Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp's First Quarter 2025 Earnings Conference Call. Your lines will be in a listen-only mode during the 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 the instruction of entering the queue. Please note that this conference is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introductions. Ms. Kleinhenn, you may now begin.

Thank you. Good morning and welcome to FS KKR Capital Corp's first 2025 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 December 31, 2024. 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 first quarter earnings release that was filed with the SEC on May 7, 2025. 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, Chief Executive Officer and Chairman; Dan Pietrzak, Chief Investment Officer and Co-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 all for joining us for FSK's first quarter 2025 earnings conference call. I'd like to begin this morning's call with a few comments regarding some of the uncertainties in the world. Since our last earnings call in February of this year, our country's economic outlook, the volatility associated with both debt and equity markets, and the major geopolitical risks have all worsened. Not only are investors faced with the task of analyzing new and different risk elements, but they are forced to react to daily headlines regarding the current administration's announcements. Indeed, for investors who value stability, the current market is challenging at best. As Dan will discuss in more detail, we have been taking proactive steps to provide investors with the most accurate information and the best overall investor experience as it relates to FSK during this challenging time. And while no one would have predicted exactly the events which have transpired over these last many weeks, our team did envision that volatility would rise from time to time and that 2025 would be the year of transition for interest rates. Those are the main reasons we announced in February our Board's intention to maintain our $0.64 per share quarterly distribution and also our $0.06 per share supplemental distribution for each of the four quarters during 2025. Our goal was and still is to provide investors with both transparency and stability of income from FSK. Our view rests upon the premise that by early next year, the macroeconomic environment will settle down, providing BDCs with a clearer picture of interest rates, tariffs, and other key drivers of economic activity. Our strategy of building a healthy balance of spillover income during periods of higher interest rates enables us to provide stability and confidence in our quarterly distributions during these periods of greater market volatility, regardless of variances in our net investment income on a quarter-to-quarter basis. Additionally, starting late last year, the team began analyzing our portfolio in terms of both tariff and DOGE exposure, and those analyses have been further refined over the last several weeks. Again, Dan will address this topic during his comments. And now I'd like to shift to FSK's first quarter performance. During the first quarter, FSK generated net investment income totaling $0.67 per share and adjusted net investment income totaling $0.65 per share as compared to our public guidance of approximately $0.66 and $0.64 per share, respectively. From a liquidity perspective, we ended the quarter with approximately $3.2 billion of available liquidity. Consistent with my earlier comments, 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. This total distribution equates to a 12% yield on our March 31st NAV of $23.37 per share. And with that, I'll turn the call over to Dan.

