FS KKR Capital Corp Stock

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp.'s Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference call is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Second Quarter 2026 Earnings Conference Call. Please note that FS KKR Capital Corp. may be referred to as FSK, the fund or the company throughout the call.

Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued this morning. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended June 30, 2026. A link to today's webcast and the presentation is available on the For Investors section of the company's website under Events and Presentations.

Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today's conference call includes forward-looking statements that are not historical facts, including, without limitation, statements with regard to future events or future performance or financial conditions, statements regarding share repurchase activity, distribution levels and frequency, expectations for net investment income levels in future quarters and the financial position, business strategy and plans and objectives of management for FSK's future operations.

Words such as anticipate, believe, expect, intend, project and future or similar expressions indicate a forward-looking statement, although not all forward-looking statements include these words. These forward-looking statements are not guarantees of performance or events and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause our actual results or future events to differ materially from those expressed or forecasted in these forward-looking statements for any reason.

We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or future events to differ materially from these statements. The forward-looking statements included on this call are based on information available to FSK today and current expectations, forecasts and assumptions and involve a number of judgments, risks and uncertainties. Except as required by the federal securities laws, FSK undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In addition, this call will include certain non-GAAP financial measures that have not been prepared in accordance with U.S. generally accepted accounting principles. These non-GAAP financial measures are not in accordance with or an alternative to measures prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. These measures should only be used to evaluate FSK's results of operations in conjunction with their corresponding GAAP measures. For such non-GAAP measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's second quarter earnings release that was filed with the SEC on August 6, 2026. To obtain copies of the company's latest SEC filings, please visit FSK's website.

Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman; Dan Pietrzak, Chief Investment Officer and President; and Steven Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson.

I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you for joining FSK's Second Quarter 2026 Earnings Conference Call. During the second quarter, FSK generated net investment income totaling $0.44 per share and adjusted net investment income totaling $0.43 per share. Our net asset value per share declined 2.8% from $18.83 to $18.30 during the quarter. Our net investment income per share for the second quarter equates to an annualized yield of 9.6% based upon our June 30 net asset value per share and compared to our previously announced guidance of 8% to 9%.

Our Board has declared a third quarter distribution of $0.44 per share for common shareholders, which is consistent with our dividend policy of paying out 100% of our prior quarter's GAAP net investment income on a per share basis.

As we have indicated on prior earnings calls, we expect our quarterly distribution level will fluctuate as our net investment income fluctuates on a quarter-to-quarter basis. On our first quarter earnings call in May, we announced several strategic actions that the FS/KKR advisor is undertaking to help enhance the financial and trading profile of FSK. Since that announcement, we believe we have made meaningful progress executing these actions. Dan will provide a detailed update on our progress during his portion of this call.

There continues to be strong collaboration across the FS/KKR partnership, and we believe these actions reflect our commitment to long-term value creation. At the same time, we recognize that there is work ahead as we continue stabilizing our investment portfolio and executing on our strategic actions.

And with that, I'll turn the call over to Dan.

Thanks, Michael. The broader credit markets continue to be impacted by a combination of geopolitical uncertainty, inflationary pressures and rapid technological change. Ongoing tensions in the Middle East, along with a broader focus on energy security and supply chain resiliency contribute to elevated levels of macroeconomic volatility.

As a reminder, FSK does not invest directly in oil or commodity-linked companies. Inflation remains higher than pre-pandemic norms, reinforcing the importance of disciplined underwriting and thoughtful capital structure selection. We continue to closely monitor inflation and the incremental risk associated with a sustained inflationary period as do our portfolio companies.

That said, given the size and market position of many of our portfolio companies, they historically have demonstrated an ability to pass through higher operating costs to customers during inflationary periods. This dynamic reinforces our confidence in the resilience of the upper end of the middle market.

While advances in AI and automation are driving meaningful productivity gains, they are also creating both opportunities and risks as industries adapt to evolving competitive dynamics. Against this backdrop, we believe scale, selectivity, strong portfolio construction and deep sponsor relationships remain critical differentiators in private credit. We also believe that the breadth and depth of the KKR Credit platform, along with our active approach to portfolio management, position us well as we navigate the current environment.

As Michael mentioned, I'd like to provide an update on the strategic actions we announced on our first quarter earnings call, which we believe already are providing benefits to shareholders. The $150 million tender offer by KKR expired on June 11, 2026. As a result, a subsidiary of KKR purchased approximately $150 million of shares of FSK's common stock at a purchase price of $11 per share. On June 29, 2026, FSK closed the $150 million issuance of Cumulative Convertible Perpetual Preferred Stock, purchased by a subsidiary of KKR.

As a reminder, the convertible preferred stock will pay dividends on a quarterly basis of 5% per annum in cash or at FSK's option, 7% per annum in PIK dividends, in either case, increasing annually by 1% beginning on the 5.5-year anniversary of the issue date. FSK's $300 million stock repurchase program commenced on June 29, 2026. During the second quarter, we repurchased approximately 377,800 shares of FSK's common stock through the program or approximately $4 million worth of shares.

During the third quarter, we have continued repurchasing shares. Since the beginning of the third quarter, we have repurchased 3.3 million shares or approximately $36 million, bringing the cumulative value of shares repurchased to $40 million since June 29 at a weighted average purchase price of $10.73 per share.

Beginning in the second quarter of 2026, KKR agreed to waive its portion of the subordinated income incentive fee for 4 consecutive quarters. This waiver had a positive $11 million impact on our Q2 net investment income.

Turning to our investment activity. During the second quarter, we originated approximately $590 million of new investments. Almost all of these investments related to deals committed to prior to the second quarter or add-on financings to existing portfolio company names.

As we have previously communicated, during the period when FSK is repurchasing shares, we will continue to reduce the fund's new investment originations. Our new investments, coupled with $1.3 billion of net sales and repayments when factoring in net sales to our joint venture, equated to a net portfolio decrease of $735 million during the second quarter.

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

We continue to believe in the strength of our investment strategy, which primarily focuses on upper middle market companies with EBITDAs in the $50 million to $150 million range across a diverse set of industries and sectors. As of June 30, the weighted average EBITDA of our portfolio companies was $241 million, and the median EBITDA was $130 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 6% across companies in which we have invested in since April 2018.

Interest coverage levels remain healthy with median second quarter coverage at approximately 1.9x. During the second quarter, 2 investments were added to non-accrual status and 2 were removed. Heniff Transportation Systems and Alacrity Solutions Group, the 2 nonaccruals together totaled $104 million of costs and $91 million of fair value across our investment portfolio. Dental Care Alliance and Affordable Care were removed from non-accrual status as they were restructured during the second quarter.

As of June 30, non-accruals represented 7.1% of our portfolio on a cost basis and 3.8% of our portfolio on a fair value basis. This compares to 8.1% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis as of March 31.

In summary, we are pleased with the strategic actions the FS/KKR Advisor has taken and is continuing to take. KKR's tender was successfully completed. FSK's liquidity position was enhanced by KKR's $150 million convertible preferred stock investment. Our gross and net leverage levels are lower and our portfolio rotation continues in earnest. As we execute on the remaining portion of our common stock buyback program and continue to improve the quality of our investment portfolio, we do acknowledge that FSK will become a smaller fund. On the other side of the equation, we anticipate it will be a higher-quality fund as well.

And with that, I'll turn the call over to Steven to go through our financial results.

Thanks, Dan. As of June 30, 2026, FSK's investment portfolio had a fair value of $11.4 billion, consisting of 232 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 21% 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 63% senior secured debt as of June 30.

In addition, our joint venture represented approximately 14% of the fair value of our portfolio as of the end of the second quarter. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans total approximately 69% of our total portfolio and senior secured investments total approximately 73% of our portfolio as of June 30. The weighted average yield on accruing debt investments was 9.8% as of June 30 as compared to 9.9% during the first quarter.

Turning to our quarterly operating results. Our total investment income was $290 million for the second quarter, a decrease of $14 million compared to the first quarter. The primary components of our total quarterly investment income were as follows: Total interest income was $217 million, representing a decrease of $7 million quarter-over-quarter. The decline in interest income primarily was due to a reduction in the size of our investment portfolio and assets placed on non-accrual during the prior quarter.

Dividend and fee income totaled $73 million, a decrease of $7 million quarter-over-quarter. Our total dividend and fee income is summarized as follows: $45 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $23 million during the quarter and fee income totaling approximately $5 million during the quarter.

As a reminder, on February 23, 2026, our partner, South Carolina Retirement Systems Group Trust increased its equity ownership percentage in our joint venture from 12.5% to approximately 21%, and our ownership percentage changed from 87.5% to approximately 79%. This purchase was executed at the then-current net asset value of the joint venture. This change in ownership, therefore, was reflected partially in the dividend income from the joint venture during the first quarter and was reflected fully during the second quarter.

Our net expenses were $168 million during the second quarter, a decrease of $19 million compared to the first quarter. The primary components of our net expenses were as follows: our interest expense totaled $101 million, a decrease of $4 million quarter-over-quarter. Our weighted average cost of debt was 5.5% as of June 30. Management fees totaled $44 million, a decrease of $4 million quarter-over-quarter.

As Dan mentioned, beginning in the second quarter of 2026, KKR agreed to waive 100% of its portion of the subordinated income incentive fee for 4 consecutive quarters. This waiver applies to 50% of the subordinated income incentive fee that otherwise would be paid. Net of this waiver, income incentive fees totaled $12 million, a decrease of $13 million from the first 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 ending 1Q 2026 net asset value per share of $18.83 was increased by GAAP net investment income of $0.44 per share and was decreased by $0.56 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.42 per share quarterly common stock dividend paid during the quarter and increased by $0.01 per share due to share repurchases, which began on June 29. The sum of these activities results in our June 30, 2026, net asset value per share of $18.30.

From a forward-looking perspective, we expect net investment income to be in the range of 8% to 9% of net asset value on an annualized basis for the balance of 2026. This level of net investment income will depend on numerous future factors, including geopolitical risks, the overall U.S. economy and the overall health of our investment portfolio.

Turning to our capital structure. In June, we issued $900 million of 7.5% unsecured notes due 2031, which subsequently were swapped to a floating rate of SOFR plus 3.488% via an interest rate swap agreement. As of June 30, our debt-to-equity and net debt-to-equity levels were 127% and 122%, respectively, compared to 138% and 131% at March 31. Consistent with the objectives outlined in our first quarter earnings call, we reduced leverage and returned net debt-to-equity to our target range of 1 to 1.25x.

Looking ahead, we will seek to manage leverage and liquidity while maintaining flexibility to support our share repurchase program. At the end of the second quarter, our available liquidity was $3.5 billion and approximately 72% of our drawn balance sheet and 48% 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. We are encouraged by the results of the strategic actions taken by the FS/KKR Advisor and the progress we are making with regard to portfolio rotation. We recognize, however, that there still is important work ahead. Improving portfolio performance, delivering greater consistency in our results and regaining market confidence remain key areas of focus. We are committed to executing on the initiatives we have outlined, and we believe the strength of our platform and our commitment to shareholders will enable us to be successful in our efforts. As always, we appreciate your participation on the call today and for your interest in FSK.

Operator, we'd like to now open the line for questions.

[Operator Instructions]

Our first question comes from the line of Arren Cyganovich of Truist Securities.

The loan sales that you did, the $500 million that you referenced, maybe you just provide some color on what were these? How did you go about doing this? And is this going to be something that we would expect kind of ongoing as we look forward?

I'd put it a little bit more in probably just ordinary course of business, right? We talked about this on our last call, looking at some of the tall trees, some of the larger exposures we might have had or some, we'll call it, very high-quality assets, but maybe just at a different kind of margin than what the market was affording. So I think net-net, we look at the overall new investments we made, but with that $1.3 billion plus of repayments, I think we're happy with that result and happy to get back down into our target leverage area.

Okay. And the marks that you took this quarter, were those more related to existing non-accrual restructurings or exits? Or were these a result of new marks from other companies this quarter?

If you do look at it, Arren, really driven off of a handful of names that we would have talked about before. The big drivers were PRG, ATX, Wittur, Peraton, Lionbridge and Medallia that pretty much made up the entire amount or at least a supermajority of the amount.

Our next question comes from the line of Finian O'Shea of WFS.

Can you remind us or update on the sort of destination portfolio composition with your sort of strategic repositioning? Is it going to look something like, say, 80% performing unitranche and 20% ABF JV? Or are there sort of inputs or other tilts around the edges?

Fin, we talked about this a bit last quarter. I think we're kind of on the same, I would call it, path that over time, we would look to get the 1L percentage up. I think we've been happy with our asset-based finance business and effort as it relates with inside FSK. I'd say the same thing about the JV. So I think you should expect those to be in the same kind of ranges of, let's call it, 10-plus percent, 10% to 15%, but probably a little bit less focus on second lien and sort of junior debt.

Okay. That's helpful. And then with the JV opening up more to the partner, was that sort of a one-off? Or might you downsize your position more, expand it more or anything like that?

