FS KKR Capital Corp

NYSE:FSK

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, welcome to FS KKR Capital Corp’s Third Quarter 2021 Earnings Conference Call. Your lines will be in a listen-only mode during the remarks by FSK’s management. At the conclusion of the company's remarks, we will begin the question-and-answer session. At which time I will give you instructions on how to enter the queue. Please note that this conference is being recorded.

At this time, Robert Paun, Head of Investor Relations will proceed with the instructions and the introductions. Mr. Paun, you may begin.

[Robert Paun, Head-Investor Relations]

Thank you. Good morning and welcome to FS KKR Capital Corp’s third quarter 2021 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 8, 2021. 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, 2021. 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 third quarter earnings release that was filed with the SEC on November 8, 2021. 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 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 and Chief Executive Officer]

Thank you, Robert, and good morning everyone. Welcome to FS KKR Capital Corp’s third quarter 2021 earnings conference call.

The third quarter represented the first full quarter of operational results for the newly combined FSK. And I am pleased to announce it was a positive quarter across multiple metrics. As demonstrated by our results, we continue to see strength and stability in the business from both an investing and earnings perspective.

During the quarter, our investment team originated approximately $2.8 billion of new investments. We out earned our target 9% annualized dividend yield on our net asset value. And we experienced a 1% increase in our net asset value. Since the establishment of our current dividend policy, the third quarter of 2021 was the seventh consecutive quarter that we have over earned our target annualized yield.

During the third quarter, our GAAP net investment income was $0.71 per share. Our adjusted net income was $0.64 per share, which was $0.03 per share above our public guidance of $0.61 per share at the end of the second quarter. Our net investment income during the quarter was driven by continued strong originations and positive portfolio company performance.

From a liquidity perspective, we ended the quarter with approximately $2.5 billion of available liquidity with no meaningful near-term debt maturities. Additionally, in October, we accessed the public debt markets issuing $1.25 billion of unsecured bonds at a weighted average coupon of 2.54% further enhancing our liquidity and funding profile. As previously announced, our Board authorized a $100 million stock buyback program, which went into effect at the end of the third quarter.

Through October 29, 2021, we have repurchased approximately $3.3 million of shares under this program. Based on our third quarter financial results, which exceeded our public guidance, our Board has declared a distribution of $0.62 per share for the fourth quarter as compared to our original expectation of a $0.60 per share dividend. This distribution is consistent with our variable dividend policy, which seeks to provide shareholders with a 9% annualized dividend yield on our net asset value over time.

Looking forward to the fourth quarter, we expect our adjusted net investment income to be $0.61 per share. While Steven will cover the details associated with our forward guidance later in the call, from a summary standpoint, as we begin to focus both on the fourth quarter, as well as 2022, I believe FSK is well positioned to continue building on the themes highlighted in our recent Investor Day presentation, including moving closer to our target leverage range, optimizing our capital structure and transitioning a portion of our non-yielding assets into yielding assets.

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

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

Thanks, Michael. As we consider the current economic environment, perhaps like many of you, our internal discussions focus on inflation, supply chain dynamics and the availability of labor. From an inflation standpoint, we continue to believe that many of our current inflationary pressures may well prove to be transitory in nature. Our view acknowledges the fact that both inflation and supply chain issues have been influenced directly by consumer's behavior during the pandemic.

As people have quarantined, a meaningful percentage of stimulus and other disposable dollars have been spent on goods such as autos, furniture and electronics, as opposed to services such as travel and leisure. Indeed, demand for durable goods recently peaked earlier this year at a level almost 30% higher than the long-term trend line.

At the same time, manufacturing jobs are still 4% lower than pre-pandemic levels. As a result, inventory levels have dropped and prices have risen in some sectors sharply as businesses have responded to these pressures. Ultimately, we believe the majority of supply chain issues will be resolved over the coming quarters as demand for durable goods returns to more normalized levels and consumers focus again on travel and leisure.

From a labor standpoint, as we have said on prior calls, sectors which continue to see particularly notable shortages include healthcare, education, manufacturing, and hospitality. We expect wage inflation to continue running above pre-pandemic levels, given the elevated level of job openings and the constrained availability of workers.

Additionally, a recent wave of retirements creates the need to replace workers as well. Over time, however, given the lower skill levels frequently associated with these industries, we don't see the current labor issues leading to runaway levels of future inflation.

From an investing perspective, we view the current macroeconomic environment as a constructive backdrop for credit and overall elevated investment activity. Though, we acknowledge that higher costs associated with inventories, freight and labor are beginning to temper EBITDA growth rates.

