FS KKR Capital Corp (FSK) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to FS KKR Capital Corp.'s Fourth 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 Fourth 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 February 28, 2022.

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, 2021. A link to today's webcast and the presentation is available on the Investor Relations section of the company's website under Events and Presentations. Please note that this call is the property of FSK. Any unauthorized rebroadcast of this call in any form is strictly prohibited.

Today's conference call includes forward-looking statements and are subject to risks and uncertainties that could affect FSK or the economy generally. We ask that you refer to FSK's most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements. FSK does not undertake to update its forward-looking statements unless required to do so by law.

In addition, this call will include certain non-GAAP financial measures. For such measures, reconciliations to the most directly comparable GAAP measures can be found in FSK's fourth quarter earnings release that was filed with the SEC on February 28, 2022. 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 good morning, everyone. Welcome to FS KKR Capital Corp.'s Fourth Quarter 2021 Earnings Conference Call. From both an operational and a strategic perspective, 2021 was a momentous year for FSK, and I am proud of what the team accomplished.

During the year, we closed out a transformational merger of 2 publicly traded companies creating a single BDC with over $16 billion in assets. Our investment team originated over $8 billion in new investments in 2021, which is our largest origination year since FS/KKR became the adviser, resulting in meaningful progress on the rotation of legacy assets. Our net asset value increased 8.6% to $27.17 at year-end 2021 as compared to $25.02 at year-end 2020. FSK paid $2.47 per share in dividends in 2021, equating to a 9.2% yield on our average net asset value and above our long-term target yield of 9%.

Finally, we continue to optimize our capital structure by issuing $1.65 billion of unsecured notes during 2021, an attractive blended coupon of 2.6% and closing on 4 amendments to approve the terms of various bilateral financing facilities. These activities contributed to a material decline in our weighted average cost of debt to approximately 3% at December 31, 2021, compared to 3.9% at December 31, 2020.

In terms of fourth quarter results, we're pleased to conclude 2021 with another positive quarter, illustrating the strength and stability of the business. During the fourth quarter, our investment team originated approximately $2.1 billion of new investments. Our GAAP net investment income was $0.66 per share and our adjusted net investment income was $0.65 per share, which was $0.04 above our public guidance of $0.61 per share at the end of the third quarter.

From a liquidity perspective, we ended the quarter with approximately $2.6 billion of available liquidity. Additionally, in January, we again accessed the public debt markets, issuing $500 million of 3.25% unsecured bonds, further enhancing our liquidity and funding profile. As previously announced, late in the third quarter, we began executing on our $100 million share repurchase program. Through February 25, 2022, we have repurchased approximately $19 million of shares under the program. Based on our fourth quarter results, our Board has declared a distribution of $0.63 per share for the first quarter. Steven will speak more about our quarterly dividend and our overall dividend policy later in the call.

Looking forward to 2022, we believe we are well positioned to continue delivering strong results. Specifically, we are pleased with the progress we have made on our net investment income growth opportunities introduced at our Analyst and Investor Day last September. Dan will provide a more detailed discussion on this progress.

In summary, I'm extremely proud of the accomplishments of the team during the past 12 months, and I believe we are well positioned for another positive year as we continue to make meaningful progress on our growth opportunities and strategic initiatives.

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. As we contemplate the state of the economy, our posture is that the current economic environment remains generally constructive for credit. However, like many of you, we continue to assess potential macro risks associated with inflation, rising interest rates, supply chain dynamics and the availability of labor as well as impact from the situation in the Ukraine.

From a portfolio perspective, we have witnessed a return of spending by both businesses and consumers as pent-up demand has started to flow through order pipelines and inventories are beginning to return to more normalized levels. That said, while we are quite pleased with portfolio company performance, inflationary and geopolitical pressures are beginning to temper EBITDA growth rates. In order to mitigate risk, we continue to focus on portfolio diversification, having an origination funnel that is as deep and as broad as possible.

Underwriting long-term sustainable cash flows with a bias towards larger companies, which possess at least some degree of pricing power and investing in other parts of the private credit market, including asset-based finance, which we believe provides quite attractive risk-adjusted returns.

