FS KKR Capital Corp (FSK) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp.'s First Quarter 2021 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 .

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s First 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 May 10, 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 March 31, 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, including risks associated with the possible impact of COVID-19 that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.

FSK does not undertake to update its forward-looking statements, unless required to do so by law. In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's first quarter earnings release that was filed with the SEC on May 10, 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.

Thank you, Robert, and welcome, everyone, to FS KKR Capital Corp.'s First Quarter 2021 Earnings Conference Call. The first quarter represented another positive stable quarter for FSK. During the quarter, our investment team originated $417 million of new investments. We experienced an increase in our net asset value, and we again outearned our target 9% annualized dividend yield on our net asset value. I'm pleased to report that the first quarter of 2021 represents the fifth consecutive quarter since the establishment of our current dividend policy that we have over-earned our target annualized yield. Again, I congratulate our team for achieving these solid results, especially during such a volatile period.

During the first quarter, our net investment income was $0.63 per share, which was $0.03 per share above our quarterly dividend of $0.60 per share and also $0.02 per share above our public guidance at the end of the fourth quarter. From a liquidity perspective, we ended the quarter with approximately $1.9 billion of available liquidity with no meaningful near-term debt maturities.

Looking forward to the second quarter, assuming the proposed merger between FSK and FSKR closes before the end of the second quarter, we plan to file a single combined 10-Q for the quarter for the surviving entity, FSK. From an FSK dividend perspective, our Board has declared a distribution of $0.60 per share for the second quarter, which equates to an annualized yield of 9.2% on our net asset value per share of $26.03 as of March 31, 2021. A Assuming the proposed FSK and FSKR merger closes on schedule, on our second quarter earnings call, we will provide detailed guidance with regard to our near-term operating expectations.

However, based on the positive feedback we have received from the market regarding our existing dividend policy, assuming current market conditions remain relatively intact, we currently expect to continue to target a 9% minimum annualized dividend yield. As we prepare for the closing of the preferred -- proposed merger of FSK and FSKR, the board and I are extremely pleased with how the FS KKR team is performing and how well our investment portfolio is positioned for the future. As a result, we believe that the proposed merger of FSK and FSKR will be consummated at an opportune time.

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

Thanks, Michael. In early November of last year, on our third quarter 2020 conference call, we shared our belief that the Fed's primary focus was reducing unemployment with a secondary goal of targeting inflation at around 2% per year. At that time, unemployment was 6.9%. Today, just 2 quarters later, unemployment is 6.1%, an impressive decline in its own right, but even more so when one accounts for the number of eligible workers still choosing not to work due to lingering pandemic-related concerns as well as the extra financial support provided by the most recent stimulus package.

Going forward, we believe Fed policymakers will continue to lead with a primary focus on the labor market and the hiring in certain sectors such as travel, hospitality and leisure, infrastructure and home building will lead to a continued near-term drop in unemployment with wage growth perhaps occurring sooner than many observers may expect.

In our conversations with financial sponsors and portfolio companies, we have been encouraged by their operating and financial performance, which has included meaningful increases in both revenues and EBITDA on a quarterly basis for the last 3 to 4 quarters. Going forward, we believe the coming quarters will be marked by continued improvement in free cash flow growth across many sectors, offset only partially by the effects of expected higher near-term inflation. Over the immediate term, while we continue to believe that modest inflation is healthy for the overall economy, we believe inherent structural forces, including technology and demographic trends, will help balance longer-term inflationary pressures.

From an investing perspective, we, like other large BDC platforms, continued to experience the repayment of certain assets as sponsors and portfolios take advantage of the strength of the syndicated markets. While repayments are normal in our business, we recognize the market's focus on our ability to reinvest. To this end, we continue to be encouraged by the significant growth, which has occurred in the private credit markets over the last several years as both sponsors and portfolio of companies have come to depend on larger, well-funded platforms as traditional and regular way sources of financing.

