FSK - NYSE

Good morning, ladies and gentlemen. Welcome to FS KKR Capital Corp.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Please note that the 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 Fourth Quarter and Full Year 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 December 31, 2025. A link to today's webcast and the presentation is available on the For Investors 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 25, 2026. 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 Fourth Quarter and Full Year 2025 Earnings Conference Call. I'd like to start today's call by reviewing the goals we set for 2025 and discussing how we performed against those priorities. Our first goal was to originate attractive, well-structured investments, which would be accretive to the quality of our investment portfolio. During 2025, we achieved this goal as our investment team leveraged its deep sponsor relationships to originate $5.6 billion of predominantly first lien and asset-based finance investments. Second, we set out to provide shareholders with $2.80 per share of total distributions through a combination of our quarterly base and supplemental distributions. Our spillover income, which purposely was increased during the high interest rate environment allowed us to achieve the objective even against the backdrop of a declining interest rate environment. Our third goal was to continue proactively laddering the right side of our balance sheet. During 2025, we continued to optimize our capital structure by issuing $400 million of new unsecured notes, closing on a new $400 million bilateral lending facility, diversifying our funding sources through 2 new middle market CLOs and further enhancing our liquidity profile through an amendment to our senior secured revolving credit facility that increased our total commitment, extended the maturity and reduced pricing. Despite the achievement of these goals, during the second quarter and fourth quarter of 2025, we experienced downward pressure on a few specific investments across our portfolio, which resulted in a decline in our net asset value. We acknowledge that noninvestment-grade private debt investing necessarily will result in underperforming assets from time to time. However, we are disappointed by these markdowns. Dan, of course, will discuss these topics in more detail later in the call. Looking ahead to 2026, our goals are as follows: First, we expect to address underperforming assets through restructurings, exits and continued proactive portfolio monitoring to reduce the number of nonaccruals and non-income-producing investments in the portfolio. Second, we will continue our strategy of focusing on first lien senior secured originations with the goal of continuing to increase the overall quality and diversification of our investment portfolio while simultaneously continuing to focus on rotating a portion of our legacy investments. Third, we remain focused on preserving our strong liquidity and balance sheet flexibility by keeping net leverage within our target range and maintaining ample revolver capacity to manage volatility and selectively deploy capital. Turning to our fourth quarter results. FSK generated net investment income totaling $0.48 per share and adjusted net investment income of $0.52 per share as compared to our public guidance of $0.51 and $0.56 per share, respectively. Our net asset value share declined by 5% to $20.89 compared to $21.99 as of the end of the third quarter. The 2 primary components of the quarterly change in net asset value are a $0.22 per share decline as a result of our $0.70 per share distribution compared to our GAAP NII of $0.48 per share and an $0.87 per share decline as a result of downward pressure on certain investments. From a liquidity standpoint, we ended the quarter with approximately $3.8 billion of available liquidity. Based upon our updated dividend framework and expected operating results, our Board declared a total first quarter distribution of $0.48 per share, consisting of our base distribution of $0.45 per share and a supplemental distribution of $0.03 per share. This represents a 100% payout of our GAAP net investment income and a 9.2% yield on our ending fourth quarter net asset value. With that, I'll turn the call over to Dan to provide additional color on the market and the quarter.

