FS KKR Capital Corp.

Good morning, ladies and gentlemen. Welcome to FSKKR Capital Corp's third quarter 2023 earnings conference call. Your lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you instructions on entering the queue. Please note that this conference is being recorded. 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 FSKKR Capital Corp's third quarter 2023 earnings conference call. Please note that FSKKR 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 yesterday. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30th, 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 third quarter earnings release that was filed with the SEC on November 6, 2023. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Foreman, Chief Executive Officer and Chairman, 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 Michael.

Thank you, Robert, and good morning, everyone. I'd like to start by acknowledging the tragedy in the Middle East and the loss of innocent lives. Like so many of you, I was shocked by the invasion of Israel. To the many people who have had family, friends, and loved ones impacted by these devastating and tragic events, our hearts go out to you. And now, turning to FSK's results for the third quarter, our financial and operating results showed continued strength as we exceed our earnings guidance and out-earned our quarterly base and supplemental distribution. During the third quarter, we generated net investment income totaling $0.84 per share and adjusted net investment income totaling $0.80 per share as compared to our public guidance of approximately $0.79 and $0.76 per share, respectively. Our net asset value per share at the end of the third quarter was $24.89 which is equal to our net asset value per share at the start of the year. During the third quarter, our net asset value per share increased by approximately 1%. Based on our positive operating results, our board has declared a fourth quarter regular quarterly distribution of 70 cents per share, consisting of our base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. As many of you will recall, in May of this year, we declared a series of three special distribution payments totaling 15 cents per share. The third 5 cent per share installment will be paid at the end of this month. Based on our continued strong performance, coupled with our positive earnings outlook, I'm pleased to announce that our special distribution will continue for the next two quarters, an amount totaling 10 cents per share. Consistent with our corporate view of sharing additional earnings with our investors on a real-time basis, this special distribution will be paid in two equal installments of $0.05 per share in the first and second quarters of 2024, and will be on top of our quarterly base and supplemental distributions, which currently total $0.70 per share. From a forward-looking perspective, we continue to be optimistic about the growth in the private credit sector, which provides significant tailwinds for our industry. In general, our portfolio companies have been adjusting well to the higher interest rate environment as we have not seen significant increases in credit stress or defaults. FSK continues to generate strong earnings and as ample liquidity take advantage of new high quality investments, as well as to support our existing portfolio companies through add on investments. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Thank you, Michael. In the wake of continued inflationary pressure and higher for longer interest rates, private credit continues to be an attractive asset class due to its directly negotiated transactions, predominantly floating rate interest structures, and significant issuer diversification. As a result of these and other positive attributes, private credit is continuing to become an increasing allocation for institutional investors. As we mentioned on last quarter's call, we have seen an increase in deal flow as M&A activity continues to ramp. In addition, there are recent signs that the syndicated markets are beginning to stabilize, with activity picking up in that part of the market as well. At the same time, we are seeing some pressure on spreads in the upper end of the middle market, as spreads have tightened by 25 to 50 basis points during the quarter. With private equity funds holding more than $2 trillion of dry powder, we continue to believe sponsors will utilize private credit solutions to finance transactions. Turning to investment activity, during the third quarter, we originated $504 million of new investments. Over 65% of our investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $386 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $118 million. In terms of recent deployment opportunities, one new investment of note is a partnership with PayPal. KKR Credit has agreed to purchase approximately 40 billion euros of PayPal's consumer receivables originated in Europe. FSK has committed approximately 80 million euros towards the transaction. Having the ability to work exclusively with a strategic partner like PayPal is a testament to the strength and maturity of KKR Credit's asset-based finance business. In terms of interest coverage, at the end of the third quarter, our portfolio companies had a median interest coverage of 1.5 times. For clarity, This calculation uses base rates as of June 30, 2023 to align with portfolio company financials. While the higher rate environment has impacted certain companies, overall credit performance continues to be stronger than many market observers anticipated. As companies in the larger end of the private credit market have demonstrated their ability to pass along price increases, while simultaneously navigating their labor and other input costs. Despite the challenging macro environment, we continue to see portfolio company revenue and earnings growth. We remain focused on large, high-quality borrowers with strong operating margins and deep equity cushions. The weighted average EBITDA of our portfolio companies was $212 million as of September 30, 2023. Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 6% across companies in which we have invested in since April of 2018. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks, Dan. As of September 30th, 2023, our investment portfolio had a fair value of $14.7 billion. consisting of 200 portfolio companies. This compares to a fair value of $14.8 billion in 195 portfolio companies as of June 30, 2023. At the end of the third quarter, our 10 largest portfolio companies represented approximately 19.5% of the fair value of our portfolio, which is consistent with prior quarters. We continue to focus on senior secured investments. as our portfolio consisted of approximately 60% first lien loans and 68% senior secured debt as of September 30th. In addition, our joint venture represented 9.6% 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 first lien loans, total approximately 68% of our total portfolio and senior secured investments total approximately 76% of our portfolio as of September 30th. The weighted average yield on occurring debt investments was 12.2% as of September 30th, 2023 compared to 12.1% as of June 30th. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Similar to recent quarters, the increase in our weighted average yield during the third quarter was primarily associated with the continued rise in base rates. Including the effects of our investment activity during the third quarter, as of September 30th, 2023, approximately 86% of our total investment portfolio is comprised of investments originated either by KKR credit or the FSKR advisor. During the third quarter, excluding the impact of merger accounting, we experienced net portfolio appreciation on investments of approximately $23 million. During the quarter, we placed one debt investment on non-accrual. The company is named Bowery Farming, and it is one of the largest vertical farming businesses in the US. Bowery is a smaller position in our portfolio, as the first loan has a cost basis of $62 million, and a fair value of $13 million as of September 30th. We also received a $15 million pay down at par during the quarter. As of September 30th, 2023, non-accruals represented 4.8% of our portfolio on a cost basis and 2.4% on a fair value basis compared to 4.8% on a cost basis and 2.5% on a fair value basis as of June 30th, 2023. We believe it is helpful to provide the market with information based on the assets originated by KKR credit. As of the end of the third quarter, non-accruals related to the 86% of our total portfolio, which has been originated by KKR credit and the FS KKR Advisor were 2.3% on a cost basis and 0.6% on a fair value basis. Additionally, since the start of the FS KKR Advisor almost six years ago, The advisor has originated over $22 billion of investments and has experienced an annualized cost basis non-accrual rate of less than 1%. And with that, I'll turn the call over to Stephen to go through our financial results.