During the third quarter, we originated approximately $2.8 billion of investments. The new investments in the quarter were spread across 19 high quality companies and nine industries. As with prior quarters, our growth continues to leverage KKR's broad capabilities within the private credit market.

New investments during the quarter carried a weighted average yield of 7.3% and were predominantly in first lien senior secured structures. In the third quarter, approximately 40% of our originations came from opportunities and companies previously invested in by KKR, again, illustrating the power of incumbencyand our relationships.

Our $2.8 billion total investments combined with $1.5 billion of net sales and repayments when factoring in sales to our joint venture equated to a net portfolio increase of $1.3 billion during the quarter.

Turning to the investment performance metrics for the FS/KKR Advisor which can be seen on Slide 11 of our earnings presentation on our website. The updated information is summarized as follows: since the FS/KKR Advisor was formed through September 30, 2021, we have originated approximately $15.3 billion of new investments and have experienced 85 basis points of cumulative appreciation. We continue to be pleased with the investment performance our team has been able to deliver, and we believe these data points continue to be the best illustration of the manner in which we have taken measurable steps to rotate the investment portfolio.

As we have discussed on prior earnings calls, private credit as an asset class continues to grow significantly as sponsors and management teams are increasingly depending on larger well funded BDC platforms as traditional sources of financing. We expect this phenomenon to continue as companies and sponsors value certainty of execution from a single financing partner or a small group who better understands its business and offers a more partnership oriented approach to financing.

As a result, we continue to see larger companies which previously might have focused solely on the syndicated markets choose a private credit market transaction. In fact, during the third quarter, we invested over $600 million across six unit tranches financings that were in excess of $1 billion in size. Two of which were in excess of $2.5 billion each. We view this activity as a tangible example of the growth and attractiveness of our market.

Before turning the call to Brian to discuss the details of our investment portfolio, I'd like to comment briefly on one repayment we experienced during the quarter. As I mentioned on our last call, during the second quarter, it was announced publicly that Home Partners of America was acquired. In the third quarter, we exited our equity and warrant position in Home Partners realizing proceeds of approximately $267 million, including the equity position held in the joint venture, which equates to 2.6x our original cost basis.

We are pleased to have such a successful outcome on this investment. As a result of this activity, at the end of the third quarter, our equity investments represented 5.3% of our portfolio compared with 6.8% at the end of the second quarter.

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

[Brian Gerson, Co-President]

Thanks, Dan. I'd like to start my discussion on the investment portfolio by providing some details around a few of our larger investments during the quarter. KKR Credit was lead arranger and committed approximately $475 million to a $2.9 billion revolving credit and term loan facility to support a refinancing of Insight Global for Harvest Partners.

The company provides a diversified suite of professional staffing and managed services to primarily Fortune 1000 companies and SMBs, and was historically financed in the syndicated market.

FSK committed approximately $290 million of the financing, while other KKR Credit advised accounts provided the balance of the commitment. KKR Credit was also the joint lead arranger and committed $293 million to a $1.4 billion revolving credit term loan and delayed draw facility to support Harvest Partners’ acquisition of Affordable Care Inc. The company provides tooth replacement services and is primarily focused on traditional dentures as well as implants to treat late stage periodontal disease.

FSK committed approximately $173 million of the financing, while other KKR Credit advised accounts provided the balance of the commitment. FSK also invested approximately $50 million in the company’s preferred equity to support the transaction.

Finally, KKR Credit was the lead arranger and sole lender for a $282 million revolving credit and terminal loan facility to support TPG Capital's acquisition of BGB Group, a medical communications and healthcare marketing firm for larger pharmaceutical companies. FSK committed approximately $188 million of the financing, while other KKR Credit managed accounts provided the balance of the commitment.

Turning to the portfolio as of September 30, our investment portfolio had a fair value of $15.8 billion consisting of 190 portfolio companies. This compares to a fair value of $14.7 billion and 195 portfolio companies as of June 30, 2021. At the end of the third quarter, our top 10 largest portfolio companies represented approximately 20% of our portfolio, which is in line with the end of the second quarter. We continue to focus on senior secured investments as our portfolio consisted of 61.2% of first lien loans and 72.7% senior secured debt as of September 30.

In addition, our joint venture represent 8.8% of the portfolio and our asset based finance investments represented 12.6% of the portfolio equating to an additional 21.4%, which comprised predominantly of first lien loans or asset based finance investments, which we believe have meaningful principal protection.

