute its ABS strategy, closing B Jet's 20 20 four-one in April at attractive terms, helping drive meaningful capital return into the business. During the Q2, FSK received $51,000,000 of distributions, which were used to fully repay our structured mezzanine position and partially repay our PIK preferred position. In conjunction with this distribution, our PIC preferred equity investment was restructured into a perpetual preferred. Speaker 400:15:15This repayment and corresponding amendment was executed in a manner in which we preserved all of our pre existing economics while better positioning the company for future growth. As a result of these actions, $309,400,000 of costs and $256,600,000 of fair value associated with our Global Jet was removed from non accrual status. We continue to remain focused on rotating the remaining 12% of legacy investment exposure. Production Resource Group, Global Jet Capital, JW Aluminum and our performing 1st lien position in PSKW, all of which we've discussed on either this or prior earnings calls, represent approximately 9% of the 12% total legacy exposure and we continue to be satisfied with their performance. In addition, since Q2 2018, we have achieved significant portfolio rotation out of cyclical industries. Speaker 400:16:12We have rotated over $3,000,000,000 of legacy investments out of materials, energy, consumer durables and consumer discretionary into new investments in more defensive industries like software and services, healthcare equipment and services and commercial and professional services. And with that, I'll turn the call over to Steven to go through our financial results. Speaker 500:16:35Thanks, Brian. Our total investment income increased by $5,000,000 during the Q2 to $439,000,000 The primary components of our total investment income during the quarter were as follows. Total interest income was $353,000,000 an increase of $3,000,000 quarter over quarter. Dividend and fee income totaled $86,000,000 an increase of $2,000,000 quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows: $52,000,000 of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $16,000,000 during the quarter and fee income totaling approximately $18,000,000 during the quarter. Speaker 500:17:25Our interest expense totaled $115,000,000 during the quarter, a decrease of $1,000,000 quarter over quarter and our weighted average cost of debt was 5.3% as of June 30. Management fees totaled $54,000,000 a decrease of $1,000,000 and incentive fees totaled $45,000,000 an increase of $2,000,000 quarter over quarter. Other expenses totaled $10,000,000 an increase of $2,000,000 quarter over quarter. The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 1Q 2024 net asset value per share of $24.32 was increased by GAAP net investment income of $0.77 per share and was decreased by $0.39 per share due to a decrease in the overall value of our investment portfolio. Speaker 500:18:25Our net asset value per share was reduced by our $0.70 per share quarterly distribution and also the $0.05 per share special distribution. These activities result in our June 30, 2024 net asset value per share of Speaker 300:18:43$23.95 Speaker 500:18:46From a forward looking guidance perspective, we expect Q3 2024 GAAP net investment income to approximate $0.72 per share and we expect our adjusted net investment income to approximate $0.70 per share. Detailed third quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $351,000,000 We expect recurring dividend income associated with our joint venture to approximate $47,000,000 a decrease of approximately $5,000,000 quarter over quarter. The expected decrease is the result of recent portfolio company paydowns and the corresponding recycling of capital. We expect other fee and dividend income to approximate $26,000,000 during the Q3. Speaker 500:19:40The expected decrease is due to a lower level of anticipated asset based finance dividends. These dividends tend to fluctuate on a quarterly basis for various reasons. From an expense standpoint, we expect our management fees to approximate $53,000,000 We expect incentive fees to approximate $42,000,000 We expect our interest expense to approximate $117,000,000 and we expect other G and A expenses to approximate $10,000,000 And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share comprised of $2.80 per share of quarterly base and supplemental distributions and $0.10 per share of previously paid special distributions. Turning to our capital structure in June, we issued $600,000,000 of 6.875 percent unsecured notes due 2029, which were subsequently swapped to floating rate pursuant to interest rate swap agreements that mature when the notes are due in 2029. Proceeds from the unsecured note issuance are used to repay outstanding debt on our revolver. Speaker 500:21:02With this issuance, we further strengthened our balance sheet and liquidity position and extended our maturity ladder. Our gross and net debt to equity levels were 119% and 109%, respectively, at June 30, 2024, compared to 117% and 109% at March 31, 2024. At June 30, our available liquidity was $4,700,000,000 and approximately 72% of our drawn balance sheet and 47% of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions. Speaker 200:21:47Thanks, Stephen. In closing, we've had a productive first half of twenty twenty four. First, origination activity increased from muted 2023 levels, resulting in deployment of capital into compelling new transactions. 2nd, our underlying portfolio companies generally continue to perform well and we have made significant progress restructuring certain non accruing investments. Lastly, we continue to fully earn both our base and supplemental distributions on a per share basis and pay out a 15% dividend yield based on our currently expected full year distribution of $2.90 per share in our recent market share price. Speaker 200:22:27As we look toward the second half of the year and beyond, we believe the future opportunity for our platform is extremely attractive. On behalf of the team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions. Operator00:22:43Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Finian O'Shea of Wells Fargo Securities. Your line is now open. Speaker 600:23:13Hey, everyone. Good morning. Good morning. First question, can you talk about the spillover picture? What sort of I don't know if you guys give the dollar number, but I think it's probably a pretty stretched percentage of income or NAV and what plans you have with that or what sort of options you're looking at? Speaker 300:23:42Yes. And I'm happy to start there and Stephen might want to add to that. I think we've always thought about having 2 to 3 quarters of spillbacks sort of income there. I think we're kind of the middle to sort of the upper end of that range, which I think we're happy with. I think that provides a nice protection as we think about longer term dividend coverage. Speaker 300:24:05But Stephen, anything you want to add there? Speaker 700:24:07Yes. Fin, I would just say that the $0.05 per quarter special distribution that we have just completed that program, that took us from kind of really close to 3 quarters of spillover down to something in the sort of 2.8 range now in terms of quarters of dividends. So that program did everything we wanted it to do. And now we're in the position, as Dan says, if rates are to fall, then we have that cushion from a distribution standpoint if we wish to use it. Speaker 600:24:42Okay. That's helpful. And I think, Stephen, your guidance, I heard a lower income on the ADEF book. Is that correct? And, seeing what the market dynamics are or if it's idiosyncratic? Speaker 300:24:58I don't even think it's idiosyncratic fitness. So those deals, I think because they're a little bit more highly structured are not necessarily just as consistent as it relates to dividends on a quarter by quarter basis. I think there's great consistency over what's called the life of the deal. I think we've been very pleased with what we've seen in the market there. Some of the tailwinds surrounding regional banks have persisted. Speaker 300:25:33That's been a nice amount of deal flow. And I think we like the footprint we have as a platform there. But I don't think it's anything more than timing. Great. Speaker 600:25:44That's all for me. Thank you. Speaker 300:25:46Thank you, Tim. Speaker 700:25:48One moment for our next question. Operator00:25:54Our next question comes from the line of Mark Hughes of Truist. Your line is now open. Speaker 800:26:00Yes, thank you. Good morning. Where you had refis that perhaps you passed on, what was your experience in terms of were you more selective this quarter than in prior