FS KKR Capital (US:FSK)2022-08-09 16:57Financial Data and Key Metrics Changes - The company generated net investment income of $0.71 per share and adjusted net investment income of $0.67 per share, compared to guidance of approximately $0.70 and $0.65 per share respectively [9] - The net asset value (NAV) per share decreased to $26.41, down from $27.33 at the end of the first quarter, primarily due to a 1.6% decline in the value of the investment portfolio [32][37] - Total investment income decreased by $17 million quarter-over-quarter, with total interest income at $287 million and fee and dividend income totaling $92 million [29] Business Line Data and Key Metrics Changes - Origination volume slowed significantly, with $804 million of investments in Q2 compared to $2.1 billion in Q1 [10] - The investment portfolio had a fair value of $16.2 billion, consisting of 192 portfolio companies, with 61.9% in first lien loans and 70.6% in senior secured debt [22] - The weighted average yield on accruing debt investments increased to 9.2% from 8.3% in the previous quarter [22] Market Data and Key Metrics Changes - The company noted a reduction in M&A activity over the last 3 to 4 months, attributed to macro trends affecting acceptable purchase price multiples [16] - The current lending environment is described as lender-friendly, with loan structures being favorable in terms of covenants and expected returns of 9% to 10% on new loans [46] Company Strategy and Development Direction - The company is focused on maintaining a defensively minded portfolio with strong competitive positions and resilient cash flows, while limiting exposure to cyclical industries [13] - The asset-based finance business is highlighted as a key differentiator, focusing on investment opportunities associated with large pools of collateral [14] - The company aims to leverage its strong liquidity position to be opportunistic with new investments in the second half of the year [10] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding inflation, supply constraints, and geopolitical risks, while also noting the importance of rigorous portfolio monitoring [12] - The company anticipates that the demand for private credit will continue to provide meaningful investment opportunities [40] - Management expects to benefit from rising interest rates, projecting an increase in net investment income due to resetting interest rate contracts [28] Other Important Information - The company has repurchased approximately $41 million of shares under a $100 million share repurchase program [10] - Non-accruals totaled approximately 4.9% of the portfolio on a cost basis, compared to 3.2% in the previous quarter [26] Q&A Session Summary Question: Credit quality and EBITDA performance at the portfolio level - Management noted that the portfolio has been performing well, with a defensive positioning that has provided pricing power despite inflation challenges [44] Question: Deal environment and market conditions - The lending environment is currently favorable for private credit lenders, with good loan structures and attractive returns [46] Question: Interest income guidance and losses during the quarter - Interest income guidance includes PIK income, and approximately 75% to 80% of losses were attributed to market-related factors rather than credit issues [48][50] Question: Economic uncertainty and portfolio management - Management indicated that the current economic situation allows for better preparation and management of portfolio companies compared to past recessions [52] Question: Global Jet investment performance - The asset portfolio is performing well, but rising rates have impacted the capital structure, leading to non-accrual status [60] Question: Syndicated market conditions - The syndicated market remains disrupted, and a return to normalcy will require clearing existing risks and rational underwriting [68]