Thanks, Brian. Our total investment income increased by $3 million quarter over quarter to $465 million. The primary components of our total investment income during the quarter were as follows. Total interest income was $374 million, a decrease of $2 million quarter over quarter, primarily driven by the $500 million in asset sales we mentioned last quarter. Dividend and fee income totaled $91 million, an increase of $5 million quarter over quarter, as our joint venture experienced approximately $3 million in one-time fees and dividends. Our total dividend and fee income during the quarter is summarized as follows. $58 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $21 million during the quarter, and fee income totaling approximately $12 million during the quarter. Our interest expense totaled $117 million, a decrease of $1 million quarter over quarter due to the decline in net debt to equity from 113% at June 30th to 110% at September 30th. Our weighted average cost of debt was 5.3% as of September 30th. Management fees totaled $56 million and incentive fees totaled $47 million, both unchanged quarter over quarter. Other expenses totaled $11 million during the third quarter. a decrease of $1 million. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows. Our ending 2Q2023 net asset value per share of $24.69 was increased by GAAP net investment income of 84 cents per share and was increased by 11 cents per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution. The sum of these activities results in our September 30, 2023 net asset value per share of $24.89. From a forward-looking guidance perspective, we expect fourth quarter 2023 GAAP net investment income to approximate $0.74 per share. and we expect our adjusted net investment income to approximate 77 cents per share. Detailed fourth quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $377 million. We expect recurring dividend income associated with our joint venture to approximate $53 million. We expect other fee and dividend income to approximate $23 million, as we expect normal course asset-based finance dividends to be incrementally lower in the fourth quarter. From an expense standpoint, we expect our management fees to approximate $56 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $117 million. And we expect our other G&A expenses to approximate $10 million. During the fourth quarter, we expect our excise taxes will approximate We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting, which is why our projected fourth quarter gap net investment income is 4 cents per share below our anticipated adjusted net investment income. Our gross and net debt to equity levels were 115% and 110% respectively. at September 30, 2023, compared to 118% and 113% at June 30, 2023. At September 30, our available liquidity was $3.6 billion. Approximately 59% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. In October, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility. The amendment provides for, among other things, an increase in total commitments to $4.67 billion and an extension of the maturity date to the fourth quarter of 2028. We were very pleased to complete this amendment, as it has reflected both of the strength of the FSK platform, as well as the long-term relationships we are fortunate to maintain with the investment community. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thanks, Stephen. In closing, we're pleased with our third quarter results and our year-to-date performance, as our net asset value at the end of the third quarter was flat compared to the start of the year. Our adjusted net investment income in the quarter exceeded both our public guidance as well as our total dividend. Our underlying portfolio companies are performing well from a credit perspective, and we deployed capital into compelling new transactions. With available liquidity of $3.6 billion and a strong balance sheet, we have ample capital to invest in the attractive risk-adjusted opportunities we are seeing in the market. On behalf of the team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from John Hecht with Jefferies. Please go ahead.

