Q3 2019 Earnings Call
Good morning, welcome to Aeris Capital Corporation's third quarter ended September Thirtyth Tiny 19 earnings conference call at this time.
Then sorry, now listen only mode. As a reminder, this conference is being recorded on Wednesday October Thirtyth Tony 19.
I'll turn the conference over to Mr., John Stilmar of Investor Relations. Please go ahead Sir.
Thank you Carl and good morning, everyone welcome to Aeris Capital Corporation's third quarter ended September Thirtyth 2019 earnings Conference call.
At this time all participants are in listen only mode. As a reminder, this conference is being recorded on Wednesday October Thirtyth 2019.
Thanks, Let me start with some important reminders comments made during the course of this conference call and web cast and accompanying documents contain forward looking statements that are subject to risks and uncertainties.
Many of these forward looking statements can be identified by the words, such as anticipates believes expects intends well should they in similar such expression. The companys actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its FCC filings.
Capital Corporation assumes no obligation to update any such forward looking statements. Please also note that past performance or market information is not the guarantee of future results.
During this conference call. The company May discuss certain non-GAAP measures as defined by a C.C. regulation G. Such as core earnings per share or <unk>. The company believes the core EPS provides a useful information for investors regarding financial performance because it is one method. The company uses to measure its financial condition and results of operation.
A reconciliation of course S to the NAV per share increase or decrease stockholders' equity, resulting from operations. The most directly comparable GAAP financial measure can be found an accompanying slide presentations for this call. In addition reconciliation of these measures may also be found in our earnings release filed this morning with the FCC on form 8-K.
Certain information discussed in his presentation, including information relating to portfolio companies was derived from third party sources and it's not been independently verified and accordingly, the company makes no representation or warranty is with respect to this information.
The company's third quarter ended Septemberthirty 2019 earnings presentation can be found on the company's website at Www Dot Aeris capital Corp. Dotcom by clicking on the Q3 19 earnings presentation link on the home page of the Investor Resources section.
There is capital corporations, earning release and 10-Q are also available on the company's website.
Now I'll turn the call over to Kipp, Deveer Ares capital Corporation's Chief Executive Officer.
Thanks, a lot John .
Hello, everyone and thanks for joining the call today.
I'm here with our co presidents, Michael Smith, and Mitch Goldstein, our Chief Financial Officer, Penni roll and several other members of the management team.
I'd like to take a few minutes to highlight our third quarter results and to provide some thoughts on the current market conditions.
After that I'll turn the call ever to Penny and the Michael who are covered <unk>, who will cover our detailed financial results and discuss recent investment activity and some summary metrics for the portfolio.
This morning, we reported another strong quarter with Q3 core earnings of 48 cents per share well above our regular an additional dividends declared for the quarter.
We also continue to experience stable credit performance with no new non accruals this quarter.
Finally, we believe we're in a strong liquidity position entering the third quarter with approximately $3 billion of cash and committed debt capital available to us.
Overall, we feel very good about her performance and our balance sheet position.
In terms of new investment activity.
I would describe the market that we operate in as one that remains competitive but investable.
Transaction volumes are running below levels for last year and this is increased pressure on some to put capital to work, leading some aggressive behavior and lower quality underwriting by certain market participants.
We believe that we continue to have the many competitive advantages we have developed at a RCC to differentiate us and that our experience in this market will serve as well.
As we look at the market today, we're beginning to see some changes and the broadly syndicated markets that might lead to more broad based discipline in the middle market.
Moderating CLO formation and continued outflows from retail loan funds or two factors that have led to a slowdown in activity in the broadly syndicated leverage loan market.
In addition, there is a widening dispersion of credit performance and the broadly syndicated market. It should begin to filter into the middle market.
And this is made 2019 to more bifurcated credit pickers market, which we see as a positive for us.
Since the middle markets typically influenced by the risk reward dynamics of these larger broadly syndicated transactions, we remain hopeful that more friendly terms and opportunities are underway in the middle market.