Turning to FSK's investment activity. During the fourth quarter, we originated approximately $2.1 billion of investments. The investments in the quarter were spread across 14 new high-quality companies and 7 industries and included certain non-sponsor and asset-based finance transactions. Of note, the average EBITDA of the corporate names was approximately $100 million and the average LTV was 43%, reflecting our continued focus on the upper end of the middle market as well as the broader acceptance of the private credit product to larger issuers. New investments during the quarter carried a weighted average yield of 7.5%.

In the fourth quarter, approximately 50% of our originations came from opportunities and companies previously invested in by KKR, again, illustrating the power of incumbency and our long-standing existing relationships. Our $2.1 billion of total investments, combined with $900 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $1.2 billion during the quarter.

As Michael mentioned earlier, during our 2021 Analyst and Investor Day, we presented 3 primary opportunities to potentially enhance our net investment income; first is rotating out of certain non-income producing assets into income producing assets; second is operating somewhere closer to the midpoint of our target leverage range; and third is selectively refinancing certain higher cost unsecured debt on our balance sheet.

At our Investor Day, we communicated our view that, in total, over the next 6 quarters, these opportunities, depending on prevailing interest rates and other factors could generate up to $0.15 per quarter of additional net investment income. In addition, we analyzed the remaining legacy portfolio's contribution to net investment income, which also totaled $0.15 per quarter.

With that as a backdrop, I would like to provide a progress report of where we stand after 2 quarters post the Investor Day. First, at the time of the Investor Day, we identified $0.04 per share of potential incremental net investment income growth on a quarterly basis, assuming we redeployed certain income -- certain non-income producing assets into income-producing assets. At the end of the fourth quarter, we are pleased to report that we have achieved roughly half or $0.02 per share of this incremental net investment income growth.

The second opportunity we identified was operating at our target leverage. At our Investor Day, we estimated a potential $0.09 per share of quarterly incremental net investment income growth, of which $0.07 per share was associated with the investment portfolio and $0.02 per share was associated with the expansion of our joint venture.

At that time, FSK's net debt-to-equity ratio was 0.9x and the joint venture's net debt-to-equity ratio was 0.75x. Over the last 2 quarters, we have expanded both our investment portfolio and our joint venture to generate approximately $0.05 per quarter of additional run rate net investment income.

The third opportunity we spoke about related to the right side of the balance sheet. At the time of our Investor Day, we had the opportunity to refinance approximately $1 billion of unsecured notes, which would provide an incremental $0.02 per share of quarterly net investment income. Since the Investor Day, we have issued $1.75 billion of unsecured notes at a blended coupon of 2.7%. By issuing these unsecured notes, we are in a favorable position to refinance the remaining unsecured bonds we highlighted during our Investor Day during the second quarter of this year, and while our interest expense will be elevated by approximately $0.02 per share per quarter until we repay the remaining bonds during the second quarter of this year. We are pleased to have positioned ourselves to achieve the savings in the next few months.

As a result of these activities, as of today, we have achieved approximately $0.05 per share of incremental quarterly run rate adjusted net investment income. Additionally, we are quite pleased to have made substantial progress across each of the 3 areas we identified.

As we move through the balance of 2022, we will continue to update the market on our progress. Before turning the call to Brian, I'd like to take a moment to discuss KKR Credit's business and the growth we've seen in private credit over the last several years as well as the importance of the Credit business to KKR.

Over the last 5 years, KKR Credit has grown from $36 billion in AUM to $187 billion of AUM. And within KKR Credit, Private credit is the fastest-growing segment of the business with AUM of approximately $70 billion. Over the same period of time, we have invested meaningfully in our team across origination, structuring, execution, portfolio maintenance and monitoring. In parallel, we've also grown our infrastructure and have taken measured steps to institutionalize our platform.

From an operational perspective, we leverage the entire firm in everything we do, including origination and underwriting. In summary, Credit comprises more than 1/3 of KKR's total assets under management. The business is important, it's growing, and it remains a large and key focus for KKR.

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

Thanks, Dan. As of December 31, 2021, our investment portfolio had a fair value of $16.1 billion, consisting of 189 portfolio companies. This compares to a fair value of $15.8 billion and 190 portfolio companies as of September 30, 2021. At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 19% of our portfolio, which is in line with the end of the third quarter. We continue to focus on senior secured investments as our portfolio consisted of 60.7% of first lien loans and 71.1% senior secured debt as of December 31.

