FSK - NYSE

Good morning, ladies and gentlemen. Welcome to the FS KKR Capital Corp.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, Anna Kleinhenn, Head of Investor Relations, will proceed with the introduction. Ms. Kleinhenn, you may begin.

Thank you. Good morning, and welcome to FS KKR Capital Corp.'s Third Quarter 2025 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 September 30, 2025. A link to today's webcast and the presentation is available on the For Investors section of the company's website under Events & 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 third quarter earnings release that was filed with the SEC on November 5, 2025. 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 President; and Steven Lilly, Chief Financial Officer. Also joining us on the call today are Co-Chief Operating Officers, Drew O'Toole and Ryan Wilson. I'll now turn the call over to Michael.

Thank you, Anna, and good morning, everyone. Thank you all for joining FSK's Third Quarter 2025 Earnings Conference Call. I'd like to start today's call with a few market observations. We believe the BDC industry in general and FSK in particular, are resilient. The BDC industry's ability to navigate historical periods of volatility, whether due to interest rate adjustments, asset prices, inflationary pressures or spread compression has been strong. The primary reason so many BDCs successfully navigated prior period of volatility has been the lowly levered capital structures with which many companies, including FSK operate. When interest rates began moving up just a few years ago in response to inflationary pressures, many industry observers became overwhelmingly negative in their predictions for BDCs. Not only did the vast majority of BDC portfolio companies navigate this period of adjustment, BDC operators did as well, with many of us delivering sustained quarters of higher levels of net investment income and higher dividends for shareholders. As interest rates have started declining, many industry observers once again, are predicting difficult times ahead for BDCs. At its heart, the BDC industry is a spread lending business built on the back of diversified pools of assets and strong balance sheets. So while we expect the Federal Reserve will continue to reduce rates over the coming quarters, that reduction in rates will be immediately helpful to portfolio companies from an interest burden standpoint and likely will generate additional M&A activity. We also believe that while net investment income levels necessarily will decline from the recent highs, FSK in particular, and the BDC industry in general, are well positioned to continue providing investors with an attractive current income stream as compared to the risk-free rate. And with that, I'd like to turn to a quick overview of FSK's quarterly results and a few comments on our forward dividend strategy, which will begin in the first quarter of 2026. During the third quarter, FSK generated net investment income, and adjusted net investment income of $0.57 per share as compared to our public guidance of approximately $0.58 and $0.57 per share, respectively. Additionally, our net asset value increased to $21.99, compared to $21.93 as of the end of the second quarter. On October 8, 2025, we announced that our Board declared a fourth quarter distribution totaling $0.70 per share, consisting of our base distribution of $0.64 per share and a supplemental distribution of $0.06 per share. In contemplating our forward dividend strategy, we considered the prevailing interest rate environment, the overall investing environment and future unsecured debt maturities. Additional considerations included annualized BDC dividend yields, on net asset values over various market cycles and our projected level of spillover income as of December 31 of this year. Finally, we actively listen to investors in terms of their views of our historical base plus supplemental dividend policy, as we were one of the first BDCs to implement such a policy some years ago. The culmination of this process yields the following conclusions. First, investors appreciate the base plus supplemental strategy as a method of receiving additional dividend income on a real-time basis. Next, we believe FSK's annualized dividend yield expressed as a percentage of our net asset value, we'll continue to be very competitive with our peer group, and we'll have the ability to vary over time as our net investment income varies, thereby maximizing current income to our investors. For 2026, we expect FSK's total distribution to equate to an annualized yield on our net asset value of approximately 10%. Consistent with the BDC industry's long-term yield of between 9% and 10%. We currently expect our quarterly distribution will be comprised of a base distribution of approximately $0.45 per share, and will be supplemented by our quarterly net investment income over and above this level. During the first quarter of 2026, we currently expect our total distribution will approximate $0.55 per share based on future interest rates, refinancing activities on the right side of the balance sheet and overall investment yields. We expect our total quarterly distribution will vary over time. And with that, I'll turn the call over to Dan.