The weighted average yield on accruing debt investments was 8.1% as of September 30, 2021 as compared to 8.5% at June 30, 2021. As a reminder, the weighted average yield in the third quarter is adjusted to exclude the accretion associated with the merger with FSKR.

The decline in our weighted average yield during the quarter was primarily associated with the repayment of higher yielding assets during the quarter and new, lower yielding investments, which closed during the quarter. Including the effects of the investment activity we experienced during the quarter as of September 30, approximately 84% of our yielding investment portfolio is now comprised of investments originated either by KKR or the FS/KKR Advisor.

During the third quarter, excluding the impact of merger accounting, we experienced net portfolio appreciation of $89 million. The total amount of realized and unrealized appreciation we experienced across the portfolio during the quarter was $243 million. And our realized and unrealized depreciation totaled $154 million during the quarter.

During the third quarter, we placed our investment in sequential brands on non-accrual, and we took a portion of our investment in ATX off of non accrual. On August 31, sequential brands filed for Chapter 11 protection with the intention of running a 363 sale process for essentially all of the company's assets. On October 29, the company announced successful bidders for its active division, as well as the Jessica Simpson brand, Joe's Jeans and William Rast.

On November 3, the judge approved the sales without objections. We expect closing for the various sales to occur before November 14, proceeds leave to pay back a 100% of the DIP loans, we, and another lender provided fund a wind down reserve and provide a recovery on our loan. Pursuant to the contemplated transactions, we expect to receive a combination of cash, as well as newly structured debt and equity in the buyer of the active division.

ATX which was placed on non-accrual status in the second quarter recently completed an out of court restructuring of its balance sheet where FSK and the other first lien lenders took control of the company and converted the existing first lien term loan into a combination of new first lien, subordinated debt and equity.

The new first lien security was placed back on accrual during the quarter. As a result of the third quarter’s activity, our non-accruals represent approximately 5.1% of our portfolio on a cost basis and 3.7% of our portfolio on a fair value basis as of September 30, compared to 4.4% on a cost basis, and 3% on a fair value basis as of June 30, 2021.

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. On our last earnings call, we provided a detailed discussion regarding the accounting requirements associated with FSK's merger with FS/KKR, utilizing our previously described financial reporting framework. We report to the market, our third quarter GAAP net investment income, which includes the effects of merger accounting and our adjusted net investment income, which normalizes our net investment income for the effects of the merger and other one time items.

The presentation of net investment income and adjusted net investment income is reconciled on Page 13 of our earnings supplement. As Michael mentioned, the third quarter represented our first full quarter of activity as a combined company. As a result quarter-over-quarter comparisons are impacted by the fact that second quarter results only included the combined company following the June 16 closing date of the merger. Therefore in our discussion of our quarterly results, I will focus less on quarter-over-quarter comparisons and more on the details of the current quarter.\

Our total investment income of $360 million was impacted by the following. Our total interest income of $274 million was aided by the investment activity about which Dan and Brian spoke.

Our fee and dividend income totaled $86 million during the quarter. The largest components of our fee and dividend income included $42 million of dividend income from our joint venture during the quarter, which we view as recurring income. Other dividends from various portfolio companies totaled approximately $13 million during the quarter.

Finally, fee income totaled $31 million during the quarter, which was driven by our origination and repayment activity in the quarter. Our interest expense totaled $70 million during the third quarter. And our weighted average cost of debt was 3.2%. Management fees were $58 million during the quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter. Incentive fees totaled $20 million in the third quarter, which is net of a $15 million incentive fee waiver associated with the merger.

As previously announced, the adviser will waive $90 million of incentive fees spread evenly over six quarters, which began this quarter. And just as a reminder, as we discussed on our second quarter earnings call, the adviser does not earn an incentive fee on any of the merger-related accretion and associated with FSK's acquisition of FS/KKR. [ph]

The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our starting 3Q 2021 net asset value per share of $26.84 was increased by GAAP net investment income of $0.71 per share, and was increased by $0.24 per share, due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.65 per share dividend. But some of these activities results in our September 30, 2021 net asset value per share of $27.14.

From a forward looking guidance perspective, we expect our fourth quarter GAAP net investment income to approximate $0.61 per share. And we expect our adjusted net investment income also to approximate $0.61 per share.

Our GAAP net investment income and our adjusted net investment income are expected to equally shutter during the fourth quarter, as the effects of merger related accretion and excise taxes and other one time items offset each other. The details of our fourth quarter guidance are as follows: our recurring interest income on a GAAP basis is expected to approximate $274 million. Net of merger related accretion our recurring interest income is expected to approximate $258 million. Our expected fourth quarter recurring interest income net of merger related accretion is expected to grow by $4 million from our third quarter level of $254 million as a result of portfolio growth offset by a decline from 8.5% to 8.1% in the weighted average yield associated with our investment portfolio. We expect recurring dividend income associated with our joint venture to approximate $44 million.

