FSKR - Earnings call transcript Q3 2020

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Operator

Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corp II's Third Quarter 2020 Earnings Conference Call.

Your lines will all be in a listen-only mode during the remarks from FS KKR's management. At the conclusion of the company's remarks, we will begin the question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. At this time, Robert Paun, Head of Investor Relations, will proceed with the introduction. Mr. begin. please Paun,

Robert Paun

Today's is release is to morning, II's information XXXX. Good the November note to KKR be of FS FS a the and fund Thank press replay company FSKR quarter and being XXXX Corp referred may II third Capital Please included an FSKR issued earnings Capital the X, Replay call. KKR or throughout you. Corp welcome as conference that call XX will days. recorded, audio that on the be conference call available for in call.

includes forward-looking from the for statements. its does required these unless the call materially COVID-XX or FSKR and update webcast posted filings impact the are In important of statements to ask ended the addition, the quarter risks We could and and property FSKR any presentation its to refer factors economy is presentation FSKR's has call its call outcomes under performance that Relations with company's undertake to that that that financial on Please rebroadcast the on with September a form information FSKR Presentations. differ generally. XX, strictly supplemental is Investor respect possible affect SEC portfolio or of Today's by associated of and unauthorized website to this risks containing you forward-looking uncertainties, note statements including law. today's recent results Any risks financial section conference XXXX. the and Events could cause a prohibited. A this do is to actual not and so with subject in for of FSKR. available website to link most to

call this non-GAAP measures. will addition, include financial In certain

comparable supplemental nature the information was in X, can not release related and financial GAAP. be For considered with be SEC considered prepared GAAP reconciliations found with FSKR's or third directly earnings in as in filed should information November XXXX. for most such be substitute Non-GAAP that quarter isolation in measures the to the measures, on accordance should a

may In reported addition, website. as by please the visit financial of company's the these obtain same SEC non-GAAP latest similarly not To named FSKR's be other measures filings, copies companies. measures

Michael Speaking call Pietrzak, Co-President; now to over Ryan Operating Chief officers, Michael. Chairman and will us and on today's Steven Gerson, Wilson. will Lilly, I Chief are be phone Officer; Also on Chief Forman, call Officer. Co-President; Officer O'Toole Dan Financial Executive and Brian the and the Investment joining Drew turn Co-Chief

Michael Forman

and quarter Capital to Robert, everyone call. II's KKR welcome, FS Corp conference third you, Thank XXXX earnings

First, country and begun let continued country team of proud almost election, team during unrest, permeated our presidential has aspect to extraordinary effects of of to leading recent with up uncertainties been every the these pandemic In our I combined be our the the and doing entirely the is to with events times. society. have extremely social weeks, The continue normal. associated by investment loved and to almost consumed operating of of a cadence election. job the wishes seem post-COVID ones continues me has adapt business your your work a somehow largely ongoing in the of Thanks environment. co-workers function teams, our FS virtual well offer you, the to to continues to each seem to world. day-to-day The as our to dedication KKR my our

supply communicating management positioning themselves are on value chains outlined recognizing which third proactively maturities. teams companies. net perspective, things to reserves, investment our continue investment decisions long-term call. the as and quarter, holiday as portfolio, time as building portfolio creation. the a tangible an included we The that such the quarter's during move earnings that have business sponsors per the during decisions companies FS operations, in meaningful increase Thanksgiving cash of healing we of are market quarter manifesting weeks divided. operating no of stronger begin and our in in season a have by working realigning are towards our quarter, available we we guidance $X.XX liquidity for in range of $X.X we hope our as few an with country value well-informed Across than products. decisions with for income together the process These job with is investment will closely the focused maximizing make resulting streamlining Our our ended in to value was their share per with to just perspective, These customers an done of From end. appreciated net ways debt has near-term share billion liquidity with we investment the team X.X% KKR in asset line quarter these exceptional From approximately was last seen

executing Through we quarter, $XXX program. under have began million shares XX, we third of repurchase share October million XXXX, approximately program. $XX purchased previously announced the our the During

investment income quarter a to Looking net investment times. uncertainties during of inherent our are share net forward, range associated expect currently these $X.XX to quarter, per extraordinary given providing $X.XX we the we share. approximately with growing investment portfolio fourth Like income last our per

quarter. targeted and call And our the of per yield distribution with fourth color our with an XX, the I'll September annualized and of levels declared quarter, of to Our dividend that, on and $XX.XX of of share $X.XX the the a per which keeping turn equates as NAV for additional to NAV X%. Dan team share provide over XXXX. X.X% to of This market board yield has the long-term on

