FS KKR Capital Corp Q2 FY2025 Earnings Call

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp.'s Second Quarter 2025 Earnings Conference Call. Please note that this conference is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Second Quarter 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 June 30, 2025. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events & 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 6, 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 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 Second Quarter 2025 Earnings Conference Call. During the second quarter, FSK generated net investment income totaling $0.62 per share and adjusted net investment income totaling $0.60 per share as compared to our public guidance of approximately $0.64 and $0.62 per share, respectively. Our net asset value per share declined 6.2% from $23.37 to $21.93 during the quarter. Our operating results this quarter primarily were attributable to company-specific situations impacting four portfolio companies. Dan will provide significant detail on each company shortly. Our new investment activity has remained strong despite the still somewhat slow M&A environment. During the first half of 2025, the investment team originated $3.4 billion of investments, of which $1.4 billion were originated during the second quarter. We continue to find compelling ABF opportunities, and this segment of our portfolio remains a strong performer while also providing enhanced portfolio diversification. Additionally, we have continued to scale our Credit Opportunities Partners Joint Venture, which expands our investment funnel and delivers a consistent stream of recurring dividend income on both a quarterly and annual basis. On the right side of the balance sheet, we continue to maintain strong liquidity to support our funding needs, ending the quarter with $3.1 billion of availability across cash, unsettled trades and undrawn credit facilities. Our 2025 distribution guidance remains in place, and we continue to expect our distributions during the full year will total $2.80 per share, comprised of $2.56 per share of base distributions and $0.24 per share of supplemental distributions. Our Board has declared a third 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 previously have stated, our 2025 distribution strategy was designed to provide shareholders with additional distributions from the spillover income that we have accumulated. As we approach our target spillover balance range, we expect our 2026 distribution strategy will be based on key factors, including prevailing interest rates, our overall portfolio yield, the spread environment with respect to new investments and the weighted average cost of our liability structure. In keeping with our long-held view of providing as much transparency as possible to the market, we plan to provide additional details regarding our 2026 dividend strategy on our third quarter earnings call. And with that, I'll turn the call over to Dan.

