FS KKR Capital Corp Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the FS KKR Capital Corp.'s Second Quarter 2022 Earnings Conference Call. Please note that this conference is being recorded. At this time, Robert Paun, Head of Investor Relations, will proceed with the introduction. Mr. Paun, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Second Quarter 2022 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 on August 8, 2022. 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, 2022. A link to today's webcast and the presentation is available on the Investor Relations 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 and are subject to risks and uncertainties that could affect FSK or the economy generally. 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 outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such 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 8, 2022. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chairman and Chief Executive Officer; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us in the room are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I will now turn the call over to Michael.

Thank you, Robert, and good morning, everyone. Welcome to FS KKR Capital Corp.'s Second Quarter 2022 Earnings Conference Call. With the broader equity markets experiencing significant volatility during the first half of the year, we are reminded of the benefits of dividend-focused investment companies like FSK, which offer investors the opportunity for consistent risk-adjusted yields across multiple market environments. Our investment portfolio continues to experience a high degree of financial stability due to the quality of investments our team has originated over the last 4-plus years. During the second quarter, we generated net investment income totaling $0.71 per share and adjusted net investment income totaling $0.67 per share as compared to our public guidance of approximately $0.70 and $0.65 per share, respectively. Based on our quarterly financial results, our Board has declared a third quarter total distribution of $0.67 per share. As part of this distribution, we're also increasing our quarterly base distribution to $0.61 per share. As Dan will discuss in more detail during his comments, origination volume slowed during the second quarter as our investment team originated $804 million of investments compared to $2.1 billion of investments during the first quarter of this year. Consistent with the overall private debt market, the value of our investment portfolio declined marginally during the quarter due primarily to spread widening and market multiple contraction. The 1.6% decline in the value of our investment portfolio equated to a 3.4% decline in our net asset value quarter-over-quarter. In terms of our $100 million share repurchase program through August 6, 2022, we have repurchased approximately $41 million of shares under this program. From a forward-looking perspective, we believe our strong liquidity position will enable us to be opportunistic with regard to new investments as we move into the second half of the year. And with that, I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.

Thanks, Michael. As we enter the second half of the year, we continue to monitor closely the persistence of inflation, ongoing supply constraints, higher interest rates, and heightened geopolitical risk. These factors, coupled with fears of a recession, have contributed directly to market volatility. While we believe that the Federal Reserve's decision to take a more aggressive stance in terms of raising interest rates ultimately will help curb inflation. We believe these volatile times underscore the importance of maintaining a rigorous approach to portfolio monitoring, including having a comprehensive quarterly review process and operating with a seasoned workout team. In addition, over the last 4-plus years, we have constructed a defensively minded portfolio consisting of largely first lien structures with low loan-to-values and strong interest coverage ratios. We continue to focus on companies with strong competitive positions and resilient cash flows, while at the same time, we have limited our exposure to companies in more cyclical industries, such as those focused on discretionary consumer spending. In addition to our traditional investment structures, we believe our asset-based finance business, which focuses on investment opportunities associated with large pools of collateral, frequently paired with long-term contractual cash flow streams, is a key differentiator for us. We believe the increased volatility in the public markets, which Michael mentioned earlier, will continue to lead to strong demand for private capital from both a financial sponsor and issuer perspective. From an investor perspective, private credit investments provide structural downside protection while still maintaining attractive risk-adjusted returns, especially during times of increased market volatility. We believe our size, scale, portfolio diversification, strong capital structure, and industry-leading origination capabilities will enable us to operate from a position of strength as we navigate the current market environments. Turning to activity for the quarter. From an origination perspective, the $804 million of investments we originated predominantly were focused on add-on financings for existing portfolio companies. In terms of market color, we believe the reduction in M&A activity over the last 3 to 4 months is related to macro trends, which has created an environment where buyers and sellers are grappling more than usual to determine acceptable purchase price multiples. At the same time, volatility in the liquid credit markets has made it more difficult for buyers to access financing, even for high-quality businesses. During these types of market environments, it is vital for us to maintain our high-quality credit standards and disciplined underwriting process. As a result, we expect these market conditions will create many attractive opportunities to invest over the coming months. Of our $804 million of total investments, combined with $819 million of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio decrease of $15 million during the quarter. In terms of recapping the 3 opportunities to increase our net investment income on a per share basis that we outlined during our September 2021 Investor Day. First was rotating out of certain non-income-producing assets into income-producing assets. Second, was operating somewhere closer to the midpoint of our target leverage range. And third, we are selectively refinancing certain higher cost unsecured debt on our balance sheet. At our Investor Day, we communicated our view that by the end of 2022, these opportunities, depending on prevailing interest rates and other factors, could generate up to $0.15 per share per quarter of additional adjusted net investment income. In addition, we analyzed the remaining legacy portfolio's contribution to our adjusted net investment income per share, which also totaled $0.15 per quarter. During our first quarter 2022 call, we stated that we had achieved approximately $0.12 per share of incremental quarterly run rate adjusted net investment income through 3 quarters. At the end of the second quarter of 2022, before taking into account recent upward moves in interest rates, we are pleased to report that we have achieved all $0.15 per share of the incremental quarterly run rate adjusted net investment income we had projected. The detailed bridge can be seen on Slide 11 of our earnings presentation. In addition, we have continued to rotate our legacy portfolio. As of the end of the second quarter, $0.11 per share of our quarterly adjusted net investment income was generated by legacy investments. And of this $0.11 per share, $0.09 per share of the contribution came from investments valued at 95% of costs or higher. As of the end of the second quarter, we have rotated 90% of our yielding investment portfolio. We continue to be quite pleased with the progress we have made with respect to both increasing our quarterly adjusted net investment income on a per share basis and rotating our investment portfolio into KKR originated assets. You will hear further evidence of this progress when Steven provides our third quarter guidance in just a few minutes. And with that, I'll turn the call over to Brian.