Thanks, Michael. I'd like to start by focusing on FSK's recent performance. As Michael noted, our recent underperformance reflects challenges in certain legacy investments, including Production Resource Group, as well as challenges in certain current adviser originated investments such as Medallia, Cubic Corp, KBS and 48forty. We are actively engaged in each of these situations and are pursuing company-specific solutions to stabilize performance and maximize recoveries, although we acknowledge each company faces challenges unique to a specific business. We also acknowledge that our nonaccrual assets are higher than we would like, which tempers our near- to intermediate-term view from an NII standpoint. Specifically, this means that our 2026 dividend, which we originally believed would equate to approximately 10% of net asset value, may now be more in the range of 9% of net asset value. Stepping back a bit, focusing on the current adviser's long-term performance. Since the formation of the FS/KKR Advisor 8 years ago, we have originated $34 billion of investments in FSK, generating an unlevered IRR of 9.1% since inception. And while recent nonaccruals have emerged from this body of work, we do believe some level of defaults is inevitable in a sub-investment-grade portfolio, particularly across various market cycles. Nevertheless, we are focused on the work ahead of us during 2026 and beyond, not only to establish more stability in our investment portfolio, but also to regain the market's confidence in our ability to deliver more consistent results on a quarter-to-quarter basis. And with that, I'll turn to a few specific comments about the quarter. During the fourth quarter, approximately 50% of net realized and unrealized losses were attributable to 4 investments: Production Resource Group, Medallia, Peraton and Cubic Corp. We have spoken about most of these investments in detail in the past. However, I'll give a quick update on each name. PRG, a legacy investment, is a leading provider of integrated entertainment and live event production solutions. PRG continues to be impacted by softer operating performance due to headwinds in their TV, film and music segments. During the quarter, we incurred approximately $47 million of net losses. Medallia, an enterprise software as-a-service experience management platform, has faced competitive pressures, which have resulted in the company's recent financial underperformance. This investment contributed $29 million of unrealized losses during the quarter. Peraton, a provider of technology-focused services and solutions to U.S. government agencies, contributed $23 million of unrealized losses during the quarter. Cubic Corp, an existing nonaccrual investment, is a diversified technology provider to defense and civil-related agencies across governments throughout the world. Over recent periods, the company has experienced order and implementation delays, resulting in the current period valuation. Cubic Corp contributed $21 million of unrealized depreciation during the quarter. Turning to the investing environment. During 2025, we experienced a 13% increase in the number of investment opportunities we evaluated, though I would highlight we are remaining extremely selective. We are focused on continuing to diversify our portfolio by taking smaller position sizes in a greater number of borrowers. Additionally, based on the opportunities we are seeing in the market today, we continue to believe the best risk-adjusted returns are in first lien loans and asset-based finance investments. During the fourth quarter, we originated approximately $1.1 billion of new investments. Approximately 80% of our new investments were focused on add-on financings to existing portfolio companies and long-term KKR relationships. Our new investments, combined with $806 million of net sales and repayments when factoring in sales to our joint venture, equated to a net portfolio increase of $292 million. New originations consisted of approximately 65% in first lien loans, 15% in asset-based finance investments, 18% in capital calls to the joint venture and 2% in equity and other investments. Our new direct lending investment commitments had a weighted average EBITDA of approximately $352 million, 6.2x leverage through our security and a weighted average coupon of approximately SOFR plus 475 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 December 31, the weighted average EBITDA of our portfolio companies was $236 million, and the median EBITDA was $132 million. Our portfolio companies reported a weighted average year-over-year EBITDA growth rate of approximately 4% across companies in which we have invested in, since April of 2018. Median interest coverage increased to 1.9x compared to 1.8x at the end of the third quarter. Software and services currently represents 16% of our investment portfolio, diversified across 50 issuers with an average position size of 33 basis points of our total investment portfolio. Average and median EBITDA of approximately $162 million and $110 million, and a median LTV of approximately 39%. This segment of our portfolio historically has been one of our best performers and has been underwritten with a particular focus on primary customer relationships and the durability of revenue and cash flow streams attached to those relationships. We will continue to assess potential future AI risks with each investment we analyze as our current belief is that widespread AI adoption may result in an overall expansion of the addressable market, even though it likely will negatively impact certain companies, which either have not yet achieved meaningful positive cash flows or are less well positioned from a customer retention standpoint. During the fourth quarter, 5 investments were added to nonaccrual status and 1 was removed. New nonaccrual assets include Alacrity Solutions, Amerivet Partners, Dental Care Alliance, Gracent and Lionbridge Technologies. Together, these investments totaled $255 million of cost and $214 million of fair value across our investment portfolio. As previously disclosed, Production Resource Group was removed from nonaccrual status. As of December 31, nonaccruals represented 5.5% of our portfolio on a cost basis and 3.4% of our portfolio on a fair value basis. This compares to 5% of our portfolio on a cost basis and 2.9% of our portfolio on a fair value basis as of September 30. Nonaccruals relating to the 90% of our portfolio, which has been originated by KKR Credit were 5.1% on a cost basis and 3.1% on a fair value basis as of the end of the fourth quarter. This compares to 3.4% on a cost basis and 1.8% on a fair value basis as of the end of the third quarter. And while we acknowledge that this nonaccrual rate is above the long-term BDC industry average cost basis, nonaccrual rate of approximately 3.8%, we also recognize that this measure is a point-in-time data point. KKR's long-term average cost basis nonaccrual rate since April 2018 is 1.2%. In summary, with regard to our investment portfolio, we recognize there's work to be done, which may result in an above-average level of portfolio volatility during certain periods, coupled with lower levels of net investment income as compared to prior estimates. Portfolio metrics do move over time, and we believe our investment and workout team are well equipped to successfully navigate this period of elevated portfolio volatility. Lastly, subsequent to quarter end, we announced that the aggregate capital commitment to our joint venture with South Carolina Retirement Systems Group Trust increased from $2.8 billion to approximately $2.975 billion, reflecting an additional net $175 million contribution from our partner. Following this transaction, our partners' ownership percentage climbed from 12.5% to 21.1%, and our ownership percentage changed from 87.5% to 78.9%. We and our partner have been very pleased with the performance of the JV to date, and this incremental capital positions the joint venture to continue scaling while fully leveraging the breadth and depth of the KKR credit investment platform. With that, I'll turn the call over to Steven to go through our financial results.

