FS KKR Capital Corp.

Good morning, ladies and gentlemen. Welcome to the FSKKR Capital Corp's second 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, Anna Kleinhen, Head of Investor Relations, will proceed with the introductions. Ms. Kleinhen, you may begin.

Thank you. Good morning, and welcome to FSKTR Capital Corp's second quarter 2024 earnings conference call. Please note that FSKTR Capital Corp may be referred to as FSK, the funds, 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 June 30th, 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 second quarter earnings release that was filed with the SEC on August 6, 2024. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman, Dan Pietrzak, Chief Investment Officer and Co-President, Brian Gerson, Co-President, and Stephen Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's second quarter 2024 earnings call. During the second quarter, FSK generated net investment income totaling 77 cents per share, and adjusted net investment income totaling $0.75 per share, as compared to our public guidance of approximately $0.74 and $0.71 per share, respectively. As we look at our borrowers' operating performance for the quarter, we continue to see strong results as most companies have adjusted to the higher base rate environment. We did, however, see some stress on investments placed on our accrual in the prior quarters. Our workout investment teams have continued working toward resolutions for these portfolio companies. And the team will go into more detail on this later in the call. From a liquidity perspective, we ended the quarter with approximately $4.7 billion of available liquidity. Our board has declared a total third quarter 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. We continue to believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to a 12.1% yield on our June 30, 2024 net asset value of $23.95 per share and a yield of approximately 15% based upon our recent share price. As Dan will discuss in more detail during his comments, the market remains competitive as all lenders have experienced some amount of spread compression. During the first half of 2024, the investment team originated $2.7 billion of investments, of which $1.3 billion more originated during the second quarter. From a forward-looking perspective, despite the expectations the Fed may begin reducing interest rates as early as September, we believe the elevated rate environment, coupled with our still significant level of spillover income, will continue to drive FSK's earnings and provide support for the attractive base and supplemental distributions we are paying our shareholders. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Thanks, Michael. The first half of this year has been characterized by a strong economic backdrop. However, recent economic data has surfaced some concerns over the health of the U.S. economy. Global markets have evolved and adapted to the current interest rate and inflationary environment. However, the domestic political environment and the international geopolitical situation remain extremely complex. As a result, and with certain recent market moves, we expect market volatility to remain elevated. Regardless of the election outcome, we believe government spending will likely remain elevated regardless of which political party wins the White House. Importantly, productivity in the U.S. remains high, which should allow many companies to continue their level of sustained growth despite higher wages and inventory costs. As Michael mentioned, competition for new investments continues to remain elevated as M&A volumes remain below average. That being said, The investment opportunities we have been evaluating continue to be of higher quality as financial sponsors seek to return capital to LPs by monetizing many of their top performing assets. These market inputs have resulted in tighter pricing for new transactions, as well as an increased level of requests from existing portfolio companies to amend and reduce pricing related to loans originated over the last two to three years. At the same time, though, we are starting to see some stabilization in pricing for new deals, which we view positively. We believe the continued uncertainty around both the election and the timing of future rate cuts are the drivers of the still slower M&A environment. However, we still expect to see an increase in M&A activity over the coming months. During the second quarter, we originated $1.26 billion of new investments. Approximately 70% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $1.34 billion of net sales and repayments, equated to a net portfolio decrease of $76 million. New originations consisted of approximately 81% in first lien loans, 2% in other senior secured debt, 1% in subordinated debt, and 16% in asset-based finance investments. Asset-based finance investments were a smaller portion of our second quarter deployment activity, primarily due to the fact that the ABF investments still tend to be more opportunistic in nature than traditional direct lending. KKR has approximately $60 billion in ABF assets under management, with a team of more than 50 people dedicated to the strategy. We believe that size and scale matter and that our approach is differentiated, which is why we have invested in building out the team and the infrastructure to support it. Our target for ABF investments in FSK remains 10 to 15% of the company's total portfolio. We continue to be pleased with the quality of new investments. During the second quarter, our new direct lending investments had a weighted average EBITDA of approximately $127 million. 5.1 times leverage through our security, and a weighted average coupon of approximately SOFR plus 550. One example of a new deal originated by our non-sponsor-backed effort during the quarter was Rockefeller Capital Management, a financial services firm serving high net worth and ultra-high net worth individuals. KKR Credit was co-lead on the deal to refinance the existing capital structure, and FSK, as well as other KKR funds, committed $100 million of a $700 million Unitronch loan. Another investment to highlight is our investment in Cadence Education, a leading provider of early childhood education services in the U.S. KKR Credit was co-lead on the new deal to refinance the existing capital structure. And FSK, as well as other KKR funds, committed $198 million of the $680 million total financing. When we look at aggregate trends across our portfolio companies, we observe 12% year-over-year EBITDA growth at portfolio companies in which we have invested in since April of 2018. Additionally, the weighted average and median EBITDA of our portfolio companies was $225 million and $124 million, respectfully, as of June 30th, 2024. As of the end of the second quarter, Non-accruals represented 4.3% of our portfolio on a cost basis and 1.8% of our portfolio on a fair value basis. This compares to 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31, 2024. Brian will provide further details on the driver of the reduction of our non-accrual rate later in the call. We also believe it is helpful to provide the market with information based on FSK's assets originated by KKR Credit. Non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FSKKR Advisor, were 2.4% on a cost basis and 0.6% on a fair value basis as of June 30th, 2024. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks, Dan. At the end of the second quarter, our investment portfolio had a fair value of $14.1 billion, consisting of 208 portfolio companies. This compares to a fair value of $14.2 billion in 205 portfolio companies as of March 31, 2024. Leverage remained relatively flat quarter over quarter, and the decline in our investment portfolio's fair value was primarily driven by unrealized depreciation relating to three investments, Miami Beach Medical Group and Bowery Farming, which has been on non-accrual, and Kellermeyer Bergensen Services, which was restructured in the first quarter. While smaller investments from a cost and fair value perspective, Miami Beach and Bowery continue to be under pressure, and we are working with both companies to maximize our recovery. We are pleased with the progress that KBS is making under our collective ownership, and are optimistic about its future prospects. At the end of this second 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 58% first lien loans and 66% senior secured debt as of June 30th. 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 totaled approximately 67% of our portfolio, and senior secured investments totaled approximately 74% of our portfolio as of June 30th. The weighted average yield on occurring debt investments was 12% as of June 30th, a decrease of 10 basis points compared to 12.1% as of March 31, 2024. The decrease is primarily attributable to lower spreads on new investments and the repricing of certain investments during the quarter. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. During the second quarter, we amended our investment in GlobalJet Capital, which simplified and enhanced the company's capital structure. As we have discussed on prior earnings calls, we have been pleased with the accomplishments of GlobalJet's management team during recent years, as the company made a strategic shift to be more selective with originations and increase return targets, while also reducing SG&A to drive a higher ROE. Importantly, the company's approximately $2 billion Jet Lease and Loan portfolio has no delinquencies and is experiencing attractive renewal or sale opportunities on assets that are coming off lease. The business is in a stable and competitive position and has generated an ROE approaching 10% in each of the last two years. Additionally, the company has returned $130 million of capital to FSK over roughly the last two years. The business continues to execute its ABS strategy, closing BJET's 2024-1 in April at attractive terms, helping drive meaningful capital return into the business. During the second quarter, FSK received $51 million of distributions, which were used to fully repay our structured mezzanine position and partially repay our PIC preferred position. In conjunction with this distribution, our PIC preferred equity investment was restructured into a perpetual preferred. This repayment and corresponding amendment was executed in a manner in which we preserved all of our pre-existing economics while better positioning the company for future growth. As a result of these actions, $309.4 million of cost, and $256.6 million of fair value associated with our investment in GlobalJet was removed from non-accrual status. We continue to remain focused on rotating the remaining 12% of legacy investment exposure. Production Resource Group, GlobalJet Capital, JW Aluminum, and our performing first lien position in PSKW, all of which we've discussed on either this or prior earnings calls, represent approximately 9% of the 12% total legacy exposure, and we continue to be satisfied with their performance. In addition, since Q2 2018, we have achieved significant portfolio rotation out of cyclical industries. We have rotated over $3 billion of legacy investments out of materials, energy, consumer durables, and consumer discretionary into new investments in more defensive industries like software and services, healthcare equipment and services, and commercial and professional services. And with that, I'll turn the call over to Stephen to go through our financial results.