Thanks, Michael. I'll keep my macro and industry remarks brief this quarter and instead focus my time discussing as many specifics as we can concerning the four companies Michael referenced. In recent months, geopolitical tensions, regulatory changes, tariffs, and market volatility have combined to increase uncertainty about the timing of the resurgence of M&A transactions. While transactions have been getting done, global M&A volume is down close to 10% year-over-year. Despite these overall declines, our team evaluated more opportunities in Q2 than in any of the previous eight quarters. This continued increase in deals screened, together with the recent legislative developments, supports our cautious optimism that conditions are aligned for an increase in M&A activity later this year and into next year. During our first quarter earnings call, we estimated that approximately 8% of our portfolio could have direct exposure to tariffs. Since then, the landscape has continued to evolve with changes to both the countries impacted and specific tariffs. We have remained closely engaged with our portfolio companies and their sponsors, actively updating our analysis to reflect the latest developments. Based on this updated analysis, we estimate that our direct tariff exposure has declined and now falls within the low to mid-single-digit range. The companies that are either affected or potentially will be affected have been proactive in mitigating potential impacts, including exploring alternative supply chain strategies and passing through costs where possible. While our portfolio and the private credit market in general continue to demonstrate stability, we experienced an increase in non-accruals this quarter due to specific situations with four companies. Three of these companies are larger investments in our portfolio, which accounted for the negative move in our net asset value during the quarter. Comments regarding the four companies are as follows: Our first lien, last-out positions in Production Resource Group, or PRG, were added to non-accrual, contributing $198 million of cost and $122 million of fair value collectively. PRG is a legacy investment, which was initially restructured in 2020. Industry-wide stress and heightened competition have led to significant pricing erosion, and as such, the company's performance has significantly underperformed expectations in 2025. As a result, we reduced the value of our investment and placed our first lien, last-out securities on non-accrual. We are working toward a full restructuring of the business, and we'll provide updates as they become available. Our first lien senior secured positions in 48forty were also added to non-accrual during the quarter, contributing $188 million of cost and $91 million of fair value collectively. 48forty is one of the nation's largest wood pallet manufacturers and recyclers. The company has been negatively impacted by post-COVID normalization trends such as inventory de-stocking. While the company has continued to make interest payments, we made the decision to place the investment on non-accrual status as we work through next steps with the company and the sponsor. FSK's second-out first lien loan to Kellermeyer Bergensons Services, or KBS, was added to non-accrual, contributing $94 million of cost and $48 million of fair value. KBS is a large provider of janitorial and cleaning services to nationwide retailers and offices. The company completed a consensual restructuring in early 2024 and since then has successfully focused on new business development, value creation, operational improvements, and cost reductions. The company's performance has stabilized, and we have received indications of interest in purchasing the business from strategic third parties. This process is evolving, and we will update the market as we learn more. Lastly, our first lien and second lien investments in Worldwise were added to non-accrual, contributing $20 million of costs and $11 million of fair value collectively. The company is a pet products provider, which was restructured during the fourth quarter of 2024. In connection with the restructuring, the sponsor contributed $42 million of equity, resulting in a $30 million debt paydown at par across KKR funds. Following the restructuring, the business has faced headwinds from tariffs and softer consumer demand. We are actively implementing strategic initiatives aimed at stabilizing operations and realizing meaningful cost efficiencies. While each of these situations is unique to the issuer, our workout team remains actively engaged and is working closely with our advisers and management teams to effectuate the best outcomes possible. During the second quarter, two companies were removed from non-accrual status. First, our first lien investment in Bowery Farming that had previously been placed on non-accrual was written off. Second, a legacy investment, JW Aluminum, was amended during the quarter into a perpetual preferred equity position. At the same time, the company's performance has improved in recent periods to the point that earlier this year, we received a return of $98 million of capital as the company successfully refinanced and upsized a bond issuance. Turning to our investment activity, during the second quarter, we originated approximately $1.4 billion of new investments. Approximately 72% of our investments were focused on add-on financing 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 $311 million. New originations consisted of approximately 83% in first lien loans, 5% in subordinated debt, and 12% in asset-based finance investments. Our new direct lending investment commitments had a weighted average EBITDA of approximately $251 million, 5.8x leverage through our security and a weighted average coupon of approximately SOFR plus 520 basis points. We continue to believe in the strength of our investment strategy, which primarily focuses on upper middle market companies with EBITDA in the $50 million to $150 million range across a diverse set of industries and sectors. As of June 30, the weighted average EBITDA of our portfolio company was $252 million and the median EBITDA was $114 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 8% across companies in which we have been invested since April of 2018. Interest coverage levels remain healthy with the median second quarter coverage at 1.8x. As of the end of the second quarter, non-accruals represented 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis. This compares to 3.5% of our portfolio on a cost basis and 2.1% of our portfolio on a fair value basis as of March 31. We believe it is helpful to provide the market with information based on the FSK assets originated by KKR Credit. Non-accruals relating to 91% of our total portfolio, which has been originated by KKR Credit and the FS/KKR Advisor, were 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter. This compares to 2% on a cost basis and 1% on a fair value basis as of the end of the first quarter. And with that, I'll turn the call over to Steven.

