FSK - NYSE

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp. First Quarter 2024 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 2024 Earnings Conference Call. Please note that FS KKR Capital Corp. may be referred to as FSK, The Fund or The Company throughout the call. Today's conference call is being recorded, and an audio replay of the call will be available for 30 days. Replay information is included in a press release that FSK issued yesterday. In addition, FSK has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended March 31, 2024. The 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, reconciliation 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, 2024. Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies. To obtain copies of the company's latest SEC filings, please visit FSK's website. Speaking on today's call will be Michael Forman, Chief Executive Officer and Chairman; Dan Pietrzak, Chief Investment Officer and Co-President; Brian Gerson, Co-President; and Steven Lilly, Chief Financial Officer. Also joining us on the call are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Robert, and good morning, everyone. Thank you all for joining us today for FSK's First Quarter 2024 Earnings Conference Call. FSK had a positive start to the year, consisting of net investment income totaling $0.76 per share and adjusted net investment income totaling $0.73 per share. During the quarter, we also made significant progress with regard to 3 of the investments placed on nonaccrual during the fourth quarter of last year. We experienced increased origination volumes as our investment team originated approximately $1.4 billion of investments. Our net asset value as of the end of the first quarter was $24.32. From a liquidity perspective, we ended the quarter with approximately $4.2 billion of available liquidity. Finally, we delivered an annualized ROE of 10.1% for the quarter. Based on our positive operating results, our Board has declared a second quarter distribution of $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. As we mentioned on our third quarter 2023 earnings call, our Board previously declared a special distribution totaling $0.10 per share. The first $0.05 per share installment was paid this February and the second $0.05 per share installment will be paid later this month. Accounting for the special distribution, our total second quarter distribution will be $0.75 per share. As a result of achieving our operating targets, we believe investors will be able to receive a minimum of $2.90 per share of total distributions in 2024, which equates to an 11.9% yield on our March 31, 2024 net asset value and an annualized yield of approximately 15% based on our recent share price. From a forward-looking perspective, we remain confident in the long-term earnings power of FSK, which enables us to continue paying an attractive distribution to our shareholders. We're encouraged by the increased level of origination activity and the quality of the deal volume during the first quarter. The private credit markets continue to experience strong tailwinds and we believe we're well positioned to take advantage of these opportunities. 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. For the past year, it has been our view that inflation would remain elevated and the higher interest rate environment will last longer than some market observers expected. Our view has largely proven accurate and should our views continue to play out, we believe floating rate asset structures, coupled with investment strategies focused on large defensive portfolio companies and asset-based finance investments directly side to financial and hard assets will remain attractive. Looking ahead, it is our expectation that the economy will experience stickier inflation in the near term, coupled with continued, albeit slowing overall economic growth. As Michael highlighted earlier, there are strong tailwinds to our business as sponsors continue to utilize private credit solutions to finance transactions. Origination activity picked up meaningfully in the first quarter compared to the prior few quarters, and we expect a material increase in private market transaction activity during 2024. Given significant private equity dry powder, combined with pent-up demand from an M&A perspective and the desire for private equity fund LPs to see a higher level of return of capital. As we mentioned on our last call, the macro backdrop created challenges for a few of our portfolio companies during the fourth quarter of last year. Our workout team has been active on these names. And as Brian will discuss, we're pleased to have achieved positive results quickly. And while there's still work to be done, reducing our non-income and nonaccrual investments, we clearly are pleased with the recent progress we've made. Turning to investment activity. During the first quarter, we originated $1.4 billion of new investments. Approximately 75% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments combined with $1.7 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio decrease of $221 million. New originations consisted of approximately 69% in first lien loans, 3% in second lien loans, 3% in other senior secured debt, 1% in subordinated debt and 24% in asset-based finance investments. As we mentioned on our last call, with regard to new investments, we're continuing to see tighter pricing in the upper end of the middle market. The trade-off to the spread compression is still strong documentation and very solid credit profiles. We also continue to be pleased with the quality of the new deals. During the first quarter, our new direct lending investments had a weighted average EBITDA of approximately $243 million, 5.7x leverage through our security and a 47% equity contribution, all with a weighted average coupon of approximately SOFR plus 570 basis points. One example of a new deal in the quarter was our investment in Curia Global, a manufacturer of active pharmaceutical ingredients, who provides contract pharmaceutical development, manufacturing, packaging and analytical services. KKR was the sole lender as we provided $125 million off-balance sheet SPV structured trade receivables facility secured by Curia U.S. receivables. Pricing was 625 basis points with a 2% upfront fee. FSK committed $83 million of the $125 million facility. Additionally, in the first quarter, KKR and its affiliates, along with other partners purchased GreenSky, a point-of-sale finance company from Goldman Sachs as part of its divestiture from consumer-related businesses. GreenSky was founded in 2006 and focuses on offering home improvement financing alternatives for prime borrowers. FSK committed $80 million to the transaction. I also want to highlight a sale of the music IP investment in KKR Chord IP Aggregator that occurred during the first quarter. In connection with this sale, FSK received an $89 million return of capital. FSK Chord IP Aggregator also received a well-collateralized seller note that is expected to be repaid during 2024. And FSK's respective share of the seller note is approximately $30 million. The transaction resulted in a $20 million gain to our net asset value, and we expect to realize an IRR of approximately 18% on our position. When we look at the aggregate trends across our portfolio companies, we've continued to see high single-digit EBITDA growth with modest margin pressure due to the continued inflationary environment. Over the coming quarters, while we expect continued revenue growth from our portfolio companies, we'd expect growth to slow modestly as macro trends could potentially lead to a slowdown in economic growth. The weighted average EBITDA of our portfolio companies was $218 million as of March 31, 2024. Additionally, our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 7% across companies in which we've invested in since April of 2018. And with that, I'll turn the call over to Brian to discuss our portfolio in more detail.

