FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the FS KKR Capital Corp.'s Second Quarter 2022 Earnings Conference Call. [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. Paun, you may begin.

[Robert Paun, Director, IR]

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Second 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 August 8, 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 June 30, 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 second quarter earnings release that was filed with the SEC on August 8, 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.

[Michael Forman, Chairman & CEO]

Thank you, Robert, and good morning, everyone. Welcome to FS KKR Capital Corp.'s Second Quarter 2022 Earnings Conference Call. With the broader equity markets experienced significant volatility during the first half of the year, we are reminded of the benefits of dividend-focused investment companies like FSK, which offer investors the opportunity for consistent risk-adjusted yields across multiple market environments. Our investment portfolio continues to experience a high degree of financial stability due to the quality of investments our team has originated over the last 4-plus years.

During the second quarter, we generated net investment income totaling $0.71 per share and adjusted net investment income totaling $0.67 per share as compared to our public guidance of approximately $0.70 and $0.65 per share, respectively. Based on our quarterly financial results, our Board has declared a third quarter total distribution of $0.67 per share. As part of this distribution, we're also increasing our quarterly base distribution to $0.61 per share.

As Dan will discuss in more detail during his comments, origination volume slowed during the second quarter as our investment team originated $804 million of investments compared to $2.1 billion of investments during the first quarter of this year. Consistent with the overall private debt market, the value of our investment portfolio declined marginally during the quarter due primarily to spread widening and market multiple contraction. The 1.6% decline in the value of our investment portfolio equated to a 3.4% decline in our net asset value quarter-over-quarter. In terms of our $100 million share repurchase program through August 6, 2022, we have repurchased approximately $41 million of shares under this program. From a forward-looking perspective, we believe our strong liquidity position will enable us to be opportunistic with regard to new investments as we move into the second half of the year.

And with that, I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.

[Daniel Pietrzak, Co-President & CIO]

Thanks, Michael. As we enter the second half of the year, we continue to monitor closely the persistence of inflation, ongoing supply constraints, higher interest rates and heightened geopolitical risk. These factors, coupled with fears of a recession, have contributed directly to market volatility. While we believe that the Federal Reserve's decision to take a more aggressive stance in terms of raising interest rates ultimately will help curb inflation. We believe these volatile times underscore the importance of maintaining a rigorous approach to portfolio monitoring, including having a comprehensive quarterly review process and operating with a seasoned workout team.

In addition, over the last 4-plus years, we have constructed a defensively minded portfolio consisting of largely first lien structures with low loan to values and strong interest coverage ratios. We continue to focus on companies with strong competitive positions and resilient cash flows. While at the same time, we have limited our exposure to companies in more cyclical industries, such as those focused on discretionary consumer spending.

In addition to our traditional investment structures, we believe our asset-based finance business, which focuses on investment opportunities associated with large pools of collateral, frequently paired with long-term contractual cash flow streams is a key differentiator for us. We believe the increased volatility in the public markets, which Michael mentioned earlier, will continue to lead to strong demand for private capital from both a financial sponsor and issuer perspective.

From an investor perspective, private credit investments provide structural downside protection while still maintaining attractive risk-adjusted returns, especially during times of increased market volatility. We believe our size, scale, portfolio diversification, strong capital structure and industry-leading origination capabilities will enable us to operate from a position of strength as we navigate the current market environments.

Turning to activity for the quarter. From an origination perspective, the $804 million of investments we originated predominantly were focused on add-on financings for existing portfolio companies. In terms of market color, we believe the reduction in M&A activity over the last 3 to 4 months is related to macro trends, which has created an environment where buyers and sellers are grappling more than usual to determine acceptable purchase price multiples. At the same time, volatility in the liquid credit markets has made it more difficult for buyers to access financing even for high-quality businesses. During these types of market environments, it is vital for us to maintain our high-quality credit standards and disciplined underwriting process. As a result, we expect these market conditions will create many attractive opportunities to invest over the coming months. Of our $804 million of total investments, combined with $819 million of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio decrease of $15 million during the quarter.

