Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corp’s First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, Robert Paun, Director of Investor Relations, will proceed with the introduction. Mr. Paun, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp’s First Quarter 2019 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 May 8, 2019. 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 March 31, 2019. A link to today’s webcast and a presentation is available on the Investor Relations section of the Company’s website under Events and Presentations. Please note that this call is a property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited. Today’s conference call includes forward-looking statements and we ask that you refer to FSK’s most recent filing with the SEC for important factors 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 first quarter earnings release that was filed with the SEC on May 8, 2019. 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 of FSK; Dan Pietrzak, Chief Investment Officer of FSK; and Brian Gerson, Head of Private Credit for FS Investments. We’re also joined by Bill Goebel, Chief Financial Officer of FSK. I will now turn the call over to Michael.

Thank you, Robert, and welcome everyone to FS KKR Capital Corp’s First Quarter 2019 Earnings Conference Call. On today’s call, I will provide an update on our core objectives and discuss some recent developments regarding our strategy going forward. Following my remarks, Dan Pietrzak will provide our perspective on the current lending environment and review our investment activity for the quarter. Brian Gerson will discuss our financial results for the first quarter and then we’ll open the call for Q&A. I’d like to begin today’s call by making a few comments on the progress we’ve made since our strategic partnership closed a little over a year ago. We’ve accomplished a great deal collectively and have made significant strides in integrating our teams and transitioning our investment portfolio. With our new combined scale, we’ve made progress on several of our key portfolio construction objectives, including increased focus on directly originated credit and a reduction in equity exposure. We’ve closed on a number of large capital commitments, and from a liability perspective, closed on a $2.1 billion revolving credit facility, which significantly reduced FSK’s cost of financing. We believe we have built a strong base for long-term success. We have generated consistent deal flow through a robust origination pipeline as seen by the increased deal volume and capital deployment we’ve reported in the last four quarters. And as a result of the merger of FSIC and CCT, we are operating our business more efficiently and we have reduced risk through greater portfolio diversification. While we are proud of our accomplishments and progress, we recognize we still have work to do and we’re focused on our long-term core objectives, which include delivering to our shareholders a competitive and stable dividend that is supported by recurring investment earnings, preserving capital and positioning FSK as…

Thank you, Michael, I will offer a few highlights on what we are seeing in the market and provide an update on our portfolio and investment activity during the quarter. The leveraged credit markets rebounded in the first quarter with both high-yield bond and senior secured loan indexes recovering their losses from the fourth quarter of last year alongside equities. All 3 markets posted a strong start to the year as investor sentiment for risk assets generally improved, the US economy continued to expand and the outlook for interest rate shifted. The Federal Reserve’s more dovish stance dramatically reduced the odds of a near-term rate hike and a decline in short-term interest rates were in part responsible for steady inflows into high-yield bond mutual funds during the quarter. While this resulted in the sharp rebound and high-yield bonds, the combination of a more cautious fed and benign inflation data have the opposite effect on bank loan mutual fund flows, with investors rotating out of low duration floating-rate assets. By the end of March, bank loan mutual funds had experienced 19 consecutive weekly withdraws totaling $23.5 billion. Today, the overall private credit lending environment remains competitive, but we believe we are well positioned with our size, scale, portfolio diversification, incumbency positions and origination capabilities to capitalize on opportunities. As Michael mentioned earlier, we remain focused on being disciplined in our credit selection and are executing transactions where we believe there is a compelling risk reward. Moving to activity in the first quarter. KKR Credit continued to see a high level of deal volume with nearly 300 transactions evaluated. Total deployment in Q1 at FSK was $549 million up from $220 million in the fourth quarter. When including activity across FSIC and CCT, in Q4, total deployment was $498 million. Sales and…