quarters? Is that a spread issue? How much was the competition a driver of that? Speaker 800:26:21And if you addressed this earlier, I apologize, I jumped on the call a little bit late. Speaker 300:26:25No, no, no worries. Good morning, Mark. I think you probably are broadening that to both refinancings as well as kind of repricings. I think from time to time if these things are coming up and we're either a little bit more negative on the sector or the company, we may very well use that as an opportunity to lighten our position or look to potentially get repaid. So I would just call it a credit call And that could be again company leverage sort of sector. Speaker 300:26:59And I think it's our job to be dynamic as we think about Speaker 400:27:03And generally, we see repricing for very well performing credits where the company and sponsor come to us and ask us to mark the credit to market from a pricing perspective. And I think our view is that given that those loans tend to be passed or call protection, The idea of staying invested on market terms in a credit that we know and like is viewed positively because our alternative would be to get repaid and then go out and find a new investment at the same spread level. So we think it makes all the sense in the world to play in the right ones and we'll continue to do so. Speaker 300:27:40Yes. Mark, just one more point there. I think when we are doing that though as a general rule of thumb, we are either looking for some sort of upfront fee as it relates to the repricing or at a minimum extending Call Pro to keep some optionality for the benefit of the lender. Absolutely. Speaker 800:27:59Understood. Thanks for that clarification. The opportunities in Asset Based Finance, how do you see that as we sit here today? Speaker 600:28:11Yes. I mean, I was alluded Speaker 300:28:12to this with Fin's question. I think broad stroke positive, right? Just if you think about the setup of the market, large sized market, in our mind, close to $7,000,000,000,000 or sort of on the path to there. That's bigger than the high yield bond market, the syndicated loan market, the direct lending market combined. There has not been, let's call it, scaled capital raise there. Speaker 300:28:39There's not a lot of scale players who like ourselves, I think we're fortunate with $60 odd,000,000,000 of AUM and 50 plus people. So I think just the setup as well or the setup is strong. We have seen, we'll call it certain tailwinds there. We've been very active in buying loan portfolios from banks that we've some of those deals have been pretty sort of public sort of out there. I think we're able to source attractive risk adjusted returns there. Speaker 300:29:12So it's a space we remain quite constructive on. Speaker 800:29:15Yes. And I'm not sure if you touched on this, but anything recently with some of the turbulence in the economy, anything you've heard from portfolio companies that would indicate any kind of material change? Are you feeling like a steady she goes, at least as you're seeing in your portfolio companies are experiencing it? Speaker 300:29:38Yes. I mean, it's that's probably a pretty broad question, right? I mean, I think the recent economic volatility in the equity markets has been a bit kind of yo yo like for the last 4 or 5 trading days. I think that probably spikes a little bit more focus. I think it's our job to be in the cautious camp generally. Speaker 300:30:01I think I would probably be balanced with on one hand, we've been pleased with what we've seen. You can see that from the EBITDA growth numbers. On the other hand, I think we have to clearly acknowledge there's less free cash flow in the system considering where rates are. That makes or that provides certain challenges. If there is sort of a bump in the road, the company just doesn't have the same flexibility or moves they might have had sort of prior. Speaker 300:30:37So I think that's kind of top of mind. I mean you touched on the asset back sort of comment. I think we have centered ourselves if we are investing in consumer related exposures there in the more prime part of the market, I think we've been quite happy with what we've seen there as it relates to the performance there. Probably a little bit more worried as you go down market credit quality on the consumer side. Speaker 800:31:06Appreciate it. Thank you. Speaker 700:31:08Thank you. One moment for our next question. Operator00:31:16Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open. Speaker 900:31:22Hey, good morning. Thanks for taking my question. Just one follow-up on the asset base finance contribution to 3rd quarter income, the dividends there. And I just want to get a better understand, is there anything that drives the timing, any kind of macro inputs or is it really just really difficult to predict and could be a little episodic there? Thanks. Speaker 300:31:49No problem. And I wouldn't think about it at all in kind of the macro context. Obviously, if macro environment changes meaningful one way or the other, the portfolio of financial or hard assets that were invested in might sort of change. I would just really equate this more to a timing sort of point, right? And I'll give you maybe 2 simple examples, right? Speaker 300:32:13If we own a portfolio of aviation leasing assets, There's and those are contracted so the cash flows we're getting in. But if we're in the midst of selling certain of those assets, those asset sales, some might happen 1 quarter, some might happen a couple quarters down the road. So a bit non linear in that sort of sense. There could be other deals where we've used the capital markets to finance ourselves. Sometimes those capital markets transactions will divert cash flow to the senior tranche to delever themselves. Speaker 300:32:47That's not negative at all from a value perspective. It's a timing of cash flow point. But those would be 2 probably simplistic examples. Yes. Speaker 400:32:55And I wouldn't characterize it as difficult to predict. I think Dan said it right, which is just nonlinear in certain cases. Speaker 900:33:03Got you. Got you. Super helpful there. Super helpful there. And then just one follow-up, if I may. Speaker 900:33:09In terms of the leverage, I think in the past, you've talked about being closer to, I think, the higher end of the targeted range. Just wanted to see if there's any kind of updated outlook. Where would you feel comfortable in terms of leverage trending over the near term? Thanks. Speaker 300:33:25No. And that's a good question, Ken. Thank you. I think there's a couple of points there. I don't think our ranges has changed, right? Speaker 300:33:34We like the 1 to kind of 1 in the quarter. I would argue we're at the kind of lower side of that on that net basis. So I think there's some room to kind of add there. I think that's helpful and can provide a certain amount of benefits to the earnings side. There's also additional leverage capacity down at the joint venture level, which would be the same. Speaker 300:33:58I think we are quite happy with the liability side of our balance sheet. We were happy to get that $600,000,000 deal done this quarter. I think the number was roughly 72% of our debt outstanding this quarter is from the unsecured bond market. We've got a lot of undrawn capacity on the revolver. We've effectively funded our 24 maturities. Speaker 300:34:24So I think we are I think we've got some room there would be the short answer. Speaker 900:34:30Great. Great. Thank you very much, Dan. Speaker 300:34:33Thanks. Have a good day. Speaker 700:34:35One moment for our next question. Operator00:34:40Our next question comes from the line of Melissa Wedo of JPMorgan. Your line is now open. Speaker 1000:34:47Good morning. Thanks for taking my questions today. A quick follow-up. I think I caught the average EBITDA on new originations, but I might have confused that with average EBITDA in the portfolio. Was it the case that the average EBITDA on originations came down quite a bit this quarter from the Q1? Speaker 300:35:14Give me one second Melissa just to sort of touch base on that. Yes, I think the average EBITDA was $127,000,000 in the quarter. I think that's probably more in line with the median EBITDA of the entire portfolio. I don't probably read that much into that other than just kind of the deal flow that occurred during this 90 day period. That said, I think it is important to note, I mean, we're pretty focused on having a broad origination footprint, right? Speaker 300:35:50We do talk about being focused on the upper end of the middle market, but we're usually defining that as $50,000,000 to $150,000,000 of EBITDA. We will do deals that are below that. I'd say