Thanks, Dan. As of December 31, 2025, FSK's investment portfolio had a fair value of $13 billion, consisting of 232 portfolio companies. At the end of the fourth quarter, our 10 largest portfolio companies represented approximately 19% of the fair value of our portfolio compared to 20% as of the end of the third quarter. We remain focused on senior secured investments as our portfolio consisted of approximately 58% first lien loans and 62% senior secured debt as of December 31. In addition, our joint venture represented approximately 15% of the fair value of our portfolio as of the end of the fourth quarter. As a result, when investors consider our entire portfolio, looking through to the investments in our joint venture, then first lien loans total approximately 68% of our total portfolio and senior secured investments total approximately 72% of our portfolio as of December 31. The weighted average yield on accruing debt investments was 10% as of December 31, a decrease of 50 basis points compared to 10.5% as of September 30. As a reminder, the calculation of weighted average yield is adjusted to exclude the accretion associated with the merger of FSKR. Turning to our quarterly operating results. Our total investment income was $348 million for the fourth quarter, a decrease of $25 million compared to the third quarter. The primary components of our total quarterly investment income were as follows: Total interest income was $256 million, representing a decrease of $29 million quarter-over-quarter. The decline in interest income was driven by investments placed on nonaccrual during the quarter, lower base rates and the repayment of higher-yielding investments. Dividend and fee income totaled $92 million, an increase of $4 million quarter-over-quarter. Our total dividend and fee income is summarized as follows: $58 million of dividend income from our joint venture, other dividends from various portfolio companies totaling approximately $28 million during the quarter and fee income totaling approximately $6 million during the quarter. Our total expenses were $213 million during the fourth quarter, a decrease of $1 million compared to the third quarter. The primary components of our total expenses were as follows: Our interest expense totaled $110 million, a decrease of $6 million quarter-over-quarter, and our weighted average cost of debt was 5.1% as of December 31. Management fees totaled $50 million, a decrease of $1 million quarter-over-quarter. Incentive fees totaled $28 million, a decrease of $5 million from the third quarter. Other expenses totaled $7 million, a decrease of $3 million quarter-over-quarter. And lastly, excise tax totaled $18 million during the quarter. The detailed bridge in our net asset value per share on a quarter-over-quarter basis is as follows: Our ending third quarter 2025 net asset value per share of $21.99 was increased by GAAP net investment income of $0.48 per share and was decreased by $0.87 per share due to a decrease in the overall value of our investment portfolio. We experienced a $0.01 per share reduction in net asset value from realized loss on extinguishment of debt and a $0.70 per share reduction as a result of the total quarterly distribution paid during the quarter. The sum of these activities results in our December 31, 2025 net asset value per share of $20.89. From a forward-looking guidance perspective, we expect first quarter 2026 GAAP net investment income to approximate $0.45 per share, and we expect our adjusted net investment income to approximate $0.44 per share. The detailed components of our first quarter guidance are as follows: Our recurring interest income on a GAAP basis is expected to approximate $226 million. We expect recurring dividend income associated with our joint venture to approximate $60 million. We expect fee and other dividend income to approximate $29 million. From an expense standpoint, we expect our management fees to approximate $48 million. We expect incentive fees to approximate $26 million. We expect interest expense to approximate $104 million, and we expect other G&A expenses to approximate $9 million. Capital Structure. In December, we closed our third middle market CLO, raising $363 million of low-cost secured debt priced at a weighted average rate of SOFR plus 157 basis points. We are pleased with this financing given it is match funded with no mark-to-market at an attractive rate. As of December 31, our gross and net debt-to-equity levels were 130% and 122%, respectively, compared to 120% and 116% at September 30. Our leverage remains within our target range of 1 to 1.25x net debt to equity. At the end of the fourth quarter, our available liquidity was $3.8 billion and approximately 62% of our drawn balance sheet and 43% of our committed balance sheet was comprised of unsecured debt. Pro forma for the $1 billion unsecured bonds that matured on January 15, 2026, 49% of our drawn balance sheet and 38% of our committed balance sheet was comprised of unsecured debt, and our next balance sheet maturity is a $400 million bond in January of 2027. And with that, I'll turn the call back to Michael for a few closing remarks before we open the call for questions.