Thanks, Brian. Our total investment income increased by $5 million during the second quarter to $439 million. The primary components of our total investment income during the quarter were as follows. Total interest income was $353 million, an increase of $3 million quarter over quarter. Dividend and fee income totaled $86 million, an increase of $2 million quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows. $52 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $16 million during the quarter, and fee income totaling approximately $18 million during the quarter. Our interest expense totaled $115 million during the quarter, a decrease of $1 million quarter over quarter, and our weighted average cost of debt was 5.3% as of June 30th. Management fees totaled $54 million, a decrease of $1 million, and incentive fees totaled $45 million, an increase of $2 million quarter over quarter. Other expenses totaled $10 million, an increase 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 1Q2024 net asset value per share of $24.32 was increased by GAAP net investment income of 77 cents per share and was decreased by 39 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 $0.70 per share quarterly distribution and also the $0.05 per share special distribution. These activities result in our June 30, 2024 net asset value per share of $23.95. From a forward-looking guidance perspective, we expect third quarter 2024 GAAP net investment income to approximate 72 cents per share, and we expect our adjusted net investment income to approximate 70 cents per share. Detailed third quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $351 million. We expect recurring dividend income associated with our joint venture to approximate $47 million, a decrease of approximately $5 million quarter-over-quarter. The expected decrease is the result of recent portfolio company paydowns and the corresponding recycling of capital. We expect other fee and dividend income to approximate $26 million during the third quarter. The expected decrease is due to a lower level of anticipated asset-based finance dividends These dividends tend to fluctuate on a quarterly basis for various reasons. From an expense standpoint, we expect our management fees to approximate $53 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $117 million. And we expect other G&A expenses to approximate $10 million. And, as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share, comprised of $2.80 per share of quarterly base and supplemental distributions, and $0.10 per share of previously paid special distributions. Turning to our capital structure, in June, we issued $600 million of 6.875% unsecured notes due 2029, which were subsequently swapped to floating rate pursuant to interest rate swap agreements that mature when the notes are due in 2029. Proceeds from the unsecured note issuance were used to repay outstanding debt on our revolver. With this issuance, we further strengthened our balance sheet and liquidity position and extended our maturity ladder. Our gross and net debt to equity levels were 119% and 109% respectively at June 30, 2024, compared to 117% and 109% at March 31, 2024. At June 30, our available liquidity was $4.7 billion and approximately 72% of our drawn balance sheet and 47% of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thanks, Stephen. In closing, we've had a productive first half of 2024. First, origination activity increased from muted 2023 levels, resulting in the deployment of capital into compelling new transactions. Second, our underlying portfolio companies generally continue to perform well, and we've made significant progress restructuring certain non-accruing investments. Lastly, We continue to fully earn both our base and supplemental distributions on a per share basis and pay at a 15% dividend yield based on our currently expected full year distribution of $2.90 per share in our recent market share price. As we look toward the second half of the year and beyond, we believe the future opportunity for our platform is extremely attractive. On behalf of the team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions.

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 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Finian O'Shea of Wells Fargo Security. Your line is now open.

Hey, everyone. Good morning. First question, how are you? Can you talk about the spillover picture? What sort of, I don't know if you guys give the dollar number, but I think it's probably a pretty stretched percentage of income or NAV. And what plans you have with that or what sort of options you're looking at?

Yes, and I'm happy to start there, and Stephen might want to add to that. I think we've always thought about having two to three quarters of spillbacks of income there. I think we're kind of the middle to sort of the upper end of that range, which I think we're happy with. I think that provides a nice protection as we think about longer-term dividend coverage. But Stephen, anything you want to add there?

Yeah, Finn, I would just say that, you know, the five cent per quarter special distribution that we have just completed that program, you know, that took us from kind of really close to three quarters of spillover down to something in the sort of 2.8 range now in terms of quarters of dividends. So, you know, that program did everything we wanted it to do. And, you know, now we're in the As Dan says, if rates are to fall, then we have that cushion from a distribution standpoint if we wish to use it.

Okay, that's helpful. And I think, Stephen, your guidance, I heard a lower income on the ADF book. Is that correct in seeing what the market dynamics are or if it's idiosyncratic?

I don't even think it's idiosyncratic fitness. Those deals, I think because they're a little bit more highly structured, are not necessarily just as consistent as it relates to dividends on a quarter-by-quarter basis. I think there's great consistency over what's called the life of the deal. I think we've been very pleased with what we've seen in the market there. Some of the tailwinds, you know, surrounding, you know, regional banks have persisted. That's been a nice amount of deal flow. And, you know, I think we like the footprint we have as a platform there. But I don't think it's anything more than timing.

I agree. It's all for me. Thank you.

Thank you, Tim.

One moment for our next question. Our next question comes from the line of Mark Hughes of Truist. Your line is now open.

Yeah, thank you. Good morning. Were you had refis that perhaps you passed on? What was your experience in terms of, were you more selective this quarter than in prior quarters? Was that a spread issue? How much was the competition a driver of that? And if you addressed this earlier, I apologize. I jumped on the call a little bit late.

No, no worries. No worries. Good morning, Mark. I think you probably are broadening that to both refinancings as well as kind of repricings. I think from time to time if these things are coming up and we're either a little bit more negative on the sector or the company, we may very well use that as an opportunity to lighten our position or look to potentially get repaid. So I would just call it a credit call. And that could be, again, company leverage sort of sector. And I think it's our job to be dynamic as we think about that.