Thanks Michael. As we discussed on our fourth quarter earnings call, our view at the time was that increases in M&A activity this year would take longer to materialize due to geopolitical uncertainty. That view still holds true even more so now. As expected, the more liquid markets are bearing the brunt of the current volatility with wider credit spreads and uneven trading. Over the last month, spreads have also begun to widen on certain private direct lending deals due to the market volatility. As Michael noted earlier, we have been in close contact with sponsors and management teams and have run extensive analyses in an effort to stay up-to-date with the latest tariff policies and impacted countries. Additionally, as we originate new investments, we are evaluating each deal for potential risks related to tariffs or DOGE. As a result, we believe we have a good understanding of the first-order potential tariff impacts on the portfolio. However, we remain cautious as second or third-order impacts are still unknown, and depending on the ultimate tariff resolution, may take real-time to play out. Based on our current portfolio analysis, we believe approximately 8% of our portfolio could have direct exposure to tariff policies, should they become permanent. While DOGE exposure is more difficult to quantify, we currently estimate low to mid-single-digit DOGE exposure. The industry most impacted by potential tariff policies includes our consumer durables, consumer discretionary, consumer staples, and industrials, which falls within our capital goods classification. The industries most impacted are software and services, healthcare equipment and services, and aerospace and defense, which also falls within our capital goods classification. I would clarify that this information is top down in nature, and therefore, it remains too early to attempt to specifically quantify what impacts these items could have on individual portfolio companies from an EBITDA and free cash flow perspective. The good news is our typical portfolio company tends to be large and a market share leader and therefore, maintain highly diversified customer and supplier relationships. As a result, these companies typically enjoy more pricing power, which allows them to pass through price increases compared to smaller companies. Since identifying potential tariff-related headwinds in November, we have taken a proactive approach to managing exposure across the portfolio. Notably, during the quarter, we achieved a full exit on two portfolio companies that we believe exhibited more risk from a tariff and cycle standpoint. The first example, 360 Group is a company whose products are primarily sourced from China. The second example, Lakeview Farms, is a food products business, subject to consumer purchasing behavior. We are pleased with both outcomes as the investments were repaid at par. Another bright spot is our asset-based finance portfolio, which we view as particularly compelling during periods like this. Traditional secured and unsecured corporate credit investing hinges largely on future earnings forecasts and cash flow assumptions, which are obviously vulnerable to macro shifts. ABS investments, by contrast, are anchored in contractual structures tied directly to tangible collateral. We would note, however, that we remain mindful about our consumer-related exposure in our ABS portfolio, though we are focused almost entirely on secured risk or high FICO score prime borrowers. Overall, we continue to be bullish on ABS's positive impact on our portfolio and the diversification benefits it provides. Turning to FSK's investment activity. During the first quarter, we originated approximately $2 billion of new investments. Approximately 45% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $1.1 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $881 million. New originations consisted of approximately 63% in first lien loans, 1% in other senior secured debt, 19% in asset-based finance, 15% in capital costs to the joint venture, and 2% in equity and other investments. Our new direct lending investment commitments added a weighted average EBITDA of approximately $257 million, 5.5 times leverage through our security and a weighted average coupon of approximately SOFR plus 505 basis points. Though the first quarter of the year has traditionally resulted in seasonally slower new originations, this has been our strongest origination quarter from both a total and net deployment perspective since 2022. Despite the sluggishness of the US M&A market, during the first quarter, we experienced strong origination activity driven by our expansive deal funnel, which continues to generate robust diversified deal flow. Our private credit team maintained strong sponsor relationships on a global basis, and our large base of incumbent borrowers remains a consistent and valuable source of repeat opportunities. We remain focused on the upper middle market, or companies with $50 million to $150 million of EBITDA, which tend to have more levers they can pull during challenging periods. In an environment like this, we're acutely focused on investing in high-quality companies with strong defensive positions. The weighted average EBITDA of our portfolio companies was $255 million, and the median EBITDA was $120 million as of March 31, 2025. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 10% across companies in which we have invested since April of 2018. Interest coverage levels remained steady with the median first-quarter coverage at 1.7 times, unchanged quarter-over-quarter. At the end of the first quarter, non-accruals represented 3.5% of our portfolio on a cost basis and 2.1% of our portfolio on a fair value basis. This compares to 3.7% of our portfolio on a cost basis and 2.2% of our portfolio on a fair value basis as of December 31, 2024. We also believe it is helpful to provide the market with information based on FSK assets originated by KKR credit. Non-accruals related to the 90% of our total portfolio, which has been originated by KKR Credit and the FS KKR Adviser were 2% on a cost basis and 1% on a fair value basis as of the end of the first quarter. This compares to 2% on a cost basis and 0.8% on a fair value basis as of the end of the fourth quarter. During the first quarter, two investments were added to non-accrual status and three investments were removed. Our first lien senior secured position in New Era was added to non-accrual, contributing $29 million of cost and $23 million of fair value. Additionally, our second lien investment in Cubic Corp. was added to non-accrual, contributing $43 million of cost and $34 million of fair value. Our position in Alacrity Solutions was restructured during the quarter, which resulted in a $22 million of cost and $16 million of fair value being removed from non-accrual. Our position in Accuride was also restructured during the quarter, which resulted in $8 million of cost and $2 million of fair value being removed from non-accrual. Our remaining subordinated debt position in Miami Beach Medical was converted to equity in conjunction with the company's wind down, removing $18 million of cost and $12 million of fair value from non-accrual. Also during the quarter, JW Aluminum refinanced the $300 million high-yield bond with a new $350 million offering. This resulted in a $77 million par paydown on our senior secured bond and a $21 million paydown on our preferred equity position. Given this investment has been on non-accrual since Q4 2023, we are pleased with this outcome. Performance at JWA has been strong, and the company is a beneficiary of the recent tariff news. In terms of other portfolio updates, Production Resource Group and 4840 were our two largest markdowns during the first quarter. PRG continues to be impacted by certain tour cancellations and margin pressure, and 4840 has been impacted by labor cost and excess inventory. Separately, we're pleased to note that the sale of Maverick Natural Resources, a legacy position, which has been in the portfolio since 2014, has closed. As a result, FSK received $18 million in cash and $25 million of diversified energy company common stock. With that, I'll turn the call over to Steve.