Thank you, Steven. As we enter 2026, we actively are focused on working through the portfolio-related items Dan discussed in detail. Our new and recent originations are performing well, and the vast majority of our portfolio continues to perform in line with our original expectations. As a result, we believe our scale, experience and proactive portfolio management will enable us to maximize recoveries and to continue providing shareholders with an attractive level of current income relative to the risk-free rate. As always, we appreciate you joining us today. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Finian O'Shea with Wells Fargo Securities.

So just to start, like big picture, FSK is shrinking, which makes it worse, and likely stuck below book. So do you ever think about like a grand bargain where, say, the FS side allows for a lower fee, and then the KKR side puts in some balance sheet money to inject life into the BDC and ultimately show that the partnership model can work?

I mean that's probably a bit of a complicated question. But I think if you take a step back, I think we have been, I think, both sides quite happy with just the partnership. I mean, clearly, this has been a harder quarter. But if you do think about, we have originated $34 billion of investments into FSK in the last 8 years. The last quarters have felt bumpy, but we're sort of 9.1% sort of IRR sort of against those. I think we've got some work to do clearly on the portfolio. I think we've got some work to do, to your point about how to either grow this thing or create some levers as it relates to income growth. The short or the low-hanging fruit there is we do have too many non-income-producing assets, right? We're roughly 9.5% there. I think we've been stuck with that for a while because that really started with some of the older assets that were here. But I think us as a team have gone through, I'd say, a laundry list of things as I would think about kind of a forward operating plan as we evolve this thing for '26 and '27. I don't think this is a quarterly sort of discussion as we work on that evolution.

Okay. Sorry about that. A follow-on on the performance fee. So one of your peers yesterday, Blackstone, they had a few write-downs. They got a little bit less of an incentive fee. The stock was fine. Do you think that makes sense to revisit again? The look back that is?

Yes. And I mean, I think we're kind of quite cognizant of fee structures and constantly sort of mapping that to the market or at least where we sit versus others in the market and then also thinking about where we sit vis-a-vis sort of dividend numbers, right? I think at the $0.48-odd number, we're sort of roughly 9.2%. But I think that -- we'll call it a valuation, we as a team and we're constantly sort of thinking about and we'll be discussing those sort of matters. But I think we're, in a lot of ways, focused on the total earnings sort of here in that 9.2%, which probably lower than we want to be today, but probably above kind of historical average.

Your next question comes from the line of Ethan Kaye with Lucid Capital Markets.

Wondering if there's anything you can kind of point to any common thread or common denominator here across the positions that drove the underperformance this quarter?

