FS KKR Capital (US:FSK)2024-08-07 18:02Financial Data and Key Metrics Changes - The company generated net investment income of $0.77 per share and adjusted net investment income of $0.75 per share, exceeding public guidance of approximately $0.74 and $0.71 per share respectively [6] - Total investment income increased by $5 million to $439 million, with interest income at $353 million and dividend and fee income at $86 million [20] - The net asset value per share decreased to $23.95 from $24.32, impacted by a $0.70 per share distribution and a $0.05 special distribution [21] Business Line Data and Key Metrics Changes - The investment team originated $2.7 billion of investments in the first half of 2024, with $1.3 billion originated in the second quarter [8] - New investments consisted of approximately 81% in first lien loans, 2% in other senior secured debt, 1% in subordinated debt, and 16% in asset-based finance investments [11] - The weighted average yield on occurring debt investments was 12%, a decrease of 10 basis points from the previous quarter [16] Market Data and Key Metrics Changes - The market remains competitive with spread compression experienced by all lenders, and M&A volumes remain below average [9] - The company observed 12% year-over-year EBITDA growth at portfolio companies invested since April 2018 [13] - Non-accruals represented 4.3% of the portfolio on a cost basis and 1.8% on a fair value basis, down from 6.5% and 4.2% respectively in the previous quarter [14] Company Strategy and Development Direction - The company aims to maintain a minimum of $2.90 per share in total distributions for 2024, equating to a 12.1% yield on the net asset value [7] - The focus remains on senior secured investments, with approximately 58% in first lien loans and 66% in senior secured debt as of June 30, 2024 [15] - The company is actively rotating out of cyclical industries into more defensive sectors like software and healthcare [19] Management's Comments on Operating Environment and Future Outlook - Management noted concerns over the health of the U.S. economy but remains optimistic about sustained growth due to high productivity [9] - The expectation of elevated market volatility persists, influenced by domestic political and international geopolitical complexities [9] - The company anticipates an increase in M&A activity in the coming months despite current market conditions [11] Other Important Information - The company ended the quarter with approximately $4.7 billion of available liquidity [7] - A total third quarter distribution of $0.70 per share was declared, consisting of a base distribution of $0.64 and a supplemental distribution of $0.06 [7] - The company issued $600 million of unsecured notes due 2029, strengthening its balance sheet and liquidity position [23] Q&A Session Summary Question: Can you talk about the spillover picture? - Management indicated they are at the middle to upper end of the range for spillover, providing protection for long-term dividend coverage [26] Question: Was there a lower income on the ADF book? - Management clarified that the lower income is not idiosyncratic but rather a timing issue related to structured deals [28] Question: Were you more selective in refinancing this quarter? - Management confirmed that selectivity is based on credit quality and sector performance, adjusting positions as necessary [30] Question: How do you see opportunities in asset-based finance? - Management expressed a positive outlook on the asset-based finance market, highlighting strong deal flow and attractive risk-adjusted returns [34] Question: Any material changes from portfolio companies due to economic turbulence? - Management acknowledged recent economic volatility but noted steady performance in portfolio companies, with some concerns about free cash flow [35] Question: What is the updated outlook on leverage? - Management stated they are comfortable with current leverage levels and have room to add more if needed [40] Question: What drives the timing of asset-based finance dividends? - Management indicated that timing is more related to specific asset sales rather than macroeconomic factors [38] Question: Will supplemental dividends go away if rates decrease? - Management emphasized their focus on maintaining dividends while managing earnings growth and reducing non-income producing assets [55]