Thanks, Michael. From a macro standpoint, we have seen encouraging signs in the broader market, which point to continued growth in capital markets activity. Momentum in M&A is building, and we are seeing that strength reflected in our own pipeline as the number of deals we evaluated in the third quarter increased by approximately 30% year-over-year. While some economic indicators have shown pockets of weakness, the overall labor market continues to remain healthy, supported by solid corporate earnings. Additionally, higher FICO score consumers continue to spend at accelerated levels. Looking ahead, if the Fed can engineer a soft landing and tariff concerns can be put behind us, we believe economic conditions could continue to improve. Separately, we would note there has been a significant amount of attention to certain specific defaults in the broader marketplace. We believe those are not private credit matters and are very specific situation and names. We would also note we have no exposure to First Brands or Tricolor. Trade tensions and the recent government shutdown continue to heighten our awareness around U.S. government and tariff-related exposures. Our portfolio has low single-digit exposure to U.S. government-related borrowers. And while there could be timing effects on payments or short-term liquidity constraints, those risks have yet to materialize. Additionally, ongoing tariff discussions continue to drive market volatility. But as we have stated in the past, our exposure to tariff-impacted businesses remains in the low to mid-single digits. Both topics are on our watch list, though, and are being closely monitored. We are seeing attractive opportunities in the origination market with a growing number of opportunities coming from new issuers, which further reflects the steady pickup in M&A activity. Our focus remains on U.S.-based direct lending and top of the capital structure risk. In addition, asset-based finance investments remain an important and complementary part of the portfolio, providing incremental yield while outperforming traditional corporate credit from a default perspective. During the quarter, we had two realizations within our ABF portfolio. Our investment in Callodine Commercial Finance was repaid in full ahead of its 2026 maturity. Callodine is an asset-based lending platform for capital-intensive businesses with a focus on retail and industrial companies. We initially made this investment in November of 2020 and the repayment resulted in a 13.3% IRR. Additionally, our investment in Weber was successfully exited in connection with the company's acquisition of Blackstone products. Weber is a manufacturer and distributor of outdoor barbecues and grill accessories. We initially invested in Weber in December of 2023 via an accounts receivable financing facility. The exit resulted in a 16.8% IRR. Turning to our investment activity. During the third quarter, we originated approximately $1.1 billion of new investments. Approximately 60% 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 billion of net sales and repayments, when factoring in sales to our joint venture, equated to a net portfolio increase of $109 million. New originations consisted of approximately 65% in first lien loans, 7% in subordinated debt, 15% in asset-based finance investments, 12% in capital calls to the joint venture, and 1% in other or equity investments. Our new direct lending commitments had a weighted average EBITDA of approximately $162 million, 6.2 turns of leverage through our security and a weighted average coupon of approximately SOFR plus 472 basis points. We continue to focus on upper middle market companies with EBITDA in the $50 million to $150 million range across a diverse set of industries and sectors. As of September 30, the weighted average EBITDA of our portfolio companies was $240 million, and the median EBITDA was $115 million. Our portfolio companies reported a weighted average year-on-year EBITDA growth rate of approximately 4% across companies in which we have invested in since April of 2018. Interest coverage levels remain healthy, with median third quarter coverage at 1.8x. Our governance and workout team has made significant progress on certain investments, which we discussed during our second quarter earnings call in August. Specific company updates are as follows. We completed the restructuring of Production Resource Group, or PRG in October, resulting in a market aligned capital structure, and we and our BDC co-lender will exercise effective control of the company. And while pricing and industry pressure remains, we believe the company will be in a much better position to create value going forward. Restructuring efforts associated with 48forty are progressing. Based upon progress to date, we anticipate being in a position to discuss the finalization of the restructuring on our fourth quarter earnings call. KBS continues to perform in line with plan, and we are pleased with the workout team's efforts here, as we were able to effectuate change and stabilize the business quite quickly, and there continues to be a strategic interest in KBS. During the third quarter, no investments were added to nonaccrual status and one company was removed from nonaccrual status. Our first lien investment in New Era Technology was restructured during the quarter into a new accruing first lien loan and revolver. And we also received new preferred stock and common equity. The restructuring resulted in $29 million of cost and $18 million of fair value being removed from nonaccrual status. As of the end of the third quarter, nonaccruals represented 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis. This compares to 5.3% of our portfolio on a cost basis and 3% of our portfolio on a fair value basis as of June 30. Pro forma for the PRG restructuring, which closed subsequent to quarter end, our nonaccrual rate would be 3.6% on a cost basis and 1.9% on a fair value basis, assuming the remainder of the portfolio is unchanged. We also believe it is helpful to provide the market with information based upon FSK's assets originated by KKR Credit. Nonaccruals relating to the 90% of the portfolio, which has been originated by KKR Credit and the FS/KKR Advisor, were 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter. This compares to 3.8% on a cost basis and 2% on a fair value basis as of the end of the second quarter. With that, I'll turn the call over to Steven.