Thanks, Dan. As of June 30, 2025, FSK's investment portfolio had a fair value of $13.6 billion, consisting of 218 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio compared to 20% as of the end of the first quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 59% first lien loans and 64% senior secured debt as of June 30. In addition, our joint venture represented approximately 12% 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 totaled approximately 68% of our total portfolio and senior secured investments totaled approximately 73% of our portfolio as of June 30. The weighted average yield on accruing debt investments was 10.6% as of June 30, a decrease of 20 basis points compared to 10.8% as of March 31. As a reminder, the calculation of the weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Turning to our quarterly operating results, our total investment income was $398 million for the second quarter, which is a decrease of $2 million compared to the first quarter. The quarter-over-quarter change in total income was primarily driven by the decline in interest income as a result of investments that were placed on non-accrual during the quarter, coupled with lower fee income due to a more normalized origination quarter. The primary components of our total investment income during the second quarter were as follows: total interest income was $298 million, a decrease of $4 million quarter-over-quarter; dividend and fee income totaled $100 million, an increase of $2 million quarter-over-quarter. Our total dividend and fee income during the quarter is summarized as follows: $59 million of dividend income from our joint venture; other dividends from various portfolio companies totaling approximately $32 million during the quarter; and fee income totaling approximately $9 million during the quarter. Our total expenses were $225 million during the second quarter, which is an increase of $12 million compared to the first quarter. The quarter-over-quarter change in total expenses was primarily driven by an increase in interest expense due to higher leverage utilization during the quarter to grow our joint venture. The primary components of our total expenses were as follows: our interest expense totaled $125 million, an increase of $12 million quarter-over-quarter; our weighted average cost of debt was 5.3% as of June 30; management fees totaled $53 million, an increase of $1 million quarter-over-quarter; incentive fees totaled $36 million, a decrease of $3 million quarter-over-quarter; other expenses totaled $11 million, an increase 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 starting net asset value per share was $23.37; GAAP net investment income increased NAV by $0.62 per share, while net realized and unrealized losses decreased our net asset value by $1.36 per share; our NAV per share was further reduced by the $0.70 per share total quarterly distribution paid during the quarter, with some of these activities resulting in our June 30, 2025 net asset value per share of $21.93. From a forward-looking guidance perspective, we expect third quarter 2025 GAAP net investment income to approximate $0.58 per share, and we expect our adjusted net investment income to approximate $0.57 per share. The detailed components of our third quarter guidance are as follows: our recurring interest income on a GAAP basis is expected to approximate $289 million; we expect recurring dividend income associated with our joint venture to approximate $55 million; we expect fee and other dividend income to approximate $30 million. The decrease quarter-over-quarter is due to lower ABF dividends projected in the third quarter. From an expense standpoint, we expect our management fees to approximate $51 million. We expect incentive fees to approximate $34 million. We expect our interest expense to approximate $116 million, and we expect other G&A expenses to approximate $10 million. Turning to our capital structure. In June, we closed on a new 5-year, $400 million bilateral lending facility with CIBC priced at SOFR plus 175 basis points, thereby further extending our maturity ladder. Additionally, after the quarter end, 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 from $4.6 billion to $4.7 billion; an extension of the maturity date to the third quarter of 2030; and a reduction in spread by 10 basis points. As of June 30, our gross and net debt-to-equity levels were 131% and 120%, respectively, as compared to 122% and 114% as of March 31. Our leverage remains within our target range of 1 to 1.25x net debt to equity. At the end of the second quarter, our available liquidity was $3.1 billion and approximately 54% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt. Our next unsecured debt maturity occurs in the first quarter of 2026 and represents approximately 10% of our committed capital structure. With that, I'll turn the call back to Michael for a few closing comments before we open the line for questions.

Thanks, Steven. As we look toward the second half of the year, we acknowledge the significant work currently taking place with regard to the four companies Dan mentioned. Since its establishment in 2018, investments originated by FS/KKR Advisor have consistently performed meaningfully better than the BDC's industry's long-term average non-accrual rate of 3.7%. We look forward to bringing this quarter's non-accrual rate more in line with this and ultimately below this industry average. We are confident in our team and in our ability to navigate periods of stress, which inevitably occur from time to time. As always, we appreciate your participation on the call today and for your interest in FSK. Operator, we'd like to open the line for questions.

Our first question today comes from Arren Cyganovich with Trust Securities.

There's been a lot of discussion about the investing environment picking up in the second half and folks are quite busy in a typically slow August period. What are you seeing on your end? And what are you thinking about in terms of originations in the second half?

Yes. Arren, it's Dan. Thanks for the question. I think just two things I want to start with. First, clearly, this is a bit of a harder quarter for us, right? So we know we have some work to do as we go forward, and I want to make sure it's clean or clear the team is focused on that. And before I get to your question, just second, I mean, I did want to acknowledge the senseless and tragic events in New York City last week. All the businesses, the people, and the families impacted by these events are in our thoughts and prayers. I think when we get to the investing environment, I think the way you put it, it's well said. I mean people are busier now, I think, than they've been in some time. Just from a pure deal count perspective, we've looked at more deals in Q2 than we have in, I think, the prior eight quarters. That was off of a very kind of ugly April on the other side of Liberation Day. So I think that the key data points hold, right? There is significant pressure from LPs to get cash back from their private equity GPs. We continue to hear that. We know there's a lot of dry powder in kind of newer vintage private equity funds that I think is looking to deploy. I think we've probably seen more activity in names where they don't have to talk about tariffs or sort of worry about tariffs, but definitely a certain amount of green shoots. That said, I am expecting still bouts of volatility to sort of play it through. But again, busier this past quarter than we've been for a while.

Great. That's helpful. And then I appreciate all of the details about the four companies that you have on non-accrual and information around that. Beyond those four companies in terms of like a watch list, do you have any others that are bubbling up to the top? Or maybe you could just talk a little bit about the portfolio performance at a portfolio company level for the rest of the portfolio.

