Good morning, ladies and gentlemen and welcome to FS KKR Capital Corp’s First Quarter 2022 Earnings Conference Call. Your lines will be in a listen-only mode during the remarks by FSK’s management. At the conclusion of the company's remarks, we will begin the question-and-answer session. At which time I will give you instructions on entering the queue. Please note that this conference is being recorded. At this time, Robert Paun, Head of Investor Relations will proceed with the instructions. Mr. Paun, you may begin.

Thank you. Good morning and welcome to FS KKR Capital Corp’s first quarter 2022 earnings conference call. Please note that FS KKR Capital Corp may be referred to as FSK, the fund or the company throughout the call. Today’s conference call is being recorded and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued on May 9th, 2022. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31st, 2022. A link to today’s webcast and the presentation is available on the Investor Relations section of the company’s website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today’s conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK’s most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK’s first quarter earnings release that was filed with the SEC on May 9th, 2022. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company’s latest SEC filings, please visit FSK’s website. Speaking on today’s call will be Michael Forman, Chairman and Chief Executive Officer; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us in the room are Co-Chief Operating Officers, Drew O’Toole and Ryan Wilson. I will now turn the call over to Michael.

Thank you, Robert and good morning everyone. Welcome to FS KKR Capital Corp’s first quarter 2021 earnings conference call. I'd like to start by congratulating our entire team on delivering another strong quarter results. As we continue to execute our strategy of generating organic net investment income growth through new investments and successful portfolio rotation, we are pleased that the positive momentum we created during 2021 is continuing as we move into 2022. During the first quarter, our investment team originated $2.1 billion of new investments. In addition, we experienced a 0.6% increase in our net asset value, as we continue to see improvements in both the performance and valuation associated with specific investments. As a result of our investing activity and our portfolio's overall performance, we again meaningfully out earned our base $0.60 per share quarterly dividend. During the first quarter, our net investment income was $0.77 per share and our adjusted net investment income was $0.72 per share, which was $0.08 per share above our public guidance. Our outperformance primarily was driven by a higher than expected originations and corresponding fee income during the quarter. From a liquidity perspective, we ended the quarter with approximately $2.6 billion of available liquidity. In terms of our $100 million share repurchase program through May 6th, 2022, we've repurchased approximately $25 million of shares under this program. Based on our strong results, our Board has declared a distribution of $0.68 per share for the second quarter. As many of you know, our dividend policy consists of a base quarterly dividend of $0.60 per share, coupled with additional amounts in excess of $0.60 per share during quarters where additional net investment income is generated. In summary, our investment team produced another strong quarter of originations and our base business is continuing to produce results, which give us confidence in the future. And with that, I'll turn the call over to Dan and the team to provide additional color on the market and the quarter.

Thanks Michael. From a macro perspective, we, like others, are focused on the persistence of inflation, continued supply chain challenges, and the tragedy of human loss in Ukraine. We remain hopeful the Federal Reserve's decision to take a more aggressive stance in terms of raising interest rates will help curb inflation. As interest rates move higher in response to inflationary pressures, we expect our shareholders will benefit given that 87% of our debt investments are structured as floating rate investments, with a weighted average floor of 88 basis points. From wherever rates were on March 31st, 2022, all other things being equal, every 100 basis point increase in short-term rates should increase our annual net investment income by $0.19 per share, or between $0.04 and $0.05 per share on a quarterly basis. Against this backdrop, we continue to focus on investing in larger companies, which we believe maintain at least some degree of pricing power, as well as overall portfolio diversification. The increased volatility in the public markets continues to lead to strong demand for private capital and we believe we are well-positioned to capitalize on this opportunity. Turning to our investment activity, during the first quarter, the $2.1 billion of investments we originated were spread across 14 new high quality companies and nine industries and included two asset-based finance transactions. The average EBITA of the new corporate names in which we invested during the quarter was approximately $186 million and the average LTV was 47%, reflecting both our continued focus on the upper end of the middle market, as well as conservative investment structures we are pursuing. Our investments during the quarter carried a weighted average yield of 8.4% and approximately 59% of our portfolio activity came from opportunities and companies previously invested in by KKR, again, illustrating the…