I think time could tell there. We've had a great relationship with our partner there. A little bit, I think, constant conversations about what we want that to look like, how we want it to evolve, what's good for FSK, what's good for them. But I think where it sits today, we feel like we're in a pretty good spot.

Our next question comes from the line of Jason Stewart of Compass Point.

In terms of the loan sales and prepayment activity, what's the line of sight going forward in the next maybe 3Q, 4Q for that activity?

Yes. I mean prepayments or repayments have definitely been slower than I think we would have expected. I think that goes in line with what you would have heard on other calls where new deal activity or just kind of broad M&A feels light versus, I think, everybody's expectations from the start of the year. I think you can attribute that a lot to what's happening with Iran, geopolitical sort of tight points. That said, the team has definitely been busier on the other side of June 30, but I think it's still kind of muted sort of levels. So I would probably expect a light number in Q3. But at some point, I think it's fair to assume that, that ramps back up to more traditional levels.

Okay. I mean rough math, even if we assume that number is light or it gives you plenty of liquidity and room on leverage to continue on the share repurchase. I mean if you are done with that and the fee waiver is done in the next couple of quarters, what's the next step here?

Yes. No, I appreciate that question. I think we are happy that we kicked off the share repurchase. I think we've been guiding the market that we will be mindful about liquidity and leverage as we think about the share repurchase, but we do have an intention to fulfill that. You're right about the fee waiver extending for another 3 quarters past the quarter that we just reported on.

I think it remains our intention to get through, I'd say, a lot of heavy lifting on some of these non-income-producing assets. I would like leverage to get down to the middle of that target range over time. It could bounce around the upper end of that target range for a couple of quarters. But I think the longer-term piece is the middle of that range. So I would frame the quarter. I think we've had some good progress with things that we said we were going to do on the last call. You heard the comments in the script. We know there's some still heavy lifting to do and we're going to be focused on that as we finish out '26 and go into '27.

[Operator Instructions]

Our next question comes from the line of Kenneth Lee of RBC Capital Markets.

Just one more on the loan sales there. Any details in terms of the types of loans across the industries or any other details around the specifics around what kind of loans were sold there?

Yes, Ken, no kind of real target beyond what I said. I don't view kind of what we did as much different than some of the ordinary course business stuff. I think we're always mindful about some of the -- these larger positions and can we bring those down I think it's good to see a certain amount of liquidity in the book. When we're underwriting a loan, we're not assuming that we're looking to kind of move on from it or sort of sell some of it, but we have the opportunity to do so. And I think it was good for the entity as we're talking about reducing leverage and getting inside that target range. But there was really no specific theme besides that.

Got you. Very helpful there. And just one more follow-up here. In terms of the share repurchases go-forward, and I realize you're going to be mindful of the leverage targets as well. How active could you be? And what factors are you going to be looking at closely to judge the activity of repurchases there?

Yes. And I mean I think it's a couple of things, right? I mean, obviously, it's going to be -- we've historically done these things under a 10b5-1 program. You're going to be mindful about market volumes, and there's a bunch of rules as it relates around that. I think we're still, I think, quite mindful about, on the one hand, just managing kind of that leverage ratio. But with where the stock has been trading, it's quite an attractive time to buy back the stock.

But like I said, I think we've been trying to guide folks, and I think we talked about this on the last call that we have every intention of filling this, but it's going to be mindful of those sort of points and probably occurs over the course of '26 and '27.

Our next question comes from the line of Heli Sheth of Raymond James.

You mentioned activity is seeing somewhat of a pickup after 2Q. Are you seeing anything different there in terms of spreads or pricing? Or is it kind of steady on that front?

Yes. Thanks for the question. I'd put it in a couple of buckets. I think the activity level is picking up as there was some, we'll call it, sense of belief in the market that the Iran situation was either under control or at least the sides were working towards a deal. I think we did see spreads widen and terms and conditions get better really on the back of the redemption activity in the nontraded space. That's not really different than what we saw in 2022. I think -- and that we'll call that could have been up to 75 basis points plus of sort of spread move as you kind of work through the quarter for the new deals that were getting done.

It's probably come back a little bit since then on the spread side, just as I think the redemption, we'll call it, noise has calmed down a little bit, even though the numbers remain elevated. There has been continued interest in the space from an institutional perspective. My guess is that will probably widen back out a little bit if M&A picks up to a normal volume. But I think net-net, we have seen the environment toggle to what I call more of a lender-friendly environment versus a borrower-friendly environment. We're happy to see that.

Got it. That makes sense. And then on repayments, I think you had pretty elevated repayments this past quarter. How are you weighing reinvesting back into assets into the portfolio versus share repurchases? Any specific strategy there?

I'm not sure it's a specific strategy beyond what we talked about, right? We want to get the share repurchase plan done. We want to be mindful about our leverage number. We want to see the repayments come through. We want actually that leverage to get back to probably more the middle of that range.

So we're going to try to balance all those together. The majority of our new investments for the quarter really related to fundings on delayed draw term loans or revolvers. We'll be mindful about new investments as well. We're trying to just factor that all together to achieve the goals that we laid out.

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

Great. Thank you. And thank you all for your time today. If there are any other additional questions, please do not hesitate to reach out to us. Enjoy the rest of the summer. We'll talk to you again next quarter. Thank you.

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

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp.'s First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, Caitlin Welch from FS KKR Capital Corp, Investor Relations will proceed with introduction. Ms. Welch, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp's First Quarter 2026 Earnings Conference Call. Please note that FS KKR Capital Corp. may be referred to as FSK, the fund or the company throughout the call. Today's conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued this morning. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31, 2026.

[indiscernible] today's webcast and the presentation is available on [indiscernible] Investors section of the company's website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK's future performance or financial condition or the economy generally. These forward-looking statements are not guarantees of performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict. 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 11, 2026. 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 merely 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 will now turn the call over to Michael.

Thank you, Caitlin, and good morning, everyone. Thank you all for joining FSK's First Quarter 2026 Earnings Conference Call. As we start this morning's call, I would like to highlight 2 main points. First, it was a challenging quarter as our net asset value declined 9.9% per share and our net investment income was $0.42 per share. Our NAV decline is attributed to portfolio company names we've discussed on these calls in the past, new nonaccrual investments and mark-to-market moves across certain segments of our portfolio.

Second, as announced this morning, meaningful strategic actions are being taken to help improve the financial and trading profile of FSK. Dan is going to walk through the details of the 4 components here in a minute, but the goal of these actions is to provide the necessary support for FSK to navigate what will be a period of transition to achieve stability, which we expect will include a smaller size and better positioned balance sheet over time. From a dividend perspective, our Board has declared a second quarter distribution of $0.42 per share which is consistent with our dividend policy of paying 100% of our GAAP net investment income on a per share basis. As we have indicated on prior earnings calls, we expect our quarterly distribution level will fluctuate as our net investment income fluctuates on a quarter-to-quarter basis.

And with that, I'll turn the call over to Dan.

Thank you, Michael, and thank you, everyone, for joining our call. It is an important call for FSK and we have a lot to walk through. So I'm going to take a different approach with my comments this more. I'm going to begin by walking through the strategic actions we are announcing today. Following that, I'm going to address a handful of key questions and concerns that we think are on the minds of investors, including some additional information on the portfolio.

Hopefully, at the end of the conclusion of my remarks, everyone will gain a better appreciation for why after a great deal of thought and consideration, we are announcing these various strategic actions. Before getting into specifics, I would like to say that we are disappointed by our recent performance. We will get into more in the portfolio section of my remarks, but during our ongoing monitoring of the portfolio and our regular quarterly review process, we invested time stress testing the portfolio against a number of future potential downside scenarios, including certain macroeconomic pressures and idiosyncratic named specific events.

As a result, we and KKR are announcing strategic actions that we think will benefit shareholders. This ongoing analysis helps support our view of a disconnect in the trading price of FSK versus its intrinsic value. First, KKR announced that it intends to commence a $150 million fixed price tender for FSK stock at a price per share of $11. The tender price represents a premium to Friday's closing price as KKR believes the stock is undervalued at that level. The purpose of the tender is to express that view through direct action by providing liquidity to shareholders.

Second, KKR is making $150 million investment into FSK through a cumulative convertible petrol preferred security with an initial conversion price of $18.83, the March 31, 2026 NAV per share. The convertible preferred stock has a starting dividend of 5% in cash or 7% PIK at FSK's option and is redeemable at FSK's option in cash or in certain circumstances in shares. It's redeemable at KKR's option after 6 years, which is outside the maturity date of all FSK's existing indebtedness. After 6 months at the option of the holder, it is convertible into FSA common stock as the conversion price then in effect.

Additional details surrounding the convertible preferred stock can be found in our earnings release and also on our earnings supplement on our website. The third component is a share repurchase program. FSK is announcing a $300 million share repurchase authorization, which reflects our conviction that buybacks are an efficient use of capital with strong ROE characteristics. The program will be implemented following the tender offer period, and we expect the program will repurchase shares on a time line commensurate with investment repayments the fund receives while simultaneously being mindful of the fund's total leverage level. During the period when the fund is repurchasing shares, we will reduce the fund's new investment originations while focusing primarily on portfolio construction, supporting existing portfolio companies, reducing leverage and repurchasing stock.

And finally, beginning with the second quarter of this year to help support net investment income and in turn, our quarterly distribution begin waving its portion of the subordinate income incentive fee earned as joint owner of the adviser. To be clear, this waiver applies to 50% of the subordinated income incentive fee that otherwise would be paid. The income in [indiscernible] waiver will continue for 4 quarters. After which time, the Board and the adviser will review the fund's overall fee agreement consistent with their obligations under the Investment Company Act.

Take care of the adviser are focused on taking immediate and impactful actions with regards to supporting FSK during this period of transition toward more diversified investments focused on first lien securities, asset-based finance and other accretive investments, all sourced using the broad KKR origination footprint. During this period, FSK intends to utilize proceeds from the convertible preferred issuance for additional liquidity and to fund a portion of the $300 million stock buyback plan.

FSK intends to continue to offer shareholders a competitive quarterly distribution, aided by the income incentive fee waiver, and FSK will focus on operating within its target leverage ratio. These actions demonstrate our conviction in the long-term value of the platform, and we believe they create strong alignment with shareholders as we execute on improving performance. Today's announcement should be viewed as part of a large effort to drive value for shareholders. We will continue to be focused on our stock price, especially if it continues to trade at a wide discount to net asset value.

Turning to our results in the portfolio. I'm going to focus my comments on 3 areas: First, details related to the quarterly NAV decline at FSK; second, an update on our software exposure. And third, the current state of the portfolio beyond just the quarterly results. beginning with the quarterly NAV decline. Overall, the NAV decline during the quarter was driven by company-specific credit events, which we consider to be more permanent in nature, and credit spreads and other mark-to-market moves that we believe would not be considered permanent impairment. These include moves on software and services names.

The name specific credit events, which includes several 2021 and 2022 vintage loans are being impacted by the combination of the lingering effects of the higher inflationary and higher interest rate environment. which reduced free cash flow levels for many companies and created issues specific to certain portfolio companies, including labor rates and changing customer behavior. These factors have continued to impact specific legacy investments, including ATX and Production Resource Group, which together represent approximately 15% of the total NAV decline as well as current adviser investments. including Medallia, Cuba Corp and Affordable Care, which together represent approximately 33% of the total NAV decline.

We are taking proactive actions together with other lenders where applicable, to support these businesses through capital infusions or providing operational resources and oversight, including bringing in new management teams to drive stability and growth. Each company faces challenges and additional risk factors which will take time to work through. Individual names could deteriorate further. Separate from the names mentioned above, we believe a meaningful amount of the remaining portfolio markdowns would relate to credit spreads and other mark-to-market moves that are not considered permanent impairment.

Looking back at our collective body of work. Since April 2018, we have invested approximately $34.5 billion in new transactions. at an unlevered IRR of approximately 8.7%, and we have put together a well-balanced liability structure. But with the benefit of hindsight, let me review the path we have taken. While we have maintained healthy portfolio diversification, we are focused on diversifying our portfolio and our top 20 investments.

In 2021, we invested in what we believe to be high-quality second lien and junior debt deals. Unfortunately, some of these investments have underperformed. We avoided ARR loans generally as we do not like the risk profile, but we did invest in Medallia considering the strength of the business at the time and the outsized equity check. This name has underperformed, and it was placed on nonaccrual during the quarter. For reference, [indiscernible] was marked down to $0.54 in the quarter.

For the second topic, I'd like to provide additional color on our assessment of AI risk in our total portfolio and more detail on our software and services exposure. Our AI risk assessment was completed across our entire portfolio and used the 19 metric framework developed in partnership with KKR's private equity team. Based on our latest review, we believe that approximately 86% of our portfolio reflects low AI risk, 11% medium risk and 3% high risk. Our software and services portfolio currently represents 16% of our investment portfolio and is diversified across 52 issuers. Based on our current assessment, we believe our software and services portfolio remains defensively positioned, typically falling within 3 categories, which we believe carry low near-term risk of AI disruption.

