FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corp's Third Quarter 2020 Earnings Conference Call. The lines will be in a listen-only mode during remarks by FSK's management. At the conclusion of the company's remarks, we'll 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 introduction. Mr. Paun, you may begin.

[Robert Paun, Head, Investor Relations]

Thank you. Good morning and welcome to FS KKR Capital Corp.'s Third Quarter 2020 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 November 9, 2020. In addition, FSK has posted on its website, a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended September 30, 2020. 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 a 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, including risks associated with the possible impact of COVID-19 that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's third quarter earnings release that was filed with the SEC on November 9, 2020. 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 Stephen Lilly, Chief Financial Officer. Also joining us on the phone are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson.

I will now turn the call over to Michael.

[Michael Forman, Chairman & Chief Executive Officer]

Thank you, Robert, and welcome, everyone, to FS KKR Capital Corp.'s Third Quarter 2020 Earnings Conference Call. First, let me offer my continued well wishes to each of you, your loved ones and your coworkers as our country continues to adapt a post-COVID world. The FS KKR team continues to function largely in a virtual work environment. Thanks to the ongoing dedication of our investment and operating teams. The day-to-day cadence of our business somehow has begun to seem almost normal. I continue to be extremely proud of the job our team is doing during these extraordinary times.

In recent weeks, our country has been almost entirely consumed by events leading up to the presidential election. The uncertainties associated with the election, combined with the effects of the pandemic and social unrest, seem to have permeated every aspect of our society. Our hope is that as we move toward the Thanksgiving holiday season in just a few weeks, that our country will begin the process of healing by recognizing we are stronger together than we are divided.

Across our investment portfolio, we have seen management teams and sponsors continue to make well-informed business decisions focused on positioning their companies for long term value creation. These decisions have included such things as building cash reserves, streamlining operations, communicating proactively with customers, and realigning supply chains to maximizing time-to-market for products. These decisions are manifesting themselves in tangible ways as the value of our investment portfolio appreciated during the third quarter, resulting in an increase in our net asset value per share of 4.7% as of quarter end. The FS KKR investment team has done an exceptional job working closely with these companies.

From an operating perspective, our net investment income was $0.53 [ph] per share during the quarter, which was $0.03 above our third quarter dividend of $0.60 per share, and also 3% per share above our public guidance. From a liquidity perspective, we ended the quarter with approximately $1.5 billion of available liquidity with no meaningful near-term debt maturities. Looking forward consistent with our dividend strategy of targeting a long-term yield to investors of 9% of our net asset value, we currently expect our fourth quarter adjusted net investment income to approximate $0.64 per share. As such, our Board has declared a distribution of $0.60 cents per share for the fourth quarter, which equates to an annualized yield of 9.8% on our NAV share of $24.46 as of September 30, 2020.

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

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thanks, Michael. From a macro perspective, many of the trends we highlighted in our second quarter earnings calls have continued to develop, including a rebuilding of our investment pipeline alongside a reemergence of M&A activity. And while the market is still not back to pre-COVID levels in terms of transaction volumes, we believe it has recovered to approximately 75% or 80% of those levels.

Another topic we discussed in detail in our second quarter call, the disconnect between the markets, and the general U.S. economy continues to raise meaningful questions and still concerns us with regard to near-term economic performance and ongoing economic recovery. The high yield market continues to experience record monthly issuance levels as illustrated by year-to-date 2020 [indiscernible] of $338 billion through September 30, which is only $7 billion below the full year annual issuance record of $345 billion the market set during 2012. The high yield market continues to be fueled by a record-level of refinancings not seen since the Great Recession.

In the leveraged loan market, the record level of monthly issuances in January and February evaporated in March and remain depressed through July. However, in both August and September, the leveraged loan market has returned to record levels of issuances, as borrowers have access to market with a healthy balance of LBO, M&A, and refinancing activity.

Pricing for the leveraged loans has been aggressive in many instances driven in part by the low overall yield environment and a desire by many managers to put money to work in an effort to generate parent yields. From KKR perspective, we continue to believe the Federal Reserve's stated goal of reducing unemployment from the current level of 6.9% to the fed's long term target of 4.1%. While simultaneously targeting inflation of around 2% per year, clearly illustrates the feds focus on recovery of jobs first with inflation targeting a distant second. As a result, we believe significant levels of government stimulus will continue well into 2021 and possibly beyond.

Across the FS KKR platform, we are participating in a number of active processes relating to new investments, but we are continuing to invest with a narrow credit lens during this unprecedented time. While our goal is to generate attractive risk adjusted returns, given the still fragile nature of many aspects of the economy, we are exercising caution from an underwriting standpoint. Additionally, the renewed health of financing markets, especially in the upper end of the middle market where we focus has created strong demand for perceived high quality transactions. In some cases, we are seeing pricing and structural terms returned to pre-COVID levels.

