FS KKR Capital Corp. II
Q4 2020 Earnings Call Transcript

Published: 2 Mar 2021

[Operator:]

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp. II's Fourth Quarter 2020 Earnings Conference Call. Your lines will be in listen-only mode during remarks by FSKR's management. At the conclusion of the company's remarks, we will begin the question-and-answer session. 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:]

Thank you. Good morning, and welcome to FS KKR Capital Corp. II's fourth quarter 2020 earnings conference call. Please note that FS KKR Capital Corp. II may be referred to as FSKR, the fund or the company throughout the call.

[Michael Forman:]

Thank you, Robert, and welcome everyone to FS KKR Capital Corp. II’s fourth quarter 2020 earnings conference call. Given the enormity of the events which occurred during 2020, we continue to feel humble as we gather to discuss our financial and operating results. We also acknowledge that while there are compelling reasons for many in the world to have hope for return to normalcy, the world never will be the same for those whose lives have been directly impacted by the effects of COVID-19.

[Dan Pietrzak:]

Thanks, Michael. In our recent earnings calls, we have focused on certain macro observations. Our views that the high-yield markets would continue to be robust, that the re-emergence of corporate M&A activity would lead to a rebuilding of BDC investment pipelines, and that governmental intervention in the economy would continue, are playing out largely as we expected.

[Brian Gerson:]

Thanks, Dan. As of December 31, our investment portfolio had a fair value of roughly $8 billion consisting of 155 portfolio companies. This compares to a fair value of $7.3 billion and 160 portfolio companies as of September 30, 2020. At the end of the quarter, our top 10 largest portfolio companies represented approximately 24% of our portfolio, which remains in line with our results for the last several quarters. We continue to focus on senior secured investments, as our portfolio consisted of 66% of first lien loans and 76.5% senior secured debt as of December 31. In addition, our joint venture represented approximately 8% of the portfolio and our asset based finance investments represented approximately 10% equating to an additional 18% of the portfolio, which is 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 8.5% as of December 31, 2020 as compared to 8.6% at September 30, 2020. In terms of color surrounding the repayments we experienced during the quarter, approximately 40% of our repayments were related to investments made by the FS/KKR Advisor since its establishment in April 2018. While we dislike losing these assets, we appreciate the markets view of their quality. One asset in particular was our investment in Pretium Packaging, which was originated in January 2020. Pretium is a designer and manufacturer of rigid plastic packaging focused on small-to-medium sized production volumes.

[Steven Lilly:]

Thanks, Brian. My comments will be framed primarily on the color behind our results, thereby hopefully framing them in a transparent and easily understandable manner.

[Michael Forman:]

Thanks, Steven. As I referenced earlier in the call, we are in the enviable position of looking back on 2020 with a feeling of significant accomplishment. Like many companies, we experienced challenges. However, our management team was disciplined and forward looking. As we enter 2021, I'm extremely pleased with the performance of our investment team, the strength of our balance sheet, and the rotational dynamics of our investment portfolio which continue to improve. As we look forward to closing of our proposed merger with FSK later this year, the FS KKR franchise will become a single BDC with approximately $16 billion in assets on a pro forma basis as of December 31, 2020. In an industry, which is growing rapidly and becoming a major part of the U.S credit markets, I am truly excited by our long-term prospects. And with that, operator, we would like to open the call for questions.

[Operator:]

Thank you. Our first question comes from Casey Alexander of Compass Point. Your line is open.

[Casey Alexander:]

Hi, good morning. My question leads to the liability structure, which as you mentioned is 91% secured and really credit facility heavy. Most BDCs would like to have certainly more unsecured debt on their balance sheet. And is that something that you would look to address before the merger? Or is that something that you would like to clean up in all these disparate credit facilities post the merger?

[Dan Pietrzak:]

Hey, Casey, it’s Dan. Thanks for that, and a good question. I think we've gotten off to a start here of – we got the initial unsecured deal done. I mean, from a target perspective, you can clearly see what FSK looks like in terms of a mix. So I think we are underweight here. We do have a little bit of labor costs issuance, either challenge or disadvantage with just how this entity is sort of rated. So I think our minds continually on looking at that liability structure, whether it's now or thinking about it sort of after a merger could be complete. But I think we do value the unsecured. We think it's important. The only thing I would note is we do feel quite comfortable with the revolver we have and we like the position we're in with no upcoming near-term debt maturities, but the unsecured will be our focus.

[Casey Alexander:]

I mean, in this upcoming quarter, you still have room to expand the balance sheet. Do you feel constrained by the fact that everything is at this point kind of driven by capacity on credit facilities? Or are you comfortable continuing to expand the balance sheet heading into the merger?

[Dan Pietrzak:]

No, we're comfortable. And I think we are pretty happy with the origination volume we saw inside of Q4. I think we’re also pretty happy with just the available liquidity that we do have.

[Casey Alexander:]

All right. Great. I'll step out and let some others ask some questions. Thanks very much.

[Dan Pietrzak:]

Thank you, Casey.

[Operator:]

Thank you. Our next question comes from Finian O’Shea of Wells Fargo Securities. Your line is open.

[Finian O’Shea:]

Hi, good morning. Thanks for having me on. First question on the COP, I think you said there's 17 recurring, which is consistent, but that portfolio looks to have made at least somewhat significant shifts to first lien as those yields came down a bit across the space mostly we saw improving yields in this quarter. So if you just want to provide some color there, Dan if you agree with my comments and is the 17% something you continue to expect to hopefully produce?

[Dan Pietrzak:]

Yes. I think the 17% is fair. I think we've been happy that we've been able to ramp the JV here and we've always talked about the target for the JV being roughly 10%, maybe a little bit more percent of the overall sort of entities. I think we got a little growth to do on the JV side inside of FSKR so maybe there's a little bit of room to grow there, but I think that 17% is a fair assumption.

[Finian O’Shea:]

Okay. Thank you. And then another sort of related question. The asset-based finance strategy has been a growing part of your book in both BDCs, you're fairly close to 30%, a little bit of room, but not too much anymore. So would – and that's obviously where the asset-based finances, pretty sticky stuff you generally control it. So is this something you can or intend to create a more headroom for, or would you say that this part of your book is more or so built out and complete?

[Dan Pietrzak:]

Yes, I mean, just, if you think about sort of portfolio construction and public guidance, we've given. I think we've talked about the ABF bucket, the Asset Based Finance bucket is sort of 10% to 15%. So we're sort of there. I think we've been happy with what we've seen deal flow wise. We think there's additional yield available there. We like the downside protection. Obviously the joint venture does help us manage that 30% bucket. I think we're going to – always look to see if we can create a little bit more room there, but we're probably getting, what I'll say pretty mature. I think you're right. It is stickier but we do see you still a decent amount of activity in that part of the market.

[Finian O’Shea:]

Okay, great. I'll hop back in the queue as well.

[Operator:]

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Dan Pietrzak for any closing remarks.

[Dan Pietrzak:]

Thank you. And thank you all for joining the call today and thank you for your support. We look forward to talking with you again in the spring. And we do hope that you and your families remain safe and healthy. Thank you.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude today's conference. As you all participating, you may all disconnect. Have a great day.