FS KKR Capital Corp.

05/11/2026 | Press release | Distributed by Public on 05/11/2026 05:12

Quarterly Report for Quarter Ending MARCH 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in millions, except share and per share amounts)
All dollar amounts (except per share amounts) in this Management's Discussion and Analysis of Financial Condition and Results of Operations are presented in millions unless otherwise noted.
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and the "Company" refer to FS KKR Capital Corp. and the "Adviser" refers to FS/KKR Advisor, LLC.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
•our future operating results;
•our business prospects and the prospects of the companies in which we may invest;
•the impact of the investments that we expect to make;
•the ability of our portfolio companies to achieve their objectives;
•our current and expected financings and investments;
•receiving and maintaining corporate credit ratings;
•the impact of changing interest rate and inflation levels, and their impact on our portfolio companies and on the industries in which we invest;
•the adequacy of our cash resources, financing sources and working capital;
•the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with the other funds managed by the Adviser, Future Standard, KKR Credit or any of their respective affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we may invest;
•general economic, political and industry trends and other external factors, including uncertainty surrounding the financial and political stability of the United States and other countries;
•our use of financial leverage;
•the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;
•the ability of the Adviser or its affiliates to attract and retain highly talented professionals;
•our ability to maintain our qualification as a RIC and as a BDC;
•the impact on our business of U.S. and international financial reform legislation, rules and regulations;
•the effect of changes to tax legislation on us and the portfolio companies in which we may invest and our and their tax position; and
•the tax status of the enterprises in which we may invest.
Words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause our actual results to differ materially from those expressed or forecasted in the forward-looking
statements. Factors that could cause actual results to differ materially include changes relating to those set forth above and the following, among others:
•changes in the economy;
•geo-political risks;
•risks associated with possible disruption in our operations or the economy generally due to terrorism, natural disasters or pandemics;
•future changes in laws or regulations and conditions in our operating areas; and
•the price at which shares of our common stock may trade on the New York Stock Exchange, or NYSE.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.
Overview
We were incorporated under the general corporation laws of the State of Maryland on December 21, 2007 and formally commenced investment operations on January 2, 2009. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code.
We are externally managed by the Adviser pursuant to the investment advisory agreement dated as of June 16, 2021, or the Advisory Agreement, and supervised by our board of directors, or the Board or the Board of Directors, a majority of whom are independent.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We seek to meet our investment objectives by:
•utilizing the experience and expertise of the management team of the Adviser;
•employing a defensive investment approach focused on long-term credit performance and preservation of principal;
•focusing primarily on debt investments in a broad array of private U.S. companies, including middle-market companies, which we define as companies with annual EBITDA of $50 million to $150 million at the time of investment;
•investing primarily in established, stable enterprises with positive cash flows; and
•maintaining rigorous portfolio monitoring in an attempt to anticipate and pre-empt negative credit events within our portfolio, such as an event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company.
We pursue our investment objective by investing primarily in the debt of middle market U.S. companies with a focus on originated transactions sourced through the network of the Adviser and its affiliates. We define direct originations as any investment where the Company's investment adviser, sub-adviser or their affiliates had negotiated the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These directly originated transactions include participation in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans and certain asset-based financing loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the "over-the-counter" market or directly from our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for
common stock or other equity or the cash value of common stock or other equity, including through a co-investment with a financial sponsor or possibly the restructuring of an investment. In addition, a portion of our portfolio may be comprised of corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps. The Adviser will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structures of our portfolio companies or otherwise make opportunistic investments, such as where the market price of loans, bonds or other securities reflects a lower value than deemed warranted by the Adviser's fundamental analysis. Such investment opportunities may occur due to general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community and may include event driven investments, anchor orders and structured products.
The senior secured loans, second lien secured loans and senior secured bonds in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally three to four years. However, we may invest in loans and securities with any maturity or duration. Our debt investments may be rated by a NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than "Baa3" by Moody's or lower than "BBB-" by S&P). We may invest without limit in debt or other securities of any rating, as well as debt or other securities that have not been rated by a NRSRO.
Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we generate revenues in the form of non-recurring commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.
Expenses
Our primary operating expenses include the payment of management and incentive fees and other expenses under the Advisory Agreement and the administration agreement dated as of April 9, 2018 between us and our Adviser, or the Administration Agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate the Adviser for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.
The Adviser oversees our day-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other administrative services. The Adviser also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, the Adviser assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.
Pursuant to the Administration Agreement, we reimburse the Adviser for expenses necessary to perform services related to our administration and operations, including the Adviser's allocable portion of the compensation and related expenses of certain personnel of Future Standard and KKR Credit providing administrative services to us on behalf of the Adviser. We reimburse the Adviser no less than quarterly for all costs and expenses incurred by the Adviser in performing its obligations and providing personnel and facilities under the Administration Agreement. The Adviser allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our Board reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of the Adviser. Our Board then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In addition, our Board considers whether any single third-party service provider would be capable of providing all
such services at comparable cost and quality. Finally, our Board compares the total amount paid to the Adviser for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs.
We bear all other expenses of our operations and transactions, including all other expenses incurred by the Adviser or us in connection with administering our business, including expenses incurred by the Adviser in performing administrative services for us and administrative personnel paid by the Adviser, to the extent they are not controlling persons of the Adviser or any of its affiliates, subject to the limitations included in the Advisory Agreement and the Administration Agreement. See Note 4 to our unaudited consolidated financial statements included herein for more information regarding the expenses borne by us and, thus, our stockholders.
