Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp. First Quarter 2024 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 First Quarter 2024 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 yesterday. 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 March 31, 2024. The 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, reconciliation to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC on May 8, 2024. 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. 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 Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us on the call are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Robert, and good morning, everyone. Thank you all for joining us today for FSK's First Quarter 2024 Earnings Conference Call. FSK had a positive start to the year, consisting of net investment income totaling $0.76 per share and adjusted net investment income totaling $0.73 per share. During the quarter, we also made significant progress with regard to three of the investments placed on nonaccrual during the fourth quarter of last year. We experienced increased origination volumes as our investment team originated approximately $1.4 billion of investments. Our net asset value as of the end of the first quarter was $24.32. From a liquidity perspective, we ended the quarter with approximately $4.2 billion of available liquidity. Finally, we delivered an annualized ROE of 10.1% for the quarter. Based on our positive operating results, our Board has declared a second quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. As we mentioned on our third quarter 2023 earnings call, our Board previously declared a special distribution totaling $0.10 per share. The first $0.05 per share installment was paid this February and the second $0.05 per share installment will be paid later this month. Accounting for the special distribution, our total second quarter distribution will be $0.75 per share. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to an 11.9% yield on our March 31, 2024 net asset value and an annualized yield of approximately 15% based on our recent share price. From a forward-looking perspective, we remain confident in the long-term earnings power of FSK, which enables us to continue paying an attractive distribution to our shareholders. We're encouraged by the increased level of origination activity and the quality of the deal volume during the first quarter. The private credit markets continue to experience strong tailwinds and we believe we're well positioned to take advantage of these opportunities. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Thanks, Michael. For the past year, it has been our view that inflation would remain elevated and the higher interest rate environment will last longer than some market observers expected. Our view has largely proven accurate and should our views continue to play out, we believe floating rate asset structures, coupled with investment strategies focused on large defensive portfolio companies and asset-based finance investments directly tied to financial and hard assets will remain attractive. Looking ahead, it is our expectation that the economy will experience stickier inflation in the near term, coupled with continued, albeit slowing overall economic growth. As Michael highlighted earlier, there are strong tailwinds to our business as sponsors continue to utilize private credit solutions to finance transactions. Origination activity picked up meaningfully in the first quarter compared to the prior few quarters, and we expect a material increase in private market transaction activity during 2024. Given significant private equity dry powder, combined with pent-up demand from an M&A perspective and the desire for private equity fund LPs to see a higher level of return of capital. As we mentioned on our last call, the macro backdrop created challenges for a few of our portfolio companies during the fourth quarter of last year. Our workout team has been active on these names. And as Brian will discuss, we're pleased to have achieved positive results quickly. And while there's still work to be done, reducing our non-income and nonaccrual investments, we clearly are pleased with the recent progress we've made. Turning to investment activity. During the first quarter, we originated $1.4 billion of new investments. Approximately 75% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments combined with $1.7 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio decrease of $221 million. New originations consisted of approximately 69% in first lien loans, 3% in second lien loans, 3% in other senior secured debt, 1% in subordinated debt and 24% in asset-based finance investments. As we mentioned on our last call, with regard to new investments, we're continuing to see tighter pricing in the upper end of the middle market. The trade-off to the spread compression is still strong documentation and very solid credit profiles. We also continue to be pleased with the quality of the new deals. During the first quarter, our new direct lending investments had a weighted average EBITDA of approximately $243 million, 5.7x leverage through our security and a 47% equity contribution, all with a weighted average coupon of approximately SOFR plus 570 basis points. One example of a new deal in the quarter was our investment in Curia Global, a manufacturer of active pharmaceutical ingredients, providing contract pharmaceutical development, manufacturing, packaging and analytical services. KKR was the sole lender as we provided $125 million off-balance sheet SPV structured trade receivables facility secured by Curia U.S. receivables. Pricing was 625 basis points with a 2% upfront fee. FSK committed $83 million of the $125 million facility. Additionally, in the first quarter, KKR and its affiliates, along with other partners purchased GreenSky, a point-of-sale finance company from Goldman Sachs as part of its divestiture from consumer-related businesses. GreenSky was founded in 2006 and focuses on offering home improvement financing alternatives for prime borrowers. FSK committed $80 million to the transaction. I also want to highlight a sale of the music IP investment in KKR Chord IP Aggregator that occurred during the first quarter. In connection with this sale, FSK received an $89 million return of capital. FSK Chord IP Aggregator also received a well-collateralized seller note that is expected to be repaid during 2024. And FSK's respective share of the seller note is approximately $30 million. The transaction resulted in a $20 million gain to our net asset value, and we expect to realize an IRR of approximately 18% on our position. When we look at the aggregate trends across our portfolio companies, we've continued to see high single-digit EBITDA growth with modest margin pressure due to the continued inflationary environment. Over the coming quarters, while we expect continued revenue growth from our portfolio companies, we'd expect growth to slow modestly as macro trends could potentially lead to a slowdown in economic growth. The weighted average EBITDA of our portfolio companies was $218 million as of March 31, 2024. Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 7% across companies in which we've invested since April of 2018. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks, Dan. As of March 31, 2024, our investment portfolio had a fair value of $14.2 billion, consisting of 205 portfolio companies. This compares to a fair value of $14.6 billion and 204 portfolio companies as of December 31, 2023. At the end of the first quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 57% first-lien loans and 65% senior secured debt as of March 31. In addition, our joint venture represented 9.8% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans totaled approximately 66% of our total portfolio and senior secured investments totaled approximately 74% of our portfolio as of March 31. The weighted average yield on occurring debt investments was 12.1% as of March 31, a decrease of 10 basis points compared to 12.2% as of December 31, 2023. The decrease was largely driven by spread compression on new deals. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. From a nonaccrual perspective, as of the end of the first quarter, our non-accruals represented 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis. This compares to 8.9% of our portfolio on a cost basis and 5.5% of our portfolio on a fair value basis as of December 31, 2023. We believe it will also be helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the first quarter, non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FS/KKR Advisor were 2.3% on a cost basis and 1% on a fair value basis. During the first quarter, we placed one small investment on nonaccrual with a cost and fair value of $21 million and $19 million, respectively. Additionally, we removed three investments from nonaccrual status with the combined cost and fair value of $395 million and $224 million. Wittur was one of the names removed from nonaccrual during the quarter. As we've discussed on prior earnings calls, we placed our second lien loan on nonaccrual during the first quarter of 2023 as it was facing persistent inflation headwinds as well as a slowdown in construction in China. The restructuring resulted in our second lien loan being fully equitized and KKR taking control of the business. The first lien debt of the company was significantly reduced at the operating company, and FSK's existing first lien loan was converted into a €52.2 million other senior secured debt position. FSK and other funds managed by KKR provided new capital to the company to fund operations. This recapitalization resulted in $122.5 million of cost and $31 million of fair value being removed from nonaccrual status. Additionally, KBS completed its full consensual restructuring during the quarter, which resulted in equitization of a portion of the nonaccruing second out loans and FSK and other lenders taking control of the company. FSK received $190.5 million of a new first lien loan, $82.8 million of a new second out first lien loan, $48.3 million of preferred equity, and KKR managed funds now own 46% of the company. This restructuring resulted in $197.6 million of cost and $135.3 million of fair value being removed from nonaccrual status. Lastly, our first lien position in Sweeping Corp of America was restructured during the first quarter, and the company received a $50 million cash injection from the equity sponsor. The first lien debt facility was restructured into a $15.7 million first-lien first-out cash paid term loan, a $28.1 million first-lien first-out PIK tranche, an $8.3 million second lien first out, and a $24 million second lien second-out term loan. This restructuring resulted in $75.3 million of cost and $57.2 million of fair value being removed from nonaccrual status. The progress we've achieved with regard to these portfolio companies is an example of the benefits of KKR Credit's investment platform. Our fundamental de-risking approach to these credits was evident in our resolution of nonaccruals this quarter. While we prefer sponsors to continue supporting their portfolio companies with additional equity, we have the resources and capabilities to support companies ourselves when necessary. By taking action quickly, we believe we will significantly improve our chances of receiving a meaningful or even full recovery of our investment capital over time. And with that, I'll turn the call over to Steven to go through our financial results.