In terms of recapping the 3 opportunities to increase our net investment income on a per share basis that we outlined during our September 2021 Investor Day. First was rotating out of certain nonincome-producing assets into income-producing assets. Second, was operating somewhere closer to the midpoint of our target leverage range. And third, we're selectively refinancing certain higher cost unsecured debt on our balance sheet. At our Investor Day, we communicated our view that by the end of 2022, these opportunities depending on prevailing interest rates and other factors, could generate up to $0.15 per share per quarter of additional adjusted net investment income. In addition, we analyzed the remaining legacy portfolio's contribution to our adjusted net investment income per share, which also totaled $0.15 per quarter.

During our first quarter 2022 call, we stated that we had achieved approximately $0.12 per share of incremental quarterly run rate adjusted net investment income through 3 quarters. At the end of the second quarter of 2022, before taking into account recent upward moves in interest rates, we are pleased to report that we have achieved all $0.15 per share of the incremental quarterly run rate adjusted net investment income we had projected.

The detailed bridge can be seen on Slide 11 of our earnings presentation. In addition, we have continued to rotate our legacy portfolio. As of the end of the second quarter, $0.11 per share of our quarterly adjusted net investment income was generated by legacy investments. And of this $0.11 per share, $0.09 per share of the contribution came from investments valued at 95% of costs are higher.

As of the end of the second quarter, we have rotated 90% of our yielding investment portfolio. We continue to be quite pleased with the progress we have made with respect to both increasing our quarterly adjusted net investment income on a per share basis and rotating our investment portfolio into KKR originated assets. You will hear further evidence of this progress when Steven provides our third quarter guidance in just a few minutes.

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

[Brian Gerson, Co-President]

Thanks, Dan. As of June 30, 2022, our investment portfolio had a fair value of $16.2 billion consisting of 192 portfolio companies. At the end of the second quarter, our 10 largest portfolio companies represented approximately 18% of our portfolio, which represents a slight decline from prior quarters. We also continue to focus on senior secured investments as our portfolio consisted of 61.9% of first lien loans and 70.6% of senior secured debt as of June 30. In addition, our joint venture represented 9.3% of the portfolio and asset-based finance investments represented 13.1% of the portfolio, equating to an additional 22.4%, which is comprised predominantly of first lien loans or asset-based finance investments. The weighted average yield on accruing debt investments was 9.2% as of June 30, 2022, compared to 8.3% at March 31. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. The increase in our weighted average yield during the quarter primarily was associated with the rise in base rates.

Including the effects of the investment activity we experienced during the second quarter, as of June 30, 2022, approximately 90% of our yielding investment portfolio is now comprised of investments originated either by KKR Credit or the FS/KKR advisor. As Dan mentioned, we are proud of the progress we have made, rotating legacy assets. During the second quarter, excluding the impact of merger accounting, we experienced net portfolio depreciation on investments of $323 million. The portfolio depreciation we experienced during the quarter was tied primarily to spread widening and market multiple contraction.

On recent earnings calls, we have provided detailed information regarding the company's legacy investment in Global Jet. Over the last several quarters, we've been actively working with the company to support their business while also positioning ourselves to receive principal payments. During the first half of 2020, we've received $56 million of cumulative principal repayments, which equates to approximately 60% of the total face value of our mezzanine tranche. Based on the quantum of principal payments being received on our mezzanine tranche. During the first quarter of this year, we restored our accrual rate on our mezzanine tranche from 9% to 15%. At the same time, as we discussed in our last earnings call, we decreased our accrual rate on our preferred equity tranche from 9% to 4.5%.

During the second quarter, we made the decision to reduce the accrual on our preferred equity tranche to 0. While the company continues to perform at the asset level with virtually no delinquencies, our decision was based on the overall value of the preferred, coupled with the recent interest rate increases and the potential impact on the company's cost of funding.