Even with this we continue to execute on our playbook, focusing on high quality companies and using our sourcing and competitive advantages to seek the best investments.
Our market leadership position with 100, plus investment professionals and national coverage footprint and long tenure in the market generates opportunities for more than 500 active sponsor relationships as well as with many non sponsor borrowers.
Additionally, our significant capital base, an ability to be a meaningful and stable source of capital positions us uniquely to support our best borrowers.
In the third quarter, 47% of our new investment commitments were to existing borrowers, which we continue to view as a differentiated source of deal flow with attractive informational and structural advantages.
And when taken together these sourcing advantages continue to enable us to be highly selective our selectivity ratio for new companies. This quarter was 4% inline with our historical average despite the unusually busy quarter.
I have 2.4 billion and new commitments.
He is sourcing advantages coupled with our consistent investment approach and our conservative balance sheet construction has enabled us to deliver strong returns to shareholders through a variety of market conditions. We feel we have the strong plan in place for the current market I'd like to turn the call over now to Penny to provide more detail in terms of a financial.
Yes.
Thanks, Jeff and good morning.
As Jim stated our core earnings per share were 48 cents for the third quarter 2019, as compared to 49 cents for the second quarter 2019, and 45 cents for the third quarter of 2018.
Core earnings were stable versus Q2 2019, the increase versus Q3 2018, driven by higher interest and dividend income that primarily resulted from a larger portfolio as compared to Q3 of 18.
In addition to our core earnings for the third quarter 2019, we reported modest net realized and unrealized losses on investments and other transactions totaling $37 million are approximately <unk>, 0.3% of the average portfolio for the quarter.
Our GAAP earnings per share for the third quarter, 2019, or 41 cents compared to 47 cents, probably the second quarter 2019, and 49 cents for the third quarter 2018.
As of September 32019, our investment portfolio was $13.9 billion at fair value.
Increase of 24% from a year ago and 7% from the prior quarter.
Also at September Thirtyth, the weighted average yield on our debt and other income producing securities at amortized cost declined to 9.8% from 10.4% as a second quarter and the weighted average yield on total investments at amortized cost was 8.8% compared to 9.2% at June .
Yes.
Yields at September Thirtyth reflect decreases in LIBOR as well as a higher concentration of first lien senior secured loans as compared to the prior quarter.
Moving to the right hand side of the balance sheet, our stockholders equity at September Thirtyth was $7.4 billion, resulting in a net asset value per share of $17.26, which was basically flat with a quarter ago and up <unk>, 0.6% from December 31st 2018.
As of September Thirtyth 2019, our debt to equity ratio net of available cash was <unk> 0.89 time, which increased from our debt to equity ratio net of available cash of <unk> 0.77 times at June Thirtyth.
We ended the quarter just below the bottom end of our target leverage range of 0.9 to 1.25 time.
As Michael will discuss later Q3 was unusually busy so we currently don't expect to see similar growth in the fourth quarter.
We continue to execute on our strategy of extending and raising additional committed financing to our already diverse capital structure, taking advantage of favorable market conditions. We reopened our most recent five year investment grade unsecured note issuance and raised an additional $250 million on top of the existing six.
Hundred $50 million of notes already outstanding.
The additional debt was issued at a premium resulting in a 3.68% effective yield to maturity as compared to the 4.2% coupon on the original issuance in June through June 2019.
Building on our successes of upsizing, extending our committed bank facilities in the third quarter, we upsized, our existing credit facility with SMBC by an incremental $100 million, bringing the aggregate facility size to 500 million.
We also extended the facilities reinvestment period to September 2022.
As of September Thirtyth 2019, our total available liquidity, including 142 million in available cash was approximately $3 billion.
With only 600 million of debt maturities between now and the end of 2021, we believed that our balance sheet as and a strong position with significant available capital to invest through a variety of market conditions in the years ahead.
Shifting to our dividends payable we announced this morning that we declared a regular fourth quarter dividend of 40 cents per share also during the fourth quarter, we will pay the previously declared additional dividend a two cents per share.