The first is businesses where the data utilized is proprietary, sensitive or the industry is highly regulated. The second is businesses where the software solution is deeply embedded or mission-critical with low to zero tolerance for error. And third, our businesses which have a substantial competitive moat, including high customer retention rates and advantage in deploying AI themselves. Our exposure also is focused on larger businesses with meaningful cash equity value support with average and median EBITDA levels of approximately $165 million and $118 million, respectively. And a median LTV of approximately 38%.

Finally, our overall software and services portfolio continues to experience both average and median EBITDA growth on a quarter-over-quarter basis. While we remain comfortable with these credit metrics, we are mindful of slowing growth and lower-than-expected valuation multiples in the coming years for the space. And while we recognize these issues, likely will impact equity holders more than credit providers. They generally will extend hold periods and potentially require additional capital to delever lenders in advance of any maturity extension or refinancing. Finally, we are continuing to update our AI risk framework across all sectors, recognizing that this technology is evolving rapidly, and has the potential to affect businesses across multiple industries, even businesses we might consider to be low risk today.

Let's move to the third point, the current state of the portfolio more generally. We segmented our portfolio to understand where incremental risk may reside. When we analyze our first lien investments currently marked above -- at 90 and above alongside our asset-based finance portfolio and our joint venture. These assets collectively total approximately 81% of the portfolio. We believe these investments are better positioned and then much of the forward potential downside risk is more likely to be concentrated elsewhere in the portfolio. Although to be fair, forward events could create downside in this part of the portfolio as well versus current fair market value.

The remaining approximately 19% of the portfolio are First lien loans marked below 90. Second, nonfirst lien loans and restructured names. This bucket would include names like athenahealth, which is performing and is 3.2% of the portfolio. and third, all legacy names, regardless of current performance. This includes names such as JWA and Global Jet, where current performance has been strong. These total 3.3% of the portfolio. We believe this helps support our view of a disconnect in FSK's current stock price. Over the next 12 to 18 months, the adviser with the assistance of the KKR Credit team will be focusing on the following: reducing new portfolio company investments, reducing leverage levels and maintaining sufficient liquidity for the existing portfolio companies.

Next, supporting the share repurchase program while continuing to appropriately manage the liability side of the balance sheet. Rotating certain assets, including portions of larger sized positions certain lower-yielding assets and certain asset-based finance exposures. And last, continuing to pursue the strategic sale of certain individual portfolio companies where we maintain meaningful influence, these are generally minority PE positions where the goals are simple: maximize value, but at the same time, be focused on rotating the names into income-producing investments. We look forward to keeping you updated on future calls as it relates to the progress on all these fronts.

Turning briefly to the investing environment. During the first quarter of 2026, we originated approximately $499 million of new investments. Almost all of these new investments related to deals committed during 2025 or our add-on financings to existing portfolio company names usually through delayed draw term loans. Our new investments, combined with $710 million of net sales and repayments, equated to a net portfolio decrease of $211 million during the quarter. As of March 31, nonaccruals represented 8.1% of our portfolio on a cost basis. and 4.2% of our portfolio on a fair value basis. This compares to 5.5% of our portfolio on a cost basis and 3.4% of our portfolio on a fair value basis as of December 31.

And with that, I'll turn the call over to Steven to go through our financial results.

Thanks, Dan. As of March 31, 2026, FSK's investment portfolio had a fair value of $12.3 billion consisting of 236 portfolio companies. At the end of the first quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio compared to 19% as of the end of the fourth quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 60% first lien loans and 64% and senior secured debt as of March 31. In addition, our joint venture represented approximately 14% of the fair value of our portfolio as of the end of the first quarter.

As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, than first lien loans total approximately 69% of our total portfolio and senior secured investments totaled approximately 73% of our portfolio as of March 31. The weighted average yield on accruing debt investments was 9.7% as of March 31, a decrease of 30 basis points compared to 10% as of December 31. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR.

Turning to our quarterly results. Our total investment income was $304 million, for the first quarter, a decrease of $44 million compared to the fourth quarter. The primary components of our total quarterly investment income were as follows: Total interest income was $224 million, representing a decrease of $32 million quarter-over-quarter. The decline in interest income was driven by lower base rates and investments placed on nonaccrual during the quarter. Given that fee income totaled $80 million, a decrease of $12 million quarter-over-quarter. Our total dividend and fee income is summarized as follows: $60 million of dividend income from our joint venture other dividends from various portfolio companies totaling approximately $18 million during the quarter and fee income totaling approximately $2 million during the quarter.

As a reminder, on February 23, 2026, our partner, South Carolina Retirement Systems Group Trust increased its equity ownership percentage in our joint venture from 12.5% to approximately 21% and our ownership percentage changed from 87.5% to approximately 79%. This purchase was executed at the [indiscernible] current net asset value of the joint venture. This change in ownership, therefore, is reflected partially in the dividend income from the joint venture in the first quarter and will be fully reflected beginning in the second quarter. Our total expenses were $187 million during the first quarter, which is a decrease of $26 million compared to the fourth quarter.

The primary components of our total expenses were as follows: our interest expense totaled $105 million, a decrease of $5 million quarter-over-quarter. Our weighted average cost of debt was 5.3% as of March 31. Management fees totaled $48 million, a decrease of $2 million quarter-over-quarter. Income incentive fees totaled $25 million, a decrease of $3 million from the fourth quarter. Other expenses totaled $9 million, an increase of $2 million quarter-over-quarter. A detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending 4Q 2025 net asset value per share of $20.89 was increased by GAAP net investment income of $0.42 per share and was decreased by $2 per share due to a decrease in the overall value of our investment portfolio.

We experienced a $0.48 per share reduction as a result of the total quarterly distribution paid during the quarter. With some of these activities results in our March 31, 2026, net asset value per share of $18.83. From a forward-looking perspective, with respect to net investment income, we want to be cognizant as we have discussed today, that we expect to have activity with regard to portfolio rotation, which we expect will result in a small sized balance sheet. Coupling that activity with the expected share buyback we currently expect net investment income to be in the range of 8% to 9% of net asset value on an annualized basis over the coming quarters. So we would add that this level of net investment income will depend on numerous factors, including geopolitical risks, the overall U.S. economy and the overall health of our investment portfolio.

As of March 31, our gross and net debt to equity levels were 138% and 131%, respectively, as compared to 130% and 122% at December 31. At the end of the first quarter, approximately 51% of our drawn balance sheet and 38% of our committed balance sheet was comprised of unsecured debt. In terms of anticipated 2Q activity with lower new net deployment and a line of sight of certain portfolio ratio moves that are ongoing we are expecting net repayments in excess of $500 million. I would note that there could be some timing differences to when these events actually occur and certain portfolio rotation activities could occur after June 30.

On May 8, we completed an amendment to our senior secured revolving credit facility, whereby, among other things, we reduced the size of the facility to $4.1 billion. We reset certain covenants and the applicable borrowing spread was increased by 12.5 basis points. After giving effect to this amendment, our pro forma March 31, 2026 liquidity was $2.3 billion, which included pro forma undrawn debt capacity, cash and net receivables for open trades.

And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thank you, Steven. While we believe that FSK is not alone in dealing with specific issues affecting individual portfolio companies, We recognize that our recent NAV volatility has been meaningful. With that in mind, the actions being announced today are focused on achieving long-term stability for the fund. And we believe the course of action we are pursuing represents a beneficial path for shareholders. As always, we appreciate you joining us today.

With that, operator, we'd like to open the line for questions.

[Operator Instructions] First question comes from the line of Kenneth Lee of RBC Capital Markets.

Just one on the tender offer process there. Maybe just talk about how you went about setting the $11 a share offer price despite intrinsic value that's potentially higher there?

Ken, thanks for the question. I think on the tender, we tried to be pretty detailed in the prepared remarks and in the press release due to securities law points to the way the sort of tenders work. We can't comment much over that. But I think you can note the price versus either closing levels or kind of recent activity over a 30- or 60-day period. But I just refer back to the press release and the prepared remarks because of that.

And just one follow-up, if I may. In terms of the portfolio location, wondering how active you could be in terms of rotation. Is it going to be dependent on prepayments? Or are there other factors or other ways that you could be a little bit more active in terms of rotation there?

No, [indiscernible] that. I think it's a little bit of both, right? Obviously, there's a consistent amount of repayments in a portfolio like this, while they could be a little bit slower with what's going on market-wise, I think we still expect to see that. Steven did mention the $500 million-plus number of what we're expecting in Q2. And then we have been active, and there's been some pretty, I call, good demand for us kind of trimming some of the tuner trees or some of the larger names of the portfolios or certain lower-yielding assets or certainly the ABF assets that we think we can optimize in a better sort of format. So it's probably a little bit of everything, but I think you should expect we'll be active on the portfolio side.

[Operator Instructions] Our next question comes from the line of Arren Cyganovich of Cu Securities.

Dan, with now limited to supporting existing investments for new investment activity or how is this going to impact your overall platform in terms of direct lending and how much other -- or how much assets do you have in other vehicles that will kind of keep you relevant from an investing standpoint?

Yes, Arren, thanks for the question. I would just make 2 points. I think I would think about it more in the context of reduced new investing activity. I think we want to be mindful about the buyback and be mindful about leverage. But I think it will be reduced and it could be physician size-wise, meaningfully reduced as we look to continue to build further diversification. If you do think about it in the confines of the overall credit business and the private credit business, On one hand, this was a very material part of total AUM. If you went back a handful of years ago, all the way back to April of 2018, you think of our total just put it on the direct lending side, that's roughly $40 billion.

You look at the private credit side in totality, that's $140 billion of AUM. You look at the credit business overall, it's $330 million. billion of AUM. So this is an important and meaningful pool of capital, but the business has grown around it. I think that's a good thing. I think it's a good thing because it gives us more firepower, but I think we're able to build, I think, over time, more diversification here with it being a smaller size of the overall sort of footprint.

Okay. And then the second question I have is it's good to see the waiver on the subordinated incentive fee. Why is not future standard participating in that waiver as well?

Yes. I mean I'd start by talking about just -- I would think about the total package here, right? We're kind of active on the convertible prep. We're active on the tender, we're mindful about the waiver, what that can mean for NII and dividends. So I wouldn't think about it in terms of the total package.

Yes. And thank you for the question, This is Michael Forman. I'd say first, we fully appreciate and support the strategic initiatives. We think they're a really important step forward while we've all not been happy with the performance, we believe the dynamic will change. And we believe that this is in the best interest of the fund and the shareholders. Dan and I and our firm spend a lot of time with the Board mapping out what we thought we could do going forward. And I think it's got to be looked in that lens. I conclude with the nature of this partnership. It's been a very strong partnership -- it's been a very good collaboration. I think that ultimately will yield positive results for our investors and for the fund.

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

A special dividend is not part of this discussion. So I just wanted to ask about how the spillover, et cetera, is going to be managed? I mean, obviously, if there's a buyback still over per share goes up if you were to distribute still, the leverage goes up, right. There's lots of moving parts in the what's the approach going to be on managing that? Because obviously, if the dividend does come down in the voltage, if it comes down, then you run up against the limits on how much you can roll over as well. So what's the approach going to be on managing that component?

Robert, it's Steven. Thank you for the question. It will not surprise you at all that we wanted to have certainty with the discussions that have been going on internally and also with the Board, as Michael says, over the last decently long time period and have certainty on those actions have certainty with our financing agreements. So I think during the course of the year, as we mentioned on our last call, we received the K-1s from partnerships and things that do affect our spillover balance on an annual basis. And we'll learn more about that in the sort of August, September time frame. So I think it's very reasonable for you and the market to conclude that later in the year, we'll certainly be talking about that, I think, would be a conclusion you could come to -- but it was important to put these items that Dan mentioned in his prepared remarks in place first.

Got it. Then a second question is more, Dan, I think you said after talking about the specific names, ATX, PRG, [indiscernible] you said individual names could deteriorate further. How much I mean, obviously, the valuations right now are our best effort valuations, right? But I mean, what's your confidence level that there's going to be stability going forward? Or is it more likely that there would be additional deterioration in fair value if various macro uncertainties persist. Obviously, it's your best assessment of fair value right now, but how much variability could there be in the downside on that?

Thanks for the question. I think you're right. I mean these are clearly our best judgments of value today. I think we are cognizant of what's going on sort of macro wise, what's going on in geopolitical, what's gone on with a commentary around sectors like software, some of the specific subsectors in sort of health care. So our entire goal and focus here is maximizing value in each of these situations. But I think we are -- we'll call it being realistic or being mindful about that sort of current market conditions.