Thanks, Dan. As of March 31, 2024, our investment portfolio had a fair value of $14.2 billion, consisting of 205 portfolio companies. This compares to a fair value of $14.6 billion and 204 portfolio companies as of December 31, 2023. At the end of the first quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our portfolio, which is in line with prior quarters. We continue to focus on senior secured investments as our portfolio consisted of approximately 57% first-lien loans and 65% senior secured debt as of March 31. In addition, our joint venture represented 9.8% of the fair value of our portfolio. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans totaled approximately 66% of our total portfolio and senior secured investments totaled approximately 74% of our portfolio as of March 31. The weighted average yield on occurring debt investments was 12.1% as of March 31, a decrease of 10 basis points compared to 12.2% as of December 31, 2023. The decrease was largely driven by spread compression on new deals. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. From a nonaccrual perspective, as of the end of the first quarter, our non-accruals represented 6.5% of our portfolio on a cost basis and 4.2% of our portfolio on a fair value basis. This compares to 8.9% of our portfolio on a cost basis and 5.5% of our portfolio on a fair value basis as of December 31, 2023. We believe it will also be helpful to provide the market with information based on the assets originated by KKR Credit. As of the end of the first quarter, non-accruals relating to the 88% of our total portfolio, which has been originated by KKR Credit and the FS/KKR Advisor were 2.3% on a cost basis and 1% on a fair value basis. During the first quarter, we placed 1 small investment on nonaccrual with a cost and fair value of $21 million and $19 million, respectively. Additionally, we removed 3 investments from nonaccrual status with the combined cost and fair value of $395 million and $224 million. Wittur was one of the names removed from nonaccrual during the quarter. As we've discussed on prior earnings calls, we placed our second lien loan on nonaccrual during the first quarter of 2023 as it was facing persistent inflation headwinds as well as a slowdown in construction in China. The restructuring resulted in our second lien loan being fully equitized and KKR taking control of the business. The first lien debt of the company was significantly reduced at the operating company, and FSK's existing first lien loan was converted into a EUR 52.2 million other senior secured debt position. FSK and other funds managed by KKR provided new capital to the company to fund operations. This recapitalization resulted in $122.5 million of cost and $31 million of fair value being removed from nonaccrual status. Additionally, KBS completed its full consensual restructuring during the quarter, which resulted in equitization of a portion of the nonaccruing second out loans and FSK and other lenders taking control of the company. FSK received $190.5 million of a new first lien loan, $82.8 million of a new second out first lien loan, $48.3 million of preferred equity and KKR managed funds now own 46% of the company. This restructuring resulted in $197.6 million of cost and $135.3 million of fair value being removed from nonaccrual status. Lastly, our first lien position in Sweeping Corp of America, was restructured during the first quarter, and the company received a $50 million cash injection from the equity sponsor. The first lien debt facility was restructured into a $15.7 million first-lien first-out cash paid term loan, a $28.1 million first-lien first-out PIK tranche, a $8.3 million second lien first out and a $24 million second lien second-out term loan. This restructuring resulted in $75.3 million of cost and $57.2 million of fair value being removed from nonaccrual status. The progress we've achieved with regard to these portfolio companies is an example of the benefits of KKR Credit's investment platform. Our fundamental derisking approach to these credits was evident in our resolution of nonaccruals this quarter. While we prefer sponsors to continue supporting their portfolio companies with additional equity, we've the resources and capabilities to support companies ourselves when necessary. By taking action quickly, we believe we'll significantly improve our chances of receiving a meaningful or even full recovery of our investment capital over time. And with that, I'll turn the call over to Steven to go through our financial results.