And generally, we see repricings for very well-performing credits where the company and sponsor come to us and ask us to mark the credit to market from a pricing perspective. And I think our view is that given that those loans tend to be past their call protection, the idea of staying invested on market terms in a credit that we know and like is viewed positively because our alternative would be to get repaid and then go out and find a new investment at the same spread level. So we think it makes all the sense in the world to play in the right ones and we'll continue to do so.

Mark, just one more point there. I think when we are doing that, though, as a general rule of thumb, to the repricing or to minimum extending call pro to keep some optionality for the benefit of the lender.

Understood. Thanks for that clarification. The opportunities in asset-based finance, how do you see that as we sit here today?

Yeah, I mean, I was alluding to this with Finn's question. I think, you know, broad stroke positive, right? Just if you think about the setup of the market, large size market, you know, in our mind, close to $7 trillion or sort of on the path to there. That's bigger than the high yield bond market, the syndicated loan market, the direct lending market combined. There has not been what's called scaled capital raised there. There's not a lot of scale players who, you know, like ourselves, I think we're fortunate with 60 odd billion of AUM and 50 plus people. So I think just the setup as well, The setup is strong. We have seen, we'll call it certain tailwinds there. We've been very active in buying loan portfolios from banks. Some of those deals have been pretty sort of public, sort of out there. I think we're able to source attractive risk-adjusted returns there. So it's a space we remain quite constructive on.

Yeah. Yeah. And I'm not sure if you touched on this, but anything recently with some of the turbulence in the economy, anything you've heard from portfolio companies that would indicate any kind of material change? Are you feeling like a steady she goes, at least as you're seeing it in your portfolio companies are experiencing it?

Yeah, I mean, that's probably a pretty broad question, right? I mean, I think the recent economic volatility in the equity markets has been a bit kind of yo-yo-like for the last four or five trading days. I think that probably spiked a little bit more focus. I think it's our job to be in the cautious camp generally. I think I would probably be balanced with, on one hand, we've been pleased with what we've seen. You can see that from the EBITDA growth numbers. On the other hand, I think we have to clearly acknowledge there's less free cash flow in the system considering where rates are. That makes or that provides certain challenges if there is sort of a bump in the road. The company just doesn't have the same flexibility or moves they might have had sort of prior. So I think that's kind of top of mind. I mean, you touched on the asset back sort of comment. I think we have centered ourselves if we are investing in consumer-related exposures there in the more prime part of the market. I think we've been quite happy with what we've seen there as it relates to the performance there. Probably a little bit more worried as you go down market credit quality on the consumer side.

Appreciate it. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open.

Hey, good morning. Thanks for taking my question. Just one follow-up on the asset-based finance contribution to third quarter income, the dividends there. And I just want to get a better understanding. Is there anything that drives the timing, any kind of macro inputs? Or is it really just really difficult to predict and, you know, could be a little episodic there? Thanks.

Yeah. No, no problem. And I wouldn't think about it at all in kind of the macro context. Obviously if macro environment changes, you know, meaningful one way or the other, the portfolio of financial or hard assets that we're invested in might sort of change. you know, I would just really equate this more to a timing sort of point, right? And I'll give you maybe two simple examples, right? You know, if we own a portfolio of aviation leasing assets, you know, and those are contracted sort of cash flows we're getting in, but if we're in the midst of selling certain of those assets, those asset sales, some might happen one quarter, some might happen a couple quarters down the road. So, you know, a bit nonlinear in that sort of sense. There could be other deals where we've used the capital markets to finance ourselves. Sometimes those capital markets transactions will divert cash flow to the senior trunch to delever themselves. That's not negative at all from a value perspective. It's a timing of cash flow point. But those would be two probably simplistic examples.

And I wouldn't characterize it as difficult to predict. I think Dan said it right, which is it's just nonlinear in certain cases.

Gotcha. Gotcha. Super helpful there. Super helpful there.

And just one follow-up, if I may. In terms of the leverage, I think in the past you've talked about being closer to, I think, the higher end of the target range. Just wanted to see if there's any kind of updated outlook. Where would you feel comfortable in terms of leverage training over the near term? Thanks.

And that's a good question, Ken. Thank you. I think there's a couple of points there. I don't think our range has changed. We like the one to kind of one and a quarter. I would argue we're at the lower side of that on that net basis. So I think there's some room to kind of add there. I think that's helpful and can provide a certain amount of benefits to the earning side. There's also additional leverage capacity down at the joint venture level, which would be the same. I think we are... quite happy with the liability side of our balance sheet. We were happy to get that $600 million deal done this quarter. I think the number was roughly 72% of our debt outstanding this quarter is from the unsecured bond market. We've got a lot of undrawn capacity on the revolver. We've effectively funded our 24 maturities. So I think we've got some room there would be the short answer.

Great. Great. Thank you very much, Dan.

Thanks. Have a good day.

One moment for our next question. Our next question comes from the line of Melissa Wedo of JP Morgan. Your line is now open.

Good morning. Thanks for taking my questions today. A quick follow-up. I think I caught the average EBITDA on new originations, but I might have confused that with average EBITDA on the portfolio. Was it the case that the average EBITDA on originations came down quite a bit this quarter from the first quarter?

Give me one second, Melissa, just to sort of touch base on that. I think the average EBITDA was 127 in the quarter. I think that's probably more in line with the median EBITDA of the entire portfolio. I don't probably read that much into that other than just the deal flow that occurred during this 90-day period. That said, I think it is important to note, we're pretty focused on having a broad origination footprint. talk about being focused on the upper end of the middle market, but we're usually defining that as $50 to $150 million of EBITDA. We will do deals that are below that. I'd say probably $25 million is kind of a floor, probably a higher bar the smaller the company is. That's just what we've seen from a risk perspective or where we're getting we think appropriately paid for the risk. And then it is more than just a sponsor sort of effort. We're focused on both the sponsor as well as the non-sponsor channels. The entire goal is to make the origination funnel as big as possible so we can try to be as selective as possible when we're picking new deals to do.

And I'd also point out that the weighted average spread on those transactions was S plus 550. You know, Dan mentioned leverage is right around 5.1 times and LTB was just a smidge north of 40%. So, you know, feel good about those credits.

Got it. Thank you for that clarification. It does seem a little bit consistent with what we've heard from some other teams where some of the better risk adjusted opportunities were a little bit lower than sort of the super upper middle market range. more recently. I guess, question, when you look at your pipeline going forward, do you expect that to, you know, sort of persist? Or do you expect to go back up to the really upper tier of the middle market and then – oh, leave it there. Thank you.

Yeah, no, I think it's fair to expect that that's where it would sort of – you know, continue to sort of play out, right? Because if we are defining, you know, that sweet spot as the 50 to 150, you know, that's kind of where the medium of the portfolio is sort of sitting. Now, I'm not surprised that others would be saying that, you know, that very, you know, upper end or even these larger companies, the $250 million sort of plus are a little bit less attractive sort of now than they were before. We would agree with that. You had a period in 22 and 23 where the syndicated loan market was closed. The private debt market was the only game in town. So you were getting paid, in our opinion, kind of exceptionally well for those. Now those just companies would have more options. So that wouldn't sort of surprise us. And we have always had the view that these markets will coexist. They have for some sort of period of time. We just have the view that volatility will persist and will provide opportunities for ourselves and other private debt providers.