Hey, guys. Morning. Thanks for taking my question. One, as you guys talked, and I think it's kind of the second time in a row where you talked about the pipeline activity increasing. You know, I'm wondering if you can kind of describe, I mean, we've heard of, you know, I guess some increase in M&A activity and maybe some LBO activity. I'm wondering, can you characterize the kind of sources of the pipeline? And then, you know, what's the competition around that pipeline? Is that shifting at all relative to the last four to six months as well?

Good morning, John. know I put it into a couple of different sort of buckets in terms of of terms of the pipeline activity you know one of its just been you know we'll call it sort of live processes I'll be it you know that's probably still not maybe to the level that you would expect in any sort of normalized market but you know certain amount of green shoots there and then some of it has also been we'll call it either early reads or companies that we know are kind of gearing up for a sales process you know as we get further into 24 you know so my sense is you're going to see the and we said this on the last call it'll take having several quarters for this to kind of get through the system where things kind of actually fun but I think you'll see the majority or at least where we're sitting today the majority of that activity you know and kind of probably q2 closed and funded deal flow. In terms of competition, I'm assuming that means who's funding the deals. I do think the market is decently competitive right now. I think that's a little bit of the technical. There just hasn't been a lot of deals and people want to do some and stay funded and get to their target leverage with deployment numbers. But I think the quality of those deals remains very high and, you know, having the ability to earn kind of 12 plus percent on them for kind of, you know, good large companies, 1L sort of risk, you know, with good size equity checks, we still feel quite constructive on the market opportunity.

Okay. That's helpful. And then second question is maybe just could you give us an update on the asset-based finance

pocket or pool and as well as the credit opportunities partners I just I know particularly asset-based finance you've been particularly busy this year I wonder is that activity persisting yeah I mean so on the asset-based finance side it has been a very kind of busy time for us there you know I think our our platform is is meaningfully built out with you know over 50 people dedicated to the space you know we've got a fair amount of AUM dedicated to that space and, you know, the ability to kind of play up and down the capital structure, which I think is a real, you know, nice competitive advantage for us. I think we always think about that market as having a lot of white space. You know, we estimated sort of $5 trillion today, sort of on its way to seven, you know, so that's sort of quite positive. But with what's been going on with the regional banks has been, you know, a real sort of tailwind to that. either in allowing us to acquire asset portfolios or essentially fill the void from where they've taken a step back. I think we've been quite happy with what we've seen there. I think on the joint venture, I think the team's done a good job of seeing that continue to grow in terms of assets. I think we've got quite a strong liability structure there. I think we like the returns that is still being sort of, you know, put, you know, from that or sort of off of that, you know, joint venture. And it just has real size. And my number might not be perfect here, but, you know, it would be, I think, maybe the seventh largest BDC if we were on a standalone basis, just sort of our joint venture. So I think we like the size and scale we have there as well.

Great. Thanks very much.

Have a good day. Thanks.

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

Yeah, just one question, maybe two. You had a position Solera that was picking in the second quarter and was supposed to pick for two quarters. We've now moved into the fourth quarter. Has that one reverted now back to cash pay? And how is that company doing?

Yeah, good morning, Casey. The position has reverted back to cash pay. It did that at the end of Q3, but you won't see the impact kind of really, we'll call it, come through the numbers. That's why the pick income would have been sort of elevated in the quarter as it was in the second quarter. You know, you will see that it'll move entirely to sort of cash pay, and that was, I think, almost 30% or odd of the sort of, you know, total sort of pick amount, and the company performance is is strong in our mind.

