FS KKR Capital Corp.

Good morning, ladies and gentlemen. Welcome to the FSKKR Capital Corp's Third Quarter 2025 Earnings Conference Call. Your lines will be in a listen-only mode during remarks by FS Case 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,

We'll proceed with the introduction. Ms. Kleinhan, you may begin. Thank you.

Good morning, and welcome to FSKKR Capital Corp's third quarter 2025 earnings conference call. Please note that FSKKR Capital Corp may be referred to as FSK, the fund, or the company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued yesterday. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30th, 2025. A link to today's webcast and the presentation is available on the For Investors 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, reconciliation to the most directly comparable GAAP measures can be found in FSK's third quarter earnings release that was filed with the SEC on November 5th, 2025. 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 President, and Steven 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 FSK's third quarter 2025 earnings conference call. I'd like to start today's call with a few market observations. We believe the BDC industry in general, and FSK in particular, are resilient. the BDC industry's ability to navigate historical periods of volatility, whether due to interest rate adjustments, asset prices, inflationary pressures, or spread compression, has been strong. The primary reason so many BDCs successfully navigated prior periods of volatility has been the lowly levered capital structures with which many companies, including FSK, operate. When interest rates began moving up just a few years ago in response to inflationary pressures, many industry observers became overwhelmingly negative in their predictions for BDCs. Not only did the vast majority of BDC portfolio companies navigate this period of adjustment, BDC operators did as well, with many of us delivering sustained quarters of higher levels of net investment income and higher dividends for shareholders. As interest rates have started declining, many industry observers once again are predicting difficult times ahead for BDCs. At its heart, the BDC industry is a spread lending business built on the back of diversified pools of assets and strong balance sheets. So, while we expect the Federal Reserve will continue to reduce rates over the coming quarters, that reduction in rates will be immediately helpful to portfolio companies from an interest burden standpoint and likely will generate additional M&A activity. We also believe that while net investment income levels necessarily will decline from the recent highs, FSK in particular and the BDC industry in general are well positioned to continue providing investors with an attractive current income stream as compared to the risk-free rate. And with that, I'd like to turn to a quick overview of FSK's quarterly results and a few comments on our forward dividend strategy, which will begin in the first quarter of 2026. During the third quarter, FSK generated net investment income and adjusted net investment income of 57 cents per share as compared to our public guidance of approximately 58 cents and 57 cents per share, respectively. Additionally, our net asset value increased to $21.99 compared to $21.93 as of the end of the second quarter. On October 8th, 2025, we announced that our board declared a fourth quarter distribution totaling 70 cents per share, consisting of our base distribution of 64 cents per share and a supplemental distribution of 6 cents per share. In contemplating our forward dividend strategy, we considered the prevailing interest rate environment, the overall investing environment, and future unsecured debt maturities. Additional considerations included annualized BDC dividend yields on net asset values over various market cycles and our projected level spillover income as of December 31st of this year. Finally, we actively listened to investors in terms of their views of our historical base plus supplemental dividend policy as we were one of the first BDCs to implement such a policy some years ago. The culmination of this process yield the following conclusions. First, investors appreciate the base plus supplemental strategy as a method of receiving additional dividend income on a real-time basis. Next, we believe FSK's annualized dividend yield, expressed as a percentage of our net asset value, will continue to be very competitive with our peer group and will have the ability to vary over time as our net investment income varies. thereby maximizing current income to our investors. For 2026, we expect FSK's total distribution to equate to an annualized yield on our net asset value of approximately 10%, consistent with the BDC industry's long-term yield of between 9% and 10%. We currently expect our quarterly distribution will be comprised of a base distribution of approximately 45 cents per share and will be supplemented by our quarterly net investment income over and above this level. During the first quarter of 2026, we currently expect our total distribution will approximate 55 cents per share based on future interest rates, refinance activities on the right side of the balance sheet, and overall investment yields. We expect our total quarterly distribution will vary over time. And with that, I'll turn the call over to Dan.