Thanks, Dan. I’ll provide a summary of the financial results for the first quarter of 2019. You can find this information starting on Slide 4 of the earnings presentation. As a reminder, this is the first quarter of full results from the combined FSK entity following the closing of the merger between FSIC and CCT in December of last year. For the 3 months ended March 31, 2019, net investment income was $0.18 per share. Net realized and unrealized gains and losses were positive $6 million or $0.01 per share in the first quarter. This was comprised of realized losses of $15 million and unrealized gains of $21 million. During the quarter, market and credit based portfolio appreciation was somewhat muted by negative unrealized marks on certain investments, which totaled approximately $0.07 per share. At March 31, 2019, approximately 0.4% of FSK’s portfolio was on nonaccrual on a fair value basis, down from 1% at year-end 2018 and down from 1.9% pro forma for the combined entity prior to the close of the merger at September 30, 2018. During the quarter 1 investment was placed on nonaccrual. Additionally, we had 2 investments removed from nonaccrual due to restructurings, which were Aspect Software and MB Precision. Turning to dividend. As Michael spoke about earlier, one of our core objectives is to provide a competitive and stable dividend that is supported by recurring investment earnings. During the quarter, we paid a regular $0.19 per share dividend, representing a 9.7% annualized yield based on our March 31, 2019, NAV. We continue to feel good about the $0.19 dividend, as we look to further reduce our equity exposure and rotate out of non-income-producing assets along with increasing our exposure to our strategic joint venture and asset base finance investments. We believe all of these…

Thanks, Brian, and thank you to everyone for your time today. As always, we appreciate your support. We’re looking forward to updating you throughout the year as we make progress on our core objectives. With that, we will now open the call for questions.

[Operator Instructions] Our first question is from Rick Shane with JP Morgan. Your line is open.

Hey guys, good morning and thanks for taking my question. I just wanted to ask sort of one high level question. We’re obviously seeing the industry repositioned for higher leverage and you guys are seeking approval. I’m curious as this is developing if you are actually seeing the already competitive landscape increase in intensity?

Rick it’s Dan Pietrzak. I think fair question. There has been a lot of money raised for the space. I think the two offsets to that those, there has been a lot of money raised for middle market private equity, which is a clear kind of user of this, number one, and number two, I think where we’ve tried to position the business at this upper end of the middle market, we just see it as less competitive. We see the less people who can write these full-size checks. I think you can see from some of the case studies we gave in terms of deals we completed in the quarter, the real size. And I think we’ve just seen more competition in that sort of $25 million to sort of $35 million, $40 million EBITDA space. So I think it’s a good question, I think it’s one that is quite fair to ask, but I think we’re positioned pretty well to avoid some of that.

And do you see your competition in that market in part and it’s interesting you showed a couple of transactions in the first quarter, some of that were clubbed out and some that you led, do you see your competition in that market really is the 144A market?

No, I mean – and if you just look at the deals that we sort of did, I mean, the Lipari deal was one where we did speak for the whole thing, we were the sole lender. I think we were able to do that because of the excessively quick turnaround time; you had a company to sponsor looking for a solution. The Athena deal was a really interesting transaction. The first lien was sold into the more traditional syndicated markets. We split that deal, the bottom pieces with another sort of large private lender, and then the same for Savers. So I think as we are talking with some of these larger companies, at times they could definitely access what I’ll call the syndicated loan market. I think we’re not necessarily trying to compete with that and the needs and reasons why the private credit space exists, whether it’s carve out, whether it’s certainty of execution, whether it’s a bespoke situation like Savers, and that’s where we’re looking to play.

Got it. Thank you very much guys.

And our next question is from Casey Alexander with Compass Point. Your line is open.

Good morning. Couple of questions, one, you did give a target potential leverage ratio of 0.95 times, and obviously, you’re trying to work down equity and non-income-producing assets. If you are successful in pushing down those non-income-producing assets below 5%, would at that time you consider is somewhat higher target leverage ratio given that you have more of the portfolio as income producing?

Casey, it’s Dan. I think couple of things. So one, when we do talk about the 0.95 times, I think, Michael’s comments in the script, we’re kind of near-term, I expect that’s over sort of 12 months to 18 months, right. We’re going to be mindful about credit risk and not just be doing loans to meet our target to the leverage number. I think we’ve been happy with the progress that we’ve made on both the equity bucket and that non-income-producing bucket, which obviously there is some overlap to those names. There’s a bit more work to do there. Hopefully, you saw in our prepared remarks, we did give some color about how we thought about the equity bucket. I think could we go above 0.95 times, sure. Is maybe more of a natural target even sort of 1:1, I think, yes. At the same time though, we’re not going to be aggressive uses of leverage and we’re going to want to keep that dry powder available for what I’ll call market disruptions and more interesting opportunities to invest and deploy.

Secondly, how would potentially doing a securitization or a CLO of your own assets compared to the cost of your credit facility? I’m assuming that you’ve kind of studied that that dynamic.

