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spk09: Good morning, ladies and gentlemen. Welcome to FSKKR Capital Corp First Quarter 2024 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you instructions on entering the queue. Please note that this conference is being recorded. At this time, Robert Pond, Head of Investor Relations, will proceed with the introduction. Mr. Pohn, you may begin.
spk10: Thank you.
spk00: Good morning and welcome to FSKKR Capital Corp's first quarter 2024 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 March 31st, 2024. A link to today's webcast and the presentation is available on the investor relations section of the company's website under events and presentations. Please note that this call is the property of FSK. 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 on May 8, 2024. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman, Dan Pietrzak, Chief Investment Officer and Co-President, Brian Gerson, Co-President, and Stephen Lilly, Chief Financial Officer. Also joining us on the call are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I will now turn the call over to Michael.
spk04: Thank you, Robert, and good morning, everyone. Thank you all for joining us today for FSK's first quarter 2024 earnings conference call. FSK had a positive start to the year consisting of net investment income totaling 76 cents per share and adjusted net investment income totaling 73 cents per share. During the quarter, we also made significant progress with regard to three of the investments placed on non-approval during the fourth quarter of last year. We experienced increased origination volumes as our investment team originated approximately $1.4 billion in investments. Our net asset value as of the end of the first quarter was 2432. From a liquidity perspective, we ended the quarter with approximately $4.2 billion of available liquidity. Finally, we delivered an annualized ROE of 10.1% for the quarter. Based on our positive operating results, our board has declared a second quarter distribution of 70 cents per share consisting of a base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. As we mentioned on our third quarter 2023 earnings call, our board previously declared a special distribution totaling 10 cents per share. The first 5 cents per share in stone was paid this February and the second $0.05 per share installment will be paid later this month. Accounting for the special distribution, our total second quarter distribution will be $0.75 per share. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to an 11.9% yield on our March 31, 2024 net asset value and an annualized yield of approximately 15% based on our recent share price. From a forward-looking perspective, we remain confident in the long-term earnings power of FSK, which enables us to continue paying an attractive distribution to our shareholders. We are encouraged by the increased level of origination activity and the quality of the deal volume during the first quarter. The private credit markets continue to experience strong tailwinds, and we believe we are well-positioned to take advantage of these opportunities. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.
spk13: Thanks, Michael. For the past year, it has been our view that inflation would remain elevated and the higher interest rate environment would last longer than some market observers expected. Our view has largely proven accurate and should our views continue to play out, we believe floating rate asset structures coupled with investment strategies focused on large defensive portfolio companies and asset-based finance investments directly tied to financial and hard assets will remain attractive. Looking ahead, it is our expectation that the economy will experience stickier inflation in the near term, coupled with continued, albeit slowing, overall economic growth. As Michael highlighted earlier, there are strong tailwinds to our business as sponsors continue to utilize private credit solutions to finance transactions. Origination activity picked up meaningfully in the first quarter compared to the prior few quarters, and we expect a material increase in private market transaction activity during 2024, given significant private equity dry powder combined with pent-up demand from an M&A perspective and the desire for private equity fund LPs to see a higher level of return of capital. As we mentioned on our last call, The macro backdrop created challenges for a few of our portfolio companies during the fourth quarter of last year. Our workout team has been active on these names, and as Brian will discuss, we are pleased to have achieved positive results quickly. And while there's still work to be done reducing our non-income and non-accrual investments, we clearly are pleased with the recent progress we have made. Turning to investment activity. During the first quarter, we originated $1.4 billion of new investments. Approximately 75% of our new investments were focused on add-on financing to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $1.7 billion of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio decrease of $221 million. New originations consisted of approximately 69% in first lien loans, 3% in second lien loans, 3% in other senior secured debt, 1% in subordinated debt, and 24% in asset-based finance investments. As we mentioned on our last call, with regard to new investments, we are continuing to see tighter pricing in the upper end of the middle market. The trade-off to the spread compression is still strong documentation and very solid credit profiles. We also continue to be pleased with the quality of the new deals. During the first quarter, our new direct lending investments had a weighted average EBITDA of approximately $243 million, 5.7 times leverage through our security, and a 47% equity contribution, all with a weighted average coupon of approximately SOFR plus 570 basis points. One example of a new deal in the quarter was our investment in Curia Global, a manufacturer of active pharmaceutical ingredients who provides contract pharmaceutical development, manufacturing, packaging, and analytical services. AKR was the sole lender, as we provided a $125 million off-balance sheet SPV structured trade receivables facility secured by Curia's U.S. receivables. Pricing was 625 basis points with a 2% upfront fee. FSK committed $83 million of the $125 million facility. Additionally, in the first quarter, KKR and its affiliates, along with other partners, purchased GreenSky, a point-of-sale finance company from Goldman Sachs, as part of its divestiture from consumer-related businesses. GreenSky was founded in 2006. and focuses on offering home improvement financing alternatives for prime borrowers. FSK committed $80 million to the transaction. I also wanted to highlight a sale of the music IP investment in KKR Chord IP Aggregator that occurred during the first quarter. In connection with this sale, FSK received an $89 million return of capital. FSK Chord IP Aggregator also received a well-collateralized seller note that is expected to be repaid during 2024. And FSK's respective share of the seller note is approximately $30 million. The transaction resulted in a $20 million gain to our net asset value, and we expect to realize an IRR of approximately 18% on our position. When we look at the aggregate trends across our portfolio companies, we have continued to see high single-digit EBITDA growth, with modest margin pressure due to the continued inflationary environment. Over the coming quarters, while we expect continued revenue growth from our portfolio companies, we would expect growth to slow modestly, as macro trends could potentially lead to a slowdown in economic growth. The weighted average EBITDA of our portfolio companies was $218 million as of March 31, 2024. Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 7% 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.