Yeah. Okay. Good. Great. Secondly, are you willing to add some on balance sheet exposure? I mean, most of the exposure that you've added over the last several quarters has all gone to the JV. The JV is now at about 10%. Um, and maybe you address this a little bit, but, but where can you grow the overall portfolio? Are you, do you still have to go to the JV or can you add some to the on balance sheet exposure?

No, I think you should expect to see the on-balance sheet number sort of grow as well. I think we did add $2.89 to the joint venture this quarter. I don't think anything went to the joint venture sort of last quarter. I think we're kind of well inside our target leverage number at FSK. I think we're pretty happy with what we see in terms of dry powder in the entity, including the revolver sort of extent. I think you should expect to see, you know, while still with inside that sort of target range, us kind of continuing to add assets on FSK's balance sheet as we sort of move forward.

All right. Thank you for taking my questions.

Have a good day, Casey. Yeah.

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

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

Yeah, good morning, Ken. I think that sort of term, upper end of the middle market, has a pretty sort of broad definition. I think when we're talking to folks, that's probably more in the $100 to $150 million of EBITDA. I think in recent quarters, it's even gone beyond that as the syndicated loan market has been shut and private debt has really been, I think, the only gain in town. I do think we started the year as an extremely, we'll call it lender-friendly environment I think we've probably come off that a bit, and we mentioned about seeing a certain amount of spread compression. That said, I think more and more companies continue to access private debt as a financing source. I think especially doing that in times of volatility, and they're looking for certainty of financing. But I think just a lot of folks... are being drawn to this market versus the broadly syndicated market. The broadly syndicated market is never going to go away. I think private debt has become an equal peer there. I think we're still seeing very good structures. I think the market has had a good amount of discipline as it relates to some of the documentation weaknesses that we may have seen in the broadly sort of syndicated market, but just a little bit tighter on pricing, as we mentioned in our prepared remarks.

Gotcha. Very helpful there. And then one follow-up, if I may, in terms of the supplemental distributions, I wonder if you could share some initial thoughts on visibility, confidence, and the potential line of sight around supplementals for next year. Thanks.

Yeah, and I'll start to this, and Stephen Lilly might want to add to it. Obviously, we've had the sort of base in the supplemental, and then we had the $0.15 of special for 2023. I think that that is a good story in our mind. We've told the market we were going to pay sort of additional earnings as part you know, they were sort of earned by sort of FSK. I think that'll put, you know, roughly at, you know, $2.95 of sort of total dividends, you know, paid for the year, which I think is quite attractive for our investors and obviously a big sort of focus for ours. You know, we felt confident to extend that special. You know, that's the 10 cents that was mentioned in the prepared remarks. You know, I think by definition, you know, that means we feel confident about the supplemental as well. I think you should expect the base and supplemental to remain in the coming course.

Great. Very helpful there. Thanks again.

Thank you.

Thank you. One moment for our next question. Our next question comes from Ryan Lynch with KBW. Please go ahead.

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

Yeah, and Ryan, you're happy to talk about that. I mean, I don't think it was actually a small investment considering we're going to buy 40 billion euros over the coming years. Obviously, this was a strategic transaction for both us and for PayPal. There's a fair amount of, I think, public sort of statements out there that we can kind of point to. I think that said, you know, the receivables are short, which is why that, you know, $40 billion number does seem high. You know, the book will probably turn six times per year. You know, the 80 million euros that's kind of mentioned in the script was FSK's share of the overall sort of deal. And the deal, you know, is the receivables are essentially going into an SPV you know, there's certain banks providing financing to that SPV, and then FSK and the other KKR credit accounts are providing the remainder of the capital. You know, that $2 million piece was just the initial funding, but you should expect it to ramp fully over the coming course.

Okay. And then so the $80 million that's going to FSK, that was kind of what I was talking about with the smallish. Is that expected to grow over time, or how do you kind of view your overall exposure? to these loans, and maybe it's too early to tell. And then, I guess also, what should we expect with sort of the, it sounds like it turns over a lot, which would make sense, what are sort of the return expectation for these types of loans?