And we have. I mean, I think we’ve been pretty happy with our liability structure to-date. I think we are focused on diversification as you can imagine, and we are definitely looking at sort of accessing that space. I think it’s probably a little bit too early to talk about kind of your pricing now, but clearly we’re going to try to create a certain amount of balance with all the different tools that we have available to make sure that the right pricing, the right duration, look to reduce mark-to-market risk where we can, et cetera.

And lastly, we’re almost halfway into the second quarter. How does it look from deployment and also from a repayments standpoint?

No, a good question. I think you’ve seen we had a good sort of Q1, right. I probably think more about the numbers as that deployed number versus the net number after what we sold into the JV. So I think it was probably net positive sort of 130 we’re really out where we want to be vis-a-vis kind of leverage today. We’re definitely seeing more pressure on repayments in Q2. There is some deals that I think without the market volatility may have gotten refinanced at some point in Q4, potentially even in Q1. Certain situations like that we’re able to capitalize but I think there is more pressure on repayments as we sit here in Q2. And I’m not surprised that considering the volatility in the last few quarters.

Okay. Thanks for taking my questions

Thank you.

And our next question is from Finian OShea with Wells Fargo Securities. Your line is open.

Hi, guys good morning. Thanks for taking my question. Dan, can you give some color on the market environment, how things have rebounded? Can you expand a little more for us on the economic side, if you were to think about say you’re median or performing in line with expectations-type portfolio company, which is most of everybody’s book. Are there any mounting or emerging pressure points there? Or are we seeing general very robust health on the portfolio credit side?

I think you got a couple of questions in there, Fin, and let me take a shot, but feel free to add to it. The market remains competitive. I think it’s difficult to have recall a market that’s probably not competitive. That said, I do think that what happened in Q4, took a little bit of froth out of things that probably slowed down some M&A activity and maybe some sort of higher quality deal activity in Q1, but I we’re starting to see some of that volume and at least dialogs kind of pickup. The market has, I would say, come back. I mean, I think the markets are available and deep on the syndicated side for new loans to be sold into. I think we’re still seeing a little bit of pressure for the harder situations, are the more sort of bespoke, which is probably good for us. And then as it relates to company performance, we’ve got a lot of names on the credit platform as you know across the different buckets of capital that we manage. I think we’re generally still seeing positive and good numbers. The macro numbers the US put out have been strong. That said, I think we’re pretty mindful. We remain light cycle credit and we need to be pretty defensive about what we’re doing.

And then just one on the liability side, just thinking about the commitment share for the BDC and some of your and Brian’s commentary on financing strategy, it sounds like you will kind of replace other stuff and keep most of that commitment. So is that fair to say that you’ll approach, not saying that is a right or wrong strategy, of course, there’s pros and cons but are you – is it safe to say you will be taking a very conservative financing structure going forward?

I can start this and Brian can add to it. I think conservative is a fair word. I think there’s different definitions of conservative, right. We are going to like maturity and we are going to like balance of diversification across both loan types and lenders and then probably diversification amongst kinds of products as well. And Michael mentioned, I mean, we remain very proud of the revolver we put in place, both in terms of the size, where it’s priced, the flexibility it gives us. The market is deep on, I think, the bilateral bank market side. We’re obviously looking into the CLO space to see if something is done there. I think we remain interested in the unsecured market. But I think the better word is probably balanced and conservative.

Clearly looking at the right-hand side of the balance sheet, that’s a key lever for us to drive NII and manage our risk. And not a lot more to add to Dan’s comment other than continue to diversify and watch our maturities and improve the balance sheet as we go.

And then just one more, if I may. Tying in some of really the comments from all you on strategy and the JV, we’re seeing now of course a lot of your peers deciding the JV no longer makes sense given 2:1 leverage and you’re kind of just moving in that direction, but I think setting the 0.95 times target was 1 year from now. So would you say that you’re viewing this – do you view there to be value of a leveraged senior asset bucket in the BDC or might we see you a year from now when this is ramped just kind of move on it and the whole time it was sort of a warehouse facility as we saw with several of your peers? Any color on that proposition.

Well, I think Fin, it’s a very fair question especially with what kind of leverage going up. As you know, our JVs have been a bit different than sort of most. We’ve been using it more to make sure we’re capturing the full origination of the entire KKR Credit platform, which can include non-eligible portfolio companies. I think we’re thinking about it a little bit more today to include still privately originated but certain sort of lower-yielding assets to both be able to position ourselves well in the market but put on sort of good risk-adjusted returns. So we’re not viewing it as a warehouse, we’re viewing it as a real part of our strategy. And I think it all does with the other end of Michael’s comments that we don’t expect our strategy to change with this increased in leverage. We want to run this what we believe will be a conservative leverage number, that sort of 0.95 times near-term target and the JV just forms part of all that.