Thanks, Dan. As of June 30, 2022, our investment portfolio had a fair value of $16.2 billion consisting of 192 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 18% of our portfolio, which represents a slight decline from prior quarters. We also continue to focus on senior secured investments as our portfolio consisted of 61.9% of first lien loans and 70.6% of senior secured debt as of June 30. In addition, our joint venture represented 9.3% of the portfolio and asset-based finance investments represented 13.1% of the portfolio, equating to an additional 22.4%, which is comprised predominantly of first lien loans or asset-based finance investments. The weighted average yield on accruing debt investments was 9.2% as of June 30, 2022, compared to 8.3% at March 31. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the quarter primarily was associated with the rise in base rates. Including the effects of the investment activity we experienced during the second quarter, as of June 30, 2022, approximately 90% of our yielding investment portfolio is now comprised of investments originated either by KKR Credit or the FS/KKR advisor. As Dan mentioned, we are proud of the progress we have made, rotating legacy assets. During the second quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of $323 million. The portfolio depreciation we experienced during the quarter was tied primarily to spread widening and market multiple contraction. On recent earnings calls, we have provided detailed information regarding the company's legacy investment in Global Jet. Over the last several quarters, we've been actively working with the company to support their business while also positioning ourselves to receive principal payments. During the first half of 2020, we've received $56 million of cumulative principal repayments, which equates to approximately 60% of the total face value of our mezzanine tranche. Based on the quantum of principal payments being received on our mezzanine tranche. During the first quarter of this year, we restored our accrual rate on our mezzanine tranche from 9% to 15%. At the same time, as we discussed in our last earnings call, we decreased our accrual rate on our preferred equity tranche from 9% to 4.5%. During the second quarter, we made the decision to reduce the accrual on our preferred equity tranche to 0. While the company continues to perform at the asset level with virtually no delinquencies, our decision was based on the overall value of the preferred, coupled with the recent interest rate increases and the potential impact on the company's cost of funding. During the quarter, we placed 2 small debt investments with a combined fair market value of $11.4 million on non-accrual and removed 1 small investment with a fair market value of $15.5 million from non-accrual status. Based on the quarter's activity and including the legacy preferred equity investment in Global Jet, as of June 30, 2022, nonaccruals totaled approximately 4.9% of our portfolio on a cost basis and 2.9% on a fair value basis compared to 3.2% on a cost basis and 1.5% on a fair value basis as of March 31, 2022. Given that 90% of the yielding assets in our investment portfolio has been originated by KKR Credit, we thought it would be helpful to begin providing the market with information based upon our rotated portfolio. As of the end of the second quarter, non-accruals relating to the 90% of our portfolio, which has been originated by KKR Credit and the FSK Care adviser were 2.2% on a cost basis and 0.5% on a fair value basis. And with that, I'll turn the call over to Steven.