As we move forward in 2021, we will continue to be highly selective in our underwriting as we adhere to our internal view that we want to be well-downside protected in this market. Also, later in the call, Brian will speak about a few repayments of legacy positions, which were originated prior to the establishment of the FS/KKR Advisor, where we played active roles with both the portfolio of companies and their sponsors to create positive outcomes.

In terms of new investing activity during the first quarter, the FS/KKR Advisor closed on approximately $1.1 billion of total investments across our BDC franchise, $417 million of which were within FSK. From a volume standpoint, the first quarter began slowly as it frequently does. As our transaction pipeline began to expand, we continue to exercise caution by being highly selective, focusing only on investment opportunities which met our criteria.

During the quarter, our closure rate approximated 2%, which compares to our historical closure rate of approximately 4%. Approximately 40% of our FSK originations this quarter came from opportunities in companies previously invested in by KKR. Again, illustrating the power of incumbency and our relationships. Our $417 million of total investments, combined with $684 million of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio decrease of $267 million during the quarter.

During April, we closed $350 million in investments, and we experienced $530 million in repayments. As we said during our fourth quarter call, we continue to forecast a higher-than-average level of repayments over the next few months given the continued strength and abundant liquidity within the syndicated markets. In terms of color around a few of our investments during the quarter, KKR Credit was the lead arranger and committed $320 million to a $505 million first lien delayed draw term loan for MB2 Dental Solutions, a dental service organization with a total of 266 practice locations across 21 states.

FSK's portion of the commitment was $66 million, while FSKR and other KKR-managed accounts committed the remainder. KKR Credit also committed $175 million to a second lien financing for Peraton Corp., a large government services IT business focused on intelligence and defense. The sponsor, Veritas Capital, acquired a separate government IT services business and merged it with Peraton. The combination creates a scaled leader in the government IT services sector with a particular focus on higher-end cybersecurity and product development work with over 10,000 employees.

FSK committed $57 million to the financing, while FSKR and other KKR-managed accounts committed the remainder. The financing is an example of an investment opportunity with a larger company where we believe the dynamics of the second lien structure are compelling. Both of these investment opportunities are examples of the types of transactions we find attractive, well-capitalized, solid operating companies that appear well positioned for future growth.

About a year ago, we began providing detailed investment performance metrics for the FS/KKR Advisor. The updated information is summarized as follows: Since the FS/KKR Advisor was formed, through March 31, 2021, we have originated approximately $4.8 billion of new investments in FSK and have experienced 86 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 illustrate the manner in which we have taken measurable steps to turn the investment portfolio toward what we believe to be more conservative investment structures in companies with more defensible operating positions.

This information is detailed on Slide 12 in our investor presentation on our website. And with that, I'll turn the call over to Brian to discuss some investment portfolio specifics.

Thanks, Dan. As of March 31, our investment portfolio had a fair value of $6.5 billion, consisting of 152 portfolio companies. This compares to a fair value of $6.8 billion and 164 portfolio companies as of December 31, 2020. At the end of the quarter, our top 10 largest portfolio companies represented approximately 23% of our portfolio, which remains in line with our results for the last several quarters. We continue to focus on senior secured investments as our portfolio consisted of 51.2% of FERC's lien loans and 63.5% senior secured debt as of March 31. In addition, our joint venture represented 11.3% of the portfolio and our asset-based finance investments represented 14.7%, equating to an additional 26% 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 8.6% as of March 31, 2021, as compared to 8.8% at December 31, 2020. 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 assets which closed during the quarter. In terms of color surrounding the repayments we experienced during the quarter, approximately 28% of our repayments were related to investments made by the FS/KKR Advisor since its establishment in April 2018. The other 72% of our repayments were associated with legacy investments.

As Dan mentioned, 2 of these legacy investments are highlighted as follows: first is Kodiak Building Partners, which distributes building products to commercial builders and remodelers. The investment was originated in December 2017 and when Corp Square purchased Kodiak, American Builders and 2 small tuck-in acquisitions. We provided the full $174 million unit tranche and $52 million accordion to support the business. Since the time that FSK's original investment, Kodiak completed more than 10 acquisitions.