Across the FS KKR platform, we benefit significantly from our incumbency positions with existing borrowers as well as our deep relationships with key sponsors. These positions and relationships have allowed us to see our fair share of new opportunities while still maintaining a selective bias, which hinges on protection of principal first and yield second. As a result of these fundamental drivers during the third quarter, we originated $174 million in new investments, which is still below our capabilities from a processing or capacity standpoint. Our $174 million of total investments combined with $231 million of net sales and repayments when factoring in sales to our joint venture equated to a net portfolio reduction of approximately $57 million during the quarter.

I should mention that during the period from October 1 to November 4, FSK closed on an additional $300 million in investments. As a result, even though we believe we have remained disciplined from an origination perspective, we think we are well positioned from an overall portfolio standpoint as we move into the last few months of the year.

Last quarter, we began providing detailed investment performance metrics for the FS KKR Advisor. This information is detailed on Slide 12 of our investor presentation on our website. The updated information is summarized as follows. Since the FS KKR Advisor was formed, through December 31, 2019, we made approximately $3.2 billion in new investments and we experienced 42 basis points of cumulative appreciation. From the same starting point through September 30, 2020, we have originated approximately $4.2 billion of new investments and have experienced 1.17% of cumulative depreciation, which includes the effects of COVID.

We continue to be satisfied with the investment performance our team has been able to deliver over this time period and we believe these data points illustrate the manner in which we are turning the investment portfolio toward what we believe to be more conservative investment structures in companies with more defensible operating positions. Lastly on this point, as of the end of the third quarter, approximately 51% of our portfolio has been originated by the FS KKR Advisor and 81% has been originated by KKR.

From a forward-looking perspective, we believe the federal government will continue to find ways to support the economy until either an effective COVID vaccine is developed or herd immunity is achieved. We believe the broader market, which has been in receipt of stimulus dollars in government support will continue to function somewhat in line with where we are today -- that is, liquidity will continue to exist for both borrowers and lenders, some level of corporate M&A activity will continue and the public markets will continue to function within a band of relative normalcy. Of course, these assumptions, in large part depend on investors' and operators' collective trust in the future actions of the federal government. We also believe government intervention in the economy will be increasingly difficult to unwind in a non-disruptive manner, the longer the monetary support is required.

As a result, we are pleased with the performance of our investment portfolio this quarter. And while we are confident that the investment decisions we currently are making are based on thorough analysis and diligence, we have to acknowledge that the operating world we find ourselves in is still far from normal. These observations lead us to conclude that the road back to full recovery may at times be volatile, if for no other reason than the significant dependence the capital markets has placed on our federal government for the foreseeable future. Nevertheless, we are pleased with the quarter and believe we are well-positioned as we begin to look forward to 2021.

And with that, I'll turn the call over to Brian to discuss some investment-portfolio specifics.

[Brian Gerson, Co-President]

Thanks, Dan. As of September 30, our investment portfolio had a fair value of $6.6 billion consisting of 172 portfolio companies. This compares to a fair value of $6.6 billion and 173 portfolio companies as of June 30 2020. At the end of the third quarter, our top 10 largest portfolio companies represented approximately 23% of our portfolio, which remains in line with our results for the last several quarters. We continue to focus on senior secured investments as our portfolio consisted of 54% of first lien loans and 68% senior secured debt as of September 30.

The weighted average yield on occurring debt investments was 8.6% at September 30, 2020, as compared to 8.7% at June 30 2020. The decline in our weighted average portfolio yield was primarily due to exit to certain higher yielding assets throughout the quarter. From a non-accrual perspective, as of the end of the third quarter, our nonaccruals represented approximately 8% of our portfolio on a cost basis and 2.8% of our portfolio on a fair value basis, compared to 9.9% and 3.8% as of June 30. We did not place any new investments on nonaccrual in the third quarter, and four previous nonaccrual debt positions were restructured.

From an overall valuation perspective, our investment portfolio increased by approximately 2% or $132 million during the quarter. The details associated with our quarterly valuation results are as follows. The total amount of realized and unrealized depreciation experienced across the portfolio during the quarter was $356 million. Our quarterly appreciation includes the reversal of $180 million of unrealized depreciation associated with certain portfolio company restructuring, including Borden Dairy, FourPoint and Mood Media. Our remaining $176 million of portfolio appreciation primarily was driven by a combination of positive operating results and improved valuation inputs during the quarter for specific investments initially impacted by spread widening in general market conditions during the first and second quarters, but which continue to recover.