Yes, happy to address that. I believe we've tried to share as much detail as possible, not only during this call but also in previous ones. Each issue we discussed is somewhat unique to the companies involved, although KBS and 48forty have experienced notable over-earning due to COVID, and these companies are now unleveraged. Regarding the watch list, you can refer to the risk ratings we publish in the QAR bucket three and four, which represent about seven percent of the portfolio. A couple of names we've mentioned before are Global Jet and JWA, both of which have shown positive momentum. On the flip side, we have some concerns. The high interest rate environment is challenging for companies, particularly regarding government contracts and services. I want to emphasize that we are being cautious and perhaps more negative than others about certain matters. However, the consumer sector has performed well, as seen in the consumer businesses we lend to and the consumer portfolios we hold, which are mostly concentrated in higher FICO scores. It's important to remain mindful as we move further into the second half of the year and into 2026.

Our next question comes from Finian O'Shea with Wells Fargo Securities.

We wanted to ask first about the COP JV. Steven, I think your guide for 3Q of $55 million, that's a touch lower than what you had guided for this Q, which was $56 million. I know it came in well above that, but you're guiding it down a little bit despite a bit of a ramp there. So seeing what kind of earnings situation and also credit situation, how that has compared to the mothership BDC? And then sort of finally, what I'm getting at is, is the JV in a similar place where as we go into '26 and it maybe pays down spillover perhaps, is that going to also be a lower reset payout?

Fin, it's Steven. I'll address the first part of your question and then pass the second part to Dan. The change in the expected dividend from COP for the third quarter compared to what we received in the second quarter is primarily due to the timing of certain ABF dividends. We received slightly higher dividends in the second quarter, so we can expect lower dividends in the third quarter. As you and others are aware, dividend distributions in the ABF portfolio can be somewhat inconsistent and are not evenly distributed throughout the year. This situation is quite typical. We anticipate that the joint venture will, over time, reach a level in the mid-50s or even slightly better as those investments mature within that portfolio.

Yes, just to add to those points, I think you have a solid understanding of the asset-based finance space. To clarify, the timing of those deals was more relevant than performance issues. We aim to continue increasing this within the maximum limit we discussed, which is about 15%. Additionally, while I don't have the exact numbers right now, we can revisit this later; I anticipate that the joint venture has a higher percentage of floating rate debt compared to fixed rate than the parent company does.

Okay. That's helpful. And next question, so portfolio conditions today given this quarter probably mean that you're below book for a little while. Seeing your view on the buyback and something you could put in place to potentially take advantage of that at a point where, say, the stock becomes cheap and you become confident in portfolio stability.

Yes. I'll take that, Fin. I think a couple of points there, right? I mean we have historically been active in buybacks, as you know. I do think we'll have to balance that with what we see as the market opportunity and where we are vis-à-vis a target leverage ratio. I think the target leverage ratio is kind of important to us. We're kind of within our sort of band now. But my guess is we're probably a little bit sort of above maybe recent historical averages. So I think we have to just factor all those pieces together as we plan forward.

The next question is from Sean-Paul Adams with B. Riley Securities.

On the new non-accruals, it seems like they've largely been legacy troubled assets that had proactive restructuring, however, continue to have further subsequent headwinds. When you're looking over the past troubled assets that have undergone some of that proactive intervention, how many are you currently monitoring for situations like this? Out of Worldwise, Kellermeyer and Alacrity, it seemed that there was a significant change in quarter-over-quarter marks. So just if you could provide any more color on that.

Yes. No, I'm happy to do that. And I think just for the sake of clarity, you are correct in the sense that KBS has been, for lack of a better word, going on for a period of time, right? PRG would be the same. PRG had an initial restructuring in 2020, but that was in the depth of COVID. It's a business that focuses on Broadway and sort of entertainment. So obviously, revenue went to zero. And quite frankly, it was probably over-levered going into that. Just to the KBS, 48forty, and Worldwise were regular way sort of KKR originations. When we do what we call something legacy would have been kind of prior adviser that would have been PRG. I think our workout team has done a good job. We've got a strong group of people from the leadership of that team to the various folks along with skill sets of financial modeling/financial restructuring skills, bankruptcy lawyers, even down to some PE experience to where we have to sort of run these. I do think, in some ways, that workout term is probably a little bit of a misnomer, right? That team is getting involved the moment something goes on the watch list. In some ways, some of the most value that gets added from that is kind of at that stage because we can tighten up documents, try to de-risk the position. I think we talked about one of those names on our last call when we had a repayment of a company called ThreeSixty, which was probably the biggest tariff exposure we had in the entire portfolio that was gone for an extended period of time. I think each of these is in a different spot, Sean-Paul, like the PRG name has been ongoing for some extended period of time. The lender group on KBS is working hard. That initial restructuring is probably only a year old. 48forty is still paying interest, so clear. I think just our expectation is that's where it's sort of trending. The team is prepared to spend a significant amount of time to try to maximize the outcome, kind of maximize the return on capital.

