FS KKR Capital Corp.

Welcome to the FSKKR Capital Corp's first 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 instructions on entering the queue. Please note, this conference is being recorded. At this time, Robert Pond, Head of Investor Relations, will proceed with the introduction. Mr. Pond, you may begin.

Thank you.

Good morning and welcome to KKR Capital Corps first quarter 2023 earnings conference call. Please note that capital court may be referred to as the fund or the company throughout the call. 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 issued this morning. 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 March 31st, 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. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC this morning, May 5, 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 Dan Pietrzak, Chief Investment Officer and Co-President, Brian Gerson, Co-President, and Stephen Lilly, Chief Financial Officer. 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 Dan.

Thank you, Robert, and welcome, everyone, to FSKKR Capital Corp's first quarter 2023 earnings conference call. Unfortunately, Michael Forman is not able to participate on today's call due to an unavoidable scheduling conflict. For the first quarter, our team again delivered strong operating results, as FSK generated net investment income totaling 81 cents per share and adjusted net investment income totaling 78 cents per share, as compared to our public guidance of 77 cents and 74 cents per share, respectively. Our net asset value increased modestly quarter over quarter, as the slight decline in the value of our investment portfolio was offset by out-earning our $0.70 per share distribution and accretive share repurchases. M&A activity remained muted during the first quarter. As a result, our investment team originated approximately $270 million of new investments. That said, we are seeing activity level and inquiries ramp up in recent weeks. From a liquidity perspective, we ended the first quarter with approximately $3 billion of available liquidity. With regard to our share repurchase program, during March we completed the remaining portion of our previously committed $100 million buyback program as we repurchased $32 million of shares. Based on our continued strong financial results, our board has declared a second quarter distribution of 70 cents per share, which consists of our base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. As a reminder, based on the overall strength of the company's earnings power, we expect our quarterly supplemental distribution to total a minimum of 6 cents per share throughout 2023. and possibly beyond, equating to a minimum of 70 cents per share per quarter of quarterly distributions during 2023. Additionally, we are pleased to announce special distributions totaling 15 cents per share, which will be paid in three equal installments between now and the end of 2023. We are pleased to be in a position to share this additional income with investors. as we have worked diligently over the last several quarters to achieve our targeted level of spillback income. Our special distributions equate to an additional 5 cents per share per quarter on top of our regular quarterly and supplemental distributions over the next three quarters. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.95 per share of total distributions in 2023, which equates to 11.8% yield on our March 31, 2023 net asset value and an annualized yield of approximately 16% based on our recent share price. We further believe that our ability to provide shareholders with such an attractive distribution is based on the significant portfolio rotation work we have accomplished over the last five years. Turning to the current market and economic environment, the volatility we experienced in the financial markets during 2022 has continued during the first quarter of 2023, especially with the challenges in the banking space. We continue to expect inflation to remain elevated, and we believe the higher interest rate environment will last longer than some market observers are expecting. Should our views prove accurate, then we believe floating rate asset structures, coupled with investment strategies which contain a degree of inflation protection, such as large defensive portfolio companies and asset-based finance investments tied to collateral pools, will remain attractive. While we do expect M&A transaction volumes to remain below average, for the next few quarters. The increased volatility and economic uncertainty does create compelling investment opportunities for FSKKR and other large-scale players. We and other private debt investors are able to negotiate attractive pricing, enhance call protection, and lower overall leverage levels for extremely high-quality companies. Spreads on new originations are approximately 100 basis points higher compared to a year ago. Additionally, large private debt platforms like FSK will continue to benefit from incumbency positions to support existing portfolio companies, as well as protections in our loan documents, allowing us to reprice existing investments to current market rates, which we believe is quite important from a portfolio perspective. Our investment portfolio continues to perform well as our borrowers have adapted to the current operating environment and have successfully demonstrated an ability to pass through price increases, which have helped maintain acceptable EBITDA margins. As I mentioned earlier, during the first quarter, we originated $270 million of investments. These investments were focused on funding and add-ons to existing portfolio companies. resulting in approximately 87% of our originations coming from opportunities and companies previously invested in by KKR. Our new investments, combined with $264 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $6 million. In terms of interest coverage, At the end of the first quarter, our portfolio companies had a median interest coverage of 1.7 times. For clarity, this was calculated using base rates as of December 31st, 2022 to align with portfolio company financials. As evidenced by our lower than average origination activity, we remain extremely selective in our underwriting and origination process. Also, during periods of market stress, we benefit from our portfolio monitoring unit and our dedicated workout and governance teams. These dedicated internal teams are able to work seamlessly alongside our deal teams to navigate situations which potentially arise during more challenging operating environments. That being said, through the end of the first quarter, we have not experienced a significant increase in amendment requests. which we view as a positive. With that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks, Dan.