Dan Pietrzak

to levels. And those recovered market we the a of to pipeline in or while continued XX% macro our calls it levels of in to believe of quarter still is the perspective, volumes, back M&A terms XX% including of our we highlighted second transaction activity. From earnings many not pre-COVID of has rebuilding have alongside approximately Michael. trends re-emergence Thanks, a develop, a investment

is the to in and the near-term in markets economic $XXX detail the market July. market record $X call, of the in a only of in concerns raise seen February U.S. depressed set monthly level billion fueled below which the to ongoing leveraged and market by regard cumulative billion the annual XX, quarter to with year meaningful still discussed March of loan Recession. evaporated full through $XXX disconnect high-yield high-yield as market, continues record be not through billion January In and illustrated monthly issuances level remained we experience performance record second economy and XXXX. continues refinancings questions since Great us XXXX and general by of year-to-date levels recovery. the The issuances issuance September The the record between issuance to our topic during Another continues

on the August Reserve's refinancing the inflation instances year. of simultaneously Illustrates a and market with clearly and for leveraged leveraged target to driven KKR current LBO, yields. many both of effort in levels and healthy believe loan recovery overall unemployment current X.X% inflation put environment to September, yield these in has focus borrowers to while managers distinct market M&A in long-term of has from record first with returned of issuances low in balance However, the goal targeting of activity. level the the of accessed the Fed's Fed's perspective, continue by we part a the jobs have stated by generate money of loans as to to to X% X.X% an per targeting that a reducing a Federal From work around second. Pricing many aggressive been desire

Across As FS we this continuing relating to possibly invest the are with well a narrow result, believe lens participating KKR continue time. and levels we we platform, to a government of new credit but number in active a beyond. stimulus significant will investments, of during unprecedented into XXXX are processes

economy, of While our the of to underwriting is caution we still aspects an nature from fragile returns, perspective. risk-adjusted are generate exercising given many goal the attractive

Additionally, as levels. allowed perceived created the structural bias pre-COVID and health These FS to end second. the pricing our market from of we demand first maintaining renewed transactions. platform, the middle strong seeing for borrowers are some has our return and cases, upper high-quality fair still share terms our positions relationships existing the key financing In of of markets, especially Across in we benefit significantly of and the where focus, on yield we have KKR see while which as positions hinges a selective well to sponsors. opportunities, deep incumbency us principal relationships new with with protection the

in still million these we As $XXX the capabilities is below processing from which second capacity standpoint. a a new originated result drivers, investments, of fundamental or during quarter, our

I quarter. investments. November of approximately period in mention portfolio million closed factoring in venture, equated million from $XXX X, $XX when and net with repayments, FSKR additional net X of $XXX combined to joint to of during growth that million our $XXX during October an sales million sales the to investments Our the total should

experienced our same billion the approximately believe through formed summarized result, year. includes from detailed the information website. XX and of we as point even a providing last began in and XXXX, have cumulative on we points is well few is starting think X.XX% XX, information disciplined originated an which As Advisor. of standpoint COVID. $X.X performance depreciation, was the cumulative $X.X December September we quarter, our perspective. KKR overall Advisor of approximately from Since investments, FS XX, Last The through presentation of into KKR FS the XXXX, from we have an updated investment months have of for detailed we depreciation. billion origination effects experienced investor though metrics And of investments follows. basis portfolio made move positioned new we we the We the new on This are remained XX as we Slide

with deliver are satisfied to time performance over defensible more in the data conservative structures be this we to to which our manner investment these believe and in continue investment toward able believe portfolio has we operating be what with more points we We illustrate the been positions. period, investment companies the turning team

in liquidity stimulus will support, for relative receipt has of is FS a as effective government originated an been of markets continue until exist broader and of function forward-looking vaccine will band market, originated to with this line portfolio activity of public will has has We is will or lenders, the federal will today, find been our perspective, corporate that either dollars continue the a and of the of we believe in we continue KKR COVID within and are government the Advisor, the and been approximately economy KKR. function immunity end on point, both Lastly, XX% quarter, the to where XX% to From achieved. third support continue level borrowers by which continue normalcy. somewhat to M&A the ways some believe herd developed by is, to

assumptions, and part, investors' these in the the of future large course, depend government. in collective Of actions on federal trust operators'