In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by the Adviser, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
Portfolio Investment Activity for the Three Months Ended March 31, 2026 and for the Year Ended December 31, 2025
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2026 and the year ended December 31, 2025:
For the Three Months Ended
For the Year Ended
Net Investment Activity March 31, 2026 December 31, 2025
Purchases $ 499 $ 5,638
Sales and Repayments (710) (5,874)
Net Portfolio Activity $ (211) $ (236)
For the Three Months Ended
March 31, 2026
New Investment Activity by Asset Class Purchases Percentage Sales and Repayments Percentage
Senior Secured Loans-First Lien $ 343 69 % $ (290) 41 %
Senior Secured Loans-Second Lien - - (5) 1 %
Other Senior Secured Debt - - - -
Subordinated Debt 29 6 % (52) 7 %
Asset Based Finance 123 24 % (133) 19 %
Credit Opportunities Partners JV, LLC - - (189) 26 %
Equity/Other(1)
4 1 % (41) 6 %
Total $ 499 100 % $ (710) 100 %
(1) Equity/Other includes investments in preferred equity investments. During the three months ended March 31, 2026, purchases of preferred equity investments were $0, and sales and repayments of preferred equity investments were $16.
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2026 and December 31, 2025:
March 31, 2026
(Unaudited) December 31, 2025
Amortized
Cost(1)
Fair Value Percentage
of Portfolio
Amortized
Cost(1)
Fair Value Percentage
of Portfolio
Senior Secured Loans-First Lien $ 7,746 $ 7,310 59.6 % $ 7,819 $ 7,523 57.8 %
Senior Secured Loans-Second Lien 593 459 3.8 % 598 539 4.2 %
Other Senior Secured Debt 65 36 0.3 % 65 55 0.4 %
Subordinated Debt 100 99 0.8 % 122 126 1.0 %
Asset Based Finance 1,826 1,660 13.5 % 1,831 1,694 13.0 %
Credit Opportunities Partners JV, LLC 1,984 1,707 13.9 % 2,202 1,968 15.1 %
Equity/Other(2)
1,064 998 8.1 % 1,104 1,104 8.5 %
Total $ 13,378 $ 12,269 100.0 % $ 13,741 $ 13,009 100.0 %
(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts and PIK interest or dividends, as applicable, on investments.
(2) As of March 31, 2026, Equity/Other included $756 of preferred equity investments at fair value.
The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2026 and December 31, 2025:
March 31, 2026 December 31, 2025
Number of Portfolio Companies 236 232
% Variable Rate Debt Investments (based on fair value)(1)(2)
61.2% 60.9%
% Fixed Rate Debt Investments (based on fair value)(1)(2)
7.9% 8.2%
% Other Income Producing Investments (based on fair value)(3)
20.3% 21.4%
% Non-Income Producing Investments (based on fair value)(2)
6.4% 6.1%
% of Investments on Non-Accrual (based on fair value)
4.2% 3.4%
Weighted Average Annual Yield on Accruing Debt Investments(2)(4)
9.9% 10.1%
Weighted Average Annual Yield on All Debt Investments(5)
8.7% 9.3%
_____________________
(1)"Debt Investments" means investments that pay or are expected to pay a stated interest rate, stated dividend rate or other similar stated return.
(2)Does not include investments on non-accrual status.
(3)"Other Income Producing Investments" means investments that pay or are expected to pay interest, dividends or other income to the Company on an ongoing basis but do not have a stated interest rate, stated dividend rate or other similar stated return.
(4)The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each accruing Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as of March 31, 2026, and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as of March 31, 2026.
(5)The Weighted Average Annual Yield on All Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as of March 31, 2026, and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as of March 31, 2026.
For the three months ended March 31, 2026, our total return based on net asset value was (7.56)% and our total return based on market value was (28.21)%. For the year ended December 31, 2025, our total return based on net asset value was 0.21% and our total return based on market value was (20.31)%. See footnotes 5 and 6 to the table included in Note 11 to our unaudited consolidated financial statements included herein for information regarding the calculation of our total return based on net asset value and total return based on market value, respectively.
Direct Originations
We define Direct Originations as any investment where the Adviser or its affiliates negotiates the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These Direct Originations include participation in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions. The following table presents certain selected information regarding our Direct Originations as of March 31, 2026 and December 31, 2025:
Characteristics of All Direct Originations held in Portfolio
March 31, 2026 December 31, 2025
Number of Portfolio Companies 225 220
% of Investments on Non-Accrual (based on fair value)
3.7% 3.4%
Total Cost of Direct Originations
$13,012.7 $13,350.0
Total Fair Value of Direct Originations
$11,885.4 $12,636.0
% of Total Investments, at Fair Value
96.9% 97.1%
Weighted Average Annual Yield on Accruing Debt Investments(1)
9.9% 10.1%
Weighted Average Annual Yield on All Debt Investments(2)
8.9% 9.3%
_____________________
(1)The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each accruing Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Does not include Debt Investments on non-accrual status. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as of March 31, 2026, and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as of March 31, 2026.
(2)The Weighted Average Annual Yield on All Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as of March 31, 2026, and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as of March 31, 2026.
Credit Opportunities Partners JV, LLC
COPJV is a joint venture between the Company and SCRS. COPJV's second amended and restated limited liability company agreement, or the COPJV Agreement, requires the Company and SCRS to provide capital to COPJV of up to $2,975 in the aggregate where the Company and SCRS would provide approximately 79% and 21%, respectively, of the committed capital. Pursuant to the terms of the COPJV Agreement, the Company and SCRS each have 50% voting control of COPJV and are required to agree on all investment decisions as well as certain other significant actions for COPJV. COPJV invests its capital in a range of investments, including senior secured loans (both first lien and second lien) to middle market companies, broadly syndicated loans, equity, warrants and other investments. As administrative agent of COPJV, the Company performs certain day-to-day management responsibilities on behalf of COPJV and is entitled to a fee of 0.25% of COPJV's assets under administration, calculated and payable quarterly in arrears. As of March 31, 2026, the Company and SCRS have funded $2,520.0 to COPJV, of which $2,016.0 was from the Company.
Below is a summary of COPJV's portfolio as of March 31, 2026 and December 31, 2025:
As of
March 31, 2026
December 31, 2025
Total debt investments(1)
$ 4,308.5 $ 4,530.1
Weighted average annual yield on accruing debt investments(2)
9.4 % 9.5 %
Number of portfolio companies in COPJV 154 158
Largest investment in a single portfolio company $ 107.5 $ 107.3
Unfunded commitments $ 97.7 $ 111.9
____________
(1)"Debt Investments" means investments that pay or are expected to pay a stated interest rate, stated dividend rate or other similar stated return.
