FS KKR Capital (NYSE:FSK) management used its fourth-quarter and full-year 2025 earnings call to outline progress on origination and balance sheet initiatives, while also addressing portfolio markdowns and higher nonaccruals that weighed on net asset value (NAV) and near-term income expectations.
2025 priorities and updated 2026 focus
Chief Executive Officer Michael Forman said the company met several goals set for 2025, including originating “attractive, well-structured investments” and paying $2.80 per share in total distributions during the year through base and supplemental dividends. Forman said the company originated $5.6 billion of predominantly first-lien and asset-based finance investments during 2025. He also highlighted liability management actions, including issuing $400 million of new unsecured notes, closing a new $400 million bilateral lending facility, launching two new middle-market CLOs, and amending the senior secured revolving credit facility to increase commitments, extend maturity, and reduce pricing.
Quarterly results, NAV decline, and dividend declaration
For the fourth quarter, Forman said FSK generated GAAP net investment income (NII) of $0.48 per share and adjusted NII of $0.52 per share, compared with the company’s public guidance of $0.51 and $0.56 per share, respectively. NAV per share declined 5% to $20.89 at December 31, 2025, from $21.99 at the end of the third quarter.
Forman attributed the quarterly NAV change primarily to two factors: a $0.22 per share decline resulting from paying a $0.70 per share distribution versus GAAP NII of $0.48 per share, and a $0.87 per share decline from lower valuations on certain investments. The company ended the quarter with approximately $3.8 billion of available liquidity.
Based on its updated dividend framework and expected operating results, the board declared a first-quarter 2026 distribution of $0.48 per share, including a $0.45 base distribution and a $0.03 supplemental distribution. Forman said this represented a 100% payout of GAAP NII and a 9.2% yield on ending fourth-quarter NAV.
Credit performance: key markdowns and nonaccrual additions
President and Chief Investment Officer Dan Pietrzak said recent underperformance reflected challenges in several legacy and advisor-originated investments, naming Production Resource Group (PRG), Medallia, CubicCorp, KBS, and 48Forty. He said management was actively engaged in these situations and pursuing company-specific solutions to stabilize performance and maximize recoveries.
Pietrzak added that nonaccrual assets were higher than the company would like, which he said tempers the near- to intermediate-term view for NII. As a result, he said the 2026 dividend—previously expected to equate to around 10% of NAV—may now be “more in the range of 9% of net asset value.”
During the quarter, Pietrzak said about 50% of net realized and unrealized losses were attributable to four investments:
- Production Resource Group (PRG): Pietrzak said softer operating performance amid headwinds in TV, film, and music contributed to about $47 million of net losses in the quarter.
- Medallia: Competitive pressures and financial underperformance contributed $29 million of unrealized losses.
- Peraton: Contributed $23 million of unrealized losses.
- CubicCorp: An existing nonaccrual investment; Pietrzak cited order and implementation delays and said it contributed $21 million of unrealized depreciation.
FSK added five investments to nonaccrual status in the fourth quarter and removed one. New nonaccruals were Alacrity Solutions, AmeriVet Partners, Dental Care Alliance, Gracian, and Lionbridge Technologies, totaling $255 million of cost and $214 million of fair value. PRG was removed from nonaccrual status.
As of December 31, nonaccruals were 5.5% of the portfolio on a cost basis and 3.4% on a fair value basis, compared with 5.0% and 2.9% at September 30. Pietrzak noted the point-in-time measure was above an industry average cost-basis nonaccrual rate of about 3.8%, while adding that KKR’s long-term average since April 2018 was 1.2%.
Origination activity and portfolio composition
Pietrzak said the company evaluated 13% more investment opportunities during 2025 and remained “extremely selective,” with a focus on smaller position sizes across more borrowers. He said management continued to see the best risk-adjusted returns in first-lien loans and asset-based finance investments.
In the fourth quarter, FSK originated about $1.1 billion of new investments, with roughly 80% tied to add-on financings for existing portfolio companies and long-term KKR relationships. Factoring in $806 million of net sales and repayments (including sales to the joint venture), the portfolio increased by $292 million. He described the mix of new originations as 65% first-lien loans, 15% asset-based finance investments, 18% capital calls to the joint venture, and 2% equity and other investments. New direct lending commitments carried a weighted average coupon of SOFR plus 475 basis points, with leverage of 6.2x through FSK’s security and weighted average EBITDA of about $352 million.
Chief Financial Officer Steven Lilly said that as of December 31, 2025, the investment portfolio had a fair value of $13 billion across 232 portfolio companies. The weighted average yield on accruing debt investments was 10%, down from 10.5% the prior quarter. Lilly also said the portfolio was 58% first-lien loans and 62% senior secured debt, while the joint venture represented about 15% of fair value. On a look-through basis including joint venture holdings, first-lien loans totaled about 68% and senior secured investments about 72% of the total portfolio.
Guidance, leverage, and spillover income
Lilly said total investment income was $348 million in the fourth quarter, down $25 million from the third quarter, with interest income declining due to new nonaccruals, lower base rates, and repayment of higher-yielding investments. He said interest expense was $110 million and the weighted average cost of debt was 5.1% as of December 31.
For the first quarter of 2026, Lilly guided to GAAP NII of approximately $0.45 per share and adjusted NII of about $0.44 per share. He also noted the company closed its third middle-market CLO in December, raising $363 million of secured debt priced at a weighted average rate of SOFR plus 157 basis points.
Leverage increased quarter-over-quarter, with gross and net debt-to-equity at 130% and 122% at December 31, compared with 120% and 116% at September 30. Lilly said the company remained within its target range of 1.0 to 1.25 times net debt-to-equity. He also noted the next maturity after the January 2026 maturity of $1 billion of unsecured bonds is a $400 million bond due in January 2027.
On spillover income, Lilly said the company ended the year with an estimated $464 million of spillover, which he characterized as roughly three and a half quarters at the current dividend rate. He said there may be timing differences tied to partnership tax allocations and that the company expects more clarity in the August-September timeframe. Lilly added that if an additional payment is needed later in the year to satisfy spillover-related requirements, the company would make it, but emphasized the current approach differs from the prior year’s practice of effectively paying a fixed $0.70 per share quarterly distribution through 2025.
About FS KKR Capital (NYSE:FSK)
FS KKR Capital Corp (NYSE:FSK) is a closed-end, externally managed business development company that primarily invests in private middle-market U.S. companies. The firm seeks to generate current income and capital appreciation by structuring investments in floating-rate senior secured loans, unitranche financings, second lien debt and mezzanine instruments. As a business development company, FSK provides financing solutions designed to support growth initiatives, acquisitions, leveraged buyouts and recapitalizations for privately held enterprises.
Established in 2018 through a strategic partnership between FS Investment Corporation and KKR Credit Advisors, a division of global investment firm KKR & Co Inc, FSK combines the credit underwriting capabilities of KKR’s global platform with FS’s expertise in private credit markets.