We difficult the intervention also non-disruptive believe government increasingly longer in required. monetary to unwind is economy the manner, be will support a the in

that, pleased be federal are the and the with to full recovery capital has are times, pleased which look a to are diligence, on the forward with other and we currently quarter. the dependence quarter, no on discuss based call lead from reason believe the we As we to some performance to XXXX. to positioned volatile. we are portfolio at have confident is decisions with investment analysis to are still result, our foreseeable specifics. of we acknowledge Nevertheless, are future. the investment ourselves that us we begin thorough may, to placed turn making the investment over significant find And well the And than while portfolio These we for And for observations we world back government conclude far our Brian that that normal. I'll operating as markets the this road

Brian Gerson

Dan. Thanks,

compares September our portfolio value $X.X in XX% of to our the several our At consisting of June largest had last a line XXX quarter, of value of our results which portfolio, XX, companies XXXX. third billion, a remains XXX This fair portfolio quarters. portfolio of to investment the of billion as represented the As with and end companies top XX of fair $X.X XX, companies. portfolio

The portfolio senior XX, non-accruals to focus The as with decline was June portfolio yield contracts on our of of a XX. We X.X% spreads investments a investments our September XXXX. as weighted on X.X% secured lower perspective, certain represented the average XX, basis, portfolio in reset at first-lien at of yield quarter. XX% which secured to due at debt compared weighted X.X% fair of and to and X.X% our continue as loans change approximately and compared was From during of September occurring portfolio in quarter, June the value XX% , investment to consisted XX% our and levels primarily maturity LIBOR XXXX, average third as on senior of debt X.X% a the the cost end coupled XX. of as on our non-accrual basis of

the retailer portfolio the the value quarter, mall cost two approximately X% increased Jackson, communications on of based overall was results placed unrealized including million, cost and includes follows. perspective, certain and million. of respectively. total million appreciation $X.X or associated $XX as quarterly well for we $XX appreciation and of Dairy, million our basis FourPoint, million quarter. value of portfolio fair million restructurings, During with the unrealized an quarterly experienced The provider, as the quarter during A are as the valuation we million by across a Belk, reversal appreciation Borden $X.X a details basis investments of the associated and valuation and satellite realized our company Media investment Intelsat and with $XXX portfolio with $XX.X fair nonaccrual. Mood $XXX The From Arena. respectively, amount during

appreciation driven the first quarters, spread recover. during a and market conditions initially was positive quarter for by specific second valuation primarily combination but Our operating the investments which during million in inputs XXX by to general results continued remaining of impacted and widening and improved portfolio

investment impacted XX% the certain production Our group, was marked COVID, realized to of million. depreciation and depreciation $XX $XXX unrealized our which by by quarter. to the including investments, resource million down our unrealized in many totaled continuing during effects was Over be legacy related of

depreciation from the million to $XXX approximately mentioned previously addition, losses related In realize primarily restructuring.

discussed represents valuation demonstrates situations. internal both we and And complicated discuss step to having that, professionals in having of alongside workout from dedicated these value us and our group across the earnings during of challenging perspective. Steven over able our the teams investments these operating time second meaningful turn instrumental dedicated a to navigate of call, completed portfolio consuming processes, many a legacy our seamlessly While of detail. work specifics which on restructurings the our portion series from more the was quarter financial an to for investment we of Taking a investment believe our these with call results team I'll of

Steven Lilly

financial Brian them color earnings focus more in Thanks transparent release on metrics Brian. comments which contained My in the linking but our Hopefully will touched. Michael, in already on be a results. XX-Q, focused reporting our rather way and press more the Dan to behind less have comments and on informative the broader

$X interest fee in First, asset our $X increase venture and partially $X dividend based which in a an of million investment income this by to was from the increase of and $XX joint investments, million million both related million our quarter income decrease income and of offset was finance income.

