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

Explicit Guidance:

• Q4 2026 Net Investment Income (NII): Expected to range from 8% to 9% of Net Asset Value (NAV) per share on an annualized basis (GAAP).
• Q4 2026 Tax Provision: Annual excise tax provision typically recognized in the fourth quarter.
• Distribution Levels: Quarterly distribution expected to fluctuate based on quarterly NII variance; Q4 2026 distribution declared at $0.44 per share + $0.20 special distribution (paid December 2026).
• Share Repurchases: Program cumulative total of $90 million purchased as of Oct 30, 2026 (30% of the $300 million program initiated June 29, 2026).

Business-Segment Outlook:

• Portfolio Transition: Continuing long-term focus on shifting portfolio to "first-lane senior secured positions" (currently 69% first lien, 73% senior secured including joint ventures).
• Target Profile: Continued focus on upper middle-market companies with EBITDA of $50–$150 million; portfolio weighted average EBITDA is $235 million (median $131 million).
• Non-Accruals: Two new non-accruals added (3 Pillar Global, New Era Technology) totaling $142M cost; Medallia restructured and removed from non-accrual status; risk remains regarding future performance of restructured assets.
• Deployment Strategy: Near-term focus on deleveraging and share buybacks rather than aggressive capital deployment; net deployment expected to resume in earnest during 2027 as buyback program completes and leverage targets are met.

Market and Competitive Outlook:

• Market Conditions: Market spreads currently ~50 basis points wider than start of year due to non-traded BDC redemptions and macro uncertainty; market tone shifted to be "more lender-friendly."
• Deal Flow: New deal flow expected to increase as bid-ask spreads narrow; currently, the market is "missing" a healthy amount of M&A activity and sponsors selling businesses.
• Software Sector: Elevated focus and concern regarding valuation and debt market shifts specifically within the software space due to AI-driven seismic shifts.
• Institutional Demand: Strong and sustained interest from institutional investors in the underlying capital markets, contrasting with retail redemption activity.
• Asset Allocation (ABF): Asset-backed finance (ABF) portion expected to remain within a 10% to 15% historical range; not an active target for shrinkage but part of broader balance sheet management.

Macro / Industry Outlook:

• Geopolitical & Monetary Policy: Environment shaped by geopolitical tensions, monetary policy uncertainty, and AI capital evolution.
• Economic Fundamentals: Corporate and economic fundamentals viewed as resilient despite uncertainty.
• Interest Rates: Rates expected to "stick up," providing a tailwind to floating-rate portfolios; weighted average yield on accruing debt investments at 10% as of Sept 30, 2026.
• M&A Environment: M&A market recovery deemed necessary to resolve valuation gaps; timeline for a "normal" M&A environment is uncertain.

Strategic Initiatives:

• Share Buybacks: Priority to complete $300 million repurchase program and achieve leverage target of "one-to-one and a quarter" (Net Debt/Equity); projected completion timeframe for balancing buyback and leverage goals is "course of 2027."
• KKR Fee Waiver: KKR waived subordinated income incentive fee for four consecutive quarters starting Q2 2026; currently in the second quarter of this waiver, which provided a $12 million positive impact to NII. Future permanence of fee structure to be reviewed with the board annually.
• Acquisition of Torac: Velocity Financial's acquisition of Torac (portfolio company) expected to close in Q4 2026; FSK's holding in Romanew Thorax Holding Company (formerly Torac) valued at 8th largest investment.
• Restructuring: Medallia successfully restructured into senior lien, preferred equity, and common equity to remove from non-accrual status; active management of risk ratings 3 and 4 (watch list).
• JW Aluminum: Recognized as a high-performing, non-AI business paying consistent dividends; potential strategic review for monetization as market conditions improve.

Risks and Headwinds to Outlook:

• Portfolio Activity Variance: Portfolio composition changes (sales, repayments, non-accruals) may cause Q4 2026 results to deviate from guidance.
• Market Risks: Market-based uncertainties, including spread volatility and valuation revisions, particularly in software and AI sectors.
• Restructuring Uncertainty: Continued risks and uncertainties regarding the future performance of restructured portfolio companies (e.g., Medallia, 3 Pillar).
• Macro Volatility: General volatility in the economic landscape and geopolitical tensions impacting deal flow and asset values.
• One-Time Items: Exclusion of non-recurring items (e.g., Belk dividend, excise tax finalization) may cause quarter-over-quarter variance.

Management Tone on the Future:

• Confidence: "Encouraged" by progress but acknowledges "more work to be done" regarding portfolio rotation and non-income-producing assets.
• Focus: Shift from deployment to balance sheet optimization (deleveraging, buybacks); confidence in the resilience of corporate fundamentals despite market headwinds.
• Cautious Optimism: Avoids specific forecasting on M&A timing but expresses belief that valuation gaps will eventually narrow and activity will return.

Miscellaneous:

• Special Distribution: $0.20 per share special distribution in Q4 2026 represents accumulated spillback income to maintain RIC status; spillback balance estimated at top end of $464 million range (per 2025 10-K).
• Liquidity: Available liquidity at $3.4 billion as of Sept 30, 2026; debt-to-equity at 127%.
• Fee Structure: Income incentive fees net of waiver totaled $11 million in Q3 2026; KKR waiver applies to 50% of subordinated fees that would otherwise be paid.