During the quarter, we placed 2 small debt investments with a combined fair market value of $11.4 million on nonaccrual and removed 1 small investment with a fair market value of $15.5 million from nonaccrual status. Based on the quarter's activity and including the legacy preferred equity investment in Global Jet, as of June 30, 2022, nonaccruals totaled approximately 4.9% of our portfolio on a cost basis and 2.9% on a fair value basis compared to 3.2% on a cost basis and 1.5% on a fair value basis as of March 31, 2022. Given that 90% of the yielding assets in our investment portfolio has been originated by KKR Credit we thought it would be helpful to begin providing the market with information based upon our rotated portfolio. As of the end of the second quarter, non-accruals relating to the 90% of our portfolio, which has been originated by KKR Credit and the FSK Care adviser were 2.2% on a cost basis and 0.5% on a fair value basis.

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

[Steven Lilly, CFO]

Thanks, Brian. During this portion of the call, I'll focus on the expected near-term effects of rising interest rates on our financial results. Our second quarter results, our forward-looking guidance and our balance sheet. During the third quarter, we expect to benefit from the rising interest rate environment by approximately $0.04 per share as existing portfolio company interest rate contracts began resetting at higher levels. And while there is a detailed breakout of how every 100 basis points of interest rate increases is expected to positively impact our investment income provided in our 10-Q. For planning purposes, our high-level view is that every 100 basis point move in short-term rates could increase our annual net investment income by up to $0.26 per share, which equates to approximately $0.06 per share per quarter.

Turning to our financial results for the second quarter. Total investment income decreased by $17 million quarter-over-quarter, primarily due to repayments experienced both at the end of the first quarter and during the second quarter, the $8 million of onetime nonrecurring interest income that we experienced during the first quarter, which we discussed on our first quarter earnings call and the lower volume of originations, which Dan discussed. The components of our total investment income during the quarter were as follows: Total interest income was $287 million during the second quarter, fee and dividend income totaled $92 million during the quarter, flat quarter-over-quarter. Our dividend and fee income during the second quarter is summarized as follows: $53 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $26 million and fee income totaling approximately $13 million. Our dividend income was higher than expected during the second quarter, primarily due to the continued ramping of our joint venture and larger-than-expected dividend payments from certain asset-based finance investments.

Our interest expense totaled $83 million, an increase of $6 million quarter-over-quarter due to rising base rates and the fact that we were operating at target leverage throughout the quarter. Our weighted average cost of debt was 3.5% at June 30. Management fees were $63 million during the quarter, an increase of $1 million quarter-over-quarter.

Incentive fees totaled $22 million during the second 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 adviser will waive $90 million of incentive fees spread evenly over 6 quarters, which began during the third quarter of 2021. And just as a reminder, as we have discussed on our prior earnings calls, the adviser does not earn an incentive fee on any of the merger-related accretion associated with FSK's acquisition of FSKR.

The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending 1Q 2022 net asset value per share of $27.33 was increased by GAAP net investment income of $0.71 per share, and was decreased by $0.96 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.68 per share dividend paid during the quarter and increased by $0.01 per share due to share repurchases. The sum of these activities results in our June 30, 2022 net asset value per share of $26.41.

From a forward-looking guidance perspective, we expect third quarter 2022 GAAP net investment income to approximate $0.76 per share, and we expect our adjusted net investment income to approximate $0.72 per share. Detailed third quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $317 million, which reflects the impact of the increase in base rates. We expect recurring dividend income associated with our joint venture to approximate $52 million. We expect other fee and dividend income to approximate $38 million during the third quarter.

From an expense standpoint, we expect our management fees to approximate $61 million. We expect incentive fees net of the $15 million quarterly waiver to approximate $25 million. We expect our interest expense to approximate $95 million. And we expect other G&A expenses to approximate $10 million. As a reminder, the $0.04 per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger accounting. This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected.