We expect other fee and dividend income to approximate $31 million during the fourth quarter. As we have discussed, our fee income was higher than we expected during the third quarter based on the elevated level of originations and repayments we experienced during the quarter.

Our fourth quarter guidance reflects our view of a more normal quarter from both an origination and a repayment perspective. The $13 million difference between our third quarter actual fees and other dividends of $44 million. And our fourth quarter expected level of $31 million equates to approximately $0.04 per share of net investment income.

From an expenses standpoint, we expect our management fees to approximate $61 million. We expect incentive fees, net of the $15 million quarterly waiver to approximate $16 million. We expect our interest expenses to approximate $73 million, and we expect other G&A expenses to approximate $10 million. During the fourth quarter, we expect our excise taxes will approximate $12 million.

As many of you know, our spillback level is currently between one and two quarters worth of dividends, which we believe represents a healthy balance of having some spillback cushion, while at the same time, not allowing our spillback balance to grow too large.

During the fourth quarter, we expect our – we expect to incur non-recurring early extinguishment of debt costs in the amount of $3 million relating to a debt facility, which was repaid with a portion of the proceeds from the unsecured notes offering we completed in October. The unsecured notes offering and the repayment of the debt facility will result in a reduction in our cost of debt capital on a go forward basis of approximately 14 basis points.

From a forward looking dividend perspective, as Michael indicated, our fourth quarter dividend will be $0.62 per share with the quarter’s dividend being tied directly to the additional net investment income we generated during the third quarter. All else being equal, given that we expect our fourth quarter adjusted net investment income to approximate $0.61 per share. We currently believe it is reasonable for investors to expect that should we achieve our adjusted net investment income guidance for the fourth quarter that our first quarter 2022 dividend would be $0.60 per share.

However, I should note that dividends are subject to the discretion of our Board and applicable legal requirements and this forward guidance while intended to be helpful to investors should not be interpreted as a formal dividend announcement.

In terms of the right side of our balance sheet, our gross and net debt-to-equity levels were 110% and 103% respectively as of September 30, 2021. This compares to gross and net debt-to-equity of 101% and 90% respectively at the end of the second quarter. At September 30, our available liquidity of $2.5 billion equates to approximately 16% of the value of our investment portfolio, which is a very comfortable percentage and allows for meaningful future portfolio growth.

At September 30, approximately 43% of our drawn balance sheet was comprised of unsecured debt and our overall effective average cost of debt was 3.2%.

In October, we issued $500 million of 1.625% unsecured notes maturing in 2024 and $750 million of 3.125% unsecured notes maturing in 2028. The collective $1.25 billion bond offerings has a blended coupon of 2.54%, including the effects of the bond offerings and subsequent use of proceeds. Approximately 52% of our drawn balance sheet is comprised of unsecured debt. Additionally, pro forma for these recent unsecured debt offerings and subsequent use of proceeds, our weighted average cost of debt is now 3.1%.

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 and Chief Executive Officer]

As we begin focusing on 2022 and beyond, FSK is well positioned. We have a healthy investment portfolio, meaningful liquidity to pursue additional quality investments and a strong balance sheet undergirding our activities. We have near-term opportunities to continue to optimize our balance sheet, move closer to our target leverage range and to rotate a portion of our non-income producing investments into income generating investments. I take pride in what our team has accomplished during 2021, and I am optimistic about the future.

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

[Operator]

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

[Casey Alexander, Compass Point]

Yes. Good morning. I have a couple of questions for you. First of all, just in terms of mix, the portfolio that highest percentage of first lien than it's ever been and was a very high first lien generated new investments. Is that just mix of what was presented to you? How does Q4 shape up? Would Q4 see a more balanced menu of originations? And how do you view that mix over time?

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

Hey, Casey. Good morning. I think I would think about it a couple of ways, right? From a risk-taking or an underwriting perspective, I believe we are trying to be cautious on that front. That said, this was a kind of moment in time. This was this specific quarter. I think it is what was originated by us during this quarter. So I wouldn't think about that as a permanent change in any way. I think the portfolio construction that we would have laid out on our Investor Day remains consistent. I think you will see some, we'll call it, more subordinate pieces of the capital structure come forward.

