FS KKR Capital Corp

NYSE:FSK

Earnings Call Analysis

FSK Reports Strong 2023 Performance and Growth

In 2023, FSK's total investment income grew by 12% and adjusted net investment income per share by 6%. The company achieved a 10% ROE and paid $2.95 per share in distributions, marking an 11% increase from 2022. Q4 saw $680 million in new investments and a $162 million net portfolio growth but faced a 1.7% NAV decline and specific credit challenges. FSK's liquidity remained strong at $3.9 billion. Dividend guidance for 2024 projects a base and supplemental distribution total of at least $0.70 per share per quarter, promising investors a minimum of $2.90 per share in total distributions for the year.

Steady Income Growth and Robust Distributions Mark 2023 Performance

FSK reported solid financial outcomes for 2023, with a 12% rise in total investment income and a 6% increase in adjusted net investment income per share from the previous year. This translated into a substantial return on equity (ROE) of 10%. Shareholders saw a generous return as the company paid out $2.95 per share in distributions―an 11% hike from 2022's figures, aligning with an impressive 12% yield on the average net asset value throughout the year.

Strategic Portfolio Adjustments Continue Amidst Market Volatility

Despite a slight dampening of 1.7% in net asset value during the fourth quarter due to specified credit challenges, FSK managed to fortify its portfolio with targeted investments and prudent capital structure enhancements. They expanded their credit facilities and successfully floated $400 million in unsecured notes, all while realizing net investment income of $0.71 per share and adjusted net investment income of $0.75 per share. In the final quarter, the team initiated around $680 million in new investments, culminating in a net portfolio growth of $162 million, against the backdrop of a sound liquidity position with approximately $3.9 billion available.

Dividend Outlook Signals Confidence in Sustainable Earnings

Emphasizing the board's confidence in the company's sustained earnings capacity, FSK has announced a first-quarter distribution of $0.70 per share. This includes a base distribution of $0.64 and a supplemental distribution of $0.06 per share. Additionally, a special distribution totaling $0.10 per share has been declared, to be doled out in two equal parts in the successive quarters. Projecting into 2024, FSK's leadership expects that the base and supplemental distributions will maintain at least a steady $0.70 per share per quarter. Consequently, investors can anticipate a minimum total distribution of $2.90 per share for the year, aligning with a robust yield rate based on the company's current and historical valuations.

Positive Market Trends in Private Credit Highlight Future Opportunities

FSK executives expressed optimism about the transformative growth trends in the private credit sector, foreseeing significant and enduring benefits. They maintain a strategic approach to their investment portfolio, prioritizing long-term opportunities and trends. With stable U.S. inflation and a resurgence in private equity transaction activity projected for the latter half of 2024, FSK is positioning itself to capitalize on the upswing. Their outlook is particularly favorable towards private credit due to its uniqueness in transaction structuring, potential for attractive returns, and broad issuer diversification. Notably, even as the middle market experiences spread compression, private credit remains an appealing field for financial sponsors.

FSK Addresses Challenges with Specific Portfolio Holdings

The company acknowledged difficulties with certain portfolio companies. For example, higher wage demands and a problematic Medicare reimbursement landscape have troubled Miami Beach Medical Group and Reliant Rehab, leading both issuers to be placed on nonaccrual in the fourth quarter. Additionally, Kellermeyer Bergensons Services (KBS), a labor-intensive facilities upkeep firm, confronted earnings headwinds due to rate hikes and wage inflation, forcing them into restructuring, and, subsequently, part of FSK's investment was also placed on nonaccrual.

New Investments Reflect a Refined Direct Lending Approach

FSK's investment team remained active, channeling $680 million into new investment opportunities. Noteworthy is that nearly 58% of these investments backed add-on financings for existing portfolio entities and solidified KKR relationships. The strategic maneuver led to a $162 million net portfolio uptick. Investments were characterized by a conservative profile, with a weighted average EBITDA of about $250 million, leverage of 5.3x through FSK's security stake, and an average coupon of SOFR plus 600, against substantial equity contributions.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corporation's Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

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

[Robert Paun, executive]

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Fourth Quarter and Full Year 2023 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 yesterday.

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 December 31, 2023. 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 that 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 fourth quarter earnings release that was filed with the SEC on February 26, 2024. 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, Chief Executive Officer and Chairman; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us in the room are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson.

I will now turn the call over to Michael.

[Michael Forman, executive]

Thank you, Robert, and good morning, everyone. Thank you all for joining us for FSK's Fourth Quarter and Full Year 2023 Earnings Conference Call. During 2023, FSK accomplished many key objectives.

