FS KKR Capital (US:FSK)2025-02-27 21:59Financial Data and Key Metrics Changes - In Q4 2024, FSK generated net investment income of $0.61 per share and adjusted net investment income of $0.66 per share, compared to guidance of approximately $0.63 and $0.68 per share respectively [16][17] - The net asset value per share decreased to $23.64 from $23.82 in Q3 2024, impacted by a decrease in the overall value of the investment portfolio and the total quarterly distribution paid [36][40] - Total investment income decreased by $34 million quarter over quarter to $407 million, primarily due to a decline in base rates and delayed closings of new investments [34][35] Business Line Data and Key Metrics Changes - In Q4, FSK originated $891 million of new investments, compared to $1.46 billion of exits, with no sales to the joint venture during the quarter [22][23] - New direct lending investments had a weighted average EBITDA of approximately $206 million and a weighted average coupon of approximately SOFR plus 516 basis points [24] - Non-accruals represented 3.7% of the portfolio on a cost basis and 2.2% on a fair value basis, a slight improvement from 3.8% and 1.7% respectively in Q3 2024 [25][26] Market Data and Key Metrics Changes - The weighted average yield on accruing debt investments decreased to 11% as of December 31, 2024, down from 11.5% in Q3 2024, primarily due to a decline in base rates and spread compression [33] - The current macroeconomic environment is characterized by a balancing act between growth desires, inflationary pressures, and interest rate adjustments, impacting M&A activity [20][21] Company Strategy and Development Direction - The company aims to improve credit quality and overall portfolio stability, having reduced non-accrual investments by 58% during 2024 [11] - FSK plans to maintain a disciplined origination strategy, entering 2025 with significant liquidity to capitalize on expected increases in M&A activity [12][15] - The company expects to provide shareholders with total distributions of at least $2.80 per share in 2025, consisting of a quarterly base distribution of $0.64 and a supplemental distribution of $0.06 [15][38] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the timing of increased M&A activity, suggesting it may take longer to materialize than some industry observers forecast [20] - The company remains optimistic about the direct lending market fundamentals, noting strong revenue and earnings growth among borrowers [21] - Management highlighted the importance of maintaining downside protection in underwriting deals, especially in a borrower-friendly market [122] Other Important Information - FSK's investment portfolio had a fair value of $13.5 billion as of December 31, 2024, consisting of 214 portfolio companies [31] - The company issued $700 million of unsecured notes due 2030 during Q4, which were swapped to floating rates [39] - Available liquidity stood at $4.8 billion, with a significant portion of the balance sheet comprised of unsecured debt [40] Q&A Session Summary Question: Dividend outlook and spillover income - Management confirmed confidence in the dividend outlook, emphasizing the importance of spillover income and maintaining a base and supplemental distribution strategy [44][46] Question: Spread trends and risk characterization - Management noted spread compression across credit markets, with current direct lending deals yielding around 10% total return, indicating a more borrower-friendly market [50][52] Question: New originations and pipeline fill - Management indicated that a few deals rolled over from Q4 to Q1, with a growing pipeline driven by private equity sponsors needing to liquidate back books [56][60] Question: M&A activity and asset-backed finance outlook - Management characterized the asset-backed finance market as having significant activity, with expectations for continued interest and unique origination opportunities [70][73] Question: Areas of weakness in the portfolio - Management acknowledged some idiosyncratic issues affecting specific issuers but maintained a generally constructive outlook on the economy and portfolio performance [75][78] Question: Fee income and repayment activity - Management indicated that fee income may fluctuate, with expectations for additional repayments in Q1, and emphasized the importance of discipline in deal-making [112][120]