In an effort to link the $0.15 per share of quarterly run rate adjusted net investment income, about which Dan spoke earlier, from the time of our Investor Day in September of last year and compared to our third quarter 2022 guidance, the key inputs are as follows: First, we began with the $0.61 per share of adjusted net investment income we provided as guidance at our Investor Day and add $0.15 per share to that number, which equates to quarterly adjusted net investment income of approximately $0.76 per share. We then lowered that number by $0.04 per share due to income accrual adjustments and by another $0.04 per share due to higher liability costs and higher weighted average leverage.

Lastly, we increased by $0.04 per share due to a higher weighted average portfolio yield as compared to our portfolio's yield at the time of our Investor Day. These adjustments result in our current run rate adjusted net investment income of $0.72 per share, which equals our third quarter guidance of $0.72 per share. This detailed bridge also can be seen on Slide 11 of our earnings presentation on our website.

In terms of the right side of our balance sheet, our gross and net debt to equity levels were 125% and 115%, respectively, as of June 30, 2022. This compares to gross and net debt to equity of 127% and 112%, respectively, at the end of the first quarter of 2022. At June 30, our available liquidity was $2.7 billion. At the end of the second quarter, approximately 51% of our drawn balance sheet and 42% of our committed balance sheet was comprised of unsecured debt and our overall effective average cost of debt was 3.5%.

During the second quarter, we further enhanced our liquidity and debt maturity profile by closing an amendment to our senior secured revolving credit facility. The amendment provides for, among other things, an increase of total commitments to $4.66 billion and an extension of the maturity date from 2025 to 2027. We were very pleased to complete this amendment as it is reflected both of the operational strength of the FSK platform as well as the long-term relationships we are fortunate to maintain with the investment community.

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

[Michael Forman, Chairman & CEO]

Thanks, Steven. I'm proud of the team's continued execution of our strategic initiatives. In the fourth quarter since our 2021 Investor Day, we've achieved 100% of the organic net investment income growth that we estimated we could achieve over a 6-quarter period of time. This growth in net investment income enables FSK to operate from a position of strength during the current period of increased market volatility. From a forward-looking perspective, we believe the continued demand for private credit will provide us with meaningful opportunities to generate strong returns for our shareholders, both from a recurring dividend and total return perspective.

And with that, operator, we would like to open the call for questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of John Hecht with Jefferies.

[John Hecht, Jefferies]

Congratulations on achieving in rapid pace all the goals you set out on the Analyst Day last year. First one is, it sounds like based on what you talked about Global Jet and some of the other assets that you kind of resolved or at least de-risked out of the NPA, the percentage of the NPA. So number one, I guess, maybe just talk about what you're seeing in terms of credit quality and EBITDA performance at the portfolio level, given inflation and so forth. And then -- is there any other big assets that you kind of suggest we monitor here as things looking pretty good in the portfolio level.

[Daniel Pietrzak, Co-President & CIO]

John, thanks for the kind words on the Investor Day stuff. And thinking about just the portfolio, almost across the board, the top line numbers have been pretty good for the first half of 2022. I think we've been fortunate that we've been building a defensive portfolio. We've been fortunate that we've been targeting companies that are in the upper end of the middle market. I think they just have had more pricing power, more levers to pull. I think that said, we are a little bit cautious on things right now. Inflation impacts sort of every company, the wage sort of challenges are real supply chain issues kind of remain real. So we just had our quarterly portfolio review probably about 10 days ago. I think we feel pretty good where the book sits, I think, really because of how it's been positioned. So I don't think there's any particular names to watch. I think we've talked about we've been lighter in spots like consumer discretionary, things that we think might be a bigger challenge now. And I think the second half of the year and the start of '23 could very well be a little bit bumpy kind of overall market wise. But again, I think we think the portfolio is a pretty good spot.

[John Hecht, Jefferies]

Okay. And then maybe talk about the deal environment you mentioned wider spreads. I think that the activity last quarter was impacted by overall market conditions. Where are we now in terms of spreads, covenants, I guess, deal terms given the ongoing choppiness in the market.