First, our total investment income grew approximately 12% year-over-year. Second, our adjusted net investment income per share increased by approximately 6% year-over-year. Third, for the full year, FSK generated an ROE of 10%. Fourth, we paid $2.95 per share in total distributions in 2023, representing an 11% increase over distributions paid in 2022, equating to a 12% yield on our average net asset value during the year. Fifth, we continued optimizing our capital structure by amending and upsizing our revolver in October and issuing $400 million of unsecured notes in early November.

In terms of our fourth quarter results, we generated net investment income totaling $0.71 per share and adjusted net investment income totaling $0.75 per share. During the fourth quarter, our investment team originated approximately $680 million of new investments, resulting in net portfolio growth of approximately $162 million.

Our net asset value declined by 1.7% for the quarter, primarily due to specific challenges associated with a few credits, which we will discuss in more detail later in the call. From a liquidity perspective, we ended the quarter with approximately $3.9 billion of available liquidity.

Based upon our overall operating results, our Board has declared a first quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share.

Also, as we mentioned on our last earnings call in early November, our Board declared a special distribution totaling $0.10 per share. This special distribution will be paid in 2 equal installments of $0.05 per share in the first and second quarters of this year and will be paid in addition to our quarterly base and supplemental distributions.

Based on the continued trajectory of the company's earnings power, coupled with our view that interest rate reductions will be more muted than some market participants expect, we are pleased to provide forward-looking dividend guidance for the full year 2024 as we currently expect our base and supplemental distributions will total at least $0.70 per share per quarter throughout the year.

Combining our $0.70 per share quarterly distributions for the full year with our two $0.05 per share special distributions to be paid during February and May, investors should expect to receive a minimum of $2.90 per share of total distributions during 2024. This equates to an 11.9% yield on our current net asset value and an annualized yield of approximately 14.3% based on our recent share price.

While Dan will discuss the current market environment in greater detail, we continue to be optimistic about the significant growth trends within the private credit sector, which we believe will provide meaningful benefits for our industry for many years to come.

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

[Daniel Pietrzak, executive]

Thanks, Michael. Looking back on 2023, I am pleased with the results for FSK as we produced an ROE of 10%, and we continue to take positive steps rotating our investment portfolio. Looking back on the last 6 years since the establishment of the FS/KKR Advisor, I take great pride in the team's accomplishments as well as the continued growth of the KKR Credit platform which has current assets under management of $219 billion. Within FSK, we have originated over $22 billion of new investments, and we have an annualized depreciation rate, which includes both realized and unrealized amounts of less than 50 basis points.

In terms of the current economic and market environment, with U.S. inflation beginning to stabilize, combined with significant private equity dry powder, pent-up demand from an M&A perspective, as well as the desire for private equity fund LPs to see a higher level of return of capital, we expect to see a material increase in private market transaction activity during 2024, which we believe will be weighted towards the second half of the year.

As Michael mentioned, private credit continues to be an exceptionally attractive asset class due to its directly negotiated transactions, attractive total returns and significant issuer diversification. As a result, even if the syndicated debt markets become more active during 2024, which we expect they will, we believe private credit structures will continue to be one of the primary avenues for many sponsors as there is an increasing desire for sponsors to know their lenders.

With that said, we are seeing spread compression in the upper end of the middle market with spreads back to January 2022 levels. In addition, still elevated interest rates, supply chain disruptions due to the Middle East crisis and inventory destocking could potentially lead to a slowdown in economic growth. These market inputs will require borrowers and lenders to remain cautious during the coming quarters.

In terms of our most recent results, this macro backdrop created challenges for a few of our portfolio companies during the fourth quarter. Specifically, Miami Beach Medical Group and Reliant Rehab, two names we have discussed on prior calls, continue to be affected by higher wage pressures and a challenging Medicare reimbursement environment. And while we do not have any meaningful additional exposure to Medicare reimbursement dependent companies, both of these issuers were placed on nonaccrual during the fourth quarter.

Additionally, late in the fourth quarter, we received an update from Kellermeyer Bergensons Services, another name we have discussed on prior earnings calls, which showed a material deterioration in the company's forward earning projections. KBS is a labor-intensive facilities maintenance business and the impact of higher interest rates, wage inflation, and the loss of certain customers has resulted in restructuring discussions.

The first step of the restructuring was completed during the fourth quarter, which resulted in a portion of our investment in KBS being placed on nonaccrual. We expect the full restructuring to occur in the near term. Our workout team has been active on these names for some time. And as Brian will discuss, we have achieved positive results, including significant principal paydowns at par and meaningful progress towards debt restructurings.

Turning to investment activity. During the fourth quarter, we originated $680 million of new investments. Approximately 58% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $518 million of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $162 million.

We are pleased with the quality of our new originations. During the fourth quarter, our direct lending investments had a weighted average EBITDA of approximately $250 million, 5.3x leverage through our security and a 60% equity contribution, all with a weighted average coupon of approximately SOFR plus 600.