As of March 31, 2023, our investment portfolio had a fair value of $15.3 billion, consisting of 189 portfolio companies. This compares to a fair value of $15.4 billion and 197 portfolio companies as of December 31, 2022. At the end of the first quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio. We continue to focus on senior secured investments as our portfolio consisted of 61% first lien loans and 69.4% senior secured debt as of March 31st. In addition, our joint venture represented 9.1% of the fair value of the portfolio and asset-based finance investments represented 11.7%, which are comprised predominantly of first lien loans or secured asset-based finance investments. Looking through to the investments in our joint venture, our total portfolio consisted of 77% senior secured debt as of March 31st. During the first quarter, our new originations consisted of approximately 82% in first lien loans 11% in asset-based finance investments, 3% in subordinated debt, and 4% in equity and other investments. The weighted average yield on accruing debt investments was 11.7% as of March 31, 2023, compared to 11.4% as of December 31. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the first quarter was primarily associated with the continued rise in base rates, as well as higher yields on new originations during the past few quarters. Including the effects of the investment activity we experienced during the first quarter, as of March 31, 2023, approximately 86% of our total investment portfolio is now comprised of investments originated either by KKR credit or the FS KKR Advisor. This compares to 84% at March 31, 2022. During the first quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of approximately $17 million. The largest negative movers in our portfolio, which were impacted by credit performance-related issues during the quarter, were WITR and Reliant Rehab. Witter is a global leader in the outsourced elevator component segment with a focus on the production of elevator doors and the manufacturing of adjacent components for both new equipment markets and the aftermarket. The company has been facing persistent inflation headwinds as well as a slowdown in construction in China, which has led to us placing our second lien loan on non-accrual this quarter. Reliant Rehab offers physical, occupational, and speech therapy services to skilled nursing facilities. The company has been affected by macroeconomic factors across the healthcare services industry, including a decline in labor productivity, an increase in contract labor given a tight labor market in the U.S., and inflation-driven wage increases. I'd also like to comment on another investment, Miami Beach Medical Group. Miami Beach Medical Group provides primary care, specialty care, in-house pharmacy, and home visits, primarily focusing on Medicare Advantage members. The company has recently experienced weaker performance due to lower membership growth, elevated medical expenses, and higher operating expenses related to wage inflation. In the first quarter, we provided an amendment which included a $50 million first lien debt pay down at par from the sponsor. During the quarter, we placed two debt investments on non-accrual with a combined fair market value of $72 million and a cost of $140 million. In addition, there were three debt investments fully removed from non-accrual status with a combined fair market value of $7 million and a cost of $29 million. Based on the first quarter's activity, as of March 31, 2023, non-accruals totaled 5.5% of our portfolio on a cost basis and 2.7% on a fair value basis compared to 4.9% on a cost basis and 2.4% on a fair value basis as of December 31, 2022. We also thought it would be helpful to provide the market with information based on the assets originated by KCR credit. As of the end of the quarter, non-accruals relating to the 86% of our total portfolio, which has been originated by KKR Credit and the FSKKR Advisor, were 2.8% on a cost basis and 0.8% on a fair value basis. And with that, I'll turn the call over to Stephen.

Thanks, Brian. As Dan mentioned earlier, we are pleased to reward shareholders with a declaration of a $0.15 per share special distribution. which will be paid in three equal installments in May, August, and November of this year. Combining our quarterly base and supplemental distributions of 70 cents per share with the three 5 cent per share quarterly special distributions, our total distribution for 2023 should be a minimum of $2.95 per share. This represents an 11.8% yield on our March 31, 2023 net asset value of $24.93 per share and a 16% yield on our current stock price, both of which we view as quite attractive. Turning to our financial results for the first quarter, total investment income increased by $7 million quarter over quarter, driven by increased interest income. The components of our total investment income during the quarter were as follows. Total interest income was $369 million, an increase of $9 million quarter over quarter. Dividend and fee income totaled $87 million, a decrease of $2 million quarter over quarter. Our dividend and fee income during the first quarter is summarized as follows. $55 million of recurring dividend income from our joint venture. Other dividends from various portfolio companies totaling approximately $27 million. and fee income totaling approximately $5 million. Our interest expense totaled $114 million, an increase of $5 million quarter over quarter, due to the impact of rising base rates on our secured debt facilities. Our weighted average cost of debt was 5.1% as of March 31st. Management fees totaled $58 million, a decrease of $1 million quarter over quarter, and incentive fees totaled $46 million during the first quarter. The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 4Q 2022 net asset value per share of $24.89 was increased by GAAP net investment income of 81 cents per share and was decreased by 11 cents per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our 70 cents per share dividend paid during the quarter and increased by 4 cents per share due to share repurchases. The sum of these activities results in our March 31, 2023 net asset value per share of $24.93. From a forward-looking guidance perspective, we expect second quarter 2023 GAAP net investment income to approximate 78 cents per share. And we expect our adjusted net investment income to approximate 75 cents per share. Detailed second quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $362 million as we continue to expect the low average M&A activity during the quarter. We expect recurring dividend income associated with our joint venture to approximate $55 million. We expect other fee and dividend income to approximate $30 million. From an expense standpoint, we expect our management fees to approximate $58 million. We expect incentive fees to approximate $45 million. We expect our interest expense to approximate $115 million, and we expect other G&A expenses to approximate $10 million. As a reminder, the three-cent per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting. This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected. In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 118% respectively at March 31, 2023, both of which are unchanged from their fourth quarter levels. At March 31, our available liquidity was $3 billion. At the end of the first quarter, approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt, and the overall effective weighted average cost of debt was 5.1%. And with that, I'll turn the call back to Dan for a few closing remarks before we open the call for questions.

Thanks, Stephen. In closing, we are pleased that our portfolio rotation and achievement of operational goals have reached the point where we can provide shareholders with such an attractive overall distribution rate for 2023 and possibly beyond. And while uncertainty in the overall economy remains, we believe FSK is well positioned from a portfolio construction standpoint to continue to deliver strong results for our shareholders. With that, operator, we'd like to open the call for questions.