Our realized and unrealized depreciation total $224 million during the quarter, over 90% of our unrealized depreciation was related to certain legacy investments, many continuing to be impacted by the effects of COVID. In addition, approximately $182 million of depreciation related to realized losses, primarily from the previously mentioned restructurings. While we discussed many of the specifics of these investments on our second quarter earnings call, having a series of completed restructurings across the legacy portion of our portfolio represents a meaningful step for us from both an operating and valuation perspective.

KKR's dedicated worker [ph] group was instrumental during these complicated and time-consuming processes, which we believe demonstrates the value of having a dedicated internal team of investment professionals able to work seamlessly alongside our investment teams to navigate these challenging situations.

And with that, I'll turn the call over to Steven to discuss our financial results in more detail.

[Steven Lilly, Chief Financial Officer]

Thanks, Brian. My comments will be less-focused on reporting financial metrics already contained in our earnings press release and 10-Q, but rather focus more on the color behind our results, hopefully linking them in a more transparent and informative way to the broader comments on which Michael, Dan and Brian have touched.

First, the $3 million decline and our total investment income quarter-over-quarter was impacted by the following. We experienced a decline of $12 million in our interest income, primarily due to repayments of higher yielding assets across our investment portfolio, coupled to a lesser extent with continued declines in LIBOR. Given that 98% of our floating rate investment portfolio has floors, which average 88 basis points, we believe the vast majority of LIBOR-based interest rate compression has now worked its way through the portfolio. Our fee and dividend income increased by $9 million during the third quarter, as compared to the second quarter. The largest components of our fee and dividend income included $17.5 million of dividend income from our joint venture during the quarter. As many of you know, we typically expect this recurring dividend income to approximate between $15 million and $20 million on a quarter-to-quarter basis.

Other dividends primarily from our asset-based finance investments totaled approximately $12 million during the quarter and fee income totaled $3 million during the quarter. Our interest expense declined by $2 million during the quarter as we benefited from the reduction in LIBOR as approximately 54% of our drawn balance sheet is floating [ph] rate. Management fees decreased by $2 million during the quarter due to the lower amount of average gross assets during the quarter compared to the prior quarter. The detailed bridge and our net asset value per share on a quarter-over-quarter basis is as follows.

Our starting Q3 2020 net asset value per share of $23.37 was increased by net investment income of $0.63 per share and was further increased by $1.06 per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.60 per share dividend, the sum of these activities results in our September 30 net asset value per share of $24.46. From a forward-looking guidance perspective, we expect our fourth quarter recurring net investment income per share to approximate $0.64 and we expect our GAAP net investment income per share to approximate $0.57.

The bridge from our $0.63 per share of net investment income during the third quarter to our fourth quarter guidance is as follows. Our recurring interest income is expected to be relatively flat quarter-over-quarter as new investments and repayments somewhat offset each other, coupled with more static yields associated with our floating rate portfolio given that most of our LIBOR floors have now been achieved; we expect dividend income associated with our JV to approximate $20 million; we expect other fee and dividend income to approximate $15 million during the fourth quarter.

From an expense standpoint, we expect our interest expense will remain relatively flat quarter-over-quarter, we expect our quarterly management fee will increase by approximately $2 million during the fourth quarter based on the higher average value of our investment portfolio during the quarter; and we expect other general and administrative expenses will remain flat quarter-over-quarter. Finally, during the fourth quarter we expect to pay excise taxes totaling approximately $9 million. To reflect more accurately, the ongoing operational nature of the business, we add back excise taxes to calculate our recurring net investment income and net investment income per share. Nevertheless, we believe it is important to provide the market a bridge for both calculations.

As a reminder, over the long term, we expect our dividends per share will equate to a 9% yield on our net asset value per share, but we acknowledge there will be certain quarters where our annualized yield may be greater or less than this range due to quarter-to-quarter fluctuations in the business from an operational standpoint.

That being said, we are pleased that during the first three quarters of 2020 despite the far reaching effects of COVID and the resultant volatility on most companies' investment portfolios, we have been able to exceed our 9% target dividend yield to investors. Obviously, our dividend policy of achieving a 9% target dividend yield on our net asset value means that over time, it would be normal for our quarterly dividend to fluctuate somewhat in concert with the quarter-to-quarter change in our net asset value. In terms of the right side of our balance sheet, our gross and net debt to equity levels are 131% and 120% respectively. These leverage levels represent a decline from our leverage levels during the first and second quarter of this year. Our available liquidity of $1.5 billion equates to approximately 22% of the value of our investment portfolio, which is a very comfortable percentage.