Yes, Ethan, thanks for the question. Maybe I'll put it in a couple of buckets, right? If you do look at the 5 names that were added to nonaccruals, 2 of those are in the sort of medical or sort of health care roll-up space, right? That's one area we are kind of keeping an eye on. I think we've seen a lot of names performing well there, but that has been a space where wage inflation sort of has mattered, retention has mattered. That's been across kind of dental as well as the vet area. So that is probably what I'd say one common theme out there on the nonaccrual side. I think the other names where we've seen some of the marks and we went through in the script, I mean, 4 names drove 50-odd percent of that. One of them is PRG, which has been a tough name for a long time. We've got a lot of resources sort of attached to that, but that's very much idiosyncratic to that name. The rest of it, I would just probably put in the camp of we'll call it operational sort of underperformance. There's a little bit of [indiscernible] or government sort of contract risk embedded in there, but I think that still plays through the system with someone like a Peraton or sort of a Cubic. So there are -- on one hand, some themes with the medical roll-ups on some hand, some themes with kind of the [indiscernible] sort of government sort of points and then some of it just boils down to operational performance.

Got it. And then I guess the 3 kind of other non-legacy names you mentioned as well as at least I think one of the new nonaccrual names seem to be either software-centric or software adjacent, if I'm not mistaken. I'm just curious if there's any kind of -- we're obviously hearing a lot about the emergence of AI and the risk that poses to software companies. Wondering if any kind of pressure from that dynamic?

Yes. No, it's a very fair question considering what's going on news-wise. I mean the overall portfolio from software for us is about 16%. I think we have been evaluating what I would call AI risk in that portfolio for some time, not just on the back of the recent news flow. We do have the benefit of working with our private equity colleagues and have come up with this sort of what I'll call framework looking at 20 different data points to assess what might be high risk or not. I think from an investing perspective, we have focused on what I would call mission-critical products, those that are sort of hard to rip out or have focused on those businesses that, in our opinion, truly have proprietary data. I think we have not been active in the ARR space, right? We do have one ARR loan left, which is Medallia, which we sort of talked about. I think when you put all that together, when we look at our portfolio, we got sort of roughly 2% of the names that we think have a high AI risk attached to them. Of the names you kind of referred to, you look at the ones that were talked about as it relates to driving the mark. I don't think that they actually had anything to do with AI as it relates to underperformance. It's really more in that operational camp. The one that did would be Lionbridge, right? That business is a language translation business and sort of a gaming business. The language business has, in our opinion, had some headwinds from that. We think the gaming business is quite attractive. I think for a long time, and I think we still might believe we could be covered from that gaming business. But really not AI-driven is the summary point.

Your next question comes from the line of Arren Cyganovich with Truist Securities.

The 2026 goal of kind of dealing with the problem credits, maximizing value can often take a while to unfold. How are you kind of approaching this to try to both quickly address these, but also maximize the value that you're going to get from potential restructuring?

Yes. And the line is not great, but I think the question was around sort of maximizing value. So if I don't answer it fully, please add to it. I think we did talk about our '26 goals, right? I mean, clearly, addressing these underperforming assets has to be top of that list. I think the other parts of it relate to getting more diversification in the portfolio. That's been a big focus and needs to continue to be. And then obviously, thinking about liquidity. We've got a deep and solid investment [indiscernible], specifically those who function on the workout side. We've got 25-odd people focused on portfolio monitoring. I do think, Arren, it's a little bit of a case-by-case basis. I think there are some things that I would expect to be multiyear events, and some of the PRG has been multiyear already. I think there are some where we think there could be a either faster sale process either because it would be accretive or sort of a risk management point. In several of these businesses, we have replaced management teams, brought in new senior leadership, used our senior adviser network. So it will be case by case. I would caution to say that it's not an overnight thing, right? We do believe it will take some time. That's why we're talking about things over kind of a longer period, which I would call sort of '26 and '27.

Got it. And maybe you could just provide a little more details on the JV equity changes there and what drove that? And how much of a drag will that be from the dividend income associated with that?

Yes. Fair question. We've been happy with the joint venture. I think that's the starting point, right? We've talked about a lot on prior calls about getting that towards its target number of roughly 10% to 15%. It's been at the upper end of that range. We do want to see it continue to grow over time, which that was really the driver here. South Carolina has been a great partner for us. Then putting additional capital in, I think you can just equate to FSK kind of selling a portfolio or an asset sort of that kind of the mark and then you can use those proceeds to reinvest into other places. So there's some offset to that to your question around any sort of dividend reduction. But the point and the purpose of it was to allow the entity to grow. My guess is, over time, you will see our percentage potentially sort of tick back up as we continue to put additional sort of capital in there. That's not necessarily automatically will happen, but it's something that sort of could happen. But it's about trying to continue to grow. I think it will have a certain amount of an impact out of the gate. I think we're mindful about that, but I think we were pretty happy to continue this good partnership with South Carolina.