Thanks, Brian. Our total investment income decreased by $13 million quarter-over-quarter to $434 million, primarily due to repayments of higher-yielding positions and the impact of investments placed on nonaccrual during the fourth quarter of last year. The primary components of our total investment income during the quarter were as follows: total interest income was $350 million, a decrease of $18 million quarter-over-quarter. Dividend and fee income totaled $84 million, an increase of $5 million quarter-over-quarter. Our total dividend and fee income during the quarter is summarized as follows: $53 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $14 million during the quarter and fee income totaling approximately $17 million during the quarter. Our interest expense totaled $116 million, a decrease of $2 million quarter-over-quarter, and our weighted average cost of debt was 5.4% as of March 31. Management fees totaled $55 million, a decrease of $1 million, and incentive fees totaled $43 million, an increase of $2 million quarter-over-quarter. Other expenses totaled $8 million, a decrease of $2 million quarter-over-quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending Q4 2023 net asset value per share of $24.46 was increased by GAAP net investment income of $0.76 per share, and was decreased by $0.14 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution. These activities result in our March 31, 2024 net asset value per share of $24.32. From a forward-looking guidance perspective, we expect second quarter 2024 GAAP net investment income to approximate $0.74 per share, and we expect our adjusted net investment income to approximate $0.71 per share. Detailed second quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $341 million. We expect recurring dividend income associated with our joint venture to approximate $52 million. We expect other fee and dividend income to approximate $34 million during the second quarter. From an expense standpoint, we expect our management fees to approximate $55 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $114 million, and we expect other G&A expenses to approximate $10 million. As Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share comprised of $2.80 per share of quarterly distributions and $0.10 per share of special distributions. Our gross and net debt to equity levels were 117% and 109%, respectively, at March 31, 2024, compared to 120% and 113% at December 31, 2023. As of March 31, our available liquidity was $4.2 billion and approximately 65% of our drawn balance sheet and 44% of our committed balance sheet was comprised of unsecured debt. 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. In closing, we're pleased with the positive start to 2024. As our origination activity picked up, we made significant progress on certain portfolio names, and we continued to fully earn both our base and supplemental distributions on a per share basis. The long-term earnings power of FSK continues to be strong and we have confidence in our ability to continue to award shareholders with these attractive distributions. And with that, operator, we'd like to open the call for questions.