Thank you. If you would like to ask a question at this time, please press star 11 on your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. And our first question comes from the line of John Heck with Jefferies. Your line is open. Please go ahead.

Good morning, guys. Thanks very much for taking my question. Dan, I think you said you're seeing activity pick up more recently in terms of deals. Maybe can you talk about the source and characteristics of the pipeline?

Happy to, John, and good morning. I do think it's a little bit early in those processes, but I think we're just seeing more either inbounds or inquiries from you know, either sell-side firms or companies themselves or, quite frankly, people who we lend money to today who might be interested in us, you know, indicating financing terms if they go sort of sell the business. I don't think that's any guarantees of a big near-term sort of M&A sort of push, but I think it was a bit of green shoots that we are seeing. My sense is the overall M&A environment remains, you know, somewhat lower or slow for the rest of this year, but we'll start to pick up, you know, very end of the year into 24.

Okay. And then you mentioned, I think you mentioned like a hundred basis points overall spread pickup. You know, obviously there's dislocations in certain part of the markets. You guys, you guys have your ABS and your, and then obviously the non ABS portfolios, maybe can you, where's the, where's the best opportunity in the widest spreads? Is there any kind of arbitrage that you guys are focusing on in the market at this point?

Yeah, I'm not sure it's an arbitrage, but I'd probably split it in two pieces. The direct lending market is extremely attractive today for both new deals or even add-ons to these existing portfolio companies. The 100 basis points I mentioned is really where we see credit spreads today on new loans versus where they may have been let's call it the start of 22, I'd couple that with probably an extra point on average of upfront fees, probably better call pro. And then you add the overall move in SOFR on top of that, because obviously these are floating rate loans. You're probably 12.5% on your regular way new direct lending yield today. That's quite attractive. You know, I think especially when you're focused on the upper end of the middle market, you know, so good in our mind defensive companies, you know, companies that you feel, you know, quite frankly, you know, just well downside protected. So I think that direct lending market is very interesting and the move has been quite material. You know, you mentioned the asset backside. You know, I think the overall, you know, available returns there probably didn't move as much as direct lending did. probably still above it. I think the investing environment there for us has more been pivoting to either different types of deals or different parts of really the capital structure to get the best risk-adjusted rewards we can get. We've been busy there. I think that will continue as well.

Okay. And then you mentioned, I think, 1.7 times coverage. Maybe you could just give us a quick glimpse in the revenue and EBITDA trends at the portfolio level.

Yeah, no, happy to do that. I mean, I think we talked about the 1.7 times. I think we wanted to make it clear how we calculated that. So that was not an LPM sort of interest number that was using kind of the 1231 number for your benefit. If we think about just where we are today or sort of the top of that forward curve, you probably take that down to 1.6, so not a big move from there. I think we still have seen year-on-year EBITDA growth. I think we're happy to see that. I think we're probably a little bit worried about margins. You know, we've seen companies been able to pass through prices, but, you know, the inflation points are real. The wage inflation points are real. You know, so we're quite mindful about the portfolio and managing the risk in it. But, you know, we probably, from a base case perspective, you know, I think the portfolio is probably outperformed where I, you know, thought it would have been a handful of sort of quarters ago, and we just got to watch it going forward.

All right. Thanks very much, and congratulations. Have a good quarter. Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ryan Lynch with KBW. Your line is open. Please go ahead.

Hey, good morning. First question has to do with, you mentioned the potential for some to pick up an activity. You know, obviously there's the hope for that. There's some other correct lenders talk about that as well. My question, though, comes to, you know, if that market does start to pick up at all and there's more activity in an M&A and LBOs going on, I was just curious if you had any take on that Emerson deal kind of switching from the direct lenders to the broadly syndicated loan market. Is that sort of a one-off, or do you think if deal activity picks up, that will also potentially coincide with the broadly syndicated loan market looking to gain back some share?

Yeah, good morning, Ryan. I mean, probably no specific thoughts on the individual deal. I think every deal in some ways is you know, is unique either to the company or the situation, you know, or if it's a sponsor deal, you know, the sponsor. You know, and I mentioned it on to John on the prior question. You know, I think we're just, we're seeing a bit more inquiry. We're seeing, you know, a bit more of just existing, you know, companies or sponsors, maybe to those that we lend to, thinking about how we lend to, you know, a forward sort of sale of that business. So I think that's, you know, a bit of sort of positive news. I mean, clearly, you know, private debt has, you know, filled the void for the syndicated loan market in the last, you know, probably four or five quarters at this point, you know, when the, when the loan market comes back and functions sort of as normal, you know, that balance will sort of change a bit. I think we expect that, you know, the syndicated loan market's not going to go away. I think what we feel good about though, the tailwind on the other side is we've just seen more and more companies wanting to access a private debt solution. You know, they want to know their lender, they want certainty of execution, and I think that trend continues. So, you know, clearly the syndicated loan market will refinance some of these companies over time, but I still think the tailwind is here for private debt.

Okay, understood. And a lot of times when we hear about new non-accruals in your portfolio or any BDT portfolio, it's usually... idiosyncratic events that are happening in particular business. I would just love to hear though, if you think about maybe the bottom quartile of performers in your portfolio, so maybe not just the non-accruals, but just the somewhat underperformers of your portfolio, have you been able to notice any sort of common threads that you're seeing week through of why those companies are struggling more than others in this particular environment?