That’s all from me. Thank you guys.

And our next question is from Paul Johnson with KBW. Your line is open.

Good morning guys. Thanks for taking my question. I wanted to ask about a specific credit Belk – your portfolio company Belk. It seems like it’s a very traditional retail investment that’s – obviously that sector is coming to some pretty significant secular challenges over the last few years; it’s a second-lien investment. I think you guys also made some additional retail investments this quarter. Just curious, I mean, could you provide any kind of color around this investment and why it’s had a stress market as well as is the transaction that you are the leader in or was this a syndicated deal?

Paul, thanks for the question. We get flooded in a couple of parts. I mean, I think Belk is a fair name. It’s on our watch list as well. I think if you go and look at kind of recent performance, same-store sales numbers were pretty good, at least relative to kind of the sector. The company has historically produced a fair amount of cash flow. The company has historically bought a fair amount of debt and kind of retired that, which has been helpful from an overall leverage position. And I think the structure of that loan is a bit unique and it does have some security attached to it, mainly in the form of real estate. So I think you put that all together, I think we’re still comfortable with the position. I think we’re quite mindful it can be volatile from a mark-to-market position; the first lien I think trades fairly actively. So it’s something we got our eye on for sure. It was a privately-placed second lien. It was us than another sort of large credit player who ended up sort of taking that down. So it’s not a broad sort of holder group. And then maybe the second part of your question was just about broader retail. We’re clearly of the opinion like everyone else out there. Mall-based retail has been under real stress where we have seen some marks in the portfolio and some challenges in the portfolio over the past quarters as it relates to that space. I think we can be constructive on certain names that are on retail, but we’re going to find them to either be different, while we put Savers in that bucket. We would find maybe there is a quite strong collateral package where you’re not that worried about the actual performance of the store or the brand itself. All you’re going to do is something that has a lot of real structure. There is a handful of names that we’ve looked out are done – that we’ve done it and really, let’s call, two turns of leverage with real amortization, not sort of excess cash flow sweeps, like contractual 2.5% per quarter type amortization. So if we can get those, we will do it; if we can’t, we’ll walk away.

Okay. Thanks that’s very good detail.

[Operator Instructions] And our next question is from Terry Ma with Barclays. Your line is open.

Hey good morning. If you reach your near-term target leverage of 0.95x given the current environment and you kind of successful in reducing your equity exposure to, call it, sub-5% and also executing on some of your strategic initiatives like the JV, what kind of target ROE should we expect or are you targeting?

So I think you’re right on the levers, right. I think we feel good about being able to get to that target, but like I said, we did want to give the color about 12 months to 18 months. I think we feel good about getting the equities sort of book down and although, like I said, we did try to give some more color into the details of sort of breakdowns of that book. And I think ramping the JV will also take a certain lot of time, but we feel good about that. Assuming the market holds up, assuming market conditions are our consistent, sort of upper single digits type ROE thinking about some type of normalized loss number.

I’m sorry, you said upper single digits?

Yes. I mean, I’m hesitant to give any sure sort of the forward numbers out there, but that’s the way we sort of think about it. Even if you break down the loan book, right, your regular way first lien loan [indiscernible] today. Your second lien loans really plus 8 you think where our LIBOR is, you think what sort of leverage we feel confident are, sort of dividend number of 9.7%. So I think it’s all in that sort of context.

In terms of longer-term leverage targets, I think some of your peers have thrown out numbers as high as 1.25 times in the quarter, 1.5 times debt-to-equity. Does FSK have appetite for that type of leverage target longer-term?

It really doesn’t and that’s for one simple reason. From Michael’s comments, we don’t intend on changing business model here. This is a privately-originated, privately-negotiated transaction entity. I think if you start to get to those kind of leverage numbers with these types of loans, you’re going to be getting a little bit too aggressive on the liability side and that’s something that I think any of us would encourage or be comfortable with. So can we go above 1 times, yes, could we get to 1.25 times and positions of market volatility where we want to capitalize on it, absolutely. But I don’t think that will be a stated target from us.

Okay. Got it. That’s helpful. Thank you.

Thank you. And ladies and gentlemen, this ends our Q&A session and conference for today. Thank you for participating and you may all disconnect. Have a wonderful day.