Thanks, Dan. As of September 30, FSK's investment portfolio had a fair value of $13.4 billion, consisting of 224 portfolio companies. At the end of the third quarter, our 10 largest portfolio companies represented approximately 20% of the fair value of our investment portfolio, compared to 19% as of the end of the second quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 58% first lien loans, and 63% senior secured debt as of September 30. In addition, our joint venture represented approximately 13% 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 and first lien loans total approximately 68% of our total portfolio, and senior secured investments totaled approximately 73% of our portfolio as of September 30. The weighted average yield on accruing debt investments was 10.5% as of September 30, a decrease of 10 basis points compared to 10.6% as of June 30. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger with FSKR. Turning to our quarterly operating results. Our total investment income was $373 million for the third quarter, a decrease of $25 million compared to the second quarter. The primary components of our total investment income during the third quarter were as follows: total interest income was $285 million, representing a decrease of $13 million quarter-over-quarter. The decline in interest income was driven by lower base rates, the repayment of higher-yielding investments and the flow-through of assets previously placed on nonaccrual status during the second quarter. Dividend and fee income totaled $88 million, a decrease of $12 million quarter-over-quarter. As we noted on our second quarter earnings call, we anticipated a decline in third quarter dividend income, primarily due to the timing of distributions from certain ABF investments, which were paid during the second quarter. Our total dividend and fee income is summarized as follows: $59 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $25 million during the quarter, and fee income totaling approximately $4 million during the quarter. The decline in fee income quarter-over-quarter primarily was due to lower upfront fees associated with the mix of new investments during the quarter, lower prepayment fees due to the age of investments that repaid during the quarter and fewer amendments during the third quarter. Our total expenses were $210 million during the third quarter, a decrease of $15 million compared to the second quarter. The change in total expenses primarily was driven by a decrease in interest expense due to lower leverage utilization during the quarter. The primary components of our total expenses were as follows: our interest expense totaled $116 million, a decrease of $9 million quarter-over-quarter. Our weighted average cost of debt was 5.3% as of September 30. Management fees totaled $51 million, a decrease of $2 million quarter-over-quarter. Incentive fees totaled $33 million, a decrease of $3 million quarter-over-quarter. Other expenses totaled $10 million, a decrease of $1 million quarter-over-quarter. Lastly, we incurred $4 million of excise tax during the third quarter related to the finalization of 2024 tax items related to certain international and ABF investments. The detailed bridge on our net asset value per share on a quarter-over-quarter basis is as follows: our ending 2Q 2025 net asset value per share of $21.93 was increased by GAAP net investment income of $0.57 per share, and was increased by $0.19 per share due to an increase in the overall value of our investment portfolio. Our net asset value per share was reduced by our $0.70 per share total quarterly distribution paid during the quarter. The sum of these activities results in our September 30, 2025, net asset value per share of $21.99. From a forward-looking guidance perspective, we expect fourth quarter 2025 GAAP net investment income to approximate $0.51 per share and we expect our adjusted net investment income to approximate $0.56 per share. The detailed components of our fourth quarter guidance are as follows: our recurring interest income on a GAAP basis is expected to approximate $270 million. We expect recurring dividend income associated with our joint venture to approximate $57 million. We expect fee and other dividend income to approximate $33 million. From an expense standpoint, we expect our management fees to approximate $50 million. We expect incentive fees to approximate $29 million. We expect our interest expense to approximate $109 million. And we expect other G&A expenses to approximate $9 million. During the fourth quarter, we expect our excise taxes will approximate $20 million. We expect the net effect of excise taxes to be partially offset by the accretion of our investments due to merger accounting. Turning to our capital structure. In September, we issued $400 million of 6.125% unsecured notes due 2031, which subsequently were swapped the floating rate via an interest rate swap agreement at a weighted average spread of SOFR plus 2.748%. Proceeds were used to repay a portion of the outstanding debt on our revolver. As of September 30, our gross and net debt to equity levels were 120% and 116%, respectively, compared to 131% and 120% at June 30. Our leverage remains within our target leverage range of 1 to 1.25x net debt to equity. At the end of the third quarter, our available liquidity was $3.7 billion and approximately 64% 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. We are pleased with our third quarter results, and we're also pleased to announce our 2026 distribution strategy, which we expect will result in an annualized yield of approximately 10% on our net asset value. From a forward-looking perspective, the pickup in M&A activity is positive to see as we believe our investment platform is particularly well suited to capitalize on this increased activity. On behalf of the team, we thank you all for joining the call and for your continued support. Operator, we'd like to open the call for questions.