spk14: Thanks, Dan. As of March 31, 2024, our investment portfolio had a fair value of $14.2 billion, consisting of 205 portfolio companies. This compares to a fair value of $14.6 billion and 204 portfolio companies as of December 31, 2023. At the end of the first quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 57% first lien loans and 65% senior secured debt as of March 31st. In addition, our joint venture represented 9.8% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans total approximately 66% of our total portfolio and senior secured investments total approximately 74% of our portfolio as of March 31st. The weighted average yield on occurring debt investments was 12.1% as of March 31st, a decrease of 10 basis points compared to 12.2% as of December 31, 2023. The decrease was largely driven by spread compression on new deals. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with a merger with FSKR. From a non-accrual perspective, As of the end of the first quarter, our non-accruals represented 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis. This compares to 8.9% of our portfolio on a cost basis and 5.5% of our portfolio on a fair value basis as of December 31, 2023. We believe it will also be helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the first quarter, non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FSK Care Advisor, were 2.3% on a cost basis and 1% on a fair value basis. During the first quarter, we placed one small investment on non-accrual, with a cost and fair value of $21 million and $19 million respectively. Additionally, we removed three investments from non-accrual status with a combined cost and fair value of $395 million and $224 million. WIDR was one of the names removed from non-accrual during the quarter. As we've discussed on prior earnings calls, we placed our second lien loan on non-accrual during the first quarter of 2023 as it was facing persistent inflation headwinds, as well as a slowdown in construction in China. The restructuring resulted in our second lien loan being fully equitized and KKR taking control of the business. The first lien debt of the company was significantly reduced at the operating company, and FSK's existing first lien loan was converted into a 52.2 million euro other senior secured debt positions. FSK and other funds managed by KKR provided new capital to the company to fund operations. This recapitalization resulted in $122.5 million of cost and $31 million of fair value being removed from non-accrual status. Additionally, KBS completed its full consensual restructuring during the quarter, which resulted in equitization of a portion of the non-occurring second outloaned, and FSK and other lenders taking control of the company. FSK received $190.5 million of a new first lien loan, $82.8 million of a new second out first lien loan, $48.3 million of preferred equity, and KKR managed funds now own 46% of the company. This restructuring resulted in $197.6 million of costs and $135.3 million of fair value being removed from non-accrual status. Lastly, our first lien position in Sweeping Corp of America was restructured during the first quarter and the company received a $50 million cash injection from the equity sponsor. The first lien debt facility was restructured into a $15.7 million first lien, first out cash paid term loan a $28.1 million first lien, first out pick tranche, a $8.3 million second lien, first out, and a $24 million second lien, second out term loan. This restructuring resulted in $75.3 million of cost and $57.2 million of fair value being removed from non-accrual status. The progress we've achieved with regard to these portfolio companies is an example of the benefits of KKR Credit's investment platform. Our fundamental de-risking approach to these credits was evident in our resolution of non-accruals this quarter. While we prefer sponsors to continue supporting their portfolio companies with additional equity, we have the resources and capabilities to support companies ourselves when necessary. By taking action quickly, we believe we will significantly improve our chances of receiving a meaningful or even full recovery of our investment capital over time. And with that, I'll turn the call over to Stephen to go through our financial results.
