FS KKR Capital (US:FSK)2021-08-10 17:18Financial Data and Key Metrics Changes - The second quarter of 2021 saw adjusted net income of $0.74 per share, exceeding the quarterly dividend of $0.60 per share by $0.14 [17] - The net asset value (NAV) per share increased to $26.84 from $26.03 in the previous quarter, reflecting a positive change in portfolio valuations [50] - Total investment income increased by $20 million quarter-over-quarter, driven by the merger's contribution and investment activity [47] Business Line Data and Key Metrics Changes - The investment team originated $2.3 billion of new investments during the second quarter, with a weighted average yield of 7.9% [16][26] - The portfolio consisted of 56.4% first lien loans and 70.1% senior secured debt as of June 30, 2021 [38] - The joint venture now represents 10% to 15% of the portfolio, reflecting a strategic shift to leverage broader origination networks [25][68] Market Data and Key Metrics Changes - The economic environment remains active, with a strong pipeline of originations and a positive outlook for portfolio companies [20][74] - The competitive landscape for private credit has intensified, with increased capital raised for middle market private equity [93] Company Strategy and Development Direction - The merger with FS KKR Capital Corp II has positioned the company as a leader in the specialty finance sector, with approximately $16 billion in assets [14] - The focus is on rotating into stronger companies in less volatile industries and enhancing diversification across industries and issuer positions [23] - The company aims to maintain a balanced portfolio with a significant portion in first lien senior loans and asset-based finance investments [25] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic recovery and the potential for continued growth in the private credit market [20][74] - There is a cautious approach to underwriting, emphasizing the sustainability of EBITDA in the current investment environment [74] - The company anticipates a third-quarter dividend of $0.65 per share, reflecting the additional net investment income generated [53] Other Important Information - The company has a strong liquidity position with $3.6 billion available, equating to approximately 24% of the investment portfolio's value [55] - The effective average cost of debt is 3.38%, with ongoing efforts to reduce higher-priced debt [55] Q&A Session Summary Question: What is the cadence of originations in the third quarter? - The pipeline remains strong, with approximately $1 billion of originations since the end of Q2, indicating a busy quarter ahead [65] Question: How does the company view the shift towards upper middle market investing? - The company has strategically focused on the upper end of the middle market, targeting companies with $50 million to $100 million in EBITDA, which has proven to be less competitive and more resilient [66] Question: What is the current pipeline and investment environment? - The investment environment is positive, with strong performance metrics across portfolio companies, but caution is advised regarding the sustainability of EBITDA [74] Question: Can you discuss the relative yields and competitive environment? - The market is competitive, with pricing pressures observed, but the company believes it can leverage its size and scale to navigate these challenges effectively [93] Question: What are the expectations for the joint venture's leverage? - The joint venture is currently under-leveraged at 0.75 times, with a target range of 1 to 1.25 times, indicating room for growth [105]