We also continue to see very attractive opportunities in asset-based finance with our investments this quarter having a weighted average projected IRR of approximately 14%. One asset-based finance investment worth noting is Vehicle Secured Funding Trust which is an approximately $7 billion secured portfolio of super-prime RV loans that we purchased from the Bank of Montreal. Given the scale of our asset-based finance business and the experience of the team, we were able to acquire this high-quality loan portfolio on attractive terms.

While the macro backdrop suggests a continued uncertain economic environment in 2024, we continue to see portfolio company revenue and earnings growth. We remain focused on large, high-quality borrowers with strong operating margins and significant equity cushions. The weighted average EBITDA of our portfolio companies was $236 million as of December 31, 2023. Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 6% across companies in which we have invested in since April of 2018.

And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

[Brian Gerson, executive]

Thanks, Dan. As of December 31, 2023, our investment portfolio had a fair value of $14.6 billion, consisting of 204 portfolio companies. This compares to a fair value of $14.7 billion and 200 portfolio companies as of September 30, 2023.

At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio which is consistent with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 66% senior secured debt as of December 31.

In addition, our joint venture represented 9.5% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans totaled approximately 67% of our total portfolio and senior secured investments totaled approximately 75% of our portfolio as of December 31.

The weighted average yield on accruing debt investments was 12.2% as of December 31, 2023, which was flat compared to the yield as of September 30. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Including the effects of our investment activity during the fourth quarter, as of December 31, 2023, approximately 87% of our total investment portfolio is comprised of investments originated either by KKR Credit or the FS/KKR Advisor.

From a nonaccrual perspective, as of the end of the fourth quarter, our nonaccruals represented approximately 8.9% of our portfolio on a cost basis and 5.5% of our portfolio on a fair value basis. We believe it is also helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the fourth quarter, nonaccruals related to the 87% of our total portfolio, which has been originated by KKR Credit and the FS/KKR Advisor were 5.1% on a cost basis and 2.6% on a fair value basis.

During the fourth quarter, we placed 5 investments on nonaccrual with a combined cost and fair value of $654 million and $422 million, respectively. The credit stress we have seen in these names primarily relates to the factors that Dan mentioned earlier.

Specifically, Miami Beach Medical Group and Reliant Rehab continue to be affected by higher wage pressures and a challenging Medicare reimbursement environment. Miami Beach is the second largest independent provider of capitated primary care services to Medicare Advantage plans in South Florida. Reliant is hired by skilled nursing facilities to provide outsourced physical and occupational therapy and has also been impacted by a post-COVID environment where skilled nursing facilities are more reluctant to bring outside personnel into their facilities.

During the fourth quarter, we restructured our Reliant $125 million first lien term loan into a cash pay of $62.5 million first-out term loan and a $62.5 million second-out term loan, which was placed on nonaccrual. Due to the proactive work of the KKR workout team, to date, we have received par paydowns of over $100 million in Reliant Rehab, and $75 million on Miami Beach.

KBS is a labor-intensive facilities maintenance business and the impact of higher interest rates, wage inflation, and the loss of certain customers has resulted in restructuring discussions. The first step of the restructuring was completed during the fourth quarter, which resulted in our $366 million first lien loan exposure being restructured into $166 million first-out and a $200 million second-out term loan with the second-out investment in KBS being placed on nonaccrual. We expect a full consensual restructuring to occur in the near term which will result in the lenders equitizing a portion of the second-out and taking control of the company.

Our first lien position in Sweeping Corp of America, which is the largest outsourced provider of street and parking lot sweeping services in the U.S., was placed on nonaccrual due to poor integration of add-on acquisitions and higher-than-expected customer churn following price increases. We are actively negotiating with the sponsor regarding restructuring, which will result in the sponsor investing a meaningful amount of equity into the company and the majority of the position going back on accrual.

Additionally, our preferred stock position in JW Aluminum was placed on nonaccrual based on the company's total enterprise value, contributing $215 million of cost and $149 million of fair value to our portfolio. JW Aluminum continues to perform well with strong EBITDA growth. However, given our preferred equity position, our current view of enterprise value does not support continuing to accrue on the name.

In terms of one other portfolio update, Solera, a borrower who switched to pick accrual from cash accrual 2 quarters ago, returned to cash accrual as expected during the fourth quarter. This change accounted for the majority of the reduction in our interest income recognized during the quarter.

And with that, I'll turn the call over to Steven to go through our financial results.

[Steven Lilly, executive]

Thanks, Brian. Our total investment income decreased by $18 million quarter-over-quarter to $447 million, primarily due to the specific portfolio company results Dan and Brian mentioned as well as lower quarterly asset-based finance dividends. The primary components of our total investment income during the quarter were as follows: Total interest income was $368 million, a decrease of $6 million quarter-over-quarter; Dividend and fee income totaled $79 million, a decrease of $12 million quarter-over-quarter.