Thanks, Michael. From a macro standpoint, we have seen encouraging signs in the broader market, which point to continued growth in capital markets activity. Momentum in M&A is building, and we are seeing that strength reflected on our own pipeline as the number of deals we evaluated in the third quarter increased by approximately 30% year over year. While some economic indicators have shown pockets of weakness, the overall labor market continues to remain healthy, supported by solid corporate earnings. Additionally, higher FICO score consumers continue to spend at accelerated levels. Looking ahead, if the Fed can engineer a soft landing and tariff concerns can be put behind us, we believe economic conditions could continue to improve. Separately, we would note there has been a significant amount of attention to certain specific defaults in the broader marketplace. We believe those are not private credit matters and our very specific situation and names. We would also note we have no exposure to first brands or tricolor. Trade tensions and the recent government shutdown continue to heighten our awareness around U.S. government and tariff-related exposures. Our portfolio has low single-digit exposure to U.S. government-related borrowers, and while there could be timing effects on payments or short-term liquidity constraints, those risks have yet to materialize. Additionally, ongoing tariff discussions continue to drive market volatility. But as we have stated in the past, our exposure to tariff impacted businesses remains in the low to mid single digits. Both topics are on our watch list though and are being closely monitored. We are seeing attractive opportunities in the origination market with a growing number of opportunities coming from new issuers. which further reflects the steady pickup in M&A activity. Our focus remains on U.S.-based direct lending and top of the capital structure risk. In addition, asset-based finance investments remain an important and complementary part of the portfolio, providing incremental yield while outperforming traditional corporate credit from a default perspective. During the quarter, we had two realizations within our ABF portfolio. Our investment in Caledon Commercial Finance was repaid in full ahead of its 2026 maturity. Caledon is an asset-based lending platform for capital-intensive businesses with a focus on retail and industrial companies. We initially made this investment in November of 2020, and the repayment resulted in a 13.3% IRR. Additionally, our investment in Weber was successfully exited in connection with the company's acquisition of Blackstone products. Weber is a manufacturer and distributor of outdoor barbecues and grill accessories. We initially invested in Weber in December of 2023 via an accounts receivable financing facility. The exit resulted in a 16.8% IRR. Turning to our investment activity, during the third quarter, we originated approximately $1.1 billion of new investments. Approximately 60% 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 billion of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $109 million. New originations consisted of approximately 65% in first lien loans, 7% in subordinated debt, 15% in asset-based finance investments, 12% in capital calls to the joint venture, and 1% in other or equity investments. Our new direct lending commitments had a weighted average EBITDA of approximately $162 million, 6.2 turns of leverage through our security, and a weighted average coupon of approximately SOFR plus 472 basis points. We continue to focus on upper middle market companies with EBITDA in the $50 to $150 million range across a diverse set of industries and sectors. As of September 30th, the weighted average EBITDA of our portfolio companies was $240 million, and the median EBITDA was $115 million. Our portfolio companies reported a weighted average year-on-year EBITDA growth rate of approximately 4% across companies in which we have invested in since April of 2018. Interest coverage levels remain healthy, with median third quarter coverage at 1.8 times. Our governance and workout team has made significant progress on certain investments, which we discussed during our second quarter earnings call in August. Specific company updates are as follows. We completed a restructuring of production resource group, or PRG, in October, resulting in a market aligned capital structure and we and our BDC co-lender will exercise effective control of the company. And while pricing and industry pressure remains, we believe the company will be in a much better position to create value going forward. Restructuring efforts associated with 4840 are progressing. Based upon progress to date, we anticipate being in a position to discuss the finalization of the restructuring on our fourth quarter earnings call. KBS continues to perform in line with plan, and we are pleased with the workout team's efforts here, as we were able to effectuate change and stabilize the business quite quickly, and there continues to be strategic interest in KBS. During the third quarter, no investments were added to non-accrual status, and one company was removed from non-accrual status. Our first lien investment in New Era Technology was restructured during the quarter into a new accruing first lien loan and Revolver, and we also received new preferred stock and common equity. The restructuring resulted in $29 million of cost and $18 million of fair value being removed from non-accrual status. As of the end of the third quarter, non-accruals represented 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis. This compares to 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis as of June 30th. Pro forma for the PRG restructuring, which closed subsequent to quarter end, our non-accrual rate would be 3.6% on a cost basis and 1.9% on a fair value basis, assuming the remainder of the portfolio is unchanged. We also believe it is helpful to provide the market with information based upon FSK's assets originated by KKR credit. Non-accruals relating to the 90% of the portfolio, which has been originated by KKR credit and the FSK KKR Advisor, were 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter. This compares to 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter. With that, I'll turn the call over to Stephen.