And as we said on our second quarter earnings call, we continued to be pleased with our liability structure, which is 36%, unsecured and 64% secured with an overall weighted average cost of debt of 3.7%. In terms of debt maturities, we have no maturities until the middle of 2022. Our largest year maturities is 2024 on approximately 50% of our capital structure will roll forward. Finally, from an unfunded commitments perspective, as of September 30, 2020, we had approximately $311 million of unfunded debt commitments, of which approximately $46 million represented revolver facilities and $212 million of unfunded equity commitments primarily associated with commitments related to our asset-based finance portfolio.

As we said during both our first and second quarter earnings calls, the majority of our unfunded debt and equity commitments are generally used for capital expenditures or acquisitions and therefore subject to performance or other threshold tests including in certain situations, our specific consent. As a result, while these commitments are disclosed in our 10-Q for informational purposes, we do not believe they will be drawn in any meaningful capacity on a quarter-to-quarter basis.

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

[Michael Forman, Chairman & Chief Executive Officer]

Thanks, Steven. As we've mentioned throughout this call, there's no shortage of issues our world county faces as we believe the federal government will continue to play an active role in the economy for the foreseeable future. That said, we continue to believe the long term benefits that we believe would accrue to investors from the establishment of the FS KKR platform are beginning to materialize in tangible ways. From deep sponsor relationships to the rigor of investment committee decision making, to proactive portfolio management, to broad based dedicated work teams, the seasoned BDC industry operators, the best of what we structured and plan for as we established the FSKK, our advisor seems to be coming to fruition at a very opportune time. We will look forward to continuing to update you on future progress.

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

[Operator]

[Operator Instructions] And our first question comes from the line of Casey Alexander with compass points. Your line is now open.

[Casey Alexander, Compass Point]

Hi, good morning. Can you put up a pencil around kind of a run rate for dividends being generated by the portfolio. There's been a fair amount of fluctuation and came in at a higher than normal number. And I'm just trying to get to the right run rate going forward?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, Casey's its Dan, good morning. I think you've seen the dividend growth out of the joint venture over the last several quarters. I think we have started to get that to steady state, maybe there's a little bit more growth there. We did have some strong performance out of the asset based finance portfolio this quarter. You know, some of those mainly due to sort of COVID reasons had been sort of turned off, but they returned to sort of paying, those numbers are probably in some ways maybe a little bit higher, because there was some sort of catch up in there. And then the only other thing I noticed, if you look at our fee income for the quarter, and it was $3 million. I think the range in the four quarters prior was $6 million to $16 million. But that's probably the ranges and the bounds for you know, sort of what you're seeing in dividend and fee income.

[Casey Alexander, Compass Point]

Okay, well, you stole my next question, which was about fee income. You discussed that pricing and structured terms, in some cases have returned to pre COVID levels. From a logical standpoint, it seems to me that the deals that got into the pipeline first, were kind of the no brainers that performs exceedingly well through COVID and would have been done under any circumstances? Is there a point in time, where we start to see somewhat COVID dinged companies that are going to come to market for money? Because they have to for refinancing reasons where spreads may be a little bit better, terms may be a little bit stronger because of their financial condition at the point in time that they're coming to market?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, now it's a good question. I probably break it down in a couple of ways, though. I think a lot of the COVID impacted names could have already come sort of seeking sort of capital. Maybe those things weren't done by us, but just done by either other market participants or sort of different sort of forms of the market. I think we see things today, pipeline is definitely built back up but we quoted the 75% to 80% number, I mean, the teams are sort of very busy, I think for transactions that are more center of the fairway the ones that you want to be invested in for sure. From a credit perspective, we are seeing them as we'll call those pre COVID levels. I do think there's more scrutiny on documentation. I do think there's more scrutiny on ad backs. But at least from a pricing perspective, I think some of that is just to supply demand point by we're still catching up on the pipeline activity, there's people who want to deploy money in this market.

I do think if you have a credit, which maybe is not even COVID impacted, but just has a story to it, a little bit harder, a little bit more work that is so wide of what we would have seen in say, January or February, buying maybe 50 to 75 basis points. So, I think that's the way we're seeing things sort of today in the market.

[Casey Alexander, Compass Point]

Okay. All right, thank you. I'll step back in the queue and let some other folks ask some questions. Thank you.

[Operator]

Thank you. Our next question comes from the line of Rick Shane with JP Morgan. Your line is now open.