[Daniel Pietrzak, Co-President & CIO]

No, that's a good question in this environment. If you think about M&A volumes kind of down, right? I think we would have always forecasted that 2022 would have slower the year than '21. That's probably just been exacerbated. I think on the other side of that, though, the syndicated loan market is clearly disrupted and in many ways, shut. So that is providing I think, very good lending opportunities for us and for this market. I think you've gotten a market right now that is definitely lender-friendly. And it's also a market where I think everybody is being a little bit more cautious on kind of sizing of positions. So that sort of last dollar of risk is definite -- or last dollars is definitely sort of pricing risk. When you think about that, I think loan structures are as good as they've been for some time in terms of covenants, et cetera. But I think the more interesting thing is you're at a point where you're probably 9% to 10% sort of unlevered returns on new loans to, again, where we're targeting the upper end of the middle market. That feels quite good. So I think as a lending environment, we feel pretty excited about. One moment for our next question, please.

[Operator]

Our next question comes from the line of Casey Alexander with Compact Point.

[Casey Alexander, Compass Point Research & Trading]

I have just a couple of maintenance questions and then a broader question. Steven, on your interest income guidance of $317 million, I'm assuming that includes PIK income?

[Steven Lilly, CFO]

Yes, Casey, it does.

[Casey Alexander, Compass Point Research & Trading]

Yes. Okay. I thought so. Secondly, on the losses that occurred during the quarter, can you delineate between what percentage of those losses were spread in market-adjusted related versus how much were credit-based markdowns what I'm trying to get at is some degree of recoverability of some of those mark-to-market deposits.

[Daniel Pietrzak, Co-President & CIO]

No, Casey. fair question. I would think about it probably 2 ways, right? One, I would say 75%, 80% of that number would be spread or sort of market related. But I think when you do think about the remaining pieces of that, I mean, there could be a company that hit a bump, maybe did an acquisition, it could have been 1 turn or 1.5 turns more levered. But a lot of those, if not all of those, I think, will be sort of part of recovery. So I would think about credit versus market, like I said, it's sort of 75% to the market, 25% other. But I think a lot of those credit issues are not real credit issues as much as just leverage points. Is that helpful?

[Casey Alexander, Compass Point Research & Trading]

Yes. Yes, it is. And of course, you guys have a fully fledged workout team that has a lot more experience at these things than maybe many other platforms. So I would assume that would be helpful in terms of recoveries down the road. My last question is this period of economic uncertainty that we've entered into or are entering into depending upon how you feel about the timing is quite different from the COVID recession from the great financial crisis, which were clearly either way more unexpected. This is telegraphed by the Fed raising interest rates to slow down the economy and put the brakes on inflation. Does this give you more time to work with your portfolio companies and allow them to prepare in terms of bolstering the balance sheet, managing their expenses, managing their inventories to levels of expected demand for an economy that's slowing down. Should that arguably result in better credit outcome coming out of this 1 than maybe we have in past recessions that we've been through?

[Daniel Pietrzak, Co-President & CIO]

It's an interesting sort of point or an interesting question. I think you're right. This is not like things we've probably seen for the last 20 years. I mean we've got to point to so the -- sort of 1, 2002 is probably the best comp for this. Back in '01 and '02, you had a time of a big valuation move to the negative. That was the -- so the NASDAQ bubble, you had a lack of consumer confidence, which was really driven on the back of 9/11. Now the other side of that, that you had some pretty high sort of unemployment numbers, which you don't have today. So I think on 1 hand, you're correct that because this is fairly well telegraphed because it will play out over many months or many quarters, I think you have a chance to both work with companies, but also probably get a couple of different bites of the apple if a covenant gets breached or some sort of other things to kind of reset loan terms or get new sort of capital in there.

The only thing that I think is on the other side of that is not a lot of management teams, quite frankly, probably not a lot of investment professionals have had to manage risk in this inflationary environment. So I think it could put out a couple of surprises there as well. I will tell you Casey we are probably leaning in to spending even more time on the portfolio. I mean, I talked about we do a quarterly review process anyway, but we've been expanding our portfolio monitoring team. We continue to expand sort of our workout team we want to make sure that we are in an exceptional sort of spot there. Because like I said, I think we feel really good about the book, but I'm just expecting a bumpy couple of quarters market-wise.