Yeah, I mean, I think you should expect that number to be sort of the target, at least for the near or sort of medium term. You know, it might very well sort of grow from there as the program progresses. continues to take off. I think like most things in our asset-based finance bucket, we view them as extremely attractive from, we'll call it a downside protection basis. We think because these are either secured receivables or short-duration receivables, we have a great amount of confidence in their repayment profile. But then we're generally trying to do deals inside this strategy it kind of let's call it mid-teens plus right so view it as great diversification to a corporate credit book um you know well protected from from when we think about sort of the downside and effectively return enhancing versus just regular way direct money okay and then one last one on it um are these sort of

loans that were previously going to, I know it's Europe, so maybe it's not relevant, but I'm thinking, you know, you mentioned earlier that, you know, kind of the slowdown of regional banks sort of lending. Are these the types of loans that would fit into, like, regional bank, these consumer financing type loans, that this is the reason that KKR is kind of stepping in to fill that void, or where were these loans previously going? been going.

Yeah, that wouldn't have been the case for a transaction like this. I mean, you don't have the same regional banking model in Europe that you have in the U.S. So that sort of concept is generally not the same. This was talked about a bunch on the PayPal side. This was all funded on PayPal's balance sheet before this deal.

Okay. Gotcha. And then I just had one question outside of the PayPal discussion. You talked about a lot of companies and deals sort of gearing up now that will take a while to sort of incubate and could come to fruition maybe in the second quarter and beyond in 2024. I'm just curious, what sort of do you think assumptions that these companies are making in order for these deals to transact? And maybe said it differently, are these deals dependent on sort of rate cuts? or stabilizing base rates, or is the current environment, if it just stays steady with rates stay where they are, the environment sort of stays stable, do you think that that's good enough to have these deals sort of come to fruition? Just from a high level. I know every deal's specific, but just kind of high level.

No, it's a fair question. I think just sort of stable will be, we'll call it enough of a catalyst or market conditions to allow that to get done. You know, I think you've had valuation mismatches for some time now between, you know, kind of the seller and sort of the buyer. I think those have, we'll call it started to narrow. I think, you know, at least sort of our view is we're in an environment of higher rates for longer. And I don't think the inflation story is done, but I think it's become, we'll call it much more manageable and sort of under control. And I do think you have the other sort of point out there. In the private equity community, I think there is a growing amount of pressure for realizations and money to be returned to LPs. And then there's also a lot of dry powder sort of sitting on the sidelines. So that's why I think if we could just stay in what's called a stable type kind of macro which obviously there's a lot going on, so maybe that'll be sort of hard. But I think we stay there. That'll be the catalyst to get that done. And we'll get these deals coming to market as we get through 24. Okay.

That's helpful. That's all for me today. I appreciate it. Have a good day, Matt.

Thank you. One moment for our next question. Our next question comes from Melissa Weddle with J.P. Morgan. Please go ahead. Good morning.

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

Yeah, it's a good and fair question. You know, I would probably separate the two just for one second. The market opportunity or the investing opportunity is quite strong. It's a thematic that we believe a lot in and this place that we've been very focused on. I think each of the deals is a little bit different. Sometimes the deals, when deployed, have to get to scale before they can start to pay a dividend. You can have a certain timing mismatch and then there's a handful of deals that we are looking to, we'll call it do certain positive things on the liability or sort of financing side, which will kind of restart that process where dividends might be slower. But I think about it more in terms of a timing mismatch than a permanent sort of point on the dividend side.

Got it. That's helpful. Thank you. I was also hoping we could touch on one portfolio company. I believe Graycent was on the non-accrual list previously. It looks like it was removed and marked up back to par in 3Q. I was hoping we could just touch on that. Was that a restructuring? Did they get current? Could you give us some detail there?

Yeah, I mean, it's been probably a multi-pronged restructuring um you know over the last you know probably 24 months and brian might want to sort of add to this but you know i think we've reached what we'll call the next phase of that you know this was a a legacy advisor position that had um sort of a meaningful amount of challenges you know the business has kind of shrunk sort of materially um uh and i think there's some additional sort of capital put into it as it relates to this quarter as well which kind of triggered it sort of going off that non-accrual list But it's a pretty small position at this point.

Thank you. One moment for our next question.