$XX.X our portfolio As has XX rate JV dividend reminder, investment from floating recurring totaled quarter. income our of floors our during points, million basis average a XX% which the

approximate a of $XX $XX we this million typically quarter-to-quarter and basis. know to million As recurring expect dividend on between many you

value $X of quarter as interesting as asset approximately declined the our detailed LIBOR the to by fees by due our average the The rate. is floating quarter follows. million a the balance quarter-over-quarter bridge expense from we've sheet in gross assets as million benefited the on quarter. reduction per net Our Management drawn lower of to during is decreased quarter in prior $X basis amount during compared during the share XX%

value our increased by was in of share and $X.XX of increased Our of XXXX income the portfolio. per net overall starting per to share value per net by investment an further $X.XX $XX.XX increase due XQ asset investment was share

asset share was our $X.XX per share share per as the our our From impacted results quarter by guidance these share during investment per $X.XX share XX the of quarter value $X.XX to our bridge of asset positively per recurring value income Additionally, net forward-looking of net a And of repurchases net value $XX.XX. $X.XX by $X.XX share follows. quarter. The in share share sum perspective, our third dividend. to our per activities September reduced investment per is net from of income per asset fourth net was

is Our million overall recurring our expected in be $X investment higher portfolio. income due to interest growth to

dividend JV recurring expect with approximate to $XX associated income We our million.

fee during We due quarter approximate the increase income origination increase quarter-over-quarter. and during in standpoint, $XX interest to approximately we expect dividend an quarter to million other flat expect which million an our expense $X will by the activity. fourth From expense

We expect will quarter. flat the other relatively management fee administrative general expenses during and remain and

portfolios, far-reaching on than X% will over net our our reminder, certain quarterly acknowledge change despite asset Gap] asset achieving share a standpoint. normal in we fluctuate equate maybe X% range or quarters of per first yield our great share. means able our our the in that an X% there it due COVID of business be we on pleased target concert we our expect Obviously, dividend in yield dividend net for are Though, annualized our per policy a we net would operational have XXXX, to dividend to exceed be the dividends value the fluctuations from being quarter-to-quarter value. yield. overtime, of resultant yield our asset effects and said, investment dividend value the the to quarters a been the to That this [Audio somewhat with will that, less target quarter-to-quarter during As long-term where three

first the balance the levels levels levels are modest this terms XX%, leverage a decline debt and of XX% sheet, leverage second from net quarter side equity our year. our and respectively. to during These represent right of of and In our gross

of comfortable value a to percentage. our portfolio, of to the equates Our available be billion of $X.X very investment approximately which XX% continues liquidity

had an related million of $XXX commitments, XX% with structure is primarily million of associated to Our debt unfunded portfolio. as unfunded Finally, commitments revolver commitments, million perspective, XX, from finance September and X.X% secured represented equity weighted average $XXX of approximately our overall debt capital with facilities we of unfunded of an of cost XXXX, commitments $XXX which asset-based approximately

first As acquisitions subject earnings our we capital generally equity threshold debt other or in therefore said during and performance of our second specific and situations, unfunded for expenditures consent. commitments majority for to both are and calls, certain the used quarter including, tests our

XX-Q commitments on drawn our they these the while back a not for I'll capacity any comments few meaningful a in will for open turn questions. we purposes, do disclosed call basis. call in result, a believe with As quarter-to-quarter are we for closing be informational to And Michael the that, before

Michael Forman

Steven. Thanks,

fruition are sponsor seasoned to to to Advisor broad-based platform be and seems materialize as this dedicated relationships government benefits there As for would establishment the throughout time. to to deep the in That to the KKR believe the will committee economy opportune role faces. an federal issues industry foreseeable to we teams, we the of rigor From no to play decision-making, call, we of that from continue very for the the establish believe we investors the planned of BDC shortage mentioned a is in long-term active the workout portfolio management, world currently structured KKR proactive FS have what our we And best of said, accrue ways. to to continue investment beginning we FS future. at believe coming tangible operators,

operator, And We update that, questions. we would to open forward like call with you for to future progress. the will look on continuing to