I think we're doing a lot of good things on these names I mean, obviously, something like Medallia for the quarter was painful. But I think that company with a lower capital structure, we'll be in a better spot to be able to grow they haven't probably been able to invest in things like AI enough. We made some significant management changes to a handful of portfolio companies. There's been some really good progress on names like JWA and Global Jet. So it's active across the board, Robert, it's just how to say.

Our next question. Our next question comes from the line of Finian O'Shea of Wells Fargo Securities.

Ron, so on the KKR parent call, the team sort of went out of their way to outline that performance issues aren't there at least to this extent across the direct lending suite. Can you sort of outline why that is? What are the sort of inputs that led to greater losses here? And are those fixes you're going to make where performance will converge over time?

Fin, thanks for the question. And you were a little low volume, but I think I got it, but if not, feel free to add to it. On FSK itself, and we've talked about this over an extended period. Clearly, some of the -- although we're probably tired of talking about, I'm sure the market is tired appearing, but A lot of the NAV volatility has been caused by legacy names. By definition, they wouldn't be in the pools of capital you're referring to. That's sort of point one.

Point two, we historically have not had a dedicated junior debt fund on the institutional side. We've only had that up late. So the funds that you would be referring to were direct lending only. or ABF only, so various sort of dedicated strategies. And where we have felt some NAV volatility, especially in recent quarters as some of these 21, 22 vintage names that I think we and others felt were very high quality when they were done, right? They're pretty broadly held across names like Solara and Peraton and Cubic, and we think [indiscernible] and Proton are both good businesses. But that would be outside the scope of that.

And then the nature of this vehicle, obviously, is a little bit sort of different, right? The funds are IRR focused. It's not a consistent dividend payer with sort of NAV on sort of the other side. But we've been happy with the performance there. I think even looking at the body of work here that I talked about, new investments of $34.5 billion at an 8.7% unlevered. I think, again, we're disappointed by what we've seen from some of those recent -- now volatility on a handful of these names. But I think it's -- and clearly, there's going to be some on names in there, but it's just smaller and I think in some way it's more spread out. But hopefully, that answers the question.

Yes. Hopefully, I'm a little later this time. Just for the follow-up, you outlined the company will likely shrink pursuant to buybacks and delevering. Does that -- and I appreciate you gave the sort of step by step there. Does that go beyond the buyback program you just put in place?

You say beyond, Fin, what do you mean by that?

It was $300 million of buyback you announced, right?

No, that's correct. That's right.

Like what you do another one? I mean I think we can evaluate that?

The other side of this being completed. I think when we talk about how we see the balance sheet evolving. And I think -- I think the buyback is important. We will look and intend to sort of get that done. I think it will be subject, as we mentioned in our prepared remarks, around repayments coming in and so on, et cetera. I think we do want to get leverage down to more inside that target range. I think the combo of those 2 things would just bring you to that. But I think you can hear from our remarks that where we're kind of sitting today, we think the stock has been dislocated. I think we're trying to put these actions in place as we think about enhancing equity value that we talked about we're going to be mindful if there's still a big disconnect between stock and sort of NAV. So we got a lot of these actions being announced today, and we got a lot to execute on.

[Operator Instructions] And our next question comes from the line of Rick Shane of JPMorgan.

Look, my first question is going to be a little ironic given all my questions previously about repurchasing shares. But as you sort of pursue this path Obviously, 1 of the headwinds to your multiple is the relatively low return on capital. And I'm curious how you -- as you sort of move through this, how you manage capital profitability to the extent that the business may be descaling.

Yes. No, I appreciate the question. I think there's probably a couple of pieces of that, right? We did have and sort of have had a very low amount of fee income. I think the environment we're going into, even with the lower kind of new level of deals, we can see that sort of pop up. I think we've talked about this on prior calls. We've got a focus area on reducing non-income producing assets as well as nonaccrual assets. Obviously, we felt some nonaccrual moves this quarter with Medallia and affordable care.

And I think that will take a couple of forms, Rick. Sometime that could just be regular by asset sales. You would have heard us on prior calls talking about some of the historic names in the portfolio like JWA or Global Jet that have paid out historical or recent decent amount of dividends and most of that has been return of capital. But that's another way. So I think we got to be laser focused on that side. because that is probably 1 of the more accretive things that drops down to the bottom line. But it's a fair question, and we appreciate it.

Got it. And then look, there's a little bit of a fine line between Talos, which is not my favorite thing to traffic and corporate governance, which obviously, we have to think about. Can you help us understand a little bit more about the decision and sort of how you balance incentives between the 2 managers here. And if this dynamic sort of creates any divergence in terms of what each side incentives might be.

Yes. Thanks for the question. I will go back to a couple of points. I mean I think as I went through in the prepared remarks, we spent a lot of time going through kind of all the various details and options on these proposals. We did that as a group. As Michael sort of talked about, I think the partnership has been strong. We spent a lot of time talking about with the Board as well. So I think it was an open and so a transparent conversation throughout this. I think a lot of work went into announcing the points of this action plan here.

Our next question comes from the line of Paul Johnson of KBW.

I appreciate the supportive actions from the adviser as well as the high conversion rate on the preferred. But just curious as why that was, I guess, the more optimal decision on the preferred capital infusion as opposed to something like an infusion of common equity at NAV or even committing some to the tender offer.

Paul, thanks for the question. I would probably go back a bit again to just thinking about the totality of the package here. I think we're trying to address a bunch of different sort of pieces between the convertible pref between the tender, between the share repurchase program and between the incentive piece of the piece, obviously, touching on NAV and other things from the share repurchase stock price sort of moves or support with the tender, liquidity and maybe even liquidity to help on the share repurchase vis-a-vis the convertible pref. And then NII and so the dividends and think about the incentive fee. So it was trying to really touch on and capture sort of all 4 of those points as we thought about it and decided on this path.

I'm showing no further questions at this time. I will now turn it back to Dan Pietrzak for closing remarks.

We wanted to thank you for your time today. We know there's a lot of information here, and we're available at any time for follow-up questions as needed. Thank you.

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

Good day gentlemen. Welcome to FS KKR Capital Corp.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] . Please note that the conference is being recorded. At this time, Anna Kleinen, Head of Investor Relations, will proceed with the introduction. Mr. Kanon, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Fourth Quarter and Full Year 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, 2025.

A link to today's webcast and the presentation is available on the for Investors section of the company's website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is shortly 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 fourth quarter earnings release that was filed with the SEC on February 25, 2026.

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 Petersak, 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, and good morning, everyone. Thank you all for joining FSK's Fourth Quarter and Full Year 2025 Earnings Conference Call. I'd like to start today's call by reviewing the goals we set for 2025 and discussing how we performed against those priorities. .

Our first goal was to originate attractive well-structured investments, which would be accretive to the quality of our investment portfolio. During 2025, we achieved this goal as our investment team leveraged its deep sponsor relationships to originate $5.6 billion of predominantly first lien and asset-based finance investments.

Second, we set out to provide shareholders with $2.80 per share of total distributions through a combination of our quarterly base and supplemental distributions. Our spillover income, which purposely was increased during the high interest rate environment allowed us to achieve the objective even against the backdrop of a declining interest rate environment.

Our third goal was to continue proactively laddering the right side of our balance sheet. During 2025, we continue to optimize our capital structure by issuing $400 million of new unsecured notes closing on a new $400 million bilateral lending facility, diversifying our funding sources through 2 new middle market CLOs and further enhancing our liquidity profile through an amendment to our senior secured revolving credit facility that increased our total commitment, extended the maturity and reduced pricing.

Despite the achievement of these goals during the second quarter and fourth quarter of 2025, we experienced downward pressure on a few specific investments across our portfolio, which resulted in a decline in our net asset value. We acknowledge that non-investment-grade private debt investing necessarily will result in underperforming assets from time to time. However, we are disappointed by these markdowns.

Dan, of course, will discuss these topics in more detail later in the call. Looking ahead to 2026, our goals are as follows: First, we expect to address underperforming assets through restructurings, exits and continued proactive portfolio monitoring to reduce the number of nonaccruals and nonincome-producing investments in the portfolio.

Second, we will continue our strategy of focusing on first lien senior secured originations, with the goal of continuing to increase the overall quality and diversification of our investment portfolio while simultaneously continuing to focus on rotating a portion of our legacy investments. Third, we remain focused on preserving our strong liquidity and balance sheet flexibility by keeping net leverage within our target range and maintaining ample revolver capacity to manage volatility and selectively deploy capital.

Turning to our fourth quarter results. FSK generated net investment income totaling $0.48 per share and adjusted net investment income of $0.52 per share as compared to our public guidance of $0.51 and $0.56 per share, respectively.

Our net asset value share declined by 5% to $20.89 compared to $21.99 and as of the end of the third quarter. The 2 primary components of the quarterly change in net asset value are a $0.22 per share decline as a result of our $0.70 per share distribution compared to our GAAP NII of $0.48 per share and an $0.87 per share decline as a result of downward pressure on certain investments.

From a liquidity standpoint, we ended the quarter with approximately $3.8 billion of available liquidity. Based upon our updated dividend framework and expected operating results, our Board declared a total first quarter distribution of $0.48 per share, consisting of our base distribution of $0.45 per share and a supplemental distribution of $0.03 per share. This represents a 100% payout of our GAAP net investment income and a 9.2% yield on our ending fourth quarter net asset value.

With that, I'll turn the call over to Dan to provide additional color on the market and the quarter.

Thanks, Michael. I'd like to start by focusing on FSK's recent performance. As Michael noted, our recent underperformance reflects challenges in certain legacy investments, including Production Resource Group, as well as challenges in certain current adviser originated investments such as Medallia, Cuba Corp, KBS and 4840. .

We are actively engaged in each of these situations and are pursuing company-specific solutions to stabilize performance and maximize recoveries. Although we acknowledge each company faces challenges unique to a specific business. We also acknowledge that our nonaccrual assets are higher than we would like, which tempers our near to intermediate term view from an NII standpoint.

Specifically, this means that our 2026 dividend, which we originally believed would equate to approximately 10% of net asset value may now be more in the range of 90% of net asset value. Stepping back a bit, focusing on the current advisers long-term performance. Since the formation of the FSK care adviser 8 years ago, we have originated $34 billion of investments in FSK, generating an unlevered IRR of 9.1% since inception.

And while recent nonaccruals have emerged in this body of work, we do believe some level of defaults is inevitable in a sub-investment-grade portfolio, particularly across various market cycles. Nevertheless, we are focused on the work ahead of us during 2026 and beyond, not only to establish more stability in our investment portfolio, but also to regain the market's confidence in our ability to deliver more consistent results on a quarter-to-quarter basis.

And with that, I'll turn to a few specific comments about the quarter. During the fourth quarter, approximately 50% of net realized and unrealized losses were attributable for investments, Production Resource Group, Medallia, Peraton and Cuba Corp. We have spoken about most of these investments in detail in the past. However, I'll give a quick update on each name. PRG, a legacy investment is a leading provider of integrated entertainment and live event production solutions. PRG continues to be impacted by softer operating performance due to headwinds in their TV, film and music segments.

During the quarter, we incurred approximately $47 million of net losses. Medallia, an Enterprise Software as a Service experience management platform has faced competitive pressures, which have resulted in the company's recent financial underperformance. This investment contributed $29 million of unrealized losses during the quarter.

Paraton, a provider of technology-focused services and solutions to U.S. government agencies contributed $23 million of unrealized losses during the quarter. Cuba Corp, an existing nonaccrual investment is a diversified technology provider to defense and civil related agencies across governments throughout the world. Over recent periods, the company has experienced order and implementation delays resulting in the current period valuation.

Cuba Corp contributed $21 million of unrealized depreciation during the quarter. Turning to the investing environment. During 2025, we experienced a 13% increase in the number of investment opportunities we evaluated, though I would highlight, we are remaining extremely selective. We are focused on continuing to diversify our portfolio by taking smaller position sizes and a greater number of borrowers.

Additionally, based on the opportunities we are seeing in the market today, we continue to believe the best risk-adjusted returns are in first lien loans and asset-based finance investments. During the fourth quarter, we originated approximately $1.1 billion of new investments. Approximately 80% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships.

Our new investments, combined with $806 million of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $292 million. New originations consisted of approximately 65% in first lien loans, 15% in asset-based finance investments, capital calls to the joint venture and 2% in equity and other investments.

Our new direct lending investment commitments had a weighted average EBITDA of approximately $352 million. 6 2x leverage through our security and a weighted average coupon of approximately so for plus 475 basis points. We continue to focus 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 December 31, the weighted average EBITDA of our portfolio companies was $236 million, and the median EBITDA was $132 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 4% across companies in which we have invested in since April of 2018.

Median interest coverage increased to 1.9x compared to 1.8x at the end of the third quarter. Software and services currently represents 16% of our investment portfolio, diversified across 50 issuers with an average position size of 33 basis points of our total investment portfolio. Average and median EBITDA of approximately $162 million and $110 million and a median LTV of approximately 39%. This segment of our portfolio historically has been one of our best performers and has been underwritten with a particular focus on primary customer relationships and the durability of revenue and cash flow streams attached to those relationships.

