FS KKR Capital Q2 2026 Earnings: Leverage Falls While NAV Declines

FS KKR Capital (NYSE: FSK) reported second-quarter 2026 total investment income of $290 million, down from $398 million a year earlier, while its GAAP diluted loss narrowed to $0.13 per share from $0.75. Net investment income was $122 million, or $0.44 per share, but $154 million of net realized and unrealized losses kept total GAAP earnings negative. Portfolio rotation reduced leverage and non-accrual exposure sequentially, although net asset value fell to $18.30 per share.

Core Earnings Data

Investment income declined across most major categories. Interest income from non-controlled and unaffiliated investments fell to $166 million from $224 million, while paid-in-kind interest, fee income, and dividend and other income were also lower in aggregate.

Net expenses decreased by $57 million, helped by lower interest expense, lower management fees, and an $11 million subordinated income incentive fee waiver. That reduction did not fully offset the decline in investment income, leaving net investment income down about 29% year over year.

Sequentially, net investment income increased to $0.44 per share from $0.42 in the first quarter. Adjusted net investment income, a non-GAAP measure, rose to $0.43 from $0.41 per share.

Portfolio Activity and Credit Quality

FSK purchased $590 million of investments during the quarter, compared with $1.334 billion of sales and repayments. That $744 million gap reduced the investment portfolio’s fair value to $11.418 billion from $12.269 billion at the end of March, a decline of about 6.9%.

Senior secured securities represented 63.0% of the portfolio. The annual yield on accruing debt investments edged down to 9.8% from 9.9%, while the yield on all debt investments increased to 8.8% from 8.7%.

Credit indicators improved modestly. Non-accrual investments declined to 3.8% of the portfolio at fair value and 7.1% at amortized cost, compared with 4.2% and 8.1%, respectively, in the prior quarter. However, exposure to the ten largest portfolio companies increased to 21% from 20%.

Realized and Unrealized Losses Still Outweighed Investment Income

The quarter’s central earnings issue was the gap between positive investment income and continuing portfolio losses. FSK generated $122 million of net investment income, but $154 million of net realized and unrealized losses—plus a $2 million loss on debt extinguishment—resulted in a $34 million GAAP decrease in net assets from operations.

The largest negative components included $116 million of unrealized depreciation on controlled and affiliated investments and $72 million of realized losses on non-controlled affiliated investments. These were partly offset by $85 million of unrealized appreciation on non-controlled affiliated investments.

Although the total realized and unrealized loss improved sharply from both the prior year and the first quarter, it remained large enough to offset recurring investment income. NAV consequently declined to $18.30 per share from $18.83 at the end of March, a decrease of about 2.8%.

Leverage, Liquidity, and Distribution Coverage

Debt principal outstanding fell to $6.491 billion from $7.290 billion sequentially. The debt-to-equity ratio declined to 127% from 138%, while the non-GAAP net debt-to-equity ratio fell to 122% from 131%. Management said leverage had returned to its target range.

FSK ended the quarter with $109 million of cash, cash equivalents, restricted cash, and foreign currency, plus $3.1 billion available under its financing arrangements, subject to borrowing-base and other limitations. Unsecured debt represented 72% of total debt, and the weighted average effective interest rate was 5.49%.

The board declared a third-quarter common-stock distribution of $0.44 per share, equal to second-quarter GAAP net investment income per share but one cent above adjusted net investment income. Management explicitly stated that the 50% subordinated income incentive fee waiver helped support both net investment income and the distribution; the financial statements recorded an $11 million waiver for the quarter.

FSK also completed several capital actions. A KKR subsidiary finished a $150 million tender offer, FSK issued $150 million of convertible preferred stock to a KKR subsidiary, and the company began its $300 million repurchase program. From the program’s June 29 start through August 5, FSK repurchased approximately $40 million of common shares at a weighted average price of $10.73 per share, below reported NAV.

Management View

CEO and Chairman Michael Forman emphasized the sequential improvement in net investment income, lower leverage, and progress reducing non-accrual assets. President and CIO Daniel Pietrzak said the capital actions announced in May were progressing as planned and linked them with ongoing portfolio rotation and efforts to improve portfolio quality.

Investor Risks

• Continued portfolio losses: Realized and unrealized losses still exceeded net investment income, producing a GAAP loss and further NAV erosion.
• A smaller income-producing portfolio: Sales and repayments substantially exceeded new purchases. Continued net runoff could pressure investment income if deployment remains below repayments.
• Distribution reliance on fee support: The declared $0.44 distribution matched GAAP net investment income but exceeded adjusted net investment income by one cent, and management acknowledged that the incentive-fee waiver supported the result.
• Residual credit and concentration exposure: Non-accrual levels improved but remained 7.1% at amortized cost, while exposure to the ten largest portfolio companies increased to 21%.
• Leverage remains meaningful: Deleveraging improved the financial profile, but debt still equaled 127% of common equity, leaving results sensitive to portfolio valuation changes and financing costs.

Summary

FS KKR Capital’s second quarter showed progress on leverage and non-accrual exposure, but the portfolio continued to generate realized and unrealized losses that outweighed recurring investment income and reduced NAV. The main issues for coming quarters are whether portfolio rotation can stabilize credit performance without further weakening the income base, and whether investment income can support the $0.44 distribution without continued fee waivers.