spk08: Thanks, Brian. Our total investment income decreased by $13 million quarter over quarter to $434 million, primarily due to repayments of higher yielding positions and the impact of investments placed on non-accrual during the fourth quarter of last year. The primary components of our total investment income during the quarter were as follows. Total interest income was $350 million, a decrease of $18 million quarter over quarter. Dividend and fee income totaled $84 million, an increase of $5 million quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows. $53 million of recurring dividend income from our joint venture other dividends from various portfolio companies totaling approximately $14 million during the quarter, and fee income totaling approximately $17 million during the quarter. Our interest expense totaled $116 million, a decrease of $2 million quarter over quarter, and our weighted average cost of debt was 5.4% as of March 31st. Management fees totaled $55 million, a decrease of $1 million, and incentive fees totaled $43 million, an increase of $2 million, quarter over quarter. Other expenses totaled $8 million, a decrease of $2 million, quarter over quarter. The detailed bridge in our net asset value per share on a quarter over quarter basis is as follows. Our ending 4Q2023 net asset value per share of $24.46. was increased by GAAP net investment income of 76 cents per share and was decreased by 14 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 quarterly distribution and the 5 cent per share special distribution. These activities result in our March 31, 2024 net asset value per share of $24.32. From a forward-looking guidance perspective, we expect second quarter 2024 GAAP net investment income to approximate 74 cents per share, and we expect our adjusted net investment income to approximate 71 cents per share. Detailed second quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate 341 million dollars. We expect recurring dividend income associated with our joint venture to approximate $52 million. We expect other fee and dividend income to approximate $34 million during the second quarter. From an expense standpoint, we expect our management fees to approximate $55 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $114 million. and we expect other GNA expenses to approximate $10 million. As Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share, comprised of $2.80 per share of quarterly distributions and 10 cents per share of special distributions. Our gross and net debt-to-equity levels were 117% and 109% respectively at March 31, 2024, compared to 120% and 113% at December 31, 2023. As of March 31, our available liquidity was $4.2 billion, and approximately 65% of our drawn balance sheet and 44% of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
spk04: Thanks, Stephen. In closing, we're pleased with a positive start to 2024. As our origination activity picked up, we made significant progress on certain portfolio names, and we continue to fully earn both our base and supplemental distributions on a per share basis. The long-term earnings power of FSK continues to be strong, and we have confidence in our ability to continue to award shareholders with these attractive distributions.
spk10: And with that, operator, we would like to open the call for questions.
spk09: 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 11 again. Please wait while we compile the Q&A roster. Our first question comes from John Hecht with Jefferies. John, please go ahead with your question.
spk02: Morning, guys. Thanks for all the detail in the quarter, and thanks for taking my questions. The first one is you had a very active deployment quarter, but then also it was very active in repayments as well. Dan, I'm wondering kind of your outlook for both sides of that picture. I know you've talked about an increasing deal market over the course of this year because of private equity fund needs. And maybe give us an update on your perspective there. And then in addition, What kind of signals should we look for for the repayment activity to either stabilize or start to drop? And is that a function of, call it the liquid loan markets, and different levels of competition in the space?
spk13: Good morning, John. Maybe starting with your second question first, I think we probably are expecting some We'll call it some level of consistent repayments because the syndicated loan market is open. We think that's a good fact because that just speaks to overall market activity. A lot of these companies have been held by their sponsors for some extended period of time, so they could very well be sold. All that said, I think the incumbency positions do have real value for us, and you've seen that quarter after quarter. I think we were happy to start to see some level of additional sort of pickup in the market. You can see that in our deployment numbers. Some of that is loan extensions. With some of those loan extensions came repricings. I think we touched on that during the call as well. We do remain pretty confident, though, that there are, we'll call it, a bunch of technicals out there that are going to push this M&A market to more fully reopen. You know, there is pressure from the LPs. There is a lot of dry powder on the sidelines. And I do think that, you know, valuation mismatch that we saw for most of kind of the second half of 22 and 23 is definitely narrowed. So I think that should make for a productive kind of Q2 second half of the year.
spk02: Okay. And then second question. That's helpful, by the way. And second question is that, you know, you mentioned spreads – you know, a little bit under pressure just because of the market dynamics. Where do you think those are going? And, you know, where are you finding opportunity in the market where maybe the spreads aren't getting quite as pressured?