Thanks, Dan. As of September 30th, FSK's investment portfolio had a fair value of $13.4 billion, consisting of 224 portfolio companies. At the end of the third quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our investment portfolio, compared to 19% as of the end of the second quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 63% senior secured debt as of September 30th. In addition, our joint venture represented approximately 13% 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 and first lien loans total approximately 68% of our total portfolio, and senior secured investments total approximately 73% of our portfolio as of September 30th. The weighted average yield on accruing debt investments was 10.5% as of September 30th, a decrease of 10 basis points compared to 10.6% as of June 30th. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Turning to our quarterly operating results, our total investment income was $373 million for the third quarter, a decrease of $25 million compared to the second quarter. The primary components of our total investment income during the third quarter were as follows. Total interest income was $285 million, representing a decrease of $13 million quarter over quarter. The decline in interest income was driven by lower base rates, the repayment of higher yielding investments, and the flow through of assets previously placed on non-accrual status during the second quarter. Dividend and fee income totaled $88 million, a decrease of $12 million quarter over quarter. As we noted on our second quarter earnings call, we anticipated a decline in third quarter dividend income primarily due to the timing of distributions from certain ADF investments which were paid during the second quarter. Our total dividend and fee income is summarized as follows. $59 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $25 million during the quarter, and fee income totaling approximately $4 million during the quarter. The decline in fee income quarter over quarter primarily was due to lower upfront fees associated with the mix of new investments during the quarter, lower prepayment fees due to the age of investments that repaid during the quarter, and fewer amendments during the third quarter. Our total expenses were $210 million during the third quarter, a decrease of $15 million compared to the second quarter. The change in total expenses primarily was driven by a decrease in interest expense due to lower leverage utilization during the quarter. The primary components of our total expenses were as follows. Our interest expense totaled $116 million, a decrease of $9 million quarter over quarter. Our weighted average cost of debt was 5.3% as of September 30th. Management fees totaled $51 million, a decrease of $2 million quarter over quarter. Incentive fees totaled $33 million, a decrease of $3 million quarter over quarter. Other expenses totaled $10 million, a decrease of $1 million quarter over quarter. Lastly, we incurred $4 million of excise tax during the third quarter related to the finalization of 2024 tax items related to certain international and ABS investments. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows. Our ending 2Q2025 net asset value per share of $21.93 was increased by GAAP net investment income of 57 cents per share and was increased by 19 cents per share due to an increase in the overall value of our investment portfolio. our net asset value per share was reduced by our 70 cents per share total quarterly distribution paid during the quarter. The sum of these activities results in our September 30, 2025 net asset value per share of $21.99. From a forward-looking guidance perspective, we expect fourth quarter 2025 GAAP net investment income to approximate 51 cents per share and we expect our adjusted net investment income to approximate 56 cents per share. The detailed components of our fourth quarter guidance are as follows. Our recurring interest income on a GAAP basis is expected to approximate $270 million. We expect recurring dividend income associated with our joint venture to approximate $57 million. We expect fee and other dividend income to approximate $33 million. From an expense standpoint, we expect our management fees to approximate $50 million. We expect incentive fees to approximate $29 million. We expect our interest expense to approximate $109 million. And we expect other G&A expenses to approximate $9 million. During the fourth quarter, we expect our excise taxes will approximate $20 million. We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting. Turning to our capital structure, in September we issued $400 million of 6.125% unsecured notes due 2031, which subsequently were swapped to floating rate via an interest rate swap agreement at a weighted average spread of SOFR plus 2.748%. Proceeds were used to repay a portion of the outstanding debt on our revolver. As of September 30th, our gross and net debt to equity levels were 120% and 116% respectively, compared to 131% and 120% at June 30th. Our leverage remains within our target leverage range of 1 to 1.25 times net debt to equity. At the end of the third quarter, our available liquidity was $3.7 billion, and approximately 64% 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.

