FS KKR Capital Corp (FSK) (Q2 2026) Earnings Call Highlights: NII Beats Guidance, NAV Declines 2.8%

• Net Investment Income (NII): $0.44 per share for Q2 2026, equating to an annualized yield of 9.6% based on June 30 NAV.
• Adjusted Net Investment Income: $0.43 per share for Q2 2026.
• Net Asset Value (NAV): Declined 2.8% quarter-over-quarter to $18.30 per share as of June 30, 2026, from $18.83 at the end of Q1.
• Total Investment Income: $290 million for Q2, a decrease of $14 million from the prior quarter.
• Interest Income: $217 million, down $7 million quarter-over-quarter.
• Dividend and Fee Income: $73 million, down $7 million quarter-over-quarter, including $45 million from the joint venture and $23 million from other portfolio companies.
• Net Expenses: $168 million for Q2, a decrease of $19 million from Q1.
• Interest Expense: $101 million, down $4 million quarter-over-quarter.
• Management Fees: $44 million, down $4 million quarter-over-quarter.
• Income Incentive Fees: $12 million, down $13 million from Q1, reflecting KKR's waiver of its portion of the subordinated income incentive fee.
• Portfolio Fair Value: $11.4 billion as of June 30, 2026, comprising 232 portfolio companies.
• Weighted Average Yield on Accruing Debt Investments: 9.8% as of June 30, compared to 9.9% in Q1.
• Non-Accruals: Represented 7.1% of the portfolio on a cost basis and 3.8% on a fair value basis as of June 30, down from 8.1% and 4.2%, respectively, at March 31.
• Debt-to-Equity: 127% as of June 30, down from 138% at March 31.
• Net Debt-to-Equity: 122% as of June 30, down from 131% at March 31.
• Available Liquidity: $3.5 billion at the end of Q2.
• Share Repurchases: Approximately 377,800 shares repurchased in Q2, with cumulative repurchases of $40 million since June 29 at a weighted average price of $10.73 per share.

Release Date: August 06, 2026

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• FS KKR Capital Corp FSK generated net investment income of $0.44 per share, exceeding its guidance of 8% to 9% annualized yield, with an actual yield of 9.6%.
• The company successfully completed KKR's $150 million tender offer and closed a $150 million convertible preferred stock issuance, enhancing liquidity.
• FS KKR Capital Corp (FSK) reduced its net debt-to-equity ratio to 122% from 131%, returning to its target range of 1.0x to 1.25x.
• Non-accruals decreased to 7.1% of the portfolio on a cost basis and 3.8% on a fair value basis, down from 8.1% and 4.2% respectively.
• The KKR fee waiver positively impacted Q2 net investment income by $11 million, and the company repurchased $40 million of shares at an attractive average price of $10.73 per share.

Negative Points

• FS KKR Capital Corp (FSK)'s net asset value per share declined 2.8% to $18.30, driven by a $0.56 per share decrease in portfolio value.
• The company added two investments to non-accrual status during the quarter, totaling $104 million in cost and $91 million in fair value.
• Total investment income decreased by $14 million quarter-over-quarter, primarily due to a smaller portfolio and non-accruals.
• The company expects to become a smaller fund as it continues share repurchases and reduces new originations, which may limit growth.
• Repayment and sales activity is expected to remain light in Q3 due to muted M&A and geopolitical uncertainty, potentially slowing portfolio rotation.

Q & A Highlights

Q: The $500 million in loan sales during the quarter—can you provide color on what these were, how you went about doing this, and whether this is ongoing?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: This was largely ordinary course of business, focused on reducing some larger exposures or "tall trees" and high-quality assets at different margins than the market afforded. Combined with $1.3 billion of repayments, we are happy with the result and getting back to our target leverage area.

Q: What drove the marks taken this quarter—were they related to existing non-accrual restructurings or new marks from other companies?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: The marks were driven by a handful of previously discussed names, including PRG, ATX, Wittur, Peraton, Lionbridge, and Medallia, which made up the entire or supermajority of the decrease.

Q: Can you update us on the destination portfolio composition with the strategic repositioning? Will it look like 80% performing unitranche and 20% ABF JV?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: We are on the same path to increase the first-lien percentage over time. We are happy with the asset-based finance business and the JV, so expect those to remain in the 10% to 15% range, with less focus on second lien and junior debt.

Q: With the JV opening up more to the partner, was that a one-off, or might you downsize or expand your position?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: Time will tell. We have a great relationship with our partner and are in constant conversations about how we want it to evolve. Where it sits today, we feel we are in a pretty good spot.

Q: What is the line of sight for loan sales and prepayment activity going forward in Q3 and Q4?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: Repayments have been slower than expected, in line with light M&A activity due to geopolitical tensions. The team has been busier after June 30, but activity is still muted. We expect a light number in Q3, but it should ramp back to more traditional levels at some point.

Q: If the share repurchase is done and the fee waiver ends in the next couple of quarters, what is the next step?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: We are happy to have kicked off the share repurchase and intend to fulfill it while being mindful of liquidity and leverage. The fee waiver extends for another three quarters. We intend to get through heavy lifting on non-income-producing assets and get leverage to the middle of the target range over time, though it may bounce around the upper end for a couple of quarters.

Q: Any details on the types of loans or industries involved in the loan sales?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: There was no specific theme beyond ordinary course business. We are always mindful of reducing larger positions and maintaining liquidity in the book. It was good for the entity as we reduce leverage and get inside the target range.

Q: How active could you be with share repurchases going forward, and what factors will you look at?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: We will use a 10b5-1 program and be mindful of market volumes and rules. We are mindful of managing the leverage ratio, but with the stock trading where it is, it is an attractive time to buy back stock. We have every intention of fulfilling the program, likely over the course of 2026 and 2027.

Q: You mentioned activity picking up after Q2. Are you seeing anything different in spreads or pricing?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: Activity picked up as the Iran situation seemed under control. Spreads widened and terms improved on the back of redemption activity in the nontraded space, similar to 2022. Spreads moved up to 75 basis points for new deals, but have come back a bit as redemption noise calmed. The environment has toggled to a more lender-friendly one, which we are happy to see.

Q: With elevated repayments, how are you weighing reinvesting in assets versus share repurchases?
A: Daniel Pietrzak, Co-President and Chief Investment Officer: There is no specific strategy beyond what we discussed. We want to complete the share repurchase plan, be mindful of leverage, and see repayments come through to get leverage to the middle of the range. Most new investments were fundings on delayed draw term loans or revolvers, and we will be mindful about new investments to achieve our goals.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.