spk13: Yeah, no, it's a very fair question considering, you know, I think what everybody's been seeing out there. You know, spreads have, you know, definitely tightened. You know, I would say they've tightened, you know, 75-odd basis points in maybe the last six months. I think there is a bit of that market technical out there in my mind, where even though we're starting to see some level of activity, it's not that normalized level. And for some of the pools of capital, a decent amount of money has been raised that's looking to get deployed. My sense is that does change with the comments I made to your prior question, John. So if the market is kind of living in a – probably 500 to 550 now. I think you're going to get back to probably where you were, we'll call it pre-all the rate moves. I think the market was kind of a 550 to 600 market from a spread perspective. The one point I would make, though, is even with some of the repricings, we are getting the benefit of extending call protection. I would say we're extending that for one to two years on average, and we are getting the benefit probably more times than not of actually charging an upfront fee in conjunction with that. So there's some offsets to that, which is helpful. And then just your last point, I mean, we talked about some of the deals that we did in the quarter on the call. You know, some of the trade receivable stuff, some of the other asset-based finance stuff is providing additional return to the portfolio, which we're happy to see.
spk02: Great. Thanks very much.
spk13: Have a good one.
spk09: Standby for our next call. Our next call comes from Kenneth Lee with RBC Capital Markets. Kenneth, go ahead with your question.
spk12: Hi, good morning. Thanks for taking my question. Just one on the asset-based finance opportunities there. Wondering if you could just talk about the current outlook for such opportunities and perhaps talk a little bit more about the competitive landscape that you're seeing and whether you're seeing any kind of impact from new entrants into the space. Thanks.
spk13: Sure. Good morning. Thanks for the question. You know, it is a sector that we're pretty excited about, and we feel like there's, you know, a lot of white space there. You know, it is, you know, and Kenneth, it goes a little bit to your comment, it is a very kind of Large market, we estimate that market is north of $5 trillion. That makes it bigger than the direct lending market, the syndicated loan market, and the high-yield bond market combined. So I think that's a good fact. I think it's in the early days of capital formation, so there's just not a lot of scaled capital players out there. And then there have been some market thematics that have given some pretty good tailwinds to this business. Obviously, there's been certain challenges with the regional banks. There's been banks selling assets. There's been banks committing maybe less capital than they did to certain FinCos. Somebody needs to come there and fill that void, you know, pools of capital like ours that we are managing here with FSK or sort of otherwise are able to sort of do that. So I think all that lines up, you know, big market, not a lot of scale capital, some good sort of tailwinds, and I think We really like the up-down of the risk profile and the relative value. So I think we'll continue to be active there.
spk12: Gotcha. Very helpful there. And then one follow-up, if I may. Really appreciate the details around the restructuring involving those three portfolio companies. I wonder if you could just talk a little bit more at a higher level around the general approach of that FSK has around potential de-risking, what kind of options are available, and how do you choose the course of action for particular portfolio companies? Thanks.
spk13: Sure, happy to do that. I imagine we weren't pleased to see what we'll call progress on these names. I think we are fortunate from a human capital or a staffing perspective to have a very strong restructuring and workout team You know, it's a dedicated team. A woman, Lauren Kruger, runs that team. You know, in addition to running that team, she sits on the investment committee for the regulatory business, so she's active across the board. You know, I would say it's a very bottoms-up approach in many ways, right? And this is the comments that sort of Brian made. I mean, obviously, we would prefer, you know, the sponsors support the companies directly. and we're obviously willing to work with the sponsors to do that. From time to time, that won't be an option, and we need to be prepared to take control. You know, we're not afraid to do that. We've got the resources of the entire firm sort of behind us. But maybe just kind of one example of this is, you know, while KBS was, you know, I think a difficult situation, you know, that consensual deal I think will help, you know, kind of drive longer-term value. We've brought other resources in. from the firm, including a handful of KKR advisors to bear to that situation, which will be helpful. In some ways, all the options are on the table. We're going to pick what we think is the best for that current situation, but I think it's just important to have the resources that are available. I think we are happy to see these non-accruals down quarter over quarter. I think we do still remain happy with the You know, 88% of the portfolio is that KKR sort of originated piece, and the non-accruals are 2.3% and 1%. So I think it's just an important fact to understand out there.
spk14: Hey, Dan. The one thing I'd add to this, Ken, it's Brian, is that in situations like this, time is not always your friend. So I think our approach to sort of address things quickly and, you know, deliberately – really important because sometimes you know we never believe in kicking the can down the road because situations get worse not better in those you know in those circumstances so we want to drive to a resolution clearly you know we do prefer the sponsor to support continue to support their portfolio companies and they often do but when they don't we just don't want to you know close our eyes and hope for the best we need to be getting in there and preparing to you know, maximize value for our investors.