Your next question comes from the line of Casey Alexander with Compass Point Research & Trading.

I have one question and one follow-up. My first question is, look, I hate to bring up what might seem like a tired old refrain. But at the moment, the stock is trading at 55% of book, and that kind of screams not to invest in new loans, but to take repayments and start buying the stock. Could you guys give us some feeling for your temper in regards to beginning to initiate meaningful stock repurchases? And I know -- look, I know the employees have bought the stock. I know the advisers bought the stock. But at this point in time, your only road to increasing NAV at this point in time is accretive share repurchases at such a dramatic discount to book value.

Yes. Casey, thanks for the question. I think we understand the point there. I think as the entity, these numbers might not be perfect, but I think we have historically bought back $350 million of stock. That's probably more than sort of most out there. It is something that we do have to consider. I think the only thing on the other side of that, that I just need to be mindful about is the market noise and/or volatility. And I do believe some of that is overdone out there broadly, but that's kind of top of mind and then where we're at vis-a-vis sort of leverage and target leverage. But it is, yes, something that we will be talking about.

Yes. And the fact that maybe some of the movement in the stock is related to broader market noise would argue even more, I would think, to buying it here because some of that will then be relieved by the absence of the market noise, and this would be the most accretive level. My second question is there have been multiple reports of pretty material dislocation in the fix and flip market. And FSK has a significant investment in Toorak. And so I was wondering if you could remind us what the structure of the Toorak investment is and how it's performing?

Yes. Yes. So if you go back, I mean, that investment was initially made in 2016. It, in a lot of ways, started out in probably thinking about it almost as a trade, right, meaning that there was no institutional footprint out there. We wanted to capitalize on that. When we did the deal back in '16, I probably would have been happy with -- if we did kind of $1 billion to $2 billion of loans. I think when we do look at it today, right, we've done $12.5 billion of loans. I think the cumulative losses for the entity over the 10 years have been kind of roughly $100 million, so that's held up pretty well. I think we have seen -- and I don't think your point is wrong, Casey. I'll come back to the other side of that. I think we have seen some positive of point, their direct origination business did almost $800 million or $820 million last year. They do have a business in the U.K. that's been quite effective and quite strong. I think we have seen higher delinquencies in the U.S., roughly 10%, although that's been sort of stabilizing. I think we have seen ROEs challenged, right? Some of that relates to the delinquency numbers. Some of that relates to the rate environment where the interest rate on the loans did not move anywhere near the financing cost did, right? That has had an impact on us, right? Our dividends out of Toorak which have historically been roughly 10% per year have been lower. We've seen some impact to the mark there. But arguably, over the 10-year period has been a positive story. It is treated like a portfolio company, meaning it is an active originator on a direct basis as well as a buyer of loans in the U.S. and the U.K. And so we can either be the benefactor of those cash flows or it's a partnership with the management team, you could look for a monetization event down the road. But I think you're not wrong about the noise. I think there's been a little bit of let's call it, LTV type risk against some of the loans that have originated, especially from some of the smaller guys. Fortunately, Toorak hasn't had really any or -- de minimis exposure to things like that. But I think the ROE has been the bigger one.

Your next question comes to the line of Rick Shane with JPMorgan.

Look, Casey really covered, I think, as far as I'm concerned, the most important structural issue in terms of repurchasing shares. Look, you guys had over $5 billion come in last year, $5 billion the year before that. Presumably, the run rate in terms of repayments will be similar this year, which should provide a fair amount of liquidity for repurchases. I haven't -- listening to all the BDC calls, I haven't heard anybody make a super compelling case for, wow, there's this incredible dislocation, this opportunity to deploy capital into new loans that's so attractive. What is out there that's actually more accretive to both earnings and again, to NAV than repurchasing shares at this point?