Our first question comes from John Hecht with Jefferies.

First one is you had a very active deployment quarter but then also, it was very active in repayments as well. Dan, I'm wondering kind of your outlook for both sides of that picture. I know you've talked about an increasing deal market over the course of this year because of private equity fund needs and maybe give us an update on your perspective there. And then in addition, what kind of signals should we look for the repayment activity to either stabilize or start to drop? And is that a function of, call it, the liquid loan markets and different levels of competition in the space?

I think we are expecting some level of consistent repayments because the syndicated loan market is open. This is a positive development as it reflects overall market activity. Many of these companies have been held by their sponsors for an extended period, so they could potentially be sold. That said, our incumbency positions hold real value, which you can see in our results quarter after quarter. We're pleased to see some increase in market activity, which is reflected in our deployment numbers. Some of this includes loan extensions, and with those extensions come repricing, which we also mentioned during the call. We remain confident that there are several factors pushing the M&A market toward a more complete reopening. There's pressure from limited partners, and a significant amount of capital remains available. Additionally, the valuation mismatch we witnessed in the second half of 2022 and into 2023 has certainly narrowed, suggesting a productive second half of the year ahead.

Okay. And then for my second question, I appreciate the insights. You mentioned that spreads are a bit under pressure due to market dynamics. What do you anticipate for those spreads moving forward? Additionally, where do you see opportunities in the market where the spreads might not be as pressured?

Yes, that's a valid question given what everyone has been observing. Spreads have definitely tightened, roughly by 75 basis points over the past six months. There seems to be some market technicals at play, where even though we're seeing some activity, it's not yet at a normalized level. A significant amount of capital has been raised that is ready to be deployed. I believe this situation will evolve based on what I mentioned in response to your earlier question, John. Currently, the market appears to be around 500 to 550 basis points, but I think it has the potential to return to the pre-rate move levels, which I would describe as a 550 to 600 basis point market from a spread perspective. It's worth noting that despite some repricings, we are benefiting from extended call protection, averaging an extension of one to two years. Additionally, we're often able to charge an upfront fee alongside that, which provides a helpful offset. To address your final point, we highlighted some deals from the quarter during the call. Our activities in trade receivables and various asset-based finance transactions are contributing additional returns to the portfolio, which we are pleased to see.