This is the last of our four previously declared additional quarterly dividends of two cents per shares to be paid in 2019.
The fourth quarter regular dividend will be paid on December 30th to stockholders of record on December 16th and the two cents per share additional dividends will be payable on December 27 to stockholders of record on December 16.
Following the filing of our 2018 tax return we determined that our final taxable income spillover from 2018 going into 2019 was $343 million or 80 cents per share.
Which provides us with a significant amount of undistributed earnings.
Given the amount of spillover coming into 2019 combined with our year to date 2019 core earnings in excess of our dividends paid we believe we will continue to be in a strong undistributed taxable income position at the end of this year.
Before I turn the call over to Michael I wanted to remind everyone that the third quarter was the last quarter of our 10 quarter fee waiver that was put into place in conjunction with the American capital acquisition.
As you May recall, our advisor voluntarily waived a total of $100 million of income based fees over 10 quarters or $10 million per quarter in order to aid the company's profitability as we transitioned out of the lower and Nonyielding American capital portfolio into higher yielding Aries directly originated investment.
Since we closed on the acquisition in January of 2017, we have exited almost 2 million $2 billion of these investments realizing a meaningful IR generated a higher level of overall core earnings and expanded our quarterly dividend from 38 cents per share to 40 cents per share.
Well during the same time, increasing air Ccs net asset value over 80 cents per share.
In summary, we believe the fee waiver had the intended impact and the American capital acquisition has been a success for shareholders. While also positioning the company for future success.
I will now turn the call over to Michael to walk through our investment activities for the quarter.
Thanks Penny.
As as Mitch Goldstein, and I do each quarter I'd like to spend a few minutes, providing more detail on our third quarter investment in portfolio performance. I will then provide a quick update on post quarter end activity and our backlog and pipeline.
During the third quarter, our team originated 2.4 billion of new commitments across 50 transactions with 90% of the commitments in leading and controlling first lien loans. Additionally, nearly two thirds of these commitments were in various service related sectors that have per performed well for us in past.
That cycles.
As Kip mentioned, although broader M&A volume has cooled companies continue to seek additional capital for growth initiatives and strategic add on acquisitions are significant portfolio and position of incumbency continues to be a meaningful competitive advantage in sourcing new investments and known.
Good quality borrowers.
This quarter 32 of our 50, new commitments came from existing borrowers.
Of note the EBITDA of the company's we financed in the third quarter ranged from $12 million to $116 million with a weighted average EBITDA of 50 million.
In comparison, the weighted average EBITDA of borrowers in the portfolio was 137 million, which underscores our ability to be relevant to a wide spectrum upper middle market borrowers.
We are focused on finding new borrowers that can hopefully be in the portfolio for years to calm while also backing our best borrowers through additional financings.
In the quarter, we continued to broaden and diversify our portfolio.
Reaching 352 different borrowers with an average hold position at fair value of only 0.3%.
Our largest single borrower, excluding our investments in Es DLP and Ivy Hill is just 2.6% of the portfolio at fair value underscoring that no single name as immaterial impact on the future aggregate performance of our company.
We believe our large in diversified portfolio, which is focused on high free cash flow non cyclical industries is resilient and positioned to perform well through a wide variety of economic conditions.
As Kipp also mentioned credit quality continues to be stable our portfolio generated weighted average EBITDA growth of 3% over the past 12 months down slightly from the 4% level in the prior quarter.
Our non accrual rates at amortized cost of 1.5% and 0.2% at fair value remained very low.
And there were no new portfolio companies added to nonaccrual in the quarter.
Before I turn the call back over to Kip, Let me provide a brief update on our post quarter investment activity.
From October Onest, two October 24th 2019, we made new investment commitments totaling 360 million and exited or were repaid on 326 million of investment commitments generating approximately $6 million of net realized gains.
As of October 24, our backlog and pipeline stood at roughly 665 million and 265 million respectively.
While these levels are below average we've seen a recent pickup in our activity and expect the typical year end push we usually see.