probably $25,000,000 is kind of a floor. They're probably a higher bar the smaller the company is. That's just what we've seen from a risk perspective or where we're getting we think, appropriately paid for the risk. Speaker 300:36:23And then it is more than just a sponsor sort of effort, right? We're focused on both the sponsor as well as the non sponsor channels. The entire goal is to make the origination funnel as big as possible, so we can try to be as selective as possible when we're picking new deals to do. Speaker 400:36:41And I'd also point out that the weighted average spread on those transactions was S plus 5.50. Dan mentioned leverage was right around 5.1 times and LTV was just a smidge north of 40%. So feel good about those credits. Speaker 1000:36:59Got it. Thank you for that clarification. It does seem a little bit consistent with what we've heard from some other teams where some of the better risk adjusted opportunities were a little bit lower than sort of the super upper middle market range more recently. I guess, question, when you look at your pipeline going forward, do you expect that to sort of persist? And or do you expect to go back up to the really upper tier of the middle market? Speaker 1000:37:34And then I'll leave it there. Thank you. Speaker 300:37:38Yes. No, I think it's fair to expect that that's where it would sort of continue to sort of play out, right? Because if we are defining that sweet spot as the 50 to 150, that's kind of where the medium of the portfolio sort of sitting. Now I'm not surprised that others would be saying that that very upper end or even these larger companies, the $250,000,000 sort of plus, are a little bit less attractive sort of now than they were before. We would agree with that. Speaker 300:38:11You had a period in 2022 and 2023 where the syndicated loan market was closed. The private debt market was the only game in town. So you were getting paid, in our opinion, kind of exceptionally well for those. Now those just companies would have more options. So that wouldn't sort of surprise us. Speaker 300:38:31And we have always had the view that these markets will coexist. They have for some sort of period of time. We just have the view that volatility will persist and will provide opportunities for ourselves and other private debt providers. Speaker 1000:38:51Thank you. Operator00:38:53Thank you. Speaker 700:38:55One moment for our next question. Operator00:39:00Our next question comes from the line of Sean Paul Adams of Raymond James Investments. Your line is now open. Speaker 1100:39:08Good morning. On Keller Meyer, you guys said you are pretty happy with the progress, but the equity was written down approximately 50%. Should we expect that even if progress continues to be positive, if there's any more downside in that asset? Speaker 300:39:27Yes. I think that's a very fair question. I think we are happy with all the work that us and the other lenders there have been doing as we've moved that company outside of the sponsor ownership and inside or under the control of that sort of group. These are kind of herculean lifts. We've got a lot of great resources on our workout and restructuring team, as do I think the other lenders involved there. Speaker 300:40:07So the equity sort of mark is a little bit of a point in time with how earnings may have either moved or market multiples might have moved. But I think when we talk about the progress, talking about there's a longer term gain there about stabilizing and hopefully growing that business. Speaker 400:40:25Yes. And look, and I think in terms of KBS, a couple more things. Clearly, given that the equity is levered, small movements in EBITDA are going to have outsized impacts on a quarterly basis on that mark. We are happy with where this thing is trending. We are working with management. Speaker 400:40:48We have a new value creation plan in place. We're definitely focused operationally on this business on how to reduce churn, improve operations, reduce SG and A, etcetera, etcetera. A lot of work is being done in the background there. And I think really the proof in that is going to be over the longer term and we are bullish on the prospects of this business. Speaker 1100:41:14Perfect. Thank you for that color. Turning to just new originations and spread compressions. You guys said that the quality of the investment opportunities is high and that the top performers are actually being moved by the sponsors. How much, if any, of the current spread compression is actually mix related, due to the higher quality companies already having embedded lower spreads? Speaker 1100:41:43And how much is like for like credit quality spread compression versus just raw competitive pressure? Speaker 300:41:52Yes, there's probably not a perfect answer to that. I would probably try to break it down a little bit. We have seen, let's say, these higher quality businesses being the ones that are being moved by certain sponsors, right? We do know very clearly there's a fair amount of pressure on GPs broadly from their LPs to monetize assets so those LPs can get some money back. And these better assets, I think, just have not had the moves on valuation multiples. Speaker 300:42:27So they're more perfect sort of candidates, to sell. I think or the spread compression probably more broadly, I would probably go through the journey of if you think about January 2022, the regular way deal was, let's call it, dollars 5.75 that probably gapped out to $650,000,000 in the summer of 2023. That was all due to a clear belief or a clear concern about where the economy was going, hard landing, soft landing and that sort of debate. I think once inflation was deemed to be more under control, and this view, I mean, the market until probably recently has not even been talking about a soft landing, been talking about sort of growth. So the average spreads probably came down closer to 500, right? Speaker 300:43:19Now I wouldn't say we were surprised by that. Obviously, we would like the loan portfolio to be as wide as possible. But in most fixed income instruments, when the benchmark moves as much as it has, credit spreads do tighten. And if you think about just the regular way loan and the examples I gave, the January 2020 loan was probably 7.5%, 8% kind of all in. And even a loan today is 10.5% sort of plus percent of all in. Speaker 300:43:45So we still think that's really interesting risk adjusted returns. Speaker 1100:43:51Perfect. That's wonderful color. I really appreciate it. Speaker 300:43:55No problem. Have a good day. Operator00:44:06Our next question comes from the line of Bryce Roe of B. Riley. Your line is now open. Speaker 1200:44:12Great. Thanks a lot. I wanted to maybe start on the supplemental dividend. Obviously, you all announced a variable dividend approach some time ago. And the special programs run its course as you've noted. Speaker 1200:44:32And it sounds like you've got a decent amount of spillover, maybe almost 3 quarters of the current regular plus supplemental in your pocket. So my question is if we do start to kind of get lower rates and lower earnings, lower NII associated with those lower rates, at what point does the supplemental kind of go away? Are you looking to get the spillover down to, let's call it, 2 quarters worth of base or base plus supplemental? Speaker 300:45:11Yes. And I'll let Brian and Stephen sort of add to this. But I think we have been pretty in trying to listen to the market for a long time about the dividend policy. I think which is why kind of where we are today, that 64% is the base as kind of rates were moving, it felt appropriate to have the supplemental next to that, we'll call it very comfortable base. And then we did make a statement to the market that we intended to really pay out kind of what we were earning hence that was the $0.05 sort of special, right? Speaker 300:45:50I think we are fortunate with the spillback dollars to ensure that we keep the total $0.70 consistent for an extended period of time. Obviously, the whole sector will have some earnings sort of pressure in a downward kind of rate environment. And I so I think that's clearly acknowledged. I think we are focused on though where are the levers that we do have for earnings growth. That would go back to the leverage question that we asked before as well as looking to reduce any non income producing assets to sort of help drive that. Speaker 300:46:30But if anything else, Stephen or Brian, you want to add? Speaker 700:46:34I think you said it well. Speaker 400:46:36Yes. Look, I think we do have a couple of larger positions that are non income producing that we are looking to monetize. We can't guarantee when or if