(2)The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each accruing Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for
any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. Stated annual interest rate for floating rate Debt Investments assumes the greater of (a) the respective base rate in effect as of March 31, 2026, and (b) the stated base rate floor. The base rate utilized in this calculation may not be indicative of the base rates for specific contracts as of March 31, 2026.
Portfolio Composition by Industry Classification
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2026 and December 31, 2025:
March 31, 2026
(Unaudited) December 31, 2025
Industry Classification(1)
Fair
Value
Percentage of
Portfolio
Fair
Value
Percentage of
Portfolio
Capital Goods $ 1,455 11.9 % $ 1,542 11.9 %
Commercial & Professional Services 1,563 12.7 % 1,726 13.3 %
Consumer Discretionary Distribution & Retail 54 0.4 % 60 0.5 %
Consumer Durables & Apparel 315 2.6 % 306 2.4 %
Consumer Services 269 2.2 % 263 2.0 %
Consumer Staples Distribution & Retail 102 0.8 % 99 0.8 %
Credit Opportunities Partners JV, LLC 1,707 13.9 % 1,968 15.1 %
Energy 2 0.0 % 24 0.2 %
Equity Real Estate Investment Trusts (REITs) 251 2.0 % 264 2.0 %
Financial Services 819 6.7 % 836 6.4 %
Food, Beverage & Tobacco 55 0.4 % 56 0.4 %
Health Care Equipment & Services 1,572 12.8 % 1,668 12.8 %
Household & Personal Products 111 0.9 % 112 0.9 %
Insurance 548 4.5 % 547 4.2 %
Materials 321 2.6 % 276 2.1 %
Media & Entertainment 462 3.8 % 508 3.9 %
Pharmaceuticals, Biotechnology & Life Sciences 253 2.1 % 217 1.7 %
Real Estate Management & Development - - 1 0.0 %
Software & Services 2,010 16.4 % 2,134 16.4 %
Technology Hardware & Equipment 2 0.0 % 2 0.0 %
Telecommunication Services 104 0.9 % 109 0.8 %
Transportation 294 2.4 % 291 2.2 %
Total $ 12,269 100.0 % $ 13,009 100.0 %
Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Adviser uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The Adviser uses an investment rating scale of 1 to 4. The following is a description of the conditions associated with each investment rating:
Investment
Rating 		Summary Description
1
Performing investment-generally executing in accordance with plan and there are no concerns about the portfolio company's performance or ability to meet covenant requirements.
2
Performing investment-no concern about repayment of both interest and our cost basis but company's recent performance or trends in the industry require closer monitoring.
3
Underperforming investment-some loss of interest or dividend possible, but still expecting a positive return on investment.
4
Underperforming investment-concerns about the recoverability of principal or interest.
The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of March 31, 2026 and December 31, 2025:
March 31, 2026 December 31, 2025
Investment Rating Fair
Value 		Percentage of
Portfolio 		Fair
Value 		Percentage of
Portfolio
1 $ 8,414 69 % $ 8,774 67 %
2 2,613 21 % 3,212 25 %
3 826 7 % 760 6 %
4 416 3 % 263 2 %
Total $ 12,269 100 % $ 13,009 100 %
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended March 31, 2026 and March 31, 2025
Revenues
Our investment income for the three months ended March 31, 2026 and 2025 was as follows:
Three Months Ended March 31,
2026 2025
Amount Percentage of Total Income Amount Percentage of Total Income
Interest income $ 186 61.2 % $ 240 60.0 %
Paid-in-kind interest income 38 12.5 % 62 15.5 %
Fee income 2 0.7 % 17 4.2 %
Dividend income 78 25.6 % 81 20.3 %
Total investment income(1)
$ 304 100.0 % $ 400 100.0 %
___________
(1)Such revenues represent $262 and $330 of cash income earned as well as $42 and $70 in non-cash portions relating to accretion of discount and PIK interest for the three months ended March 31, 2026 and 2025, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.
The level of interest income we receive is generally related to the balance of income-producing investments, multiplied by the weighted average yield of our investments. Fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees and other non-recurring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.
The decrease in interest and PIK income during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 is primarily attributable to the Company placing certain assets on non-accrual status during the three months ended March 31, 2026.
The decrease in dividend income during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 is primarily attributable to the decrease in dividends paid in respect to certain equity and asset based finance investments, partially offset by higher dividends on our investment in COPJV during the three months ended March 31, 2026.
Expenses
Our operating expenses for the three months ended March 31, 2026 and 2025 were as follows:
Three Months Ended March 31,
2026 2025
Management fees $ 48 $ 52
Subordinated income incentive fees 25 39
Administrative services expenses 2 3
Accounting and administrative fees 1 1
Interest expense 105 113
Other expenses 6 5
Total operating expenses $ 187 $ 213
The decrease in expenses during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 can primarily be attributed to a decrease in subordinated income incentive fees and management fees as a result of the lower asset base and lower investment income as discussed above.
The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2026 and 2025:
Three Months Ended March 31,
2026 2025
Ratio of operating expenses to average net assets 3.21 % 3.19 %
Ratio of incentive fees, interest expense and excise taxes to average net assets(1)
2.23 % 2.28 %
Ratio of net operating expenses, excluding certain expenses, to average net assets 0.98 % 0.91 %
__________
(1)Ratio data may be rounded in order to recompute the ending ratio of net operating expenses to average net assets or net operating expenses, excluding certain expenses, to average net assets.
Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as SOFR, among other factors.
Net Investment Income
Our net investment income totaled $117 ($0.42 per share) and $187 ($0.67 per share) for the three months ended March 31, 2026 and 2025, respectively.
The decrease in net investment income during the three months ended March 31, 2026 compared to the three months ended March 31, 2025 can primarily be attributed to lower investment income during the three months ended March 31, 2026 as discussed above.