Our total dividend and fee income during the quarter is summarized as follows: $51 million of recurring dividend income from our joint venture; other dividends from various portfolio companies totaling approximately $16 million during the quarter; and fee income totaling approximately $12 million during the quarter.

Our interest expense totaled $118 million, an increase of $1 million quarter-over-quarter, and our weighted average cost of debt was 5.4% as of December 31. Management fees totaled $56 million, unchanged quarter-over-quarter, and incentive fees totaled $41 million, a decrease of $6 million quarter-over-quarter. Other expenses totaled $10 million during the fourth quarter, a decrease of $1 million.

The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows; our ending 3Q 2023 net asset value per share of $24.89 was increased by GAAP net investment income of $0.71 per share and was decreased by $0.39 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution. So sum of these activities results in our December 31, 2023 net asset value per share of $24.46.

From a forward-looking guidance perspective, we expect first quarter 2024 GAAP net investment income to approximate $0.73 per share, and we expect our adjusted net investment income to approximate $0.71 per share.

Detailed first quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $348 million. We expect recurring dividend income associated with our joint venture to approximate $51 million. We expect other fee and dividend income to approximate $30 million during the first quarter.

From an expense standpoint, we expect our management fees to approximate $55 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $117 million and we expect other G&A expenses to approximate $10 million. And as Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share, comprised of $2.80 per share of quarterly distributions and $0.10 per share of special distributions during the first half of the year.

Our gross and net debt to equity levels were 120% and 113%, respectively, at December 31, 2023, compared to 115% and 110% as of September 30, 2023. At December 31, our available liquidity was $3.9 billion and approximately 63% of our drawn balance sheet and 44% of our committed balance sheet was comprised of unsecured debt. Additionally, in November, we issued $400 million of 7.875% unsecured notes due 2029, further enhancing our balance sheet and liquidity position and extending our maturity ladder.

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, executive]

Thanks, Steven. In 2023, FSK shareholders earned a total return of over 30%. And from a forward-looking perspective, given our earnings prospect for the year, we believe we'll continue to provide shareholders with an attractive distribution and total return in 2024. And while we were disappointed with the challenged credits during the fourth quarter, the temporary loss of revenue associated with these companies does not alter the long-term view of our ability to continue to provide investors with an above-average dividend yield going forward.

On behalf of our team, we thank you all for joining the call and for your continued support. And with that, operator, we'd like to open the call for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of John Hecht from Jefferies.

[John Hecht, analyst]

Just on credit, maybe could you just give us an update on Global Jet. And then maybe talk about kind of the pipeline of credit as you see other companies within the portfolio that are exposed to either wage pressures or interest rate pressures, and given that inflation and rates are now stabilizing, are those types of issues starting to stabilize as well?

[Daniel Pietrzak, executive]

John, maybe starting with Global Jet. It's a fair question. It is a decent-sized position. It is a name that is on nonaccrual. I think it's just north of 2% of the nonaccrual balance. I think on the positive side of the story, though, the business continues to perform quite well. I think there's actually not an even delinquent sort of line item in their entire leasing or sort of loan book. So the management team there has done a very good job. That market has held up sort of quite well. As you recall, that's more of a Finco who does loan and leasing to the private jet space, which has had, no pun intended, a good sort of tailwind behind us for the last sort of several years.

I think on the credit side, it obviously is sort of a tough quarter with some of these names. I mean, you got some sector issues with the Medicare reimbursement space. You've got kind of wage inflation, a bit of a common theme. We haven't necessarily seen that abate yet. I think we are kind of cautious on kind of macro. So that generally, I think the rates were sort of higher will continue to put kind of free cash flow stress on companies. I think those who have the big wage footprint could be a challenge.

But I think we are seeing revenue growth across the portfolio. I think there's always going to be a watch list in the credit business of kind of names on it, but there's not really much in the near term sort of watch list that probably has us sort of focused other than the names that we're sort of talking about sort of here on the call today. So I guess just a quick summary, Global Jet Capital is in a pretty good spot from just an overall credit perspective and kind of mindful about risk, but the rest of the portfolio feels okay.

[John Hecht, analyst]

That's helpful. And then just thinking about 2024, I guess, kind of balancing your cautious outlook along with the other side of the story, which is that there's -- the deal environment, it looks like it's improving over the course of the year given the, I guess, the private equity framework out there, kind of maybe balance your perspectives on the leverage that you're willing to put on the book relative to where you are now? And then maybe thinking about interest rates, kind of your willingness or your appetite to use the revolver to fund growth relative to other sources of capital?

