FS KKR Capital Corp. Third Quarter 2026 Financial Results Conference Call - FS KKR CAPITAL CORP

Financial Performance:

• Net Investment Income (NII) reached $0.46 per share for Q3 2026; Adjusted NII also stood at $0.46 per share.
• Net Asset Value (NAV) per share closed at $18.25 (up from $18.30 in Q2 before distribution adjustments; reported $18.28 in bridge due to specific adjustments).
• Total Investment Income was $294 million (+$4M QoQ), driven by $88 million in dividend and fee income (including a one-time $25 million dividend from Belk) and $206 million in interest income (-$11M QoQ).
• Net expenses were $167 million (-$1M QoQ), with management fees at $42 million and interest expense at $99 million (5.6% weighted average rate).
• A KKR subordinated income incentive fee waiver contributed $12 million to Q3 NII.
• Non-accruals decreased to 6.4% of portfolio cost basis (3.4% fair value) from 7.1% (3.8% fair value) in Q2; two new non-accruals (3 Pillar Global, New Era Technology) added ~$142M cost, while Medallia was restructured out of non-accrual status.
• Debt-to-equity ratio held steady at 127% (net debt-to-equity at 125%).
• Available liquidity stood at $3.4 billion, with 73% of drawn balance sheet and 49% of committed balance sheet in unsecured debt.

Guidance and Future Outlook:

• Management expects Q4 2026 GAAP NII per share to annualize between 8% and 9% of NAV.
• Guidance notes Q4 will be impacted by a typical annual excise tax provision and a non-recurring Q3 Belk dividend, offset by an anticipated $17 million dividend from JW Aluminum.
• The company aims to continue repurchasing shares to target an annualized dividend rate of 8% to 9% of NAV.
• Strategic focus remains on deleveraging (targeting approx. 1.25x debt-to-equity) and rotating the portfolio toward first-lien senior secured positions.
• Net capital deployment is expected to remain limited in late 2026, with a potential shift to net deployment projected over the 2027 timeframe.

Business Segments and Product Lines:

• Investment portfolio fair value reached $11.3 billion across 234 companies; top 10 holdings represent 21% of fair value.
• Portfolio composition is heavily weighted toward senior secured debt: 59% first-lien loans and 63% total senior secured debt; including joint venture exposure, first-lien and senior secured totals reach ~69% and ~73% respectively.
• New investments originated were ~$335 million; sales and repayments totaled $442 million, resulting in a net portfolio decrease of $107 million.
• Key portfolio activity included the acquisition of Torac (Romanew Thorax Holding) by Velocity Financial, FSK's 8th largest investment, expected to close in Q4.
• Portfolio companies have a weighted average EBITDA of $235 million and median EBITDA of $131 million, with 4% year-over-year growth.
• Asset-backed finance (ABF) segment remains targeted at 10-15% of the portfolio, despite the impending Torac sale.

Market and Competitive Landscape:

• Market conditions are characterized by geopolitical uncertainty, monetary policy shifts, and evolving AI capital requirements; however, corporate fundamentals remain resilient.
• Lender-friendly terms have emerged, with bid-ask spreads widening approximately 50-100 basis points compared to the start of the year, though partially recovering.
• M&A activity remains muted, with institutional investor interest high but retail redemptions in non-traded BDCs influencing market liquidity.
• The software sector faces valuation uncertainty and a "seismic shift" in debt market terms, creating specific risk monitoring areas for the portfolio.
• Private credit continues to offer attractive characteristics via floating-rate structures and diversified issuer exposure.

Risks and Challenges:

• Credit risk persists with new non-accruals added (3 Pillar Global, New Era Technology), specifically in the software/AI-integration space, though operational restructuring of Medallia mitigated some exposure.
• Forward-looking statements carry risks regarding actual results differing from forecasts due to market volatility, geopolitical events, and capital requirements.
• Excise tax liabilities remain a quarterly concern, particularly in Q4.
• Concentration risks in the ABF and software sectors require ongoing monitoring of valuation and liquidity.
• Regulatory compliance as a regulated investment company requires careful management of income distribution and taxable income (spillback).

Management Commentary and Tone:

• Tone is cautiously optimistic yet disciplined; management emphasizes progress on strategic objectives while acknowledging "more work to be done."
• Confidence is placed in the portfolio's underlying EBITDA growth and the resilience of fundamentals despite macro headwinds.
• Management expressed satisfaction with the $90 million share repurchase progress (30% of the $300M program completed).
• Strategic priority is clearly stated as share buybacks and deleveraging rather than aggressive new deployment at this time.
• Management indicated the KKR fee waiver is currently a four-quarter arrangement under review, not necessarily permanent.

Analyst Questions and Answers:

• Maturity Cadence: ~25% of the portfolio matures through 2028; software sector maturity and valuation shifts are a primary focus.
• Deployment Timeline: Net deployment is not expected to resume until 2027, contingent on completing buybacks and achieving target leverage levels (~1.25x).
• Spillover and Tax: Spillover income is estimated to be near the top end of the previously guided range ($464M); a special distribution of $0.20/share was declared to distribute accumulated spillback.
• Fee Waivers: The incentive fee waiver is a temporary, quarterly-reviewed measure tied to the current four-quarter program.
• ABF Strategy: No active plan to shrink the ABF segment; expected range remains 10-15%, with good risk-adjusted returns expected.
• Torac Investment: The sale of Torac is viewed as a proper exit after 10 years of significant value creation; no negative impact on book value was realized.
• JW Aluminum: A strong, non-AI exposed business with consistent dividends; management noted potential M&A interest but declined to comment on specific inquiries.

Other Key Points:

• A Q4 2026 distribution of $0.44 per share was declared, along with a special distribution of $0.20 per share, both payable in December.
• Since the June 29th inception of the buyback program, FSK repurchased 8 million shares for $90 million, accreting NAV by 16 cents per share.
• The "Belk" one-time dividend increased Q3 NII per share by $0.08.
• The company highlighted the restructuring of Medallia into first-lien debt, preferred, and common equity to remove it from non-accrual status.
• $2 million in excise tax was incurred in Q3 regarding 2025 tax items for international and ABF investments.