We will continue to assess potential future AI risks with each investment we analyze as our current belief is that widespread AI adoption may result in an overall expansion of the addressable market, even though it likely will negatively impact certain companies, which either have not yet achieved meaningful positive cash flows or are less well positioned from a customer retention standpoint.

During the fourth quarter, 5 investments were added to nonaccrual status and 1 was removed. New nonaccrual assets include Alacrity Solutions, Amerivat Partners, Dental Care Alliance, Gracia and Lionbridge Technologies. Together, these investments totaled $255 million of cost and $214 million of fair value across our investment portfolio.

As previously disclosed, Production Resource Group was removed from nonaccrual status. As of December 31, nonaccruals represented 5.5% of our portfolio on a cost basis and 3.4% of our portfolio on a fair value basis. This compares to 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis as of September 30. Nonaccruals relating to the 90% of our portfolio, which has been originated by KKR Credit were 5.1% on a cost basis and 3.1% on a fair value basis as of the end of the fourth quarter. This compares to 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter.

And while we acknowledge that this nonaccrual rate is above the long-term BDC industry average cost basis, nonaccrual rate of approximately 3.8%. We also recognize that this measure is a point-in-time data point. KKR's long-term average cost basis nonaccrual rate since April 2018 is 1.2%.

In summary, with regard to our investment portfolio, we recognize there's work to be done which may result in an above-average level of portfolio volatility during certain periods, coupled with lower levels of net investment income as compared to prior estimates.

Portfolio metrics do move over time, and we believe our investment and workout team are well equipped to successfully navigate this period of elevated portfolio volatility.

Lastly, subsequent to quarter end, we announced that the aggregate capital commitment to our joint venture with South Carolina Retirement Systems Group Trust increased from $2.8 billion to approximately $2.975 billion, reflecting an additional net $175 million contribution from our partner. Following this transaction, our partners' ownership percentage climbed from 12.5% to 21.1% and and our ownership percentage changed from 87.5% to 78.9%.

We and our partners have been very pleased with the performance of the JV to date and this incremental capital positions the joint venture to continue scaling while fully leveraging the breadth and depth of the KKR Credit investment platform.

With that, I'll turn the call over to Stephen to go through our financial results.

Thanks, Dan. As of December 31, 2025, FSK's investment portfolio had a fair value of $13 billion, consisting of 232 portfolio companies. At the end of the fourth 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 third quarter. .

We remain focused on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 62% senior secured debt as of December 31. In addition, our joint venture represented approximately 15% of the fair value of our portfolio as of the end of the fourth quarter. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, and first lien loans total approximately 68% of our total portfolio and senior secured investments total approximately 72% of our portfolio as of December 31.

The weighted average yield on accruing debt investments was 10% as of December 31, a decrease of 50 basis points compared to 10.5% as of September 30. As a reminder, the calculation of 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 $348 million for the fourth quarter, a decrease of $25 million compared to the third quarter. The primary components of our total quarterly investment income were as follows: Total interest income was $256 million, representing a decrease of $29 million quarter-over-quarter. The decline in interest income was driven by investments placed on nonaccrual during the quarter lower base rates and the repayment of higher-yielding investments.

Dividend and fee income totaled $92 million, an increase of $4 million quarter-over-quarter. Our total dividend and fee income is summarized as follows: $58 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $28 million during the quarter and fee income totaling approximately $6 million during the quarter.

Our total expenses were $213 million during the fourth quarter, a decrease of $1 million compared to the third quarter. The primary components of our total expenses were as follows: our interest expense totaled $110 million, a decrease of $6 million quarter-over-quarter and our weighted average cost of debt was 5.1% as of December 31.

Management fees totaled $50 million, a decrease of $1 million quarter-over-quarter in sense of fees totaled $28 million, a decrease of $5 million from the third quarter. Other expenses totaled $7 million, a decrease of $3 million quarter-over-quarter. And lastly, excise tax totaled $18 million during the quarter.

The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending third quarter 2025 net asset value per share of $21.99 was increased by GAAP net investment income of $0.48 per share and was decreased by $0.87 per share due to a decrease in the overall value of our investment portfolio.

We experienced a $0.01 per share reduction in net asset value from realized loss on extinguishment of debt and a $0.70 per share reduction as a result of the total quarterly distribution paid during the quarter.

The sum of these activities results in our December 31, 2025, net asset value per share of $20.89. From a forward-looking guidance perspective, we expect first quarter 2026 GAAP net investment income to approximate $0.45 per share and we expect our adjusted net investment income to approximate $0.44 per share.

The detailed components of our first quarter guidance are as follows our recurring interest income on a GAAP basis is expected to approximate $226 million. We expect recurring dividend income associated with our joint venture to approximate $60 million. We expect fee and other dividend income to approximate $29 million.

From an expense standpoint, we expect our management fees to approximate $48 million. We expect incentive fees to approximate $26 million. We expect interest expense to approximate $104 million, and we expect other G&A expenses to approximate $9 million.

[indiscernible] structure. In December, we closed our third middle market CLO, raising $363 million of low-cost secured debt priced at a weighted average rate of SOFR plus 157 basis points. We are pleased with this financing, given it is match funded with no mark-to-market at an attractive rate.

As of December 31, our gross and net debt-to-equity levels were 130% and 122%, respectively, compared to 120% and 116% at September 30. Our leverage remains within our target range of 1x to 1.25x net debt to equity. At the end of the fourth quarter, our available liquidity was $3.8 billion and approximately 62% of our drawn balance sheet and 43% of our committed balance sheet was comprised of unsecured debt.

Pro forma for the $1 billion unsecured bonds that matured on January 15, 2026, 49% of our drawn balance sheet and 38% of our committed balance sheet was comprised of unsecured debt and our next balance sheet maturity is a $400 million bond in January of 2027.

And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thank you, Stephen. As we enter 2026, we actively are focused on working through the portfolio-related items Dan discussed in detail. Our new and recent originations are performing well, and the vast majority of our portfolio continues to perform in line with our original expectations. As a result, we believe our scale, experience and proactive portfolio management will enable us to maximize recoveries and and to continue providing shareholders with an attractive level of current income relative to the risk-free rate.

As always, we appreciate you joining us today. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Finian Osha with Wells Fargo Securities.

Everyone, good morning. So just to start, like big picture, FSK is shrinking, which makes it worse than likely stuck below book. So do you ever think about like a grand bargain or, say, the FS side allows for a lower fee. And then the KKR side puts in some balance sheet money to inject life into the BDC and ultimately show that the partnership model can work?

Yes, I mean, that's probably a bit of a complicated question. But I think if you take a step back, I think we have been, I think, both sides quite happy with just the partnership I mean, clearly, it's been a harder quarter. But if you do think about we have originated $34 billion of investments into FSK in the last 8 years, the last quarters have helped bumpy, but we're to the 9.1% sort of IRR sort of against those.

I think we've got some work to do clearly on the portfolio. I think we got some work to do, to your point about how to either grow this thing or create some levers as it relates to income growth. The short or the low-hanging fruit there is we do have too many nonincome-producing assets. right? We're roughly 9.5% there. I think we've been stuck with that for a while because that really started with some of the older assets that were here.

I think us and the team have gone through I'd say, a laundry list of things as I would think about kind of a forward operating plan as we evolve these things for 26 to 27. I don't think this is a quarterly sort of discussion as we work on that evolution.

Okay. Sorry, can you -- sorry about that. A follow-on the performance fees. So one of your peers yesterday Blackstone, they had a few write-downs. They got a little bit less of an incentive fee. The stock was fine. Do you think that makes sense to revisit again the look back that is?

Yes. And I mean, I think we're kind of quite cognizant of fee structures and constantly sort of mapping that to the market or at least where we sit versus others in the market? And then also thinking about where we said vis-a-vis sort of dividend numbers, right? I think at the $0.48 odd number or sort of roughly 9.2%. But I think that we'll call it a valuation. We as a team, and we're constantly sort of thinking about well be discussing those sort of matters.

But I think we're, in a lot of ways, focused on the total earnings for the year and that 9.2%, which probably lower than we want to be today, but probably above kind of historical average.

Thank you. Your next question comes to the line of Ethan Kay with Lucid Capital Markets.

Wondering if there's anything you can kind of point to any common threat or common denominator here across the position that drove the underperformance this quarter?

Yes, Ethan, thanks for the question. Maybe I'll put it in a couple of buckets, right. If you do look at the the 5 names that were added to nonaccruals, 2 of those are in the sort of medical or sort of health care rollup space, right? That's one area we are kind of keeping an eye on I think we've seen a lot of names performing well there, but that has been a space where wage inflation sort of has mattered. Retention has mattered. That's been across kind of dental as well as the area. So that is probably what I'd say, one common theme out there on the nonaccrual side.

I think the other names where we've seen some of the marks and when we got through the script, I mean 4 names drove 50-odd percent of that. One of them is PRG, which has been a tough name for a long time. We've done a lot of resources sort of attached to that, but that's very much idiosyncratic to that name.

The rest of it, I would just probably put in the camp of, we'll call it, operational sort of underperformance. There's a little bit of dose or government sort of contract risk embedded in there. And I think that still plays through the system with someone like a Peraton or sort of a cubic. So there are, on one hand, some themes with the medical roll-ups on some hands and themes with kind of the dose or the government to the points and then some of it is boils down to operational performance.

Got it. And then I guess the 3 kind of other nonlegacy names you mentioned as well as at least I think one of the new nonaccrual names seem to be either software-centric or software adjacent, if I'm not mistaken. I'm just curious if there's any kind of -- we're obviously hearing a lot about the emergence of AI and the risk that poses to software companies wondering if any kind of pressure from that dynamic?

Yes. No, it's a very fair question considering what's going on news wise. I mean, the overall portfolio from software for us is about 16%. I think we have been evaluating what I would call AI risk in that portfolio for some time, not just on the back of the recent news flow. We do have the benefit of working with our private equity colleagues and have come up with this sort of what I'll call framework looking at 20 different data points to assess what might be high risk or not.

I think from an investing perspective, we have focused on what I would call mission-critical products, those that are sort of hard to rip out or are focused on those businesses that, in our opinion, truly have proprietary data.

I think we have not been active in the ARR space, right? We do have 1 ARR loan left, which is Medallia, which we sort of talked about. I think when you put all that together, when we look at our portfolio, we got sort of roughly 2% of the names that we think have a high AI risk attached to them.

Of the names you kind of referred to, you look at the ones that were talked about as it relates to driving the mark. I don't think that they actually had anything to do with as it relates to underperformance, it's really more in that operational camp. The one that did would be lines, rich right? That business is a language translation business and sort of a gaming business.

The language business has, in our opinion, had some headwinds from that. We think the gaming business is quite attractive. I think for a long time, and I think we still might believe we could be covered from that gaming business, but really not AI-driven as a summary point.

Thank you. Your next question comes from the line of Aaron Sanovi with Truist Securities. .

The 2026 goal of kind of dealing with from credits, maximizing value can often take a while to unfold. How are you kind of approaching this to try to both quickly address the east, but also maximize the value that you're going to get from potential restructuring.

Yes. And the line is not great. But I think the question was around sort of maximizing value. So if I don't answer it fully, please add to it. I think we did talk about our 26 goals, right? I mean clearly, addressing these underperforming assets has to be top of that list. I think the other parts of it relate to getting more diversification in the portfolio. That's been a big focus. It needs to continue to be. And then obviously thinking about liquidity.

We've got a deep and solid invespecifically those who function on the workout side we've got 25 odd people focused on portfolio monitoring. I do think, Ari's a little bit of a case-by-case basis. I think there are some things that I would expect to be multiyear events and some PRG has been multiyear already.

I think there are some where we think there could be either a faster sale process, either because it be accretive or sort of a risk management point in several of these businesses, we have replaced management teams, brought in new senior leadership, used our senior adviser network. So it will be case by case. I would caution to say that it's not an overnight thing, right? We do believe it will take some time. That's why we're talking about things over kind of a longer period, which I would.

Got it. And maybe you could just provide a little more details on the JV equity changes there? And what drove that? And how much of a drag will that be from the dividend income associated with that?

Yes, fair question. We've been happy with the joint venture. I think that's the starting point, right? We've talked about a lot on prior calls about getting that towards its target number of roughly 10% to 15%. It's been at the upper end of that range. We do want to see it continue to grow over time, which that was really the driver here. South Carolina has been a great partner for us. .

Then putting additional capital in, I think you can just equate to FSK kind of selling a portfolio or an asset sort of that kind of the mark and then you can use that -- those proceeds to reinvest into other places. So there's some offset to that, to your question around any sort of dividend reduction.

But the point and the purpose of it was to allow the entity to grow. My guess is, over time, you will see our percentage potentially sort of tick back up as we could continue to put additional sort of capital in there. That's not necessarily automatically will happen, but it's something that sort of could happen. But it's about trying to continue to grow.