Net Realized Gains or Losses
Our net realized gains (losses) on investments, foreign currency forward contracts and foreign currency for the three months ended March 31, 2026 and 2025 were as follows:
Three Months Ended March 31,
2026 2025
Net realized gain (loss) on investments(1)
$ (195) $ (18)
Net realized gain (loss) on foreign currency forward contracts (4) 0
Net realized gain (loss) on foreign currency (5) 1
Total net realized gain (loss) $ (204) $ (17)
______________
(1)We sold investments and received principal repayments, respectively, of $585 and $125 during the three months ended March 31, 2026 and $881 and $526 during the three months ended March 31, 2025.
Net Change in Unrealized Appreciation (Depreciation)
Our net change in unrealized appreciation (depreciation) on investments, foreign forward currency forward contracts and unrealized gain (loss) on foreign currency for the three months ended March 31, 2026 and 2025 were as follows:
Three Months Ended March 31,
2026 2025
Net change in unrealized appreciation (depreciation) on investments $ (377) $ (14)
Net change in unrealized appreciation (depreciation) on foreign currency forward contracts 9 (10)
Net change in unrealized gain (loss) on foreign currency 14 (26)
Total net change in unrealized appreciation (depreciation) $ (354) $ (50)
The net change in unrealized appreciation (depreciation) on investments during the three months ended March 31, 2026 was driven primarily by reduced valuations of certain portfolio companies during the three months ended March 31, 2026, including Affordable Care Inc., Production Resources Group and Medallia Inc. The net change in unrealized appreciation (depreciation) on investments during the three months ended March 31, 2025 was driven primarily by reduced valuations of certain portfolio companies during the year, including Production Resources Group and 48Forty Solutions.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2026, the net decrease in net assets resulting from operations was $(441) ($(1.57) per share) compared to a net increase in net assets resulting from operations of $120 ($0.43 per share) during the three months ended March 31, 2025.
Financial Condition, Liquidity and Capital Resources
Overview
As of March 31, 2026, we had $133 in cash, cash equivalents, including money market funds, restricted cash and foreign currency, which we or our wholly-owned financing subsidiaries held in custodial accounts, and $2,602 in borrowings available under our financing arrangements, subject to borrowing base and other limitations. As of March 31, 2026, we also had broadly syndicated investments and opportunistic investments that could be sold to create additional liquidity. As of March 31, 2026, we had unfunded debt investments with aggregate unfunded commitments of $1,326.0, unfunded equity/other commitments of $87.2 and unfunded commitments of $434.0 to COPJV. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the need arise.
We currently generate cash primarily from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities or other financing transactions. Our primary use of cash is investments in portfolio companies, payments of our expenses, including management fees, incentive fees and cost of any borrowings or other financing arrangements, including interest expenses, and the payment of cash distributions to our shareholders.
Asset Coverage
To seek to enhance our returns, we also employ leverage as market conditions permit and at the discretion of the Adviser, but in no event will leverage employed exceed the maximum amount permitted by the 1940 Act. Prior to June 14, 2019, in accordance with the 1940 Act, we were allowed to borrow amounts such that our asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. Effective June 15, 2019, our asset coverage requirement applicable to senior securities was reduced from 200% to 150%. For purposes of the 1940 Act, "asset coverage" means the ratio of (1) the total assets of a BDC, less all liabilities and indebtedness not represented by senior securities, to (2) the aggregate amount of senior securities representing indebtedness (plus, in the case of senior securities represented by preferred stock, the aggregate involuntary liquidation preference of such BDC's preferred stock). As of March 31, 2026, the aggregate amount outstanding of the senior securities issued by us was $7.3 billion. As of March 31, 2026, our asset coverage was 172%. See Note 9 for a discussion of the Company's financing arrangements.
Prior to investing in securities of portfolio companies, we invest the cash received from fees, interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments primarily in cash, cash equivalents, including money market funds, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
Financing Arrangements
The following table presents summary information with respect to our outstanding financing arrangements as of March 31, 2026:
As of March 31, 2026
(Unaudited)
Arrangement Type of Arrangement Rate Amount
Outstanding 		Amount
Available 		Maturity Date
Callowhill Credit Facility(2)
Revolving Credit Facility
SOFR+1.75%(1)
$ 326 $ 74 June 2, 2030
CCT Tokyo Funding Credit Facility(2)
Revolving Credit Facility
SOFR+1.90% - 2.05%(1)(3)
43 - June 2, 2026
Meadowbrook Run Credit Facility(2)
Revolving Credit Facility
SOFR+1.95%(1)
274 26 November 22, 2028
Senior Secured Revolving Credit Facility(2)
Revolving Credit Facility
SOFR+1.75% - 1.88%(1)(4)
2,154(5)
2,502(6)
July 16, 2030
2.625% Notes due 2027(7)
Unsecured Notes 2.63% 400 - January 15, 2027
3.250% Notes due 2027(7)
Unsecured Notes 3.25% 500 - July 15, 2027
3.125% Notes due 2028(7)
Unsecured Notes 3.13% 750 - October 12, 2028
7.875% Notes due 2029(7)
Unsecured Notes 7.88% 400 - January 15, 2029
6.875% Notes due 2029(7)(8)
Unsecured Notes 6.88% 600 - August 15, 2029
6.125% Notes due 2030(7)(8)
Unsecured Notes 6.13% 700 - January 15, 2030
6.125% Notes due 2031(7)(8)
Unsecured Notes 6.13% 400 - January 15, 2031
CLO-2 Notes(2)(9)
Collateralized Loan Obligation
SOFR+1.480% - 2.15%(1)
380 - April 15, 2037
CLO-3 Notes(2)(10)
Collateralized Loan Obligation
SOFR+1.47% - 2.10%(1)
363 - January 15, 2038
Total $ 7,290 $ 2,602
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(1)The benchmark rate is subject to a 0% floor.