Now as examples of that, I think we are probably more willing to lean in on the subordinate part of our capital structure on names we know. You would have saw that in affordable care that Brian spoke of in the prepared remarks. You could see that in something like Apex where we actually transition to a 2L from a 1L. But I would think about it as just more this quarter, that's how it turned out.

[Casey Alexander, Compass Point]

All right. Thank you. My second question is for Michael. Michael, the BDC has basically shrunk together five really pretty solid quarters in a row. Yet, it still has the lowest price to NAV of any BDC in the greater than $1 billion market cap group. It has a solid dividend yield has a portfolio that seems to be performing well. The team seems to be performing well. How frustrating is it? And it also seems that FSK seems to be more subject to some level of misinformation out in the marketplace as well. How frustrating is that? What other measures can you take to start to amortize that discount? And does that include potentially additional share repurchases?

[Michael Forman, Chairman and Chief Executive Officer]

Thank you, Casey. I mean, I think from our perspective, we just need to remain focused and patient. I'm extremely proud of what we accomplished over the last 24 months. If you go back to 2019 – go back to 2017, 2018, this adviser, the KKR FS Adviser inherited a pretty difficult book, has cleaned up that book. We've accomplished all of the mergers. We're now one vehicle. And we started to trade better, but not certainly as well as we would like.

But I think we need to judge our performance on exactly what we delivered in this quarter, and we've delivered that in a number of consecutive quarters. I'm hopeful we can continue to do that. And we're not going to make any – take any rash actions. We're going to continue to just deliver and regain folks confidence. And we think we've come a long way. A lot of folks have made a fair amount of money with us who believed in us and bought when the stock had traded significantly down. It's recovered. I suspect there's still some technical pressure. I suspect some people are exiting that bought at lower prices. And we're just going to continue to execute. And the market will I'm sure catch up to the quality of this team, which I think is very, very high. All right.

[Casey Alexander, Compass Point]

All right. Great. Thank you for taking my questions. If I have any more, I will come back in the queue later on.

[Michael Forman, Chairman and Chief Executive Officer]

Thank you, Casey.

[Operator]

Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.

[John Hecht, Jefferies]

Good morning, guys. Thanks for taking my questions. Just in terms of the yield drift in the quarter, maybe can you bridge that? Can you talk about the yields on the assets that paid off versus new yields? What you see in the market, how much of it might be tied to investing higher up the capital structure? And then just your general thoughts going forward given the overall rate and competitive market.

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

Sure, John. Good morning. I mean, I think you hit a couple of the points in there. I mean going back to Casey's to the prior question, obviously, we were very weighted first lien during this quarter. That clearly had an impact on new originations. That said, I think we are very happy with the deals we have done. And certain of the items that have repaid were sort of higher yielding. So I think you put the combo of those two things together, you get from that 8.5 to the 8.1.

Now on the other side of that, though, I think the market continues to evolve in many ways in our favor. I think the macroeconomic backdrop is constructive both from deals happening, which we need that to be the case for us to be in the market deploying capital, but also just from what we're seeing from a performance perspective. And then you take that maybe to step further, private credit itself, I think, has just become a much more accepted asset class. You look at borrowers who we interact with or sponsors who we interact with. They continue to look to this market as a solution, which is providing certainty of execution, good partnership on the lending side.

So I think we like the tailwinds there. I think you can see that by the size of some of these deals that have gotten done. People have called it the mega unitranche kind of theme. But I think the numbers this quarter is somewhat skewed by just the first lien that sort of did go in versus we did get a fair amount of repayments this quarter as well.

[John Hecht, Jefferies]

Okay. And then Dan, just talking – you mentioned kind of how private debt markets have expanded to kind of – to your favor in terms of more reliable sources of capital. I'm wondering, can you flesh it out in terms of – does that – how – I assume that increases your opportunity set a lot more? What does it do for that? What does it do? What does it mean for the competitive environment? And do you think this is kind of a permanent shift? Or is there anything that we might look to in the future that would cause a change in the overall development of this market?

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

Yes. So one, I – we'll maybe start with your last question. I do think it is permanent in nature. I think if I went back three or four years ago, there would be deals that would go above a certain size that I think would automatically go to more of a syndicated market. I think what has changed since then is folks like ourselves have become larger, have been able to deploy larger dollars into individual deals, that's changed the dynamic with our conversations with sponsors and borrowers.

But then you go back to that acceptance point, I think people are just sort of more comfortable with this products or generally. And we are offering something, right? I mean, we can't compete with the syndicated market day in and day out on a pure pricing perspective. We're not sort of trying to do that. But for companies that are looking to grow or for companies who truly value a quick turnaround time or certainty of execution, we can offer that, we can offer that delayed draw term loan. Maybe it's a carve-out, hence, sort of ratings would be hard to get and not needed by us. So I think we're just giving a real value proposition. And with the size of the capital base, I believe it to be permanent.