Furthermore, should the market experienced similar volatility is as we saw it in the fourth quarter of last year, we could have been more active quarter than today's backlog and pipeline imply.
Note. Our backlog contains investments that are subject to approvals and documentations and may not close or we may sell a portion of these investments post closing.
With that I'll turn it back to kit for some closing remarks, thanks Michael.
In closing we had another good quarter strong profits and stable credit performance. We continue to execute on the same plan that we've had for 15 years, maintaining a defensively positioned portfolio investing in origination capabilities to see the broadest amount of deal flow from the best companies being highly selective in our approach and maintaining.
A strong and liquid balance sheet, we believe our continued execution against these goals physicians our business for success in the future that concludes our prepared remarks, Karl can you open the line for questions. Please.
Certainly sir.
At this time you would like to ask a question. Please press Star then one under Touchtone phone.
If he would like to withdraw your question. Please press Star then to.
Please note as a courtesy to those who may wish to ask a question.
Limit yourself to one question and a single follow on if you have additional questions. You may we entered the Q that investor relations team will be available to address any further questions at the conclusion of today's call.
The first question comes from Rick Shane of JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question this morning.
Look last charter wash was on nonaccrual and you guys made a significant additional commitment I think it was about $107 million off the top of my had just like to discuss what you saw last quarter.
And sort of what the developments are for.
The additional financing.
Yes, correct me if I go back in fact some of the.
But we did do an add on to wash its along existing portfolio company. It was not on nonaccrual last quarter.
Okay, Mike My mistake and Okay can you just talked about that because it is one of the big commitments that you guys made this quarter.
Yes, sure. It's a large leveraged buyouts, it's been in the portfolio for awhile.
The company literally.
Installs laundry machines and residential apartment buildings, where people do their laundry, so it's a pretty stable business.
The large company and they've continued to make strategic acquisitions, I think that the private equity firm that owns it views it as a consolidation opportunity. So it's one of those good companies that's been in our portfolio now for a while that we continue to.
Gross.
Got it great Thanks, and sorry about the confusion on that I misread the footnote.
No Hey, Rick its penny.
Actually realize after the fact that we had mislabeled that in the 10-Q last quarter. So weve.
Quarter, So I'll take a salad.
You caught me [laughter] I was surprised to hear that well, yes, sorry about that and those filings you can't get everything right every quarter, so and shame on us when you have 350.
Try our best that we had a little hiccup our apologies for that.
Hi, given what we do for living we understand thanks guys.
Hi, Good company performing well [laughter].
Thanks for your question Rick.
The next question comes from Aaron's agenda, which of Citi. Please go ahead.
Thanks, Kim just kind of touching on your comments around the the competitive environment and some some actors not not.
Doing the best of investing choices.
How did this compare against you know.
Quarter to quarter worsening speaking about theme and you know how does this compared to some of the more frothy times.
Okay.
Eight or so.
I don't think Theres, a huge change quarter to quarter I mean, I think what you're seeing is the widening in.
Loan spreads a little bit of.
Reticence on the part of loan buyers in particular to do higher risk transactions, whether its single beer Triple C deals or is much tougher to get done right now.
I would say that the.
Caution probably in the broadly syndicated markets, where as you know areas is an active player to just not through the BDC is probably a bit more cautious than we might see from some of the middle market competition that probably as a result of you know.
Folks with a fair amount of dry powder wanting to stay busy I think one of the things. It's nice for US is we've got a very large credit platform here and participate in a lot of markets that others may either not participate in or be more limited in so that market's informed as to be a little bit careful.
I'd say that all the while while having a big quarter. So ill answer that question too.
Even though you didn't ask Eric I'm sure, we'll get it just the people remember that the pace of the year has been very funny and it continues to be a little bit funny today right. I mean, the first quarter as a result of last year's fourth quarter being so volatile was incredibly slow.
And I think we had a.
