FS KKR Capital Corp. Q1 FY2026 earnings call

Strategic Actions to Support Shareholder Value

• KKR will initiate a $150 million fixed-price tender offer for FSK common stock at $11 per share, a premium to the prior closing price, to express confidence in the company's intrinsic value and provide shareholder liquidity.
• KKR will invest $150 million in FSK via a cumulative convertible perpetual preferred security with an initial conversion price of $18.83 (Q1 2026 NAV per share), a 5% starting cash dividend (7% paid-in-kind at FSK's option), redeemable by FSK at its option and by KKR after 6 years.
• FSK's board approved a $300 million share repurchase authorization, to be implemented after the tender offer, timed to match investment repayments while maintaining target leverage. New investment originations will be reduced during this period, with capital focused on portfolio construction, supporting existing companies, deleveraging, and share repurchases.
• Starting Q2 2026, KKR will waive 50% of its subordinate income incentive fee for four quarters to support net investment income and dividend distributions. After this period, the board and advisor will review the full fee agreement.

Portfolio and NAV Update

• The 9.9% Q1 NAV decline was driven by two main factors: company-specific permanent credit impairments from legacy 2021/2022 vintage investments, and temporary mark-to-market markdowns from credit spread moves, concentrated in software and services names. Specific troubled names (ATX, Production Resource Group, Medallia, Cubic Corp, Affordable Care) accounted for ~48% of the total NAV decline.
• Management is taking proactive steps to support troubled portfolio companies, including capital infusions, operational oversight, and new management team placements.
• The company completed a 19-metric AI risk assessment across the full portfolio: 86% of the portfolio carries low AI risk, 11% medium risk, and 3% high risk. Software and services exposure represents 16% of the total portfolio across 55 issuers, and is mostly defensive with low near-term AI disruption risk, with continued quarter-over-quarter EBITDA growth.
• Approximately 81% of the portfolio consists of first lien loans marked above 90, asset-based finance, and joint venture assets, which management views as better positioned against future downside risk. The remaining 19% is concentrated in lower-marked first lien loans, non-first lien/restructured credits, and all legacy positions regardless of performance.

Operational Updates

• Q1 2026 originated $499 million in new investments (mostly committed 2025 deals and add-ons for existing companies), resulting in a net portfolio decrease of $211 million after $710 million in net sales and repayments.
• FSK amended its senior secured revolving credit facility in May 2026, reducing the facility size to $4.1 billion, reset covenants, and increasing the borrowing spread by 12.5 basis points. Pro forma liquidity as of quarter end was $2.3 billion.

As of March 31, 2026, FSK's total investment portfolio had a fair value of $12.3 billion across 236 portfolio companies. The 10 largest positions represent 20% of total portfolio fair value. By asset type: 60% of the portfolio is first lien loans (69% when including joint venture positions), 64% is senior secured debt (73% including joint venture positions), and the joint venture itself represents 14% of total portfolio fair value.

Financial results for Q1 2026: Total investment income was $304 million, consisting of $224 million in interest income and $80 million in dividend and fee income. Total expenses for the quarter were $187 million, including $105 million in interest expense, $48 million in management fees, and $25 million in income incentive fees. Net asset value (NAV) per share declined 9.9% quarter-over-quarter to $18.83, driven by a $2 per share decrease from portfolio valuation markdowns offset partially by $0.42 per share in GAAP net investment income. Non-accrual investments represent 8.1% of the portfolio on a cost basis and 4.2% on a fair value basis, up from 5.5% cost and 3.4% fair value at the end of Q4 2025. The weighted average yield on accruing debt investments was 9.7% as of quarter end, down 30 basis points from Q4 2025.

• Management expects net investment income to annualize to 8% to 9% of NAV over coming quarters, though this is dependent on macroeconomic conditions, geopolitical risks, and portfolio health.
• FSK expects net portfolio repayments in excess of $500 million in Q2 2026, though some portfolio rotation activity may spill over into the second half of the year.
• The company will focus on achieving a smaller, better positioned balance sheet over the transition period, with a priority on reducing gross and net leverage from current levels of 138% and 131% respectively to within the target leverage range.
• The board declared a Q2 2026 distribution of $0.42 per share, consistent with the policy of paying out 100% of GAAP net investment income per share, with quarterly distributions expected to fluctuate alongside net investment income.

• The lingering effects of high inflation and high interest rates have reduced free cash flow for many portfolio companies, creating idiosyncratic challenges for specific legacy investments that could lead to further deterioration and additional markdowns.
• Slowing growth and lower-than-expected valuation multiples in the software and services sector could extend hold periods for portfolio positions and require additional capital ahead of refinancing or maturity extensions.
• Downside macroeconomic or geopolitical events could lead to markdowns even for the higher-quality 81% of the portfolio that management views as well-positioned.
• The 3% of the portfolio classified as high AI risk faces potential disruption from rapidly evolving artificial intelligence technology, which could also impact businesses currently classified as low risk over time.

Q: Why was the tender offer price set at $11 per share, when management says intrinsic value is higher? / A: Due to securities regulations governing tender offers, management cannot provide additional commentary beyond what was included in the press release and prepared remarks. Investors can reference the price relative to recent closing prices and 30/60-day average trading levels. /

Q: How active will portfolio rotation be, and will it depend only on prepayments? / A: Rotation will be driven by a combination of regular ongoing prepayments (which are still expected even in the current market environment) and active sales of larger positions, lower-yielding assets, and selected asset-based finance exposures where the company can optimize capital allocation. Management expects net repayments over $500 million in Q2 2026, and will be active in trimming positions. /

Q: Why is only 50% of the subordinated incentive fee being waived for four quarters, rather than a full or permanent waiver? / A: The full set of strategic actions (tender offer, convertible preferred infusion, share repurchase program, and partial fee waiver) should be viewed as a comprehensive package designed to support FSK through its transition. All parties collaborated with the board to develop the plan, which is viewed as the best path forward for long-term shareholder value. /

Q: Why have FSK's losses been larger than performance across KKR's other direct lending vehicles, and will performance converge over time? / A: Most of FSK's recent NAV volatility comes from legacy positions and 2021/2022 vintage junior debt investments that are not held in KKR's newer, more focused direct lending and asset-based finance funds. FSK's structure as a consistent dividend-paying vehicle is also different from the IRR-focused structure of newer funds. Over time, as FSK shrinks its balance sheet, deleverages, and rotates its portfolio, performance is expected to become more aligned with KKR's broader direct lending platform.