I think it will have a certain amount of an impact out of the gate I think we're mindful about that. But I think we were pretty happy to continue this good partnership with South Carolina.

Thank you. Your next question comes from the line of Casey Alexander with Compass Point Research and Trading.

I have 1 question and 1 follow-up. My first question is, look, I hate to bring up what might seem like a tired old refrain, but at the moment, the stock is trading at 55% of book, and that's kind of streams not to invest in new loans, but to take repayments and start buying the stock could you guys give us some feeling for your temper in regards to beginning to initiate meaningful stock repurchases.

And I know, look, I know the employees have bought the stock. I know the advisers bought the stock. But at this point in time, your only road to increasing NAV at this point in time is accretive share repurchases at such a dramatic discount to book value.

Casey, thanks for the questions. I think we understand the point there. I think as the entity -- these numbers might not be perfect, but I think we have historically bought back $350 million of stock. That's probably more than sort of most out there. It is something that we do have to consider. I think the only thing on the other side of that, that I just need to be mindful about is the market noise and volatility and I do believe some of that is overdone out there broadly, but that's kind of top of mind and then where we're at vis-a-vis sort of leverage and target leverage, but it is, yes, something that we will be talking about.

Yes. And the fact that maybe some of the movement in the stock is related to broader market noise would argue even more, I would think, to buying it here because some of that will then be relieved by the absence of the market noise, and this would be the most accretive level.

My second question is there have been multiple reports of a pretty material dislocation in the fix and flip market, and FSK has a significant investment in [indiscernible] and so I was wondering if you could remind us what the structure of the Turk investment is and how it's performing?

Yes. So if you go back, I mean, that investment was initially made in 2016. In a lot of ways, started out in probably thinking about it almost as a trade, right, meaning that there was no institutional footprint out there, we wanted to capitalize on that. When we did the deal back in '16, I probably would have been happy with if we did kind of $1 billion to $2 billion of loans.

I think what we do look at it today, right, we've done $12.5 billion of loans. I think the cumulative losses for the entity over the 10 years have been kind of roughly $100 million. So that's held up pretty well. I think we have seen -- and I don't think your point is wrong, Casey, I'll come back to the other side of that. I think we have seen some positive sort of points.

Their direct origination business did almost $800 million or $820 million last year. They do have a business in the U.K. that's been quite effective and quite strong. I think we have seen higher delinquencies in the U.S. roughly 10%, although that's been sort of stabilizing. I think we have seen ROEs challenged, right?

Some of that relates to the delinquency numbers, some of that relates to the rate environment where the the interest rate on the loans did not move anywhere near the financing cost did, right?

That has had an impact on us, right? Our dividends out of Torc, which have historically been roughly 10% per year have been lower. We've seen some impact to the mark there. But arguably, over the 10-year period has been a positive story. It is treated like a portfolio company, meaning it is an active originator on a direct basis as well as a buyer of loans in the U.S. and the U.K.

And so we can either be the benefactor of those cash flows or it's a partnership with the management team, you could look for a monetization event down the road. But I think you're not wrong about the noise. I think there's been a little bit of let's call it, LTV type risk against some of the loans that have originated especially from some of the smaller guys, fortunately, torics had really any de minimis exposure to like that. But I think the ROE has been the bigger one.

Your next question comes to the line of Rick Shane with JPMorgan.

Look, Case really covered, I think, as far as I'm concerned, the most important structural issue in terms of repurchasing shares. Look, you guys had over $5 billion come in last year, $5 billion the year before that. Presumably, the run rate in terms of repayments will be similar this year which should provide a fair amount of liquidity for repurchases.

I haven't -- listening to all the BDC calls, I haven't heard anybody make a super compelling case for, wow, there's this incredible dislocation, this opportunity to deploy capital into new loans that's so attractive.

What is out there that's actually more accretive to both earnings and again to NAV than repurchasing shares at this point?

Yes. And thanks for the question, Rick. I think the investing environment has been maybe the right word is interesting over the last handful of years, right? There's been a lot of different forms of market events -- the market I think on the direct lending side, to be fair, has felt decently tight in terms of -- you have seen spread compression I think a lot of that has had to do with the fact of inflows were high.

I do think the inflows from the wealth channel was a driver of that, and that was really coupled with let's call it, lower than normal M&A volumes. So you could talk about a little bit of a market technical out there, I think the offset to that is I think the quality of the companies that have been accessing the market has been strong.

I think the size of the companies that have been accessing the market has been good. I think we prefer to lend to those larger companies. I think the thing we have tried to focus on is getting diversification in the book, right? So that was growing the joint venture was one form of that. We've gone up to the target number we have seen some compelling opportunities in the asset-based finance.

We talked about some of those on prior deals onside prior calls, either the Harley-Davidson or the PayPal. But I understand the point. I think we need to take all that into consideration as we move forward.

I would say one thing. I probably am expecting a more lender-friendly environment as we go through the course of '26. I think that will very much skew based upon how open the capital markets is, which it is pretty open right now. But I think you'll see the flows maybe sort of temper a bit and then you'll have to see what happens in the capital markets as the sort of probably primary driver of that. But our eyes are focused on it.

I appreciate the answer. Look, there's the old cars may you live in interesting times. I'm not sure but you guys, but I'm tired of interesting times. .

Thank you. Your next question comes from the line of Robert Dodd with Raymond James.

Sorry, I'm recovering from that thing [indiscernible] because I agree with him on that one. A couple of questions on credit, not surprising. On the main markdowns this quarter I mean PRG, Medallia, Pareton, I mean cubic is already on noncore. Those are the 3. I mean, PIG just came off, not a call markdown. I mean looking at the scale of the marks I got a question -- are there -- is there a high probability that those businesses end up on nonaccrual as well or large segments of them?

Do they have to go through aggressive restructurings, where even if they don't go in [indiscernible], you equitize a bunch of the debt and those -- is there an increment for risk in addition, obviously, to the the 5 new ones this quarter, those 3 PRG, which has been a mill process already, but the first restructuring didn't stick. Is there a material risk that there's more earnings loss to come from those assets?

Yes. And on thank you for the question. I think on each of those names, there's what I would call some level of active dialogue or sort of active to the monitoring. I mean, Peraton is probably as much of over time, it's evolved as much as a Level 2 asset as sort of Level 3. So I think that is some of that component in there, so I think as we -- as you go down the list of those, right, I think we're trying to make significant changes on the PRG.

There is a large chunk of more sort of equity right equity life risk that's in the non-income-producing bucket. I think the lenders have been doing a lot of work on the Cubic side, but there still is, quite frankly, some headwinds on -- from the government. I think Pareton had some good news, right, during Q4 is related to sort of a big contract win.

And I think we're going to spend time with the other lenders. And I'm sure discussions with the sponsor on Medallia. There's a lot of capital below the metal, but performance has been more difficult, really operational, though non-AI, so they're all live situations.

Got it. Got it. And then on to the -- you mentioned this in response to another question, I mean the health care and the roll-up issue. I mean a few years ago, physician office roll, talking about your portfolio at this point. And then it became dental, I mean, you've got DCA, but a lot of other people at DCA and 2 other dental businesses went back on nonaccrual this quarter elsewhere.

And you had -- I mean, obviously, that's been an evolving theme the roll-up issue within the health care space has become, it doesn't seem to be getting fixed, right, broadly across space.

Is there this continues to spill. I mean there's still plenty of dental businesses that aren't currently feeling those pressures across in your portfolio elsewhere. And the same thing like with vets and what's the next shoe to drop on the roll-up strategy kind of breaking down as it exists in your portfolio as a [indiscernible] obviously?

Yes. I mean I think that is a fair question. And I think you're correct, it was for some period of time, probably one of the darlings of both PE and direct lending. We -- it is an emerging theme in our mind or it has been for the last handful of quarters. I think we saw it initially on things that were, let's call it, consumer discretionary sort of focused, right? So they were sort of struggling. We have seen, as I talked about before, kind of the wage inflation remains sort of a challenge there. .

We have seen, we'll call it, very different performance even within the dental space on certain names. So -- and some of that goes to, we'll call it, structure of business or how the employees are getting compensated, whether they own part of their individual practice or whether everybody owns something sort of up top.

So it is a little case specific I think for us, we're 5.7% of the portfolios in these medical sort of roll ups, 3.3% of that is dental. DCA went on nonaccrual, it got sort of marked down this quarter. I think we feel pretty good about that business, that team.

I think we were in, what I'll call it, live discussions with the junior net holders and sponsors there. it feels like it's going to be a 1-L led solution. But that business is actually doing what we'll call it, broadly okay or at least in line with plan, but I think being a '21 investment at a different rate environment just over levered.

The -- we have seen some other names out there that have inside of this quarter, struggle a little bit more in the dental space, right? We have 1 of those in affordable care, but it is a bit of a hotspot right now and 1 that we're focused.

Your next question comes from the line of Dylan Heinz with B. Barley Securities.

I know we talked about this quite a little bit here, but I guess what was the inflection point coming from last quarter's expectations of decreasing nonaccruals, there's the pro forma guide cost and 1.9% of fair value after PRG restructuring. But I guess, like yes, what was the breaking point coming from that to where we are now?

And again, another fair question. I do think, just to be there, I think the 3.6% was just kind of giving a pro forma knowing that BRG had sort of fallen off it wasn't trying to sort of necessarily guide, but if that was the impression, we'll work better on communication there.

I think that if you look at the nonaccruals, really, the 3 of the names are quite small from a market value perspective the real drivers are really DCA and Lionsbridge I just talked about DC on the prior call, that was a live conversation with those who are subordinate to us and it's going a different way than I think we would have assumed or thought it was going.

And then on Lionsbridge, we were in an active sales process. We do think parts of that business are still interesting -- and that was the one space in the portfolio where there was some direct in my mind, kind of AI impact, not just performance, but the kind of overall mode around the business, which I think made that sort of sales process hard. So I think the events relating to what we're at CA and Linsburg were the drivers.

Your next question comes from the line of Finn orchewith Rose Fargo Securities.

I appreciate the follow. I'll be less abstract this time. I wanted to get an update on the -- I know you talked about the dividend a little bit, but part of the sort of lead up to the finality here was the spillover item. Can you give us an update there? Did you like reach your target range? And/or should we anticipate specials like on top of the supplemental program ?

Yes. And I'll let Stephen kind of go through that. I think just for everybody's benefit on the call, just as a reminder, right, we did change the dividend effective the dividend policy in the last call to be more sort of base and supplemental the $45 base the supplemental sort of thereafter. But Stephen, do you want to.

Yes. Then we ended the year, I think the number in the 10-K is the estimate is $464 million or so of spillover. And as you will certainly not based on the current dividend, that's sort of 3.5 quarters or so. What I would say in that is this we have -- what we've seen kind of during late '24 and through 2025 as the ABF portfolio has continued to ramp and international structured investments and partnerships and banks, we're making estimates at this point in the year tax could be.

And then in certain investments, whether or not cash is received, they're quota paper profits, and we allocated our portion of tax, which would go into spillover. So there can be some timing differences on that. And so we will know much more in the kind of August, September time frame. But I think we stand by what we said before, which is if we need to make a payment later in the year, we will certainly do that.

But I think it's too early to tell if some of these reversals could happen or where the final partnership tax returns will come in over the summer months. So it's a little bit of wait and see. But certainly, when the will announce it.

Yes. No, appreciate it. So it's not like last year where it's overpaying like the 45% is your true like NOI target?

Yes. I think what we said in terms of the dividend is as GAAP net investment income moves quarter-to-quarter, then the dividend will move as well. And then if we need to make an additional payment later in the year to satisfy something from a spillover related basis, we will do that, which is, as I think you're pointing out, different than the concept last year of effectively guaranteeing the market we're going to pay $0.70 for all 4 quarters of 2025 because for other reasons, more over-earning reasons and the higher interest rate period, the spillover balance had grown.

This concludes the question-and-answer session. And I would now like to turn it back to Dan Peter such for closing remarks.

Thank you, everyone, for your time on the call today. We very much appreciate it. We are available for any follow-up questions as needed. And if not, we look forward to speaking with you on our Q1 call. Thank you.

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

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Third 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 September 30, 2025. A link to today's webcast and the presentation is available on the For Investors 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 third quarter earnings release that was filed with the SEC on November 5, 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 FSK's Third Quarter 2025 Earnings Conference Call. I'd like to start today's call with a few market observations.

We believe the BDC industry in general and FSK in particular, are resilient. The BDC industry's ability to navigate historical periods of volatility, whether due to interest rate adjustments, asset prices, inflationary pressures or spread compression has been strong. The primary reason so many BDCs successfully navigated prior period of volatility has been the lowly levered capital structures with which many companies, including FSK operate. When interest rates began moving up just a few years ago in response to inflationary pressures, many industry observers became overwhelmingly negative in their predictions for BDCs. Not only did the vast majority of BDC portfolio companies navigate this period of adjustment, BDC operators did as well, with many of us delivering sustained quarters of higher levels of net investment income, and higher dividends for shareholders.