Reasonably busy kind of traditionally busy second quarter. The third quarter was busy your than we usually experience because I think a lot of things that maybe would have gotten done spilled over the second quarter and Conversely, the second quarter spilled into the third quarter and as you noticed from mikes.
Discussion of backlog and pipeline when we report that number here today as part of our public, earning it's actually pretty low relative to where we've been historically that being said the last couple of weeks have actually been very active. So it's it's just a little bit of a weird year in terms of pacing.
And we'll see how we finished out the year, we're hopeful that some of the modest dislocations and.
Discipline in the larger markets as I was trying to get through or in some of the prepared remarks spillover in creating good fourth quarter for us, but we'll see it's just the end of October here.
Okay. Thanks, its appreciate that.
On the fee rule is there any movement or update for the industry getting some relief from there.
Well I mean, I think you know we've continued to tell a pretty positive story about that we obviously senses folks are aware and amended application.
To the FCC on September 3rd Theres, No real update between September Threerd and today I think I think that it's yeah under advisement.
Up until September Threerd, it's been great [laughter], we're being patient waiting for response.
Fair enough. Thanks.
Sure. Thanks.
The next question comes from Ryan Lynch of KBW. Please go ahead.
Hey, good morning.
First question you guys this quarter.
Got into the bottom end of year your target leverage range of 0.9 to 1.25, that's obviously a pretty wide range. So I'm just curious what factors that you all consider that would cause you to operate at the lower under that range versus the upper end of the range and then given those factors and as we sit here today.
Do you guys foresee yourself operating more the lower end or the upper end or in the middle.
I mean I think for now you know we made the point that actually I think based on the busier than we expected quarter were a little bit higher than we might have expected here at the end of Q3.
I think our inclination for now is to operate it kind of the middle.
Were below being a bit cautious the upper end of that range can drive more earnings but the earnings we think the company are quite good.
So I think we're balancing thinking about any potential declines in fair value down the line preserving enough cushion for that so I'd say generally the middle to below the middle for now.
But things change the investing environment gets really really exciting.
We might change our view on that.
Okay and then.
Over the last two quarters.
Dividend income, excluding Ivy Hill is running kind of around 21 million dollar range versus when you look at 28 team that kind of ran at closer to that the $10 million range I know Penny you've mentioned.
In your prepared remarks, it that's just due to.
The larger portfolio. So it's kind of below the lower 20 millions fair assumption for dividend income going forward, excluding Ivy Hill.
Yes.
We have a lot of portfolio companies outside of Ivy Hill, the pay dividend, but a lot of then don't pay consistently though.
Declare them periodically and pay them, but I think it's still a decent run rate we do have a few.
Kind of preferred stocks that pay a dividend that we accrue as well based on them declaring so it's probably a good.
Presented of level, it will ebb and flow and if you look at each quarter, you'll see there are timing differences around when those kind of not schedule and dividends come and get paid.
Okay.
I appreciate the time today.
Thanks, Ron.
The next question comes from John had the Jeffrey Please go ahead.
Thanks, guys for taking my questions are good morning.
No.
I guess, a focus a little bit on rates.
Penny you mentioned.
Part of the.
Yield drift this quarter was tied to higher composition or first lien and then some tied to.
Just that you had the effect of aboard movements can you is there anyway to quantify how much was attributed to one versus the other.
Yes. He is look at just overall I would say roughly 20, thats or so whats from I'm worried about 30 Bips was from just portfolio mix rough split.
Okay and Thats on then average.
At the end of the quarter.
And then given the rate environment.
Do you guys I know, you're revolvers are cheaper funding, but theres probably opportunities to find elsewhere in the market with a lower cost a funny, but how do we think about your ability to optimize cost of funds and this type of rate environment you over the next four quarters say.
I mean, when we look at our balance sheet and how we capitalize it without an equity currently we have a little more room to run with higher leverage now under the new.
Leverage construct but.
But if you look at what we've been focusing on it we want to continue to be a consistent issue or into the investment grade market, which we've done.