that happens, but that also is pretty meaningful lever for us. Speaker 1200:46:52Yes. That's a good segue, Brian, for my kind of next question. Obviously, good optics around what happened at Global Jet coming off non accrual and clearly trying to simplify that capital structure to maybe get a better end game or outcome in place. Is there a kind of a similar playbook with JW Aluminum, given that it is legacy, it's a similar kind of instrument in the capital structure. It's kind of marked at the same level that Global Jet was. Speaker 1200:47:27Just kind of curious if there's an opportunity for to simplify that capital structure and maybe put it in a better position for that monetization outcome? Speaker 300:47:38Do you want to start? Speaker 400:47:39Yes. I mean, look, I think each company sort of has a different ownership base in senior securities. I think in the case of GJC Global Jet, we had a lot of alignment in terms of simplifying the capital structure. I think in the case of JWN, the capital structure is maybe a little bit more complex with different holders. But I think the focus on monetization of both is still front and center for us. Speaker 300:48:10And I think that's why we tried to provide the additional clarity in the prepared remarks about that 12% remains in that legacy sort of bucket, but 4 of those positions is roughly 70% or 75% of them. And I don't I wouldn't call it easy to be able to monetize them. 3 of them are kind of in equity positions where we're not in control, but I think we've done a lot to improve those positions, to stabilize those positions. And I think we've done a lot working together with the other partners in those deals to try to maximize the outcome. Speaker 400:48:49Okay. I Speaker 1200:48:50appreciate it. That's all for me. Operator00:48:54At this time, I am showing no further questions. I would like to turn it back to Dan Pietrzak for closing remarks. Speaker 300:49:02Well, thank you all for your time today. We're always available for any follow-up points that you may have. Please do enjoy the rest of your summer, and we look forward to speaking to you again in the fall. Have a good day. Operator00:49:14Thank you for your participation in today's conference. This concludes the program. You may now disconnect.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallFS KKR Capital Q2 202400:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsSlide DeckPress Release(8-K)Quarterly report(10-Q) FS KKR Capital Earnings Headlines4 Ultra-High-Yield Stocks That Pay 12% and Higher Dividends Are Passive Income WinnersApril 22 at 7:19 AM | 247wallst.comBlue Owl Capital (NYSE:OBDC) vs. FS KKR Capital (NYSE:FSK) Head-To-Head ComparisonApril 19, 2025 | americanbankingnews.comTrump purposefully forcing markets to crash…Whether you agree with the plan or not doesn’t matter. It’s happening. The only question is – are you ready for it?April 24, 2025 | Porter & Company (Ad)Contrasting Blue Owl Capital (NYSE:OBDC) & FS KKR Capital (NYSE:FSK)April 19, 2025 | americanbankingnews.comJim Cramer on FS KKR Capital Corp. (FSK): Too Much Leverage in This High-Yield BDCApril 18, 2025 | msn.comCritical Comparison: Blue Owl Capital (NYSE:OBDC) versus FS KKR Capital (NYSE:FSK)April 17, 2025 | americanbankingnews.comSee More FS KKR Capital Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like FS KKR Capital? Sign up for Earnings360's daily newsletter to receive timely earnings updates on FS KKR Capital and other key companies, straight to your email. Email Address About FS KKR CapitalFS 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.View FS KKR Capital ProfileRead more More Earnings Resources from MarketBeat Earnings Tools Today's Earnings Tomorrow's Earnings Next Week's Earnings Upcoming Earnings Calls Earnings Newsletter Earnings Call Transcripts Earnings Beats & Misses Corporate Guidance Earnings Screener Earnings By Country U.S. Earnings Reports Canadian Earnings Reports U.K. Earnings Reports Latest Articles Seismic Shift at Intel: Massive Layoffs Precede Crucial EarningsRocket Lab Lands New Contract, Builds Momentum Ahead of EarningsAmazon's Earnings Could Fuel a Rapid Breakout Tesla Earnings Miss, But Musk Refocuses and Bulls ReactQualcomm’s Range Narrows Ahead of Earnings as Bulls Step InWhy It May Be Time to Buy CrowdStrike Stock Heading Into EarningsCan IBM’s Q1 Earnings Spark a Breakout for the Stock? 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There are 13 speakers on the call. Operator00:00:00Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp. 2nd Quarter 2024 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. Operator00:00:21Please note that this conference is being recorded. At this time, Anna Kleinhan, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhan, you may begin. Speaker 100:00:33Thank you. Good morning, and welcome to FS KKR Capital Corp. 2nd quarter 2024 earnings conference call. Please note that FS KKR Capital Corp. May be referred to as FSK, the Fund or the Company throughout the call. Speaker 100:00:50Today'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 June 30, 2024. 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 100:01:29Any 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. Speaker 100:02:05For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's 2nd quarter earnings release that was filed with the SEC on August 6, 2024. 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 100:02:58Also 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. Speaker 200:03:08Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's Q2 2024 Earnings Call. During the Q2, FSK generated net investment income totaling $0.77 per share and adjusted net investment income totaling $0.75 per share as compared to our public guidance of approximately $0.74 and $0.71 per share respectively. As we look at our borrowers operating performance for the quarter, we continue to see strong results as most companies have adjusted to higher base rate environment. We did however see some stress on investments placed on non accrual in the prior quarters. Speaker 200:03:49Our workout investment teams have continued working toward resolutions for these portfolio companies and the team will go into more detail on this later in the call. From a liquidity perspective, we ended the quarter with approximately $4,700,000,000 of available liquidity. Our Board has declared a total 3rd quarter distribution of $0.70 per share consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. We continue to believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to a 12.1% yield on our June 30, 2024 net asset value of $23.95 per share and a yield of approximately 15% based upon our recent share price. As Dan will discuss in more detail during his comments, the market remains competitive as all lenders have experienced some amount of spread compression. Speaker 200:04:50During the first half of twenty twenty four, the investment team originated $2,700,000,000 of investments, of which $1,300,000,000 were originated during the Q2. From a forward looking perspective, despite the expectation that the Fed may begin reducing interest rates as early as September, we believe the elevated rate environment, coupled with our still significant level of spillover income, will continue to drive FSK's earnings and provide support for the attractive base and supplemental distributions we are paying our shareholders. 