FS KKR Capital (US:FSK)2024-11-07 18:02Financial Data and Key Metrics Changes - FSK generated net investment income of $0.77 per share and adjusted net investment income of $0.74 per share, exceeding guidance of approximately $0.72 and $0.70 per share respectively [10] - The net asset value per share at the end of Q3 2024 was $23.82, down from $23.95 at the end of Q2 2024 [40] - Total investment income increased by $2 million to $441 million, with total interest income rising by $3 million to $356 million [37] Business Line Data and Key Metrics Changes - FSK originated approximately $1.1 billion of new investments during Q3 2024, with 57% focused on add-on financings to existing portfolio companies [12][21] - New investments consisted of approximately 84% in first-lien loans and 16% in asset-based finance investments [21] - The weighted average yield on accruing debt investments decreased by 50 basis points to 11.5% [33] Market Data and Key Metrics Changes - The U.S. economy has experienced a 6.8% growth rate in real terms since the Fed began raising rates in early 2022 [16] - Inflation has declined from 9.1% in June 2022 to approximately 2.4% today, supporting consumer spending [17] - The M&A environment is expected to improve significantly in 2025, with increased middle market deal volumes [18] Company Strategy and Development Direction - FSK is well-positioned to capitalize on expected market conditions, focusing on new investment opportunities and rotating out of legacy portfolio companies [13][14] - The company maintains a high bar on credit quality and a disciplined underwriting process [12] - FSK continues to see compelling opportunities in asset-based finance as banks reposition their portfolios due to regulatory requirements [20] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the outlook for new investment opportunities and the potential for a very active year in 2025 [49] - The company noted that while the M&A pipeline is growing, it has been slower to start than anticipated [76] - Management highlighted that revenue and EBITDA growth in the portfolio has been positive but slower than in previous years [77] Other Important Information - Non-accruals represented 3.8% of the portfolio on a cost basis, down from 4.3% in Q2 2024 [26] - The company has approximately $1.2 billion of unsecured notes maturing in 2025, representing about 10% of total debt commitments [47] - FSK's available liquidity was $4.4 billion at the end of Q3 2024 [45] Q&A Session Summary Question: Impact of lower rates and spread compression on yields - Management indicated that the yield compression of 50 basis points was due to both lower rates and spread compression [51] Question: Dividend coverage and spillover income - Management confirmed that spillover income is sufficient to bridge any gaps in dividend coverage, with nearly three quarters of spillover available [56] Question: PIK income expectations - Management expects PIK income to remain around 15% for the next couple of quarters, with half of the PIK income being regular business [61] Question: M&A pipeline growth expectations - Management believes the M&A pipeline will grow, driven by pressure from LPs to return capital and the availability of dry powder in private equity [74] Question: Credit outlook and revenue trends - Management noted that revenue and EBITDA growth has been slower than in previous years, but overall trends remain positive [77] Question: Repricing activity trends - Management observed that repricing activity has been slower, with spreads settling at certain levels [85] Question: Asset-based finance opportunities - Management highlighted that asset-based finance deals are typically keyed off bank or capital market rates, with targeted returns in the mid-teens [98]