You know, I think we have seen, let's call it issues that have impacted companies, you know, sort of broadly. I think if you went back, you know, four or six quarters, it was probably supply chain challenges. I think today, you know, most companies who maybe are heavily reliant on the expense side, on wages, you know, are sort of generally sort of struggling. And I think the environment we're in, You know, I do think if you look at that bottom 25% in your example, it's, you know, outside of the idiosyncratic sort of points, it's probably companies who have struggled for whatever reason, you know, to pass through sort of price, right, just with everything that's sort of happened. And that has, you know, sort of been impactful. And I think that, you know, some of that has been, you know, maybe not in an environment or a sector where they could do that. You know, maybe there's, you know, Maybe their end customers are sort of well-stocked. But I think where we sit today is probably wages and lackability to pass through price to keep the revenue side up.

Okay. I just had one last one. Sure. I think there's been a lot of disruption in the banking sector with the several failures. It seems like there's going to be probably a pullback in bank lending. I'm not sure how much that really affects, you know, your overall LBO, you know, kind of private credit buyout business. I'm not sure how much of a competitor, you know, banks really are in holding those assets on their balance sheet. But it does seem that banks potentially could be a competitor, maybe some of your ABL businesses. So I would just love to hear, have you seen any sort of pickups? in your ABL business from the retreat or do you expect any sort of pick up and opportunities from a potential retreat in banks that they do from lending in ABL?

Yeah, that's a fair question considering what's happened this quarter. I think you're right. I mean, the impact on the regional banks I don't think moves a lot on the regular way direct lending business. Remember what, and you were sort of mentioning ABL. When we talk about ABL, we're probably talking more about receivables and inventory financing. That's clearly a product that we have, you know, that we're out to companies. Those companies are probably ones who are struggling, who need to access an alternative form of capital. And, you know, we're probably better providers of that than banks due to the, you know, the shape of the corporate. I think the broader sort of piece, just not to confuse the two, is our asset-based finance effort. you know, that's more consumer mortgage, you know, sort of funding the real economy but not really sort of corporate credit. You know, my sense is, you know, everything that is going on with the regional banks is probably, you know, a net positive to both those pieces as there should be, you know, more deal flow. And I think history will tell you that, you know, the private debt markets can come and fill that capital void that might be left. You know, I think, you know, that said, on the other side, I think we're a little bit mindful from a risk perspective that, you know, the regional banks taking a step back or being forced to, you know, shrink their balance sheet could, you know, cause a credit contraction in the overall market and could, you know, provide some additional bumps either from a volatility perspective or an impact on a recession. So I think we're mindful about all those factors.

Okay, I understand. Yeah, that's a good one. the negative impacts and things just to point it back broadly. So understood. I appreciate the time today. All right. Have a good day.

Thank you. And again, if you would like to ask a question at this time, please press star 1-1 on your touchtone telephone. One moment for our next question. Our next question comes from the line of Melissa Wedo with J.P. Morgan. Your line is open. Please go ahead.

Thanks so much. Appreciate you taking my questions today.

First, I want to touch on the share repurchase authorization, which you completed this quarter. With shares trading where they are relative to NAF, how are you guys thinking about future share repurchase activity and possibly pursuing another authorization?

Good morning, Melissa. I would note a couple of things here. I think we are happy that we completed the $100 million. I think we've been pretty consistent to the market that We intend to complete these when they get put in place. I think we have done more than most. We've probably repurchased almost $500 million of shares over the last five years amongst the various BDCs that were public at one time or another. Clearly, this will be something that we have on the top of our mind or are considering on a go-forward basis in line with what we've done in the past. I would note You know, I think we're happy to also provide this special dividend, right, which is kind of capital, you know, for the benefit of shareholders. You know, I think we've talked, you know, on the prior call about, you know, the 70 cents between the 64 and the six supplemental. I think we continue to feel good about that. That was $2.80 per share. And then with this additional 15, you're up to 295. You know, that's, you know, 11.7%. onto the NAV. So we think the income potential is good, but I think that special was something we were very happy we were able to do this quarter.

Yep, certainly. I have a question on funding. You've got a few unsecured maturities in 2024. Given the current funding split between revolvers and fixed rate debt and sort of your outlook for interest rate,

um remaining higher than perhaps implied by the forward curve how are you thinking about your funding profile and how are you how should we expect uh you guys to manage that going forward thanks yeah and and uh ryan or steve might want to add to this as well but i think we're very happy with all the unsecureds we did you know in advance of the beginning of of uh 22. i mean we even did a deal and it was january february 22 and sort of decent size So I think we're quite happy about no near-term maturities. Obviously, we have plenty of undrawn capital on the revolver just to take those out if we needed to. That said, I think we intend to continue to access this market. We'll continue to talk to investors. We want to be a frequent issuer. But at the same time, I think we're going to be prudent and we're going to look at other markets we've accessed in the past as well, whether they be sort of bilaterals or CLOs, et cetera. So I think we've got a bunch of tools at our disposal. We've got a lot of comfort for where we sit on the undrawn piece of the revolver, but our intention is to be active in that market.

Thank you. Thank you. And I would now like to turn the conference back over to Dan Peterczak for any further remarks.

All right. Well, thank you, everyone, for your time today. As always, we're available for any follow-up questions. Have a good weekend and speak next quarter.

this concludes today's conference call thank you for participating you may now disconnect you Thank you. Thank you. We'll be right back. you Good morning, ladies and gentlemen. Welcome to the FSKKR Capital Corp's first 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 instructions on entering the queue. Please note, this conference is being recorded. At this time, Robert Pond, Head of Investor Relations, will proceed with the introduction. Mr. Pond, you may begin.