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 300:05:29Thanks, Michael. The first half of this year has been characterized by a strong economic backdrop. However, recent economic data has surfaced some concerns over the health of the U. S. Economy. Speaker 300:05:43Global markets have evolved and adapted to the current interest rate and inflationary environment. However, the domestic political environment and the international geopolitical situation remain extremely complex. As a result, and with certain recent market moves, we expect market volatility to remain elevated. Regardless of the election outcome, we believe government spending will likely remain elevated regardless of which political party wins the White House. Importantly, productivity in the U. Speaker 300:06:16S. Remains high, which should allow many companies to continue their level of sustained growth despite higher wages and inventory costs. As Michael mentioned, competition for new investments continues to remain elevated as M and A volumes remain below average. That being said, the investment opportunities we have been evaluating continue to be of higher quality as financial sponsors seek to return capital to LPs by monetizing many of their top performing assets. These market inputs have resulted in tighter pricing for new transactions as well as an increased level of requests from existing portfolio companies to amend and reduce pricing related to loans originated over the last 2 to 3 years. Speaker 300:07:06At the same time though, we are starting to see some stabilization in pricing for new deals, which we view positively. We believe the continued uncertainty around both the election and the timing of future rate cuts are the drivers of the still slower M and A environment. However, we still expect to see an increase in M and A activity over the coming months. During the Q2, we originated $1,260,000,000 of new investments. Approximately 70% of our new investments were focused on add on financings to existing portfolio companies and long term KKR relationships. Speaker 300:07:46Our new investments combined with $1,340,000,000 of net sales and repayments equated to a net portfolio decrease of $76,000,000 New originations consisted of approximately 81% in 1st lien loans, 2% in other senior secured debt, 1% in subordinated debt and 16% in asset based finance investments. Asset Based Finance Investments were a smaller portion of our 2nd quarter deployment activity, primarily due to the fact that the ABF investments still tend to be more opportunistic in nature than traditional direct lending. KKR has approximately $60,000,000,000 in ABF assets under management with a team of more than 50 people dedicated to the strategy. We believe that size and scale matter and that our approach is differentiated, which is why we have invested in building out the team and the infrastructure to support it. Our target for ABF investments in FSK remains 10% to 15% of the company's total portfolio. Speaker 300:08:54We continue to be pleased with the quality of new investments. During the Q2, our new direct lending investments had a weighted average EBITDA of approximately 100 and $27,000,000 5.1x leverage through our security and a weighted average coupon of approximately SOFR plus 5.50 dollars One example of a new deal originated by our non sponsor backed effort during the quarter was Rockefeller Capital Management, a financial services firm serving high net worth and ultra high net worth individuals. KKR Credit was co lead on the deal to refinance the existing capital structure and FSK as well as other KKR funds committed $100,000,000 of a $700,000,000 unitranche loan. Another investment to highlight is our investment in Cadence Education, a leading provider of early childhood education services in the U. S. Speaker 300:09:50KKR Credit was co lead on the new deal to refinance the existing capital structure. And FSK as well as other KKR funds committed $198,000,000 of the $680,000,000 total financing. While we look at aggregate trends across our portfolio companies, we observed 12% year over year EBITDA growth at portfolio companies in which we have invested in since April of 2018. Additionally, the weighted average and median EBITDA of our portfolio companies was $225,000,000 100 and $24,000,000 respectfully as of June 30, 2024. As of the end of the second quarter, nonaccruals represented 4.3% of our portfolio on a cost basis and 1.8% of our portfolio on a fair value basis. Speaker 300:10:45This compares to 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31, 2024. Brian will provide further details on the driver of the reduction of our non accrual rate later in the call. We also believe it is helpful to provide the market with information based on FSK's assets originated by KKR Credit. Non accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FS KKR Advisor were 2.4% on a cost basis and 0.6% on a fair value basis as of June 30, 2024. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail. Speaker 400:11:40Thanks, Dan. At the end of the second quarter, our investment portfolio had a fair value of $14,100,000,000 consisting of 208 portfolio companies. This compares to a fair value of $14,200,000,000 205 portfolio companies as of March 31, 2024. Leverage remained relatively flat quarter over quarter and the decline in our investment portfolio's fair value was primarily driven by unrealized depreciation relating to 3 investments, Miami Beach Medical Group and BioRefirming, which has been on non accrual and Keller Meyer Bergenson Services, which was restructured in the Q1. While smaller investments from a cost and fair value perspective, Miami Beach and Bowery continue to be under pressure and we are working with both companies to maximize our recovery. Speaker 400:12:30We are pleased with the progress that KBS is making under our collective ownership and are optimistic about its future prospects. At the end of the Q2, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 58% 1st lien loans and 66% senior secured debt as of June 30. In addition, our joint venture represented 9.8% of the fair value of our portfolio. As a result, when investors consider our entire portfolio looking through to the investments in our joint venture, then 1st lien loans totaled approximately 67% of our portfolio and senior secured investments totaled approximately 74% of our portfolio as of June 30. Speaker 400:13:24The weighted average yield on recurring debt investments was 12% as of June 30, a decrease of 10 basis points compared to 12.1% as of March 31, 2024. The decrease is primarily attributable to lower spreads on new investments and the repricing of certain investments during the quarter. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. During the Q2, we amended our investment in Global Jet Capital, which simplified and enhanced the company's capital structure. As we have discussed on prior earnings calls, we have been pleased with the accomplishments of GlobalJets' management team during recent years as the company made a strategic shift to be more selective with originations and increase return targets, while also reducing SG and A to drive a higher ROE. Speaker 400:14:17Importantly, the company's approximately $2,000,000,000 jet lease and loan portfolio has no delinquencies and is experiencing attractive renewal or sale opportunities on assets that are coming off lease. Speaker 300:14:29The business is in Speaker 400:14:30a stable and competitive position and has generated an ROE approaching 10% in each of the last 2 years. Additionally, the company has returned $130,000,000 of capital to FSK over roughly the last 2 years. The business continues to execute its ABS strategy, closing B Jet's 20 20 four-one in April at attractive terms, helping drive meaningful capital return into the business. During the Q2, FSK received $51,000,000 of distributions, which were used to fully repay our structured mezzanine position and partially repay our PIK preferred position. In conjunction with this distribution, our PIC preferred equity investment was restructured into a perpetual preferred. Speaker 400:15:15This repayment and corresponding amendment was executed in a manner in which we preserved all of our pre existing economics while better positioning the company for future growth. As a result of these actions, $309,400,000 of costs and $256,600,000 of fair value associated with our Global Jet was removed from non accrual status. We continue to remain focused on rotating the remaining 12% of legacy investment exposure. Production Resource Group, Global Jet Capital, JW Aluminum and our performing 1st lien position in PSKW, all of which we've discussed on either this or prior earnings calls, represent approximately 9% of the 12% total legacy exposure and we continue to be satisfied with their performance. In addition, since Q2 2018, we have achieved significant portfolio rotation out of cyclical industries. Speaker 400:16:12We have rotated over $3,000,000,000 of legacy investments out of materials, energy, consumer durables and consumer discretionary into new investments in more defensive industries like software and services, healthcare equipment and services and commercial and professional services. And with that, I'll turn the call over to Steven to go through our financial results. Speaker 500:16:35Thanks, Brian. Our total investment income increased by $5,000,000 during the Q2 to $439,000,000 The primary components of our total investment income during the quarter were as follows. Total interest income was $353,000,000 an increase of $3,000,000 quarter over quarter. Dividend and fee income totaled $86,000,000 an increase of $2,000,000 quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows: $52,000,000 of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $16,000,000 during the quarter and fee income totaling approximately $18,000,000 during the quarter. Speaker 500:17:25Our interest expense totaled $115,000,000 during