Yes. And thanks for the question, Rick. I think the investing environment has been -- maybe the right word is interesting over the last handful of years, right? There's been a lot of different forms of market events to the market. I think on the direct lending side, to be fair, has felt decently tight in terms of -- you have seen spread compression. I think a lot of that has had to do with the fact of inflows were high. I do think the inflows from the wealth channel was a driver of that, and that was really coupled with, let's call it, lower-than-normal M&A volume. So you can talk about a little bit of a market technical out there. I think the offset to that is, I think the quality of the companies that have been accessing the market has been strong. I think the size of the companies that have been accessing the market has been good. I think we prefer to lend to those larger companies. I think the thing we have tried to focus on is getting diversification in the book, right? So that was growing the joint venture was one form of that. We got up to the target number. We have seen some compelling opportunities in the asset-based finance. We talked about some of those on prior deals -- I'm sorry, prior calls, either the Harley-Davidson or the PayPal. But I understand the point. I think we need to take all that into consideration as we move forward. I would say one thing. I probably am expecting a more lender-friendly environment as we go through the course of '26. I think that will very much skew based upon how open the capital markets is, which it is pretty open right now. But I think you'll see the flows maybe sort of temper a bit, and then you'll have to see what happens in the capital markets as the sort of probably primary driver of that. But our eyes are focused on.

I appreciate the answer. Look, there's the old curse may you live in interesting times. I'm not sure about you guys, but I'm tired of interesting times.

Your next question comes from the line of Robert Dodd with Raymond James.

Excuse me. Sorry, I'm coupling from Rick's line because I agree with him on that one. Just a couple of questions on credit, not surprising. On the main markdowns this quarter, I mean, PRG, Medallia, Peraton, I mean, Cubic is already on nonaccrual. Those are the 3, I mean, PRG just came off, nonaccrual, it is markdown. I mean, looking at the scale of the marks, I got a question. Are there -- is there a high probability that those businesses end up on nonaccrual as well or large segments of them? Do they have to go through aggressive restructurings where even if they don't go on nonaccrual, you equitize a bunch of the debt. And those -- is there an incremental risk in addition, obviously, to the 5 new ones this quarter, those 3, PRG, which has been a multiyear process already, but the first restructuring didn't stick. Is there a material risk that there's more earnings loss to come from those assets?

Yes. And Rob, thanks. I think on each of those names, there's what I would call some level of active dialogue or sort of active sort of monitoring. I mean Peraton is probably as much of a -- over time, it's evolved to as much of a Level 2 asset as sort of Level 3. So I think there's some of that component in there. So I think as we -- as you go down the list of those, right, I think we're trying to make significant changes on the PRG side. There is a large chunk of more sort of equity-like risk that's in the non-income-producing bucket. I think the lenders have been doing a lot of work on the Cubic side, but there still is, quite frankly, some headwinds from the government. I think Peraton had some good news, right, during Q4 as it related to sort of a big contract win. And I think we're going to spend time with the other lenders, and I'm sure in discussions with the sponsor on Medallia. There's a lot of capital below us in Medallia, but performance has been more difficult, really operational, though non-AI. So they're all live situations.

Got it. Got it. And then on to the -- you mentioned this in response to another question. I mean the health care and the roll-up issue. I mean a few years ago, physician office rollups. I'm not talking about your portfolio at this point. And then it became dental. I mean you've got DCA, but a lot of other people in DCA and 2 other dental businesses went back on nonaccrual this quarter elsewhere. And you had -- I mean, obviously, that's been an evolving theme. The roll-up issue within the health care space has become -- it doesn't seem to be getting fixed, right, broadly across the space. Is there -- this continues to spiral? I mean there's still plenty of dental businesses that aren't currently feeling those pressures across -- in your portfolio and elsewhere. And the same thing like with vets and what's the next shooter to drop on the roll-up strategy kind of breaking down as it exists in your portfolio as a [indiscernible] obviously?