Our next call comes from Kenneth Lee with RBC Capital Markets.

Just one on the asset-based finance opportunities there. Wondering if you could just talk about the current outlook for such opportunities and perhaps talk a little bit more about the competitive landscape that you're seeing and whether you're seeing any kind of impact from new entrants into the space?

Sure. Thanks for the question. We are quite enthusiastic about this sector and believe there is significant potential for growth. It is a massive market, estimated to be over $5 trillion, which exceeds the combined size of the direct lending market, the syndicated loan market, and the high-yield bond market. This is an important observation. We are still in the early stages of capital formation, which means there aren't many large capital players in the space. Additionally, recent market dynamics have created favorable conditions for our business. While there have been some challenges with regional banks, including asset sales and reduced capital commitments to certain financial companies, there is a need for capital to fill these gaps. Pools of capital like ours, including FSK and others, are positioned to address this. Overall, we see a large market with limited large-scale capital, positive trends, and we appreciate the risk profile and relative value. Therefore, we plan to remain active in this area.

Got you. Very helpful there. And then one follow-up, if I may. Really appreciate the details around the restructuring involving those three portfolio companies. I wonder if you could just talk a little bit more at a high level around the general approach that FSK has around potential derisking, what kind of options are available? And how do you choose the course of action for a particular portfolio companies?

Sure, I'm happy to share. Ken, we are pleased to see progress with these companies. We are fortunate to have a strong restructuring and workout team led by Lauren Krueger. She not only heads this team but also participates in the investment committee for the regular business, so she's actively involved. Our approach is very bottoms-up. While we would prefer direct support from the sponsors for the companies, we are willing to collaborate with them. There may be times when that is not possible, and we are ready to take control if needed. We have the full resources of the firm to support us in these situations. For example, the KBS situation was challenging, but that consensual deal should help build long-term value. We have also brought in additional resources from the firm, including KKR advisers, to assist with this. Essentially, we are keeping all options on the table and will choose the best course of action for each situation. We are pleased to see the reduction in nonaccruals quarter-over-quarter and remain satisfied with 88% of the portfolio being the KKR originated portion, with nonaccruals at 2.3% and 1%. It is an important aspect to consider.

One thing I'd like to add is that in situations like this, time is not always beneficial. Therefore, our approach to address issues quickly and thoughtfully is crucial because often, delaying action results in worsening circumstances. We aim for resolution. While we prefer sponsors to continue supporting their portfolio companies, and they often do, we cannot simply wait and hope for positive outcomes when they don't. We must be proactive in preparing to maximize value for our investors.

Our next question comes from Bryce Rowe with B. Riley.

I want to kind of ditto some of the comments around the information around the restructurings, resolutions, super helpful and certainly pleasantly surprised to see the pace at which you made those happen. Maybe shifting to the capital structure and might have talked about this in past calls. But Steven, maybe you could speak to the opportunity to refinance or at least address some of the maturities you've coming up in '24 and '25, especially in light of how open the debt capital markets are today?

Bryce, I appreciate your question. From our perspective, we addressed our July maturity last fall when we issued $400 million in unsecured notes. I agree that the markets are currently open and active, which is certainly a positive sign. We will evaluate our options in the usual manner. As a frequent issuer, we plan to continue this strategy over time. Having a solid start to the year, like we had in this quarter, has been beneficial for us. We will consider all these factors, and the way we've structured our capital over the years really reduces our risk by allowing us to be a steady issuer each year.

That's helpful. And then maybe just one follow-up on the restructurings of the resolutions, and obviously took care of some here in the first quarter. But curious, I assume that, that workout group continues to kind of work hard on the other situations. Can you speak to maybe the pace of those potential resolutions and kind of maybe an update on Miami Beach since it was one of the larger nonaccruals that were added in the fourth quarter.