In August 2018, we increased our investment by providing an incremental $100 million commitment to the company's delayed draw term loan to fund the company's growth. In February of this year, the business completed the dividend recapitalization through the syndicated market, and our investment was repaid in full at a call price of $101 million.

Another sizable legacy investment that was repaid during the quarter was All Systems. The company is a human capital solutions provider in the U.S., serving a diverse set of blue-chip customers. The investment in All Systems was originated on October 2016 when THL Partners acquired the business and was highly acquisitive during our hold period. In July 2019, we opportunistically refinanced the company with the new unitranche facility. This refinancing allowed us to repay the first out lender in full, thereby improving our financing position. Our loans repaid in full at par in January of this year upon the sale of the company.

Including the effects of these and other repayments, as of March 31, 2021, approximately 84% of our yielding investment portfolio is now comprised of investments originated by KKR. Turning back to our existing portfolio. During the first quarter, we experienced net portfolio appreciation of $121 million. The total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was $249 million, and our realized and unrealized depreciation totaled $128 million during the quarter.

During the quarter, we placed 2 investments on nonaccrual, Sequel Youth & Family Services and Central Park Leasing. Sequel has been on our watch list and Central Park Leasing, a static pool of 34 Airbus and Boeing aircraft, has been heavily impacted by the COVID-19 pandemic. Also during the quarter, we placed one asset, NBG Home, back on accrual status. NBG is a designer, manufacturer and distributor of products for the home decor market. During the depths of the COVID pandemic, we invested additional capital to support the company. And now, several months later, the business has recovered meaningfully, driven by strong consumer demand for its products.

As a result of these activities, at the end of the first quarter, our nonaccruals represented approximately 6.8% of our portfolio on a cost basis and 3.6% of our portfolio on a fair value basis, compared to 6.6% on a cost basis and 2.5% on a fair value basis as of December 31, 2020.

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

Thanks, Brian. In terms of color behind our financial results, the $12 million decline in our total investment income quarter-over-quarter was impacted by the following. We experienced a decrease of $11 million in our interest income, primarily due to the investment activity about which Dan and Brian spoke as several of our higher coupon investments were refinanced during the quarter. This activity was partially offset by new investments, which carried weighted average yields of 8%.

Our fee and dividend income remained flat quarter-over-quarter. The largest components of our fee and dividend income included $22 million of dividend income from our joint venture during the quarter. Other dividends from various portfolio companies totaled approximately $9 million during the quarter. Finally, fee income totaled $11 million during the quarter, representing a decrease of $1 million quarter-over-quarter with the change tied directly to our origination and repayment activity during the quarter.

Our interest expense remained relatively flat quarter-over-quarter and management fees decreased by $1 million during the quarter due to the lower amount of average gross assets during the quarter as compared to the prior quarter. The detailed bridge in our NAV per share on a quarter-over-quarter basis is as follows: our starting 4Q 2020 NAV per share of $25.02 was increased by GAAP net investment income of $0.63 per share and was increased by $0.98 per share due to an increase in the overall value of our investment portfolio; our NAV per share was reduced by our $0.60 per share dividend. The sum of these activities results in our March 31, 2021 NAV per share of $26.03.

From a forward-looking guidance perspective, we expect our second quarter net investment income prior to any effects of the proposed merger with FSKR to approximate $0.61 per share. The bridge from our $0.63 per share of net investment income during the first quarter to our second quarter guidance is as follows: our recurring interest income is expected to decline by approximately $6 million due to a combination of the following, anticipated repayments of certain higher-yielding assets during the second quarter and the effects of lower origination volumes that we experienced during the first quarter. We expect recurring dividend income associated with our joint venture to remain flat with the first quarter at approximately $22 million. We expect other fee and dividend income to approximate $24 million during the second quarter.