[Rick Shane, JPMorgan]

Good morning, everybody. And thank you for taking my questions. I hope everybody's well. First of all, really appreciate the effort to provide so much guidance it's helpful as we look forward. When we think about the overall mix of the portfolio and the combination of repayments and you highlighted the fact that they're higher yielding loans repaid disproportionately in the third quarter. When we think about where spreads are now in the opportunities, particularly that you're considering, do we think that spreads are going to stabilize, drift higher drift lower again, I realize given the size of the portfolio, it's very marginal. But where do you see the marginal investment at this point?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Good morning Rick and hope your wells as well. I think spreads are let's called that fairly sort of stable now. I think we would have talked about in April, or May a scenario where we would have thought every deal would have been 100 to 200 basis points wide. That didn't last very long, and there weren't necessarily a lot of deals that are done there. You know, I think for that regular way, we'll call it unitranche type loan. I think we're seeing fairly, let's call a stable sort of spread environment, I think there are things that on an opportunistic basis that we can do, whether it be second lien or maybe back to Casey's question, something that maybe had a little bit more of a COVID impact, but we're comfortable on the recovery, that we can out earn kind of that normal type investments.

So I think those opportunities exists, I think the way we've constructed the portfolio today is a way that we will continue in terms of portfolio construction. I think the comment you made about your repayments of the quarter being sort of higher yielding investments, I mean, there wasn't that many repayments in the quarter, so that was skewed really just sort of one or two names. But obviously, we're looking to build the portfolio in a very diversified basis with Principal protection first kind of yield second but knowing we've got dividend sort of goals and to the targets to meet.

[Rick Shane, JPMorgan]

Got it. And then I'm all asked the same question, basically, in the context of covenants and protections in terms of has regained any power in the market in terms of structure?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, I think we have, while pricing has for that center of the fairway deal has sort of come back to what we'll call pre COVID levels? I do think, there are just a bit more discipline out there, as it relates to add backs and structure and sort of covenants. I think you've heard us say this before; we're a big believer that the first lien Unitron [ph] product is supposed to have a covenant. Right, you're not getting paid enough to sort of notch, and I think you will continue to see us employ that strategy on a go forward basis. I think a little bit more waited to the to the lender sides of it.

[Rick Shane, JPMorgan]

Dan, thank you very much.

[Operator]

Thank you. And our next question comes from the line of John [ph] with Jefferies. Your line is now open.

[Unidentified Analyst]

Good morning, guys. Thanks very much. First question so a little bit of a tag on to the last question, characteristics of the recent pipeline, and the recent kind of post end of Q3 investment activity, but maybe not terms but any industry or geographical characteristics we should be thinking about?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Good morning, John. I don't think any geographical per se, I think you should assume that with the higher risk bar, underwriting bar that we have today, we are focused on non-cyclical in many ways, not names that we wouldn't be worried about being impacted by we will call it second wave of COVID. You know, hopefully the news yesterday, so the changes that dynamic a bit but I think we're playing defense when we think about sort of underwriting today, and those would be the kind of industries that you should expect, we're sort of playing. And obviously, a lot of the deals that closed in that first month of this quarter were things that were committed to sort of last quarter, but I think that's the way we expect the pipeline to come together over the next sort of quarter two for sure.

[Unidentified Analyst]

Okay. And then within the last quarter of your net deployments, asset based finance was a pretty big portion. Was that one particular deal, or was that just sort of an opportunity that presented itself in that quarter or is that something more of a long term, call it might be a bigger mix of that? How do we just think about that component of the originations in the quarter?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, no, it's a good question. I'd start on the portfolio construction sort of piece. I think we've talked about, asset based finance being let's call it somewhere between 10% and 15% of the portfolio. We're kind of there now. So I think we're happy about that. You know, because I think the total numbers inside of q3 on the origination side, we're fairly small versus kind of normal quarters, I think that's probably skewing a little bit, there was one more opportunistic transaction that does come to mind that we sort of did, but I wouldn't read too much into that focus on the 10% to 15% guidance from the portfolio construction.

[Unidentified Analyst]

Okay. And then that's question. Dan you talked about in a lot of parts of the markets kind of terms, getting back to normal or even pre COVID level. But you also kind of referred to other activities, like LBO and maybe acquisition kind of financings creeping up. Just as you look into 2021. Assuming more of the same or we have, call it a slow recovery that might not be straight lined but more or less the recovery some levels of stimulus. Do you guys have an opinion on how the kind of deal market shapes up next year in terms of the drivers of the flow?