Thanks, Stephen. We are pleased with our third quarter results, and we're also pleased to announce our 2026 distribution strategy, which we expect to result in an annualized yield of approximately 10% on our net asset value. From a forward-looking perspective, the pickup and M&A activity is positive to see, as we believe our investment platform is particularly well-suited to capitalize on this increased activity. On behalf of the team, we thank you all for joining the call and for your continued support. Operator, we'd like to open the call for questions.

Thank you. At this time, we will conduct the question and answer session. To ask a question during this, 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 Finian O'Shea at Wells Fargo Securities.

Hey, everyone. Good morning. So it looks like there was some improvement on a few of the legacy names, equity, which is, of course, very welcome. Question as it relates to that is, to what extent is this indicative of you and the team advancing toward exiting these investments? Thank you.

Good morning, Clint. Fair question. I think we have been pretty happy with the work that our workout and governance team has done across these names. We've talked about several of them on calls in the past. I think some of them are complicated because they're effectively minority equity investments where we don't have perfect governance or control. I think that said, and we've talked about this in the past, on some of the names like GlobalJet, we've seen a really good job by the management team there, a real evolution of that balance sheet and kind of their own sort of ROE figures. I think we talked about the PRG restructuring, which is positive. JWA's got a bit of a benefit from tariffs. So we are very, very focused on looking to monetize there for a bunch of different reasons. including being able to redeploy in more interest-bearing, but progress.

Okay, it's helpful. Thanks. And Steven, a follow-up. I'm sure a question we all have on the dividend is what sort of progress you made toward your targets on spillover and what that might mean. I guess as an input to your formula on the variable, but also potential specials this year, next year, or whenever. Thanks.

Yeah, thanks, Ben. We certainly have made progress during 2025, which was our goal. I think we'll end the year probably cleaning out a little north of 100 million of spillover. obviously with our partnership investments, you know, blockers that exist too and international partnerships, you know, there is just the way those flow through in terms of our obligation, tax obligation, which does impact spillover. You know, there's a build on the other side. So I think to the heart of your question, if we end the year, you know, when we go through the estimates at that time period where with the reduction in the dividend going into 2026, if we have a balance there, then I think our expectation would be to make a one-time distribution or so to shareholders something first half of next year that would get us to the remaining part of our target balance of plus or minus two quarters worth of dividends on an ongoing basis. And then also incumbent in the dividend strategy is that we, I think the market, you and the market should expect us to pay on a full annual basis 100% of our gap net investment income. It may not hit that every quarter given that we pay excise tax in the fourth quarter, but for the full year, we would be paying basically 100% of NII.

And will you have a, sorry to sneak in a bonus question here, like in the out years, if you look at the SOFR curve, you might not be that much above the 45. You know, of course, we'll see, but let's just go with it. Are you going to want this sort of degree of headroom, like, given your sort of commitment to the variable nature? Like, if your NOI goes to 45, are we going to see 35 plus 10 or something like that?

Yeah, I'll start, and Stephen can add to it, and then we charge extra for bonus questions.

You know, I

I think we're probably not in the business of trying to give out, you know, multi-year sort of forward guidance because it's quite hard, right? It's a question of, you know, where does SOFR go? You know, I think you see that, I think not just us, but probably the whole industry has got a lower fee income number where we sit this quarter. You know, so probably a bunch of variables that go into that. You know, we did take into account what I think you're talking about, right? You know, the forward curve, you know, we know we have, you know, the benefit of some, you know, cheaper liabilities that were issued at a different rate environment that will get refinanced to kind of think about that base and then, you know, being mindful about paying out the supplemental ahead of that. But I think we were pretty deliberate in coming up with that 45 cent estimate.

Awesome. Thank you, Dan. Have a good day.

Our next question comes from Aaron Signovich at TruList.

Thanks. With respect to the PRG restructuring in October, can you provide any details in terms of what you received in return and was it close to the mark, etc.?

Yeah, I mean, it's probably just in a quite simple matter, it was a fairly messy capital structure because it had gone through a bunch of changes over the years and that messy capital structure was difficult, I think, to allow the company to go forward, not just from a financial perspective, but a governance perspective. So I think that was the real driver.