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

Hi, guys. Going back to the ABS, the dividend income for Q4, obviously, I mean, TORAC or whatever you're supposed to call it these days, the dividend went down this quarter. Is any of the relatively lower, still very healthy, level of dividends from the asset-backed finance side connected to the real estate market going to receive exposure indirectly there? Or is there something else just, you know, it's not normally seasonal in Q4. And that's obviously to your point, Dennis, the timing issues and things like that. But is there a real estate factor at play?

Yeah, and I'll answer the question, but if I miss something, let me know, because it was a little bit hard to hear a couple of the points in there. I mean, I think on the example of sort of TORAC, I mean, TORAC, you know, the underlying loan performance has been quite strong. And I think we've been sort of happy to see that. But like a lot of sort of asset classes out there right now, that would fall onto one where the cost of financing sort of generally has gone up more than the yields on the underlying loans. So that has put some sort of, we'll call it stress on net income or sort of ROE there. They do have the benefit of having been a very frequent issuer and having the ability to Those deals revolve, so as loans repay, they can continue to add to those. But I think this goes a little bit to Melissa's question. As we think about kind of forward financing, some of those structures might kind of trap cash in the entities for sort of a longer period of time. So I'd say it's not seasonal. We try to run that book as neutral as we can from sort of a rates perspective, but there'll be some amount of kind of refinancing risk there or sort of term out sort of points that we have to be mindful of.

Understood. Thank you. And that does answer the question for me. You talked about, obviously, there's a little bit of spread compression now. The syndicated market seems to be showing some signs of life, not all the way back yet by a long stretch. I mean, what are your thoughts over the give me a more conceptual over the next 12 months call. Is there a risk to spreads in the private credit market that if the syndicated market comes back more aggressively, that puts meaningful spread compression risk in the private credit side? Given base rates are so high, you can obviously, that could be handled without a problem. Does that create a dynamic where The spread compression risk is maybe elevated if the syndicated market comes back while base rates are very high.

Yeah, I mean, it's a very fair question. I don't think so, but I don't think so for a couple of reasons. I think there's a bit of a floor level to where this market sort of might very well get to. Part of that is driven by a bunch of the pools of capital that invest here might be levered pools, but I think you're always going to have a certain amount of a gap between the private debt market and the syndicated market. I think we've talked about this on some prior calls. I think if you looked at deals that were done at the beginning of 22, the market spread was probably 575 on average. I think that would have gapped out in the beginning part of this year to probably 675 on average. That's a pretty big move considering the benchmark also jumped almost 450 plus basis points. I'm just comparing that basis point number versus the floor that was in the deals. Now I think you're back down to you're looking at deals today that are probably you know, it's kind of six to sort of 625. But I think that's, I think those are going to be range bound generally in there. And I think it will be somewhat subject to deal volumes. You know, the desire for people sort of to deploy capital and then, you know, there's been maybe excess capital raised that's looking to get deployed quickly.

Thank you. Thanks.

Thank you.

One moment for our next question. Our next question comes from Bryce Rowe with B. Reilly. Please go ahead.

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

Yeah, happy to, Bryce. And Brian might want to add to these as well. But I think on the winter side, we announced on the last call this kind of agreement reached as it relates to restructuring. Those processes take time. I think we do expect that to get done. you know, hopefully at some point in Q4 or sort of early sort of Q1. But that's progressing along, you know, I think as we would expect. I think we've been, you know, happy with what we've seen in terms of, you know, stable performance at the company level. You know, I think the NBG process is pretty much complete. But anything you want to add?

Yeah, look, at NBG, you know, we restructured that business around their lighting fixtures business. which has historically been a relatively strong performer within their portfolio. That's really the basis of our investments going forward. Working closely with the management team on optimizing results, working through costs, working through sales, all those sorts of things. So that's sort of gone through the restructuring. Now we're on the other side and now it's gonna come down to execution. Okay, that's helpful.

And then maybe one more on the non-accruals. I mean, GlobalJet dominates the non-accrual list. I think it's 60% plus of the non-accruals fair value marked at a relatively high 75% to 80%. I mean, Dan, what would it take to get that account back to accrual status? Any kind of update you can provide there? Thanks.