[Brian Gerson, Co-President]

And one other thing I'd add, Casey, it's Brian, is that if you kind of compare this go around the 2001, 2002 time frame, 2006, 2008 financial crisis, I think that the private credit market has evolved a lot. And we tend to, as you know, control our loans, we're not in big syndicates. And I think that facilitates a workout process that's much more efficient and quicker. We saw that in COVID, and we'd expect to see that same sort of activity and behavior again.

[Operator]

Our next question comes from the line of Ryan Lynch with KBW.

[Ryan Lynch, KBW]

First question I had was just -- I wanted to get your guys' overall thoughts on Capital. A couple of questions on there. One, it looked like you guys took some exposure off, it looked like you guys exited your 2 subordinated loans in that investment and also reduce our -- the cost base of your equity investments. So number one, did you guys reduce your exposure in Turack a little bit? And then also, on that investment. Obviously, that's a sizable -- you have a sizable equity investment in that business. Certainly, there's been a pretty dramatic shift in housing trends regarding prices, interest rates and overall just transaction volume. I would love to just hear how that business is holding up and how you expect it to hold up if these recent shifts in kind of the housing market continue going forward?

[Daniel Pietrzak, Co-President & CIO]

Yes, sure, Ryan, I think in terms of your exposure question, so we did reduce or sort of take off a couple of working capital lines that we were providing the just getting that capital from sort of other sources now. So in terms of I think the overall business, we remain as confident as ever in its -- I think the team has done an excellent job I think you are right. I think it's a decent sized position for us. I think we've been quite pleased with how it's performed, both from a loan perspective in terms of losses, but also just the consistency and the size of the dividends that it's been able to pay for us. It is obviously a much more difficult real estate market in some ways. You've seen tremendous sort of housing price growth. You've seen very strong sort of rental growth. I think that will potentially mute volumes for . I think on the other side of that, a lot of the industry maybe is not as well capitalized as they are. So they are -- I think they're their opportunities to lend money is going up. And quite frankly, the yields that they're able to achieve on those loans, I think, is really attractive for a loan that's about 20, 25 points of sort of "equity capital below you" meaning it's a 75 or 80 LTV loan. I mean the asset yields for them are probably 300 basis points wider in the last 6 months.

So I think we feel good again about where that portfolio sits in the lending opportunity there on the forward. I think maybe 1 thing we do keep in mind is -- that is definitely -- and that is much more of a business that's providing capital for homes to be renovated and then sold if volumes on the buying side go down, some of these loans could take a little bit longer to pay off. But again, the yields they're able to get are pretty attractive. So we feel quite good about the position.

[Ryan Lynch, KBW]

Okay. That's a helpful update. Okay. That's a helpful update. And the other 1 was on another just specific company on global jets. I think in your comments, I just want to make sure I'm understanding your commentary fully. It sounds like that the and the leases are performing very well. It's just the capital structure might be a little bit off. And the impact from rising rates is just causing you to put that on nonaccrual and reduce the fair value. It sounds like that's true. And correct me if I'm wrong with that. And then the second part of that question is Obviously, the trajectory of rates is that they keep going pretty meaningfully higher throughout the next 6 to 12 months and then in 2023, things could potentially change. is the current fair value mark that you have today using the forward curve assumption so that if the Fed does continue to raise rates throughout 2022, we're not going to see continual markdowns? Or how is that fair value mark calculated today.

[Daniel Pietrzak, Co-President & CIO]

Yes. So the short answer on number 2 is yes, it's using the forward sort of curve there. If you go back to your first sort of part of that. And the way you described it is, I would say, generally correct. I mean the asset portfolio, remember, it's a lease and sort of lending business in private aviation has done extremely well. there's 0 or virtually sort of no even delinquencies in the portfolio. I think we've talked about this on sort of prior sort of calls. I think the company has an excellent management team. The company has done a bunch of things very good. I think their competitors know have really centered around a handful of banks, which has just put pressure on the ROE of the business, which was just further exacerbated by funding costs going up and arguably lease yields or loan kind of returns not moving the same way. So I think when you put those 2 things together, that drove us to on that piece. And as we talked about that, I think we got almost $60 of principal proceeds on the mezzanine note during the first half of 2022. So the company itself is doing quite well. It's more of an ROE question.