Yes. Bryce, happy to. I mean, obviously, the team will remain busy there, and kind of focus for the resolutions. And I thought the point that Brian made was a very good one. I think we continue to make progress on Miami Beach, probably a little bit more of a complicated situation, complicated sort of industry, probably more to talk about there in the coming quarters. There's a handful of other names that may be are either on the nonaccrual or the non-income-producing list that we're kind of watching M&A markets closely. We're probably preparing for or thinking about kind of '24 or early '25 sort of exits there. And then maybe just one of the larger names that you've, Bryce, is Global Jet. That, I think, is roughly 44% of the nonaccrual balance. I think we've been very happy with what management has done of late. I think they've done a really nice job. That book is at the overall company level on the asset side is north of $2 billion. I don't believe there's one credit issue in that portfolio. They recently accessed the capital markets from a financing perspective. And we'd have received roughly $130 million of distributions as that business continues to rightsize its equity base. So I think the team has done a really nice job there working with the management team and the other sort of sponsors to push that business forward. But those are probably some highlights for you, Bryce.

Our next question comes from Casey Alexander with Compass Point Research & Trading.

A couple of questions, Dan. One, in relation to the new underwriting environment, are we seeing repays with higher yields and the new spread compression, should we be thinking about a drag on weighted average yields as the year goes along? And that's just, I think, a general question, but I'm curious how you feel about that.

I believe it's reasonable to consider that. This situation extends beyond just FSK; as people's portfolios adjust, those changes may result in investments in lower-yielding assets. This decrease in yield will be influenced not only by the benchmark but also by the spreads. However, I think there will be some compensation through transaction fees, which could help stabilize earnings to some extent. We've seen an unusually low amount of volume for about the past eight quarters, and looking across the industry can highlight that. So, I believe there's some balance to be struck here. In response to Bryce's earlier question, we are diligently working on improving our non-accrual or non-income-generating assets, transitioning them into income-producing ones, which should positively impact our bottom line. We are still within our target leverage range and have some room to maneuver, which should be beneficial.

Secondly, on the ABL side, KKR has, I believe, set up a real effort to attack ABLs not just withstanding the BDC. So that's clearly a focus of KKR. So what percentage of the portfolio would you be willing to take ABLs to in the BDC? And where do origination yields there sit relative to direct origination private credit? And is that also a way to potentially offset some drag on weighted average yields?

Yes, thank you for that, Casey. We are making a significant effort in this area, with over 50 people dedicated to it and more than $50 billion in total assets under management. Just to clarify, we refer to it as asset-based finance, which focuses on portfolios of financial and hard assets, while the market typically considers asset-based lines of credit as only involving receivables. This is a broad initiative for us. As I mentioned, we appreciate the downside protection. Specifically to your question, we are currently looking at deals that yield anywhere from 100 to 400 basis points above standard direct lending deals. This aligns with the range we've previously discussed for asset-based finance within FSK. Additionally, our joint venture provides us with a significant advantage here. You can expect us to remain active in this area, engaging in new deals while some existing ones will self-liquidate or amortize.

Casey, it's Brian. The other constraint is just non-EPC. ABS investments are usually non-EPC and we've to stay within the 30% bucket, and we also have the JV. So that's a bit of a constraint. But as Dan mentioned, we can also put ABF into the JV to basically increase our buying power on non-EPC.

Our next question comes from Melissa Wedel of JPMorgan.

I wanted to follow up on the first question regarding investment activity levels. We experienced some higher repayment activity in the first quarter, which caused leverage in the portfolio to decrease slightly. Since we're currently in the middle of the target range, I'm interested in your thoughts about this level of portfolio leverage, particularly in light of your comments about anticipating a slowdown in growth for portfolio companies, both in revenue and EBITDA, during the second half of the year.