In addition, our joint venture represented 8.7% of the portfolio, and our asset-based finance investments represented 13.9% of the portfolio, equating to an additional 22.6%, 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 a 8.4% as of December 31, 2021. As a reminder, the weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Including the effects of the investment activity we experienced during the fourth quarter, as of December 31, 2021, approximately 86% of our yielding investment portfolio is now comprised of investments originated either by KKR Credit or FS/KKR Advisor. This compares to 84% at the end of the third quarter of 2021 and 79% at December 31, 2020.

As Dan mentioned earlier, we are proud of the progress we have made growing our run rate net investment income and continuing to rotate our legacy assets. During the fourth quarter, excluding the impact of merger accounting, we experienced net portfolio appreciation of $8 million. The total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was $104 million, and our realized and unrealized depreciation totaled $96 million during the quarter.

As a result, our net asset value increased $0.03 per share in the fourth quarter as compared to the third quarter. And for the full year, we are very pleased that our net asset value increased 8.6%.

In terms of nonaccruals, during the fourth quarter, our largest nonaccrual sequential brands was restructured and removed from nonaccrual status. We also removed Belk and Micronics first lien loans from nonaccrual. These investments totaled $321 million of fair value. These positive moves were partially offset by a handful of smaller investments, which collectively totaled $62 million of fair value and which were placed on nonaccrual during the quarter.

As a result of the fourth quarter's activity, our nonaccruals have declined to approximately 3.9% of our portfolio on a cost basis and 1.9% on a fair value basis as of December 31, 2021, compared to 5.1% on a cost basis and 3.7% on a fair value basis as of September 30, 2021.

In terms of the investment performance metrics for the FS/KKR Advisor, which can be seen on Slide 11 of our earnings presentation on our website. The updated information is summarized as follows: since the FS/KKR Advisor was formed through December 31, 2021, we have originated approximately $17.2 billion of new investments and have experienced 72 basis points of cumulative appreciation. We continue to be pleased with the investment performance our team has been able to deliver, and we believe these data points continue to be the best illustration of the manner in which we have taken measurable steps to rotate the investment portfolio.

Before turning the call to Steven, I'd like to comment on 2 specific assets. First, during the fourth quarter, Global Jet completed a tax-driven recapitalization of a portion of its balance sheet, whereby approximately 80% of the company's existing subordinated notes were exchanged into new 9% PIK preferred stock. The balance of our existing subordinated notes remained outstanding. Both securities were accrued at 9% during the fourth quarter. The preferred stock contains anti-layering provisions. So from a structural perspective, the securities are tied together our effective seniority on the entire position has not changed. Unrelated to the tax-driven transaction, as you can imagine, given the age of this investment, its size and overall complexity, we are actively engaged with the company and our co-investment partners regarding ongoing business strategy and capital structure optimization.

Second, Sound United, a leading innovator of premium high-performance audio products for consumers around the world, announced on February 15 that it had entered into a definitive agreement to be acquired. The transactions are expected to close during the first half of 2022, subject to regulatory approval and other customary closing conditions.

As you may recall, during the depths of COVID, we converted our subordinated debt investment into equity and invested new capital in the company to support a highly strategic acquisition. Our new money was refinanced last year, and we also received a dividend on our equity position. Should the transaction close on its negotiated terms, we expect it will be a positive event for FSK during the second quarter of this year.

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

Thanks, Brian. During this portion of the call, I'll focus on our dividend policy, our financial results, our forward-looking guidance and our balance sheet. In terms of our dividend policy, I'll make a few comments with the goal of clearing of what appears to be a bit of confusion with certain market participants. .

When we instituted our current dividend policy almost 2 years ago, our goal was to provide investors with a 9% yield on our net asset value over a sustained period of time, with the understanding that due to normal fluctuations in a BDC's net asset value on a quarter-to-quarter basis, there would be quarters where our dividend yield would be either above or below an annualized rate of 9% during a specific quarter.

We also told the market that we believed a variable dividend policy would provide the best opportunity to share excess earnings with investors on a real-time basis. Since the announcement of our current dividend policy, we have announced and paid 8 quarterly dividends, all of which have been $0.60 per share or higher.