Thanks, Dan. As of March 31, 2025, our investment portfolio had a fair value of $14.1 billion, consisting of 224 portfolio companies. At the end of the first quarter, our 10 largest portfolio companies represented 20% of the fair value of our portfolio compared to 21% as of the end of the fourth quarter. We continue to focus on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 63% senior secured debt as of March 31. In addition, our joint venture represented 11.8% 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, first lien loans total approximately 67% of our total portfolio, and senior secured investments total approximately 73% of our portfolio as of March 31. The weighted average yield on accruing debt investments was 10.8% as of March 31, a decrease of 20 basis points compared to 11% as of December 31. The decrease primarily is attributable to incremental spread compression on new investments and the decline in base rates. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Our total investment income decreased by $7 million quarter-over-quarter to $400 million, primarily due to two fewer days in the first quarter compared with the fourth quarter, the paydown of higher-yielding investments, and lower spreads on new originations. The primary components of our total investment income during the quarter were as follows: Total interest income was $302 million, a decrease of $22 million quarter-over-quarter; dividend and fee income totaled $98 million, an increase of $15 million quarter-over-quarter. Our total dividend and fee income during the quarter is summarized as follows: $46 million of recurring dividend income from our joint venture; other dividends from various portfolio companies totaling approximately $35 million during the quarter; and fee income totaling approximately $17 million during the quarter. Our interest expense totaled $113 million, a decrease of $3 million quarter-over-quarter. Our weighted average cost of debt was 5.5% as of March 31. Management fees totaled $52 million, a decrease of $1 million quarter-over-quarter, and incentive fees totaled $39 million, an increase of $4 million quarter-over-quarter. Other expenses totaled $9 million during the first quarter, unchanged quarter-over-quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending 4Q 2024 net asset value per share of $23.64 was increased by GAAP net investment income of $0.67 per share and was decreased by $0.24 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 total distribution paid during the quarter. The sum of these activities results in our March 31, 2025, net asset value per share of $23.37. From a forward-looking guidance perspective, we acknowledge the many factors currently affecting the US economy. As a result, while we continue to provide guidance in an effort to be as transparent as possible with the investment community, there is the potential for greater variance within our guidance categories than in prior periods. With that said, we expect second quarter 2025 GAAP net investment income to approximate $0.64 per share, and we expect our adjusted net investment income to approximate $0.62 per share. Detailed second quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $302 million. We expect recurring dividend income associated with our joint venture to approximate $56 million. We expect other fee and dividend income to approximate $43 million during the second quarter. From an expense standpoint, we expect management fees to approximate $53 million. We expect incentive fees to approximate $36 million. We expect interest expense to approximate $124 million, and we expect other G&A expenses to approximate $10 million. And as Michael indicated during his remarks, our 2025 distribution guidance remains in place as we currently expect our distributions during the year will total $2.80 per share comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions. Turning to our capital structure. In March, we closed on our second middle market CLO, raising $380 million of low-cost secured debt priced at a weighted average rate of SOFR plus 158 basis points. We are pleased with this financing given it is match-funded with no mark-to-market at an attractive rate. Additionally, in March, we amended our Morgan Stanley funding facility, where we reduced the spread from 2.7% to 1.95% and extended the maturity date by two years to November 2028. As of March 31, 2025, our gross and net debt to equity levels were 122% and 114%, respectively, compared to 112% and 104% at December 31, 2024. At March 31, our available liquidity was $3.2 billion, and approximately 54% of our drawn balance sheet and 41% 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, while the broader environment remains uncertain, we believe that FSK has taken and is continuing to take proactive steps to deliver for our shareholders. Many private credit providers have navigated volatile markets extremely well in the past and we believe FSK is well-positioned to navigate this period of uncertainty as well. Private credit thrives in part because of its consistent ability to generate a steady stream of current income for its investors. We are confident in our business strategy and believe both the breadth of the KKR Credit platform and our strong balance sheet will allow us to continue to succeed going forward. And with that, operator, we'd like to open the line for questions.

Your first question comes from the line of John Hecht of Jefferies. John, please go ahead.