Thank you.

Good morning and welcome to FSKR Capital Corp's first quarter 2023 earnings conference call. Please note that FSKR Capital Corp may be referred to as FSK, the fund, or the company throughout the call. 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 this morning. 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 March 31st, 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. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC this morning, May 5, 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 Dan Pietrzak, Chief Investment Officer and Co-President, Brian Gerson, Co-President, and Stephen Lilly, Chief Financial Officer. 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 Dan.

Thank you, Robert, and welcome everyone to FSKKR Capital Corp's first quarter 2023 earnings conference call. Unfortunately, Michael Forman is not able to participate on today's call due to an unavoidable scheduling conflict. For the first quarter, our team again delivered strong operating results, as FSK generated net investment income totaling 81 cents per share and adjusted net investment income totaling 78 cents per share, as compared to our public guidance of 77 cents and 74 cents per share, respectively. Our net asset value increased modestly quarter over quarter, as the slight decline in the value of our investment portfolio was offset by out-earning our 70 cents per share distribution and accretive share repurchases. M&A activity remained muted during the first quarter. As a result, our investment team originated approximately $270 million of new investments. That said, we are seeing activity level and inquiries ramp up in recent weeks. From a liquidity perspective, we ended the first quarter with approximately $3 billion of available liquidity. With regard to our share repurchase program, during March we completed the remaining portion of our previously committed $100 million buyback program as we repurchased $32 million of shares. Based on our continued strong financial results, our board has declared a second quarter distribution of 70 cents per share, which consists of our base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. As a reminder, based on the overall strength of the company's earnings power, we expect our quarterly supplemental distribution to total a minimum of 6 cents per share throughout 2023. and possibly beyond, equating to a minimum of 70 cents per share per quarter of quarterly distributions during 2023. Additionally, we are pleased to announce special distributions totaling 15 cents per share, which will be paid in three equal installments between now and the end of 2023. We are pleased to be in a position to share this additional income with investors. as we have worked diligently over the last several quarters to achieve our targeted level of spillback income. Our special distributions equate to an additional $0.05 per share per quarter on top of our regular quarterly and supplemental distributions over the next three quarters. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.95 per share of total distributions in 2023, which equates to 11.8% yield on our March 31, 2023 net asset value and an annualized yield of approximately 16% based on our recent share price. We further believe that our ability to provide shareholders with such an attractive distribution is based on the significant portfolio rotation work we have accomplished over the last five years. Turning to the current market and economic environment, the volatility we experienced in the financial markets during 2022 has continued during the first quarter of 2023, especially with the challenges in the banking space. We continue to expect inflation to remain elevated, and we believe the higher interest rate environment will last longer than some market observers are expecting. Should our views prove accurate, then we believe floating rate asset structures, coupled with investment strategies which contain a degree of inflation protection, such as large defensive portfolio companies and asset-based finance investments tied to collateral pools, will remain attractive. While we do expect M&A transaction volumes to remain below average, for the next few quarters. The increased volatility and economic uncertainty does create compelling investment opportunities for FSKKR and other large-scale players. We and other private debt investors are able to negotiate attractive pricing, enhance call protection, and lower overall leverage levels for extremely high-quality companies. Spreads on new originations are approximately 100 basis points higher compared to a year ago. Additionally, large private debt platforms like FSK will continue to benefit from incumbency positions to support existing portfolio companies, as well as protections in our loan documents, allowing us to reprice existing investments to current market rates, which we believe is quite important from a portfolio perspective. Our investment portfolio continues to perform well as our borrowers have adapted to the current operating environment and have successfully demonstrated an ability to pass through price increases, which have helped maintain acceptable EBITDA margins. As I mentioned earlier, during the first quarter, we originated $270 million of investments. These investments were focused on funding and add-ons to existing portfolio companies. resulting in approximately 87% of our originations coming from opportunities and companies previously invested in by KKR. Our new investments, combined with $264 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $6 million. In terms of interest coverage, At the end of the first quarter, our portfolio companies had a median interest coverage of 1.7 times. For clarity, this was calculated using base rates as of December 31st, 2022 to align with portfolio company financials. As evidenced by our lower than average origination activity, we remain extremely selective in our underwriting and origination process. Also, during periods of market stress, we benefit from our portfolio monitoring unit and our dedicated workout and governance teams. These dedicated internal teams are able to work seamlessly alongside our deal teams to navigate situations which potentially arise during more challenging operating environments. That being said, through the end of the first quarter, we have not experienced a significant increase in amendment requests, which we view as a positive. With that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks Dan. As of March 31, 2023, our investment portfolio had a fair value of $15.3 billion, consisting of 189 portfolio companies. This compares to a fair value of $15.4 billion and 197 portfolio companies as of December 31, 2022. At the end of the first quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio. We continue to focus on senior secured investments as our portfolio consisted of 61% first lien loans and 69.4% senior secured debt as of March 31st. In addition, our joint venture represented 9.1% of the fair value of the portfolio and asset-based finance investments represented 11.7%, which are comprised predominantly of first lien loans or secured asset-based finance investments. Looking through to the investments in our joint venture, our total portfolio consisted of 77% senior secured debt as of March 31st. During the first quarter, our new originations consisted of approximately 82% in first lien loans 11% in asset-based finance investments, 3% in subordinated debt, and 4% in equity and other investments. The weighted average yield on accruing debt investments was 11.7% as of March 31, 2023, compared to 11.4% as of December 31. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the first quarter was primarily associated with the continued rise in base rates, as well as higher yields on new originations during the past few quarters. Including the effects of the investment activity we experienced during the first quarter, as of March 31, 2023, approximately 86% of our total investment portfolio is now comprised of investments originated either by KCR credit or the FS KKR Advisor. This compares to 84% at March 31, 2022. During the first quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of approximately $17 million. The largest negative movers in our portfolio, which were impacted by credit performance-related issues during the quarter, were WITR and Reliant Rehab. Witter is a global leader in the outsourced elevator component segment with a focus on the production of elevator doors and the manufacturing of adjacent components for both new equipment markets and the aftermarket. The company has been facing persistent inflation headwinds, as well as a slowdown in construction in China, which has led to us placing our second lien loan on non-accrual this quarter. Reliant Rehab offers physical, occupational, and speech therapy services to skilled nursing facilities. The company has been affected by macroeconomic factors across the healthcare services industry, including a decline in labor productivity, an increase in contract labor given a tight labor market in the US, and inflation-driven wage increases. I'd also like to comment on another investment, Miami Beach Medical Group. Miami Beach Medical Group provides primary care, specialty care, in-house pharmacy and home visits, primarily focusing on Medicare Advantage members. The company has recently experienced weaker performance due to lower membership growth, elevated medical expenses, and higher operating expenses related to wage inflation. In the first quarter, we provided an amendment which included a $50 million first lien debt pay down at par from the sponsor. During the quarter, we placed two debt investments on non-accrual, with a combined fair market value of $72 million and a cost of $140 million. In addition, there were three debt investments fully removed from non-accrual status with a combined fair market value of $7 million and a cost of $29 million. Based on the first quarter's activity, as of March 31, 2023, non-accruals totaled 5.5% of our portfolio on a cost basis, and 2.7% on a fair value basis compared to 4.9% on a cost basis and 2.4% on a fair value basis as of December 31, 2022. We also thought it would be helpful to provide the market with information based on the assets originated by KKR credit. As of the end of the quarter, non-accruals relating to the 86% of our total portfolio which has been originated by KKR Credit and the FSKKR Advisor, were 2.8% on a cost basis and 0.8% on a fair value basis. And with that, I'll turn the call over to Stephen.