the quarter, a decrease of $1,000,000 quarter over quarter and our weighted average cost of debt was 5.3% as of June 30. Management fees totaled $54,000,000 a decrease of $1,000,000 and incentive fees totaled $45,000,000 an increase of $2,000,000 quarter over quarter. Other expenses totaled $10,000,000 an increase of $2,000,000 quarter over quarter. The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 1Q 2024 net asset value per share of $24.32 was increased by GAAP net investment income of $0.77 per share and was decreased by $0.39 per share due to a decrease in the overall value of our investment portfolio. Speaker 500:18:25Our net asset value per share was reduced by our $0.70 per share quarterly distribution and also the $0.05 per share special distribution. These activities result in our June 30, 2024 net asset value per share of Speaker 300:18:43$23.95 Speaker 500:18:46From a forward looking guidance perspective, we expect Q3 2024 GAAP net investment income to approximate $0.72 per share and we expect our adjusted net investment income to approximate $0.70 per share. Detailed third quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $351,000,000 We expect recurring dividend income associated with our joint venture to approximate $47,000,000 a decrease of approximately $5,000,000 quarter over quarter. The expected decrease is the result of recent portfolio company paydowns and the corresponding recycling of capital. We expect other fee and dividend income to approximate $26,000,000 during the Q3. Speaker 500:19:40The expected decrease is due to a lower level of anticipated asset based finance dividends. These dividends tend to fluctuate on a quarterly basis for various reasons. From an expense standpoint, we expect our management fees to approximate $53,000,000 We expect incentive fees to approximate $42,000,000 We expect our interest expense to approximate $117,000,000 and we expect other G and A expenses to approximate $10,000,000 And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share comprised of $2.80 per share of quarterly base and supplemental distributions and $0.10 per share of previously paid special distributions. Turning to our capital structure in June, we issued $600,000,000 of 6.875 percent unsecured notes due 2029, which were subsequently swapped to floating rate pursuant to interest rate swap agreements that mature when the notes are due in 2029. Proceeds from the unsecured note issuance are used to repay outstanding debt on our revolver. Speaker 500:21:02With this issuance, we further strengthened our balance sheet and liquidity position and extended our maturity ladder. Our gross and net debt to equity levels were 119% and 109%, respectively, at June 30, 2024, compared to 117% and 109% at March 31, 2024. At June 30, our available liquidity was $4,700,000,000 and approximately 72% of our drawn balance sheet and 47% of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions. Speaker 200:21:47Thanks, Stephen. In closing, we've had a productive first half of twenty twenty four. First, origination activity increased from muted 2023 levels, resulting in deployment of capital into compelling new transactions. 2nd, our underlying portfolio companies generally continue to perform well and we have made significant progress restructuring certain non accruing investments. Lastly, we continue to fully earn both our base and supplemental distributions on a per share basis and pay out a 15% dividend yield based on our currently expected full year distribution of $2.90 per share in our recent market share price. Speaker 200:22:27As we look toward the second half of the year and beyond, we believe the future opportunity for our platform is extremely attractive. On behalf of the team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions. Operator00:22:43Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Finian O'Shea of Wells Fargo Securities. Your line is now open. Speaker 600:23:13Hey, everyone. Good morning. Good morning. First question, can you talk about the spillover picture? What sort of I don't know if you guys give the dollar number, but I think it's probably a pretty stretched percentage of income or NAV and what plans you have with that or what sort of options you're looking at? Speaker 300:23:42Yes. And I'm happy to start there and Stephen might want to add to that. I think we've always thought about having 2 to 3 quarters of spillbacks sort of income there. I think we're kind of the middle to sort of the upper end of that range, which I think we're happy with. I think that provides a nice protection as we think about longer term dividend coverage. Speaker 300:24:05But Stephen, anything you want to add there? Speaker 700:24:07Yes. Fin, I would just say that the $0.05 per quarter special distribution that we have just completed that program, that took us from kind of really close to 3 quarters of spillover down to something in the sort of 2.8 range now in terms of quarters of dividends. So that program did everything we wanted it to do. And now we're in the position, as Dan says, if rates are to fall, then we have that cushion from a distribution standpoint if we wish to use it. Speaker 600:24:42Okay. That's helpful. And I think, Stephen, your guidance, I heard a lower income on the ADEF book. Is that correct? And, seeing what the market dynamics are or if it's idiosyncratic? Speaker 300:24:58I don't even think it's idiosyncratic fitness. So those deals, I think because they're a little bit more highly structured are not necessarily just as consistent as it relates to dividends on a quarter by quarter basis. I think there's great consistency over what's called the life of the deal. I think we've been very pleased with what we've seen in the market there. Some of the tailwinds surrounding regional banks have persisted. Speaker 300:25:33That's been a nice amount of deal flow. And I think we like the footprint we have as a platform there. But I don't think it's anything more than timing. Great. Speaker 600:25:44That's all for me. Thank you. Speaker 300:25:46Thank you, Tim. Speaker 700:25:48One moment for our next question. Operator00:25:54Our next question comes from the line of Mark Hughes of Truist. Your line is now open. Speaker 800:26:00Yes, thank you. Good morning. Where you had refis that perhaps you passed on, what was your experience in terms of were you more selective this quarter than in prior quarters? Is that a spread issue? How much was the competition a driver of that? Speaker 800:26:21And if you addressed this earlier, I apologize, I jumped on the call a little bit late. Speaker 300:26:25No, no, no worries. Good morning, Mark. I think you probably are broadening that to both refinancings as well as kind of repricings. I think from time to time if these things are coming up and we're either a little bit more negative on the sector or the company, we may very well use that as an opportunity to lighten our position or look to potentially get repaid. So I would just call it a credit call And that could be again company leverage sort of sector. Speaker 300:26:59And I think it's our job to be dynamic as we think about Speaker 400:27:03And generally, we see repricing for very well performing credits where the company and sponsor come to us and ask us to mark the credit to market from a pricing perspective. And I think our view is that given that those loans tend to be passed or call protection, The idea of staying invested on market terms in a credit that we know and like is viewed positively because our alternative would be to get repaid and then go out and find a new investment at the same spread level. So we think it makes all the sense in the world to play in the right ones and we'll continue to do so. Speaker 300:27:40Yes. Mark, just one more point there. I think when we are doing that though as a general rule of thumb, we are either looking for some sort of upfront fee as it relates to the repricing or at a minimum extending Call Pro to keep some optionality for the benefit of the lender. Absolutely. Speaker 800:27:59Understood. Thanks for that clarification. The opportunities in Asset Based Finance, how do you see that as we sit here today? Speaker 600:28:11Yes. I mean, I was alluded Speaker 300:28:12to this with Fin's question. I think broad stroke positive, right? Just if you think about the setup of the market, large sized market, in our mind, close to $7,000,000,000,000 or sort of on the path to there. That's bigger than the high yield bond market, the syndicated loan market, the direct lending market combined. There has not been, let's call it, scaled capital raise there. Speaker 300:28:39There's not a lot of scale players who like ourselves, I