Good morning, guys. Thanks very much for taking my questions. First one is just, I guess, kind of, I guess, from a modeling perspective, the timing of deployments last quarter? And then also, is the full effect of rate changes in the run rate from last quarter? Or should we expect some more adjustments coming into this quarter from an asset yield perspective?

Good morning, John. Perhaps Steven can provide some insights on the modeling points. We were pleased with the origination number. I want to highlight a couple of things. In our last call, we mentioned that there was some carryover slippage from the previous quarter regarding deals we expected to finalize in December. On the positive side, we are also satisfied with our diversification of deployment. We're growing the joint venture, which has been a key focus for us. We continue to invest in our asset-based finance activities, and we're also looking to increase our non-US exposure. These three areas probably accounted for about half of the total $2 billion. From a modeling perspective, I believe it's quite balanced when considering the inflows and outflows. Steven, would you like to add anything?

Yes, John, it's most of the decline in rates has flowed through now as of the end of the first quarter. But as you know from the comments on the call, we went down from 11% to 10.8% on a weighted average yield basis. So that flow-through in the portfolio will affect us, and that's effectively why in the guidance that we gave, our interest income is the recurring interest income is effectively flat at around $300 million for the first quarter and then also guidance for the second quarter.

Okay. And then Dan, you did give some color around the fact that some of the high activity in 1Q was kind of a catch-up. But I'm wondering when you think about your pipeline now in activity overall within your own platform, it's clear that you guys had a much more active first quarter than, I guess, the overall market. So I'm wondering, are there certain categories of assets or characteristics of transactions that you guys as FSK and attached to KKR are maybe gaining market share? Or is there anything that you could talk about that's a reflection of the competitive environment that's giving you guys incremental opportunities?

Yes, John made a few points worth noting. I appreciate that we are sourcing from various avenues, providing FSK with access to all our private credit activities. This includes some deals from Europe and the work in our asset-based finance sector. Regarding overall activity levels, we entered the year expecting it to be very active and busy in 2025, but that momentum has begun to slow down. This is why we mentioned in February that we were pushing our M&A thesis out a little. There was definitely a slowdown in Q2, as it seems everyone hit a pause button after April 2. However, I believe we will continue to benefit from our substantial existing portfolio and our diverse origination channels. Yet, more certainty in the market will be necessary before we see a return to regular transactions.

Okay. Well, appreciate the color. Thank you.

Thank you.

Excuse me. One moment for your next question. The next question comes from the line of Casey Alexander of Compass Point Research and Trading. Casey, please go ahead.

Hi. Good morning. Thank you for taking my question. Dan, this is for you. KKR has a really highly regarded macro group. And I want to take this opportunity to ask how does the macro group, which is feeding you information, see the odds of recession changing with what's happening now? And how does the macro group see it impacting private credit going forward?

Good morning. Casey, I believe your comment will resonate well with Henry McVey and his team. We are fortunate to be part of KKR, which gives us access to valuable resources. Henry is nearby, and we have regular discussions with his team and the broader private credit group, allowing us to share insights about our portfolio and hear their perspectives. This ongoing dialogue is beneficial. While I can't fully represent his views, I can say that the initial indicators regarding the economy and corporate health were relatively positive, although consumer uncertainty remains a concern. Recent tariff numbers exceeded expectations, and there seems to be a consensus that the likelihood of a recession is probably greater than not, though it may be mild or technical. We are focusing more on potential tail risks and how situations might worsen. We rely heavily on that team for insights, and while there is some uncertainty in the markets, I noticed headlines this morning about a significant trade deal being signed, which we need to monitor closely.

My second question is, you talked about the weighted average yield came down to 10.8%. When I look at the new money yields of $950 million, is it reasonable to expect some additional yield compression as the portfolio churns because it's very likely that your repays are significantly yielding materially higher than where your new money yields are?

Yes, Casey, that's a valid point. I believe the figure is likely closer to $9.8 million or around $10 million, especially when considering some ideas and potential fee income. Our focus is on managing risk; we aim to maximize our returns on each individual loan but are also willing to walk away from loans if they don't make sense. I'm pleased we experienced some growth in the joint venture, which we've discussed for a while. I do believe the M&A market will eventually return, although we might have reached a point where predicting that is difficult. On a longer timeline, we can expect additional fee income to be generated, but it’s possible that downward pressure on yields will continue.