Thanks, Brian. As Dan mentioned earlier, we are pleased to reward shareholders with a declaration of a $0.15 per share special distribution, which will be paid in three equal installments in May, August, and November of this year. Combining our quarterly base and supplemental distributions of 70 cents per share with the three 5 cent per share quarterly special distributions, our total distribution for 2023 should be a minimum of $2.95 per share. This represents an 11.8% yield on our March 31, 2023 net asset value of $24.93 per share, and a 16% yield on our current stock price, both of which we view as quite attractive. Turning to our financial results for the first quarter, total investment income increased by $7 million quarter over quarter, driven by increased interest income. The components of our total investment income during the quarter were as follows. Total interest income was $369 million, an increase of $9 million quarter over quarter. Dividend and fee income totaled $87 million, a decrease of $2 million quarter over quarter. Our dividend and fee income during the first quarter is summarized as follows. $55 million of recurring dividend income from our joint venture. Other dividends from various portfolio companies totaling approximately $27 million. And fee income totaling approximately $5 million. Our interest expense totaled $114 million, an increase of $5 million quarter over quarter, due to the impact of rising base rates on our secured debt facilities. Our weighted average cost of debt was 5.1% as of March 31st. Management fees totaled $58 million, a decrease of $1 million quarter over quarter, and incentive fees totaled $46 million during the first quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows. Our ending 4Q 2022 net asset value per share of $24.89 was increased by gap net investment income of 81 cents per share and was decreased by 11 cents per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our 70 cent per share dividend paid during the quarter and increased by 4 cents per share due to share repurchases. The sum of these activities results in our March 31, 2023 net asset value per share of $24.93. From a forward-looking guidance perspective, we expect second quarter 2023 GAAP net investment income to approximate 78 cents per share. and we expect our adjusted net investment income to approximate 75 cents per share. Detailed second quarter guidance is as follows. Our recurring interest income on a gap basis is expected to approximate $362 million, as we continue to expect the low average M&A activity during the quarter. We expect recurring dividend income associated with our joint venture to approximate $55 million. We expect other fee and dividend income to approximate $30 million. From an expense standpoint, we expect our management fees to approximate $58 million. We expect incentive fees to approximate $45 million. We expect our interest expense to approximate $115 million. And we expect other G&A expenses to approximate $10 million. As a reminder, the three-cent per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting. This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected. In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 118% respectively. at March 31, 2023, both of which are unchanged from their fourth quarter levels. At March 31, our available liquidity was $3 billion. At the end of the first quarter, approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt, and the overall effective weighted average cost of debt was 5.1%. And with that, I'll turn the call back to Dan for a few closing remarks before we open the call for questions.

Thanks, Stephen. In closing, we are pleased that our portfolio rotation and achievement of operational goals have reached the point where we can provide shareholders with such an attractive overall distribution rate for 2023 and possibly beyond. And while uncertainty in the overall economy remains, we believe FSK is well positioned from a portfolio construction standpoint to continue to deliver strong results for our shareholders. With that, operator, we'd like to open the call for questions.