Thanks, Brian. Our total investment income decreased by $13 million quarter-over-quarter to $434 million, primarily due to repayments of higher-yielding positions and the impact of investments placed on nonaccrual during the fourth quarter of last year. The primary components of our total investment income during the quarter were as follows: total interest income was $350 million, a decrease of $18 million quarter-over-quarter. Dividend and fee income totaled $84 million, an increase of $5 million quarter-over-quarter. Our total dividend and fee income during the quarter is summarized as follows: $53 million of recurring dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $14 million during the quarter and fee income totaling approximately $17 million during the quarter. Our interest expense totaled $116 million, a decrease of $2 million quarter-over-quarter, and our weighted average cost of debt was 5.4% as of March 31. Management fees totaled $55 million, a decrease of $1 million and incentive fees totaled $43 million, an increase of $2 million quarter-over-quarter. Other expenses totaled $8 million, a decrease of $2 million quarter-over-quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: our ending 4Q 2023 net asset value per share of $24.46 was increased by GAAP net investment income of $0.76 per share, and was decreased by $0.14 per share due to a decrease in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share quarterly distribution and the $0.05 per share special distribution. These activities result in our March 31, 2024 net asset value per share of $24.32. From a forward-looking guidance perspective, we expect second quarter 2024 GAAP net investment income to approximate $0.74 per share, and we expect our adjusted net investment income to approximate $0.71 per share. Detailed second quarter guidance is as follows: our recurring interest income on a GAAP basis is expected to approximate $341 million. We expect recurring dividend income associated with our joint venture to approximate $52 million. We expect other fee and dividend income to approximate $34 million during the second quarter. From an expense standpoint, we expect our management fees to approximate $55 million. We expect incentive fees to approximate $42 million. We expect our interest expense to approximate $114 million, and we expect other G&A expenses to approximate $10 million. As Michael indicated during his remarks, we currently expect our distributions during the year will total at least $2.90 per share comprised of $2.80 per share of quarterly distributions and $0.10 per share of special distributions. Our gross and net debt to equity levels were 117% and 109%, respectively, at March 31, 2024, compared to 120% and 113% at December 31, 2023. As of March 31, our available liquidity was $4.2 billion and approximately 65% of our drawn balance sheet and 44% of our committed balance sheet was comprised of unsecured debt. 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. In closing, we're pleased with the positive start to 2024. As our origination activity picked up, we made significant progress on certain portfolio names, and we continued to fully earn both our base and supplemental distributions on a per share basis. The long-term earnings power of FSK continues to be strong and we've confidence in our ability to continue to award shareholders with these attractive distributions. And with that, operator, we'd like to open the call for questions.

[Operator Instructions] Our first question comes from John Hecht with Jefferies.

First one is you had a very active deployment quarter but then also, it was very active in repayments as well. Dan, I'm wondering kind of your outlook for both sides of that picture. I know you've talked about an increasing deal market over the course of this year because of private equity fund needs and maybe give us an update on your perspective there. And then in addition, what kind of signals should we look for the repayment activity to either stabilize or start to drop? And is that a function of, call it, the liquid loan markets and different levels of competition in the space?