Yes. Thanks, Melissa, I think we're pretty comfortable with where we sit right now, right? We've historically given that kind of 1 to 1.25x range with probably the midpoint of or sort of the target of kind of the 1.15x. So maybe slightly sort of below that. I think we like how much available liquidity we have. I think we like the maturity ladder we've got on the liability side. I think we're prepared to kind of operate within that range, considering we've that level of dry powder. I think on to your other comment, I mean, I think the overall market has taken the view maybe almost too aggressively that, that sort of the hard landing concept is removed from the equation and we're in this more kind of soft landing perspective. I think we're expecting some slowdown, though at the consumer side more sort of broadly, which will impact some of the names here and maybe reduce that kind of year-on-year EBITDA growth. It is our job for these companies to be a little bit glass half empty. But we got a little bit of room to work on the leverage side, and we're in a good liquidity position. So we feel good about that.

I appreciate that. Following up on the funding, there are several upcoming maturities. You have always approached your security issuances in a very laddered and well-diversified way. However, there are some maturities coming up in 2024 and 2025. Considering the current rate and spread environments, how are you planning to manage these upcoming maturities? Also, what is your appetite for further diversification compared to using the available capacity on the revolver?

No worries. Steven may have mentioned some of this already. If he has anything to add, he can do so. We completed a deal in November to essentially pre-fund the upcoming maturity this summer. We currently have $4.2 billion in available liquidity and about 65% of our balance sheet is funded through unsecured means. You can expect us to be very active in the market, issuing consistently but also opportunistically when the markets are favorable. We will also consider other options, such as CLOs, to ensure we remain well diversified in terms of our liabilities. Steven, do you have anything to add?

I think you covered it well.

Our next question comes from Robert Dodd with Raymond James.

On the forward outlook in terms of economic risk and macro risk, how much of that concern stems from overall demand and revenue versus margins, right? But we're hearing mixed messages from some BDCs that well, generally, BDCs, where a lot of software are seeing margins go up because software companies are flashing sales expense. But on your companies, how much of the kind of the cost-cutting or margin management tools have already been expanded, so to speak, over the last several years because Obviously, it's been a theme for a lot of companies for many years? And are they running out of tools on that front, do you think?

It's a valid question. Our primary exposure is in the software sector, focusing on larger software companies with an emphasis on EBITDA rather than just recurring revenue structures. We've observed that the ability to raise prices without hesitation has likely diminished, making it more difficult to do so. This aligns with your observations. The greatest challenges seem to arise when a company's expenses are significantly influenced by wages, especially given the ongoing wage inflation issues. When you factor in the current high interest rate environment, which we anticipate will persist, these concerns gain more weight. Therefore, we are paying close attention to the revenue aspects, which is partly why we expect to see slower EBITDA growth in the upcoming quarters.

Got it. So, regarding activity levels in the second half of the year, there's definitely a lot of expectation around LPs wanting their money back. Do you think the gap between buyers and sellers is starting to close? Has that contributed to the low activity levels we've seen? And do you believe that gap will close enough this year to lead to a significant increase in activity in the second half, or are people still hesitant on that front?

No. The short answer is yes. I believe the gap has closed significantly or will close enough to increase transaction levels. There have been several factors at play. Going back to last summer, we observed more activity and discussions about deals, but the events in Israel and the Middle East in October caused most things to pause. Additionally, the market was anticipating six rate cuts at the beginning of the year, leading people to prefer holding onto assets with the hope that better pricing would come in a lower rate environment. However, there's a growing consensus that rates will remain high for an extended period, which changes that dynamic. While there may be some obstacles ahead, discussions about a hard landing are largely off the table, and concerns among people seem to be somewhat muted, although we are adopting a more cautious stance. All of these factors are coming together. As you mentioned, people are eager for capital back on the LP side, and on the other hand, there is plenty of available capital.

Our next question is from Erik Zwick of Hovde Group.

I wanted to start first with a question regarding the pipeline. I'm curious if you could provide any commentary in terms of how that looks today in terms of the mix of new investments versus add-on opportunities as well as if there are any particular industry segments that you're finding that are either kind of more active or more attractive from your perspective?

I'd say it's almost in line with what you'd probably expect, right? We've been probably overweighed towards the add-on and the incumbency. So I think you're always going to see a large chunk of that considering the size of the platform, but some of that will be regular way kind of new deals. So I think it's pretty balanced. I think the pipeline is decent right now. I think the level of deals that I see being screened were making their way to the investment committee is definitely up more quarter-on-quarter or up more than maybe what we saw last year. I still think it will take a little while to play out, Erik; some of the conversations here are just people gearing up for this. That means it's a multiple-month process and a multiple month kind of close, but constructive.