[Operator Instructions] Our first question comes from Finian O'Shea of Wells Fargo Securities.

So it looks like there was some improvement on a few of the legacy names, equity, which is, of course, very welcome. Question as it relates to that is to what extent is this indicative of you and the team advancing toward exiting these investments?

Fin, fair question. I think we have been pretty happy with the work that our workout and governance team has done across these names. We've talked about several of them on kind of calls in the past. I think some of them are complicated because they're effectively minority equity investments, where we don't have sort of perfect governance or control. I think that said -- we've talked about this in the past on some of the names like Global Jet, we've seen a really good job by the management team there, a real evolution of that balance sheet and kind of their own sort of ROE figures. I think we talked about the PRG restructuring, which is positive. JWA has got a bit of a benefit from tariffs. So we are very, very focused on looking to monetize there for a bunch of different reasons, including being able to redeploy into more interest-bearing [indiscernible] assets, but progress.

Okay. That's helpful. And Steven, a follow-up, I'm sure a question we all have on the dividend is where -- what sort of progress you made towards your targets on spillover and what that might mean for, I guess, as an input to your formula on the variable, but also potential specials this year, next year or whenever?

Yes. Thanks, Fin. We certainly have made progress during 2025, which was our goal. I think we'll end the year probably cleaning out a little north of $100 million of spillover. Obviously, with our partnership investments, blockers that exist to and international partnerships, there is just the way those flow through in terms of our obligation, tax obligation, which does impact spillover. There's a build on the other side. So I think to the heart of your question, if we end the year when we go through the estimates at that time period, where with the reduction in the dividend going into 2026, if we have a balance there, then I think our expectation would be to make a onetime distribution or so to shareholders something first half of next year that would get us to the remaining part of our target balance of plus or minus 2 quarters' worth of dividends on an ongoing basis. And then also incumbent in the dividend strategy is that we -- I think the market -- you and the market should expect us to pay on a full annual basis, 100% of our GAAP net investment income. It may not hit that every quarter given that we pay excise tax in the fourth quarter. But for the full year, we would be paying basically 100% of NII.

And will you have a -- sorry to sneak in a bonus question here. Like in the out years, if you look at the SOFR curve, if you might not be that much above the $0.45. Of course, we'll see, but let's just go with it. Are you going to want this sort of degree of headroom like given your sort of commitment to the variable nature? Like if your NOI goes to $0.45, are we going to see $0.35 plus $0.10, or something like that?