[Dan Pietrzak, Chief Investment Officer & Co-President]

You know, it's a good question. I think we've seen a lot of add on and recent sort of months that's companies just effectively going on the offensive as their businesses has stabilized, I think it's probably been easier to buy a competitor today than arguably do sort of a new deal. So I think for us, percentage wise, that is probably been higher. I think we're starting to see more regular way M&A processes happen and occur and advisors are hired. I mean, people are not traveling as much as they used to, or as much as maybe with historical norms will be, but I think people are finding ways to get deals done. I think if we're in and around the environment we are today, so let's call that sort of large second wave lockdowns, may be sort of an understanding of the economy can be a bit bumpy and volatile, but people have some comfort around that, I think you'll just continue to see that more traditional pipeline, sort of pick up on the M&A side. Great, thanks very much, guys.

[Operator]

Thank you. And our next question comes from the line of Finian O'Shea with Wells Fargo Securities. Your line is now open.

[Finian O'Shea, Wells Fargo Securities]

Hey, good morning. Thank you. Just a first question on the dividend again, appreciating the target levels, you all laid out? Is there a certain point where you'll go back to a fixed dividend perhaps when you feel NAV is stabilized? Should we think of this variable policy as more transitory or permanent concept?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, Fin maybe I'll start and Steven can add to this. I think we've gotten a lot of feedback from the market. You know, I think it's probably a bit of a combination of creating a sense of stability. But also, I think, understanding what this product is and what the BDC is, I think that variable component does make some real sense to us. But, Steven, why don't you kind of add to that?

[Steven Lilly, Chief Financial Officer]

Yes. So I think Dan's right that we think of this more as a permanent shift, rather than a transitory shift. And we think, frankly, the industry would benefit itself in the same way, not just our platform. There's so many variables, every quarter that BDC's deal with in terms of changing interest rate environments, changing deal environments, we've talked a lot about pricing a pipeline, credit quality, it's just lots of inputs that you handle every quarter as an operator. And to have a fixed dividend over time, this becomes very difficult for all BDC. So we think having more of a floating type policy that matches NAV and creates a target yield for investors over a long sustained period of time, as we think of a more enlightened, better way to go for the industry as the industry continues to mature, frankly.

[Finian O'Shea, Wells Fargo Securities]

That's helpful. What do you think of a similarly the concept of a floating hurdle rate?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, it's an interesting question Fin. I mean, you could argue it does align with what the general investments of these types of vehicles are which are floating rate loans. You know the other side of that it probably puts a little bit of complexity in there, as you think about how to manage your kind of asset liability sort of side. You know, and I think there's also some complexity because most of the deals do sort of come with LIBOR floors. So, I mean, I think that concept is probably interesting. I think the complexities could be a challenge, though to be honest.

[Finian O'Shea, Wells Fargo Securities]

Understand, that's all for me. Thank you, guys.

[Operator]

Our next question comes from the line of Robert Dodd with Raymond James. Your line is now open.

[Robert Dodd, Raymond James]

Hi, guys. Good morning. Back to kind of a pricing question but not just about spreads, obviously. I mean, with your comments Dan, I mean talking about, better structures, maybe lower leverage, and etcetera. I mean, the spread might have been given back, so to speak in a very competitive market after the COVID spike. But what about if you can kind of talking about what's the forward risk adjusted total return yield or however you want to word it given if add backs are reduced, if Doc's [ph] are better, it's not [indiscernible] higher. The spread might have been competed away, but those other components don't seem to have been. So what impact did those have right now in kind of the implied total return pricing rather than just spread pricing?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes, it's an interesting question. I'm not entirely sure those other pieces are so far away from pre COVID items, that you would give them a ton of value in a pricing sort of common standpoint. I mean, documents are better, but documents are not what they would have been in an April or May deal. You know, covenants, I think are holding, I think the focus on Add backs are sort of better, for sure. And I think the market saw certain challenges was on deals where add backs were done, obviously, that was inflating EBITDA, maybe that cash didn't come through. So, I think it's an impact, I would say this for your benefit I mean, I think from our view that your regular way unitron steel is probably LIBOR plus 625 [ph], it's probably two points of all ID, you probably get an assumption of some level of call fees or call Pro, when you think about your overall portfolio, that's putting you maybe sort of 80%-ish on an unlevered basis.

We've been pretty selective in the second lien space, but you we're prepared to do those, a lot of times those second lien credits will be locked down and all the time, there'll be larger companies, but in our mind, they can be some of the better credits in the portfolio. You know, they're probably 400 basis points back of the first lien syndicated markets, so now talking probably 200 basis points back of what we just said, on the unitron. So, I think there's ways to build, you know, an overall pretty attractive yield here, especially considering where overall sort of rates are. But I think that's the way we've been thinking about.

[Robert Dodd, Raymond James]

Appreciate that. On the asset back, I mean, obviously, [indiscernible] paid a dividend this quarter. So you're seeing a rebound in those areas, but still kind of maintaining the 10% to 15% target for that mix in the portfolio. Even, obviously, asset backed security has something going for it versus other lows in the market, but what would it take for you for lack of a better term for you to be interested in shifting that 10% to 15% either higher or lower?