We have a large balance sheet that needs a lot of debt capital to want to keep the appropriate next between secured and unsecured and we have had a strong focus on increasing the capacity on the floating side, which today is 5 billion committed and only about 2 billion funded and I think that just gives us flexibility to think about how we funded the balance sheet.
In the context.
Next our rates our lives or.
We are the LIBOR floaters on the revolving secured facilities have no floor, so thats beneficial as well as we use more if in a declining rate environment.
Even though.
Right now I'd say, we expect the.
Well I've already go below the floors in the near term on the asset side, so, but it does give us a lot of flexibility on how we manage the balance sheet get some potential benefit from using more floating rate option that weve been very focused on raising a in the last six months I'll just I'll add one thing this is Kevin.
I think the question was right.
How do you optimize cost I would just say again and I've said this a lot of folks we're not focused solely on optimizing cost.
Right. One thing. This particular das is we're very large company relative to others that finance themselves in the space and we need to two pennies point have a diversity of financing, but the other thing that we've done.
We think is huge advantage to those companies, we've actually bought duration and thats cost something right. So we actually have a great balance sheet, which positions us with they almost.
Perfect, but as close to perfect. As you think we can achieve matching of assets and liabilities and I have put as much particularly at this point in the cycle in that as I do.
Optimizing cost is being that the first and foremost coal.
[noise] makes total sense, thanks and last question.
Obviously credits trend it very well for you guys I Wonder if you could comment on that.
Performance to the company's within the portfolio and maybe just a brief comment on what industries you might shy away from the next few quarters, given what you're seeing out there.
Yeah, I mean, I think you know it continues to slow down a little bit people probably saw the GDP numbers. This morning, which look reasonably good our Q3 number in terms of EBITDA growth was 3% versus 4% in Q2 versus 6% a year ago. So we're absolutely with a broad portfolio and a whole host a different industry seeing.
I think the same slowing than others would say they're seeing another.
Companies and portfolios.
When we look at.
Defaults there are really been a couple of sectors that have driven and led.
Even with lower defaults the default picture, that's been retail and it's been oil and gas and.
Certain aspects of healthcare. So those are places that weve been a little more cautious I think particularly retail in oil and gas in the last year or two.
But I don't think Thats anything new right, we haven't really skewed the way that we're investing or or you know chase things in one way or would it things in another way than we have in the past.
Great appreciate that guys. Thanks.
Yeah, Thanks for the questions.
The next question comes from Casey Alexander of Compass point. Please go ahead.
Hi, and I'm, sorry, if I missed this can you go through sort of the broader puts and takes as the realized gains in unrealized.
Realized losses in the unrealized gains in the quarter.
[noise] the realized.
Both of them case here, just the real well get there I mean, the the total number is at 37 million dollar loss I, just trying to figure out how you got there.
Without going through every game in the portfolio quarter over quarter, you're talking about the unrealized I think things.
Well, let me let me give let me give you the let me give you the realized because it's it's in a couple of buckets and then we can go through the unrealized too, but okay I'm not.
Not sure we have everything here to go name by name, we've got a pretty large portfolio, but the realized loss.
Position was basically writing off.
An unsuccessful investment that we had an accompanying called Trident health services.
That was roughly 96 million dollar loss, so pretty substantial.
It was offset by gains in selling it.
American capital portfolio to brought in called soil safe.
Which generated $13 million gain to the balance there.
As a whole post the puts and takes in portfolio companies couple of here a couple other now yeah, and I ran Q disclosure will listings out more specifically to just for your reference later.
Okay, that's great.
All right.
I mean, when you discuss.
You know the 47% of your new loans were to existing borrowers it almost feels like when I look at 2.4 billion and new originations and 1.4 billion in repayments that I should almost be looking at like 1.3 billion of new originations in Threeq.
100 million of repayments because.
That's sort of what really happened that wasn't just you know you taking yourself out replacing it with another piece of paper.
No because it's not necessarily so there was the question about wash earlier right. The accounting on washes add 100, and whatever it is million repay zero because we're just doing an add on facility.
