FS KKR Capital Corp Q3 FY2024 earnings call

Key Points

• Michael Forman noted the company exceeded earnings guidance, declared a total fourth-quarter distribution of $0.70 per share, and highlighted continued strength in financial results.
• Dan Pietrzak discussed the U.S. economy remaining solid, expected increase in M&A activity in 2025, and FSK originated $1.1 billion in new investments, with 57% for add-on financings to existing portfolio companies. New investments included 84% first-lien loans and 16% asset-based finance, with examples like the purchase of a $10 billion pool of seasoned private student loans from Discover Financial Services.
• Brian Gerson provided details on the investment portfolio, noting a fair value of $13.9 billion, 217 portfolio companies, and changes in non-accrual status, including one investment added and three removed during the quarter.
• Steven Lilly reviewed financial results, with total investment income at $441 million, interest expense at $118 million, and provided guidance for fourth-quarter net investment income, expense estimates, and capital structure details.

FS KKR Capital Corp generated net investment income of $0.77 per share and adjusted net investment income of $0.74 per share in the third quarter, exceeding public guidance. Net asset value per share ended at $23.82. During the quarter, $1.1 billion of new investments were originated, with approximately 57% focused on add-on financings to existing portfolio companies. New originations were 84% first-lien loans and 16% asset-based finance investments. The weighted average yield on accruing debt investments decreased to 11.5% from 12% in the prior quarter. The 10 largest portfolio companies represented ~20% of the portfolio's fair value.

Forward-Looking Statements

• Expect fourth-quarter 2024 GAAP net investment income to approximate $0.63 per share and adjusted net investment income to approximate $0.68 per share.
• Recurring interest income is expected to be ~$332 million, recurring dividend income from joint venture ~$52 million, other fee and dividend income ~$31 million, management fees ~$53 million, incentive fees ~$36 million, interest expense ~$117 million, and other G&A expenses ~$10 million.
• Available liquidity was $4.4 billion, with ~$1.2 billion of unsecured notes maturing in 2025, and over $3.5 billion of undrawn capacity under the senior secured revolving credit facility.

Risks Identified

• Market uncertainties and economic factors that could cause actual results to differ materially from forward-looking statements.
• Impact of interest rate changes on credit metrics, spreads, and portfolio valuations.
• Potential slowdown in M&A volume affecting fee income and overall financial performance.

Q: Bryce Rowe asked about yields, yield compression, and fourth-quarter interest income guidance.

A: Dan Pietrzak responded that there is a mix of lower rates and spread compression, and the impact of market conditions on deal flow.

Q: Casey Alexander inquired about PIK income and dividend policy.

A: Michael Forman and Brian Gerson discussed PIK income composition, with roughly half from new business and the rest from companies reinvesting, and dividend policy considerations.

Q: John Hecht asked about investment pipeline and credit outlook.

A: Dan Pietrzak and Brian Gerson talked about M&A activity trends, sector-specific performance (e.g., retail and industrial pockets of weakness), and credit metrics.

Q: Mark Hughes asked about repricing activity and credit discipline.

A: Michael Forman and Dan Pietrzak discussed repricing trends, credit discipline in underwriting, and origination activity across different sectors.

Q: Kenneth Lee asked about asset-based finance benchmarks and PIK income.

A: Dan Pietrzak explained asset-based finance return profiles keyed off different benchmarks and PIK income composition (roughly half originally underwritten as PIK).

Q: Melissa Wedel asked about PIK income impact on fair value and rate trends.

A: Dan Pietrzak and Brian Gerson discussed PIK income's effect on valuations based on company performance and rate-related credit trends, noting the balance between rate changes and LP pressure to sell assets.