Thanks, Brian. During this portion of the call, I'll focus on the expected near-term effects of rising interest rates on our financial results, our second quarter results, our forward-looking guidance, and our balance sheet. During the third quarter, we expect to benefit from the rising interest rate environment by approximately $0.04 per share as existing portfolio company interest rate contracts began resetting at higher levels. While there is a detailed breakout of how every 100 basis points of interest rate increases is expected to positively impact our investment income provided in our 10-Q, for planning purposes, our high-level view is that every 100 basis point move in short-term rates could increase our annual net investment income by up to $0.26 per share, which equates to approximately $0.06 per share per quarter. Turning to our financial results for the second quarter. Total investment income decreased by $17 million quarter-over-quarter, primarily due to repayments experienced both at the end of the first quarter and during the second quarter, the $8 million of one-time nonrecurring interest income that we experienced during the first quarter, which we discussed on our first quarter earnings call and the lower volume of originations, which Dan discussed. The components of our total investment income during the quarter were as follows: Total interest income was $287 million during the second quarter, fee and dividend income totaled $92 million during the quarter, flat quarter-over-quarter. Our dividend and fee income during the second quarter is summarized as follows: $53 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $26 million, and fee income totaling approximately $13 million. Our dividend income was higher than expected during the second quarter, primarily due to the continued ramping of our joint venture and larger-than-expected dividend payments from certain asset-based finance investments. Our interest expense totaled $83 million, an increase of $6 million quarter-over-quarter due to rising base rates and the fact that we were operating at target leverage throughout the quarter. Our weighted average cost of debt was 3.5% at June 30. Management fees were $63 million during the quarter, an increase of $1 million quarter-over-quarter. Incentive fees totaled $22 million during the second quarter, which is net of the $15 million incentive fee waiver. As previously announced, as part of the FSK, FSKR merger, which closed in June of 2021, the adviser will waive $90 million of incentive fees spread evenly over 6 quarters, which began during the third quarter of 2021. And just as a reminder, as we have discussed on our prior earnings calls, the adviser does not earn an incentive fee on any of the merger-related accretion associated with FSK's acquisition of FSKR. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending 1Q 2022 net asset value per share of $27.33 was increased by GAAP net investment income of $0.71 per share, and was decreased by $0.96 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.68 per share dividend paid during the quarter and increased by $0.01 per share due to share repurchases. The sum of these activities results in our June 30, 2022 net asset value per share of $26.41. From a forward-looking guidance perspective, we expect third quarter 2022 GAAP net investment income to approximate $0.76 per share, and we expect our adjusted net investment income to approximate $0.72 per share. Detailed third quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $317 million, which reflects the impact of the increase in base rates. We expect recurring dividend income associated with our joint venture to approximate $52 million. We expect other fee and dividend income to approximate $38 million during the third quarter. From an expense standpoint, we expect our management fees to approximate $61 million. We expect incentive fees net of the $15 million quarterly waiver to approximate $25 million. We expect our interest expense to approximate $95 million. And we expect other G&A expenses to approximate $10 million. As a reminder, the $0.04 per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting. This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected. In an effort to link the $0.15 per share of quarterly run rate adjusted net investment income, about which Dan spoke earlier, from the time of our Investor Day in September of last year and compared to our third quarter 2022 guidance, the key inputs are as follows: First, we began with the $0.61 per share of adjusted net investment income we provided as guidance at our Investor Day and add $0.15 per share to that number, which equates to quarterly adjusted net investment income of approximately $0.76 per share. We then lowered that number by $0.04 per share due to income accrual adjustments and by another $0.04 per share due to higher liability costs and higher weighted average leverage. Lastly, we increased by $0.04 per share due to a higher weighted average portfolio yield as compared to our portfolio's yield at the time of our Investor Day. These adjustments result in our current run rate adjusted net investment income of $0.72 per share, which equals our third quarter guidance of $0.72 per share. This detailed bridge also can be seen on Slide 11 of our earnings presentation on our website. In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 115%, respectively, as of June 30, 2022. This compares to gross and net debt to equity of 127% and 112%, respectively, at the end of the first quarter of 2022. At June 30, our available liquidity was $2.7 billion. At the end of the second quarter, approximately 51% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt and our overall effective average cost of debt was 3.5%. During the second quarter, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility. The amendment provides for, among other things, an increase of total commitments to $4.66 billion and an extension of the maturity date from 2025 to 2027. We were very pleased to complete this amendment as it reflects both the operational strength of the FSK platform as well as the long-term relationships we are fortunate to maintain with the investment community. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thanks, Steven. I'm proud of the team's continued execution of our strategic initiatives. In the fourth quarter since our 2021 Investor Day, we've achieved 100% of the organic net investment income growth that we estimated we could achieve over a 6-quarter period of time. This growth in net investment income enables FSK to operate from a position of strength during the current period of increased market volatility. From a forward-looking perspective, we believe the continued demand for private credit will provide us with meaningful opportunities to generate strong returns for our shareholders, both from a recurring dividend and total return perspective. And with that, operator, we would like to open the call for questions.