All right right. So if we have an outstanding $200 million alone and we make 100 million dollar add on we don't account for it as a 200 million dollar repayment in a 300 million dollar origination we just accounted for it as 100 million dollar origination.
Okay got it.
Thank you and.
I guess lastly, and maybe you don't want to discuss this because it's a portfolio company per se, but we saw.
Another BDC just get waxed. It today based upon their CLL equity exposure can you give us a feel for how that might or might not be impacting Ivy Hill.
Yes. So look we I don't think we got whack, we obviously took a modest write down.
And Ivy Hill $19 million fair decrease in fair value.
It's really driven by a combination of a couple of things, which would be my guess what was happening in whatever other BDC, you're referring to I haven't seen that but.
The decrease in LIBOR, it's a change in the LIBOR curve, it's a widening in market COO spreads and it's also just some particular nuances that Ivy Hill, where we happen to be a little bit under invested in some of our coos.
So a little bit heavy on cash, which creates lower rates of income that we've taken.
So I don't have the same concern there because we're running what we think are higher quality materially lower leveraged vehicles and you'll see in most other.
Maybe BDC portfolios that own a bunch of broadly syndicated close I think it's pretty different.
But look that market's off I mean, there's no doubt that fuel or markets, often and a portion of that is what drove some modest declines in our valuation at Ivy Hill.
Alright, and then lastly, the write off of Trident is that what.
It's created the decrease in your non accrual percentage.
Yes on a cost base.
On a cost basis right perfect. Okay, great. Thank you very much I really appreciate you taking my questions.
Yes.
The next question comes from Afinion Oceana of Wells Fargo Securities. Please go ahead.
Hi, guys. Good afternoon, Thanks for having me on.
Just.
First question higher level.
Correct me, if I'm wrong. It it seems that you shifted a bit toward the.
Our core middle markets with an average.
EBITDA I mentioned, a 50 million.
And obviously, a great deal of commitments and.
This seems to go against.
What you've done saying pushing into the larger markets.
The softness in those markets.
So I would've expected this quarter or a good deal of origination, but but in the larger markets. So any comment on that and if you've sort of changed.
View on on whereas the better area to invest.
No not really I mean, we've got a pretty broad.
Fairway in terms of what we'd like to look at as Mike laid out I think it was 12 to 100 and whatever that number was 15 million and Mike can jump into on my quick thinking around it was more traditional middle market call. It 50 million of EBITDA Unitranche investing this quarter less of that large cap kind of privately placed second lien which tends to skew.
To bigger sizes, and larger Ebitdas and again, it's really hard to it's very hard for us to change direction quarter to quarter right. You know sort of deal flows deal flow and mix.
The SDLP scaled down a little bit this quarter.
Yep, or maybe even Mike or Mitch seems like lending 10 middle market software companies has been a source of energy portfolio growth over the last year. Some kids. In these cases are you extend credit as a function of recurring revenue as opposed to free cash flow and then if so why do you think of it.
Churns in repayment characteristics of SAP blending.
It's attractive today.
Subscription based cash flows so thats the lions share of the portfolio in software.
A our lending market, which is looking at.
Just recurring revenue and lending against revenue and typically those companies are such a rapidly growing businesses that they don't have EBITDA because they are putting so much money back into.
Sales and marketing and R&D.
We've done a couple of those deals.
I think we've done five.
We're one of the less active lenders in that space relative to the competition.
But we do both but primarily the the first kind [laughter] rather than the second guide you're asking about.
Got it the distinction is clearly helpful. And then you anticipated my follow up question and get into the portfolio size.
There are some private equity sponsors that are raising growth capital there.
And newer strategies. So I'm curious is there.
It's a bifurcated portfolio, but their portfolio.
Yes, Matt side that you would want to do that for tech lending and then the other question would be is what's the typical LTV of this portfolio.
Yes, sure so Max size on most industries tends to be 20% once it gets to 20% we start to think critically about whether there's too much allocation to particular industry.