From an expense standpoint, we expect our operating expenses, including interest expense, management fees and G&A costs to remain relatively flat quarter-over-quarter. In terms of the right side of our balance sheet, our gross and net debt-to-equity levels were 113% and 100%, respectively, as of March 31, 2021. This compares to gross and net debt-to-equity of 131% and 119%, respectively, at the end of the fourth quarter. Our available liquidity of $1.9 billion equates to approximately 29% of the value of our investment portfolio, which is a very comfortable percentage and allows for future portfolio growth.

At March 31, approximately 55% of our committed balance sheet and 77% of our drawn balance sheet was comprised of unsecured debt. We continue to be pleased with our overall weighted average cost of debt of 4.2%.

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

Thanks, Steven. The first quarter of 2021 represented a strong start to what we believe will be an active year from an investment standpoint. In addition, our team has been preparing for our proposed merger with FSKR, and we continue to be excited by the strategic opportunities a single BDC platform will provide our shareholders. The last few years has represented a time of change across our platform from the establishment of what has proved to be an excellent partnership with KKR to repositioning our investment portfolio to broadening and deepening our team to fortifying our balance sheet, we are well positioned for the future.

On behalf of our entire team of more than 200 professionals, we look forward to keeping you informed of our progress, and we appreciate your interest and support. And with that, operator, we would like to open the call for questions.

(Operator Instructions) Our first question comes from Casey Alexander with Compass Point.

I have three, and I'll just give them all to you at one time. First, if you could generally discuss the pipeline and the pipeline relative to the competition from the broadly syndicated loan channel. Secondly, if you could discuss the potential for rotation from equity assets, which are close to 10% of the portfolio. And obviously, you have 10% of the portfolio that's non-income producing.

And then my last question is, given the high level of repayments and prepayments during the quarter, why sell $193 million of investments down into the JV as opposed to holding them on balance sheet and maintaining some more of the interest-earning assets on balance sheet? Those are my 3 questions.

Sure, Casey. And I'll go through them, tell me if I missed something, Brian might add as well. I think we've been happy with pipeline, right? I think we talked about January as it historically is probably a little bit slower. You saw the $1.1 billion across the entire BDC franchise. We have been seeing a certain amount of repayments happening as people were getting refinanced in the syndicated market, right? That market has generally been frothy for most of the year, probably cooled down a little bit or I will say normalized sort of a bit. That is what we expect, right? We're investing in companies, we're expecting them to grow and have access to cheaper sort of forms of capital.

I don't view that we're in there kind of slugging it out and competing every day with the syndicated market because in many ways, we just -- we're not trying to do that on a cost of capital game, right? That said, we have found more and more borrowers and sponsors are looking for what the private credit market provides, right? Certainty of execution, maybe some flexibility in terms of the delayed draw term loan. And as I said in my remarks, I think the larger platforms have the ability to do that. So I think there's a good tailwind in terms of the market dynamic. Obviously, the strength of the syndicated market has maybe been a little bit of a headwind in -- just in terms of a net deployment number.

But I think we feel good about pipeline. I think on the -- it has been a focus of ours, as you know, for many quarters on rotating out of some of the equity positions. We've exited a fair amount of individual line items over the last handful of quarters. I think that's been sort of positive. We have kind of missed maybe some of the larger ones in terms of moving the needle. That said, one of the larger positions, a company called ASG, you can find that in the announcement. That business was sold. I think, either Q2 or Q3, we would get fully repaid there. I think we're happy to see that. I think that was a good transaction for sort of all involved.

And maybe last question in terms of the high-level sort of piece. Obviously, we're keeping the super majority of the economics when it does go to the JV. So it's not that material a move, right? That said, we are managing the portfolio for different things, including managing sort of non-EPC capacity.

Our next question comes from John Hecht with Jefferies.

John, can you hear us?

Our next question comes from Finian O'Shea with Wells Fargo.

First question for Michael or Dan, perhaps. Do you have the final estimate of how far you'd be behind on the incentive fee and how that compares to the $90 million of fee waivers?