Thanks Dan. As of March 31, 2022, our investment portfolio had a fair value of $16.6 billion consisting of 193 portfolio companies. This compares to a fair value of $16.1 billion and 189 portfolio companies as of December 31, 2021. At the end of the first quarter, our 10 largest portfolio companies represented approximately 19% of our portfolio, which is in line with the end of the fourth quarter. We continue to focus on senior secured investments as our portfolio consisted of 59.9% of first lien loans and 69.2% senior secured as of March 31st. In addition, our joint venture represented 8.9% of the portfolio and asset-based finance investments represented 13.2% of the portfolio, equating to an additional 22.1% which is comprised predominantly of first lien loans or asset-based finance investments, which we believe have meaningful principal protection. During the first quarter, our new originations consisted of approximately 55% in first lien loans, 2% in second lien, 21% in asset-based finance investments, 4% in the joint venture, 16% in preferred equity, and 2% in equity and other investments. The weighted average yield on accruing debt investments was 82.3% as of March 31, 2022, compared to 8.4% at year-end 2021. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Including the effects of the investment activity we experienced during the first quarter, as of March 31, 2022, approximately 88% of our yield in investment portfolio is now comprised of investments originated either by KKR credit, or the FS KKR advisor. This compares to 86% at the end of the fourth quarter of 2021 and 79% at December 31, 2020. We are proud of the progress we have made continuing to rotate legacy assets and we remain focused on taking a disciplined…

Thanks Brian. During this portion of the call, I'll focus on our financial results, our forward-looking guidance, and our balance sheet. In terms of our financial results for the quarter, our total investment income increased by $32 million quarter-over-quarter, largely driven by portfolio growth due to the positive investment activity about which Dan and Brian spoke. The primary components of our total investment income are as follows. Interest income increased by $22 million quarter-over-quarter, including an approximate $8 million one-time benefit, predominantly due to our investment and Micronics, in which we recorded additional income, coupled with our successful exit of the investment in February. Our fee and dividend income totaled $92 million during the first quarter, an increase of $10 million compared to the fourth quarter of 2021. Our fee and dividend income during the first quarter is summarized as follows; $44 million of dividend income from our joint venture, other dividends from various portfolio companies of approximately $19 million, and fee income of approximately $29 million. Our fee income was higher than expected during the first quarter based on the elevated level of originations and repayments we experienced. Our interest expense totaled $77 million, an increase of $4 million quarter-over-quarter, due to the fact that we were operating at target leverage throughout the quarter. Our weighted average cost of debt was 3.1% and management fees were $62 million, an increase of $2 million quarter-over-quarter, due to the higher amount of average gross assets during the quarter compared to the prior quarter. Incentive fees totaled $25 million during the first quarter, which is net of the $15 million incentive fee waiver. As previously announced as part of the FSK-FSKR merger, which closed in June of 2021, the advisor will waive $90 million of incentive fees spread evenly over six quarters,…

Thanks Steven. In closing, I'm excited about the company's outlook based on the team's execution of our strategic initiatives, which was clearly reflected in our strong first quarter results. We look forward to continuing to build on our current progress and growth opportunities. As always, I'd like to thank our investors for their continued support. And with that, operator, we'd like to open the call for questions.

Thank you. [Operator Instructions] Our first question comes from Kenneth Lee of RBC Capital Markets. Your line is open.

Hi, thanks for taking my call. My question. One about leverage given the you you've reached your target and the current market backdrop, how do you how do you expect the leverage to manage over the near-term? Thanks.

No problem. Good morning Ken. I didn't hear the last part of the questions, sort of, perfectly but I think, again, just how do we expect leverage to kind of evolve over the near-term?

That's it?

Yes, so I think too, I think you're right, we're kind of inside our target range, almost kind of smack in the middle of it. So, I think we're happy about that. There's going to be no change in our mind to that range of where we expect kind of leverage to be, if anything, I think we're probably going to look to remain sort of at and around this level, considering what some of that market volatility is out there. I think we've been pretty happy with the amount of unsecured debt issuance that we did, especially, as we get into the market in the first month of this year. And we talked about those numbers in the script, kind of, real size instead of a good rate, I think has been a great thing for our liability structure, which is now 53% of the funded debt is in unsecured bonds.

Great. And just one follow-up if I may. You talked about the preferred equity investment recently, wondering if you could just talk a little bit more about your current appetite for any kind of investment low on the capital structure, either equity related or otherwise? Thanks.

Yes, no, happy to do that. I think with what's going on, kind of, market wise, the bar for anything that would be subordinate would be quite high. You're referring to the athena sort of health investment. I think that falls into a bit of a sweet spot, though, for us. We did -- the last sort of buyout that was done, I think the deal closed in February of 2019, we did second lien and sort of, prep there, that was repaid after two years, we got to know the company, the management team quite well, sort of, quite fond of them. This new opportunity presented itself, the company has grown tremendously, sort of, over time. But a large company now, roughly a $1 billion of EBITDA, roughly 55 LTV deal with kind of $6 billion of capital below us. Those are these larger companies, we want to get behind, we think a really good investment to be a part of. Again, for a name that we only have real history with is as we're a prior lender.