Operator

from [Operator of first JP with comes Shane line question Instructions] Rick Morgan. And our the

open. go is line Your ahead. Please

Rick Shane

move just had nonaccrual sales FSKR to you FSK been decision believe I the and of it's on on different terms as that nonaccrual, about nonaccrual previously, security please? to In talk the well, at to two Can securities. at

Michael Forman

it you're And a security. is Rick. Thanks, different correct,

down about Obviously scholar term, amortization retailer. and their the a nothing being of in a COVID. actually all both actually payments. name kind impacted mall of knowledge up by the expecting of they've not there's and think near We the have payments recent other made to first any capital I than secondly, specific including pay structure them, based don't

do to thing prudent nonaccrual. this on have the is thought we So

Rick Shane

then the be of And to look from in How That's first investment? helpful When restructuring color nonaccrual correct? path nonaccrual production the potentially timing equity other move big a or look of at going that an the do the during when was we investment the is seems quarter this the history obviously, given and that challenge, to especially on Is on sensitivity. the continued forward that payments. COVID the loan plays given equity quarter, the recoverable a COVID resource related the out? And you you think a investment. that

Michael Forman

I sort et services is with impacted much just in mean, the big the events of providing Obviously, level in leader Broadway and very particular, been large name, scale for COVID them. set, Broadway's the of, business production sort in volume to in It's industry a lighting leader, status has it of industry and a focus challenged. cetera.

with happy to gotten quite we're there. quite happy we're where on think is. lot with of we've footprint what I this. think I a their work, And hard been the It's team

has recovery hard cognizant to impact had in But dictated things COVID open work and I with will but pandemic, -- meaningful of road call a sit the think, on we be that satisfied by today we're with up, thing. what happens of being -- think we think this I of them. to the we their lot where front still when we'll start think

Operator

And Securities. next you. our O’Shea question Thank Fargo [Operator comes Wells with from Instructions] Finian

open. is line Please ahead. go Your

Finian O’Shea

interest rate, Just Street XX. Alpha was a credit to that question processes in on higher by amended by XX little place can Which lot bit understanding, better Obviously, be a the a the trend. those for CLP's time. a against July some is facility

have may on joint more So on -- lending venture? the you any tight provide color I why guess those gotten conditions yes, can

Michael Forman

a Yes, question. it's fair Finian

lot it is a timing think related. of I

it middle terms called was the and think environment the liability relates here the overall post-August That August. agreed this. seen optimize, one But we probably The more, I in extension, here, what's even continue in of we've think I we've FSKR. to to market bit on a in kind -- said, used deals spreads a financing the year the and I in of that's ways a were it's of like euphoria as clean it think of of some of a up harsher summer. middle structure

I been extension. point one have with a that negotiated. would year it's when right, specifically your So think we today But where sit is versus

Finian O’Shea

on level just through Is any, so them you higher guess together? about on still follow a these I to it's But to BDC how long like merging view to that, happen? on a talk go up of direction a to that you level? thing desire understanding medium some have six it think being maybe higher And I journey a IPO ago, vehicles And obviously, you on sort would together, expensive vehicles the separated. of less. any history term need months the before come about. have But any, that anything, color

Michael Forman

along good performance I we've the of Now, sort this on been obviously way. of And call obviously kind deployed. it's we've question focused quarter, a question. got FSKR last and mean, a of that or getting on times bunch

entity, I think it's gotten clearly something This of many it's that we're public think for And full the that remains as I minds. lot quarter is, very make the can first a in something our a color of we've kind years public so sense. happy.

it's a this quarter we've just on fair think now. of to ask. I sort But very question focused been

Operator

conference the showing Pietrzak questions further at Thank you. no for And turn over and Mr. this Dan to to further remarks. like I any I'm time would

Dan Pietrzak

safe do that time again We you thank look you hope We your Thank you. talking everyone families you. soon. healthy. for And to your and today. again want with and we do to remain forward Thank

Operator

does Ladies great participating disconnect. This have a all you and the conference. and may gentlemen, today's in for you program thank conclude day. Everyone

FS KKR Capital Corp. II (FSKR) 13 Nov 202020 Q3 Earnings call transcript