Just slipping in one last one. We're hearing about loans spilling over from the broadly syndicated market into the private credit market, wouldn't those generally be associated with somewhat lower new origination yields as compared to stuff that just normally sits in private credit or am I mistaken about that?

That's probably a fair point. I mean, you could probably argue there's a pretty high correlation between quality and size of business and where the spread might land. I think almost as a tailwind for private credit from the COVID activity. I do think more and more companies and/or sponsors have been willing to use it as a lending tool. I think people have gotten more comfortable with that. I think, historically, I feel like people used direct lending or private credit for certainty of execution. I do think that's extended to including really wanting to know your lender; we've always had a thesis that the loan market and the bond market will continue to exist. I do continue, though, to see growth, kind of, hear more companies accessing it. And then in times of volatility, hopefully able to step in and lend against some attractive companies. We did make a comment in our prepared remarks that we saw spreads widen a bit, probably not as much as we would have liked to have seen, and if we're honest about that. But I'm not sure the volatility is done. So we're going to continue to focus on providing solutions if the market does struggle on the syndicated fact.

All right. Thank you for taking my questions. I appreciate.

Thanks. Have a good day.

One moment for your next question. The next question comes from the line of Ken Lee of RBC Capital Markets. Ken, please go ahead.

Hey, good morning. Thanks for taking my question. Just given the views for macro, continued macro uncertainty there, any updated thoughts on where preferred leverage ranges could go over the near-term there? Thanks.

Good morning, Ken. I think we've built our target range on leverage thinking about all markets, and we've always talked about one time to 1.25 times, ended the quarter at 114, ended the quarter with north of $3 billion of available liquidity. So I don't think there's really a change in range there. I think as important as the range is, I think your activity on the just liability side, generally. We were happy with the execution on the CLO. We think it's another diversified funding source for companies like this. I think we were happy with what we've kind of commented on the Morgan Stanley sort of facility. I think the management team on the FSK side and a lot of folks from the broader deal teams who spent real time on the financing facility. So, done a really nice job, and I think we feel quite good for our liability perspective today.

Great. Very helpful there. And then one follow-up, if I may, just on the asset-based financing side, the ABF portfolio. I think in the prepared remarks, you mentioned that there could be some retail-oriented risks there. Maybe you could just remind us again which particular investments you think that this could center on? And maybe just remind us again some of the downside protection in a lot of these ABF investments there? Thanks.

Yes. No. And I think we wanted to make the point fair during our prepared remarks. We are still very excited about the broader opportunity in the ABF sort of space. I did call out specifically, we're just mindful about the consumer risk we do have. That is a small percentage of FSK. It's roughly 3% of total size. I think when we have been active in the consumer space, we've generally targeted either secured risk, higher FICOs, or forward-type risks or what I call kind of either loans to homeowners or other sort of short duration loans. Maybe just two examples, we've talked about on prior calls; one would be PayPal, the European deal, but that is a portfolio that effectively turns every 90 days. So, I think that's a good risk mitigant to it. And then we talked about Discover in the past, which is a private portfolio, but it's mainly parent co-signers. I think the average FICO score there is like 760, right? So, I think the starting point of the consumer makes us kind of feel good that even with the tariff noise, even with other things, they're going to continue to perform. I think we're worried a little bit more about the non-prime or the subprime consumer because I think, by definition, in my mind, tariffs will put additional sort of cost into the system that somebody has to pay for.

Great. Very helpful there. Thanks again.

Thanks. Have a good day.

The next question comes from the line of Finian O'Shea of Wells Fargo Securities. Finian, please go ahead.

Hey everyone. Good morning. Thanks. Steven, I think the guys for non-JV and other fee was $43 million. Does that imply sort of continued strength in the ABF group or other fee income? Thanks.

In the first quarter, we experienced higher ABF dividends and distributions. This business can fluctuate from quarter to quarter, and we expect to be a bit lighter in guidance for the second quarter. However, this is nearly offset by an increase of about $1 million in dividends from the joint venture, which continues to grow as Dan noted.

So is it just the fee income that's expected to increase?

No, fee income is down, I think, $3 million quarter-over-quarter. Maybe Fin, we'll make sure we can follow up with you after to kind of tie that out because I want to make sure you have the right numbers.

Sure. Dan, regarding ABF and its yields, it seems most of the new ABF is seeing senior debt spreads below 500, with the exception of Open Door. Is this trend related to your senior high-grade style group, or is this how things are progressing for you overall in ABF?