Great, very helpful. Thanks again.

Thanks Ken.

Thank you. Our next question comes from Melissa Wedel of JPMorgan. Your line is open.

Thanks for taking my questions. Good morning. I wanted to clarify, I think, Steve, this was one of your comments on adjusted NII walk that you provided, which was really helpful. I'm not sure if I heard you correctly, but I thought you might have said that. On higher rates, that adjusted NII amount was lowered by $0.04 per share and I wanted to dig into that a little bit, because I would think with the asset sensitivity, the higher rates would have been a benefit to NII?

Melissa, hi, thanks for the question. Yes, what we were trying to outline there is -- and I think we talked about this on the fourth quarter call as well as, as rates have increased, we like some other BDCs as -- the first move in rates, because we have LIBOR fours and a very high percentage of our investments on -- obviously, on the asset side of the balance sheet, it takes a period of time with an increase in rates before you pierce through those fours. And so now, as of the end of the quarter with, I guess, three month LIBOR was just under one -- it was like 0.96 or something, so for every 100 basis points of increase in rates going forward, we believe we'll generate an incremental on an annual basis $0.19 a share of net investment income on a quarterly basis therefore between four and five. But it's really that timing difference. And for your modeling purposes, Melissa and others on the call, given that most of our borrowers are under typically like a three-month LIBOR contract, it will take a little bit of time before we will see the benefit there. So, for modeling purposes, I would think more third quarter, fourth quarter than second quarter, which -- so those thoughts are incumbent in our guidance. And that guidance is detailed on page 11 of our earnings supplement as well, just free [ph] to have after the call.

Got it. And just in terms of thinking about real investments, definitely hear your point about having reached a certain level of leverage, and being quite satisfied or at or around those levels going forward, particularly with the volatility in the environment, I'm curious about your outlook on yield for potential new investment as it does seem that risk is pricing a bit higher these days?

Yes, I mean, I think we would share that view in terms of how risk is pricing. I mean, it's -- it was only the beginning of May, but it's been a pretty adventurous year so far. I think we all started off the year with a lot of money, having sat on the sidelines coming out pretty aggressive. The movement rates has been real. The conversations around inflation have been real, the news out of Europe with Ukraine has been, sort of, troubling. So, I think we're expecting just last deal volume as we go through the rest of the year. I think a lot of people you know are in a wait and see approach I think you know, us included and I think we're getting the benefit because most of this portfolio today and on a go forward basis will be floating rate assets, but I think the overall return for risk will go up.

Thank you.

Thank you.

Our next question comes from Paul Johnson of KBW. Your line is open.

Yes, good morning, guys. Thanks for taking the questions. You touched on this a little bit earlier with Ken's question, but I'm just curious, obviously, rates have moved quite a bit higher since you left back in January, has that basically kind of, the base -- maybe it's more temporary, but closed the window for refinancing sort of existing higher cost debt? Maybe more of a wait and paused approach to continuing to lower the cost of debt, or do markets still remain pretty conducive to execute on that?

I think your wait and see statement, Paul is probably the right one. I don't think that would just be for us, but probably any sort of issuer into this market. The right moves have been material, like I said, I think we're pretty, pretty thankful that we got into the market in Q1 of this year, pretty happy with what we did at the end of 2021. Obviously, the use of proceeds was to pay off our 4.75% of the deal. But I think, wait and see is, kind of, the right sort of, thought or sort of outlook to the way we think about that. Now, I think we feel good about our overall position, though. Our revolver is with a great group of partner banks, it's got real duration attached to it and we'll be focused on keeping that duration.

Thanks. Appreciate that. Then on, just more specifically, your leasing and your asset-backed financed part of your portfolio. Just wondering if you could talk about how that -- against how that's affected by the current environment, does that tend to benefit from a rising rate environment, the underlying assets, potentially longer outstanding balances or outstanding leases? Any sort of effect from the environment that plays through to that part of your portfolio?

No, good question, fair question. I think we've been happy to grow that part of our portfolio here. I think it's roughly sort of 13%. We focus a lot on downside protection, you and those deals as we do have actual product collateral available to us. I think there's a lot of good --probably benefits when we think about inflation, because a fair amount of this is either sort of real asset-backed, we've had single family rental exposure or aviation, sort of, leasing exposure. So, are you getting kind of an inflation sort of pick up from that? Or at least to the backdrop? I think where we probably worry a little bit in the market as it relates to your overall asset-based finance effort is, what's the impact of this on the consumer? You've had a, obviously a big mover rates, you got, expenses sort of prices at the pump. We were very light though on any consumer exposure, we'd have done that sort of on purpose, not necessarily thinking that the rate moves, or some of these shocks will be as large as they are. But these are really kind of hard asset-backed deals, which is occupies most of the portfolio now. So, I think we feel pretty good about it.