John. Maybe starting with your second question first. I think we probably are expecting, we'll call it, some level of consistent repayments because the syndicated loan market is open. We think that's a good fact because that just speaks to overall market activity. And a lot of these companies have been held by their sponsors for some extended period of time, so they could very well be sold. All that said, I think the incumbency positions do have real value for us and that you've seen that sort of quarter after quarter. I think we were happy to start to see some level of additional sort of pickup in the market. You can see that in our deployment numbers. Some of that is loan extensions. With some of those loan extensions came repricing, so I think we touched on that during the call as well. We do remain pretty confident, though, that there are a -- we'll call it, a bunch of technicals out there that are going to push this M&A market to more fully reopen. There is pressure from the LPs. There is a lot of dry powder on the sidelines. And I do think that valuation mismatch that we saw for most of kind of the second half of '22 and '23 has definitely narrowed. So I think that should make for a productive kind of Q2 or second half of the year.

Okay. And then second question -- that's helpful, by the way. And second question is that you mentioned spreads a little bit under pressure just because of the market dynamics. Where do you think those are going? And what -- where are you finding opportunity in the market, where maybe the spends aren't getting quite as pressured?

Yes. No, it's a very fair question, considering I think what everybody has been seeing out there. Spreads have definitely tightened, I'd say, they've tightened 75 odd basis points in maybe the last 6 months. I think we're -- there is a bit of that market technical out there in my mind, where while even though we're starting to see some level of activity, it's not that normalized level. And for some of the pools of capital, a decent amount of money has been raised that's looking to get deployed. My sense is that does change with the comments I made to your prior question, John. So if the market is kind of living in a probably 500 to 550 now, I think you're going to get back to probably where you were, we'll call it, pre all the rate moves. I think the market was kind of a 550 to 600 market from a spread perspective. And the one point, I'd make, though, is even with some of the repricings, we're getting the benefit of extending call protection. I'd say, we're extending that for 1 to 2 years on average. And we're getting the benefit probably more than -- more times than not of actually charging an upfront fee in conjunction with that. So there's some offset to that, which is helpful. And then just your last point. I mean, we talked about some of the deals that we did in the quarter on the call. Some of the trade receivables stuff, some of the other asset-based finance stuff is providing additional return to the portfolio, which we're happy to see.

Our next call comes from Kenneth Lee with RBC Capital Markets.

Just one on the asset-based finance opportunities there. Wondering if you could just talk about the current outlook for such opportunities and perhaps talk a little bit more about the competitive landscape that you're seeing and whether you're seeing any kind of impact from new entrants into the space?

Sure. Thanks for the question. It is a sector that we're pretty excited about, and we feel like there's a lot of white space there. It is -- kind of it goes a little bit to your comment, it is a very kind of large market, we estimate that market is north of $5 trillion. That makes it bigger than the direct lending market, the syndicated loan market and the high-yield bond market combined. So I think that's a good fact. I think it's in the early days of kind of capital formation. So there's just not a lot of scaled capital players out there. And then there have been some market thematics that have given some pretty good tailwinds to this business. Obviously, there's been certain challenges with the regional banks. There's been banks selling assets. There's been banks committing maybe less capital than they did to certain Fincos, some money needs to come there and fill that void pools of capital like ours that we're managing here with FSK or sort of otherwise are able to sort of do that. So I think all that lines up big market, not a lot of scale capital, some good sort of tailwinds. And I think we really like the up-down of the risk profile and the relative value. So I think we'll continue to be active there.

Got you. Very helpful there. And then one follow-up, if I may. Really appreciate the details around the restructuring involving those 3 portfolio companies. I wonder if you could just talk a little bit more at a high level around the general approach that FSK has around potential derisking, what kind of options are available? And how do you choose the course of action for a particular portfolio companies?

