FS Credit Opportunities (FSCO) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The Fund delivered a net return of 3.35% based on NAV for Q3 2024, with a year-to-date net return of 12.31%, outperforming high yield bonds by approximately 430 basis points and loans by 580 basis points [9][10] - The Fund paid distributions of $0.18 per share in Q3 2024, fully covered by net investment income [12] - As of November 22, 2024, the Fund's annualized distribution yield was 10.3% based on NAV and 11.1% based on stock price [13] - Total return for FSCO shareholders was 2.6% in Q3 2024 and 27.4% year-to-date as of November 22, 2024 [14] Business Line Data and Key Metrics Changes - The Fund remained fully invested throughout Q3 2024, with purchases totaling approximately$ 270 million compared to sales and repayments of $233 million [24] - Approximately 59% of new investment activity was in privately originated investments, with 100% in first lien loans [26] - By asset type, 82% of the portfolio consisted of senior secured debt, while subordinated debt was 6% [26] Market Data and Key Metrics Changes - The US economy grew 5.5% in real terms since the Fed began raising interest rates in Q1 2022, with middle market companies showing an average revenue growth of nearly 13% as of June 2024 [16] - Privately originated senior loans returned 12.5% over the past year, marking the highest return outside of late 2020 and early 2021 [17] - High yield bonds returned 5.28%, outperforming senior secured loans by 324 basis points [19] - Loan defaults have risen to a 44-month high, while high yield bond default rates fell to a 26-month low as of the end of October [21] Company Strategy and Development Direction - The company focuses on businesses with strong cash flows and modest leverage profiles, investing in credits with appropriate loan-to-values [30][34] - The strategy includes leveraging the size and scale of FSCO to drive differentiated outcomes, with$ 2.2 billion in assets as of September 30, 2024 [35] - The company aims to dynamically allocate capital across public and private markets based on risk-return opportunities [37] Management's Comments on Operating Environment and Future Outlook - The management anticipates potential volatility driven by geopolitical conflicts and changes in US rates following the November election [29] - The portfolio is constructed to be durable over the long term, focusing on sectors with better downside protection and higher recoveries [30][34] - The management is cautious about making new investments due to tight credit spreads and weak covenants in the market [32] Other Important Information - Non-accruals are just under 3% of fair market value in the portfolio, consistent with historical levels [50] - The company successfully refinanced its leverage facility, reducing the term loan and revolver pricing [53] Q&A Session Summary Question: Insights on forward-looking dividend policy - The company will review its distribution policy based on the Fund's earnings profile, base rates, and credit spreads [42] Question: Relative value in private credit - Both private and public credit are tight, but private credit still offers a premium of 150 to 175 basis points [44] Question: Impact of weak covenants on deal volumes - Weak covenants are affecting the market, leading to increased scrutiny on transactions [45] Question: Future allocation in private credit - The company sees attractive opportunities in private credit due to spread premiums and significant dispersion [46] Question: Relative value subsectors in credit - Healthcare and media/entertainment are identified as sectors with potential for excess returns [47] Question: Macro environment outlook - Recent rate moves suggest base rates may remain higher, with a focus on floating rate assets in the portfolio [49] Question: Updates on non-accrual investments - Non-accruals are under 3% of fair market value, with one new non-accrual in LaserShip [50] Question: Fee structure relative to peers - The fee structure is justified by the nature of investments, with a significant portion in private credit [51] Question: Progress on refinancing capital structure - The company successfully refinanced its leverage facility, improving pricing and borrowing capacity [53]