[Daniel Pietrzak, executive]

Yes. I mean a couple of common questions in there. I guess, first and foremost, we're not going to change, I think, sort of our leverage target, right? I think we feel comfortable with inside the range. We talked about I think kind of [ 113 sort of to 118 sort of 12 ] feels like a good number. So we do have some room for some growth, but I think we're going to be mindful about going above any sort of target there.

The deal environment, we are expecting more robust deal flow just generally in private markets. Obviously, M&A has been quite slow now for approaching 2 years. You do have I think, a bit of a situation out there where your LPs and private equity funds are looking for return of capital. So there is some pressure on what I'd call the selling side.

And then there remains a fair amount of dry powder on the buying side. And I think the market has been waiting for a belief that inflation has kind of stabilized, which I think [indiscernible] would agree with that. I think you're still going to see it in sort of some spots.

Our view has been and kind of remains that the rate environment will remain elevated for some period of time. I think the market got a fair amount of euphoria around that they're almost pricing in sort of 6 rate cuts, which we just didn't see. I think you'll see some downward movement in rates, but probably pretty muted during the course of 2014.

[Operator]

And our next question comes from the line of Bryce Rowe from B. Riley.

[Bryce Rowe, analyst]

I wanted to maybe follow up on John's question there about the balance sheet use of leverage. Dan, it certainly sounds like you're comfortable maybe going a little bit higher from a leverage perspective, but do want to get a sense for what that leverage might look like especially with some note maturities that come up here in the second half of '24 and in the first half of '25. Just trying to get a feel for how the debt stack might look as we get to about this time next year.

[Daniel Pietrzak, executive]

Happy to do that. I think we're pretty happy with where we sit from a liability perspective. We increased and extended the revolver during the course of 2023, again, revolver provides a lot of flexibility to us. Obviously, we've got a lot of capacity on that. We did the note issuance that we mentioned in our prepared remarks, that was essentially pre-funding these kind of near-term maturities that are out there.

So I think you should see us to remain consistent with how we think about the right side of the balance sheet. The revolver will be important. We will keep looking to extend that every so often to keep it more of a long-term maturity, we will continue to access the unsecured, so the bond market.

We have used CLOs in the past that may be something else we should consider. But I think we want to be cautious on the liability side. Operate with inside that target leverage, be a frequent participant in the market, I think those are important pieces of, I think, BDC balance sheets and I think we've done a good job there over the last several years, and we intend to continue that.

[Bryce Rowe, analyst]

Great. That's helpful color. And then maybe one more just around the spread environment. I mean you mentioned in your prepared remarks that spreads were back to January 2022 levels. Can you talk about kind of how it might feel with the environment, the way it is right now, I guess, the prepared comments you made about market activity possibly picking up. Do you think that there will be more spread compression from here or a bit of a stabilization going forward?

[Daniel Pietrzak, executive]

Yes. I mean, obviously, the spread moves have been, I think, pretty material sort of both sides, right, on your regular way loan in January of '22, I would say, would have been $550 million, $575 million, that gap down arguably to $675 million with kind of more fees and sort of more [indiscernible] the summer of '23 and now you've kind of come back. Yes, I think part of that move back has been that lack of deal flow.

We've got a pretty decent origination number this quarter inside of FSK and even sort of across the platform, but just that regular way deal volume is lower. So I think that there is a bit of a, we'll call it, technical in there. So I think we're getting maybe close to the point of maybe that bottom on sort of spread moves, maybe even see a little bit sort of wider if that volume picks up kind of more normally, but maybe TBD on that.

The only point that I would say, though, is I do think the quality of risk that we're seeing is quite good and where we're getting paid in a total return to the fashion. These loans are still paying roughly 11% when you factor in some amortization of the upfront fee and sort of OID. To get paid that kind of level for the size of companies that we're seeing, for the equity contributions that are below us, it feels like very good risk-adjusted returns.

So we're not entirely surprised by that spread move. Usually, when your benchmark kind of gaps out, especially as much as it did for how these loans are priced, which is SOFR based, you don't get the benefit of spread widening too, right? So I think we're not surprised by that move, and just -- 11% for this type of risk feels pretty good.

[Operator]

And our next question comes from the line of Finian O'Shea from Wells Fargo.

[Finian O'Shea, analyst]

So first question I want to hit on the partial accruals. It looks like we have a couple of new examples with the Kellermeyer and Reliant Rehab cases this quarter, but it does seem to be a general practice where you're acknowledging that you won't fully recover the investment you made, but then you carve out a piece that allows you to run interest income through and that can create the impression that you're further super-prioritizing your performance fee at the expense of shareholder recovery. So can you outline the thinking in these setups?