Thank you. If you would like to ask a question at this time, please press star 11 on your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile our Q&A roster. And our first question comes from the line of John Heck with Jefferies. Your line is open. Please go ahead.

Good morning, guys. Thanks very much for taking my questions. Dan, you said, I think you said you're seeing activity pick up more recently in terms of deals. Maybe can you talk about the source and characteristics of the pipeline?

Yeah, no, happy to, John, and good morning. You know, I do think it's a little bit early in sort of those processes, but I think we're just seeing more, you know, either inbounds or inquiries from, you know, either sell-side firms or companies themselves or, quite frankly, people who we lend money to today who might be interested in us indicating financing terms if they go sort of sell the business. I don't think that's any guarantees of a big near-term sort of M&A sort of push, but I think it was a bit of green shoots that we are seeing. My sense is the overall M&A environment remains somewhat lower or slow for the rest of this year, but we'll start to pick up very end of the year into 24. Okay.

And then you mentioned, I think you mentioned like a hundred basis points overall spread pickup. Um, you know, obviously there's dislocations in certain part of the markets. You guys, you guys have your ABS and your, and then obviously the non ABS portfolios, maybe can you, where's the, where's the best opportunity in the widest spreads? Uh, you know, is there any kind of arbitrage that you guys are focusing on in the market at this point?

I'm not sure it's an arbitrage, but I'd probably split it in two pieces. The direct lending market is extremely attractive today for both new deals or even add-ons to these existing portfolio companies. The 100 basis points I mentioned is really where we see credit spreads today on new loans versus where they may have been, let's call it the start of 22. I'd couple that with probably an extra point on average of upfront fees, probably better call pro. And then you add the overall move in SOFR on top of that, because obviously these are floating rate loans. You're probably 12.5% on your regular way new direct lending yield today. That's quite attractive. I think especially when you're focused on the upper end of the middle market, you know, so good in our mind defensive companies, you know, companies that you feel, you know, quite frankly, you know, just well downside protected. So I think that direct lending market is very interesting and the move has been quite material. You know, you mentioned the asset backside. You know, I think the overall, you know, available returns there probably didn't move as much as direct lending, you know, probably still above it. I think the investing environment there for us has more been pivoting to either different types of deals or different parts of really the capital structure to get the best risk-adjusted rewards we can get. We've been busy there. I think that will continue as well.

Okay. And then you mentioned, I think, 1.7 times coverage. Maybe you could just give us a quick glimpse in the revenue and EBITDA trends at the portfolio level.

Yeah, no, happy to do that. I mean, I think we talked about the 1.7 times. I think we wanted to make it clear, you know, how we calculated that. So that was not an LPM sort of interest number that was using kind of the 1231 number, you know, for your benefit. If we think about just where we are today or sort of the top of that forward curve, you probably take that down to 1.6. So not a big move from there. I think we still have seen, you know, year on year EBITDA growth. I think we're happy to see that. I think we're probably a little bit worried about margins. You know, we've seen companies been able to pass through prices, but, you know, the inflation points are real. The wage inflation points are real. You know, so we're quite mindful about the portfolio and managing the risk in it. But, you know, we probably, from a base case perspective, you know, I think the portfolio is probably outperformed where I, you know, thought it would have been a handful of sort of quarters ago, and we just got to watch it going forward.

All right. Thanks very much, and congratulations. Have a good quarter. Great. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ryan Lynch with KBW. Your line is open. Please go ahead.

hey good morning um first question has to do with you mentioned the potential for some some pickup and activity you know obviously there's the hope for that uh there's some other other correct lenders talk about that as well there's um my question though comes to um you know if that market does start to pick up at all and there's more activity and then m&a and ldo is going on i was just curious if you had any take on that Emerson deal kind of switching from the direct lenders to the broadly syndicated low market. Is that sort of a one-off, or do you think if deal activity picks up, that will also potentially coincide with the broadly syndicated low market looking to gain back some share?

Yeah, good morning, Ryan. I mean, probably no specific thoughts on the individual deal. I think every deal in some ways is – you know, is unique either to the company or the situation, you know, or if it's a sponsor deal, you know, the sponsor. You know, and I mentioned it on to John on the prior question. You know, I think we're just, we're seeing a bit more inquiry. We're seeing, you know, a bit more of just existing, you know, companies or sponsors, maybe to those that we lend to, thinking about how we lend to, you know, a forward sort of sale of that business. So I think that's, you know, a bit of sort of positive news I mean, clearly, you know, private debt has, you know, filled the void for the syndicated loan market in the last, you know, probably four or five quarters at best point, you know, when the, when the loan market comes back and functions sort of as normal, you know, that balance will sort of change a bit. I think we expect that, you know, the syndicated loan market's not going to go away. I think what we feel good about though, the tailwind on the other side is we've just seen more and more companies wanting to access a private debt solution. You know, they want to know their lender, they want certainty of execution, and I think that trend continues. So, you know, clearly the syndicated loan market will refinance some of these companies over time, but I still think the tailwind is here for private debt.

Okay, understood. And a lot of times when we hear about new non-accruals in your portfolio or any BDT portfolio, it's usually... you know, idiosyncratic events that are happening in your business. I would just love to hear though, if you think about maybe, you know, the bottom quartile of performers in your portfolio, so maybe not just the non accruals, but just, just the, the somewhat underperformers of your portfolio, have you been able to notice any sort of common threads of, of, of that you're seeing week through of why those, those companies are struggling more than others in this particular environment?