[John Hecht, Jefferies]

Great. Thanks very much guys.

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

Thank you.

[Operator]

Thank you. Our next question comes from Melissa Wedel with JPMorgan.

[Melissa Wedel, JPMorgan]

Good morning. Thanks for taking my questions today. First, I wanted to just confirm what I think I've heard you talk about earlier in terms of repurchases so far in the third quarter. Was that $3.3 million in October?

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

It would have been in the last few days of September, but really October because we do those under a 10b5-1. There was a time period from after a window opens to when it sort of starts. So it really started at the very end of Q3.

[Melissa Wedel, JPMorgan]

Okay. Okay. Got it. And so as we think about how that repurchase authorization will be deployed going forward, it would seem like perhaps the third quarter level of deployment would be indicative of sort of repurchase activity, at least in the near term at current valuation?

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

I think there's maybe sort of two points in there and make sure I get the sort of the question right. I mean I think the – on the share repurchase activity, as I said before, it was really sort of starting at the end of September, probably just a handful of sort of days. We've done that historically under 10b5-1 that purchase amount ends up being sort of variable. I think we've obviously bought back a lot of shares sort of over time. I think we've been sort of proud of that. I think your other question was around sort of deployment. I wouldn't think about that as necessarily a linear concept to how the 10b5-1 is set up. Does that make sense, Melissa?

[Melissa Wedel, JPMorgan]

I think so. So there's the discretionary piece on the 10b5-1. So just in terms of setting expectations going forward, it seems like there's a strong commitment to continued share repurchases, particularly at current levels.

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

Yes. And just to be clear on – I think you used the word sort of discretionary, I mean we're doing this, and we've always done this under a 10b5 that will sort of file in advance. So it's sort of nondiscretionary in nature. And what we've talked about historically on calls like this is that's kind of skewed by sort of levels of where the stock sort of trades. And then we'll constantly reevaluate on a either quarterly or semiannual basis, those 10b5-1 plans.

[Melissa Wedel, JPMorgan]

Okay. Thank you very much.

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

Thank you. Have a good day.

[Operator]

Thank you. Our next question comes from Ryan Lynch with KBW. Your line is open.

[Ryan Lynch, KBW]

Hey, good morning. Thanks for taking my questions. First off, I do appreciate you guys breaking out the accretion merger accounting. That's definitely helpful to kind of see the core earnings run rate, it's definitely helpful. One question I did have was I think you said you expect fee income to kind of return down to more normal levels in the fourth quarter and that would kind of, I think, indicate that you guys expect portfolio activity to also return to more normalized levels after you guys have had some very robust quarters in Q2 and Q3. Is that because the general market is sort of slowing down and activity is slowing down? Or is that something that you guys are choosing to do slow down sort of your originations and then you guys would just expect, I guess, to see slower repayments as well?

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

Yes, Ryan. Good morning. Maybe a couple of points in there. One, I don't see us slowing down. I mean, I think we've got the same view about risk and our process and how we sort of underwrite deals. And if those deals we like and want to do, we're going to look to lean into those. And if there's deals we're concerned about, we're going to sort of lean out. I think you are right. We've had two very good quarters over the last six months. I think we've been pretty proud when you even look back to April 2008, that $15-plus billion number.

So I would just view it a little bit more of a normalization. But I think you also have to think about it as it does involve prepayment penalties as well inside that number. And I think we've been fortunate with some good amounts that have fallen to that bucket as well. So I think it's just normalizing it for those two sort of combined. But we do see market activity quite strong. We've had a very busy October. And I think we continue to expect that for the rest of the quarter and the rest and going into 2022.

[Ryan Lynch, KBW]

Okay. Fair enough. And then the other question I had was on Slide 10, you guys show your portfolio company median EBITDA. And for the BDCs and the platforms that can participate in that upper middle market, mega tranche market. We've seen this EBITDA actually continue to climb higher, which you would expect because those companies are of a significant size, and there's more and more frequency of tapping that market. You guys are actually the opposite. Your median EBITDA is trending lower. Can you help me explain that?

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

Yes. It's interesting because we talked about that ourselves. And so number one, I'm not sure if you saw the footnote at the bottom of Page 10, it talks – the average EBITDA of the portfolio is actually $159 million. And I think we've historically shown the median for probably to remove sort of some of the outliers. But I think it continues to take a handful of the larger deals to move you from a median perspective. So I think we're happy with the median number there, but I think we've cored to the market the weighted average EBITDA was $159 million spot in the footnote there. I'm sorry, it's probably very small on Page 10.