Yes. I mean I think that is a fair question. And I think you're correct. It was for some period of time, probably one of the darlings of both PE and direct lending. We -- it is an emerging theme in our mind or it has been for the last handful of quarters. I think we saw it initially on things that were, let's call it, consumer discretionary sort of focused, right? So they were sort of struggling. We have seen, as I talked about before, kind of the wage inflation remains sort of a challenge there. We have seen, we'll call it a very different performance even within the dental space on certain names. And some of that goes to, we'll call it, structure of business or how the employees are getting compensated, whether they own part of their individual practice or whether everybody owns something sort of on top. So it is a little case specific. I think for us, we're 5.7% of the portfolio is in these medical sort of roll-ups, 3.3% of that is dental. DCA went on nonaccrual. It got sort of marked down this quarter. I think we feel pretty good about that business, that team. I think we were in, what I'll call it, live discussions with the junior debt holders and sponsors there. It feels like it's going to be a 1L-led solution. But that business is actually doing, we'll call it, broadly okay or at least in line with plan, but I think being a '21 investment at a different rate environment, just over-levered. We have seen some other names out there that have inside of this quarter, struggled a bit more in the dental space, right? We have one of those in affordable care. But it is a bit of a hotspot right now and one that we're focused on.

Your next question comes from the line of Dillon Heins with B. Riley Securities.

I know we talked about this quite a little bit here, but I guess what was the inflection point coming from last quarter's expectations of decreasing nonaccruals? There was the pro forma guide of 3.6% on cost and 1.9% of fair value after PRG restructuring. But I guess like what -- yes, what was the breaking point coming from that to where we are now?

Yes. And again, another fair question. I do think -- just to be fair, I think the 3.6% was just kind of giving a pro forma knowing that PRG had sort of fallen off. It wasn't trying to sort of necessarily guide, but if that was the impression, we'll work better on communication there. I think that if you look at the nonaccruals, really the 3 of the names are quite small from a market value perspective. The real drivers are really DCA and Lionbridge. I just talked about DCA on the prior call. That was a live conversation with those who are subordinate to us, and it's going a different way than I think we would have assumed or thought it was going. And then on Lionbridge, we were in an active sales process. We do think parts of that business are still interesting. And that was the one space in the portfolio where there was some direct, in my mind, kind of AI impact, not just performance, but the kind of overall mood around the business, which I think made that sort of sales process hard. So I think the events relating to what we were at DCA and Lionbridge were the drivers.

Your next question comes from the line of Finian O'Shea with Wells Fargo Securities.

I'll be less abstract this time. I wanted to get an update on the -- I know you talked about the dividend a little bit, but part of the sort of lead up to the finality here was the spillover item. Can you give us an update there? Did you like reach your target range? And/or should we anticipate specials like on top of the supplemental program?

Yes. And I'll let Steven kind of go through that. I think just for everybody's benefit on the call, just as a reminder, right, we did change the dividend effect of the dividend policy in the last call to be more sort of base and supplemental, the 45 base and supplemental sort of thereafter. But Steven, do you want to add?

Yes. Then we ended the year, I think the number in the 10-K is the estimate $464 million or so of spillover. And as you will certainly note, based on the current dividend, that's sort of 3.5 quarters or so. What I would say in that is as we have -- what we've seen kind of during late '24 and through 2025 as the ABF portfolio has continued to ramp and international structured investments and partnerships and things, we're making estimates at this point in the year of what tax could be. And then in certain investments, whether or not cash is received, there's -- if they're quarter paper profits, and we are allocating our portion of tax, which would go into spillover. So there can be some timing differences on that. And so we will know much more in the kind of August, September time frame. But I think we stand by what we've said before, which is if we need to make a payment later in the year, we will certainly do that. But I think it's too early to tell if some of these reversals could happen or where the final partnership tax returns will come in over the summer months. So it's a little bit of wait and see. But certainly, when there's news, we will announce it.

Yes. No, I appreciate it. So it's not like last year where it's overpaying like the 45% is your true like NOI target?

Yes. I think what we've said in terms of the dividend is as GAAP net investment income moves quarter-to-quarter, then the dividend will move as well. And then if we need to make an additional payment later in the year to satisfy something from a spillover related basis, we will do that, which is, as I think you're pointing out, different than the concept last year of effectively guaranteeing the market that we're going to pay $0.70 for all 4 quarters of 2025 because for other reasons, more over-earning reasons in the higher interest rate period, the spillover balance had grown.

This concludes the question-and-answer session. And I would now like to turn it back to Dan Pietrzak for closing remarks.

Thank you, everyone, for your time on the call today. We very much appreciate it. We are available for any follow-up questions as needed. And if not, we look forward to speaking with you on our Q1 call. Thank you.