I can take that, Finian. I'm assuming you're meaning sort of inside of FSK. We could probably follow up offline because I don't have the sort of details here. That said, I think we've been pretty happy with what we've seen, vis-à-vis, NAV growth over the last handful of quarters. I think some of that has been, we'll call it just general market bounce back. But there has been a handful of names like Sound United, like NCI, like MBG where we've talked about in the script, where we actually proactively put money into them during some of the darker days of COVID, and we've seen sort of that balance. But we can follow up offline with some of the -- that exact math for you, if you like, after the call.

Okay. Yes, I was interested on FSK and the combined entity. We can follow up. I had just a second question on platform fund raising. Once you get these -- the potential merger complete, does -- you, as an entity, or perhaps separately the FSI and the KKR side plan to resume of fundraising efforts for direct lending and how will that look on the platform side?

Yes. Fin, I mean, obviously, we've been laser-focused on getting the merger done. All things are pointing as we talked about in the prepared remarks. We're hopefully getting that done into the Q2. We do think about various kind of pools of capital raised from time-to-time. I think you've heard us sort of talk about that in the past, right?

That said, I think we've been mindful about having what I will call, the right amount of capital to address this market. We do believe this is a space where size and scale matter, but we're also pretty cognizant about making sure that we are appropriately deployed inside of these companies, both inside of our target leverage sort of numbers, but also to ensure that we're covering kind of the dividends that we're sort of out there sort of targeting. So I don't think anything unique or different than kind of normal course of business, but those are the ways we think about it.

Our next question comes from Ryan Lynch with KBW.

Kind of following up on Casey's question regarding just portfolio growth and leverage. I mean, this quarter, you guys -- when you combine kind of your balance sheet and FSKR's balance sheet, you guys are going to be under your leverage target when you kind of use that average. So how much of a priority would you guys have at growing your portfolio? Is that even a main priority right now, given kind of the strength that you guys are going against in the broadly syndicated loan market? And do you think that that's even possible with how strong that market is right now?

Yes, sure. I mean your math is right, Ryan. I mean, we're roughly 1x sort of net here sort of under that in FSKR, if you look at the numbers that came out last night. I think we're actually feeling pretty good about being kind of under that target leverage number, right? That means we have ample room for sort of growth. As you know, we've invested meaningfully in our origination footprint over the last several years.

We've made, in our opinion, sort of a bunch of very good hires from very good sort of firms. So our origination pipeline is quite active. As I sort of said in the prior question, I don't really view us kind of competing day in and day out, right? That said, the feeling of that market or the terms and conditions of that market and the pricing of that market can sort of definitely bleed into ours. And that also has driven some of those repayments.

But I think we feel quite good about beating our target leverage number in the medium term. I think we feel good about the footprint of the business and some of those tailwinds that I mentioned for the overall industry. But I think also, in markets like this, I don't think Brian and I are necessarily unhappy about having a fair amount of dry powder to deploy when the opportunities do present themselves. And maybe just last point, Ryan. I mean, we're focused every day on origination. That's the name of the game of this business, but we are trying to be very disciplined when it comes to an -- a risk and underwriting side, and you're going to see that continue.

Okay. Fair enough. And then you mentioned M&A is increasing, you guys are seeing more deal opportunities but are still remaining highly selective on only investments that really meet your investment criteria. I'm just curious, has your investment approach changed at all as you guys are deploying capital (inaudible) given the backdrop of the U.S. economy versus what you're maybe targeting or focusing on back in 2018 or 2019?

Yes, a little bit. I mean, obviously, most of the team is still working from home. So that's a change, right? You're doing kind of appropriate levels of diligence, but doing that in a different manner. I think thematically, in '18 and '19, we're underwriting for a recessionary environment to sort of -- that maybe in the normal course, never really came, right? But that was the general sort of view. Now we're sitting in an economic maybe sort of tailwind now on the other side of this pandemic. It feels like we're going to have a pretty darn good couple of years of economic performance, right?

That said, I think we're thinking about other things, right? We're thinking about, is there any potential for rising rates. We're thinking about wage inflation. We're thinking about probably that potential recessionary environment 2, 3 sort of plus years sort of out. So I think a lot of the same basics and fundamentals, but trying to adjust for the market environment that we're in today.