Our first question comes from John Hecht with Jefferies.

Congratulations on quickly achieving all the goals you set during the Analyst Day last year. It seems that, based on your comments about Global Jet and addressing some of the other assets, the percentage related to the NPA has improved. Can you discuss what you're observing regarding credit quality and EBITDA performance across the portfolio, particularly in light of inflation? Also, are there any other significant assets we should keep an eye on as the portfolio looks strong?

John, thanks for the kind words on the Investor Day stuff. And thinking about just the portfolio, almost across the board, the top line numbers have been pretty good for the first half of 2022. I think we've been fortunate that we've been building a defensive portfolio. We've been fortunate that we've been targeting companies that are in the upper end of the middle market. I think they just have had more pricing power, more levers to pull. I think that said, we are a little bit cautious on things right now. Inflation impacts sort of every company, the wage sort of challenges are real supply chain issues kind of remain real. So we just had our quarterly portfolio review probably about 10 days ago. I think we feel pretty good where the book sits, I think, really because of how it's been positioned. So I don't think there's any particular names to watch. I think we've talked about we've been lighter in spots like consumer discretionary, things that we think might be a bigger challenge now. And I think the second half of the year and the start of '23 could very well be a little bit bumpy kind of overall market-wise. But again, I think we think the portfolio is in a pretty good spot.

Okay. And then maybe talk about the deal environment you mentioned wider spreads. I think that the activity last quarter was impacted by overall market conditions. Where are we now in terms of spreads, covenants, I guess, deal terms given the ongoing choppiness in the market.

No, that's a good question in this environment. If you think about M&A volumes kind of down, right? I think we would have always forecasted that 2022 would have slower than '21. That's probably just been exacerbated. I think on the other side of that, though, the syndicated loan market is clearly disrupted and in many ways, shut. So that is providing I think, very good lending opportunities for us and for this market. I think you've gotten a market right now that is definitely lender-friendly. And it's also a market where I think everybody is being a little bit more cautious on kind of sizing of positions. So that sort of last dollar of risk is definitely sort of pricing risk. When you think about that, I think loan structures are as good as they've been for some time in terms of covenants, etc. But I think the more interesting thing is you're at a point where you're probably at 9% to 10% sort of unlevered returns on new loans to, again, where we're targeting the upper end of the middle market. That feels quite good. So I think as a lending environment, we feel pretty excited about.