[Daniel Pietrzak, executive]

Yes. No, happy to, Fin. And yes, I would put in context with maybe just the way a normal restructuring works, right? But just to take these 2 cases kind of individually and we talked about these in the prepared remarks. I mean on KBS, I think the first step of that restructuring has taken place. We expect there to be consensual sort of handover of that business.

So the loan has essentially been rightsized for what that amount will be on kind of the go-forward basis. Reliant, I think, not entirely the same situation, but that loan has been placed and has been restructured into 2 pieces. One of those pieces is regular cash but one of them has the ability for the borrower and the sponsor to pick, they would have to pick an additional sort of rate, but that is giving the company some flexibility to kind of manage their cash flow or sort of cash burn and effectively reinvest in the business.

So I don't think that it's entirely -- just think when you restructure a company, you are going to put a deck claim back on that company. You are going to sort of own equity in that sort of company on the other side. I'd equate it similar to the situations that are here. The only other point I would note is it is more likely than not that on the 2 examples that we just talked about, at least 1 of them, if not both of them, the pieces that we put on nonaccrual will pay cash in the coming quarter or coming quarters, but we would just use that to reduce the basis.

[Finian O'Shea, analyst]

Okay. And then just zooming out, follow on the advisor joint venture. There's a lot of discussions still on -- of your success in rotation, but the new FS/KKR Advisor is starting to chalk up its own sometimes significant credit losses. So do you think like -- is it time maybe to look more inward, and on that matter, is the partnership model really working the right way for shareholders?

[Daniel Pietrzak, executive]

Yes, happy to do it. I think the partnership model has worked quite well. And I think, Fin, you got to look at the numbers a bit, right? When we did take over this portfolio, it was -- the entities were sort of merged, it was roughly 75% sort of legacy assets, 25% so the KKR originated. That's 87%, 13% today the other way, including 1 of the large positions as part of that 13% would have repaid in January.

You look at just total originations, I mean, look at $22 billion, $23-odd billion of originations inside of FSK since April of 2018 and a 50 basis point or sub-50 basis points sort of depreciation rate, which is realized and unrealized numbers, like that's pretty good. And I looked at our kind of performance on the institutional funds that was investing in the same assets which has that sort of vintage, like those are sort of, I think, pretty strong numbers.

So we're not happy with the quarter here, and I think we could be honest with that. And we were always expecting a certain amount of either nonaccruals or challenges in assets that we invested, it is a credit book, right? But I do think it's a pretty interesting set, you look at roughly half of the nonaccruals are coming from 87% of the portfolio and roughly half of the nonaccruals are coming from 13% of the portfolio.

So we know we're in the business of -- in the credit business, you need to be right so the 99 out of 100 times, right? I think these credits, we've got a lot of focus on them from the deal team, the restructuring team, and we're going to look to maximize value there. But I think that $22 billion to $23-odd billion is a pretty real number as is that sub-50 basis point depreciation rate.

[Operator]

And our next question comes from the line of Casey Alexander from Compass Point.

[Casey Alexander, analyst]

Not to over nitpick, but in relation to Miami Beach and Reliant, Medicare reimbursement has been an area that private credit managers have assiduously avoided. So I'm curious when were those underwritten and kind of what was the base case that made you comfortable that you could underwrite a Medicare reimbursement model. And then how did that get sideways and lead us again through the potential recoveries on this?

[Daniel Pietrzak, executive]

Yes. No, happy to. And then frame them -- I mean, they were both done essentially prior to COVID or at least in kind of the earlier sort of days of COVID. Both of these deals would have been well south of 50 LTV from an equity perspective. I think, Casey, one of the interesting things is these are both sponsor owned businesses.

The sponsors injected a meaningful amount of additional capital in these sort of post close. That's the reference we made that we got $175 million of par debt pay downs along the way. Yes. So I think that's been a good result that will make kind of a -- when you think about a net recovery rate on the overall loan, sort of much higher and makes these kind of smaller positions to where we sit today.

I think the path to reach is probably still an active dialogue. I mean we have been approached for certain of these or either of them with inbound sort of M&A sort of opportunities or merger opportunities. I think there will be some settling of these businesses over the, we'll call it, the medium to sort of long term, but they were materially impacted from COVID, probably specifically Reliance, and we'll do what we can to kind of maximize value.

But I would -- these weren't kind of one-off kind of random things. I mean big name, I think, kind of sponsors in there, larger the equity checks we thought we were well downside protected. We've taken real principal dollars off the table along the way.

[Casey Alexander, analyst]

All right. And second, my follow-up question is the stock is now once again at a pretty elevated discount to NAV. Is there an existing share repurchase program. And are we at levels where you think the Board would consider starting to act on the share repurchase program given the elevated level of the discount?

[Daniel Pietrzak, executive]

Yes. I think we've been active here in the past just in terms of the sheer number of dollars that we have repurchased. Obviously, we've been rewarding shareholders with ensuring we're paying out kind of all the earnings we earned, I think that we essentially declared $0.20 of specials this year, right?