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams of Raymond James Investments. Your line is now open.

Good morning. On Keller Meyer, you guys said you are pretty happy with the progress, but the equity was written down approximately 50%. Should we expect that even if progress continues to be positive, if there's any more downside in that asset?

Yeah, I think that's a very fair question. I think we are happy with all the work that us and the other lenders there have been doing as we've moved that company outside of the sponsor ownership and inside or under the control of that sort of group. These are kind of Herculean lifts. We've got a lot of great resources on our workout and restructuring team as do I think the other lenders involved there. So, you know, the equity sort of mark is a little bit of a point in time with how, you know, earnings may have either moved or market multiples might have moved. But I think when we talk about the progress, talking about there's a longer-term gain there about stabilizing and hopefully growing that business.

Yeah, look, and I think in terms of KBS, a couple more things. You know, clearly given that the equity is levered, Small movements in EVTA are going to have outsized impacts on a quarterly basis on that mark. We are happy with where this thing is trending. We are working with management. We have a new value creation plan in place. We're definitely focused operationally on this business on how to reduce churn, improve operations, reduce SG&A, et cetera, et cetera. A lot of work is being done in the background there. And I think really, you know, the proof in that is going to be over the longer term, and we are bullish on the prospects of this business.

Perfect. Thank you for that, Keller. Turning to just new originations and spread compressions, you guys said that the quality of the investment opportunities is high and that the top performers are actually being moved by the sponsors. How much, if any, of the current spread compression is actually mix-related due to the higher quality companies already having embedded lower spreads?

And how much is like-for-like credit quality spread compression versus just raw competitive pressure?

Yeah, there's probably not a perfect answer to that. I would probably try to break it down a little bit. We have seen... Let's say these higher quality businesses being the ones that are being moved by certain sponsors. We do know very clearly there's a fair amount of pressure on GPs broadly from their LPs to monetize assets so those LPs can get some money back. And these better assets I think just have not had the moves on valuation multiples, so they're more perfect candidates to sell. I think the spread compression probably more broadly, I would probably go through the journey of, if you think about January 22, the regular way deal was, let's call it 575. That probably gapped out to 650 in the summer of 23. That was all due to a clear belief or a clear concern about where the economy was going you know, hard landing, soft landing, and that sort of debate. I think once inflation was deemed to be, you know, more under control and this view, I mean, the market until probably recently has not even been talking about a soft landing, been talking about sort of growth. So, you know, the average spreads probably came down closer to 500, right? Now, I wouldn't say we were surprised by that. Obviously, we would like the loan portfolio to be as wide as possible, but You know, in most fixed income instruments, when the benchmark moves as much as it has, credit spreads do tighten. And if you think about just the regular way loan and the examples I gave, you know, the January 2020 loan was probably 7.5%, 8% kind of all in. And even a loan today is, you know, 10.5%, you know, sort of plus percent to roll in. So we still think that's really interesting, risk-adjusted returns.

Perfect. That's wonderful, Colin. I really appreciate it.

No problem. Have a good day.

As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Our next question comes from the line of Bryce Rowe of B. Reilly. Your line is now open.

Great. Thanks a lot. Wanted to maybe start on the supplemental dividend. Obviously, you all announced a variable dividend approach some time ago. And the special programs run its course, as you've noted. And it sounds like you've got a decent amount of spillover, maybe almost 3 quarters of the current regular plus supplemental in your pocket. So my question is, if we do start to kind of get lower rate um and and lower earnings lower in ii associated with those lower rates you know at what point does the supplemental kind of go away are you are you looking to you know to to get the the spillover down to let's call it two quarters worth of um a base or base plus supplemental yeah and i'm uh i'll let brian and and steven sort of you know add to this but um you know i i think we have uh

you know, been pretty in trying to listen to the market for a long time about sort of the dividend and sort of the dividend policy. I think, you know, which is why we're kind of where we are today. You know, that 64 is the base as kind of, you know, rates were moving. It felt appropriate to have the supplemental, you know, next to that, we'll call it very comfortable base. And then we did make a statement to the market that we intended to really pay out kind of what we were earning. Hence, that was the five cents sort of special, right? I think we are fortunate. with the spillback dollars to ensure that we keep the total 70 consistent for an extended period of time. Obviously, the whole sector will have some earnings sort of pressure in a downward kind of rate environment, and so I think that's clearly acknowledged. I think we are focused on, though, where are the levers that we do have for earnings growth, you know, that would go back to the leverage question that we asked before, as well as, you know, looking to reduce any non-income producing assets to sort of help drive that. But if anything else, Stephen or Brian, you want to add? I think you said it well.

Yeah, look, I think, you know, we do have, you know, a couple of larger positions that are non-income producing that we are, you know, looking to monetize. We can't guarantee when or if that happens. But that also is a pretty meaningful lever for us.

That's a good segue, Brian, for my next question. Obviously, good optics around what happened at GlobalJet coming off non-accrual and clearly trying to simplify that capital structure to maybe get a better end game or outcome in place. Is there a similar playbook with JW Aluminum, given that it is legacy? Um, you know, it's, it's a similar kind of, uh, instrument in, in the capital structure. It's kind of marked at the same level that global jet was just kind of curious if there's an opportunity for, to simplify that capital structure and maybe, maybe put it in a better position for that, for that, uh, monetization outcome.

You want to start? Yeah. I mean, look, I think each company sort of has a different, um, ownership base in, in junior securities. I think in the case of GJC GlobalJet, we had a lot of alignment in terms of simplifying the capital structure. I think in the case of JWA, the capital structure is maybe a little bit more complex with different holders. But I think the focus on monetization of both is still front and center for us.

And I think that's why we tried to provide the additional clarity and the prepared remarks about that 12% remains um in that legacy sort of you know bucket but you know four of those positions is roughly 70 or 75 of them and you know i don't i wouldn't call it easy to be able to to monetize them you know three of them are are kind of in equity positions where we're not in control but i think we've uh done a lot um uh to improve those positions uh to stabilize those positions i think we've done a lot working together with the other partners in those deals to try to maximize the outcome.

I appreciate it. That's all for me.

At this time, I am showing no further questions. I would like to turn it back to Dan Pietrzak for closing remarks.

Well, thank you all for your time today. We're always available for any follow-up points that you may have. Please do enjoy the rest of your summer, and we look forward to speaking to you again in the fall. Have a good day.

Thank you for your participation in today's conference. This concludes the program. You may now disconnect. you Music. Thank you. Good morning, ladies and gentlemen. Welcome to the FSKKR Capital Corp's second 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 sessions. at which time I will give you instructions on entering the queue. Please note that this conference is being recorded. At this time, Anna Kleinhen, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhen, you may begin.