spk12: Gotcha. Very, very helpful there. Thanks again.
spk09: And bye for our next question. Our next question comes from Bryce Rowe with B. Riley. Bryce, go ahead with your question.
spk05: Thanks a bunch. Good morning. Appreciate you taking the question here. I want to kind of ditto some of the comments around, you know, the information around the restructurings, resolutions. Super helpful and certainly pleasantly surprised to see the pace at which you made those happen. Maybe shifting to the, you know, the capital structure, and might have talked about this in past calls, but Stephen, maybe you could speak to the opportunity to refinance or at least address some of the maturities you have coming up in 24 and 25, especially in light of how open the debt capital markets are today? Thanks.
spk01: Bryce, thanks for the question. You know, I think from our perspective, we took care of our July maturity last fall when we issued 400 million of unsecured notes. And, you know, certainly agree with your point. The markets are open and appear to be active. So, yeah, that's certainly a good thing. I think we'll evaluate things in the normal course as, you know, we've been a frequent issuer. I think we'll continue to be over time and certainly getting, you know, having a very nice start to the year like this quarter, you know, has been a very clean, positive quarter for us. So, I think we'll take all those things in consideration. But, you know, I think the The way the capital structure, the way we have laddered it over the last several years, you know, really de-risks us from that standpoint just in terms of being sort of methodical, you know, regular issuer, you know, on the year-to-year basis.
spk05: That's helpful. And then, you know, maybe just one follow-up on the restructuring for the resolutions. obviously took care of some here in the first quarter. But curious, I assume that that workout group continues to kind of work hard on the other situations. Can you speak to maybe the pace of those potential resolutions and kind of maybe an update on Miami Beach since it was one of the larger non-accruals that were added in the fourth quarter? Thanks.
spk13: Yeah, Bryce, happy to. I mean, obviously the team will remain busy there and kind of focus for the resolutions, and I thought the point that Brian made was a very good one. I think we continue to make progress on Miami Beach, probably a little bit more of a complicated situation, complicated sort of industry, probably more to talk about there in the coming quarters. There's a handful of other names that maybe – are either on the non-accrual or the non-income producing list that, you know, we're kind of watching M&A markets closely. We are, you know, probably preparing for or thinking about kind of, you know, 24 or early 25 sort of exits there. And then, you know, maybe just one, you know, of the larger names that you have is GlobalJet. You know, that I think is, you know, roughly 44% of the non-accrual balance there. I think we've been very happy with what management has done of late. I think they've done a really nice job. You know, that book is at the overall company level on the asset side is north of $2 billion. I don't believe there's one credit issue in that portfolio. They recently accessed the capital markets from a financing perspective and, you know, we would have received roughly $130-odd million of distributions as that business continues to right-size its equity base. So I think the team's done a really nice job there working with the managing team and the other sort of sponsors to push that business forward. But those are probably some highlights for you, Bryce. Excellent.
spk05: Thanks, Dan. Appreciate it. Thanks for the talk.
spk13: Have a good day.
spk09: Stand by for our next question. Our next question comes from Casey Alexander with Compass Point Research and Trading. Casey, go ahead with your question.
spk03: Hi, good morning. A couple questions, Stan. One, in relation to the new underwriting environment, are we seeing repays with higher yields and the new spread compression? Should we be thinking about a drag on weighted average yields as the year goes along? And that's just, I think, a general question, but I'm curious how you feel about that.
spk13: Good morning, Casey. I think it's rational to think that, right? I mean, I think this is not just an FSK point, but people's books will get rotated. Those rotations could go into lower-yielding assets. but I think that lower yield will be driven, obviously, by the benchmark, but by the spreads as well. I do think, though, there'll be some offset to transaction fees that will benefit earnings and maybe smooth that out a little bit. There's been an extraordinary light amount of volume for probably the past eight quarters, so I think you can probably go back and look across the industry at that, so I think that's you know, probably a bit of a balance. And then, you know, I think we, you know, come back to what Bryce's question was. We're working pretty hard on some of these non-accrual or non-income producing names that, you know, rotating that into income producing will be quite beneficial to the bottom line. And we're still a little bit, we're within our target leverage range. We've still got a little bit of room there, which will help.
spk03: Thank you for that. Secondly, on the ABL side, You know, KKR has, I believe, you know, set up a real effort to attack ABLs, not just withstanding the BDC. So that's clearly a focus at KKR. So what percentage of the portfolio would you be willing to take ABLs to in the BDC? And where do origination yields there sit relative to direct origination private credit And is that also a way to potentially offset some drag on weighted average yields?