So even though you look at our kind of year-on-year. So the numbers that 10% ROE, and you do see a 1.7% sort of NAV decline, after the specials, that's closer to 85 basis points. It is a conversation we frequently have with the Board, we'll continue to do that, but it is something we did in the past and we'll have it under consideration.

[Operator]

And our next question comes from the line of Paul Johnson from KBW.

[Paul Johnson, analyst]

I'm just curious, so any of the nonaccruals, the new nonaccruals this quarter, do any of those overlap with the joint venture? And was that, I guess, what drove, I guess, the lower mark on the joint venture this quarter?

[Daniel Pietrzak, executive]

Yes. Just to sort of level set again, I mean, obviously, we went through the names that we put on nonaccrual, 5 in total, 2 of those relate to the Medicare reimbursement story, 2 of those relate to the wage kind of inflation piece and maybe some of the roll ups. And JWA was, I think, more of an EV point than a performance point. And then we took 2 names kind of off nonaccrual.

There was some overlap with these names between FSK and the JV. I think KBS and Reliant would have been the bigger of those but smaller sized dollars kind of in the JV. If you recall the JV, most of the assets are kind of originated onto the FSK balance sheet and then we're creating that portfolio down the JV a little bit strategically based upon the purpose of the JV, but then also just thinking about broader kind of diversification and portfolio management. So a little bit of overlap, but not everything.

[Paul Johnson, analyst]

Got it. And then for any of these nonaccruals, new or existing, I guess, we're talking about KBS, the Sweeping. I mean, are any of these in any way related to kind of the downturn in the CRE market, just kind of referring to like a lower CapEx and lower property level budgets. Is that -- are any of these related to that situation?

[Daniel Pietrzak, executive]

It's an interesting question, and I think a thoughtful one, considering what's going on [Technical Difficulty] that office market. It's not a big driver here, though. I think the big driver is more wage inflation and then sort of higher interest costs, higher sort of debt cost, creating kind of limited sort of free cash flow.

And then when you sort of, I think, exacerbate that or include that in a situation where KBS had, we'll call, some revenue volatility. It had an extremely strong performance during and right after COVID, that was always going to sort of fall off a bit, but probably fell off a little bit more than sort of folks' expectations. So it has to be a certain amount of a factor, but I just don't find -- I just don't think it's a material or sort of major one.

[Paul Johnson, analyst]

Got it. That's helpful. And last one, just kind of stepping back here, just on the pipeline. I'm just -- any high-level comments you might have on kind of the outlook for the year? And just I'm also sort of curious what the pipeline looks like today maybe compared to like a year ago at the beginning of last year. That's all for me.

[Daniel Pietrzak, executive]

Yes. No, and it's in line with, I think, what we sort of talked about either from the remarks or maybe [ John ], thanks to question, but it feels like it will be a more active '24. It feels like there's pressure on both sides, for a lack of better word, to do deals. I think the valuation mismatch that existed to get the willing buyer, willing seller there is starting to sort of fall away. Obviously, the syndicated loan markets have started to return.

I think that would be highly correlated to just more M&A volumes that are coming through. So, yes, that is our expectation. I think it will be weighted to the back half of '24, just because we're seeing more and more kind of processes either being considered or started, it would take time to get those done, for the dealers to sign the deals to close. So that would probably point to fundings more in the second half of the year. Obviously, that should be accretive to fee income, which has been historically low for us during the course of 2023.

[Operator]

And our next question comes from the line of Kenneth Lee from RBC Capital Markets.

[Kenneth Lee, analyst]

Wondering if you could just share some thoughts around where you think portfolio average interest coverage ratios could trough and perhaps just give us a little color around what you're seeing from portfolio companies in terms of managing across the elevated interest expense there.

[Daniel Pietrzak, executive]

Yes. Thanks for the question. I think we have sort of troughed, right? You start to see SOFR trend down this kind of past quarter, although that number is de minimus. I think it was like 7 basis points on average across the portfolio. I don't -- as I said before, I don't believe in the 6 rate cuts, but I think you will start to see that, I think, trend out for the overall.

So I think we have kind of hit the bottom there. I would note, Ken, for your benefit, I think there's only 7 or 8 names in the portfolio that have an interest coverage less than 1. So that's -- running roughly 200 names, so kind of small sort of percentage there. But I think you'll see that 1.5 sort of start to tick up over the course of 2024.

And I think in terms of how they're managing it, I think they're doing kind of all they can sort of pulling the levers they can. A decent amount of company did have a certain amount of hedges, but they were never perfect, a lot of those could be rolling off. So I think it -- it is an environment that portfolio company CFO, so the treasurers obviously have a lot to do these days and have to spend a lot of time sort of focused on that. And I think the majority of the portfolio has done a good job with them.