[Dan Pietrzak, Chief Investment Officer & Co-President]

It is a sector that we are very fond of and you've heard us talk about it on calls prior, we like the sort of collateral backing of those deals. They are generally paying sort of a higher, sort of overall margin. I think there probably is a governor to why we would not take that higher, obviously, the strategic purpose of our sort of platform here is to focus on directly originated, sort of corporate loans, focused on that uptrend in the middle market. So, I think you got one sort of natural governor and obviously a lot of this stuff can be non-EPC; so that's another sort of piece of that. But again, I think we really like what we see there as real downside protection and very attractive return. So I think we're comfortable with that balance today. I think we could have some flex to take it down if we saw other lending situations, spreads just wide and maybe we didn't see the spreads widen in the asset base and finance space. But we are dynamic as we think about portfolio allocation. We're more cognizant in these and the liquid asset book. So you just can't sort of move into that quickly. But I would probably stay in that 10% to 15% range.

[Robert Dodd, Raymond James]

Thank you.

[Operator]

Thank you. Our next question comes from Bryce Rowe with National Securities.

[Bryce Rowe, National Securities]

Thanks. Good morning and I appreciate you taking the questions here. Wanted to ask a little bit about the restructurings, Dan and/or Brian. You mentioned the $180 million of reversals associated with realized losses. So curious what the mark might have been on those assets and what kind of gain or loss was associated with those exits?

[Brian Gerson, Co-President]

Bryce, it's Brian. So we had $180 million of reversal of unrealized depreciation and $182 million of realized losses associated with those same assets. So it's pretty much on top of each other.

[Bryce Rowe, National Securities]

Great, that's encouraging. And then again, on the restructuring you noted the four restructurings here in the third quarter. Maybe Dan, you can talk a little bit about your thoughts on the outcome there, the process within the organization from a restructuring perspective and then if we look at the current pipeline, if you will, of restructurings -- you guys provided some good detail around that last quarter. So just curious how you think about the current portfolio of potential restructurings here over the next three to three to six months? Thanks.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thanks for that and I'll take the first part and Brian will sort of add, too. Maybe I'll just start off with the team. I think really dating back to the end of 2017, sort of leaned into the idea of wanting to have a dedicated restructuring team. We've added that over time, we actually added someone there. April is sort of timeframe. I think we're very happy that we have that. I think the team has worked tremendously hard, our minds are very effective. I think it adds not just value for these names when they get to the spot, but adds us a lot of value when just a company is kind of on the watch list because we can be thoughtful with what amendments we might make. We're not in the business of trying to take over sort of all these companies, but we need to be prepared to do that, people need to know we're prepared to do that.

So we think that team adds us a lot of value generally. I think Borden was sort of one example inside the quarter. We think that we put ourselves in a good position there, we took some take back paper, we got an equity stake. That equity stake is marked effectively at zero. We've partnered with what I would call a best-in-class. So the management team to do that that was a lot of I think hard work and brain damage to get to that point. But I think we were happy with where we sit, we're going to work hard to support that team to try to maximize our recovery versus our initial investment.

[Brian Gerson, Co-President]

Yes, and Bryce, FourPoint is probably another name worth mentioning. We were investors in a second lien tranche and we had some equity as well in that business. The company was certainly impacted by COVID and the decline in commodity prices. It's a gas-weighted EMP business. Back in the summer in July, we basically we were part of a restructuring where we converted the second lien notes to equity, took control of the business, significantly de-levered the balance sheet, took it from close to 6x under 1x leverage. And also we did some of their hedges so they're 80% to 90% hedged. We think control of that business is important. It allows us to focus on some SG&A opportunities as well as potentially M&A down the road.

[Bryce Rowe, National Securities]

Okay, that's helpful. And just any forward guidance on how to think about the current portfolio of nonaccruals? Are you closer to getting some more restructured here over the near term?

[Brian Gerson, Co-President]

Yes, I'm not sure of these things and so the guidance perspective, I think we're pretty happy and pleased with how we've rotated the portfolio, sort of where we sit today and clearly, there are some names that were focused on. But I don't think we see anywhere near we'll call it, ‘restructuring pipeline', I think was your words, on sort of a forward basis. Okay.

[Bryce Rowe, National Securities]

Okay. All right, thank you guys. Appreciate the time.

[Brian Gerson, Co-President]

Thank you.

[Operator]

Thank you. And our next question comes from a man of Ryan Lynch with KBW. Your line is now open.