(2)The carrying amount outstanding under the facility approximates its fair value.
(3)As of March 31, 2026, there was $29 term loan outstanding at SOFR+1.90% and $14 revolving commitment outstanding at SOFR+2.05%.
(4)The spread over the benchmark rate is determined by reference to the ratio of the value of the borrowing base to the aggregate amount of certain outstanding indebtedness of the Company. In addition to the spread over the benchmark rate, a credit spread adjustment of 0.10% and 0.0326% is applicable to borrowings in U.S. dollars and pounds sterling, respectively.
(5)Amount includes borrowing in Euros, pounds sterling and Australian dollars. Euro balance outstanding of €330 has been converted to U.S. dollars at an exchange rate of €1.00 to $1.15 as of March 31, 2026 to reflect total amount outstanding in U.S. dollars. Pounds sterling balance outstanding of £130 has been converted to U.S dollars at an exchange rate of £1.00 to $1.32 as of March 31, 2026 to reflect total amount outstanding in U.S. dollars. Australian dollar balance outstanding of AUD3 has been converted to U.S dollars at an exchange rate of AUD1.00 to $0.69 as of March 31, 2026 to reflect total amount outstanding in U.S. dollars.
(6)The amount available for borrowing under the Senior Secured Revolving Credit Facility is reduced by any standby letters of credit issued under the Senior Secured Revolving Credit Facility. As of March 31, 2026, $44 of such letters of credit have been issued.
(7)As of March 31, 2026, the fair value of the 2.625% Notes due 2027, the 3.250% Notes due 2027, the 3.125% Notes due 2028, the 7.875% Notes due 2029, the 6.875% Notes due 2029, the 6.125% Notes due 2030 and the 6.125% Notes due 2031 was approximately $388, $480, $685, $405, $609, $715 and $399, respectively. These valuations are considered Level 2 valuations within the fair value hierarchy.
(8)As of March 31, 2026, the carrying values of the 6.875% Notes due 2029, the 6.125% Notes due 2030 and the 6.125% Notes due 2031 include a $9, $15 and $(1) increase (decrease), respectively, as a result of an effective hedge accounting relationship. See Note 7 for additional information.
(9)As of March 31, 2026, there were $160.0 of Class A-1 Notes outstanding at SOFR+1.48%, $100.0 of Class A-1L Notes outstanding at SOFR+1.48%, $30.0 of Class A-1W Notes outstanding at SOFR+1.48%, $20.0 of Class A-2L Notes outstanding at SOFR+1.60%, $30.0 of Class B Notes outstanding at SOFR+1.75% and $40.0 of Class C Notes outstanding at SOFR+2.15%.
(10)As of March 31, 2026, there were $125.5 of Class A-1 Notes outstanding at SOFR+1.47%, $150.0 of Class A-1 Senior Floating Rate Loans outstanding at SOFR+1.47%, $19.0 of Class A-2 Notes outstanding at SOFR+1.65%, $35.6 of Class B Notes outstanding at SOFR+1.80% and $33.2 of Class C Notes outstanding at SOFR+2.10%.
See Note 9 to our unaudited consolidated financial statements included herein for additional information regarding our financing arrangements.
Equity Issuances
On May 9, 2025, we entered into separate equity distribution agreements, or the Equity Distribution Agreements, with each of Truist Securities, Inc., RBC Capital Markets, LLC, KKR Capital Markets LLC, and SMBC Nikko Securities America, Inc., pursuant to which we may, from time to time, issue and sell up to an aggregate gross amount of $750 million in shares of our common stock through public or at-the-market offerings, or the ATM Program. During the three months ended March 31, 2026, the Company did not issue or sell shares of its common stock under the ATM Program. For further details regarding the ATM Program and the Equity Distribution Agreements, see "At the Market" Offering" in Note 3 to our consolidated financial statements included herein.
RIC Status and Distributions
We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make timely distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the tenth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our stockholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we make distributions in a timely manner to our stockholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains in excess of capital losses, or "capital gain net income" (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to stockholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our stockholders, on December 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
Subject to applicable legal restrictions and the sole discretion of our Board, we intend to authorize, declare and pay regular cash distributions on a quarterly basis. We will calculate each stockholder's specific distribution amount for the period using record and declaration dates and each stockholder's distributions will begin to accrue on the date that shares of our common stock are issued to such stockholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our Board.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a stockholder's investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our stockholders. No portion of the distributions paid during the three months ended March 31, 2026 or 2025 represented a return of capital.
We intend to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those stockholders who receive their distributions in the form of shares of our common stock under the DRP. Any distributions reinvested under the plan will nevertheless remain taxable to a stockholder.
The following tables reflect the distributions per share that we have declared on our common stock during the three months ended March 31, 2026 and 2025:
For the Three Months Ended
March 31, 2026
Date Declared Dividend Record Date Payment Date Dividend per Share
February 19, 2026 Base March 18, 2026 April 2, 2026 $ 0.45
February 19, 2026 Supplemental March 18, 2026 April 2, 2026 0.03
Total Dividends Declared $ 0.48
For the Three Months Ended
March 31, 2025
Date Declared Dividend Record Date Payment Date Dividend per Share
February 25, 2025 Base March 19, 2025 April 2, 2025 $ 0.64
February 25, 2025 Supplemental March 19, 2025 April 2, 2025 0.06
Total Dividends Declared $ 0.70
See Note 5 to our unaudited consolidated financial statements included herein for additional information regarding our distributions.
Recent Developments
Distribution
On May 6, 2026, our Board of Directors declared a regular quarterly distribution of $0.42 per share which will be paid on or about July 2, 2026 to stockholders of record as of the close of business on June 17, 2026. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of our Board of Directors.