Thank you. Good morning, and welcome to FSKTR Capital Corp's second quarter 2024 earnings conference call. Please note that FSKTR Capital Corp may be referred to as FSK the funds, 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 June 30, 2024. A link to today's webcast and the presentation is available on the investor relations section of the company's website under events and presentations. Please note that this call is the property of FSK. 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 second quarter earnings release that was filed with the SEC on August 6, 2024. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael 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 on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you all for joining us today for FSK's second quarter 2024 earnings call. During the second quarter, FSK generated net investment income totaling $0.77 per share and adjusted net investment income totaling $0.75 per share, as compared to our public guidance of approximately $0.74 and $0.71 per share, respectively. As we look at our borrowers' operating performance for the quarter, we continue to see strong results as most companies have adjusted to the higher base rate environment. We did, however, see some stress on investments placed on our accrual in the prior quarters. Our workout investment teams have continued working toward resolutions for these portfolio companies, and the team will go into more detail on this later in the call. From a liquidity perspective, we ended the quarter with approximately $4.7 billion of available liquidity. Our board has declared a total third quarter 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. We continue to believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to a 12.1% yield on our June 30, 2024 net asset value of $23.95 per share and a yield of approximately 15% based upon our recent share price. As Dan will discuss in more detail during his comments, the market remains competitive as all lenders have experienced some amount of spread compression. During the first half of 2024, the investment team originated $2.7 billion of investments, of which $1.3 billion more originated during the second quarter. From a forward-looking perspective, despite the expectation that the Fed may begin reducing interest rates as early as September, we believe the elevated rate environment, coupled with our still significant level of spillover income, will continue to drive FSK's earnings and provide support for the attractive base and supplemental distributions we are paying our shareholders. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Thanks, Michael. The first half of this year has been characterized by a strong economic backdrop. However, recent economic data has surfaced some concerns over the health of the US economy. Global markets have evolved and adapted to the current interest rate and inflationary environment. However, the domestic political environment and the international geopolitical situation remain extremely complex. As a result, and with certain recent market moves, we expect market volatility to remain elevated. Regardless of the election outcome, we believe government spending will likely remain elevated regardless of which political party wins the White House. Importantly, productivity in the U.S. remains high, which should allow many companies to continue their level of sustained growth despite higher wages and inventory costs. As Michael mentioned, Competition for new investments continues to remain elevated as M&A volumes remain below average. That being said, the investment opportunities we have been evaluating continue to be of higher quality as financial sponsors seek to return capital to LPs by monetizing many of their top performing assets. These market inputs have resulted in tighter pricing for new transactions, as well as an increased level of requests from existing portfolio companies to amend and reduce pricing related to loans originated over the last two to three years. At the same time, though, we are starting to see some stabilization in pricing for new deals, which we view positively. We believe the continued uncertainty around both the election and the timing of future rate cuts are the drivers of the still slower M&A environment. However, we still expect to see an increase in M&A activity over the coming months. During the second quarter, we originated $1.26 billion of new investments. Approximately 70% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $1.34 billion of net sales and repayments, equated to a net portfolio decrease of $76 million. New originations consisted of approximately 81% in first lien loans, 2% in other senior secured debt, 1% in subordinated debt, and 16% in asset-based finance investments. Asset-based finance investments were a smaller portion of our second quarter deployment activity, primarily due to the fact that the ABF investments still tend to be more opportunistic in nature than traditional direct lending. KKR has approximately $60 billion in ABF assets under management with a team of more than 50 people dedicated to the strategy. We believe that size and scale matter and that our approach is differentiated, which is why we have invested in building out the team and the infrastructure to support it. Our target for ABF investments in FSK remains 10% to 15% of the company's total portfolio. We continue to be pleased with the quality of new investments. During the second quarter, our new direct lending investments had a weighted average EBITDA of approximately $127 million, 5.1 times leverage through our security, and a weighted average coupon of approximately SOFR plus 550. One example of a new deal originated by our non-sponsor-backed effort during the quarter was Rockefeller Capital Management, a financial services firm serving high net worth and ultra-high net worth individuals. KKR Credit was co-lead on the deal to refinance the existing capital structure, and FSK, as well as other KKR funds, committed $100 million of a $700 million Unitronch loan. Another investment to highlight is our investment in Cadence Education, a leading provider of early childhood education services in the U.S. KKR Credit was co-lead on the new deal to refinance the existing capital structure. And FSK, as well as other KKR funds, committed $198 million of the $680 million total financing. When we look at aggregate trends across our portfolio companies, we observed 12% year-over-year EBITDA growth at portfolio companies in which we have invested in since April of 2018. Additionally, the weighted average and median EBITDA of our portfolio companies was $225 million and $124 million, respectfully, as of June 30, 2024. As of the end of the second quarter, Non-accruals represented 4.3% of our portfolio on a cost basis and 1.8% of our portfolio on a fair value basis. This compares to 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31, 2024. Brian will provide further details on the driver of the reduction of our non-accrual rate later in the call. We also believe it is helpful to provide the market with information based on FSK's assets originated by KKR Credit. Non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FSKKR Advisor, were 2.4% on a cost basis and 0.6% on a fair value basis as of June 30th, 2024. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail. Thanks, Dan.

At the end of the second quarter, our investment portfolio had a fair value of $14.1 billion, consisting of 208 portfolio companies. This compares to a fair value of $14.2 billion in 205 portfolio companies as of March 31, 2024. Leverage remained relatively flat quarter over quarter, and the decline in our investment portfolio's fair value was primarily driven by unrealized depreciation relating to three investments, Miami Beach Medical Group and Bowery Farming, which had been on non-accrual, and Kellermeyer Bergensen Services, which was restructured in the first quarter. While smaller investments from a cost and fair value perspective, Miami Beach and Bowery continue to be under pressure, and we are working with both companies to maximize our recovery. We are pleased with the progress that KBS is making under our collective ownership, and are optimistic about its future prospects. At the end of this second 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 58% first lien loans and 66% senior secured debt as of June 30th. 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 totaled approximately 67% of our portfolio, and senior secured investments totaled approximately 74% of our portfolio as of June 30th. The weighted average yield on occurring debt investments was 12% as of June 30th, a decrease of 10 basis points compared to 12.1% as of March 31, 2024. The decrease is primarily attributable to lower spreads on new investments and the repricing of certain investments during the quarter. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. During the second quarter, we amended our investment in GlobalJet Capital, which simplified and enhanced the company's capital structure. As we have discussed on prior earnings calls, we have been pleased with the accomplishments of GlobalJet's management team during recent years, as the company made a strategic shift to be more selective with originations and increase return targets, while also reducing SG&A to drive a higher ROE. Importantly, the company's approximately $2 billion Jet Lease and Loan portfolio has no delinquencies and is experiencing attractive renewal or sale opportunities on assets that are coming off lease. The business is in a stable and competitive position and has generated an ROE approaching 10% in each of the last two years. Additionally, the company has returned $130 million of capital to FSK over roughly the last two years. The business continues to execute its ABS strategy, closing BJET's 2024-1 in April at attractive terms, helping drive meaningful capital return into the business. During the second quarter, FSK received $51 million of distributions, which were used to fully repay our structured mezzanine position and partially repay our PIC preferred position. In conjunction with this distribution, our PIC preferred equity investment was restructured into a perpetual preferred. This repayment and corresponding amendment was executed in a manner in which we preserved all of our pre-existing economics while better positioning the company for future growth. As a result of these actions, $309.4 million of cost, and $256.6 million of fair value associated with our investment in GlobalJet was removed from non-accrual status. We continue to remain focused on rotating the remaining 12% of legacy investment exposure. Production Resource Group, GlobalJet Capital, JW Aluminum, and our performing first lien position in PSKW, all of which we've discussed on either this or prior earnings calls, represent approximately 9% of the 12% total legacy exposure, and we continue to be satisfied with their performance. In addition, since Q2 2018, we have achieved significant portfolio rotation out of cyclical industries. We have rotated over $3 billion of legacy investments out of materials, energy, consumer durables, and consumer discretionary into new investments in more defensive industries like software and services, healthcare equipment and services, and commercial and professional services. And with that, I'll turn the call over to Stephen to go through our financial results.