[Ryan Lynch, KBW]

Okay. Just can I -- one quick follow-up on that one. I mean if that's the case, how you described it? And if that makes sense, I mean what's the plan for it? Is it -- I mean, is it -- is the performance of your investment kind of been largely just dependent on what market rates do if market rates continue to go higher there's more stress on that capital structure and more stress on the business and if market rates go lower, kind of versus true? Or is there anything that you guys can do to improve that investment? Because it sounds like everything is performing well, but the capital structure is just in a tough spot, which means that the ultimate performance of your investment is sort of just dependent on market rate moves.

[Daniel Pietrzak, Co-President & CIO]

Yes. I don't think the capital structure is in a tough spot. I think it's just the returns that they're able to get when they compare sort of asset side versus liability side or just maybe not what you'd maybe overly -- ultimately hope for sort of a specialty finance company. That said, and we can spend more time on this separately, if you like. But company management team has done a very good job. The brand of this business is quite strong. I think their origination channels are quite strong. And I think we have been spending a lot of time with the company working on some other alternatives to generate what I will call, boost to kind of the ROE. So I think a lot of that's in progress. But I think we are just cognizant of where the ROA is and hence, where the ROE is where we sit today.

[Operator]

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

[Robert Dodd, Raymond James & Associates]

And I apologize for [indiscernible] on the horse. But following up on Ryan's question, sort of, I mean, the question of is, is this preferred equity I mean can it come back on to accrual or given at some point in the future or given the rest of the capital structure, is this effectively what you've done is restructured the preferred to common and some car comment. But -- and the likelihood of it coming back on to accrual at some point is quite low.

[Daniel Pietrzak, Co-President & CIO]

Robert, I think it definitely -- there is a -- I think you can paint a case where it could come back on accrual. I think we're not forecasting that. We probably wouldn't play to put that in sort of the models. I think there's probably more of -- going back to some of the things, Ryan, was sort of asking which were good and fair questions. What will we be able to do with the management team with the other sort of owners there to continually improve this business. Like I said, I think they've done quite a good job over the last handful of years. I think the credit story of the book is very good. So yes, it could, but I don't think it would be fair to model that in or sort of plan for that.

[Robert Dodd, Raymond James & Associates]

Got it. I appreciate that. The next one, just kind of more of a market question. I mean, the syndicated market seems still fairly frozen to your point. I mean spreads have started to come back in. I mean, I think about 40% or 50% of the widening during Q2 has kind of reversed itself so far this quarter. But nonetheless, the market seems quite dysfunctional, which is on the positive side, that's good for you guys taking share from the syndicated markets. But could you give us any color on your thoughts about what does it take for the syndicated market to come back? And do you think if it -- when if it does, does that represent a change in kind of the competitive dynamic you're seeing right now, as you said, yields are good. Structures are good.

[Daniel Pietrzak, Co-President & CIO]

I think you're correct in how the secondary markets have started to perform and you've probably gotten back 40%, 50% of some of the spread move there. That's probably an initial step in getting the syndicated markets to perform. There's been some news articles on this. You can sort of see it. There's been some larger LBOs that have not sort of issued yet. There's been a handful of banks that have been selling some of those positions would end up being probably pretty decent-sized dollar losses. So I suspect some of that risk, if not all of that risk needs to get cleared because you need people to underwrite loans, right, to get that new issue to the market and you need them to put terms on the underwrite that would probably, let's call it, be rational for someone to sort of have an interest in using it.

But I think the way you started off the question is correct. I mean opportunities or markets like this are good markets for private credit lenders such as ourselves. I think they continue to even almost get enhanced that maybe would have been a handful of years ago as there are more and more sponsors and borrowers who just prefer a private credit option. So I think there's more users of this. So I think the lending environment is good. I think it will remain good for some time.

