FS KKR Capital Corp. Third Quarter 2026 Financial Results Conference Call - VITRIA TECHNOLOGY INC

Financial Performance:

• Reported Net Investment Income (NII) of 46 cents per share for Q3 2026, with Adjusted NII also at 46 cents per share.
• Net Asset Value (NAV) per share closed at $18.25 (up from $18.30 at end of Q2, adjusted for distribution and portfolio value changes).
• Total investment income reached $294 million, up $4 million QoQ, driven by a $15 million increase in dividend and fee income.
• Total interest income fell $11 million QoQ to $206 million due to portfolio shrinkage and non-accruals; weighted average yield on accruing debt rose to 10%.
• Net expenses declined $1 million QoQ to $167 million; management fees increased $22 million due to a KKR incentive fee waiver offsetting other costs.
• Portfolio fair value stood at $11.3 billion across 234 companies; first lien loans comprised 59% of the portfolio (69% including joint ventures).
• Debt-to-equity ratio was 127% (net debt-to-equity 125%), with $3.4 billion in available liquidity.
• Non-accruals stood at 6.4% of portfolio cost basis and 3.4% of fair value; Medallia was restructured out of non-accrual status, while 3 Pillar Global and New Era Technology were added.
• Recorded $2 million in excise tax related to 2025 international and ABF investments.

Guidance and Future Outlook:

• Expects Q4 2026 GAAP NII per share to be in the range of 8% to 9% annualized based on NAV.
• Forecasted a one-time $17 million dividend from portfolio company JW Aluminum in Q4, partially offset by the typical annual excise tax provision.
• Strategic focus remains on completing the $300 million share repurchase program (30% completed), deleveraging to a target of 1.25x debt-to-equity, and rotating the portfolio toward first-lien senior secured positions.
• Anticipates continued progress on non-income-producing assets and expects deployment activity to increase as market spreads narrow and M&A activity recovers, likely over a 2027-2028 timeframe.
• Special distribution of $0.20 per share declared for Q4, representing a return of accumulated spillback income.

Business Segments and Product Lines:

• Continued focus on the upper middle market (EBITDA $50–$150 million); portfolio weighted average EBITDA is $235 million with median EBITDA of $131 million.
• Origination activity included $335 million in new investments; net portfolio decrease of $107 million driven by $442 million in sales/repayments.
• Notable transaction: Acquisition of Torac (an FSK portfolio company) by Velocity Financial; expected to close Q4 2026, monetizing FSK's long-held position.
• Restructuring of Medallia into a $66 million first lien loan, $42 million preferred equity, and $14 million common equity, removing it from non-accrual status.
• Asset-Backed Finance (ABF) segment remains a strategic component, historically targeted at 10–15% of the portfolio, with the segment expected to stay within this range.

Market and Competitive Landscape:

• Market environment characterized by geopolitical tensions, monetary policy uncertainty, and AI capital requirements; economic fundamentals deemed resilient.
• Credit market spreads are estimated to be 50–100 basis points wider than the start of the year, shifting toward a more lender-friendly environment due to non-traded BDC redemptions.
• Deal flow remains subdued with high bid-ask spreads, though institutional investor interest remains strong; retail investor interest has softened.
• Software sector faces valuation pressure and maturity wall concerns, though overall maturity wall risks are considered manageable for the non-software portion.
• KKR waived its portion of the subordinated income incentive fee for four consecutive quarters, beginning Q2 2026, providing a $12 million benefit to Q3 NII.

Risks and Challenges:

• Credit risk highlighted by 2 new non-accruals (3 Pillar Global, New Era Technology) totaling $142 million in cost basis; risks associated with IT integration and AI exposure in the software sector.
• Macroeconomic volatility, including inflation and geopolitical instability, continues to impact deal flow and M&A timelines.
• Portfolio concentration risks in specific sectors, particularly software, where valuation revisions are occurring rapidly.
• Uncertainty regarding the timing of a return to normal M&A activity and the speed of bid-ask spread compression.

Management Commentary and Tone:

• Management expressed cautious optimism, noting progress on strategic goals while acknowledging "more work to be done."
• Tone was confident regarding NAV stability and the efficacy of the current share repurchase program.
• Emphasis placed on discipline regarding leverage reduction and capital allocation (buybacks over net deployment) rather than aggressive growth.
• Executives highlighted the success of the KKR fee waiver as a critical tool for maintaining shareholder returns during the portfolio transition.

Analyst Questions and Answers:

• Maturity Cadence: ~25% of the portfolio matures between now and 2028; heightened focus on the software sector's valuation and maturity wall.
• Deployment Timetable: Net capital deployment expected to resume gradually, likely within the 2027-2028 timeframe as buyback and deleveraging targets are met.
• Spillover & Taxes: Q4 is expected to see additional spillback distribution; full 2026 spillover data will be released in the Feb 2027 10-K.
• Fee Waivers: KKR fee waiver is a 4-quarter program; future fee structures will be reviewed annually by the board, currently viewed as a supportive measure for the transition.
• ABF Strategy: Asset-Backed Finance is not being actively shrank but managed within a 10–15% historical range; recent decline is incidental to the deleveraging/buyback strategy.
• Asset Liquidity: JW Aluminum remains a high-performing, non-AI asset with consistent dividend history; while not currently targeted for sale, market interest is acknowledged.

Other Key Points:

• Share repurchases of $90 million (8 million shares) were executed through Oct 30, 2026, accreting $0.16 to NAV per share.
• A special distribution of $0.20 per share will be paid in December 2026 alongside the standard $0.44 quarterly distribution.
• The company maintains a diversified portfolio with the top 10 holdings representing 21% of fair value.
• Q3 results were positively impacted by a $25 million one-time dividend from portfolio company Belk, which added $0.08 to NII per share.