Sure. Happy to do that. Ken, we were pleased to see, we'll call it, progress on these names. I think we're fortunate from a human capital or a staffing perspective to have a very strong restructuring and workout team. It's a dedicated team, a woman, Lauren Krueger runs that team. In addition to running that team, she sits on the investment committee for the regular business, so she's active across the Board. I'd say it's a very bottoms-up approach in anyways, right? But -- and this is the comments that sort of Brian made. I mean, obviously, we'd prefer the sponsor support the companies directly, and we're obviously willing to work with the sponsors to do that. From time to time, that won't be an option and we need to be prepared to take control. We're not afraid to do that. We've got the resources of the entire firm, so they're behind us. But maybe just kind of one example of this is while KBS was, I think, a difficult situation. That consensual deal, I think, will help kind of drive longer-term value. We've brought other resources from the firm, including a handful of KKR advisers to bear to that situation, which will be helpful. So I mean, in some ways, all the options are on the table. We're going to pick what we think is the best for that current situation. But I think it's just important to have the resources that are available. So I think we're happy to see these nonaccruals down quarter-over-quarter. I think we do still remain happy with 88% of the portfolio is that KKR sort of originated piece and the nonaccruals were 2.3% and 1%. So I think it's just an important factor to understand out there.

Dan, one thing I'd add to this, Ken, it's Brian, is that in situations like this, time is not always your friend. So I think our approach to sort of address things quickly and deliberately is really important because sometimes, we never believe in kicking the can down the road because the situations get worse, not better in those circumstances. So we want to drive to a resolution. Clearly, we do prefer the sponsor to support -- continue to support their portfolio companies and they often do. But when they don't, we just don't want to close our eyes and hope for the best. We need to be getting in there and preparing to maximize value for our investors.

Our next question comes from Bryce Rowe with B. Riley.

I want to kind of ditto some of the comments around the information around the restructurings, resolutions, super helpful and certainly pleasantly surprised to see the pace at which you made those happen. Maybe shifting to the capital structure and might have talked about this in past calls. But Steven, maybe you could speak to the opportunity to refinance or at least address some of the maturities you've coming up in '24 and '25, especially in light of how open the debt capital markets are today?

Bryce, thanks for the question. I think from our perspective, we took care of our July maturity last fall when we issued $400 million of unsecured notes. And certainly agree with your point, the markets are open and appear to be active. So that's certainly a good thing. I think we'll evaluate things in the normal course. As we've been a frequent issuer, I think we'll continue to be over time. And certainly getting -- having a very nice start to the year like this quarter, has been a very clean positive quarter for us. So I think we'll take all those things into consideration. But I think the way the capital structure -- the way we've laddered it over the last several years, really derisks us from that standpoint just in terms of being sort of methodical regular issuer on a year-to-year basis.

That's helpful. And then maybe just one follow-up on the restructurings of the resolutions, and obviously took care of some here in the first quarter. But curious, I assume that, that workout group continues to kind of work hard on the other situations. Can you speak to maybe the pace of those potential resolutions and kind of maybe an update on Miami Beach since it was one of the larger nonaccruals that were added in the fourth quarter.

Yes. Bryce, happy to. I mean, obviously, the team will remain busy there, and kind of focus for the resolutions. And I thought the point that Brian made was a very good one. I think we continue to make progress on Miami Beach, probably a little bit more of a complicated situation, complicated sort of industry, probably more to talk about there in the coming quarters. There's a handful of other names that may be are either on the nonaccrual or the non-income-producing list that we're kind of watching M&A markets closely. We're probably preparing for or thinking about kind of '24 or early '25 sort of exits there. And then maybe just one of the larger names that you've, Bryce, is Global Jet. That, I think, is roughly 44% of the nonaccrual balance. I think we've been very happy with what management has done of late. I think they've done a really nice job. That book is at the overall company level on the asset side is north of $2 billion. I don't believe there's one credit issue in that portfolio. They recently accessed the capital markets from a financing perspective. And we'd have received roughly $130-odd million of distributions as that business continues to rightsize its equity base. So I think the team has done a really nice job there working with the management team and the other sort of sponsors to push that business forward. But those are probably some highlights for you, Bryce.

Our next question comes from Casey Alexander with Compass Point Research & Trading.

A couple of questions, Dan. One, in relation to the new underwriting environment, are we seeing repays with higher yields and the new spread compression, should we be thinking about a drag on weighted average yields as the year goes along? And that's just, I think, a general question, but I'm curious how you feel about that.