spk13: Yeah, no, thanks for that, Casey. We do have a real effort there. We have north of 50 people dedicated to that space. We have north of $50 billion of total AUM in that space. I mean, just a nomenclature point, we call it asset-based finance, more focused on portfolios of financial and hard assets and the market historically used views the ABLs as just receivables only, but it is a broad effort for us. We do, as I mentioned, like the downside protection, but specifically, Casey, to your point, we're probably seeing deals anywhere kind of 100 basis points to kind of 400 basis points wide of your regular way direct lending deal. I think we are... kind of within the range that we've talked about historically for asset-based finance inside of FSK. We obviously have the benefit of our joint venture to kind of help there. But, you know, I think you should continue to expect us to be active there, you know, rotating into new deals as some of these other deals will continue to self-liquidate or self-amortize.
spk14: Casey, the other constraint is just non-EPC. You know, ABF investments are usually non-EPC, and we have to stay within the 30% bucket, and we also have the JV. So that's a bit of a constraint, but as Dan mentioned, we can also put ABF into the JV to basically increase our buying power in non-EPC.
spk03: All right. Okay. Great color. Thank you for taking my question. Thanks, guys.
spk09: Stand by for our next question. Our next question comes from Melissa Waddell of JP Morgan. Melissa, go ahead with your question. Thanks, and good morning.
spk07: Wanted to touch on, I think it's really a follow-up to the first question about sort of investment activity levels. You know, obviously with some elevated repayment activity in the first quarter, we saw leverage in the portfolio come down a bit. You know, given it's sort of middle of the target range right now, I'm curious how you feel about that level of sort of portfolio leverage, especially in the context of your comments about expecting portfolio company growth on the revenue side, and I think on the EBITDA side as well, to start to decelerate in the back half of the year.
spk13: Yeah, thanks, Melissa, and good morning. I think we're pretty comfortable with where we sit right now, right? We've historically given that kind of one to one and a quarter times range, you know, with probably the midpoint of, or sort of the target at kind of the one, one, five. So maybe, you know, slightly sort of below that. I think we like, you know, how much available liquidity we have. I think we like the maturity ladder we have on the liability side. I think we're prepared to kind of operate within that range. you know, considering we have, you know, that level of dry powder. You know, I think on to your other comment, I mean, I think like the overall, you know, market has taken the view maybe almost too aggressively that sort of the hard landing concept is removed from the equation and we're in this more kind of soft landing perspective. I think we are expecting some slowdown, though, you know, at the consumer side more sort of broadly, which will impact some of the names here and maybe reduce that kind of year-on-year EBITDA growth. It is our job for these companies to be a little bit glass half-empty, but we've got a little bit of room to work on the leverage side, and we're in a good liquidity position, so we feel good about that.
spk07: Okay. Appreciate that. And then following up on the funding, you know, there are a decent number of upcoming maturities. And you guys have done, have always approached your unsecured issuance as incredibly laddered and well diversified. But there are some maturities coming up in 24 and 25. Given the rate environment, given the spread environment, how are you thinking about sort of funding those upcoming maturities? And are you what's the appetite for further diversification versus sort of using the available capacity on the revolvers? Thank you.
spk13: No, no worries. And I think Stephen may have touched on some of this. So, Stephen, if there's something to add here, please do. But, you know, we did do that deal in November, essentially, you know, pre-funding the upcoming, you know, maturity in the summer. Obviously, we've got the $4.2 billion of available liquidity. You know, we've got, I think, 65% of our you know, balance sheet is funded, you know, today from unsecured. I think you should expect us to be a very active issuer there and, you know, do that with some level of consistency, but also do it, you know, in a bid on an opportunistic basis when markets are open. And then, you know, I think we'll also look at, you know, other tools like, you know, CLOs or sort of otherwise to make sure we're kind of fully, you know, diversified from a liability perspective. But Stephen, did I, anything you want to add there?
spk01: Thank you. Covered it well.
spk09: Okay. Thank you. Stand by for our next question. Our next question comes from Robert Dodd with Raymond James. Robert, please go ahead with your question.
spk11: Morning, guys. On the forward outlook in terms of economic risk and macro risk, how much of that concern stems from overall demand and revenue versus margins, right? But we're hearing mixed messages from some BDCs that, well, generally BDCs with a lot of software are seeing margins go up because software companies are slashing sales expense. But on your companies, how much of the kind of the cost cutting or margin management tools have already been expended, so to speak, over the last several years? Because obviously it's been a theme for a lot of companies for many years. And are they running out of tools on that front, do you think?