Yes. I mean the one thing I'd add, Erik, is that just because the company is being sold doesn't necessarily mean it's going to go out of our portfolio. We're always in active dialogue with sponsors looking to sell companies about providing financing to the new buyer. And because we've the incumbency position that gives us a bit of an advantage over some of our competitors. So clearly, that's a focus for us.

That's helpful. And the second question for me is just interesting to notice on Slide 10, median interest coverage for your companies has been pretty stable for about a year and actually ticked up a little bit in Q1, which makes sense, given that base rates have been pretty stable. And given the fact that you said you've kind of seen high single-digit EBITDA growth over the past year. So I guess if we assume that rates stay here or even potentially come down and you continue to see some EBITDA growth, is it a fair assumption that we've kind of seen the bottom of kind of a trough for this particular metric for this cycle?

Yes, that would be our perspective on the trough. This view is influenced by the belief that rates are not likely to decrease anytime soon, nor do we expect them to increase significantly. It seems that over the coming years, we could see some rate reductions. There was a slight uptick recently, but to be fair, it may not have been the entire increase of 0.1; some of it could have resulted from rounding. However, there was definitely an improvement from one quarter to the next.

Our next question comes from Maxwell Fritscher of Truist Securities.

I'm calling in for Mark Hughes. I have a broader question about the economy. Is there any particular sector where you're observing issues or avoiding? Are there any credit problems across the industry, or are these credit concerns more specific to certain cases?

Yes. I think we've discussed this in previous calls. We've aimed to build our portfolio by avoiding sectors that are experiencing long-term declines, which has been beneficial. However, these sectors are likely to face ongoing challenges. The health care sector seems to be particularly struggling. Factors contributing to this include issues related to revenue and reimbursement processes, which are not unique to us but affect the entire industry. We've also noticed that new discretionary spending ventures are facing difficulties, and some consolidated companies are having a tough time. Historically, health care has been considered a stable investment, but its performance appears more varied now, and I expect this trend to continue for a while. Brian, do you have anything else to add?

I think you've articulated it well. We've been concentrating on industries that appear to be more resilient, such as software, consumer-driven healthcare, consumer sectors, and professional services. These areas have shown resilience. Conversely, we've tended to steer clear of energy, retail, and consumer products. We are observing solid earnings growth overall, as indicated by the 7% figure that Dan mentioned, although that's just an average. Currently, I wouldn't highlight any specific themes beyond what Dan shared. Certain industries are facing significant challenges. It has been somewhat specific to certain situations regarding our non-accruals and problem credits. We need to remain cautious about the overall economy and the possibility of a soft landing.

Got it. Switching to the second lien investments, are you still finding good opportunities there? It's clear that lenders are currently prioritizing their first lien investments, which constitutes the majority of your portfolio. However, could you provide any insights on the second lien market, including spread yields and your overall perspective?

Yes. I'll consider the junior debt category more broadly, including second lien or mezzanine-like options. Activity in this area has been relatively low for several years, typically driven by a more active M&A market. Recently, we've observed a few deals, primarily involving top-tier businesses, with second lien structures that have relatively tight spreads. As M&A volumes increase, we anticipate more opportunities in the junior debt space, which could present interesting prospects. We view this sector as somewhat cyclical, suggesting that the right time to engage will be when M&A activity rises and financing markets need support, potentially leading to attractive structures in terms of yield or total returns. However, we remain cautious about portfolio construction and aim to maintain a strong focus on first lien or unitranche senior secured risks.

We have a high threshold for junior capital. The weighted average EBITDA of our portfolio is around P20, give or take. When we look at our junior debt investments, the average EBITDA is likely twice that amount. Therefore, when we invest in junior debt, it tends to be in significantly larger businesses, typically those where sponsors have committed $1 billion or more. This is usually influenced by new deal activity, as Dan pointed out.

Showing no further questions, I'd like to turn it back over to Dan Pietrzak for our closing remarks.

Thank you all for joining the call today. We're always available for any follow-up points that you might have, and we look forward to talking with you again next quarter. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.