Thanks, Brian. Our total investment income increased by $5 million during the second quarter to $439 million. The primary components of our total investment income during the quarter were as follows. Total interest income was $353 million, an increase of $3 million quarter over quarter. Dividend and fee income totaled $86 million, an increase of $2 million quarter over quarter. Our total dividend and fee income during the quarter is summarized as follows. $52 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $16 million during the quarter, and fee income totaling approximately $18 million during the quarter. Our interest expense totaled $115 million during the quarter, a decrease of $1 million quarter over quarter, and our weighted average cost of debt was 5.3% as of June 30th. Management fees totaled $54 million, a decrease of $1 million, and incentive fees totaled $45 million, an increase of $2 million quarter over quarter. Other expenses totaled $10 million, an increase 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 1Q2024 net asset value per share of $24.32 was increased by GAAP net investment income of 77 cents per share and was decreased by 39 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 $0.70 per share quarterly distribution and also the $0.05 per share special distribution. These activities result in our June 30, 2024 net asset value per share of $23.95. From a forward-looking guidance perspective, we expect third quarter 2024 GAAP net investment income to approximate $0.72 per share, and we expect our adjusted net investment income to approximate $0.70 per share. Detailed third quarter guidance is as follows. Our recurring interest income on a GAAP basis is expected to approximate $351 million. We expect recurring dividend income associated with our joint venture to approximate $47 million, a decrease of approximately $5 million quarter-over-quarter. The expected decrease is the result of recent portfolio company paydowns and the corresponding recycling of capital. We expect other fee and dividend income to approximate $26 million during the third quarter. The expected decrease is due to a lower level of anticipated asset-based finance dividends these dividends tend to fluctuate on a quarterly basis for various reasons. From an expense standpoint, we expect our management fees to approximate $53 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $117 million. And we expect other G&A expenses to approximate $10 million. And, as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share, comprised of $2.80 per share of quarterly base and supplemental distributions, and $0.10 per share of previously paid special distributions. Turning to our capital structure, in June, we issued $600 million of 6.875% unsecured notes due 2029, which were subsequently swapped to floating rate pursuant to interest rate swap agreements that mature when the notes are due in 2029. Proceeds from the unsecured note issuance were used to repay outstanding debt on our revolver. With this issuance, we further strengthened our balance sheet and liquidity position and extended our maturity ladder. Our gross and net debt to equity levels were 119% and 109% respectively, at June 30, 2024, compared to 117% and 109% at March 31, 2024. At June 30, our available liquidity was $4.7 billion and approximately 72% of our drawn balance sheet and 47% of our committed balance sheet was comprised of unsecured debt. And with that, I'll turn the call back to Michael

a few closing remarks before we open the call for questions thanks stephen in closing we've had a productive first half of 2024. first origination activity increased from muted 2023 levels resulting in deployment of capital into compelling new transactions second our underlying portfolio companies generally continue to perform well and we've made significant progress restructuring certain non-accruing investments lastly We continue to fully earn both our base and supplemental distributions on a per share basis and pay out a 15% dividend yield based on our currently expected full year distribution of $2.90 per share in our recent market share price. As we look toward the second half of the year and beyond, we believe the future opportunity for our platform is extremely attractive. On behalf of the team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions.

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 the line of Finian O'Shea of Wells Fargo Securities. Your line is now open.

Hey, everyone. Good morning. First question, how are you? Can you talk about the spillover picture? What sort of, I don't know if you guys give the dollar number, but I think it's probably a pretty stretched percentage of income or NAV. And what plans you have with that or what sort of options you're looking at?

Yes, and I'm happy to start there, and Stephen might want to add to that. I think we've always thought about having two to three quarters of spillback sort of income there. I think we're kind of the middle to sort of the upper end of that range, which I think we're happy with. I think that provides a nice protection as we think about longer-term dividend coverage. But Stephen, anything you want to add there?

Yeah, Finn, I would just say that, you know, the five cent per quarter special distribution that we have just completed that program, you know, that took us from kind of really close to three quarters of spillover down to something in the sort of 2.8 range now in terms of quarters of dividends. So, you know, that program did everything we wanted it to do. And, you know, now we're in the As Dan says, if rates are to fall, then we have that cushion from a distribution standpoint if we wish to use it.

Okay, that's helpful. And I think, Stephen, your guidance, I heard a lower income on the ADF book. Is that correct in seeing what the market dynamics are or if it's idiosyncratic? Okay.

I don't even think it's idiosyncratic fitness. Those deals, I think because they're a little bit more highly structured, are not necessarily just as consistent as it relates to dividends on a quarter-by-quarter basis. I think there's great consistency over what's called the life of the deal. I think we've been very pleased with what we've seen in the market there. Some of the tailwinds, you know, surrounding, you know, regional banks have persisted. That's been a nice amount of deal flow. And, you know, I think we like the footprint we have as a platform there. But I don't think it's anything more than timing.

I agree. It's all for me. Thank you.

Thank you, Tim.

One moment for our next question. Our next question comes from the line of Mark Hughes of Truist. Your line is now open.

Yeah, thank you. Good morning. Were you had refis that perhaps you passed on? What was your experience in terms of, were you more selective this quarter than in prior quarters? Was that a spread issue? How much was the competition a driver of that? And if you addressed this earlier, I apologize. I jumped on the call a little bit late.

No, no worries. No worries. Good morning, Mark. I think you probably are broadening that to both refinancings as well as kind of repricings. You know, I think from time to time if these things are coming up and we're either a little bit more negative on the sector or the company, we may very well use that as an opportunity to lighten our position or look to potentially get repaid. So I would just call it a credit call. And that could be, again, company leverage sort of sector. And I think it's our job to be dynamic as we think about that.