Yes, I'll start, and Steven can add to it and Fin, we charge extra for bonus questions. I think we're probably not in the business of trying to give out multiyear sort of forward guidance because it's quite hard, right? It's a question of where did the SOFR go? I think you see that, I think not just us, but probably the whole industry has got a lower fee income number where we sit this quarter. So probably a bunch of variables that go into that. We did take into account what I think you're talking about, right, the forward curve. We know we have the benefit of some cheaper liabilities that were issued in a different rate environment that will get refinanced. To kind of think about that base and then being mindful of paying out the supplemental ahead of that. But I think we were pretty deliberate in coming up with that $0.45 estimate.

Our next question comes from Arren Cyganovich at Truist.

With respect to the PRG restructuring in October, can you provide any details in terms of what you received in return and was it close to the mark, et cetera?

Yes. I mean it's probably just in a quite simple matter. It was a fairly messy capital structure because it had gone through a bunch of changes over the years. And that messy capital structure was difficult, I think, to allow the company to go forward, not just from a financial perspective, but a governance perspective. So I think that was the real driver.

I'm sorry. But what did you receive in exchange?

Well, from a value perspective, we were effectively in the same spot. From a governance perspective, though, I think we're sort of significantly different, because we are effectively already equity, but there was a bunch of other tranches of equity in there that complicated the matter. That's my point about cleaning it.

Okay. That makes sense. And then the $1 billion that's coming due in January, the unsecured debt, you did an issuance recently. Was that kind of partial payment ahead of that? And what's the I mean, obviously, you didn't pay it down, but kind of a thought to use that cash kind of towards that? And then are you expecting to use the credit facilities to initially pay that and then kind of hit the market whenever you see it as attractive?

Yes. I mean I think that's pretty well said. I think the team has done a good job about being mindful about the liability side of the balance sheet, right? We're consistently extending the revolver to make sure we've got -- roughly always going back to that 5 years. We want to access and continue to access the unsecured bond market consistently. Clearly, the $400 million was done in advance of that, and we've got $3.7 billion of available liquidity. So I think we -- the liability side of these balance sheet are very important. We spend a lot of time thinking about that. But I think with that available liquidity, we feel in a good spot.

Our next question comes from Ethan Kaye at Lucid Capital Markets.

I wanted to get your thoughts on kind of how -- or if you guys are thinking about share buybacks. You indicated kind of intention to pay out 100% of NII with this new dividend framework and there's obviously many factors that kind of come into play when making these capital allocation decisions, but the stock is still trading at a meaningful discount. So wondering whether it's something you've considered or if you're kind of more comfortable returning all of NII to shareholders through the dividend?

Yes. I think we have been quite active over the years on the share buyback sort of side. I think -- I don't look at the team here, but it's probably roughly $500 million over sort of those years. I think it's something that we do obviously talk about with the Board, we think about as a management team. I think you have to be mindful about things on the other side, right? Where you're sitting versus target leverage, if you do have kind of thoughts or concerns around the forward macro. I think we feel pretty good with what we're seeing kind of out there, but it is a little bit of a bumpy environment. So I think it does all get factored in there. But it will be something that we do consider.

Understood. And then switching gears a little. You mentioned 60% of fundings were to kind of add-ons or existing relationships this quarter, you also mentioned you're seeing a growing number of opportunities from new issuers. I'm wondering whether you think we're kind of approaching maybe an inflection in terms of new borrower fundings, kind of overtaking incumbent fundings and to the extent those generate better fees, what that might mean for fee income, which, as you mentioned, looks pretty muted this quarter and maybe could be a tailwind going forward?