[Operator]

One moment for our next question, please. Our next question comes from the line of Jordan Witten with Wells Fargo.

[Unidentified Analyst]

I just have another question on Global Jet. Can you tell us how much leverage is above FSK's mezz and preferred. And then maybe if you can quantify just even something as simple as a total assets and the total liabilities ahead of FSK's position would help us better understand.

[Daniel Pietrzak, Co-President & CIO]

And I think, Jordan, I think we might have talked with you guys about this before. I mean they're a frequent issuer in the securitization market. So you wouldn't put leverage in a normal sort of corporate term. And quite frankly, those leverage facilities that are above are pretty conservative. I think they would actually be all investment grade in the probably 70 sort of 80 LTV sort of context. So we're happy to spend some more time with you if you like on that, but they're a frequent issuer and a successful issuer into those markets. And that's what sort of sits above.

[Operator]

Our next question comes from Melissa Wedel with JPMorgan.

[Melissa Wedel, JPMorgan Chase & Co.]

Good morning. Appreciate you taking some questions today. Given that you've now gotten portfolio leverage to the midpoint of your target range, which is really in of itself, on target as you sort of laid out expectations from Investor Day. So I'm curious about your appetite for increasing that portfolio leverage towards the higher end of the range. Given sort of a more cautious approach to things that you're taking to the market.

[Daniel Pietrzak, Co-President & CIO]

Yes. I don't think we have a stated change in any way to our leverage target. And I think in many ways, we probably prefer to operate at the midpoint of that range. So there can be situations that you can lean in. Obviously, nothing sort of in a private lending business sort of lines up perfectly. There could be a handful of deals we do. There could be some repayments that might happen, maybe they're not sort of the same week, the same month. So I think we want a little bit of flexibility in there. So I think we're prepared to take it up a bit from here in the sense of if there's -- because there are good deals to do. And that said, I think we prefer to operate really in the area that we're at and that's probably what I would expect.

[Melissa Wedel, JPMorgan Chase & Co.]

Okay. That's helpful. And sort of extrapolating some of your comments that a lot of originations in the second quarter. If I heard you correctly, they were focused on existing portfolio companies. I guess, given the way some of the volatility has moved some markets around and created some dislocations, I'm curious if that's still the area of your focus, and how you think about that the attractiveness of new deals in new portfolio companies or existing ones against the opportunity of buying your own stock where you guys have been really active. Appreciate any color.

[Daniel Pietrzak, Co-President & CIO]

Yes. No, there's a couple of sort of points in there. I think you're correct, and that's the way we described it in our prepared remarks. I mean, in many ways, we've always either benefited from or probably enjoyed lending as an incumbent lender or from an incumbent position. You when you have been with companies for some time, you know the management team, you know how they perform. I think you're almost sort of positively biased or positively selecting your origination flow. In prior quarters, we talked about that could have very well been half of the originations, both add-ons, but sort of just names we had lent to in the past. So I think we like that type of lending Obviously, these add-ons are being done generally the companies that are continuing to grow by definition performing. We are able to get some pricing concessions on those add-ons generally to reflect kind of the current market to the position. So I think that's a good business for us. I think you should expect that we will continue to look to exploit that incumbent lender or the sort of add-on piece. We have been very active in buying back stock. I think, we probably bought back over $500 million over the last 4-plus years as it relates to the handful of different transactions that were done to get to where we are with FSK. And I think you should expect that the current plan will get filled.

[Operator]

And with that, we conclude our Q&A session for today. I would now like to turn the conference back to Dan Pietrzak for closing remarks.

[Daniel Pietrzak, Co-President & CIO]

Well, thank you, everyone, for attending today's call. The team is available if you have any additional any additional questions. your summer. Thanks again.

[Operator]

And with that, ladies and gentlemen, we conclude today's conference. Thank you for participating and you may now disconnect.