And generally, we see repricings for very well-performing credits where the company and sponsor come to us and ask us to mark the credit to market from a pricing perspective. And I think our view is that given that those loans tend to be past their call protection, the idea of staying invested on market terms in a credit that we know and like is viewed positively because our alternative would be to get repaid and then go out and find a new investment at the same spread level. So we think it makes all the sense in the world to play in the right ones and we'll continue to do so.

Mark, just one more point there. I think when we are doing that, though, as a general rule, to the repricing or the minimum extending call pro to keep some optionality for the benefit of the lender.

Understood. Thanks for that clarification. The opportunities in asset-based finance, how do you see that as we sit here today?

Yeah, I mean, I was alluding to this with Finn's question. I think, you know, broad stroke positive, right? Just if you think about the setup of the market, large size market, you know, in our mind, close to $7 trillion or sort of on the path to there. That's bigger than the high yield bond market, the syndicated loan market, the direct lending market combined. There has not been what's called scaled capital raised there. There's not a lot of scale players who, you know, like ourselves, I think we're fortunate with 60 odd billion of AUM and 50 plus people. So I think just the setup as well, The setup is strong. We have seen, we'll call it certain tailwinds there. We've been very active in buying loan portfolios from banks. Some of those deals have been pretty sort of public, sort of out there. I think we're able to source attractive risk-adjusted returns there. So it's a space we remain quite constructive on.

Yeah. Yeah. And I'm not sure if you touched on this, but anything recently with some of the turbulence in the economy, anything you've heard from portfolio companies that would indicate any kind of material change? Are you feeling like a steady she goes, at least as you're seeing it in your portfolio companies are experiencing it?

Yeah, I mean, that's probably a pretty broad question, right? I mean, I think the recent economic volatility in the equity markets has been a bit kind of yo-yo like for the last four or five trading days. I think that probably spiked a little bit more focus. I think it's our job to be in the cautious camp generally. I think I would probably be balanced with, on one hand, we've been pleased with what we've seen. You can see that from the EBITDA growth numbers. On the other hand, I think we have to clearly acknowledge there's less free cash flow in the system considering where rates are. That makes or that provides certain challenges. If there is sort of a bump in the road, the company just doesn't have the same flexibility or moves they might have had sort of prior. So I think that's kind of top of mind. I mean, you touched on the asset back sort of comment. I think we have centered ourselves if we are investing in consumer-related exposures there in the more prime part of the market. I think we've been quite happy with what we've seen there as it relates to the performance there. Probably a little bit more worried as you go down market credit quality on the consumer side.

Appreciate it. Thank you.

Thank you.

One moment for our next question. Our next question comes from the line of Kenneth Lee of RBC Capital Markets. Your line is now open.

Hey, good morning. Thanks for taking my question. Just one follow-up on the asset-based finance contribution to third quarter income, the dividends there. And I just want to get a better understanding. Is there anything that drives the timing, any kind of macro inputs? Or is it really just really difficult to predict and, you know, could be a little episodic there? Thanks.

Yeah. No, no problem. And I wouldn't think about it at all in kind of the macro context. Obviously if macro environment changes, you know, meaningful one way or the other, the portfolio of financial or hard assets that we're invested in might sort of change. you know, I would just really equate this more to a timing sort of point, right? And I'll give you maybe two simple examples, right? You know, if we own a portfolio of aviation leasing assets, you know, and those are contracted sort of cash flows we're getting in, but if we're in the midst of selling certain of those assets, those asset sales, some might happen one quarter, some might happen a couple quarters down the road. So, you know, a bit non-linear in that sort of sense. There could be other deals where we've used the capital markets to finance ourselves. Sometimes those capital markets transactions will divert cash flow to the senior trunch to delever themselves. That's not negative at all from a value perspective. It's a timing of cash flow point. But those would be two probably simplistic examples.

And I wouldn't characterize it as difficult to predict. I think Dan said it right, which is it's just nonlinear in certain cases.

Gotcha. Gotcha. Super helpful there. Super helpful there.

And just one follow-up, if I may. In terms of the leverage, I think in the past you've talked about being closer to, I think, the higher end of the target range. Just wanted to see if there's any kind of updated outlook. Where would you feel comfortable in terms of leverage trending over the near term? Thanks.

And that's a good question, Ken. Thank you. I think there's a couple of points there. I don't think our range has changed. We like the one to one and a quarter. I would argue we're at the lower side of that on that net basis. I think there's some room to add there. I think that's helpful and can provide a certain amount of benefits to the earning side. There's also additional leverage capacity down at the joint venture level, which would be the same. quite happy with the liability side of our balance sheet. We were happy to get that $600 million deal done this quarter. I think the number was roughly 72% of our debt outstanding this quarter is from the unsecured bond market. We've got a lot of undrawn capacity on the revolver. We've effectively funded our 24 maturities. So I think we've got some room there would be the short answer.

Great. Great. Thank you very much, Dan.

Thanks. Have a good day.

One moment for our next question. Our next question comes from the line of Melissa Wedo of JP Morgan. Your line is now open.

Good morning. Thanks for taking my questions today. A quick follow-up. I think I caught the average EBITDA on new originations, but I might have confused that with average EBITDA on the portfolio. Was it the case that the average EBITDA on originations came down quite a bit this quarter from the first quarter?

Give me one second, Melissa, just to sort of touch base on that. I think the average EBITDA was 127 in the quarter. I think that's probably more in line with the median EBITDA of the entire portfolio. I don't probably read that much into that other than just the deal flow that occurred during this 90-day period. That said, I think it is important to note, we're pretty focused on having a broad origination footprint. talk about being focused on the upper end of the middle market, but we're usually defining that as $50 to $150 million of EBITDA. We will do deals that are below that. I'd say probably $25 million is kind of a floor, probably a higher bar the smaller the company is. That's just what we've seen from a risk perspective or where we're getting we think appropriately paid for the risk. And then it is more than just a sponsor sort of effort. We're focused on both the sponsor as well as the non-sponsor channels. The entire goal is to make the origination funnel as big as possible so we can try to be as selective as possible when we're picking new deals to do.

And I'd also point out that the weighted average spread on those transactions was S plus 550. You know, Dan mentioned leverage is right around 5.1 times and LTB was just a smidge north of 40%. So, you know, feel good about those credits.

Got it. Thank you for that clarification. It does seem a little bit consistent with what we've heard from some other teams where some of the better risk adjusted opportunities were a little bit lower than sort of the super upper middle market range. more recently. I guess, question, when you look at your pipeline going forward, do you expect that to, you know, sort of persist? Or do you expect to go back up to the really upper tier of the middle market and then... Oh, leave it there. Thank you.