Pursuant to our policy, the dividend levels have in certain quarters varied to allow us to pay out additional earnings on a real-time basis. To avoid any confusion in the market, we believe it is appropriate for investors to think of $0.60 per share as a base quarterly dividend with additional payments in excess of $0.60 per share as extra or supplemental. So using the fourth quarter as an example, we reported $0.65 per share of adjusted net investment income, and our Board has declared a first quarter 2022 $0.03 per share supplemental dividend in addition to the $0.60 per share base dividend for a total dividend of $0.63 per share. Finally, as many of you have heard before, we note that all future dividends are subject to full discretion of our Board and applicable legal restrictions.

Turning to our financial results for the fourth quarter. Our total investment income increased by $4 million quarter-over-quarter, largely driven by portfolio growth due to the positive investment activity about which Dan and Brian spoke. The primary components of our total investment income are as follows: interest income increased by $8 million quarter-over-quarter. Our fee and dividend income totaled $82 million during the quarter, a decline of $4 million quarter-over-quarter. As we discussed on our last call, our fee income was higher than expected during the third quarter based on the elevated level of originations and repayments we experienced during that quarter.

Our fee and dividend income during the fourth quarter is summarized as follows: $42 million of dividend income from our joint venture, other dividends from various portfolio companies of approximately $14 million and fee income of approximately $26 million. Our interest expense increased by $3 million quarter-over-quarter, and our weighted average cost of debt was 3%. Management fees were $60 million, an increase of $2 million quarter-over-quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter. Incentive fees totaled $19 million in the fourth quarter, which is net of the $15 million incentive fee waiver.

As previously announced, the adviser will waive $90 million of incentive fees spread evenly over 6 quarters, which began in the third quarter of 2021. And just as a reminder, as we discussed on our prior earnings calls, the adviser does not earn an incentive fee on any of the merger-related accretion associated with FSK's acquisition of FSKR.

The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our starting 4Q 2021 net asset value per share of $27.14 was increased by GAAP net investment income of $0.66 per share and was decreased by $0.02 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.62 per share dividend paid during the quarter and was increased by $0.01 per share due to per share repurchases. So some of these activities results in our December 31, 2021, net asset value per share of $27.17.

From a forward-looking guidance perspective, we expect our first quarter 2022 GAAP net investment income to approximate $0.69 per share, and we expect our adjusted net investment income to approximate $0.64 per share.

Detailed first quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $290 million. We expect recurring dividend income associated with our joint venture to approximate $44 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 $61 million. We expect incentive fees net for the $15 million quarterly waiver to approximate $21 million. We expect our interest expense to approximate $76 million, and we expect other G&A expenses to approximate $10 million.

The $0.05 per share difference between our GAAP net investment income and our adjusted net investment income relates to the expected accretion of our investments during the quarter due to merger account. This difference affects our recurring interest income. Other categories of our revenues and expenses are not affected.

In an effort to link the $0.05 per share of quarterly run rate adjusted net investment income, about which Dan spoke, from the time of our Investor Day in September of last year with our first quarter 2020 guidance, the key inputs are as follows: first, we begin with the $0.61 per share of adjusted net investment income we provided at our Investor Day and add $0.05 per share to that number, which equates to a quarterly adjusted net investment income of approximately $0.66 per share. We then lowered that number by $0.01 per share due to the reduction in fee income we are expecting during the first quarter as compared to that guidance, and we lower by another $0.01 per share due to the first quarter has 2 fewer days. These adjustments result in first quarter adjusted net investment income of $0.64 per share and therefore, our first quarter guidance, $0.04 per share.

In terms of the right side of our balance sheet, our gross and net debt to equity levels were 119% and 107%, respectively, as of December 31, 2021. This compares to gross and net debt to equity of 110% and 103%, respectively, at the end of the third quarter. At December 31, our available liquidity was $2.6 billion. At year-end, approximately 51% of our drawn balance sheet and 43% of our committed balance sheet was comprised of unsecured debt, and their overall effective average cost of debt was 3%. Additionally, in January of 2022, we issued $500 million of 3.25% unsecured notes maturing in 2027, further enhancing our balance sheet and liquidity position.

