FS KKR Capital (US:FSK)2025-02-27 17:02Financial Data and Key Metrics Changes - In 2024, the company reduced non-accrual investments by 58% to 3.7% on a cost basis and 2.2% on a fair value basis [11][25][26] - The net investment income for the fourth quarter was $0.61 per share, while adjusted net investment income was $0.66 per share, compared to guidance of approximately $0.63 and $0.68 per share respectively [16][37] - The weighted average yield on accruing debt investments decreased to 11% as of December 31, 2024, down from 11.5% as of September 30, 2024 [33] Business Line Data and Key Metrics Changes - The company originated $891 million of new investments in the fourth quarter, compared to $1.46 billion of exits [22] - New originations consisted of approximately 63% in first lien loans, 36% in asset-based finance investments, and 1% in equity or other investments [23] - The weighted average EBITDA of new direct lending investments was approximately $206 million, with a weighted average coupon of approximately SOFR plus 516 basis points [24] Market Data and Key Metrics Changes - The company reported a 12.1% yield on average net asset value for shareholders in 2024, with a total return of 23% [19] - Credit defaults remained largely contained across the industry, with borrowers continuing to generate revenue and earnings growth [21] - The company noted that the current macroeconomic environment is a balancing act between growth desires, inflationary pressures, and interest rate adjustments [20] Company Strategy and Development Direction - The company aims to improve credit quality and overall portfolio stability, maintain a strong balance sheet, and provide shareholders with an annual distribution of $2.80 per share [12][13][15] - The company plans to utilize its relationships to originate attractive investments and expects M&A activity to increase materially in 2025 and beyond [12][15] - The focus remains on senior secured investments, with approximately 58% of the portfolio in first lien loans as of December 31, 2024 [32] 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, citing strong tailwinds and reduced interest burdens for portfolio companies [21] - Management highlighted the importance of maintaining discipline in origination, even if it means passing on certain transactions [12] Other Important Information - The company issued $700 million of unsecured notes due in 2030 during the fourth quarter, which were swapped to floating rates [39] - As of December 31, 2024, the investment portfolio had a fair value of $13.5 billion, consisting of 214 portfolio companies [31] - The company expects to provide total distributions of at least $2.80 per share in 2025, with a combination of base and supplemental distributions [38] Q&A Session Summary Question: Dividend outlook and spillover income - Management indicated confidence in the dividend outlook, noting that spillover income is a significant factor [43][44] - The base distribution is set at $0.64 per share, with a supplemental distribution of $0.06 per share [44][46] Question: Spread compression and risk - Management acknowledged spread compression across credit markets, with a current direct lending deal yielding around 5% before fees [48][49] Question: New originations and pipeline fill - Management noted that a few deals slipped from Q4 to Q1, impacting fee income, but the pipeline is filling with private equity sponsors looking to offload back books [55][60] Question: M&A activity and asset-backed finance outlook - Management characterized the asset-backed finance market as having significant activity, with a focus on proprietary origination angles [70][73] Question: Areas of concern in the portfolio - Management indicated that any issues observed have been idiosyncratic to specific issuers, with overall portfolio EBITDA growth at approximately 16% [74][76] Question: Fee income and repayment activity - Management expects a certain amount of additional repayments in Q1, with a better balance of new deals versus repayments anticipated [120]