FS KKR Capital Corp. Q3 FY2025 earnings call

• Market observations: BDC industry resilient, lowly levered capital structures helped navigate prior volatility. Interest rate decline expected to help portfolio companies and generate M&A activity. - Macro standpoint: Encouraging signs in broader market, M&A momentum building, pipeline deals up 30% YoY in third quarter. Labor market healthy, higher FICO score consumers spending. No exposure to First Brands or Tricolor, low single-digit exposure to U.S. government-related borrowers, low to mid-single digit exposure to tariff-impacted businesses. - Investment activity: Originated ~$1.1 billion of new investments, ~60% add-on financings to existing portfolio companies. New originations: 65% first lien loans, 7% subordinated debt, 15% asset-based finance investments, etc. Weighted average EBITDA of portfolio companies $240 million, median $115 million. Governance and workout team made progress on certain investments, including PRG restructuring, 48forty restructuring progress, KBS performing in line. - Capital structure: Issued $400 million of 6.125% unsecured notes due 2031, gross and net debt to equity levels 120% and 116% respectively, available liquidity $3.7 billion.

During the third quarter, FSK generated net investment income and adjusted net investment income of $0.57 per share. Net asset value increased to $21.99. Total investment income was $373 million, with total interest income $285 million and dividend and fee income $88 million. The investment portfolio had a fair value of $13.4 billion with 224 portfolio companies. 10 largest portfolio companies represented ~20% of fair value. Weighted average yield on accruing debt investments was 10.5%. Nonaccruals were 5% on cost basis and 2.9% on fair value basis as of end of third quarter, with improvements in some legacy names.

• Fourth quarter 2025 GAAP net investment income expected to approximate $0.51 per share, adjusted net investment income ~$0.56 per share. - Components: Recurring interest income ~$270 million, joint venture dividend income ~$57 million, fee and other dividend income ~$33 million. Expenses: Management fees ~$50 million, incentive fees ~$29 million, interest expense ~$109 million, other G&A expenses ~$9 million. Excise taxes ~$20 million, net effect partially offset by accretion. - 2026: Total distribution equate to annualized yield on net asset value of ~10%. Quarterly distribution to be base ~$0.45 per share plus supplemental from net investment income. First quarter 2026 total distribution ~$0.55 per share based on future rates, refinancing, etc.

• Trade tensions and government shutdown heighten awareness around U.S. government and tariff-related exposures. Ongoing tariff discussions drive market volatility. - Certain specific defaults in broader marketplace are specific situations and names, but risks have yet to materialize fully.

Q: To what extent is improvement on legacy names indicative of advancing toward exiting these investments?

A: Workout and governance team has done good work on legacy names, some are complicated minority equity investments, but progress is being made towards monetizing them for redeploying into more interest-bearing assets.

Q: Progress on spillover and implications for dividends?

A: Ending 2025 likely cleaning out a little north of $100 million of spillover, if balance exists, expectation to make a one-time distribution first half of 2026 to get to remaining target balance, and expect to pay 100% of GAAP net investment income on a full annual basis.

Q: Thoughts on share buybacks?

A: Have been active on share buybacks over the years, something discussed with the Board, will be considered factoring in various factors like target leverage and macro environment.

Q: New borrower fundings and impact on fee income?

A: Busier in pipeline and deal flow, market has put tariffs behind it to some extent, expect impact on fee income which could be positive but upfront fees and OIDs have narrowed with spreads coming down.

Q: Resilience of base distribution level through economic cycles?

A: Deliberate in setting base distribution level, looked at forward curves, refinancing liabilities, and didn't give much upside levers, need to look at total distribution number as components are base and supplement.

Q: Spreads on new investments?

A: Haven't seen pickup or widening yet, early days of deal activity, working with high-quality companies accessing direct lending market.

Q: JV dividend income and capacity?

A: JV has additional dry powder to deploy, target of roughly 15%, currently in 12% to 15% range.

Q: Tariffs and latent issues?

A: Have a small number of names with tariff exposure, market has some understanding of tariff points, not sure broader economy has felt full impact yet, same for government-related names.

Q: Impact of First Brands, Tricolor default on asset-backed finance side?

A: Short answer is no, those are unique situations, haven't seen big shakeout, but it's a prominent question on investors' minds