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. I'll close by saying that we are continuing to take the appropriate steps to position us for long-term success, and we are pleased with how our investment portfolio is positioned. We have taken advantage of our scale, experienced management team, the KKR Credit platform and our strong balance sheet to deliver attractive financial results for our shareholders. We have demonstrated our ability to originate and underwrite through various economic backdrops. Additionally, we have defined 3 key opportunities and have been executing on them to generate incremental net investment income, which we believe provides a meaningful line of sight guidance for the coming quarters. FSK's outlook for 2022 and beyond is promising. We look forward to continuing to build on our current progress. And as always, I'd like to thank our investors for their continued support.

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

(Operator Instructions) Your first question comes from John Hecht with Jefferies.

Congratulations on achieving a lot of the goals you set forth at the Analyst Day just a few months back. First question, you guys talked about this, but I'm wondering if you can maybe give a little bit of details if you've done any internal analysis on what inflation does to any particular component of the portfolio. And then in addition to that, maybe distinguish what rising rates would do. And with both doesn't -- yes, thinking like EBITDA coverage ratios and things of that nature.

Yes, John, I'm happy to take that, and maybe we'll start with the inflation sort of part of it. Obviously, we've been focused on that for over the last several quarters. I think we've seen across the portfolio, whether it's wage inflation, whether it's relation to commodities, whether it's supply chain issues, whether it's kind of freight costs. So I think we're seeing that in the portfolio.

I think the good news is we have been focused on companies in the upper end of the mile market. We think we've -- those companies have pricing power that they've been able to push those price increases through. And we've also seen really good, let's just call it, financial performance on the revenue side of things, which is sort of offsetting this, right?

So -- and I think all that being said, and I said this in my prepared comments, we're probably starting to see EBITDA growth rates reduce across the portfolio, but we still think this is a good environment for credit. I think on the rate sort of point, I put that in maybe sort of 2 pieces, right? I think as it relates to the portfolio, I don't think we have a lot of worries in terms of rate increases. Rates have been low for a long time. Almost all these loans have floors. I think our interest coverage across the portfolio is in excess of 2.5x sort of today and even if rates popped to 150, so to 200 basis points, that number is still in excess of 2x.

So I think on the portfolio side, we feel pretty good. Obviously, the investors here could benefit from a floating rate book like the rest of the market, there will be, we'll call some lag, between where we are with the floors and where we are with having sort of floating rates of the debt. So I think -- but over an extended period of time, if rates do go up as much as we do believe the portfolio will benefit from those rising rates.

Okay. That's very helpful. And then just second question, a little bit higher level is, how do you guys think about the mix of the pipeline given the rate in kind of the forward rate environment outlook, what happens to refi activity versus new deal activity? Is there any change in sponsored versus un-sponsored type of activity from your perspective?

Yes. Well, I mean, I mean there's a couple of different points in there. I think from an origination perspective, our goal has just been to make the funnel as big as possible, right? I think we looked at over 1,600 deals last year. That's in excess of 2x where we would have been 3-plus years ago. A lot of that is just how we've grown the team, both on the sponsor and the non-sponsor side.

I think that said, I think we're a little bit mindful that activity could be a bit more muted on the M&A side. Obviously, that's both to do with rates, but what's been going on in Ukraine as well. And I think with what we are expecting in rates, I think if something did come in the door from an origination perspective, that was fixed rate, we probably pushed back pretty hard to convert that into floating, because we'd rather sort of have that sort of tailwind behind us.

But when you put all that together, I think 2021 was a really active year. I think we would have always forecasted '22 to be a bit more muted. That said, the team has been busy thus far this year.

Your next question comes from Bryce Rowe with Hovde.

Was hoping, Dan, to maybe ask you about kind of competition in the market. You highlighted a 7.5% weighted average yield on the new investments in the fourth quarter and kind of was curious how that might have trended over the last couple of months, January and February? And then I know it's early relative to the Russia-Ukraine situation, but any kind of early data points in terms of how markets might have changed relative to that? I know that's a tough one, but just figured I'd ask.