The next question is from Robert Dodd with Raymond James.

In response to Sean's comment, when we examine the assets that have re-defaulted, it appears to be becoming more prevalent, not just within your portfolio, but also among other assets in the market. Is there a recurring theme here? While each individual asset obviously has its own specifics, we are noticing more re-defaults rather than new defaults. Struggling assets have been restructured but are still facing challenges, while those that were performing well initially continue to do fine. Is there a common factor contributing to this situation? This leads to the question of whether initial restructurings should be more aggressive. Were there issues that could have warranted a more assertive approach, or did the lender group prefer to take a more cautious route? I would appreciate any insights you might have on this.

It's an interesting question. I don't think there's a specific theme. To clarify, there is another restructuring expected for PRG, while KBS is more about valuation. Although the company has stabilized, it seems to be delayed. The churn numbers have taken longer to stabilize in a way that satisfies us and the lenders. You made a good point about each situation likely being specific to whether enough restructuring can be done. We've observed some cases where certain names are either no longer in the portfolio or are only minimal amounts. The ability to restructure correlates with having a larger first lien group involved and getting the position to a sustainable spot, rather than being overly leveraged or under-leveraged. So, I don't see any themes, as each case is specific. Specifically, the only name that's actually looking at restructuring again among those four is PRG; the others are just experiencing downsides compared to our previous observations.

Got it. Understood. Flipping the topic, you mentioned that you have more deals to review than at any time in the last eight quarters. How realistic is it, considering we are in August and there are only four months left in the year, for a significant number of these to close this year? Should we be focusing more on 2026? Is there enough time left this year to actually see a real rebound in activity?

Yes. I mean I think from the numbers perspective, I think you're correct, right, because deals being reviewed now would go through kind of the regular way investment process for four, six, or eight weeks, and they probably take, on average, two months to close. Some things could be faster; some things could have a longer sort of tail. But I think you did see some of that from our reduced fee income that you saw this quarter versus last quarter. I think that is a spot on a go-forward basis that we would expect to see upside at least from the Q2 number. The only word of caution there is, I think, upfront fees and OID on new loans are considerably tighter now than it was a year ago.

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

Yes. And Dan, I echo your sentiments to our friends in Midtown. It's a really difficult situation for a lot of folks, and our heart goes out to them. It looks like it's pretty clear that the company is going to be, to a certain extent, restating its dividend philosophy. And at one point in time, the company had what you could describe as a modified variable dividend based upon earnings, and then you kind of got away from that for one and a half years or two years as you were working on the spillover. Is that what we should think about you going back to, which is maybe a base and some supplemental that toggles with earnings? Or how does the company see reformulating that dividend policy?

Yes, Casey, that's a relevant question. We wanted to touch on that during our prepared remarks, particularly regarding our outlook for Q3. You're right that we've moved toward a variable dividend policy. We’ve evolved this approach based on market feedback. Initially, our base dividend was $0.60, then we increased it to $0.64 and introduced a supplemental dividend to align with the variable approach. We also added a special dividend for several quarters. It's important to recognize that the spread environment has declined; the yield on our accruing assets has dropped by about 140 basis points over the past year. While that reflects some improvement in benchmarks, it's likely that rates will decrease further in the near term. As I mentioned with regard to fee income, a drop in rates could lead to some spread widening, but it won't be a one-for-one adjustment. We're satisfied with our liability management; as Steven noted, we are at 54% on the unsecured side, and we appreciate our maturity ladder. However, the deals we issued were under very different rate conditions, so refinancing will be important. There are some offsets to consider, such as potential increased deal volume and our current level of non-income-producing assets. We’ll be focusing on net interest income moving forward, as future earnings will guide our discussions on dividend levels. We want to ensure that there's a stable base while also allowing for variability connected to net interest income, and we will keep all this in mind as we move forward.

Okay. To expand on the discussion regarding the high level of activity you're observing, there isn't limitless space in your leverage ratio target range. Do you have any visibility on a repayment level that would enable you to manage some of this activity? Additionally, I’m uncertain about the capacity for the joint venture. I understand you increased your equity commitment to the joint venture last quarter, but this quarter you transferred a significant amount to it. How do you plan to handle the inflow unless there is also some outflow?