I'm sorry, but what did you receive in exchange?

From a value perspective, we were effectively in the same spot. From a governance perspective, though, I think we're sort of significantly different. We were effectively already but there was a bunch of other tranches of equity in there that complicated the matter. That's my point about cleaning it.

Okay. That makes sense. And then the $1 billion that's coming due in January, the unsecured debt, you did an issuance recently. Was that kind of partial payment ahead of that? And what's the, I mean, obviously you didn't pay it down, but kind of thought to use that cash kind of towards that. And then are you expecting to use the credit facilities to initially pay that and then, you know, kind of hit the market whenever you see it as attractive?

Yeah, I mean, I think that's pretty well said. I think the team has done a good job about being mindful about the liability side of the balance sheet, right? We're consistently extending the revolver to make sure we've got, you know, roughly always going back to that five years. We want to access and continue to access the unsecured bond market consistently. You know, clearly the 400 was done in advance of that, and we've got $3.7 billion of available liquidity. So I think we, the liability side of these balance sheets are very important. We spent a lot of time thinking about that, but I think with that available liquidity, we feel in a good spot. Thank you.

Thank you. Our next question comes from Ethan K. at Lucid Capital Markets.

Hey, guys. Thanks for taking my question here. I wanted to get your thoughts on kind of how or if you guys are thinking about, you know, share buybacks. You indicated kind of intention to pay out 100% of NII shares. with this new dividend framework. And, you know, there's obviously many factors that kind of come into play when making these capital allocation decisions. But, you know, the stock's still trading at a meaningful discount. So, excuse me, wondering whether it's, you know, something you've considered or if you're kind of more comfortable, you know, returning all of NII to shareholders through the dividend.

Yeah.

Good morning. You know, I think we, have been, you know, quite active, you know, over the years on the share buyback sort of side. I think, you know, I don't look at the team here, but it's probably roughly $500 million, you know, over sort of those years. You know, I think it's something that we do, you know, obviously talk about with the board we think about as a management team. I think you have to be mindful about things on the other side, right? Where you're sitting, you know, versus target leverage. You know, if you do have, kind of thoughts or concerns around the forward macro. I think we feel pretty good with what we're seeing kind of out there, but it is a little bit of a bumpy environment. So I think it does all get factored in there. But it will be something that we do consider.

Understood. And then switching gears a little, you mentioned 60% of fundings were to kind of add-ons or existing relationships. This quarter, you also mentioned you're seeing a growing number of opportunities from new issuers. I'm wondering whether you think we're kind of approaching maybe an inflection in terms of, you know, new borrower fundings kind of overtaking incumbent fundings and, you know, to the extent those generate better fees, what that might mean for fee income, which, you know, as you mentioned, looks pretty muted this quarter and, you know, maybe could be a tailwind going forward.

Yeah, you got a couple of points in there, right? You know, I think us like the larger sort of platforms, you know, like the incumbency position. So that is, you know, benefit or beneficial and kind of useful as you build out your portfolio. You know, we are busier as it relates to pipeline and deal flow. You know, we were busier in the third quarter than the second quarter. I think the second quarter we were busier than any of the prior eight quarters on an individual basis. I think the market has sort of put tariffs behind it, although I'm not sure the full impact of tariffs has necessarily flowed through. I think there's general consensus on sort of where rates are going. So I think we've seen that valuation gap or that willing buyer, willing seller sort of piece come together. If you go to the bank earnings calls, they were definitely talking about how their capital markets businesses or their M&A businesses were more active. Obviously some of those are much larger sort of deals, but when you do factor all that together with, I think there's still a real push from private equity LPs to get a return of capital. We know there's a lot of dry powder out there. I think we're constructive on that. I think everybody's talked about that for a long time. So I don't think we're in the business of trying to predict that anymore, but we do know that we're busier I think it will have an impact on fee income, which could be positive, although I would, you know, note, I mean, you know, kind of the upfront fees and the OIDs that's probably narrowed, you know, in line with sort of spreads coming down. I think, you know, we are of an opinion as the market gets busier, some of that can unwind a bit, but I would just be mindful about that.