You know, I think we have seen, let's call it issues that have impacted companies, you know, sort of broadly. I think if you went back, you know, four or six quarters, it was probably supply chain challenges. I think today, you know, most companies who maybe are heavily reliant on the expense side, on wages, you know, are sort of generally sort of struggling. And I think the environment we're in, You know, I do think if you look at that bottom 25% in your example, it's, you know, outside of the idiosyncratic sort of points, it's probably companies who have struggled for whatever reason, you know, to pass through sort of price, right, just with everything that's sort of happened. And that has, you know, sort of been impactful. And I think that, you know, some of that has been, you know, maybe not in an environment or a sector where they could do that. You know, maybe there's, you know, Maybe their end customers are sort of well-stocked. But I think where we sit today is probably wages and lackability to pass through price to keep the revenue side up.

Okay. I just had one last one. Sure. I think there's been a lot of disruption in the banking sector with the several failures. It seems like there's going to be probably a pullback in bank lending. I'm not sure how much that really affects, you know, your overall LBO, you know, kind of private credit buyout business. I'm not sure how much of a competitor, you know, banks really are in holding those assets on their balance sheet. But it does seem that banks potentially could be a competitor, maybe some of your ABL businesses. So I would just love to hear, have you seen any sort of pickups? in your ABL business from the retreat? Or do you expect any sort of pickup and opportunities from a potential retreat in banks that they do from lending in ABL?

Yeah, that's a fair question considering what's happened this quarter. I think you're right. I mean, the impact on the regional banks I don't think moves a lot on the regular way direct lending business. Remember what, and you were sort of mentioning ABL. When we talk about ABL, we're probably talking more about receivables and inventory financing. That's clearly a product that we have, you know, that we're out to companies. Those companies are probably ones who are struggling, who need to access an alternative form of capital. And, you know, we're probably better providers of that than banks due to the, you know, the shape of the corporate. I think the broader sort of piece, just not to confuse the two, is our asset-based finance effort. you know, that's more consumer mortgage, you know, sort of funding the real economy, but not really sort of corporate credit. You know, my sense is, you know, everything that is going on with the regional banks is probably, you know, a net positive to both those pieces as there should be, you know, more deal flow. And I think history will tell you that, you know, the private debt markets can come and fill that capital void that might be left. You know, I think, you know, that said, on the other side, I think we're a little bit mindful from a risk perspective that the regional banks taking a step back or being forced to shrink their balance sheet could cause a credit contraction in the overall market and could provide some additional bumps either from a volatility perspective or an impact on a recession. So I think we're mindful about all those factors.

Okay, understood. Yeah, I think it's about the, you know, the negative impact of things just pulling back broadly. So, understood. I appreciate the time today. All right. Have a good day.

Thank you. And again, if you would like to ask a question at this time, please press star 1-1 on your touchtone telephone. One moment for our next question. Our next question comes from the line of Melissa Wedale with J.P. Morgan. Your line is open. Please go ahead.

Thanks so much. Appreciate you taking my questions today.

First, I want to touch on the share repurchase authorization, which you completed this quarter with shares trading where they are relative to NAF. How are you guys thinking about future share repurchase activity and possibly pursuing another authorization?

Good morning, Melissa. I would note a couple of things here. I mean, I think we are happy that we completed the $100 million. I think we've been pretty consistent to the market that We intend to complete these when they get put in place. I think we have done more than most. We've probably repurchased almost $500 million of shares over the last five years amongst the various BDCs that were public at one time or another. Clearly, this will be something that we have on the top of our mind or are considering on a go-forward basis in line with what we've done in the past. I would note You know, I think we're happy to also provide this special dividend, right, which is kind of capital, you know, for the benefit of shareholders. You know, I think we've talked, you know, on the prior call about, you know, the 70 cents between the 64 and the six supplemental. I think we continue to feel good about that. That was $2.80 per share. And then with this additional 15, you're up to 295. You know, that's, you know, 11.7%. onto the NAV. So we think the income potential is good, but I think that special was something we were very happy we were able to do this quarter.

Yep, certainly. I have a question on funding. You've got a few unsecured maturities in 2024. Given the current funding split between revolvers and fixed rate debt and sort of your outlook for interest rate, remaining higher than perhaps implied by the forward curve. How are you thinking about your funding profile, and how should we expect you guys to manage that going forward? Thanks.

Yeah, and Ryan or Steve might want to add to this as well, but I think we're very happy with all the unsecureds we did, you know, in advance of the beginning of 22. I mean, we even did a deal, and it was January, February of 22, in sort of decent size, So I think we're quite happy about no near-term maturities. Obviously, we have plenty of undrawn capital on the revolver just to take those out if we needed to. That said, I think we intend to continue to access this market. We'll continue to talk to investors. We want to be a frequent issuer. But at the same time, I think we're going to be prudent and we're going to look at other markets we've accessed in the past as well, whether they be sort of bilaterals or CLOs, et cetera. So I think we've got a bunch of tools at our disposal. We've got a lot of comfort for where we sit on the undrawn piece of the revolver, but our intention is to be active in that market.

Thank you. Thank you. And I would now like to turn the conference back over to Dan Peterczak for any further remarks.

Well, thank you, everyone, for your time today. As always, we're available for any follow-up questions. Have a good weekend and speak next quarter.

this concludes today's conference call thank you for participating you may now disconnect