think we're fortunate with $60 odd,000,000,000 of AUM and 50 plus people. So I think just the setup as well or the setup is strong. We have seen, we'll call it certain tailwinds there. We've been very active in buying loan portfolios from banks that we've some of those deals have been pretty sort of public sort of out there. I think we're able to source attractive risk adjusted returns there. Speaker 300:29:12So it's a space we remain quite constructive on. Speaker 800:29:15Yes. And I'm not sure if you touched on this, but anything recently with some of the turbulence in the economy, anything you've heard from portfolio companies that would indicate any kind of material change? Are you feeling like a steady she goes, at least as you're seeing in your portfolio companies are experiencing it? Speaker 300:29:38Yes. I mean, it's that's probably a pretty broad question, right? I mean, I think the recent economic volatility in the equity markets has been a bit kind of yo yo like for the last 4 or 5 trading days. I think that probably spikes a little bit more focus. I think it's our job to be in the cautious camp generally. Speaker 300:30:01I think I would probably be balanced with on one hand, we've been pleased with what we've seen. You can see that from the EBITDA growth numbers. On the other hand, I think we have to clearly acknowledge there's less free cash flow in the system considering where rates are. That makes or that provides certain challenges. If there is sort of a bump in the road, the company just doesn't have the same flexibility or moves they might have had sort of prior. Speaker 300:30:37So I think that's kind of top of mind. I mean you touched on the asset back sort of comment. I think we have centered ourselves if we are investing in consumer related exposures there in the more prime part of the market, I think we've been quite happy with what we've seen there as it relates to the performance there. Probably a little bit more worried as you go down market credit quality on the consumer side. Speaker 800:31:06Appreciate it. Thank you. Speaker 700:31:08Thank you. One moment for our next question. Operator00:31:16Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open. Speaker 900:31:22Hey, good morning. Thanks for taking my question. Just one follow-up on the asset base finance contribution to 3rd quarter income, the dividends there. And I just want to get a better understand, is there anything that drives the timing, any kind of macro inputs or is it really just really difficult to predict and could be a little episodic there? Thanks. Speaker 300:31:49No problem. And I wouldn't think about it at all in kind of the macro context. Obviously, if macro environment changes meaningful one way or the other, the portfolio of financial or hard assets that were invested in might sort of change. I would just really equate this more to a timing sort of point, right? And I'll give you maybe 2 simple examples, right? Speaker 300:32:13If we own a portfolio of aviation leasing assets, There's and those are contracted so the cash flows we're getting in. But if we're in the midst of selling certain of those assets, those asset sales, some might happen 1 quarter, some might happen a couple quarters down the road. So a bit non linear in that sort of sense. There could be other deals where we've used the capital markets to finance ourselves. Sometimes those capital markets transactions will divert cash flow to the senior tranche to delever themselves. Speaker 300:32:47That's not negative at all from a value perspective. It's a timing of cash flow point. But those would be 2 probably simplistic examples. Yes. Speaker 400:32:55And I wouldn't characterize it as difficult to predict. I think Dan said it right, which is just nonlinear in certain cases. Speaker 900:33:03Got you. Got you. Super helpful there. Super helpful there. And then just one follow-up, if I may. Speaker 900:33:09In terms of the leverage, I think in the past, you've talked about being closer to, I think, the higher end of the targeted range. Just wanted to see if there's any kind of updated outlook. Where would you feel comfortable in terms of leverage trending over the near term? Thanks. Speaker 300:33:25No. And that's a good question, Ken. Thank you. I think there's a couple of points there. I don't think our ranges has changed, right? Speaker 300:33:34We like the 1 to kind of 1 in the quarter. I would argue we're at the kind of lower side of that on that net basis. So I think there's some room to kind of add there. I think that's helpful and can provide a certain amount of benefits to the earnings side. There's also additional leverage capacity down at the joint venture level, which would be the same. Speaker 300:33:58I think we are quite happy with the liability side of our balance sheet. We were happy to get that $600,000,000 deal done this quarter. I think the number was roughly 72% of our debt outstanding this quarter is from the unsecured bond market. We've got a lot of undrawn capacity on the revolver. We've effectively funded our 24 maturities. Speaker 300:34:24So I think we are I think we've got some room there would be the short answer. Speaker 900:34:30Great. Great. Thank you very much, Dan. Speaker 300:34:33Thanks. Have a good day. Speaker 700:34:35One moment for our next question. Operator00:34:40Our next question comes from the line of Melissa Wedo of JPMorgan. Your line is now open. Speaker 1000:34:47Good morning. Thanks for taking my questions today. A quick follow-up. I think I caught the average EBITDA on new originations, but I might have confused that with average EBITDA in the portfolio. Was it the case that the average EBITDA on originations came down quite a bit this quarter from the Q1? Speaker 300:35:14Give me one second Melissa just to sort of touch base on that. Yes, I think the average EBITDA was $127,000,000 in the quarter. I think that's probably more in line with the median EBITDA of the entire portfolio. I don't probably read that much into that other than just kind of the deal flow that occurred during this 90 day period. That said, I think it is important to note, I mean, we're pretty focused on having a broad origination footprint, right? Speaker 300:35:50We do talk about being focused on the upper end of the middle market, but we're usually defining that as $50,000,000 to $150,000,000 of EBITDA. We will do deals that are below that. I'd say probably $25,000,000 is kind of a floor. They're probably a higher bar the smaller the company is. That's just what we've seen from a risk perspective or where we're getting we think, appropriately paid for the risk. Speaker 300:36:23And then it is more than just a sponsor sort of effort, right? We're focused on both the sponsor as well as the non sponsor channels. The entire goal is to make the origination funnel as big as possible, so we can try to be as selective as possible when we're picking new deals to do. Speaker 400:36:41And I'd also point out that the weighted average spread on those transactions was S plus 5.50. Dan mentioned leverage was right around 5.1 times and LTV was just a smidge north of 40%. So feel good about those credits. Speaker 1000:36:59Got it. Thank you for that clarification. It does seem a little bit consistent with what we've heard from some other teams where some of the better risk adjusted opportunities were a little bit lower than sort of the super upper middle market range more recently. I guess, question, when you look at your pipeline going forward, do you expect that to sort of persist? And or do you expect to go back up to the really upper tier of the middle market? Speaker 1000:37:34And then I'll leave it there. Thank you. Speaker 300:37:38Yes. No, I think it's fair to expect that that's where it would sort of continue to sort of play out, right? Because if we are defining that sweet spot as the 50 to 150, that's kind of where the medium of the portfolio sort of sitting. Now I'm not surprised that others would be saying that that very upper end or even these larger companies, the $250,000,000 sort of plus, are a little bit less attractive sort of now than they were before. We would agree with that. Speaker 300:38:11You had a period in 2022 and 2023 where the syndicated loan market was closed. The private debt market was the only game in town. So you were getting paid, in our opinion, kind of exceptionally well for those. Now those just companies would have more options. So that wouldn't sort of surprise us. Speaker 300:38:31And we have always had the view that these markets will coexist. They have for some sort of period of time. We just have the view that volatility will persist and will provide opportunities for ourselves and