Yeah, Fin, what you're noticing is related to the receivables and inventory transactions we've been involved with. The market has mentioned an increase in asset-based lending, which fits within our broader asset-based finance category. This type of lending can be senior secured, and it often yields better overall returns compared to direct lending, especially since transactions typically exceed 500 and involve substantial upfront and exit fees. I would distinguish this from traditional asset-based finance deals such as those with Discover or PayPal, as well as our aviation leasing activities, which tend to have higher returns. The high-grade business you mentioned is a significant focus for us and keeps our asset-based finance team engaged, in addition to pursuing regular or opportunistic deals. However, those high-grade transactions are generally investment-grade products that do not fall under the FSK portfolio. You are indeed picking up on the receivables and inventory aspects.

Very helpful. Thank you so much.

Have a good day.

One moment for your next question. The next question comes from the line of Robert Dodd of Raymond James. Robert, please go ahead.

Thank you. You got it right the second time. Hi guys. Two questions, I'm going to talk about on both sides of my mouth here. One on JW Aluminum, and to your point, it should be a beneficiary. I mean, locally sourced scrap domestic producer et cetera, paying down debt, the bond investors on the refinance, I obviously think they're going to get repaid. The PIK preferred is still on non-accrual, but there's a lot of positive trends there. I mean, how close do you think that asset, it's a pretty big one, obviously, is to that preferred going back on accrual given all the positive trends and the fact that, obviously, you just got partially repaid at par on that tranche, which may indicate it's collectible at par and maybe worth taking into income?

I appreciate the question. The deal team has performed admirably over the years in a challenging industry. While we are somewhat of a minority player, the overall ownership group's business has been well coordinated. We are pleased to have completed that bond deal, allowing us to take some money off the table in the lower part of the capital structure. Earnings have shown strength, and there are definitely positive factors at play that benefit us. We're optimistic about this, but we will be cautious and conservative when considering putting something back on accrual. Time will tell, and we intend to remain active with the asset to see if we can leverage the current market conditions, which I believe are favorable for the business.

Got it. Congratulations on the work done on that asset. Regarding my second question, I'm looking at the chart on Page 10 in the presentation. It shows that over the last two quarters, the median leverage in the portfolio has decreased by four-tenths. Meanwhile, during the same period, the average borrower cost, or the income yield to you, has dropped by about 70 basis points. Although the interest coverage has slightly improved, it hasn't changed much. It seems there's a divergence between the trends in interest coverage and the portfolio yield as well as the leverage in the portfolio. Could you explain what is happening there and why interest coverage is improving at a faster pace even though portfolio leverage and rates are declining?

Yes. I will refer to Page 10. I believe there might be a slight delay effect at play. While I can see the trends you're mentioning, it seems we are discussing very small figures that could be affected by rounding. We'll conduct some further analysis on our end and follow up. However, my impression is that there is likely a stronger connection.

It's primarily the lag, Robert. When interest rates were rising, there were many questions on BDC calls, including ours, about how people calculate interest coverage and similar metrics. Is it based on trailing data, forward data, or a mix? So, the answer to your question is simply that there is a bit of a lag.

Okay. Got it. Thank you.

Thank you. One moment for your next question. The next question comes from the line of Maxwell Fritscher of Truist. Maxwell, please go ahead.

Thank you. I am on for Mark Hughes. Given the assumption of economic uncertainty persisting through 2025 in a possible recession case, do you anticipate any material difference in deal activity in the upper middle market or the upper market that you're operating in versus maybe the core middle and lower middle market?

Yes, good morning. We're having a bit of trouble hearing you, but I believe I understood your question. You could argue that some of the activity in larger companies may be less pronounced as it likely depends on a more active M&A market, including transactions between sponsors. That said, the advantage we have, along with many other large players, is our established position in the market.

Thank you. I think I'm having a little technical difficulties on my side, so I'll leave it there. Appreciate the answers.

Thank you. I think I'm having a little technical difficulties on my side, so I'll leave it there. Appreciate the answers.

Actually, I am showing no further questions. So I would now like to turn it back over to Steven for closing remarks.

Thank you everyone, thank you for taking the time today and your questions. Wishing everybody a good summer and look forward talking to you again in August. If there are any follow-up questions, please don’t hesitate to reach out to me. So thanks and have a good day.