Casey. I think it's rational to think that, right? I mean, I think this is not just an FSK point, but people's books will get rotated, those rotations could go into lower-yielding assets. But I think that, that lower yield will be driven obviously by the benchmark, but by the spreads as well. I do think, though, there will be some offset to transaction fees. That will sort of benefit kind of earnings and maybe sort of smooth that out a little bit, there's been an extraordinary light amount of volume for probably the past 8 quarters. So I think you can probably go back and look kind of across the industry at that. So I think that's probably a bit of a balance. And then I think we come back to what Bryce's question was, we're working pretty hard on some of these nonaccrual or non-income-producing names that rotating that into income producing will be quite beneficial to the bottom line. And we're still a little bit -- we're within our target leverage range, we still got a little bit of room there, which should help.

Secondly, on the ABL side, KKR has, I believe, set up a real effort to attack ABLs not just withstanding the BDC. So that's clearly a focus of KKR. So what percentage of the portfolio would you be willing to take ABLs to in the BDC? And where do origination yields there sit relative to direct origination private credit? And is that also a way to potentially offset some drag on weighted average yields?

Yes. No, thanks for that, Casey. We do have a real effort there. We've north of 50 people dedicated to that space. We've north of $50 billion of total AUM in that space. I mean, just a nomenclature point, we call it asset-based finance more focused on portfolios of financial and hard assets and the market historically views the ABLs as just receivables only. But it is a broad effort for us. We do, as I mentioned, like the downside protection, but specifically, Casey, to your point, we're probably seeing deals anywhere kind of 100 basis points to kind of 400 basis points wide of your regular way direct lending deal. I think we're kind of within the range that we've talked about historically for asset-based finance inside the -- of FSK. We obviously have the benefit of our joint venture to kind of help there. But, I think, you should continue to expect us to be active there, rotating into new deals and some of these other deals will continue to self-liquidate or self amortize.

Casey, it's Brian. The other constraint is just non-EPC. ABS investments are usually non-EPC and we've to stay within the 30% bucket, and we also have the JV. So that's a bit of a constraint. But as Dan mentioned, we can also put ABF into the JV to basically increase our buying power on non-EPC.

Our next question comes from Melissa Wedel of JPMorgan.

I wanted to touch on -- I think it's really a follow-up to the first question, about sort of investment activity levels. Obviously, with some elevated repayment activity in the first quarter, we saw leverage in the portfolio come down a bit. Given it's sort of middle of the target range right now, I'm curious how do you feel about that level of sort of portfolio leverage, especially in the context of your comments about expecting portfolio company growth on the revenue side and I think on the EBITDA side as well to start to decelerate in the back half of the year?

Yes. Thanks, Melissa, I think we're pretty comfortable with where we sit right now, right? We've historically given that kind of 1 to 1.25x range with probably the midpoint of or sort of the target of kind of the 1.15x. So maybe slightly sort of below that. I think we like how much available liquidity we've. I think we like the maturity ladder we've on the liability side. I think we're prepared to kind of operate within that range, considering we've that level of dry powder. I think on to your other comment, I mean, I think the overall market has taken the view maybe almost too aggressively that, that sort of the hard landing concept is removed from the equation and we're in this more kind of soft landing perspective. I think we're expecting some slowdown, though at the consumer side more sort of broadly, which will impact some of the names here and maybe reduce that kind of year-on-year EBITDA growth. It is our job for these companies to be a little bit glass half empty. But we got a little bit of room to work on the leverage side, and we're in a good liquidity position. So we feel good about that.

Okay. I appreciate that. And then following up on the funding, there are a decent number of upcoming maturities. And you guys have done -- have always approached your own security issuances, is incredibly laddered and well diversified. But there are some maturities coming up in '24 and '25. Given the rate environment and given the spread environment, how are you thinking about sort of funding those upcoming maturities? And are you -- what's the appetite for further diversification versus sort of using the available capacity on the revolver?

No, no worries. And I think Steven may have touched on some of this. So Steven, if there's something to add here, please do. But we did do that deal in November essentially pre-funding the upcoming maturity in the summer. Obviously, we've got the $4.2 billion of available liquidity. We've got, I think, 65% of our balance sheet is funded today from unsecured. I think you should expect us to be a very active issuer there. And do that with some level of consistency, but also do it in a bit on an opportunistic basis when markets are open. And then I think we'll also look at other tools like CLOs or sort of otherwise to make sure we're kind of fully diversified from a liability perspective. But Steven, did I -- anything you want to add there?

I think, you covered it well.