Our next question comes from the line of Casey Alexander with Compact Point.

I have just a couple of maintenance questions and then a broader question. Steven, on your interest income guidance of $317 million, I'm assuming that includes PIK income?

Yes, Casey, it does.

Yes. Okay. I thought so. Secondly, on the losses that occurred during the quarter, can you delineate between what percentage of those losses were spread and market-adjusted related versus how much were credit-based markdowns? What I'm trying to get at is some degree of recoverability of some of those mark-to-market deposits.

No, Casey. Fair question. I would think about it probably 2 ways, right? One, I would say 75%, to 80% of that number would be spread or sort of market related. But I think when you do think about the remaining pieces of that, I mean, there could be a company that hit a bump, maybe did an acquisition, it could have been 1 turn or 1.5 turns more leveraged. But a lot of those, if not all of those, I think, will be sort of part of recovery. So I would think about credit versus market, like I said, it's sort of 75% to the market, 25% other. But I think a lot of those credit issues are not real credit issues as much as just leverage points. Is that helpful?

Yes. Yes, it is. And of course, you guys have a fully-fledged workout team that has a lot more experience at these things than maybe many other platforms. So I would assume that would be helpful in terms of recoveries down the road. My last question is this period of economic uncertainty that we've entered into or are entering into depending upon how you feel about the timing is quite different from the COVID recession from the great financial crisis, which were clearly either way more unexpected. This is telegraphed by the Fed raising interest rates to slow down the economy and put the brakes on inflation. Does this give you more time to work with your portfolio companies and allow them to prepare in terms of bolstering the balance sheet, managing their expenses, managing their inventories to levels of expected demand for an economy that's slowing down? Should that arguably result in better credit outcomes coming out of this one than maybe we have in past recessions that we've been through?

That's an interesting question, and I think you're correct. This situation is different from what we've experienced over the last 20 years, and the best comparison might be to 2001 and 2002. During that time, there was a significant negative shift in valuations, stemming from the NASDAQ bubble and a decrease in consumer confidence, largely due to 9/11. However, the current environment doesn't have the same high unemployment rates we saw back then. I agree that this situation has been well-communicated and will unfold over several months, providing opportunities to work with companies and potentially reset loan terms if necessary. However, it’s worth noting that many management teams and investment professionals may not have experience managing risk in an inflationary climate, which could lead to some unexpected challenges. We're focusing more on our portfolio and have been increasing our monitoring efforts and the size of our workout team to ensure we are in a strong position. While we have confidence in our portfolio, I anticipate a few challenging quarters ahead in the market.

And one other thing I'd add, Casey, it's Brian, is that if you kind of compare this go around the 2001, 2002 timeframe, 2006, 2008 financial crisis, I think that the private credit market has evolved a lot. And we tend to, as you know, control our loans, we're not in big syndicates. And I think that facilitates a workout process that's much more efficient and quicker. We saw that in COVID, and we'd expect to see that same sort of activity and behavior again.

Our next question comes from the line of Ryan Lynch with KBW.

My first question is about your overall thoughts on Capital. It seems that you have reduced some exposure, exiting your two subordinated loans in that investment and lowering the cost base of your equity investments. Did you reduce your exposure in Turack a bit? Also, regarding that investment, you have a substantial equity stake in that business. There has been a significant shift in housing trends related to prices, interest rates, and overall transaction volume. I would like to know how that business is performing and how you expect it to perform if the recent changes in the housing market continue.

Yes, Ryan, regarding your question about exposure, we have reduced some of the working capital lines we were providing and are sourcing capital from other means now. Overall, we remain very confident in the business. The team has done an excellent job, and I agree that it represents a decent-sized position for us. We've been pleased with its performance, both in terms of loan losses and the consistency of the dividends it pays. The real estate market is definitely more challenging in some respects, with significant housing price growth and strong rental growth, which may lower our transaction volumes. On the other hand, many in the industry are not as well capitalized as we are, leading to increased lending opportunities for them. The yields they can achieve on loans, particularly those with about 20 to 25 points of equity capital beneath them, are notably attractive given a loan-to-value ratio of 75 to 80 percent. We’ve seen asset yields widen by around 300 basis points over the last six months, so we feel positive about our portfolio’s lending opportunities. One consideration is that, as this business focuses on providing capital for home renovations before resale, a decline in buying volume could extend the payoff period for some of these loans. Nevertheless, the yields they are attaining remain quite attractive, and we feel good about our position.