spk13: Yeah, good morning, Robert. It's a fair question. Our biggest sector exposure is sort of software. We've just focused on the larger sort of software names that were more EBITDA focused than recurring revenue sort of structures. I think we have seen out there that the ability to just you know blindly push through price is probably you know kind of abated and and it'll be you know more challenging just to just to do that so I think that is one point and you know almost in line with I think with what your thoughts are there you know I think where we've seen probably the most you know more or the most challenged in certain situations is when a company, when their kind of expense line is heavily driven by wages ranks, the wage inflation remains a real sort of point out there when you couple that with, you know, just the higher rate environment. And as we've talked about for multiple quarters, now we expect rates to remain higher for longer. So, you know, those are probably a little bit more of the things we do have our eye on. Um, you know, so I, I, I think we're mindful about that sort of revenue piece. I think that's partly why we're talking about expecting to see just kind of slower sort of EBITDA growth in the coming quarters.
spk11: Got it. Thank you. And then just your other point, activity levels in the second half of the year, obviously also a theme. Lots of expectation there to the point you outlined, right? I mean, LPs want their money back. How is, in your opinion, is the bid-ask between buyers and sellers on the PE side, is that actually beginning to close? Because that's obviously been a factor of why activity levels have remained low. And do you think that's going to close sufficiently, say, this year for there to be a pickup, a material pickup in activity in the second half, or are people still playing chicken on that side?
spk13: No, I think the short answer is yes. I think it has closed meaningfully or will kind of close enough to get the transaction levels up. I do think you had a bunch of what's called different factors in play. I think we, even going back to last summer, we saw a little bit more activity, a little bit more books coming around or sort of chatter about deals than the events in Israel and the Middle East sort of happened in October. That sort of we'll call it put most things on hold. And then the market was forecasting these six rate cuts, you know, coming into the year. I think people wanted to hold assets with the view that in a lower rate environment, they would sort of get better prices. But I think there's a decent, you know, consensus out there that rates are going to be higher for longer. So that's kind of off the table. And I think there's also a decent consensus that, you know, while there, there might be certain bumps in the road or sort of challenges, you know, this, this, As I said, the conversation around hard landings off the table, it's all, you know, pretty muted in terms of sort of, I think, you know, challenges in people's mind. Albeit, I think we're a little bit more cautious on that. So I think all that is coming together. And then, Robert, you said it. I mean, people are looking for, you know, capital back on the LP side. And on the other side, there's a lot of dry power.
spk09: Got it. Thank you. Stay healthy.
spk13: Thanks.
spk09: Stand by for our next question. Our next question is from Eric Zwick of Hufti Group. Eric, go ahead with your question.
spk15: Thank you. Good morning, everyone. I wanted to start first with a question regarding the pipeline. I'm curious if you could provide any commentary in terms of how that looks today in terms of the mix of new investments versus add-on opportunities, as well as if there are any particular industry segments that you're finding that are either kind of more active or more attractive from your perspective.
spk13: You know, I'd say it's almost in line with what you'd probably expect, right? You know, we've been probably overweight, you know, the add-on and the incumbency. So I think you're always going to see a large chunk of that considering the size of the platform. But some of that will be regular way kind of new deals. So I think it's pretty balanced. You know, I think the pipeline, you know, is decent right now. I think the level of deals that I see being screened or making their way to investment committee is definitely up more quarter on quarter or up more than maybe what we saw last year. I still think it'll take a little while to play out though, right? Because some of the conversations here are just people gearing up for this. That means it's a multiple month process and a multiple month kind of close, but constructively.
spk14: Yeah, I mean, the one thing I'd add, Eric, is that just because a company is being sold doesn't necessarily mean it's going to go out of our portfolio. You know, we are always in active dialogue with sponsors looking to sell companies about providing, you know, financing to the new buyer. And because we have the incumbency position, that gives us a bit of an advantage over some of our competitors. So clearly, you know, that's a focus for us.
spk15: That's helpful. Thank you. And the second question for me, it was just interesting to notice on slide 10, median interest coverage for your companies has been pretty stable for about a year and actually ticked up a little bit in one queue, which, you know, makes sense given that base rates have been pretty stable. And, you know, given the fact that you said you've kind of seen high single digit EBITDA growth over the past year. So I guess if we assume that rates stay here or even potentially come down and you continue to see some EBITDA growth, is it a fair assumption that we've kind of seen, you know, the bottom of kind of a trough for this particular metric for this cycle?