[Ryan Lynch, KBW]

That makes sense. That would be the answer to the question, I think. That's all for me.

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

Thank you, Ryan.

[Operator]

Thank you .Our next question comes from Kenneth Lee with RBC Capital Markets. Your line is open.

[Kenneth Lee, RBC Capital Markets]

Hi, good morning. Thanks for taking my question. Just on the liability side, post the recent debt issuances, it looks like the unsecured debt mix is getting close or at least within your target range. I'm just wondering how you view the current funding mix? And do you anticipate any further optimizations and changes in the near term? Thanks.

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

Good morning. I'm going to let Ryan sort of add to this. I think we've been pretty happy with what we've done there over the last handful of quarters. This was clearly one of the benefits of the merger. And I think you can see that in the October – the October sort of bond deal was done. But Ryan, why don't you add to that?

[Ryan Wilson, Co-Chief Operating Officer]

Sure. As we mentioned on our Investor Day, we do think there's continued opportunity here. There are a few bonds that are either mature next year or callable next year and a few other spots in the capital structure that we continue to see opportunity in refinancing. In terms of the percentage of unsecured, I think we're comfortable with the level that we're at. But again, in the Investor Day, we quoted 40% to 60% of unsecured as a comfortable range for us on a committed basis, and we're at the lower end of that range today. And so I think there's room to grow there should the opportunity present itself.

[Kenneth Lee, RBC Capital Markets]

Great. And just one follow-up if I may. In terms of the leverage, once again, within the target range. At this point, is it fair to say that leverage could just go up and down just based on the timing of either paydowns or originations? Or do you suppose there could be some potential increase or further movements in the leverage in the near term? Thanks.

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

I think you're right. I think it goes up and down upon the origination and repayment number. I think we're still at the lower end, though of that range. And we've talked about historically 1 to 1.25x, probably the more optimal level of 1.1. And then if you do take a look through to the JV, you actually see we're pretty underlevered there versus target. So I think we have some growth to do there. But as you get maybe inside of these ranges, you are correct, it will just toggle a little bit by timing of certain deal flow and certain repayments.

[Kenneth Lee, RBC Capital Markets]

Great. Very helpful. Thanks again.

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

Thank you. Have a good day.

[Operator]

And we have a question from Robert Dodd with Raymond James. Your line is open.

[Robert Dodd, Raymond James]

Hi, guys. On the credit side, obviously, I mean, nonaccrual is up a tick, but you flagged sequential at the Investor Day, but pretty solidly. So take that out, and they were down fairly meaningfully. And I don't think you flagged ATX getting restructured at the Investor Day. So is there anything to read into that maybe some of these restructurings and the progress on the more troubled credit side is happening faster or accelerating? Is there anything we should read into that for resolution of some of these credits or some of the other legacy assets?

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

Yes. And – fair question. I wouldn't necessarily think about it as an accelerating. I mean you've heard us talk about before and you would have saw us so to get into a bit of the weeds on this during our Investor Day. I think we've been really proud of the team that we've built on our side to deal with these troubled situations. I think as Michael mentioned, we've done a tremendous amount of portfolio transition here. We've hired really well for those seats that team has performed exceptionally well.

Honestly, Robert, I think the ATX thing just could have been a bit of a materiality point. But we definitely I think that played a key role in getting that done. I think going back to your sequential point, you're correct. I mean, our nonaccrual is 3.7% on fair value now. But if you do strip that out, which we expect that to be removed in Q4 based upon how the court case has gone, you're down to 2.2% on fair value. So we think that's actually a pretty good number. And even on the cost basis, it's 5.1 to sort of 3.7. But I think you'll see that flow through in Q4.

[Robert Dodd, Raymond James]

Got it. Got it. I appreciate that. And one more, if I can. On the JV, I mean, it kind of ties into the answer you just gave maybe to Ken. But I mean, the guidance for the dividend from the JV next quarter, $44 million. I mean your – the dividend this quarter was $42 million, but your economic share of its earnings were quite so call it $35 million. Is that an indication that either there's some catch-up because they're under distributed in the first half of the year? Or should – is it more an indicator that you're expecting substantial capital deployment in that vehicle in Q4 to drive that earnings power higher?