Yes. You got a couple of points in there, right? I think us like the larger sort of platforms like the incumbency position. So that is a benefit or beneficial and kind of useful as you build out your portfolio. We are busier as it relates to pipeline and deal flow. We were busier in the third quarter than the second quarter. I think the second quarter, we were busier than any of the prior 8 quarters on an individual basis. I think the market has sort of put tariffs behind it, although I'm not sure the full impact of tariffs has necessarily flowed through. I think there's general consensus on sort of where rates are going. So I think we've seen the -- that valuation gap or that willing buyer or willing seller sort of piece come together. I think if you go to the bank earnings calls, they were definitely talking about how their capital markets businesses, or their M&A businesses were more active. Obviously, some of those are much larger sort of deals. But when you do factor all that together with -- I think there's still a real push from private equity LPs to get a return of capital, and we know there's a lot of dry powder out there. I think we're constructive on that. I think everybody has talked about that for a long time. So I don't think we're in the business of trying to predict that anymore. But we do know that we're busier. I think it will have an impact on fee income, which could be positive, although I would note, I mean, kind of the upfront fees and the OIDs has probably narrowed in line with sort of spreads coming down. I think we are of an opinion as the market gets busier, some of that can unwind a bit, but I would just be mindful about that.

Our next question comes from Kenneth Lee at RBC Capital Markets.

Just a follow-up on the previous question. You mentioned that when you went about setting your base distribution level, you were pretty deliberate and looked at the forward curves. I just want to assess how resilient do you think that the base distribution level is being set through various economic cycles and various rate scenarios. Just wanted to tease that out a little bit more.

Yes. No, I mean, it's -- I don't think we would have said it if we didn't have a degree of confidence for where we kind of saw the various variables going forward. You are correct. I think there's a lot of sort of pieces of that puzzle in there. But just to say it again, we did look at where that forward curve would go, we did look at refinancing those liabilities. We did not give ourselves a lot of benefit in there, or what would be kind of upside levers, right, i.e., if spreads do sort of gap back out, or a big benefit of assets rotating out of a non-income-producing bucket into an income-producing bucket. So I think we put all that together, to try to be mindful about that. And we -- as we talked about in the last call, we wanted to get ahead of this. We wanted to provide transparency in there. The only point that I would make because I think it is important. I do think investors need to look at the total distribution number, though, right? We're -- we gave some thoughts about where that sets for Q1 and for all of '26. But clearly, in these earlier years, especially when those lower-priced fixed rate debt instruments are outstanding, there's some additional earnings there. So I would be focused on the total, but the components are the base and the supplement.

Got you. Very helpful there. And one follow-up, if I may. You commented on seeing some increased potential deal activity. What are you seeing in terms of spreads on the some of the newer investments there? Have you seen a potential pickup or widening just given the amount of deal activity there?

Yes. We haven't seen that, to be honest, Ken. I think we're probably still in the early days of the deal activity. And I think you got to be -- probably looking at the other side of what the inflows are to the market. I think we've talked about for some time now where we've been in a bit of this technical whereby a fair amount of capital has been raised for the space and the M&A volumes were at just sort of a lower level. So I think it's going to take a little bit more time for that to unwind if it's going to impact spreads, although I could foresee that as happening. I think we probably were expecting a little bit more continued volatility in the market across some of the higher profile defaults that we had mentioned in our prepared remarks. I think that lasted for a little bit, but when I'm talking a little bit, I'm talking about a couple of days. But I think that's kind of on our mind as well. So I'm not seeing that yet, but we are seeing pretty high-quality companies access the direct lending market, which we view as a positive.

Our next question comes from Robert Dodd at Raymond James.

We can go on to the next question and try to go back to Robert. If he's, maybe, on mute.

Our next question comes from Melissa Wedel at JPMorgan.

First, I want to clarify the new dividend policy in 2026. When you target sort of 100% payout ratio, I understand that to be sort of on an annual basis, quarterly might be a slight mismatch. Am I understanding that right? And then is that versus GAAP or adjusted NII?

Yes. I think your kind of initial thoughts there is right. There could be some mismatches on a quarterly basis and then focused on GAAP.

Okay. Got it. And then as the Board was reassessing the dividend policy going forward, it seems like there is a focus on resiliency within a lower rate environment for some period of time. Since we've also seen pressure on asset yields and again, that's also exacerbated by the capital formation we've seen in the industry. I'm curious if the Board also considered any adjustments to the fee structure for FSK.