No, that's all fair. I think in terms of competition, I mean, for sure, there's been a fair amount of -- a lot of money raised for private credit. I think that said, where we position ourselves in the upper end of the middle market, while there are definitely players there. I think there's less players there than there are in kind of the smaller side. So while we've seen competition for sure, I think it's a lot of the same players. And I think that competition is somewhat muted by the fact of probably the acceptance that we've seen of the private credit product, more and more borrowers, more and more sponsors want to use it. You've seen, I think, the markets dub that as mega unitranches.

We've seen a fair amount of those. We either led or participated in 13 deals of north of $1 billion. So I think when you have that acceptance coupled with just how much money has been raised for middle market private equity. I think almost the supply of deals is kind of outweighing the demand there. So that's been positive.

That said, like I did mention, I think we would have expected '22 to be a bit slower. Like you had in '21, some deals that were just pushed from COVID or maybe some certain companies that outperformed during COVID, and there was a transaction for the owner of that business to do. I think it's probably a little bit early to your point in terms of what happens on -- with what we're seeing with Russia and Ukraine.

I think on the unitranche product, which is most probably the most prevalent product for where we're playing and where others are playing. You probably saw in 2021 yields or spreads reduced, let's call it, 50 to 75 basis points. I think your regular way deal was on average LIBOR plus, let's say, 600, that range was probably 550 to 650.

I think you've seen that, let's call it, sort of bottom out, I think you'll probably see it trend back the other way as syndicated markets become softer, which I think they probably do on the back of what we're seeing in Europe. You'll see that sort of bleed into the illiquid and private credit market, it just takes a little bit of time.

Your next question comes from Ryan Lynch with KBW.

I just had 2. The first one, as you guys mentioned that Sound United entered an agreement to be bought sometime in the second half -- or first half of 2022. I was just curious, you guys currently have your equity investment market about $77.5 million, I think you guys said there would be upside if they exited at the proposed price, what would that mean for an exit value of Sound United?

Yes. They did sign a deal in the middle of this month. We wanted to make sure we noted it inside our prepared remarks. If you recall, this is a high-end speaker business, we did convert our existing position to equity during the darker days of COVID, we did inject new dollars into the company alongside the sponsor to allow them to do an M&A transaction that we think was fairly accretive. The company has done really well. Their products are great. The deal is signed. It's just subject to customary conditions. But I think in our estimates, we'd expect sort of upside in excess of $50 million on that position in Q1.

Okay. So $50 million upside on one where you have currently launched?

Yes.

Okay. That's helpful. And then the other 1 I had, I noticed that Toorak, it looked like you guys pulled down some of your position in there, the costs were down pretty meaningfully in the quarter. I'm just curious what was going on with a sell down, number one?

And then kind of aside second part of question, to that is just, with the increase in mortgage rates and I guess rates as broadly with that business, have you seen any material slowdown in kind of the velocity of deals and activity? I would just think that the higher rates may slow down kind of the business activities to just an update on that business as well in addition to why that position was computed in the quarter.

Yes. No, happy to do that. I think the position was sold down into the joint venture as we continue to grow the JV, so it didn't leave the system. So there's no other party in that deal. I think it's an important point. It's a good pickup, but it was just sold down to the joint venture. I think the company continues to do extremely well. volumes have, I think, actually picked up a bit during the course of '21. Obviously, their core or main product is bridge lending. A lot of the slow down there was material inside of 2020 on the back of the COVID. There was also a fair amount of delays. I think the company did an excellent job kind of navigating that. So their volumes exceeded budgets in '21, I would expect the same in '22.

Your next question comes from Casey Alexander with Compass Point.

And this may be a little off topic, but I noted that KKR invested in and purchased a different ABL lender during Q1. Does that ABL lender have a place in the BDC? And if so, how does it complement the other ABL investments that BDC has made?

Yes. Are you talking about Merchants?

Yes.

Yes. So just to clarify, Merchants looks from a prospect perspective, -- when I think about ABL, that's usually inventory and receivables, Merchants and another bridge lending sort of platform on the real estate side. That's just an asset class that we continue to like on back to sort of Ryan's question. Merchants is a business that's been around for 50-plus years. We had a really good relationship with the management team they've actually been known to Toorak for some time. So we had a little bit of an angle there. And it was a part of the country from a geographical perspective. We didn't have a lot of exposure. So that does have a place inside of FSK. And you will see that on a go-forward basis.