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

Yes. Well, maybe a couple of points there. I mean I think you are correct in the sense that you should see a ramp up in activity, I think there over this quarter and so the coming quarters. That is below our target allocation. We talked about sort of 10%, maybe even as much as 12.5% of that. I think we were sort of 8.8% at the end of Q3. That's a little bit of a timing mismatch in my mind because we did merge two JVs together.

That said, we did experience a fair amount of repayments as well, which has driven some of the asset side reduction there. I think your point around the $42 million and the $35 million, I think that's just a little bit of a normalization during sort of this quarter, but I think you'll see that sort of growth contribute to get us up to the $44 million and I think actually higher on a go-forward basis.

[Robert Dodd, Raymond James]

Got it. I appreciate it. Thank you.

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

Thank you.

[Operator]

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

[Bryce Rowe, Hovde Group]

Thanks. Good morning. I was going to also ask about the JV, some of the thoughts there that Robert had. I wanted to ask about the unsecured notes offering and kind of the structure of that with seven-year and three-year thrown in there. Do you expect, as we look forward at some of the future opportunities from a refinancing perspective to maybe tenor out a little bit here from a debt maturity perspective? Or do you see the new debt might continue to carry that five-year type of maturity?

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

Yes. And Ryan, you might want to add to this as well. I think going back, we were quite happy with the execution on the three-year and the seven-year that we sort of did in October. I think if you think about that, we're – I think we're in the risk management game, right? So we think about the same thing on the liability side. I think we want to have a fairly spread out, let's call it, maturity ladder. I think this market continues to evolve, though, it was all really centered in a five-year. We were happy to get the seven done. We've seen the market accept even a bit longer. So we've – I think the team has done an excellent job on the IR side with the fixed income investors. I think that's enabled us to achieve the success that we've had, but I think that will also continue to give us options as we go forward to manage our liability mix. But Ryan, please feel free to add anything.

[Ryan Wilson, Co-Chief Operating Officer]

The only thing I would add is I think we expect the five-year to continue to be the deepest part of the unsecured, but we've been excited to see the market, as Dan mentioned, has been expanding into longer duration, bringing some new investors into the space, both on the long and the short end. So I think you'll continue to see us issue kind of across maturities as we continue to try and tap new investors.

[Bryce Rowe, Hovde Group]

Great. That's helpful. And then maybe one more for you, Dan. You had some prepared remarks around supply chain issues and wage pressure and it being feeling more transitory. Certainly appreciate that commentary. Are you – can you speak to how those issues might be affecting your portfolio companies, your portfolio? And are any kind of credit issues popping up that you might see here down the road? Just kind of curious how you're viewing that specific to your portfolio companies?

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

Yes. That's a very sort of fair question considering what's going on out there. We review the portfolio quarterly. The entire portfolio, it's our portfolios and the management process. This was the number one theme of that, right? We had every deal team digging in to both sort of current numbers and forward numbers to make sure we're being excessively proactive looking at those risks.

I can't tell you that we've seen any major credit challenges today coming out of this, but there are some things that are on our mind. We've seen a few instances where freight costs have really exploded. That's definitely put some challenges on earnings. Labor is kind of top of mind. So I think with all that, we do have a – probably a portfolio review that we've hit that kind of peak level of EBITDA sort of growth, and we'll be mindful about that. Now it also takes its way into underwriting as well, right? So I think we've got all those same points when we're thinking about new deals. And then probably on the new deal side as well, we're also trying to overlay what we'll call sustainable earnings, certain businesses that we have looked at from time to time, I think, got a COVID tailwind. And you're trying to sort of parse out what is in our minds, sort of sustainable, what is sort of not. So for short top of mind, for sure what we'll call it a key part of our portfolio review process, and will be in our forward sort of underwriting. But Brian, anything you want to add to that?

[Brian Gerson, Co-President]

I mean, yes, I think, look, I think what we're seeing for those companies that are being impacted by supply chain is demand-driven. So you're seeing healthy top-line growth you're seeing some margin pressure. So EBITDA isn't growing as fast as top line is. But from a credit perspective, leverage is still in good shape for a lot of these companies that are facing these issues. It's just that they're not growing as fast as they like because of the supply chain pressures and increased cost.

[Bryce Rowe, Hovde Group]

Great. Thank you guys.

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

Thank you.

[Operator]

Thank you. There are no other further questions in the queue. I'd like to turn the call back to Dan Pietrzak for any closing remarks.

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

Well, thank you, everyone, for taking the time to join the call today. Thank you for the questions. We wish you and your families a happy Thanksgiving and a great holiday season. We look forward to talking with you in the near future. Have a good day.

[Operator]

This concludes today's conference call. Thank you for participating, you may now disconnect.