Thanks. Appreciate that as well. One real quick one on the just the repurchases, I know you repurchased that some shares on the buyback this quarter. The sector is obviously pulling back quite a bit here, post first quarter end, kind of, taking that in conjunction, where your stock currently trades on a price-to-book basis and the leverage on the BDC's balance sheet or where you stand from a leverage standpoint today? Are you expecting to be pretty active in this kind of sell off in the market? Are you taking more of a measured approach with just trying to prioritize balance sheet leverage? Any color there would be helpful.

I think if you recall, we've been very active, sort of all buyback over the last several years. I think between FSK or some of its predecessor entities, we bought back over probably $500 million of stock. This plan has been active. We do expect this plan to continue to buy under a 10b5-1 sort of program and we do expect it to get filled. I think we have historically thought about that trying to skew maybe a bit more with the has been, sort of, a market volatility but no change to -- I think the plan is out for the fact it's going to buy under 10b5-1 and like I said, we intend to fill it.

Got it. That's all for me. Congratulations on improving NII from the last Investor Day and as well as credit, and appreciate you taking my questions.

Thank you for that Paul.

Thank you. [Operator Instructions] Our next question comes from Casey Alexander of Compass Point. Your line is open.

Yes, good morning. He got a lot of my questions, right on the button, but I'll ask two real quick ones. Do you know when can you refinance the COVID bond without paying a big penalty on that, because there that seems to be an area where you could clearly cut some of your debt service cost?

Yes, good morning Casey. I think it is available to repay, sort of, now. I think the -- any form of prepayment penalties would start to drop pretty materially over the coming sort of quarters in the coming sort of year. I think we'll reevaluate that, sort of, at that time. I think you're right, there's potentially an opportunity to reduce some of those dimensions costs. But I think we'll think about that in the coming quarters or coming years.

Thank you. And secondly can you tell us what -- you've been working this down all along, what are what are legacy investments as a percentage of the total portfolio down to at this point in time?

Yes. 12% is kind of the number we've been sort of talking about, that's obviously moved down kind of meaningfully over the last several years. I think we've been very happy with what we've done with regards to a portfolio rotation perspective, and that that 12% number is a percentage of all the assets that are yielding in the portfolio.

And would you figure that that gets down to single-digits by the end of the year, would that be your view?

It's probably trending towards that. I mean there's a handful of larger sort of names in there that really sort of make that up. Several of those were not necessarily either the controlling shareholder or have the sole voice on how we sort of exit that, but we're quite active on all the names with the view of definitely trying to resolve those or generate kind of the best outcome possible in the coming quarters. But it's probably not perfectly linear, in terms of how it will wind down.

All right. Great. Thank you for taking the questions. I appreciate.

Thank you, Casey.

Thank you. Our next question comes from Bryce Rowe of Hovde. Your line is open.

Thanks. Good morning. Let's see, I think I'd like to ask about some of the gain and loss activity in the quarter. Obviously, you've got some two moving parts, both from a realized gain perspective and an unrealized perspective. Nice to see NAV up here again, and the quarter, but maybe you could try to characterize what's going on within the investment portfolio company-specific type events versus maybe more market-driven credit spread widening the marks on the portfolio?

Yes, I mean, maybe coupled to the points were -- and I think Brian's going to add to this. I think we are very happy with the results that we got outside United, right. We had mentioned that sort of activity on the prior call. There was maybe certain offsets to that including a pretty material move sort of down as it relates to [indiscernible] sort of a European business, pretty impacted by what's happening in Europe and sort of, Russia and Ukraine. But I mean Brian, you want to add anything else to that?

Yes, I mean, given the fact that spreads widen down during the quarter, if you look across the debt portfolio, about two-thirds of investments were probably down slightly and then about a third were up. And that was really spread-driven.

So, Bryce little bit of individuals to the name activity and then obviously, the volatility in the overall market, but I think we're pretty happy to be up on NAV in this quarter.

Yes. That's it for me. My other questions were asked. Thanks.

Great. Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to I would say Dan Pietrzak for any closing remark.

Well, thank you everyone, for your time today. We really appreciated it. If there are any follow-up points or other questions, please do not hesitate to reach out to anyone on the team. Thanks again.

Ladies and gentlemen, this concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.