Yes. The only thing I'd add, this is Brian, is that when we underwrite credits, we're always -- in terms of the scenarios that we're looking at, we're always underwriting a recession in the next year or 2 after we fund an investment. So we're focused very much on quality versus quantity in terms of our underwriting. And I don't think our discipline has changed.

Okay. Understood. You guys did have a really nice quarter this quarter, but I did want to just bring up one investment, you guys investing in Sequel. There are some really ugly articles out there on that investment involving some human strategy and other things regarding that business.

Does that change kind of -- the kind of how public some of those items are, did that change the way you guys approach really achieving some sort of resolution in that challenge in that investment and business?

Yes. Well, I guess, Ryan, thanks for the kind words on the quarter. Yes, I mean it has been a challenge to invest in. As you know, it is a legacy investment. It was originated in 2017. I think we've -- I think we're happy that we've kind of built the team on our side with the -- a fairly deep bench specifically of workout professionals to help us address situations like this.

I think we're quite capable to do that. And this is the top of the priority list. I -- without going maybe into too much detail on the call, I think we are cognizant to make sure that we're sort of doing the right thing, but also cognizant of the risk position. We've got a very good, I think, dialogue with the existing sponsor, and we're going to work hard to find a resolution there.

Our next question comes from Bryce Rowe with Hovde.

I just wanted to hit on a couple of questions here. First, in terms of some of the commentary from the last couple of quarters really around the 9% NAV dividend yield target. So I guess my question is just around kind of how we've seen the equity portion of the portfolio from a fair value perspective really increased, especially this quarter, both at FSK and FSKR. So how do you think about that relative to that 9% target? I mean, it feels like it might be a tougher bogey to hit, so to speak, that 9% target with more equity in the portfolio.

Yes. And Bryce, thanks for the question, and Steven Lilly might want to sort of answer this as well. I mean, I think we've -- I think we've gotten a good reaction for the dividend policy we put in, which I guess is now 5 quarters ago. I think we've been happy that we've been able to over earn. I think you're correct. We have seen some appreciation in that equity portfolio. Some of that could be driven by sales processes that we talked about before.

Some of that is just driven by situations where we put some new dollars in and you've seen some meaningful uplift in sort of earnings with those businesses and on the other side of the darker days of the pandemic. So I think we're happy to sort of see that equity growth. I mean, obviously, I think we're mindful about the, we'll call it, the tension between the 2, but I think we feel good about the dividend policy where we sit now in sort of that 9%. But Steven, feel free to add.

No, I think you covered it. I think you covered it well.

All right. And then maybe another question on the outstanding debt from a capital structure perspective, usage on the revolving facilities at FSK has come down as the balance sheet or the portfolio has come down here this quarter. So I'm curious how you're thinking about, and if you can comment on kind of the combined organization and how that -- how the capital structure might look on the right side of the balance sheet, being able to possibly combine some revolving facilities. Just any guidance there would be helpful.

Yes. No, happy to. I mean maybe a couple of points. One, I think on the revolver coming down probably a combo of 2 things, right? Number one is correct. Obviously, our leverage has come down, but we've also now had, I think from a financial statement perspective, the full sort of benefit of the recent bond deals that were done being used to reduce that sort of revolver.

So I think that's the change you'll see at least over the past couple of quarters. I think what we've talked about in the past is the FSK sort of right side of the balance sheet is probably what you should expect for the road map on a go-forward basis. We've been happy that we've been able to access the unsecured market from time to time. I think our expectation is we would look to continue that.

And then from the revolver perspective, the way the revolver is set up is it could be collapsed into one just as part of the regular way deal. So there's no sort of content that are sort of needed for that. So the -- those -- the joint revolver, you could sum them together in a pro forma entity.

Our next question comes from Robert Dodd with Raymond James.