Yeah, no, I think it's fair to expect that that's where it would sort of... you know, continue to sort of play out, right? Because if we are defining, you know, that sweet spot as the 50 to 150, you know, that's kind of where the medium of the portfolio is sort of sitting. Now, I'm not surprised that others would be saying that, you know, that very, you know, upper end or even these larger companies, the $250 million sort of plus are a little bit less attractive sort of now than they were before. We would agree with that. You had a period in 22 and 23 where the syndicated loan market was closed. The private debt market was the only game in town, so you were getting paid, in our opinion, exceptionally well for those. Now those companies would have more options. That wouldn't surprise us. We have always had the view that these markets will coexist. They have for some period of time. We just have the view that volatility will persist and will provide opportunities for ourselves and other private debt providers.

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Sean Paul Adams of Raymond James Investments. Your line is now open.

Good morning. On Keller Meier, you guys said you are pretty happy with the progress, but the equity was written down approximately 50%. Should we expect that even if progress continues to be positive, if there's any more downside in that asset?

Yeah, I think that's a very fair question. I think we are happy with You know, all the work that us and the other, you know, lenders there have been doing as we've moved that company, you know, outside of the sponsor ownership and inside or, you know, under the control of that sort of group. You know, these are kind of Herculean lists. You know, we've got a lot of great resources on our workout and restructuring team as do, you know, I think the other lenders involved there. So, you know, the equity sort of mark is a little bit of a point in time with how, you know, earnings may have either moved or market multiples might have moved. But I think when we talk about the progress, talking about there's a longer-term gain there about stabilizing and hopefully growing that business.

Yeah, look, and I think in terms of KBS, a couple more things. You know, clearly given that the equity is levered, Small movements in EBITDA are going to have outsized impacts on a quarterly basis on that mark. We are happy with where this thing is trending. We are working with management. We have a new value creation plan in place. We're definitely focused operationally on this business on how to reduce churn, improve operations, reduce SG&A, et cetera, et cetera. A lot of work is being done in the background there. And I think really, you know, the proof in that is going to be over the longer term. And we are bullish on the prospects of this business.

Perfect. Thank you for that, Keller. Turning to just new originations and spread compressions, you guys said that the quality of the investment opportunities is high and that the top performers are actually being moved by the sponsors. How much, if any, of the current spread compression is actually mix-related due to the higher quality companies already having embedded lower spreads?

And how much is like-for-like credit quality spread compression versus just raw competitive pressure?

Yeah, there's probably not a perfect answer to that. I would probably try to break it down a little bit. We have seen... Let's say these higher quality businesses being the ones that are being moved by certain sponsors. We do know very clearly there's a fair amount of pressure on GPs broadly from their LPs to monetize assets so those LPs can get some money back. And these better assets, I think, just have not had the moves on valuation multiples, so they're more perfect candidates to sell. I think the spread compression probably more broadly, I would probably go through the journey of, if you think about January 22, the regular way deal was, let's call it 575. That probably gapped out to 650 in the summer of 23. That was all due to a clear belief or a clear concern about where the economy was going you know, hard landing, soft landing, and that sort of debate. I think once inflation was deemed to be, you know, more under control, and this view, I mean, the market until probably recently has not even been talking about a soft landing, but talking about sort of growth. So, you know, the average spreads probably came down closer to 500, right? Now, I wouldn't say we were surprised by that. Obviously, we would like the loan portfolio to be as wide as possible, but You know, in most fixed income instruments, when the benchmark moves as much as it has, credit spreads do tighten. And if you think about just the regular way loan and the examples I gave, you know, the January 2020 loan was probably 7.5%, 8% kind of all in. And even a loan today is, you know, 10.5%, you know, sort of plus percent sort of all in. So we still think that's really interesting risk-adjusted returns.

Perfect. That's wonderful, Colin. I really appreciate it.

No problem. Have a good day.

As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. Our next question comes from the line of Bryce Rowe of B. Reilly. Your line is now open.

Great. Thanks a lot. Wanted to maybe start on the supplemental dividend. Obviously, you all announced a variable dividend approach um you know some time ago um and this the the special programs run its course as you as you've noted um and it sounds like you've got you know a decent amount of of spillover uh maybe almost three quarter three quarters of a um you know of of the current regular plus supplemental you know in in your pocket so my question is if we do start to kind of get lower rate and lower earnings, lower NII associated with those lower rates, you know, at what point does the supplemental kind of go away? Are you looking to, you know, to get the spillover down to, let's call it two quarters worth of base or base plus supplemental?

Yeah, and I'll let Brian and Stephen sort of, you know, add to this. But, you know, I think we have – you know, been pretty in trying to listen to the market for a long time about sort of the dividend and sort of the dividend policy. I think, you know, which is why we're kind of where we are today. And, you know, that 64 is the base as kind of, you know, rates were moving. It felt appropriate to have the supplemental, you know, next to that, we'll call it very comfortable base. And then we did make a statement to the market that we intended to really pay out kind of what we were earning. Hence, that was the five cents sort of special, right? I think we are fortunate. with the spillback dollars to ensure that we keep the total 70 consistent for an extended period of time. Obviously, the whole sector will have some earnings sort of pressure in a downward kind of rate environment. I think that's clearly acknowledged. I think we are focused on, though, where are the levers that we do have for earnings growth, you know, that would go back to the leverage question that we asked before, as well as, you know, looking to reduce any non-income producing assets to sort of help drive that. But if anything else, Stephen or Brian, you want to add? I think you said it well.

Yeah, look, I think, you know, we do have, you know, a couple of larger positions that are non-income producing that we are, you know, looking to monetize. We can't guarantee when or if that happens. But that also is a pretty meaningful lever for us.

Yeah. That's a good segue, Brian, for my kind of the next question. Obviously, good optics around what happened at GlobalJet coming off non-accrual and clearly trying to simplify that capital structure to maybe get a better end game or outcome in place. Is there a kind of a similar playbook with JW Aluminum, you know, given that it is legacy? Um, you know, it's, it's a similar kind of, uh, instrument in, in the capital structure. It's kind of marked at the same level that global jet was just kind of curious if there's an opportunity for, to simplify that capital structure and maybe, maybe put it in a better position for that, for that, uh, monetization outcome.

Do you want to start? Yeah. I mean, look, I think each company sort of has a different, um, ownership base in, in junior securities. I think in the case of GJC GlobalJet, we had a lot of alignment in terms of simplifying the capital structure. I think in the case of JWA, the capital structure is maybe a little bit more complex with different holders. But I think the focus on monetization of both is still front and center for us.

And I think that's why we tried to provide the additional clarity and the prepared remarks about that 12% remains in that legacy bucket, but four of those positions is roughly 70% or 75% of them. I wouldn't call it easy to be able to monetize them. Three of them are in equity positions where we're not in control, but I think we've done a lot to improve those positions, to stabilize those positions. I think we've done a lot working together with the other partners in those deals. to try to maximize the outcome.

I appreciate it. That's all for me.

At this time, I am showing no further questions. I would like to turn it back to Dan Pietrzak for closing remarks.

Well, thank you all for your time today. We're always available for any follow-up points that you may have. Please do enjoy the rest of your summer, and we look forward to speaking to you again in the fall. Have a good day.

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