Our next question comes from Robert Dodd with Raymond James.

On the forward outlook in terms of economic risk and macro risk, how much of that concern stems from overall demand and revenue versus margins, right? But we're hearing mixed messages from some BDCs that well, generally, BDCs, where a lot of software are seeing margins go up because software companies are flashing sales expense. But on your companies, how much of the kind of the cost-cutting or margin management tools of already been expanded, so to speak, over the last several years because Obviously, it's been a theme for a lot of companies for many years? And are they running out of tools on that front, do you think?

Rob. It's a fair question. I mean, our biggest sector exposure is sort of software, right? We're just focused on the larger sort of software names that we're more EBITDA focused than recurring revenue sort of structures. I think we've seen out there that the ability to just blindly push through price is probably kind of abated and it will be more challenging, just to do that. So I think that is one point and that almost in line with, I think, with what your thoughts are there. I think where we've seen probably the most or the most challenge in certain situations is when a company -- when their kind of expense line is heavily driven by wages, right? Because the wage inflation remains a real sort of point out there. When you couple that with just the higher rate environment. And as we've talked about for multiple quarters now, we expect rates to remain higher for longer. So those are probably a little bit more of the things we do have our eye on. So I think we're mindful about that sort of revenue piece. I think that's partly why we're talking about expecting to see just kind of slower sort of EBITDA growth in the coming quarters.

Got it. And then just you look -- I mean, activity levels in the second half of the year, obviously, also I think lots of expectation to the point you outlined, right, I mean, LPs want their money back. How is -- in your opinion is the bid ask between buyers and sellers on the piece -- is that actually beginning to close? Or has that obviously been a factor of why activity levels have remained low? And is -- do you think that's going to close sufficiently, like this year for there to be a pickup -- a material pickup in activity in the second half? Or are people still playing chicken on that front?

No. I think the short answer is yes. I think it has closed meaningfully or will kind of close enough to get the transaction levels up. I do think you had a bunch of, let's call it, different factors in play. I think we -- even going back to last summer, we saw a little bit more activity, a little bit more books coming around or sort of chatter about deals than the events in Israel and the Middle East have happened in October, that sort of, we'll call it, put most things on hold. And then the market was forecasting the 6 rate cuts coming into the year, I think people wanted to hold assets with the view that in a lower rate environment, they'd sort of get better prices. But I think there's a decent consensus out there that rates are going to be higher for longer. So that's kind of off the table. And I think there's also a decent consensus that while there might be certain bumps in the road or sort of challenges, this -- as I said, the conversation around hard landing off the table, it's all pretty muted in terms of sort of, I think, challenges in people's mind, albeit I think we're a little bit more cautious on that. So I think all that is coming together. And then, Robert, you said it, I mean, people are looking for capital back on the LP side and on the other side, there's a lot of dry power.

Our next question is from Erik

I wanted to start first with a question regarding the pipeline. I'm curious if you could provide any commentary in terms of how that looks today in terms of the mix of new investments versus add-on opportunities as well as if there are any particular industry segments that you're finding that are either kind of more active or more attractive from your perspective?

I'd say it's almost in line with what you'd probably expect, right? We've been probably overweighed the add-on and the incumbency. So I think you're always going to see a large chunk of that considering the size of the platform, but some of that will be regular way kind of new deals. So I think it's pretty balanced. I think, the pipeline is decent right now. I think, the level of deals that I see being screened were making their way to investment committee is definitely up more quarter-on-quarter or up more than maybe what we saw last year. I still think it will take a little while to play out, Erik, some of the conversations here are just people gearing up for this. That means, it's a multiple-month process and a multiple month kind of close, but constructive.

Yes. I mean the one thing I'd add, Erik, is that just because the company is being sold doesn't necessarily mean it's going to go out of our portfolio. We're always in active dialogue with sponsors looking to sell companies about providing financing to the new buyer. And because we've the incumbency position that gives us a bit of an advantage over some of our competitors. So clearly, that's a focus for us.

That's helpful. And the second question for me is just interesting to notice on Slide 10, median interest coverage for your companies has been pretty stable for about a year and actually ticked up a little bit in 1Q, which makes sense, given that base rates have been pretty stable. And given the fact that you said you've kind of seen high single-digit EBITDA growth over the past year. So I guess if we assume that rates stay here or even potentially come down and you continue to see some EBITDA growth, is it a fair assumption that we've kind of seen the bottom of kind of a trough for this particular metric for this cycle?