Congratulations on the NAV and earnings this quarter. If I can, on the kind of -- what do you think or how do you feel about the quality of the originations Q1 and maybe pipeline? Obviously, yes, you saw some paydowns, but interest coverage actually ticked up, which is pretty tough to do in a very competitive environment generally. So it would tend to say your originations were only the one metric, but better, maybe than the repayments. Is that true? And how does that look in the pipeline and maybe for your expectations as we go through the remainder of, say, the first half of the year?

Yes. No, fair question. I think in terms of quality originations, we feel good, right? I think we've quoted you some numbers in the prepared remarks that showed where we've been selective. I think we've been focused both on quality of business as well as quality of structure. And at the end of the day, kind of not chasing basis points, right? We need to sleep well at night, and that's got to be a material sort of focus. I think we also feel good about just that percentage of incumbency positions that we talked about. A lot of these are names that we've known for a long time, have a lot of sort of comfort in the numbers. So I think overall quality, Robert, we feel good about.

I think there's a good amount of transaction volume out there, which is allowing us to be selective. Obviously, some of the names you would prefer, you didn't get financed out of because they were performing so well. But again, that's the base case in the credit business, right? You're making the loan. And at some point, you'll try to protect it, but it could very well be taken out.

Got it. Got it. Just kind of a follow-up on the 2% close rate in the quarter, I mean, half of your historic average, is there -- I mean selectivity is good. Don't get me wrong. But is there a theme that you guys are looking for, but that maybe isn't coming to market right now or yet that's driving that lower close rate? Or is there some issue that this could go higher because of some particular thing you're looking for? I mean, any color there?

I don't think there's anything specific, right? I think there's definitely certain situations that we just will not lend into without a covenant. That could very clearly be a driver. I think we are a big believer that the unitranche market is supposed to be, for lack of better word, covenant-heavy. That doesn't mean we wouldn't do a cov-light deal, but that needs to be the -- more of the exception than sort of the rule. I think that's one.

And then in markets like this, you do see people looking at sort of a private option or a syndicated option. So that 2% could be a little bit artificially low because we just know we're not going to compete with the syndicated option, and they're looking for public 1 L and maybe a private 2 L, and maybe it's not a business we're prepared to lend to from a second lien perspective, thematically for second -- of bigger companies.

(Operator Instructions) Our next question comes from John Hecht with Jefferies.

I apologize. My phone blew up earlier on me. And then I was -- because my phone blew up, I was off, so I apologize if some of these questions are redundant. But first of all, thanks for the -- thanks for the additional disclosure this quarter. It's super clear, and it makes it kind of easier to assess what's going on. So I appreciate the disclosure.

So first question is, in this quarter, particularly the -- it was very clear there was a lot of focus on first lien relative to second lien in terms of the percentage mix of ads. Any -- it's consistent with your focus on being more conservative. So is that mix what we should expect for the near term based on your interest and pipeline? Or how do we think about the evolution of that over time?

Yes. I think it's a pretty safe assumption, John. I mean, we're trying to build that, the overall portfolio, with that level of conservatism. That said, we are very much prepared to do a second lien in play in that part of the capital structure. I think we're probably just a little bit more selective there both in terms of the quality and the size of a business as well as a pretty, I think, maybe more firm minimum total return target when we sort of put those together. But I think conceptually, you're correct. individual quarters, we could definitely be weighted and have a bit more sort of 2L, but I think your kind of starting point assumption is a fair one.

Okay. And then with the SCJV, once the 2 entities are combined in the second quarter here, does that -- what does that do in terms of the capacity and your ability to continue to grow that out?

Well, I think it does 2 things. I mean our intention will be to also merge the 2 individual sort of JVs together. I think thematically, no different than the combined sort of regular rate BDC balance sheet. I think the largest sort of balance sheets there will give us some more flexibility, right?

I think the team has been able to be a little bit more creative on the liability side of that sort of JV. So I would view it as a positive, albeit it doesn't just sort of magically create additional sort of capacity. But I think some of the flexibility of the financing structures will.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Dan Pietrzak for any further remarks.

Great. Thank you to everyone for taking the time for the call this morning. We look forward to talking with you again in the coming months. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.