The Ltvs I'd say are comparable to low in the space because the purchase prices of these rapidly growing software companies are so high.
But that's the debate right. The the leverage multiples are also high [laughter]. So it's not an unusual to see lenders lending six or seven times EBITDA.
And a company that's getting acquired for 22 times EBITDA you can compare that to a regular way elbow, where there's six turns of leverage against maybe 12 turns purchase price. So.
Because of a handful of characteristics of these companies I high growth very high free cash flow no Capex now working capital in fact deferred revenue right. So they often generated cash flow ahead of actual revenue recognition. There just great great growing cash flow businesses, which is why they're selling for such high prices.
But it does keep loan to value pretty low based on that kind of quick snapshot of the math I gave you.
And I would also add that software portfolio is well diversified.
And its end market and we do a lot of diligence around the end market before we make an investment make should we understand the competitive dynamics.
On that.
Awesome color is helpful. I guess you know.
[laughter], including there so if you're at four or 5% of the portfolio corn easier Max I could be theoretically an area of growth.
Is that an appropriate conclusion.
It has been an area of growth yet minutes very active sector and.
We've got some great relationships with some of the leading private equity firms out there and we've also been more active going direct to company in that space.
Got it that's it for me Thanks Scott.
Thanks.
The next question comes from Robert Dodd Raymond James. Please go ahead.
Just on on the point in your opening remarks could the 47% via commitments in the third quarter two existing portfolio companies I mean can you give us any.
Any color on.
Well the I mean, obviously the basic underwriting the same when it's a follow on but is there an additional dynamic all maybe other competitive lenders if amazing capital trying to try to poach youre deal so to speak and try and force you out and driving the add ons each additional add on obviously increases your bites.
In a particular portfolio company, which.
The juices diversification a little bit light so it changes the misc portfolio dynamics when can you give us any more color alone on.
How much appetite you go for doing those follow ones and what you'd like to see that be it's kind of maybe at the center the origination mix.
I mean, it's kind of we we I'd say love financing, our best high quality borrowers because we think they have less risk.
Because we obviously know them and have a relationship there and are conducting in a new set of.
Due diligence on a new company.
We also think that because if we we have the existing relationship we are insulated on pricing.
We think that the maximum leverage ask which is off and.
The way private equity will go and a new transaction is typically not what comes through his as Leverages getting added during by and build strategy. So we think that there are a lot of attractive dynamics as it relates to continuing to finance our existing borrowers.
Hopefully that answers the question a little bit on on are we getting poach.
Yes, there is usually not because.
It's more likely you know you bring in new lender in do a deal a so if were sold lender you bring a partner and if we're starting to get larger on exposure and the reason for that as if your company that has $300 million of debt outstanding you've already paid a 3% fee on that 300 million of death and your two years into an investment you're probably unlikely to want to go.
Pay $10 million of new fees to refinance us So you can save.
50 basis points right because the alternate proposal is is a bit cheaper plus you'd be working with somebody you. Didnt know, we also kind of like to think that we establish good relationships with our borrowers and they want to stay with us because were value added another market and all those things so.
I think it'll stay in line with with them.
Where it's been around 50% and.
That's some color on why why we think it stays that way.
I appreciate that and then.
And another question sort of related it's all about originations and there's been some obviously some to your point in the BSL markets and some issues on getting some deals done I'm on the on the syndication side in the past few of occasionally stepped in and done those kinds of deals which obviously.
Create.
Nice fee income plus a a big bite size all at once so what.
What's your appetite to maybe approach that I mean, you we'll call it seems to indicate so we could deal.
That is struggling which I think it's always the case to get done.
So I presume that impacts your your willingness to look at that area. The market at this point in the cycle.
Yes, I think you may have answered your own question I mean, you. Most most of the things that are top that are difficult to get done now are things where borrowers are worried about ratings right either single beer, particularly triple C, where there is a bit of a buyer strike. These days for all handful reasons.
[noise].
[noise].
[noise].
[noise].