Okay. That's a helpful update. Okay. That's a helpful update. And the other one was on another just specific company on global jets. I think in your comments, I just want to make sure I'm understanding your commentary fully. It sounds like the leases are performing very well. It's just the capital structure might be a little bit off. And the impact from rising rates is just causing you to put that on nonaccrual and reduce the fair value. It sounds like that's true. And correct me if I'm wrong with that. And then the second part of that question is, obviously, the trajectory of rates is that they keep going pretty meaningfully higher throughout the next 6 to 12 months and then in 2023, things could potentially change. Is the current fair value mark that you have today using the forward curve assumption so that if the Fed does continue to raise rates throughout 2022, we're not going to see continual markdowns? Or how is that fair value mark calculated today?

Yes. So the short answer on number 2 is yes, it's using the forward sort of curve there. If you go back to your first sort of part of that. And the way you described it is, I would say, generally correct. I mean the asset portfolio, remember, it's a lease and sort of lending business in private aviation has done extremely well. There's 0 or virtually sort of no even delinquencies in the portfolio. I think we've talked about this on sort of prior sort of calls. I think the company has an excellent management team. The company has done a bunch of things very good. I think their competitors know have really centered around a handful of banks, which has just put pressure on the ROE of the business, which was just further exacerbated by funding costs going up and arguably lease yields or loan kind of returns not moving the same way. So I think when you put those 2 things together, that drove us to on that piece. And as we talked about that, I think we got almost $60 of principal proceeds on the mezzanine note during the first half of 2022. So the company itself is doing quite well. It's more of an ROE question.

Can I ask a quick follow-up on that? If that's how you see it, what's the plan moving forward? Is the performance of your investment largely dependent on market rates? If market rates continue to rise, will there be more stress on the capital structure and the business? Conversely, if market rates decrease, does that change the situation? Is there anything you can do to enhance that investment? It seems everything is functioning well, but the capital structure is in a difficult position, meaning the overall performance of your investment is mainly influenced by market rate fluctuations.

Yes, I don't believe the capital structure is in a difficult position. The issue lies in the returns generated when comparing the asset side to the liability side, which may not meet the expectations typically held for a specialty finance company. That being said, we can discuss this in more detail if you'd like. The management team has performed well, and the brand is quite strong. Their origination channels are also robust. We've been collaborating with the company to explore alternative ways to enhance the return on equity. There are ongoing efforts in this area. However, we remain aware of the current return on assets and, consequently, the return on equity at this time.

Our next question comes from the line of Robert Dodd with Raymond James.

I apologize for interrupting. Following up on Ryan's question, is this preferred equity able to return to accrual, or have you effectively restructured it from preferred to common considering the rest of the capital structure? The likelihood of it returning to accrual at some point appears quite low.

Robert, I think there is a possibility that it could return to accrual, but we're not forecasting that and probably wouldn't include it in our models. I believe the focus should be on what we can achieve with the management team and the other stakeholders to continuously enhance this business. They have performed quite well over the past several years, and the credit outlook is positive. So while it could happen, I don't think it would be appropriate to plan for that.

I understand, and I appreciate it. Moving on to the market aspect, the syndicated market still appears to be quite stagnant. While spreads have begun to narrow, approximately 40% to 50% of the widening that occurred during Q2 has reversed this quarter. However, the market remains somewhat dysfunctional, which is beneficial for you as you gain market share from syndicated markets. Can you share your thoughts on what might be needed for the syndicated market to recover? Additionally, if it does come back, would that alter the competitive dynamics you’re currently observing, considering that yields and structures are favorable?