As interest rates have started declining, many industry observers once again, are predicting difficult times ahead for BDCs. At its heart, the BDC industry is a spread lending business built on the back of diversified pools of assets and strong balance sheets. So while we expect the Federal Reserve will continue to reduce rates over the coming quarters, that reduction in rates will be immediately helpful to portfolio companies from an interest burden standpoint and likely will generate additional M&A activity.

We also believe that while net investment income levels necessarily will decline from the recent highs, FSK in particular, and the BDC industry in general, are well positioned to continue providing investors with an attractive current income stream as compared to the risk-free rate. And with that, I'd like to turn to a quick overview of FSK's quarterly results and a few comments on our forward dividend strategy, which will begin in the first quarter of 2026.

During the third quarter, FSK generated net investment income, and adjusted net investment income of $0.57 per share as compared to our public guidance of approximately $0.58 and $0.57 per share, respectively. Additionally, our net asset value increased to $21.99 compared to $21.93 as of the end of the second quarter. On October 8, 2025, we announced that our Board declared a fourth quarter distribution totaling $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. In contemplating our forward dividend strategy, we consider the prevailing interest rate environment, the overall investing environment and future unsecured debt maturities. Additional considerations included annualized BDC dividend yields on net asset values over various market cycles and our projected level spillover income as of December 31 of this year. Finally, we actively listen to investors in terms of their views of our historical base plus supplemental dividend policy, as we were one of the first BDCs to implement such a policy some years ago.

The culmination of this process yields the following conclusions. First, investors appreciate the base plus supplemental strategy as a method of receiving additional dividend income on a real-time basis. Next, we believe FSK's annualized dividend yield expressed as a percentage of our net asset value, we'll continue to be very competitive with our peer group, and we'll have the ability to vary over time as our net investment income varies, thereby maximizing current income to our investors.

For 2026, we expect FSK's total distribution to equate to an annualized yield on our net asset value of approximately 10%. Consistent with the BDC industry's long-term yield of between 9% and 10%. We currently expect our quarterly distribution will be comprised of a base distribution of approximately $0.45 per share, and will be supplemented by our quarterly net investment income over and above this level. During the first quarter of 2026, we currently expect our total distribution will approximate $0.55 per share based on future interest rates, refinancing activities on the right side of the balance sheet and overall investment yields. We expect our total quarterly distribution will vary over time.

And with that, I'll turn the call over to Dan.

Thanks, Michael. From a macro standpoint, we have seen encouraging signs in the broader market, which point to continued growth in capital markets activity. Momentum in M&A is building, and we are seeing that strength reflected in our own pipeline as the number of deals we evaluated in the third quarter increased by approximately 30% year-over-year. While some economic indicators have shown pockets of weakness, the overall labor market continues to remain healthy, supported by solid corporate earnings. Additionally, higher FICO score consumers continue to spend at accelerated levels.

Looking ahead, if the Fed can engineer a soft landing and tariff concerns can be put behind us, we believe economic conditions could continue to improve. Separately, we would note there has been a significant amount of attention to certain specific defaults in the broader marketplace. We believe those are not private credit matters and our very specific situation and names. We would also note we have no exposure to [ First Brands ] or [ Tricolor ].

Trade tensions and the recent government shutdown continue to heighten our awareness around U.S. government and tariff-related exposures. Our portfolio has low single-digit exposure to U.S. government-related borrowers. And while there could be timing effects on payments or short-term liquidity constraints, those risks have yet to materialize. Additionally, ongoing tariff discussions continue to drive market volatility. But as we have stated in the past, our exposure to tariff-impacted businesses remains in the low to mid-single digits. Both topics are on our watch list, though, and are being closely monitored.

We are seeing attractive opportunities in the origination market with a growing number of opportunities coming from new issuers, which further reflects the steady pickup in M&A activity. Our focus remains on U.S.-based direct lending and top of the capital structure risk. In addition, asset-based finance investments remain an important and complementary part of the portfolio, providing incremental yield while outperforming traditional corporate credit from a default perspective.

During the quarter, we had two realizations within our ABF portfolio. Our investment in [ Caledon ] Commercial Finance was repaid in full ahead of its 2026 maturity. Caledon is an asset-based lending platform for capital-intensive businesses with a focus on retail and industrial companies. We initially made this investment in November of 2020 and the repayment resulted in a 13.3% [ IRR ]. Additionally, our investment in Weber was successfully exited in connection with the company's acquisition of Blackstone products. Weber is a manufacturer and distributor of outdoor barbecues and grill accessories. We initially invested in Weber in December of 2023 via an accounts receivable financing facility. The exit resulted in a 16.8% IRR.

Turning to our investment activity. During the third quarter, we originated approximately $1.1 billion of new investments. Approximately 60% 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 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $109 million. New originations consisted of approximately 65% in first lien loans, 7% in subordinated debt, 15% in asset-based finance investments, 12% in capital calls to the joint venture, and 1% in other or equity investments. Our new direct lending commitments had a weighted average EBITDA of approximately $162 million, 6.2x of leverage through our security and a weighted average coupon of approximately SOFR plus 472 basis points.

We continue to focus 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 September 30, the weighted average EBITDA of our portfolio companies was $240 million, and the median EBITDA was $115 million. Our portfolio companies reported a weighted average year-on-year EBITDA growth rate of approximately 4% across companies in which we have invested in since April of 2018.

Interest coverage levels remain healthy, with median third quarter coverage at 1.8x. Our governance and workout team has made significant progress on certain investments, which we discussed during our second quarter earnings call in August. Specific company updates are as follows. We completed the restructuring of Production Resource Group, or PRG in October, resulting in a market aligned capital structure, and we and our BDC co-lender will exercise effective control of the company. And while pricing and industry pressure remains, we believe the company will be in a much better position to create value going forward.

Restructuring efforts associated with [ 4840 ] are progressing. Based upon progress to date, we anticipate being in a position to discuss the finalization of the restructuring on our fourth quarter earnings call.

KBS continues to perform in line with plan, and we are pleased with the workout team's efforts here, as we were able to effectuate change and stabilize the business quite quickly, and there continues to be a strategic interest in KBS. During the third quarter, no investments were added to nonaccrual status and one company was removed from nonaccrual status. Our first lien investment in newer technology was restructured during the quarter into a new accruing first lien loan and revolver. And we also received new preferred stock and common equity. The restructuring resulted in $29 million of cost and $18 million of fair value being removed from nonaccrual status. As of the end of the third quarter, nonaccruals represented 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis. This compares to 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis as of June 30.

A Pro forma for the PRG restructuring, which closed subsequent to quarter end, our nonaccrual rate would be 3.6% on a cost basis and 1.9% on a fair value basis, assuming the remainder of the portfolio is unchanged. We also believe it is helpful to provide the market with information based upon FSK's assets originated by KKR Credit. Nonaccruals relating to the 90% of the portfolio, which has been originated by KKR Credit and the FSK Care Advisor, were 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter. This compares to 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter.

With that, I'll turn the call over to Steven.

Thanks, Dan. As of September 30, FSK's investment portfolio had a fair value of $13.4 billion, consisting of 224 portfolio companies. At the end of the third quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our investment portfolio, compared to 19% as of the end of the second quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 63% senior secured debt as of September 30. In addition, our joint venture represented approximately 13% 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 and first lien loans total approximately 68% of our total portfolio, and senior secured investments totaled approximately 73% of our portfolio as of September 30. The weighted average yield on accruing debt investments was 10.5% as of September 30, a decrease of 10 basis points compared to 10.6% as of June 30. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR.

Turning to our quarterly operating results. Our total investment income was $373 million for the third quarter, a decrease of $25 million compared to the second quarter. The primary components of our total investment income during the third quarter were as follows. Total interest income was $285 million, representing a decrease of $13 million quarter-over-quarter. The decline in interest income was driven by lower base rates, the repayment of higher-yielding investments and the flow-through of assets previously placed on nonaccrual status during the second quarter. Dividend and fee income totaled $88 million, a decrease of $12 million quarter-over-quarter. As we noted on our second quarter earnings call, we anticipated a decline in third quarter dividend income, primarily due to the timing of distributions from certain ABF investments, which were paid during the second quarter.

Our total dividend and fee income is summarized as follows. $59 million of dividend income from our joint venture. Other dividends from various portfolio companies totaling approximately $25 million during the quarter, and fee income totaling approximately $4 million during the quarter. The decline in fee income quarter-over-quarter primarily was due to lower upfront fees associated with the mix of new investments during the quarter, lower prepayment fees due to the age of investments that repaid during the quarter and fewer amendments during the third quarter.

Our total expenses were $210 million during the third quarter, a decrease of $15 million compared to the second quarter. The change in total expenses primarily was driven by a decrease in interest expense due to lower leverage utilization during the quarter. The primary components of our total expenses were as follows. Our interest expense totaled $116 million, a decrease of $9 million quarter-over-quarter. Our weighted average cost of debt was 5.3% as of September 30. Management fees totaled $51 million, a decrease of $2 million quarter-over-quarter. Incentive fees totaled $33 million, a decrease of $3 million quarter-over-quarter. Other expenses totaled $10 million, a decrease of $1 million quarter-over-quarter. Lastly, we incurred $4 million of excise tax during the third quarter related to the finalization of 2024 tax items related to certain international and ABF investments.

The detailed bridge on our net asset value per share on a quarter-over-quarter basis is as follows. Our ending 2Q 2025 net asset value per share of $21.93 was increased by GAAP net investment income of $0.57 per share, and was increased by $0.19 per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share total quarterly distribution paid during the quarter. The sum of these activities results in our September 30, 2025, net asset value per share of $21.99.

From a forward-looking guidance perspective, we expect fourth quarter 2025 GAAP net investment income to approximate $0.51 per share and we expect our adjusted net investment income to approximate $0.56 per share. The detailed components of our fourth quarter guidance are as follows. Our recurring interest income on a GAAP basis is expected to approximate $270 million. We expect recurring dividend income associated with our joint venture to approximate $57 million. We expect fee and other dividend income to approximate $33 million.

From an expense standpoint, we expect our management fees to approximate $50 million. We expect incentive fees to approximate $29 million. We expect our interest expense to approximate $109 million. And we expect other G&A expenses to approximate 49 million. During the fourth quarter, we expect our excise taxes will approximate $20 million. We expect the net effect of [indiscernible] to be partially offset by the accretion of our investments due to merger accounting.

Turning to our capital structure. In September, we issued $400 million of 6.125% unsecured notes due 2031. The which subsequently were swapped the floating rate via an interest rate swap agreement at a weighted average spread of SOFR plus 2.748%. Proceeds were used to repay a portion of the outstanding debt on our revolver. As of September 30, our gross and net debt to equity levels were 120% and 116%, respectively, compared to 131% and 120% at June 30. Our leverage remains within our target leverage range of 1 to 1.25x net debt to equity. At the end of the third quarter, our available liquidity was $3.7 billion and approximately 64% 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. We are pleased with our third quarter results, and we're also pleased to announce our 2026 distribution strategy, which we expect will result in an annualized yield of approximately 10% on our net asset value. From a forward-looking perspective, the pickup in M&A activity is positive to see as we believe our investment platform is particularly well suited to capitalize on this increased activity. On behalf of the team, we thank you all for joining the call and for your continued support.

Operator, we'd like to open the call for questions.

[Operator Instructions] Our first question comes from Finian O'Shea of Wells Fargo Securities.

So it looks like there was some improvement on a few of the legacy names, equity, which is, of course, very welcome. Question as it relates to that is to what extent is this indicative of you and the team advancing toward exiting these investments?

Fin, fair question. I think we have been pretty happy with the work that our workout and governance team has done across these names. We've talked about several of them on kind of calls in the past. I think some of them are complicated because they're effectively minority equity investments, where we don't have sort of perfect governance or control. I think that said -- I've talked about this in the past on some of the names like [ Global Gem ], we've seen a really good job on the management team there, a real evolution of that balance sheet and kind of the [ round of ] ROE figures.

I think we talked about the PRG restructuring, which is positive. [indiscernible] has got a bit of a benefit from tariffs. So we are very, very focused on looking to monetize there for a bunch of different reasons, including being able to redeploy and more interest-bearing the other way assets, but progress.

Okay. That's helpful. And Steven, I had a follow-up. A short question we all have on the dividend is where -- what sort of progress you made towards your targets on spillover and what that might mean for, I guess, as an input to your formula on the variable, but also potential specials this year, next year or whenever?

Yes. Thanks, Fin. We certainly have made progress during 2025, which was our goal. I think we'll end the year probably cleaning out a little north of $100 million of spillover. Obviously, with our partnership investments, blockers that exist to and international partnerships, there is just the way those flow through in terms of our obligation, tax obligation, which does impact spillover. There's a build on the other side.