other private debt providers. Speaker 1000:38:51Thank you. Operator00:38:53Thank you. Speaker 700:38:55One moment for our next question. Operator00:39:00Our next question comes from the line of Sean Paul Adams of Raymond James Investments. Your line is now open. Speaker 1100:39:08Good morning. On Keller Meyer, you guys said you are pretty happy with the progress, but the equity was written down approximately 50%. Should we expect that even if progress continues to be positive, if there's any more downside in that asset? Speaker 300:39:27Yes. I think that's a very fair question. I think we are happy with all the work that us and the other lenders there have been doing as we've moved that company outside of the sponsor ownership and inside or under the control of that sort of group. These are kind of herculean lifts. We've got a lot of great resources on our workout and restructuring team, as do I think the other lenders involved there. Speaker 300:40:07So the equity sort of mark is a little bit of a point in time with how earnings may have either moved or market multiples might have moved. But I think when we talk about the progress, talking about there's a longer term gain there about stabilizing and hopefully growing that business. Speaker 400:40:25Yes. And look, and I think in terms of KBS, a couple more things. Clearly, given that the equity is levered, small movements in EBITDA are going to have outsized impacts on a quarterly basis on that mark. We are happy with where this thing is trending. We are working with management. Speaker 400:40:48We have a new value creation plan in place. We're definitely focused operationally on this business on how to reduce churn, improve operations, reduce SG and A, etcetera, etcetera. A lot of work is being done in the background there. And I think really the proof in that is going to be over the longer term and we are bullish on the prospects of this business. Speaker 1100:41:14Perfect. Thank you for that color. Turning to just new originations and spread compressions. You guys said that the quality of the investment opportunities is high and that the top performers are actually being moved by the sponsors. How much, if any, of the current spread compression is actually mix related, due to the higher quality companies already having embedded lower spreads? Speaker 1100:41:43And how much is like for like credit quality spread compression versus just raw competitive pressure? Speaker 300:41:52Yes, there's probably not a perfect answer to that. I would probably try to break it down a little bit. We have seen, let's say, these higher quality businesses being the ones that are being moved by certain sponsors, right? We do know very clearly there's a fair amount of pressure on GPs broadly from their LPs to monetize assets so those LPs can get some money back. And these better assets, I think, just have not had the moves on valuation multiples. Speaker 300:42:27So they're more perfect sort of candidates, to sell. I think or the spread compression probably more broadly, I would probably go through the journey of if you think about January 2022, the regular way deal was, let's call it, dollars 5.75 that probably gapped out to $650,000,000 in the summer of 2023. That was all due to a clear belief or a clear concern about where the economy was going, hard landing, soft landing and that sort of debate. I think once inflation was deemed to be more under control, and this view, I mean, the market until probably recently has not even been talking about a soft landing, been talking about sort of growth. So the average spreads probably came down closer to 500, right? Speaker 300:43:19Now I wouldn't say we were surprised by that. Obviously, we would like the loan portfolio to be as wide as possible. But in most fixed income instruments, when the benchmark moves as much as it has, credit spreads do tighten. And if you think about just the regular way loan and the examples I gave, the January 2020 loan was probably 7.5%, 8% kind of all in. And even a loan today is 10.5% sort of plus percent of all in. Speaker 300:43:45So we still think that's really interesting risk adjusted returns. Speaker 1100:43:51Perfect. That's wonderful color. I really appreciate it. Speaker 300:43:55No problem. Have a good day. Operator00:44:06Our next question comes from the line of Bryce Roe of B. Riley. Your line is now open. Speaker 1200:44:12Great. Thanks a lot. I wanted to maybe start on the supplemental dividend. Obviously, you all announced a variable dividend approach some time ago. And the special programs run its course as you've noted. Speaker 1200:44:32And it sounds like you've got a decent amount of spillover, maybe almost 3 quarters of the current regular plus supplemental in your pocket. So my question is if we do start to kind of get lower rates and lower earnings, lower NII associated with those lower rates, at what point does the supplemental kind of go away? Are you looking to get the spillover down to, let's call it, 2 quarters worth of base or base plus supplemental? Speaker 300:45:11Yes. And I'll let Brian and Stephen sort of add to this. But I think we have been pretty in trying to listen to the market for a long time about the dividend policy. I think which is why kind of where we are today, that 64% is the base as kind of rates were moving, it felt appropriate to have the supplemental next to that, we'll call it very comfortable base. And then we did make a statement to the market that we intended to really pay out kind of what we were earning hence that was the $0.05 sort of special, right? Speaker 300:45:50I think we are fortunate with the spillback dollars to ensure that we keep the total $0.70 consistent for an extended period of time. Obviously, the whole sector will have some earnings sort of pressure in a downward kind of rate environment. And I so I think that's clearly acknowledged. I think we are focused on though where are the levers that we do have for earnings growth. That would go back to the leverage question that we asked before as well as looking to reduce any non income producing assets to sort of help drive that. Speaker 300:46:30But if anything else, Stephen or Brian, you want to add? Speaker 700:46:34I think you said it well. Speaker 400:46:36Yes. Look, I think we do have a couple of larger positions that are non income producing that we are looking to monetize. We can't guarantee when or if that happens, but that also is pretty meaningful lever for us. Speaker 1200:46:52Yes. That's a good segue, Brian, for my kind of next question. Obviously, good optics around what happened at Global Jet coming off non accrual and clearly trying to simplify that capital structure to maybe get a better end game or outcome in place. Is there a kind of a similar playbook with JW Aluminum, given that it is legacy, it's a similar kind of instrument in the capital structure. It's kind of marked at the same level that Global Jet was. Speaker 1200:47:27Just kind of curious if there's an opportunity for to simplify that capital structure and maybe put it in a better position for that monetization outcome? Speaker 300:47:38Do you want to start? Speaker 400:47:39Yes. I mean, look, I think each company sort of has a different ownership base in senior securities. I think in the case of GJC Global Jet, we had a lot of alignment in terms of simplifying the capital structure. I think in the case of JWN, the capital structure is maybe a little bit more complex with different holders. But I think the focus on monetization of both is still front and center for us. Speaker 300:48:10And I think that's why we tried to provide the additional clarity in the prepared remarks about that 12% remains in that legacy sort of bucket, but 4 of those positions is roughly 70% or 75% of them. And I don't I wouldn't call it easy to be able to monetize them. 3 of them are kind of in equity positions where we're not in control, but I think we've done a lot to improve those positions, to stabilize those positions. And I think we've done a lot working together with the other partners in those deals to try to maximize the outcome. Speaker 400:48:49Okay. I Speaker 1200:48:50appreciate it. That's all for me. Operator00:48:54At this time, I am showing no further questions. I would like to turn it back to Dan Pietrzak for closing remarks. Speaker 300:49:02Well, thank you all for your time today. We're always available for any follow-up points that you may have. Please do enjoy the rest of your summer, and we look forward to speaking to you again in the fall. Have a good day. Operator00:49:14Thank you for your participation in today's conference. This concludes the program. You may now disconnect.Read morePowered by