Senior Secured Revolving Credit Facility
On May 8, 2026, the Company entered into Amendment No. 1 to Third Amended and Restated Senior Secured Revolving Credit Agreement, or Amendment No. 1, amending that certain Third Amended and Restated Senior Secured Revolving Credit Agreement, originally dated July 16, 2025, by and among the Company, as borrower, each of the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and ING Capital LLC, as collateral agent. Amendment No. 1 provides for, among other things, (i) a reduction of the total commitments to approximately $4,051.7 from $4,700.0, (ii) an increase in the applicable margin with respect to lenders other than any non-extending lender with respect to the Company (a) if the Gross Borrowing Base is equal to or greater than 1.60 times the Combined Debt Amount of the Company, (x) with respect to any ABR Loan, to 0.775% per annum from 0.65% per annum, and (y) in the case of any Term Benchmark Loan or RFR Loan, to 1.775% per annum from 1.65% per annum, and (b) if the Gross Borrowing Base of the Company is less than 1.60 times the Covered Debt Amount of the Company, (x) with respect to any ABR Loan, to 0.9% per annum from 0.775% per annum, and (y) in the case of any Term Benchmark Loan or RFR Loan, to 1.9% per annum from 1.775% per annum and (iii) a reset of the minimum Shareholders' Equity floor to $3,750.0 from approximately $5,048.6.
KKR Tender Offer
Concurrently with the release of the Company's financial results for the three months ended March 31, 2026, KKR Alternative Assets L.P., a Delaware limited partnership (the "Purchaser"), announced a third-party tender offer for up to $150.0 million in aggregate amount of shares of the Company's common stock at a fixed price (the "KKR Tender Offer").
Company Share Repurchase Program
On May 6, 2026, the Board authorized the repurchase by the Company of up to $300.0 million in aggregate amount of the Company's common stock in the open market, by tender offer or in privately negotiated purchases in compliance with the Exchange Act and other applicable law (the "Company Share Repurchase Authorization"). In connection with the Company Share Repurchase Authorization, and after the completion of the KKR Tender Offer, the Company intends to enter into a trading plan under Exchange Act Rule 10b5-1, pursuant to which repurchases of shares of the Company's common stock may be made in the open market beginning 11 business days after the completion of the KKR Tender Offer, at prices below net asset value per share. The timing, manner, price and amount of any share repurchases will be determined by the Company based upon the evaluation of economic and market conditions, the market price of the shares, applicable legal, contractual and regulatory requirements and other factors. The Company Share Repurchase Authorization is scheduled to expire on June 1, 2027, unless extended, or until the aggregate repurchase amount that has been approved by the Board has been expended. The Company Share Repurchase Authorization does not require the Company to repurchase any specific number of shares of the Company's common stock and the Company cannot assure its stockholders that any shares will be repurchased under the program. The Company Share Repurchase Authorization may be suspended, extended, modified or discontinued at any time.
Convertible Preferred Stock Purchase Agreement
On May 10, 2026, the Company entered into a purchase agreement (the "Purchase Agreement") with the Purchaser, pursuant to which the Purchaser has agreed to purchase $150.0 million in newly issued shares of the Company's cumulative convertible perpetual preferred stock (the "Convertible Preferred Stock"). The Convertible Preferred Stock will be a series of the Company's preferred stock, par value $0.001 per share.
The closing of the purchase is subject to the expiration of the KKR Tender Offer, and other customary closing conditions and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and is expected to occur on the 11th business day following the expiration of the KKR Tender Offer.
The Company intends to use the proceeds from the sale of Convertible Preferred Stock for general corporate purposes including, without limitation, funding any Company common stock repurchase program or debt repayment. The Convertible Preferred Stock will rank senior to the Company's common stock with respect to all liquidation, winding up, dissolution, dividend and distribution rights. The Convertible Preferred Stock will have a liquidation preference equal to $25.00 per share (the "Liquidation Preference"), plus an amount equal to all accrued but unpaid dividends, if any, accumulated to (but excluding) the date fixed for distribution or payment, whether or not earned or declared by the Company, but excluding interest on any such distribution or payment. Dividends on the Convertible Preferred Stock will be payable on a quarterly basis in an initial amount equal to 5.00% per annum of the Liquidation
Preference per share, payable in cash or, at the Company's option, 7.00% per annum of the Liquidation Preference per share payable in additional shares of Convertible Preferred Stock; provided that the Company shall be prohibited from paying dividends in additional shares of Convertible Preferred Stock if the conversion feature at the time of issuance of such additional shares is equal to or greater than 10.00% of the value of the Convertible Preferred Stock. After the 5.5-year anniversary of the issue date, the dividend rate will increase annually by 1.00% per annum.
After the 6-month anniversary of the issue date, the Convertible Preferred Stock will be convertible into (i) the number of shares of the Company's common stock equal to the quotient of (a) the Liquidation Preference, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) to, but excluding, the date fixed for such conversion and (b) the conversion price as of the applicable conversion date (which shall not be less than the NYSE Minimum Price (as defined below)), plus (ii) cash in lieu of fractional shares. The initial conversion price will equal $18.83; provided, however, that in no event shall the conversion price be less than the NYSE Minimum Price.
At any time, upon approval by the Board, including a majority of the Independent Directors, the Company may, at its election, redeem all or any part of the then-outstanding shares of Convertible Preferred Stock in cash at a price per share equal to the Liquidation Preference, plus an amount equal to all accumulated but unpaid dividends, if any, accumulated to (but excluding) the date fixed for redemption, whether or not earned or declared by the Company, but excluding interest on any such distribution or payment. The Purchaser will have the right to convert any shares of the Convertible Preferred Stock prior to the date fixed for such redemption. At any time on or after the thirty-six month anniversary of the issue date, upon approval by the Board, including a majority of the Independent Directors, so long as the volume weighted average price of the Company's Shares on the NYSE for the 30 consecutive trading days ending on (and including) the trading day immediately preceding the date on which the Company delivers notice of redemption equals or exceeds the conversion price then in effect, the Company may, at its election, redeem all or any part of the then then-outstanding shares of Convertible Preferred Stock by delivering Shares in lieu of cash, at a redemption price equal to the Liquidation Preference, plus an amount equal to all accumulated but unpaid dividends, if any, accumulated to (but excluding) the date fixed for redemption, whether or not earned or declared by the Company, but excluding interest on any such distribution or payment. The Purchaser will have the right to convert any shares of the Convertible Preferred Stock prior to the date fixed for such redemption.