Yes. No, thanks, Melissa. I think you're correct in the sense of trying to factor all the pieces together here because it is more than just benchmarks rates, it is spreads, it is all of the other sort of factors we've talked about. The couple of points I would make is, one, the idea of the base and supplemental is not a new concept for us, right? We've really been in that land for some time. We were really in kind of the $0.60 base with supplementals on top of that, and then we amended that $0.60 to $0.64 over time. So I think that's not a new concept. And to be fair, I think we're not declaring those dividends formally for Q1 and '26, but we are trying to be pretty transparent with the market for kind of where we see this going. I think we -- by definition, kind of have to look at fees consistently or on an annual basis with the Board, I think those dialogues will continue. And I think where we do look at kind of the fee structure today, I think it lines up with the sort of the peers in the space. But yes, that is something we have to have the conversations with the Board on a consistent basis about.

Our next question comes from Paul Johnson at KBW.

Yes. It look like the JV dividend income might have been a little bit higher this quarter. I was just curious, what is sort of, kind of, the capacity in the JV or the dry powder, so to speak? Is that -- is the JV fully deployed at this point? Or is there sort of additional leverage that could be deployed there?

Yes. We do have additional sort of dry powder there to deploy into that. We have talked about the joint venture with kind of maybe an ultimate target of roughly 15%. So we're getting to kind of that neighborhood, but we still do have some capacity there. I think the joint venture has been a good partnership, not just with our sort of partner there, but from a hopefully yield enhancer, if that's the right sort of term for FSK sort of generally. But I think you can expect that to live in, kind of, that 12% to 15% range on a consistent basis.

That's helpful. And then one kind of high level question I'd ask is just your comments on tariffs. And you still have a declining, but small sort of watch list related to kind of the tariff issues, where we've seen a lot of BDCs with declining watch list some essentially to 0 at this point, becoming mainly a nonissue. So I'm just curious on your comment there, are you seeing kind of latent tariff issues start to percolate kind of in the economy? Or is this still kind of just kind of a normal sort of belated flow-through of all the significant tariff changes earlier this year?

Yes. No, it's a good and fair question. I think we do have a handful of names that are in that kind of single-digit number where we are quite mindful about tariff exposure, right? That's -- I think the fortunate news is that number is low because we've generally avoided what I would call heavy cyclical businesses or consumer retail-related names, which probably have that higher number. So I think we have seen an impact on that small number of names. I think we're working with those names to get through that. The comment I made about the tariff point on the other side is there's -- I think the market has gotten itself to the point of understanding or feeling like they know where the administration is or lives on these sort of tariff points. I am not sure, though, the overall kind of broader economy has felt the full impact yet, right? So I'm not sure that's a company-specific name versus a macro point, but that's kind of on our mind. And I would say the same thing for government-related names, I mean, we have to see how this shutdown could impact folks. You still have kind of the DOGE sort of points out there. I put them in a similar bucket where I'm not sure we've fully kind of seen the full impact of that yet kind of play out, but it's something we're pretty mindful about.

Our next question comes from Heli Sheth at Raymond James.

A little bit of a broader market question, but has the recent disruption of the First Brands, Tricolor default started to impact any competitive factors in the asset-backed finance side of the market?

Yes. Fair question. I think the short answer is no. But I think the broader answer is I think those handful of deals have brought some kind of highlights to the space. I think they're all very unique and bespoke situations as it relates to the name, and it does seem like there's some real either fraud-related matters or otherwise there, I think both of those companies operate, I think, in either difficult segments or have some history around those. So I think we feel really good about where we sit with regards to our asset-backed business. I think anyone who's done this long enough uses these as moments to kind of relook at your own sort of book, which we've been sort of doing. But I think you haven't seen a big shakeout there. I do think it is a very prominent question on investors' minds, right? Both institutional and wealth which could extend out some time lines or kind of otherwise there, which are pretty fair kind of comments or questions on their side. But I don't think from a regular way new investment perspective.

I'm showing no further questions at this time. I would now like to turn it back to Dan Pietrzak for closing remarks.

Well, I want to thank everyone for your time today. We're always available if there are any other questions. And we look forward to talking with you on our next call. Have a good day.