Yes, that would be our view in terms of the trough. Now that, that view is a little bit driven off the fact of -- well, we don't believe that rates are necessarily coming down anytime soon. I don't think they're going up either, right? So it's probably more leaning to -- over the next several years, kind of these rate reductions. You did see that kind of uptick a bit. I think to be fair, it probably wasn't all or the entire sort of 0.1, I think some of it may have just been out of the rounding there, but it definitely improved kind of quarter-on-quarter.

Our next question comes from Maxwell Fritscher of Truist Securities.

I'm calling in for Mark Hughes. Just a broader question about the economy. But -- is there any sector in particular that you're seeing cracks in or staying away from? Or are there any credit issues -- and this is industry-wide, not just in your portfolio, are these credit issues more idiosyncratic?

Yes. And I think we've talked about this on some of the prior calls. I mean, I think we've tried to build the portfolio staying away from the secular decliners, right? So that's been sort of positive out of the gate. But -- that has -- those, I think, in many ways, would continue to be challenged. I think we've seen businesses in the health care space, probably be a little bit more challenged. So I think some of that has -- had to do with -- and this is an industry point, not just anything with us. Some of it has to do with the revenue side and how people get reimbursed. We've seen some of the discretionary spend, new names kind of struggle, some of these roll-ups are sort of struggling. So health care, which historically has been viewed as a defensive asset class has probably been a little bit more mixed. And I think that probably continues for sort of some time. But Brian, anything else you want to add?

I mean, look, I think you said it pretty well. I mean, we've been focusing on industries that we think are more defensive like software, we like consumer-driven health care, we like consumer. We like professional services, business services. Those have all been pretty resilient. Energy, retail, consumer products, we've just tended to stay away from. Look, I think we're continuing to see pretty solid earnings growth across the book as evidenced by that 7% number that Dan focused, but that's clearly an average. So I'd tell you that there's nothing right now where we could say thematically beyond what Dan said, there are certain industries that are just in -- having real trouble. It's been somewhat specific -- situation specific with some of our nonaccruals and problem credits. And I think we just need to continue to be cautious about the overall economy and whether we've a soft landing or not.

Got it. And then switching gears to the second lien investments. Are you still seeing good opportunities there? Obviously, lenders are focusing or emphasizing their first lien, which you do have that -- the majority of your portfolio. So that's understandable. But any insight on the second lien, what you're seeing there in terms of spread yields, et cetera, and how you're looking at this?

Yes. And Mark, I'll probably think about it a little bit -- or Max, sorry, I'll probably think about it a little bit broader as kind of junior debt as a whole category, right, thinking about second lien or things that might be more sort of mezz like. Obviously, activity has been kind of muted there for several years because that is generally driven by a more active M&A market. We've seen a handful of deals get done of late, they've been probably top decile businesses. So there have been second lien in those structures. Those structures were actually pretty darn tight from a spread perspective. Our sense is as the M&A volumes do pick up, there's going to be more opportunity in that junior debt space. I think that will be an interesting opportunity as well. Considering that business, I think we view this a little bit more cyclical. So the time to kind of get in there is when the M&A picks back up and the financing markets are going to need someone to kind of help fill that void, and those could be pretty attractive structures from a yield or a total return perspective. Now all that being said, I think we're quite mindful about portfolio construction here, and making sure we've got a fair balance of kind of really leading with, which is the focus of this is that kind of first lien or unitranche senior secured risk.

And we've a pretty high bar for junior capital. We talk about the weighted average EBITDA of the portfolio being, call it, [ P20 ], give or take. If you look at our junior debt investments, on average, EBITDA is probably twice that. So when we do go junior, they tend to be in much larger businesses. They tend to be businesses where sponsors have written $1 billion-plus checks or multiple billion-dollar checks. That's typically driven by new deal activity, as Dan mentioned.

Showing no further questions, I'd like to turn it back over to Dan Pietrzak for our closing remarks.

Thank you all for joining the call today. We're always available for any follow-up points that you might have, and we look forward to talking with you again next quarter. Have a good day.