Your next question comes from Robert Dodd with Raymond James.

Congratulations on the quarter and congratulations on getting Sequential: Brand's restructure back on accrual. A couple of questions. On -- I'm on about credit. On the 5 new nonaccruals, small, right, I mean, $60 million in total. But looking at the names, it looks to me, I think I've recognized 4 of the 5 as having been on previous nonaccrual then restructured back on accrual and now back on nonaccrual. So is there any -- is there anything else -- is there anything that we should watch out for or any concerns about how the workout process maybe has been done in the past that some of these, again, small assets are back on nonaccrual after being restructured once before? Or -- yes, go ahead.

No. And I'm happy to go through that and thanks for the words on Sequential. The team did an excellent job there to generate the results that we did. I think -- and Robert, just to put it in a bigger perspective, I mean, I think the outcome on Sequential and then the outcome that we're seeing on Sound United, quite frankly, is due to the strength of the team that we have. I think on the names that you sort of did mention, there was sort of 5. I think there's probably no common theme about them other than they're all originated kind of pre-2018.

A handful of them did go back on accrual, but there was very specific reasons why we ended up putting them on nonaccrual during this quarter. As an example, NBG Home was performing extremely well on the other side of COVID, supply chain challenges were real there. Hence, we felt it appropriate to go back on nonaccrual.

And then we are looking at potentially sort of exits on Amtek, which is a name, quite frankly, that had a fair amount of green shoots, COVID sort of impacted that pretty materially with sort of time to exit. So some of those were sort of catalysts from there, but nothing really beyond that. And I think you're correct, it's $62 million of fair market value. And I think we're pretty happy with the reduction that we've seen down to 1.9% on fair value from 3.7% quarter-over-quarter.

I appreciate that color. On Global Jet capital, I understand the restructuring for the anti-layering provisions, et cetera. Yet if I -- I mean, it's business jets rather than commercial, which has tended to do quite well. I mean can you give us any color on where those are? I mean a bunch of business jets parked at Moscow Airport, for example, which -- any risk of sanctions or anything to its portfolio? Or is that just not a factor right now?

Yes, it's a good question. I would put it in the not-a-factor camp, right? They're predominantly focused on the U.S. or very developed geographies -- that was not just from a historical risk perspective and view. I mean our entire business here has been focused on places like the U.S. and Western Europe, but they do use the capital markets to finance themselves. That leads you to have a pretty vanilla book from a geographical perspective.

I think you are correct. There have been tailwinds, no pun intended, for the private jet or sort of business jet space. I think we've been quite proud of what the management team has been able to sort of do during this period.

I think the challenge in that business that we've talked about on sort of prior calls is just the competitive nature of the market. You look at their sort of top competitors, most of those are banks or deposit-taking institutions. It's been sort of harder for them to compete from a cost of funds perspective. So that's something we're pretty mindful about.

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

I wanted to gather any thoughts you could provide on the newer nontraded BDC market. The FS side is obviously a pioneer on that and in major private credit platforms are racing to set these up and so forth. So any color on how you view the opportunity for the adviser and the BDC platform?

Yes. I think a couple of things. Like number one, and I think we've said this on some prior calls, we have been focused on our existing platform in FSK. I think we're pretty pleased with what we've been able to accomplish during the course of this year. Michael laid out a bunch of things in his prepared remarks.

I think the things that we've done on Investor -- post Investor Day, those 3 levers been pretty sort of happy with. And I think getting it down to 1 publicly traded name versus where we started at 6, so effectively 3 years ago, that's been the most important thing.

All that said, we obviously are seeing sort of what's out there. It is something that we are considering, I think that we're sort of mindful about, and I think we'll see how we take that forward in the coming months or the coming quarters. I think it is a little bit of a statement, and I think in a good way about how private credit continues to be more expected -- or accepted in the investors of a community because I think you're seeing that on the deal volume perspective, but you're seeing from the investor side as well with, I think there's a continued sort of hunt for yield out there. So on our mind, for sure, but like I said, have been really focused on making sure we're in a good spot on FSK.

Your next question comes from Kenneth Lee with RBC Capital Markets.