Understood. Appreciate it. Thanks, guys. Thank you.

Our next question comes from Kenneth Lee at RBC Capital Markets.

Hey, good morning. Thanks for taking my question. Just to follow up on a previous question, you mentioned that when you went about setting your base distribution level, you were pretty deliberate and looked at the forward curves. I just want to assess how resilient do you think that the base distribution level is being set through

various economic cycles and various rate scenarios just want to tease that out a little bit more thanks yeah no i mean it's i don't think we would have said it if we didn't have a degree of confidence for you know where we you know kind of saw the the various variables going forward you are correct i think there's a lot of sort of pieces of that puzzle in there um but you know just to say it again like we did look at where that forward curve would go we did look at refinancing those liabilities, you know, we did not give ourselves a lot of benefit in there for what would be kind of upside levers, right, i.e., if spreads do sort of gap back out or, you know, a big benefit of, you know, assets rotating out of a non-income producing bucket into an income producing bucket. So, you know, I think, you know, we put all that together. to try to be mindful about that. And, you know, we, as we talked about in the last call, we wanted to get ahead of this. We wanted to be, you know, provide transparency in there. The only point that I would make is I think it is important. I do think investors need to look at the total distribution number though, right? You know, we gave some thoughts about where that sets for Q1 and for, you know, all of 26. But clearly in these earlier years, especially when those lower-priced fixed-rate debt instruments are outstanding, there's some additional earnings. So I would be focused on the total, but the components are the space and the subtle note.

Gotcha. Very helpful there. And one follow-up, if I may. You commented on seeing some increased potential deal activity. What are you seeing in terms of spreads on some of the newer investments there? Have you seen a potential pickup or widening, just given the amount of deal activity there? Thanks.

Yeah, we haven't seen that, to be honest, Ken. I think we're probably still in that early days of the deal activity. I think you've got to be probably looking at the other side of what the inflows are to the market. know i think we've talked about for for some time now where we've been in a bit of this technical um you know whereby you know a fair amount of capital has been raised for the space and you know the m a volumes were at just at a lower level so i think it's going to take a little bit more time for that to unwind if it's going to impact spreads although i could foresee that as as happening you know i think we probably were expecting you know, a little bit more continued volatility in the market across some of the, you know, higher profile defaults that we had mentioned in our prepared remarks. I think that lasted for, you know, a little bit, but when I'm talking a little bit, I'm talking like a couple of days, you know, but I think that's kind of on our mind as well. So not seeing that yet, but we are seeing pretty high quality companies, you know, access the direct lending market, which we view as a positive.

Gotcha. Very helpful there. Thanks again. Thanks. Have a good day.

Our next question comes from Robert Dodd at Raymond James.

Robert, your line is open. We can go to the next question and try to go back to Robert if he's maybe on mute.

Our next question comes from Alyssa Wedale at JP Morgan.

Good morning. Thanks for taking my questions today. First, I want to clarify the new dividend policy in 2026. When you target sort of 100% payout ratio, I understand that to be sort of on an annual basis. Quarterly might be a slight mismatch. Am I understanding that right? And then is that versus GAAP or adjusted MII?

Yeah. I think your kind of initial thought there is right. You know, there could be some mismatches on a quarterly basis, and that's focused on GAAP.

Okay. Got it. Thank you. And then as the board was reassessing, you know, the dividend policy going forward, it seems like there's a focus on, you know, resiliency within a lower rate environment for some period of time. Since we've also seen pressure on asset yields, and again, that's also exacerbated by the capital formation we've seen in the industry, I'm curious if the board also considered any adjustments to the fee structure for FSK. Thank you.

Yeah. No, thanks, Melissa. You know, I think you're correct in the sense of trying to, you know, factor all the pieces together here, you know, because it is more than just, you know, benchmarks rates. It is spreads. It is all of the other sort of factors we talked about. You know, the couple of points I would make is, you know, one, you know, the idea of the base and supplemental is not a new concept for us. We've really been in that land for some time. We were really in kind of the 60 cent base with supplementals on top of that. And then we amended that 60 to 64 over time. So I think that's not a new concept. And to be fair, I think we're not declaring those dividends formally for view one and 26, but we are trying to be pretty transparent with the market for kind of where we see this going. I think we... You know, by definition, kind of have to look at fees consistently or on an annual basis with the board. I think those dialogues, you know, will continue. And I think, you know, where you do look at kind of the fee structure today, I think it lines up with the, you know, sort of the peers in the space. But, yes, that is something we have to have the conversations with the board on a consistent basis about.