spk13: Yeah, that would be our view in terms of the trough. Now, that view is a little bit driven off the fact of, well, we don't believe that, you know, rates are necessarily coming down anytime soon. I don't think they're going up either, right? So it's probably more leaning to over the next several years, kind of these rate reductions. You know, you did see that kind of, you know, uptick a bit. I think to be fair, it probably wasn't all or the entire sort of point one. I think some of it may have just been kind of the rounding there, but it definitely improved kind of quarter on quarter.
spk15: Thanks for that confirmation there. Thanks for taking my question today. No problem.
spk09: Stand by for our next question. Our next question comes from Maxwell Fritcher of Truist Securities. Maxwell, go ahead with your question.
spk06: Hi, good morning. I'm calling in from Mark Hughes. Just a broader question about the economy. But is there any sector in particular that you're seeing cracks in or staying away from? Or are any credit issues, and this is industry-wide, not just in your portfolio, are these credit issues more idiosyncratic? Thanks.
spk13: Yeah, and I think we've talked about this on some of the prior calls. I mean, I think we have tried to build a portfolio staying away from the secular decliners, right? So that's been sort of positive out of the gate. But, you know, that has, you know, those I think in many ways would continue to be challenged. I think we have seen, you know, businesses in the healthcare space probably be a little bit more challenged. I think some of that has had to do with, And this is an industry point, not just anything with us. Some of it has to do with the revenue side and how people are getting reimbursed. We've seen some of the discretionary spend names kind of struggle. Some of these roll-ups are sort of struggling. So healthcare, which historically has been viewed as a defensive asset class, has probably been a little bit more mixed. And I think that probably continues for sort of some time. But Brian, anything else you want to ask?
spk14: I mean, look, I think you said it pretty well. I mean, we've been focusing on industries that we think are more defensive. We like software. We like consumer-driven healthcare. We like professional services, business services. Those have all been pretty resilient. Energy, retail, consumer products, we've just tended to stay away from. You know, look, I think... We're continuing to see pretty solid earnings growth across the book, as evidenced by that 7% number that Dan focused, but that's clearly an average. I would tell you that there's nothing right now where we could say somatically, beyond what Dan said, there are certain industries that are just having real trouble. You know, it's been somewhat, you know, specific, situation-specific with, you know, some of our non-accruals and problem credits. And, you know, I think we just need to continue to be cautious about the overall economy and whether we have a soft landing or not.
spk06: Got it. Thank you. And then switching gears to the second lean investment, are you still seeing good opportunities there? Obviously, many lenders are focusing or emphasizing their their first lien, which you do have, that's the majority of your portfolio, so that's understandable. But any insight on the second liens, what you're seeing there in terms of spread, yield, et cetera, and how you're looking at those?
spk13: Yeah, and, Mark, I'm probably thinking about it a little bit, or Maxwell, sorry, I'm probably thinking about it a little bit broader as kind of, you know, junior debt is a whole category, right, thinking about second lien or things that might be more sort of MES-like. Obviously, activity has been kind of muted there for several years because that is generally driven by a more active M&A market. We have seen a handful of deals get done of late. They have been probably top decile businesses, so there has been second leaning in those structures. Those structures were actually pretty darn tight from a spread perspective. Our sense is as the M&A volumes do pick up, there's going to be more opportunity in that junior debt space. I think that will be an interesting opportunity as well, considering that business I think we view as a little bit more cyclical, so the time to get in there is when the M&A picks back up and the financing markets are going to need someone to help fill that void. And, you know, those could be pretty attractive, you know, structures from a yield or a total return perspective. Now, all that being said, I think we're quite mindful about portfolio construction here and making sure we've got a fair balance of kind of really, you know, leading with, which is the focus of this is, you know, that kind of, you know, first leaner unit launch, you know, senior secured risk.
spk14: We have a pretty high bar for junior capital. We talk about the weighted average EBITDA of the portfolio being call it G20, give or take. If you look at our junior debt investments, on average, EBITDA is probably twice that. When we do go junior, they tend to be in much larger businesses. They tend to be businesses where sponsors have written billion-dollar-plus checks or multiple billion-dollar checks You know, that's typically driven by New Deal activity, as Dan mentioned.
spk06: That's helpful. Thank you.
spk09: Showing no further questions, I would like to turn it back over to Dan Petersack for our closing remarks.
spk13: Thank you all for joining the call today. We're always available for any follow-up points that you might have, and we look forward to talking with you again next quarter. Have a good day.
spk09: Thank you for your participation in today's conference this does conclude the program you may now disconnect.
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