FS KKR Capital Corp. Common Stock 2026 Q2 Earnings Call

Morning, ladies and gentlemen. Welcome to FS KKR Capital Corp.'s second quarter 2026 earnings conference call. Your lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we will begin the question and answer session, at which time I will give you instructions on entering the queue. Please note that this conference call is being recorded. At this time, Anna Kleinhenn, head of investor relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Thank you. Good morning and welcome to FS KKR Capital Corp.'s second quarter 2026 earnings conference call. Please note that FS KKR Capital Corp. may be referred to as FSK, the fund, or the company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued this morning. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended June 30, 2026. A link to today's webcast and the presentation is available on the For Investors section of the company's website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements that are not historical facts, including, without limitation, statements with regard to future events or future performance or financial conditions, statements regarding share repurchase activity, distribution levels and frequency, expectations for net investment income levels in future quarters, and the financial position, business strategy, and plans and objectives of management for FSK's future operations. Words such as anticipate, believe, expect, intend, project, and future, or similar expressions indicate a forward-looking statement. Although not all forward-looking statements include these words. These forward-looking statements are not guarantees of performance or events and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause our actual results or future events to differ materially from those expressed or forecasted in these forward-looking statements for any reason.

We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or future events to differ materially from these statements. The forward-looking statements included on this call are based on information available to FSK today and current expectations, forecasts, and assumptions and involve a number of judgments, risks, and uncertainties. Except as required by the federal securities laws, FSK undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, this call will include certain non-GAAP financial measures that have not been prepared in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies.

In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. These measures should only be used to evaluate FSK's results of operations in conjunction with their corresponding GAAP measures. For such non-GAAP measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's second quarter earnings release that was filed with the SEC on August 6, 2026. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman, Dan Pietrzak, Chief Investment Officer and President, and Steven Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you for joining FSK's second quarter 2026 earnings conference call. During the second quarter, FSK generated net investment income totaling $0.44 per share and adjusted net investment income totaling $0.43 per share. Our net asset value per share declined 2.8% from $18.83 to $18.30 during the quarter. Our net investment income per share for the second quarter equates to an annualized yield of 9.6% based upon our June 30th net asset value per share and compared to our previously announced guidance of 8%-9%. Our board has declared a third-quarter distribution of $0.44 per share for common shareholders, which is consistent with our dividend policy of paying out 100% of our prior quarter's GAAP net investment income on a per-share basis.

As we have indicated on prior earnings calls, we expect our quarterly distribution level will fluctuate as our net investment income fluctuates on a quarter-to-quarter basis. On our first quarter earnings call in May, we announced several strategic actions that the FS/KKR Advisor is undertaking to help enhance the financial and trading profile of FSK. Since that announcement, we believe we have made meaningful progress executing these actions. Dan will provide a detailed update on our progress during his portion of this call. There continues to be strong collaboration across the FS KKR partnership, and we believe these actions reflect our commitment to long-term value creation. At the same time, we recognize that there is work ahead as we continue stabilizing our investment portfolio and executing on our strategic actions. And with that, I'll turn the call over to Dan.

Thanks, Michael. The broader credit markets continue to be impacted by a combination of geopolitical uncertainty, inflationary pressures, and rapid technological change. Ongoing tensions in the Middle East, along with a broader focus on energy security and supply chain resiliency, contribute to elevated levels of macroeconomic volatility. As a reminder, FSK does not invest directly in oil or commodity-linked companies. Inflation remains higher than pre-pandemic norms, reinforcing the importance of disciplined underwriting and thoughtful capital structure selection. We continue to closely monitor inflation and the incremental risk associated with a sustained inflationary period, as do our portfolio companies. That said, given the size and market position of many of our portfolio companies, they historically have demonstrated an ability to pass through higher operating costs to customers during inflationary periods. This dynamic reinforces our confidence in the resilience of the upper end of the middle market.

While advances in AI and automation are driving meaningful productivity gains, they are also creating both opportunities and risks as industries adapt to evolving competitive dynamics. Against this backdrop, we believe scale, selectivity, strong portfolio construction, and deep sponsor relationships remain critical differentiators in private credit. We also believe that the breadth and depth of the KKR credit platform, along with our active approach to portfolio management, position us well as we navigate the current environment. As Michael mentioned, I'd like to provide an update on the strategic actions we announced on our first quarter earnings call, which we believe already are providing benefits to shareholders. The $150 million tender offer by KKR expired on June 11th, 2026. As a result, a subsidiary of KKR purchased approximately $150 million of shares of FSK's common stock at a purchase price of $11 per share.

On June 29th, 2026, FSK closed the $150 million issuance of cumulative convertible perpetual preferred stock purchased by a subsidiary of KKR. As a reminder, the convertible preferred stock will pay dividends on a quarterly basis of 5% per annum in cash, or at FSK's option, 7% per annum in PIK dividends. In either case, increasing annually by 1%, beginning on the five and a half year anniversary of the issue date. FSK's $300 million stock repurchase program commenced on June 29th, 2026. During the second quarter, we repurchased approximately 377,800 shares of FSK's common stock through the program, or approximately $4 million worth of shares. During the third quarter, we have continued repurchasing shares.

Since the beginning of the third quarter, we have repurchased 3.3 million shares or approximately $36 million, bringing the cumulative value of shares repurchased to $40 million since June 29th, at a weighted average purchase price of $10.73 per share. Beginning in the second quarter of 2026, KKR agreed to waive its portion of the subordinated income incentive fee for four consecutive quarters. This waiver had a positive $11 million impact on our Q2 net investment income. Turning to our investment activity. During the second quarter, we originated approximately $590 million of new investments. Almost all of these investments related to deals committed to prior to the second quarter, or our add-on financings to existing portfolio company names. As we have previously communicated, during the period when FSK is repurchasing shares, we will continue to reduce the fund's new investment originations.

Our new investments, coupled with $1.3 billion of net sales and repayments when factoring in net sales to our joint venture, equated to a net portfolio decrease of $735 million during the second quarter. As we outlined on our first quarter earnings call, as part of our broader goal to increase the overall quality and diversification of our investment portfolio, we are focused on rotating certain assets. During the second quarter, Global Jet, a legacy investment, returned $50 million of capital to FSK, which was used to further reduce our position. In addition, FSK sold approximately $500 million of investments to third parties during the second quarter at a price in line with our first quarter valuations.

We continue to believe in the strength of our investment strategy, which primarily focuses on upper middle-market companies with EBITDAs in the $50 million-$150 million range across a diverse set of industries and sectors. As of June 30th, the weighted average EBITDA of our portfolio companies was $241 million, and the median EBITDA was $130 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 6% across companies in which we have invested in since April 2018. Interest coverage levels remain healthy, with median second quarter coverage at approximately 1.9 times. During the second quarter, two investments were added to non-accrual status and two were removed. Heniff Transportation Systems and Alacrity Solutions Group, the two non-accruals, together totaled $104 million of costs and $91 million of fair value across our investment portfolio.

Dental Care Alliance and Affordable Care were removed from non-accrual status as they were restructured during the second quarter. As of June 30th, non-accruals represented 7.1% of our portfolio on a cost basis and 3.8% of our portfolio on a fair value basis. This compares to 8.1% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31st. In summary, we are pleased with the strategic actions the FS/KKR Advisor has taken and is continuing to take. KKR's tender was successfully completed. FSK's liquidity position was enhanced by KKR's $150 million convertible preferred stock investment. Our gross and net leverage levels are lower, and our portfolio rotation continues in earnest.