At any time after the 6-year anniversary of the issue date, upon 90 days' notice, the Purchaser will have the option, at its election, to require the Company to redeem any or all of the then-outstanding shares of Convertible Preferred Stock for cash consideration equal to the Liquidation Preference of the shares of Convertible Preferred Stock to be redeemed, plus an amount equal to accumulated but unpaid dividends, if any, on such shares (whether or not earned or declared, but excluding interest on such dividends) to, but excluding, the date fixed for such redemption. The Purchaser will have the right to convert any shares of Convertible Preferred Stock prior to the date fixed for any such redemption.
Upon the occurrence of a Change of Control of the Company (as defined in the articles supplementary that will establish the Convertible Preferred Stock), the Purchaser will have the option to require the Company to immediately redeem all then-outstanding shares of Convertible Preferred Stock for cash consideration equal to the Liquidation Preference thereof, plus an amount equal to all accumulated but unpaid dividends thereon to, but excluding, the redemption date (whether or not earned or declared, but excluding interest). The Purchaser will have the right to convert any shares of Convertible Preferred Stock prior to the date fixed for such Change of Control redemption.
Pursuant to the Purchase Agreement, the Purchaser has agreed that, for a period of one year following the issuance of the Convertible Preferred Stock (the "Restriction Date"), it will not, directly or indirectly, sell, pledge, transfer, dispose of, or enter into any swap or other arrangement that transfers any of the economic consequences of ownership of the Convertible Preferred Stock or the shares of the Company's common stock into which it is convertible, subject to exceptions for (i) redemption of Convertible Preferred Stock by the Company and (ii) the Purchaser's exercise of its conversion right. Following the Restriction Date, the Purchaser will be required to notify the Board of any transfer substantially concurrently therewith.
Each holder of Convertible Preferred Stock will be entitled to vote on an as-converted basis on each matter submitted to a vote of stockholders of the Company. In addition, for so long as the Company is subject to the 1940 Act, the holders of Convertible Preferred Stock, voting separately as a single class, shall have the right to elect two (2) members of the Board at all times (initially expected to be James H. Kropp and Elizabeth J. Sandler), and the balance of the directors shall be elected by the holders of shares of the Company's common stock and the Convertible Preferred Stock voting together; provided, however, if the Adviser is the Company's investment adviser and the Purchaser or its affiliates beneficially own greater than 50% of the outstanding Convertible Preferred Stock, the Independent Directors of the Company selected by the Purchaser or its affiliates shall be eligible to serve as directors elected separately by the holders of Convertible Preferred Stock. If, at any time, accumulated dividends on the outstanding shares of Convertible Preferred Stock equal to at least two full years' dividends shall be due and unpaid, or if holders of any other preferred stock become entitled to elect a majority of directors of the Company under the 1940 Act, then the number of directors constituting the Board shall automatically increase by the smallest number that, when added to the two directors elected exclusively by holders of the Convertible Preferred Stock, would constitute a majority of the Board. During any such period, the holders of the
Convertible Preferred Stock and the holders of any other outstanding preferred stock of the Company shall have the power to elect such additional directors, voting separately as a class.
"NYSE Minimum Price" means the lower of (x) the official closing price of the shares of the Company's common stock on the NYSE immediately preceding the signing of the Purchase Agreement and (y) the average official closing price of the shares of the Company's common stock on the NYSE for the five trading days immediately preceding the signing of the Purchase Agreement, in each case, as adjusted pursuant to certain anti-dilution adjustments.
The shares of Convertible Preferred Stock were offered in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act"). These securities have not and will not be registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold in the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, as applicable.
The description above is only a summary of the material provisions of the Purchase Agreement and is qualified in its entirety by reference to the copy of the Purchase Agreement, which is filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
Registration Rights Agreement
Concurrently with the issuance of the Convertible Preferred Stock, the Company and the Purchaser expect to enter into a Registration Rights Agreement (the "Registration Rights Agreement"), pursuant to which the Purchaser (and certain permitted transferees) will have the right to require the Company to register for resale under the Securities Act shares of the Company's common stock issued upon conversion of the Convertible Preferred Stock and certain other shares of the Company's common stock held by the Purchaser and its affiliates as of the closing date of the Convertible Preferred Stock offering (collectively, the "Registrable Securities"). The Purchaser will have demand registration rights (not to exceed three Demand Requests (as defined in the Registration Rights Agreement) in any 365-day period), customary piggyback registration rights in connection with Company-initiated registrations, and the right to require the Company to use commercially reasonable efforts to maintain a continuously effective shelf registration statement on Form N-2 covering the Registrable Securities from and after the Registration Date until the Purchaser has sold all Registrable Securities. The Registration Rights Agreement will include customary indemnification and contribution provisions, which survive termination of the Registration Rights Agreement.
The description above is only a summary of the material provisions of the Registration Rights Agreement and is qualified in its entirety by reference to the copy of the Registration Rights Agreement, a form of which is included in the Purchase Agreement filed as Exhibit 10.2 to this Quarterly Report on Form 10-Q.
Subordinated Income Incentive Fee Waiver
Beginning with the quarter ending June 30, 2026, KKR Credit has agreed to waive 100% of its portion of the subordinated income incentive fee (the "Incentive Fee Waiver"). The Incentive Fee Waiver applies to 50% of the subordinated income incentive fee that would otherwise be paid by the Company under the Advisory Agreement. The Incentive Fee Waiver will continue for four consecutive quarters.
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management utilizes available information, including our past history, industry standards and the current economic environment, among other factors, in forming the estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in "Note 2. Summary of Significant Accounting Policies" in our consolidated financial statements. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. We have identified one of our accounting policies, valuation of portfolio investments, specifically the valuation of Level 3 investments, as critical because it involves significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below and in the notes to our consolidated financial statements included herein.