Yeah, I think you're spot on on your numbers. I mean, it is 40% of the cost number, and I think it's 65% of the fair market value. We've talked about the name a couple of different points on the calls. I think the management team inside the company has done a very nice job. I think the underlying asset class, private jets, has had a fair amount of tailwinds, no pun intended, on the other side of COVID. Remember, it's a leasing business mainly, but a lending business as well. Their obligors are both high net worth, but also some of the larger kind of corporates in the world. So the book performance has been, I think, quite strong. We've actually taken a fair amount of cash dividends out of the company, and that's been a return of capital over the last handful of quarters. I think that's probably more likely the path forward for 24 companies. But I don't think the book has a delinquency in it right now. So I think the question or maybe the harder thing for that business has just been who their competition has been and what the available ROE has been. But again, I think they've done a really good job to get to where they are today. Yeah, and I'll just add, I think specifically their ROE has improved significantly.

several years ago in sort of low single digits. Now it's, you know, in the high single digits. You know, still would like it to be a little bit better, but it's certainly come a long way, and we're pleased to see the performance of the book. Got it.

That's a great update.

Appreciate it.

Thanks.

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

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

Yeah, I'm not sure, Eric, your instinct is entirely wrong in terms of probably being kind of near a peak. You know, I think, you know, kind of quarter on quarter, there's probably a little bit of, we'll call it further upside if you just look at kind of spot, you know, SOFR at June 30th and spot SOFR at kind of 930. And some of these loans, you know, have kind of reset periods, you know, that might be sort of 90 days. So it takes a little while for it to go through the system. I think on the other side of that, maybe to the positive, I think once we do start to see repayments, some of that could be on the lower yielding stuff that was sort of maybe put on lower yielding sort of inside the confines of the book, or maybe it gets refinanced for some of the companies that are highly performing. But then I do think we're in this environment of rates higher for longer. I think that's got a great tailwind. for income for FSK, you know, which we're sort of quite happy about. But I'm not expecting, we'll call it, meaningful upticks from here as it relates to kind of short-term or so for rates.

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

Yeah, Steven, you want to take that?

Yeah, Eric, we're continuing to be north of two and a half quarters worth of dividends, which is one of the, we sort of hit that target we've set on prior calls, which was the impetus for our special distribution that we started during, you know, earlier this year in 2023, and obviously that we just announced in conjunction with earnings that that will continue for at least another two quarters during the first half of 2024. pleased to have met that target. It's another we think of as a sort of nice asset to have and then share that excess with shareholders.

Great. Thanks for taking my question, Seth.

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

Yeah, thanks. Good morning. Just one question. Any material change in the prospects to generate the fee income once the market loosens up? You've been holding the loans longer, you and everyone else, and presumably the prepayment fees would be correspondingly lower. How sensitive is that income stream to the passage of time here?

I mean, it's an interesting point, Mark, and, you know, one, and clearly, you know, origination volumes, I think, for us in the industry broadly have been sort of lower, right? I think you can see that in the fee incomes, you know, numbers that you see. But if you do look back kind of to the same quarter or year ago, I think your fee income was, you know, two or two and a half times the size of sort of where it is today. So I do think that's a nice, let's call it natural, Even if we do see a certain amount of repayments, those repayments could generate, depending on when the loan was put on, a certain amount of exit fees, but then the new deals will generate a certain amount of new deal fees as well. I think the current quarter was $12 million of the income. I think that's lower than any kind of normal historical sort of average, so there is a bit of balance there. I think it's a very good point.

Thank you very much. Thank you very much.

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

Hi. Can you just give us some context on the decision to keep pure fishing second lien on Akula last quarter? It looks like that June 30 mark might have been informed by some discussions about exiting that position at a loss.

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

Last quarter you kept pure fishing second lean on a cool. It looks like this quarter you exited that at a loss. And that mark at June 30 may have been informed by discussions with the sponsor about exiting that position at a loss. So I'm just curious, basically, why did you keep that asset on a cruel last quarter? Is there any reason?

I think there's sort of two points there. So number one, you are correct. Probably most importantly, you know, we have exited that position. I think that was, you know, in many ways a good sort of outcome or a good result at the end of the day. And I think a bit of a testament to how we kind of risk managed the book. I think we were, you know, the asset continued to sort of pay cash. I do think the long-term prospects of that business will be, we'll call it positive. I think it's got some real sort of brands kind of attached to it. I think those were the drivers of the kind of accrual points and then the drivers of the sale was just kind of prudent risk management. But it's an exited position now. Okay, thank you.

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

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

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