[Ryan Lynch, KBW]

Good morning, thanks for taking my questions. Really, credit performance has been the focus for FSK investors over the past several quarters and in fact, maybe the last several years. Q2 versus Q3's credit performance was dramatically different despite, I think a pretty similar background for liquid loan prices and credit spreads and I think that was due to some specific credit issues and some markdowns in Q2 that caused a pretty big decline in NAV. And then in Q3, you saw the opposite of that big, big uptick in NAV. So what do you think changed between Q2 and Q3's performance in your portfolio? And you think that the portfolio has really turned the corner from a credit perspective, with the restructuring than the current markdowns of those stressed investments? Or is there still just too much certainty out there to make that call?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes. Good morning, Ryan. Thank you for that. There's a couple maybe sort of different pieces in there. I don't think the ‘credit performance' has sort of changed and over Q2 to Q3, I would go to your point, it was much more certain specific names that we continue to kind of work through and I think if we take a step back we've been very focused on rotating the portfolio. You saw in our sort of earlier comments, we've got 50 plus percent, originated from the FS KKR Advisor, 81% plus from KKR, sort of overall -- I think we've had some legitimate challenges on some of these older names. I think we've been forced dig deep on the restructuring side and quite frankly the recovery rates on some of those names have not been great. So I think that has been the driver. Now what we do want to make sure the market understands -- and this was Page 12 of our slide deck that's up on the website -- we've originated since the start of this Advisor, so 10 quarters now. Over $4.5 billion of assets. Total cumulative good depreciation sort of $49 million. I think when you put that in context, almost $4.5 billion in investments, $49 million over 10 quarters. That's well with inside the range of we talk about probably a target of sort of 1% annual losses. So I think we've made some really good progress. I think we're quite proud of what the team has done both on the origination side, but also on the portfolio side. I think we've still got some work to do as it relates to some names in there. But I think we do believe the portfolio sort of turned the corner and we look forward to continuing with what we believe are our strong originations to good and defensive companies and continue to build this portfolio in a creative manner for our investors.

[Ryan Lynch, KBW]

Okay. Thanks for the color. And then I just had one other one. I know there's been a lot of discussion on terms and pricing in the market, as well as your current pipeline. Just as I look at and you guys' leverage levels today, I understand where you guys' leverage targets are set at, [indiscernible] expectation going forward that at this point, you guys are just going to match repayments with originations? Or what's the thoughts from leverage levels going forward from here?

[Dan Pietrzak, Chief Investment Officer & Co-President]

Yes. I'm not too sure if that's the wrong assumption. We were happy to see the leverage come down this quarter. We've at that 1.2x net, it's with inside our sort of target range. Our target range of 1x to 1.25x hasn't changed. So I think you should expect this expect us to operate within there. I think we feel very good where we are from a liquidity perspective, both from available liquidity, but also sort of near term debt maturities and then the only time that I think that we would probably take it above there would be to capitalize on what we see is a market opportunity and volatility, which is obviously not there today the way it may have been in in the Q1, beginning of Q2.

[Ryan Lynch, KBW]

Okay. Understood. That's all for me. I appreciate the time today and congrats on the on the next quarter.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you.

[Operator]

Thank you. And our last question and follow-up question comes from the line of Casey Alexander with Compass Point. Your line is now open.

[Casey Alexander, Compass Point]

Yes, real quick for Steve because this is just math that I want to check. If you level-set your earnings stream going forward, do you know how many quarters of additional incentive fee waivers we have in front of us before they're absorbed if we'd look back?

[Steven Lilly, Chief Financial Officer]

Casey, we gave guidance, I guess, probably two quarters ago now that we said we expected it to be kind of in the five to six quarter range from that period of time. Clearly in our guidance for the fourth quarter, there's not an incentive fee. Clearly the books moved in a positive direction, too. So forgive me for not having the exact math. But hopefully, that's maybe a bit of a bookend for you and we can also follow up offline [indiscernible].

[Casey Alexander, Compass Point]

Yes. If you want to follow up offline, that'd be great. Thank you.

[Steven Lilly, Chief Financial Officer]

Great. Thanks so much.

[Casey Alexander, Compass Point]

Awesome. Thanks for taking my question.

[Steven Lilly, Chief Financial Officer]

Thanks, Casey.

[Operator]

Thank you. And this does conclude today's question and answer session. I would now like to turn the conference call back to Dan Pietrzak for closing remarks.

[Dan Pietrzak, Chief Investment Officer & Co-President]

Thank you. We want to thank everyone again for taking the time today. We do hope that you and your family remain safe and healthy and we do look forward to talking to you again soon. Thanks, again.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for standing by. Everybody, you may now disconnect.