Yes. And I think maybe there's two points there. I mean there is room for the JV to grow even with the assets that were sort of put down, and I think you'll continue to see that. I think that's been a great partnership with our partner there. And I think we have almost $600-plus million of uncalled sort of equity capital there. That's on one side. I think you have a very, very high correlation between new deal flow and repayments. And with the syndicated loan market picking up, we've seen some deals being refinanced by sort of that market as well. So I think we do have the levers. That said, you are not incorrect. I mean operating inside of our target leverage band is paramount to us. But I think those two things will help offset that. And like I said, I think we're happy with the amount of deals we were able to screen in this prior sort of quarter. It's not kind of where I think we will be four quarters from now, so I'm expecting more. But I think the correlation of repayments with new deal flow will remain high.

The next question is from Paul Johnson with KBW.

Just broadly on activity potentially picking up here. Your median EBITDA is $114 million. You focus on the upper middle market. Obviously, there's a lot of competition in that part of the market. How much do you expect any sort of pickup in activity to go into the BSL market versus private credit?

Yes, it's a good question. I'd take one step back. My sense is, and what we communicated to our investors broadly, is we are focused on the upper end of the middle market. We're probably defining that really in the $50 million to $150 million range. We're there on purpose because we've historically seen better management teams, fewer customer supplier concentrations. There's more levers to pull if certain things do go wrong. I think at times of market volatility, we're probably able to lean into larger companies more because the syndicated loan market is shut. I think we have seen a bunch of larger names that prefer to be in the private markets. All that being said, I think we are trying to make sure that our origination funnel is as broad as possible. So in addition to covering the 250 sponsors out there, we've got a dedicated non-sponsor team. We've probably been a little cautious on it, but we're prepared to play in certain junior debt deals, but the EBITDA of those businesses is higher. Obviously, we've got an active kind of asset-based finance pipeline in here to sort of bring that together. And we will go below $50 million. I mean I don't think we're going to go below $25 million to be blunt, and there's probably a higher bar for that size of the company. We're trying to make sure our origination aperture is as big as it can be. And we just haven't seen, at least on our side, that you're getting paid enough to be in the $10 million, $15 million, $20 million range. It doesn't mean there's anything wrong with those loans, but it's just not where we're spending time.

Thank you, Dan. That's very helpful. I have a question regarding the joint venture. It seems like there were several assets dropped in the joint venture this quarter, and it appeared there might have been a fair value loss or a write-down on the investment. Could you provide some insight into what caused that? Were these the same investments on FSK's balance sheet that were written down in the joint venture? What are the current non-accrual levels in the joint venture? Any details on that would be appreciated.

Yes. No. And then you're correct. I mean we did kind of drop sort of assets down in there. I think we've been pretty happy with our inception-to-date performance on the joint venture. You are correct as well. One of the, we'll call it, 'mark-to-market moves' this quarter would have been the JV itself. That would have been more correlated though, more consistent with some of the same names that we talked about. The JV has been more regularly used for accessing other parts of the KKR sort of origination funnel than regular way kind of U.S. direct lending, but some parts of KBS, 48forty, and Worldwise were in there.

Got it. That's very helpful there. And last question for me was just as you guys are evaluating the dividend going forward next year, I was just wondering what all is completely on the table here, considering any sort of shareholder protection, dividend downside protection, potentially with the new dividend, any sort of fee waivers, that sort of thing? Or is it just fitting the distribution into the future earnings power and sort of prevailing interest rates at the time?

Yes, there are a few points to consider. Historically, we have tended to offer higher dividends. It's crucial for us to align with market or industry averages. We will evaluate whether we need to adjust our portfolio to achieve that. Casey raised an interesting point previously regarding our dividend policy, which we view as both a baseline and a supplemental approach. The supplemental aspect could mean either future payments or a fixed payout amount. We need to analyze this in light of current trends in the rate environment. This year, we intentionally paid out $0.70, as we wanted to reduce the excess spillover to a more targeted range. At the beginning of the year, we anticipated more rate changes than we have experienced, and we aimed to provide investors with stability for 2025 and reduce risk. However, our decision on the dividend going forward will also depend on how we measure up against the market and other factors.

This does conclude our question-and-answer session. I would now like to turn it back to Dan Pietrzak for closing remarks.

I want to thank everyone for taking the time to join us on the call today. If you do have any follow-up points or questions, please do not hesitate to reach out. Wishing you a good end of the summer. Thank you.

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