As of March 31, 2026, our investment portfolio, valued at fair value in accordance with our Board-approved valuation policy, represented 95.67% of our total assets, as compared to 94.76% of our total assets as of December 31, 2025.
Valuation of Portfolio Investments
Our Board is responsible for overseeing the valuation of our portfolio investments at fair value as determined in good faith pursuant to the Adviser's valuation policy. As permitted by Rule 2a-5 of the 1940 Act, our Board has designated the Adviser as our valuation designee with day-to-day responsibility for implementing the portfolio valuation process set forth in the Adviser's valuation policy.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the FASB clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical securities; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Adviser determines the fair value of our investment portfolio each quarter. Securities that are publicly-traded with readily available market prices will be valued at the reported closing price on the valuation date. Securities that are not publicly-traded with readily available market prices will be valued at fair value as determined in good faith by the Adviser, in accordance with valuation policies approved by our Board. In connection with that determination, the Adviser will prepare portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party pricing and valuation services.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
•our quarterly fair valuation process begins by the Adviser facilitating the delivery of updated quarterly financial and other information relating to each investment to an independent third-party pricing or valuation service;
•the independent third-party pricing or valuation service then reviews and analyzes the information, along with relevant market and economic data, and determines proposed valuations for each portfolio company or investment according to the valuation methodologies in the Adviser's valuation policy and communicates the information to the Adviser in the form of a valuation range for Level 3 assets;
•the Adviser then reviews the preliminary valuation information for each portfolio company or investment and provides feedback about the accuracy, completeness and timeliness of the valuation-related inputs considered by the independent third-party pricing or valuation service and any suggested revisions thereto prior to the independent third-party pricing or valuation service finalizing its valuation range;
•the Adviser then provides the Board's valuation committee with its valuation determinations and valuation-related information for each portfolio company or investment, along with any applicable supporting materials; and other information that is relevant to the fair valuation process as required by the Adviser's board reporting obligations;
•the Board's valuation committee meets with the Adviser to receive the relevant quarterly reporting from the Adviser and to discuss any questions from the valuation committee in connection with the valuation committee's role in overseeing the fair valuation process; and
•following the completion of its fair value oversight activities, the valuation committee (with the assistance of the Adviser) provides our Board with a report regarding the quarterly valuation process.
In circumstances where the Adviser deems appropriate, the Adviser's internal valuation team values certain investments. When performing the internal valuations, the Adviser utilizes similar valuation techniques as an independent third-party pricing service would use. Such valuations are approved by an internal valuation committee of the Adviser, with oversight from the valuation committee of the Board, as described above.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, the Adviser may use any independent third-party pricing or valuation services for which it has performed the appropriate level of due diligence. However, the Adviser is not required to
determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information sourced by the Adviser or provided by any independent third-party valuation or pricing service that the Adviser deems to be reliable in determining fair value under the circumstances. Below is a description of factors that the Adviser and any independent third-party valuation services may consider when determining the fair value of our investments.
The valuation methods utilized for each portfolio company may vary depending on industry and company-specific considerations. Typically, the first step is to make an assessment as to the enterprise value of the portfolio company's business in order to establish whether the portfolio company's enterprise value is greater than the amount of its debt as of the valuation date. This analysis helps to determine a risk profile for the applicable portfolio company and its related investments, and the appropriate valuation methodology to utilize as part of the security valuation analysis. The enterprise valuation may be determined using a market or income approach.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Adviser may incorporate these factors into discounted cash flow models to arrive at fair value. Various methods may be used to determine the appropriate discount rate in a discounted cash flow model.
Domestic and foreign fixed-income instruments and non-exchange traded derivatives are normally valued on the basis of quotes obtained from brokers and dealers or pricing services using data reflecting the earlier closing of the principal markets for those securities. Bank loans, including senior secured floating rate and fixed-rate loans, are valued by using readily available market quotations or another commercially reasonable method selected by an independent, third-party pricing service that has been engaged by the Adviser, or, if such independent, third-party valuations are not available, by using broker quotations. Senior secured adjustable, variable or floating rate loans for which an active secondary market exists to a reliable degree will be valued at the bid price in the market for such loans, as provided by a loan pricing service. Directly originated loans are valued on an individual loan level. In doing so, the Adviser may engage an independent, third-party valuation agent, and fair valuation of such loans will be performed using inputs that incorporate borrower level data, including significant events affecting the issuer or collateral and market developments. Prices obtained from independent pricing services use information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Exchange traded options, futures and options on futures are valued at the settlement price determined by the relevant exchange. The value of swaps, including credit default swaps, total return swaps and interest rate swaps will be determined by obtaining at least one dealer quotation (including information from counterparties) or valuations from third-party pricing services. If no quotations or valuations are available, or if such quotations or valuations are believed to be unreliable, swaps will be fair valued pursuant to procedures adopted by the Adviser and overseen by the Board.
Other factors that may be considered include the borrower's ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing the debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security. The Adviser will normally use pricing data for domestic or foreign equity securities received shortly after the close of the primary securities exchange on which such securities trade and does not normally take into account trading, clearances or settlements that take place after the close of the exchange.
When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. The Adviser subsequently values these warrants or other equity securities received at their fair value.
See Note 8 to our unaudited consolidated financial statements included herein for additional information regarding the fair value of our financial instruments.
Other Contractual Obligations
We have entered into agreements with the Adviser to provide us with investment advisory and administrative services. Payments for investment advisory services under the Advisory Agreement are equal to (a) an annual base management fee based on the average weekly value of our gross assets (excluding cash and cash equivalents) and (b) an incentive fee based on our performance.
The Adviser is reimbursed for administrative expenses incurred on our behalf. See Note 4 to our unaudited consolidated financial statements included herein for a discussion of these agreements and for the amount of fees and expenses accrued under these agreements during the three months ended March 31, 2026 and 2025.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
FS KKR Capital Corp. published this content on May 11, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 11, 2026 at 11:12 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]