FS KKR Capital Corp. Q2 FY2025 earnings call

• Net investment results: Net investment income was $0.62 per share, adjusted net investment income $0.60 per share, with net asset value per share declining due to 4 portfolio companies in nonaccrual. - Investment activity: During the first half of 2025, $3.4 billion of investments were originated, with $1.4 billion in the second quarter. Approximately 72% of new investments were add-on financings to existing portfolio companies. New originations were 83% in first lien loans, 5% in subordinated debt, and 12% in asset-based finance investments. - Portfolio companies: Four portfolio companies were placed on nonaccrual, including Production Resource Group, 48forty, Kellermeyer Bergensons Services, and Worldwise. Two companies were removed from nonaccrual, including Bowery Farming and JW Aluminum. - Credit Opportunities Partners Joint Venture: The JV was scaled, with new investments and net sales/repayments impacting the portfolio.

During the second quarter, FS KKR Capital Corp. (FSK) generated net investment income of $0.62 per share and adjusted net investment income of $0.60 per share, compared to public guidance of approximately $0.64 and $0.62 per share respectively. The net asset value per share declined 6.2% from $23.37 to $21.93. The investment portfolio had a fair value of $13.6 billion as of June 30, 2025, consisting of 218 portfolio companies. Approximately 59% of the portfolio was in first lien loans and 64% in senior secured debt. The weighted average yield on accruing debt investments was 10.6% as of June 30, a decrease of 20 basis points from the first quarter. Total investment income for the second quarter was $398 million, a decrease of $2 million from the first quarter, primarily due to lower interest income and fee income. Total expenses were $225 million, an increase of $12 million from the first quarter, driven by higher interest expense.

• 2025 distribution guidance remains in place, with total distributions expected to be $2.80 per share ($2.56 base, $0.24 supplemental). The Board declared a third quarter distribution of $0.70 per share. - For the third quarter of 2025, GAAP net investment income is expected to approximate $0.58 per share, and adjusted net investment income is expected to approximate $0.57 per share. - The 2026 dividend strategy will be detailed in the third quarter earnings call, based on factors like prevailing interest rates, portfolio yield, spread environment, and weighted average cost of liability structure.

• Geopolitical tensions, regulatory changes, tariffs, and market volatility create uncertainty for M&A activity. - Nonaccruals in 4 portfolio companies impacted net asset value. - Interest rate fluctuations and leverage utilization pose risks to the balance sheet and expenses. - The company's performance is affected by specific situations with portfolio companies, including industry-wide stress, post-COVID normalization trends, and tariffs.

Q: On the new nonaccruals, it seems like they've largely been legacy troubled assets that had proactive restructuring, however, continue to have further subsequent headwinds. When you're looking over the past troubled assets that have underwent some of that proactive intervention, how many are you currently monitoring for situations like this? Out of Worldwise, Kellermeyer and Alacrity, it seemed that there was a significant change in quarter-over-quarter marks. So just if you could provide any more color on that?

A: Dan Pietrzak stated that the workout team is active from the start of issues, with each troubled asset situation unique. PRG, KBS, 48forty, and Worldwise have different challenges, and the team is working to maximize returns.

Q: Yes. And Dan, I echo your sentiments to our friends in Midtown. It's a really difficult situation for a lot of folks, and our heart goes out to them. It looks like it's pretty clear that the company is going to be, to a certain extent, restating its dividend philosophy. And at one point in time, the company had what you could describe as a modified variable dividend based upon earnings, and then you kind of got away from that for 1.5 years or 2 years as you were working on the spillover. Is that what we should think about you going back to, which is maybe a base and some supplemental that toggles with earnings? Or how does the company see reformulating that dividend policy?

A: Dan Pietrzak said the company will detail the dividend strategy in the third quarter call, with a focus on base and supplemental dividends tied to earnings and market factors.