I think you're correct in how the secondary markets have started to perform, and you've probably gotten back 40%, 50% of some of the spread move there. That's probably an initial step in getting the syndicated markets to perform. There's been some news articles on this. You can sort of see it. There's been some larger LBOs that have not sort of issued yet. There's been a handful of banks that have been selling some of those positions would end up being probably pretty decent-sized dollar losses. So I suspect some of that risk, if not all of that risk needs to get cleared because you need people to underwrite loans, right, to get that new issue to the market, and you need them to put terms on the underwrite that would probably, let's call it, be rational for someone to sort of have an interest in using it. But I think the way you started off the question is correct. I mean opportunities or markets like this are good markets for private credit lenders such as ourselves. I think they continue to even almost get enhanced that maybe would have been a handful of years ago as there are more and more sponsors and borrowers who just prefer a private credit option. So I think there's more users of this. So I think the lending environment is good. I think it will remain good for some time.

One moment for our next question, please. Our next question comes from the line of Jordan Witten with Wells Fargo.

I just have another question on Global Jet. Can you tell us how much leverage is above FSK's mezz and preferred? And then maybe if you can quantify just even something as simple as total assets and the total liabilities ahead of FSK's position would help us better understand.

And I think, Jordan, I think we might have talked with you guys about this before. I mean they're a frequent issuer in the securitization market. So you wouldn't put leverage in a normal sort of corporate term. And quite frankly, those leverage facilities that are above are pretty conservative. I think they would actually be all investment grade in the probably 70 sort of 80 LTV sort of context. So we're happy to spend some more time with you if you like on that, but they're a frequent issuer and a successful issuer into those markets. And that's what sort of sits above.

Our next question comes from Melissa Wedel with JPMorgan.

Good morning. Appreciate you taking some questions today. Given that you've now gotten portfolio leverage to the midpoint of your target range, which is really in of itself on target as you sort of laid out expectations from Investor Day. So I'm curious about your appetite for increasing that portfolio leverage towards the higher end of the range. Given sort of a more cautious approach to things that you're taking to the market.

Yes, we haven't officially changed our leverage target, and we generally prefer to operate at the midpoint of that range. There might be occasions when we lean in a bit more, but it's important to note that private lending doesn’t always align perfectly. We might have a few deals or some repayments that occur at different times. Therefore, we want some flexibility in our approach. We're willing to increase our leverage slightly if attractive opportunities arise, but overall, we prefer to stay in the range we're currently at.

Okay. That's helpful. And sort of extrapolating some of your comments that a lot of originations in the second quarter. If I heard you correctly, they were focused on existing portfolio companies. I guess, given the way some of the volatility has moved some markets around and created some dislocations, I'm curious if that's still the area of your focus, and how you think about that the attractiveness of new deals in new portfolio companies or existing ones against the opportunity of buying your own stock where you guys have been really active. Appreciate any color.

Yes. No, there's a couple of sort of points in there. I think you're correct, and that's the way we described it in our prepared remarks. I mean, in many ways, we've always either benefited from or probably enjoyed lending as an incumbent lender or from an incumbent position. You when you have been with companies for some time, you know the management team, you know how they perform. I think you're almost sort of positively biased or positively selecting your origination flow. In prior quarters, we talked about that could have very well been half of the originations, both add-ons, but sort of just names we had lent to in the past. So I think we like that type of lending. Obviously, these add-ons are being done generally the companies that are continuing to grow by definition performing. We are able to get some pricing concessions on those add-ons generally to reflect kind of the current market to the position. So I think that's a good business for us. I think you should expect that we will continue to look to exploit that incumbent lender or the sort of add-on piece. We have been very active in buying back stock. I think we probably bought back over $500 million over the last 4-plus years as it relates to the handful of different transactions that were done to get to where we are with FSK. And I think you should expect that the current plan will get filled.

And with that, we conclude our Q&A session for today. I would now like to turn the conference back to Dan Pietrzak for closing remarks.

Well, thank you, everyone, for attending today's call. The team is available if you have any additional questions. Thank you and have a great summer. Thanks again.

And with that, ladies and gentlemen, we conclude today's conference. Thank you for participating and you may now disconnect.