Our next question comes from Paul Johnson at KBW.

Yeah, thank you. Good morning. Thanks for taking my questions. It looks like the JV might have been a little bit higher this quarter. I was just curious, what is sort of kind of the capacity of the JV or the dry powder, so to speak? Is the JV fully deployed at this point, or is there sort of additional... leverage that could be deployed there.

Yeah, we do have additional sort of dry powder there to deploy into that. We have talked about the joint venture with kind of maybe an ultimate target of roughly 15%. So we're getting to kind of that neighborhood, but we still do have some capacity there. I think the joint venture has been a good partnership, not just with our sort of partner there, but from a hopefully yield enhancer, if that's the right sort of term, you know, for FSK sort of generally. But I think you can expect that to live in, you know, kind of that 12 to 15% range on a consistent basis.

Thanks. That's helpful. And then one kind of high-level question I'd ask is just, you know, your comments on tariffs and, you know, you still have, you know, a declining but, you know, small sort of watch list, you know, related to kind of the tariff issues where I've seen a lot of, you know, BDCs with declining watch lists, some, you know, essentially to zero at this point, it becoming mainly a non-issue. So I'm just curious, you know, on your comment there, you know, are you seeing kind of latent tariff issues start to percolate kind of in the economy or is this just still kind of a just kind of a normal sort of belated flow through of all the significant tariff changes earlier this year?

Yeah, no, it's a good and fair question. You know, I think we do have, you know, a handful of names, you know, that are in that, you know, kind of single digit number where we are kind of, you know, quite mindful about tariff exposure, right? That's, you know, the the I think the fortunate news is that number is low because we've generally avoided, you know, what I would call heavy cyclical businesses or consumer retail related names, which probably have that higher number. So I think we have seen an impact on that small number of names. I think we're working, you know, with those names to get through that. You know, the comment I made about the tariff point on the other side is, you know, there's, I think the market has gotten itself, you know, to the point of, understanding or feeling like they know where the administration is or lives on these sort of tariff points. I am not sure, though, the overall kind of broader economy has felt the full impact yet. So I'm not sure that's a company-specific name versus a macro point, but that's kind of on our mind. And I would say the same thing for government-related names. I mean, we have to see how this shutdown could impact folks you still have kind of the doge, you know, sort of points out there. You know, I put them in a similar bucket, you know, where I'm not sure we've fully kind of seen the full impact of that yet, you know, kind of play out, but it's something we're pretty mindful about.

Very helpful. Thank you. That's all for me. Okay. Thank you.

Our next question comes from Hilly Schaaf at Raymond James.

Good morning. Thanks for the question. A little bit of a broader market question, but has the recent disruption of the first brand's tri-color default started to impact any competitive factors in the asset-backed finance side of the market?

Yeah, good morning. You know, fair question. You know, I think the short answer is no, right? I think the broader answer is no. You know, I think those handful of deals have, you know, brought some kind of highlights to the space. You know, I think they're all very unique and bespoke situations as it relates to the name. It does seem like there's some real, you know, either fraud-related matters or otherwise there. You know, I think that both of those companies, you know, operate, I think, in either, you know, difficult segments or had some history around those. So I think we feel really good about where we sit with regards to our asset-backed business. I think anyone who's done this long enough uses these as moments to re-look at your own book, which we've been doing. But I think you haven't seen a big shake out there. I do think it is a very prominent question on investors' minds. both institutional and wealth, which could extend out some timelines or kind of otherwise there, which are pretty fair kind of comments or questions on their side. But I don't think from a regular way new investment perspective.

Got it. Thank you. I'm showing no further questions at this time. I would now like to turn it back to Dan, Peter, Zach for closing remarks.

Well, we want to thank everyone for your time today. We're always available if there are any other questions. We look forward to talking with you on our next call. Have a good day.

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