So I think to the heart of your question, if we end the year when we go through the estimates at that time period, where with the reduction in the dividend going into 2026, if we have a balance there, then I think our expectation would be to make a onetime distribution or so to shareholders something first half of next year that would get us to the remaining part of our target balance of plus or minus 2 quarters worth of dividends on an ongoing basis.

And then also incumbent in the dividend strategy is that we -- I think the market -- you and the market should expect us to pay on a full annual basis, 100% of our GAAP net investment income. It may not hit that every quarter given that we pay excise tax in the fourth quarter. But for the full year, we would be paying basically 100% of NII.

And will you have a -- sorry to sneak in a bonus question here. Like in the out years, if you look at the SOFR curve, if you might not be that much above the [ 45% ]. Of course, we'll see, but let's just go with it. Are you going to want this sort of degree of headroom like given your sort of commitment to the variable nature? Like if your NOI goes to [ 45 ], are we going to see [ 35 plus 10 ], or something like that?

Yes, I'll start, and Steven can add to it and then we charge extra for bonus questions. I think we're probably not in the business of trying to give out multiyear sort of forward guidance because it's quite hard, right? It's a question of where did the SOFR go? I think you see that, I think not just us, but probably the whole industry has got a lower fee income number where we sit this quarter. Probably a bunch of variables that go into that.

We did take into account what I think you're talking about, right, the forward curve. We know we have the benefit of some cheaper liabilities that were issued in a different rate environment that will get refinanced. To kind of think about that base and then being mindful of paying out the supplemental ahead of that. But I think we were pretty deliberate in coming up with that $0.45 estimate.

Our next question comes from Arren Cyganovich at Truist.

With respect to the PRG restructuring in October, can you provide any details in terms of what you received in return and was it close to the market, et cetera?

Yes. I mean it's probably just in a quite simple matter. It was a fairly messy capital structure because it had gone through a bunch of changes over the years. And that messy capital structure was difficult, I think, to allow the company to go forward, not just from a financial perspective, but a governance perspective. So I think that was the real driver.

I'm sorry. But what did you receive in exchange?

Well, from a value perspective, we were effectively in the same spot. From a governance perspective, though, I think we're sort of significantly different. Because we are effectively already equity, but there was a bunch of other tranches of equity in there that complicated the matter. That's [indiscernible]

Okay. That makes sense. And then the $1 billion that's coming due in January on secured debt, you didn't an issuance recently. Was that kind of partial payment ahead of that? And what's the I mean, obviously, you didn't pay it down, but kind of a thought to use that cash kind of towards that. And then are you expecting to use the credit facilities to initially pay that and then kind of hit the market whenever you see it as attractive?

Yes. I mean I think that's pretty well said. I think the team has done a good job about being mindful about the liability side of the balance sheet, right? We're consistently extending the revolver to make sure we've got -- roughly always going back to that 5 years. We want to access and continue to access the unsecured bond market consistently. Clearly, the $400 million was done in advance of that, and we've got $3.7 billion of available liquidity. So I think we -- the liability side of the balance sheet are very important. We spend a lot of time thinking about that. But I think with that available liquidity, we feel in a good spot.

Our next question comes from Ethan Kaye at Lucid Capital Markets.

I wanted to get your thoughts on kind of how -- or if you guys are thinking about share buybacks. You indicated kind of intention to pay out 100% of NII with this new dividend framework and there's obviously many factors that kind of come into play when making these capital allocation decisions, but the stock still trading at a meaningful discount.

So wondering whether it's something you've considered or if you're kind of more comfortable returning all of NII to shareholders through the dividend?

Yes. I think we have been quite active over the years on the share buyback to the side. I think -- I don't look at the [indiscernible] here, that's probably roughly $500 million over sort of those years. I think it's something that we do obviously talk about what the Board, we think about as a management team. I think you have to be mindful about things on the other side, right? Where you're sitting versus target leverage. If you do have kind of thoughts or concerns around the forward macro, I think we feel pretty good with what we're seeing kind of out there, but it is a little bit of a bumpy environment. So I think it does all get factored in there. But it will be something that we do consider.

Understood. And then switching gears a little. You mentioned 60% of fundings were to kind of add-ons or existing relationships this quarter, you also mentioned you're seeing a growing number of opportunities from new issuers. I'm wondering whether you think we're kind of approaching maybe an inflection in terms of new borrower fundings, kind of overtaking incumbent fundings and to the extent those generate better fees, what that might mean for fee income, which, as you mentioned, looks pretty muted this quarter and maybe could be a tailwind going forward?

Yes. You got a couple of points in there, right? I think us like the larger sort of platforms like the incumbency position. So that is a benefit -- are beneficial and kind of useful as you build out your portfolio. We are busier as it relates to pipeline and deal flow. We were busy in the third quarter than the second quarter. I think the second quarter, we were busier than any of the prior 8 quarters on an individual basis.

I think the market has sort of put tariffs behind it, although I'm not sure the full impact of tariffs has necessarily flowed through. I think there's general consensus on sort of where rates are going. So I think we've seen the -- that valuation gap or that willing buyer or willing seller sort of [ piece ] come together. If you go to the bank earnings calls, they were definitely talking about how their capital markets businesses, or their M&A businesses were more active. Obviously, some of those are not larger sort of deals. But when you do factor all that together with -- I think there's still a real push from private equity LPs to get a return of capital, and we know there's a lot of dry powder out there.

I think we're constructive on that. I think everybody has talked about that for a long time. So I don't think we're in the business of trying to predict that anymore. But we do know that we're busier. I think it will have an impact on fee income, which could be positive, although I would note, I mean, kind of the upfront fees and the OID that's probably narrowed in line with sort of spreads coming down. I think we are of an opinion as the market gets busier, some of that can unwind a bit, but I would just be mindful about that.

Our next question comes from Kenneth Lee at RBC Capital Markets.

Just a follow-up on the previous question. You mentioned that when you went about setting your base distribution level, you were pretty deliberate and looked at the forward curves. I just want to assess how resilient do you think that the base distribution level is being set through various economic cycles and various rate scenarios? I just want to tease that out a little bit more.

Yes. No, I mean, it's -- I don't think we would have said it if we didn't have a degree of confidence for where we kind of solve the various variables going forward. You are correct. I think there's a lot of sort of pieces of that puzzle in there. But just to say again, we did look at where that forward curve would go, we did look at refinancing those liabilities. We did not give ourselves a lot of benefit in there. Or what would be kind of upside levers, right, i.e., spreads do sort of gap back out. Or a big benefit of assets rotating out of a nonincome producing bucket into an income-producing bucket. So I think we put all that together, to try to be mindful about that.

And we -- as we talked about in the last call, we wanted to get ahead of this. We wanted to provide transparency in there. The only point that I would make because I think it is important. I do think investors need to look at the total distribution number, though, like we're -- we gave some thoughts about where that sets for Q1 and for all of '26. But clearly, in these earlier years, especially when those lower-priced fixed rate debt instruments are outstanding. There's some additional earnings. So I wouldn't be focused on the total, but the components are this [ base ] in the supplement.

Got you. Very helpful there. And one follow-up, if I may. You commented on seeing some increased potential deal activity. What are you seeing in terms of spreads on the newer investments there? Have you seen a potential pickup or widening just given the amount of [indiscernible] there?

Yes. We haven't seen that, to be honest, Ken. I think we're probably still in the early days of the deal activity. And I think you got to be -- probably looking at the other side of what the inflows are to the market. I think we've talked about for some time now where we've been in a bit of this technical whereby a fair amount of capital has been raised for the states and the M&A volumes were at just sort of a lower level. So I think it's going to take a little bit more time for that to unwind if it's going to impact spreads, although I could foresee that as happening.

I think we probably were expecting a little bit more continued volatility in the market across some of the higher profile defaults that we had mentioned in our prepared remarks. I think that lasted for a little bit, but I'm talking a little bit I'm talking about a couple of days. But I think that's kind of on our mind as well. So not seeing that yet. But we are seeing pretty high-quality companies access to the direct lending market, which we view as a positive.

Our next question comes from Robert Dodd at Raymond James.

We can go on to the next question and try to go back to Robert. He's, maybe, on mute.

Our next question comes from Melissa Wedel at JPMorgan.

First, I want to clarify the new dividend policy in 2026. When you target sort of 100% payout ratio, I understand that to be sort of on an annual basis, quarterly might be a slight mismatch. Am I understanding that right? And then is that versus GAAP or adjusted NII?

Yes. I think your kind of initial thoughts there is right, there could be some mismatches on a quarterly basis and then focused on GAAP.

Okay. Got it. And then as the Board was reassessing the dividend policy going forward, it seems like there is a focus on resiliency within a lower rate environment for some period of time. Since we've also seen pressure on asset yields and again, that's also exacerbated by the capital formation we've seen in the industry. I'm curious if the Board also considered any adjustments to the fee structure for FSK?

Yes. No, thanks, Melissa. I think you're correct in the sense of trying to factor all the pieces together here because it is more than just benchmarks, right? So the spreads, it is all of the other sort of factors we talked about.

The couple of points I would make is, one, the idea of the base and supplemental is not a new concept for us, right? We've really been in that land for some time. We were really in kind of the $0.60 base with supplemental on top of that, and then we [indiscernible] that [indiscernible] over time. So I think that's not a new concept. And to be fair, I think we're not declaring those dividends formally for Q1 in '26, but we are trying to be pretty transparent with the market for kind of where we see this going.

I think we -- by definition, kind of have to look at fees consistently or on an annual basis with the Board, I think those dialogues will continue. And I think when you do look at kind of the fee structure today, I think it lines up with the sort of the peers in the space. But yes, that is something we have to have the conversations with the Board on [indiscernible] basis about.

Our next question comes from Paul Johnson at KBW.

Yes. [indiscernible] JV income might have been a little bit higher this quarter. I was just curious, what is sort of, kind of, the capacity and the JV or the dry powder, so to speak, is that the JV fully deployed at this point? Or is there sort of additional leverage that could be deployed there?

Yes. We do have additional sort of dry powder there to deploy into that. We have talked about the joint venture with kind of maybe an ultimate target of roughly 15%. So we're getting [indiscernible] that neighborhood, but we still do have some capacity there. I think the joint venture has been a good partnership, not just with our sort of partner there. But from a hopefully yield enhancer, if that's the right sort of term for FSK sort of generally. But I think you can expect that to live in, kind of, that 12% to 15% range on a consistent basis.

That's helpful. And then one kind of high level question [indiscernible] is just your comments on tariffs. And you still have a declining, but small sort of watch list related to kind of the tariff issues, where we've seen a lot of BDCs with declining [indiscernible] some essentially to zero at this point is becoming mainly a nonissue.

So I'm just curious on your comment there, are you seeing kind of latent tariff issues start to percolate kind of in the economy? Or is this still kind of just kind of a normal sort of delayed flow-through of all the significant tariff changes earlier this year?

Yes. No, it's a good and fair question. I think we do have a handful of names that are in that kind of single-digit number where we are quite mindful about tariff exposure, right? That's -- the fortunate news is that number is low because we've generally avoided what I would call heavy cyclical businesses or consumer retail-related names, which probably have that higher number. So I think we have seen an impact on that small number of names. I think we're working with those names to get through that.

The comment I made about the tariff point on the other side is there's -- I think the market has gotten itself to the point of understanding or feeling like they know what the administration is or lives on these sort of tariff points. I am not sure, though, the overall kind of broader economy has felt the full impact yet, right? So I'm not sure that's a company-specific name versus a macro point, but that's kind of on our mind.

And I would say the same thing for government-related names, I mean, we have to see how this shutdown could impact folks. You still have kind of the dose sort of points out there. I put them in a similar bucket where I'm not sure we fully kind of seen the full impact of that yet kind of play out, but it's something we're pretty mindful about.

Our next question comes from [indiscernible] at Raymond James.

A little bit of a broader market question, but has the recent disruption of the [ first brands tricolor ] default started to impact any competitive factors in the asset-backed finance side of the market?

Yes. A fair question. I think the short answer is no. But I think the broader answer is I think those handful of deals have brought some kind of highlights of the space. I think they're all very unique and bespoke situations as it relates to the name, and it does seem like there's some real either fraud-related matters or otherwise there, I think both of those companies operate, I think, in either difficult segments or have some history around those. So I think we feel really good about where we sit with regards to our asset [indiscernible] I think anyone who's done this long enough uses these as moments to kind of relook at your own sort of book, which we've been sort of doing.

But I think you haven't seen a big shake out there. I do think it is a very prominent question on investors' minds, right? Both institutional and wealth which could extend out some time lines or kind of otherwise there, which are pretty fair kind of comments or questions on their side. But I don't think from a regular way new investment perspective.

I'm showing no further questions at this time. I would now like to turn it back to Dan Pietrzak for closing remarks.

Well, I want to thank everyone for your time today. We're always available if there are any other questions. And we look forward to talking with you on our next call. Have a good day.

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