[Brian Gerson, executive]

The other thing -- this is Brian. The other thing that we've seen is for our more acquisitive companies, sponsor raising junior capital typically pick preferred or something like that to continue to drive acquisition strategies and growth. So -- as well as sponsors contributing equity on their own. So we're definitely seeing some junior capital support in certain companies.

[Kenneth Lee, analyst]

Got you. Very helpful there. And just one follow-up, if I may. I wonder if you could just talk about what you're seeing around either covenants or documentation for recent investments, especially within the upper middle market segment.

[Daniel Pietrzak, executive]

Yes. I think the documentation, I think, is held, right? I think people know that we're in -- I'd like to say we're in the storage business and direct lending and private credit, so they're not the moving business. So I think things like collateral stripping or other terms like that have kind of not made their way into the market.

I think covenants is a little bit more sort of case specific. I think, guys, we've just been more and more active in sort of larger size deals. I mean the EBITDA numbers I spoke of in the prepared remarks, $250 million plus. You're getting less access to what I would call financial covenants, but you're lending to better companies which I think we're sort of comfortable with that.

I don't think those size numbers though will necessarily be sustainable, right, as companies have access to the public markets, some of them will take that, I think we'll average more down, in line with what our historical kind of medians or weighted average numbers have been. But there will be certain parts of -- or certain sort of sectors or size of companies where we would only do the deal with the financial covenant. Larger companies, I think we'll be a little bit more flexible there because we're going to like the credit risk.

[Operator]

And our next question comes from the line of Mark Hughes from Truist Securities.

[Mark Hughes, analyst]

Looks like you had some good success with the asset based finance in the quarter. Is there anything there, that was just kind of opportunistic? Or is there more activity?

[Daniel Pietrzak, executive]

Yes, thanks for the question, Mark. There was a little bit more, I'd say, activity. The one deal I mentioned in the prepared remarks, the high FICO sort of loan book out of [ BMO ], we were pretty excited about that. $7-odd billion portfolio. We're pretty constructive on the prime and sort of super prime part of the consumer sort of portfolios around this. So I think we're happy to be in that.

The 2 other names, just you have it that probably drove that we talked about on prior calls, the deal with PayPal in Europe, that transaction funded so we're happy to see that getting off to a good start. And that we did do a receivables facility, I think there was a press release out there on it for a company Wittur. So those were the 3 big drivers.

But we do think that's a really interesting space right now. We do think what's going on with the regional banks in the United States, it allows us to potentially acquire assets or fill certain void. So it's an area we're spending a lot of time on.

[Mark Hughes, analyst]

Understood. And then you talked about some pressure on spreads in the, I think, with larger deals. Does that extend down to the middle market, smaller deals?

[Daniel Pietrzak, executive]

Yes, we do see it kind of extending. I mean I think we're -- our definition of upfront in the middle market is pretty broad, right? We're thinking about companies historically in the kind of 50 to 150 context. Obviously, we've been above that with the numbers that we quoted in the remarks around the deal flow in Q4. I do think it's an important point though to think about what the total return is on these deals versus the risk you're taking versus where you're sitting in the capital structure as sort of still pretty darn interesting risk-adjusted returns, but spreads definitely did move in Q4 downward.

[Operator]

And our next question comes from the line of Robert Dodd from Raymond James.

[Robert Dodd, analyst]

If I can ask another kind of -- another question about the JV, right? So if we look at the BDC total income dropped 3.5%, I think this quarter, but within the JV, it was down more than double that, north of 8%. Yes, there's some same exposure to Reliant, KBS, [indiscernible] where the dividend is dropping. But can you walk us through about what's driving that greater decline at the JV than you're experiencing at the BDC? And given that the guidance for the dividend for Q1 is down again, it appears maybe whatever is driving that isn't over yet. So can you give us any color on that?

[Daniel Pietrzak, executive]

Yes. It's a fair question. I think part of it and then Steven Lilly might want to sort of add to this as well. But part of it was just a certain amount of larger fee income or ABF dividends on names that were probably overweight in the joint venture flowing through in Q3 than they were in Q4.

There's nothing kind of broader than that vis-a-vis kind of the rest of the portfolio there. If anything, I think we've got room to grow the joint venture, room to sort of increased kind of dividend that can be paid out there over the coming quarters or during the overall kind of 2024. But if you have anything to add?

[Steven Lilly, executive]

Exactly, yes.

[Operator]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Dan Pietrzak for any further remarks.

[Daniel Pietrzak, executive]

Well, thank you all for joining the call today and the support during 2023. If you do have any follow-ups, please let us know. We're very happy to spend the time. Thanks, and have a good day.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.