Just one on the dividend policy in terms of thinking of the $0.60 per share, the base dividend plus the excess or supplemental dividend. Should we also view this as the -- as FSK achieving additional confidence and visibility into the sustainable earnings power of the portfolio, just given all the range of achievements that they've achieved so far in terms of the growth on the NII side?

Yes. I'll let Steven sort of add to this. I mean, I appreciate the words. I think we have been happy with those -- the start for those 3 levers that we sort of talked about on Investor Day, more to do there, but I think a pretty sort of clear path.

I think we've gotten some very good feedback in the market on the idea of the variable dividend policy. I think we also got some questions though about if the market was going to be perceive it if we were at $0.64 1 quarter, $0.63 the next quarter and sort of reading a fair amount into that.

So I think we spent some time trying to figure out a way to make sure we're crisp and clear on sort of that base in the supplemental that Steven laid out. But I think that was the main focus to make sure just all the market participants are all on the same page.

But Steve, do you have anything to add there?

No, Ken, I appreciate your question. The only thing I would add is when we did come out with the policy about 2 years ago, then one of the things we were mindful of at that time was for BDCs that did have a base and supplemental structure with their dividends at that time. One of the issues that people talked about was that some of the services who track companies dividends, et cetera, would track only the base and not the supplemental. And so that was incumbent in our thinking if we're announcing just a number every quarter then and paying as much as we can with the overage of earnings, and that would put us in a very good spot and the services would track it more accurately.

As Dan alludes to, there were certain people in the market who said, well, going up a little bit -- and so is there a base and we talk to people and say, "Well, yes, I kind of think of it as $0.60." So we just want to be sure people were clear on that. it's really no complicated than that, but I appreciate the kind words. And we do think we're closing that line of sight, if you will, toward the balance of 2022 and pleased with the accomplishments since the Investor Day, certainly.

Great. Very helpful there. And just 1 follow-up, if I may. Just wanted your comments on what you're seeing in terms of current opportunities within the asset-based finance side.

Yes. I mean, happy to take that. I think that continues to be an area that we find quite attractive if you think about where we are sort of macro wise, we're staring at some noise and inflation, sort of rising rates, things that you can get essentially access to collateral, access to early sort of front-loaded sort of cash flows. I think we find those 2 things sort of quite attractive. I think it's a space where scale capital has not been raised. We've got 35 investment professionals focused on that. It's been a core investment theme for us for 5-plus years now.

So we've been excited about what we've done there. I think we'll expect that trend to continue on the forward quarters. I think in terms of inside of FSK, so you do have it. We talked about Merchants a handful of questions ago, things like that, things like Toorak, we found really attractive. We did have a really good result during 2021 with the sale of a single-family rental platform called Home Partners of America. We have sort of pivoted, and one of the new deals in the quarter was another platform that we're backing there called My Community Home.

So I think you couple that with, outside of Global Jet, we've done some other things in the private sort of jet space. We've been active in certain sort of esoteric assets like Music IP. But I think the overall investing in an environment for asset-based finance remains quite attractive. And like I said, not a lot of scaled capital or scaled players, and we think we are. And we think we've got a nice competitive advantage there.

And your next question comes from Melissa Wedel with JPMorgan.

I was looking at the pickup in portfolio yield quarter-over-quarter. And I'm curious how you sort of do the attribution on that increase? Is it -- do you think it was driven by some of that elevated activity and repayments? Or is it sort of attributable to the reduction in nonaccruals? Or what's the split between those?

Yes. No, a fair question. I think the attribution is a little bit of a couple of things, right? It's just the simple sort of summary of certain assets that got repaid versus where some of the new assets came on and then certain of the assets that did move to nonaccrual, some of them were sort of lower-yielding versus some of those assets that went to the back on accrual. So it was just really a handful of those levers changed from the 81 to the 84.

Okay. And could you remind us what the yield on the exited investments was during the quarter? And that's it for me.

Melissa, it's Steve. I think on the exited, it was around 7.9%.

And this concludes our Q&A session. I will turn the call back to Dan Pietrzak for his final remarks.

Well, thank you, everyone, for spending time with us today. We are pleased with our 2021 results and believe we're well positioned going into 2022. If you do have any additional questions, please do not hesitate to reach out. Have a good day.

And with that, ladies and gentlemen, we conclude today's program. Thank you for your participation, and you may now disconnect.