Q1 2021 Oaktree Specialty Lending Corp Earnings Call

[music].

Good morning, and welcome.

You for joining the Oaktree specialty lending Corporation's first fiscal quarter 'twenty 'twenty One conference call.

Today's conference call is being recorded.

At this time all participants are in a listen only mode, but we will be prompted for a question and answer session. Following the prepared remarks.

Now I would like to introduce Michael Master Chief of Investor Relations, who will host today's conference. Mr. Mustard, you you may begin.

Thank you operator, and welcome to Oaktree specialty lending Corporation's first fiscal quarter conference call our earnings release, which we issued this morning and the accompanying slide presentation can be accessed on the investors section of our website at Oaktree specialty lending dotcom.

Speakers today are arm and he knows he and Chief Executive Officer, and Chief Investment Officer, Matt <unk>, President and Chief Operating Officer, Mel Carlisle, Chief Financial Officer, and Treasurer, and we'll be happy to take your questions. Following their prepared remarks.

Before we begin I want to remind you that comments on today's call include forward looking statements, reflecting our current views with respect to among other things the.

Timing of likelihood of the merger closing the expected synergies and savings associated with the merger the ability to realize anticipated benefits of the merger and our future operating results and financial performance actual results could differ materially from those implied or expressed in the forward looking statements.

Please refer to our SEC filings for a discussion of these factors and further detail we undertake no duty to update or revise any forward looking statements and.

Also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any oaktree fund investors and the other should note that oaktree specialty lending uses the investors section of its corporate website to announce material information.

The company encourages investors the media and others to review the information that it shares on its website with that I would now like to turn the call over to Matt.

Thank you, Mike and welcome everyone to our first quarter earnings Conference call. We appreciate your interest in and support of O C. S. L and we hope everyone listening as well we.

We are off to an excellent start to fiscal year 'twenty 'twenty one.

O C. S. L delivered solid results for the quarter with earnings origination activity and credit quality all of strong.

We reported NAV per share of $6.85 of 5% from the prior quarter.

This increase reflected both the gains from the realization of the non core investment that was previously on non accrual as well as the ongoing price recovery and our liquid debt investments, which has continued since the market sell off in March in fact, as a result of our portfolio of strong credit quality and the performance. Since then our NAV as of.

At December 31 is $3, 6% higher than it was one year ago.

Adjusted net investment income per share and for the quarter was 14 cents as compared with 17 cents for the prior quarter. The decrease was primarily due to lower investment income compared to the previous quarter, where we generated exceptionally strong interest and income in the form of make whole interest and OID acceleration from the repayment of our and.

Investment and new Star logistics.

Excluding this amount, which contributed approximately four cents to adjusted and I last quarter earnings would have been up as a result of the portfolios continued growth and increasing yield.

Based on our consistent performance and our expectations for continued strong earnings our board increased our quarterly dividend by 9%. The 12 cents per share the third consecutive quarter with the dividend increase this amount represents a 26% increase from the dividend level one year ago.

And we had another strong quarter of originations, where we originated 200 of any $6 million of new investment commitments of this.

Of these new commitments nearly 70% were first lien loans and included $181 million and private transactions $84 million and the new issue primary market and $22 million and secondary market purchases.

We received the $161 million from Paydowns and exits and the quarter.

Including $23 million from our exit of the Mentum of noncore positions that was previously on nonaccrual.

The weighted average yield on our new debt investments and the quarter was eight 7%, which compares favorably to the average yield of seven 8% on investments, which we fully exited.

The leverage declined 2.70 times net of cash from 0.74 times at September 30, driven primarily by the timing of the new investment fundings.

Approximately $100 million in the first quarter originations did not settle and December if they had settled by quarter and leverage would have been and approximately <unk> eight times. Most of these investments have been funded in January.

Right.

As we actively identifying opportunities. We also remain focused on sourcing directly originated private credit opportunities we have.

Of continued to augment our sourcing efforts by making several key hires and our pipeline of private investments is robust.

That noted we are approaching these new investors cautiously given the uncertain economic backdrop, and recent exuberant and from other market participants and it's driven pricing and terms the pre pandemic levels.

With that and mind credit quality remains the type of the top priority and a key component of the Ocs ALS Foundation.

We had no new non accruals and the quarter and we have only one portfolio company with the fair value of $500000 of non accrual status, which represents three basis points of the total portfolio at fair value.

Yeah.

We continued to make good progress in monetizing non core holdings during the quarter exiting two positions non core investments now represent $125 million or only about 8% of the portfolio at fair value.

Before I turn it over to arm and I wanted to update you on the play on the merger of O C. S. L and O T. Oaktree strategic income Corporation as we discussed on the last call. We expect this will create a larger more scaled BDC with increased trading liquidity and potentially broadening our institutional shareholder base and may improve acts.

And as to lower cost sources of debt.

We also anticipate that it will dry drive and I accretion of a bolt the near and long term.

We are confident that now is the right time to move forward with this merger both portfolios had strong credit quality and our transition out of non core assets that had been working on since 2017 is nearly complete.

The registration statement has been declared effective the proxy solicitation process has begun and the merger is on track to close by the end of the current quarter with our shareholders and Ocs is Cheryl and scheduled to vote on turn on the transaction on March 15th.

We encourage all shareholders to review the proxy materials and vote your shares accordingly.

We're all we're very pleased with our quarterly results and we are confident that the scale of that O. C. S. L will have post merger will help drive further benefits for our shareholders with that I will now turn the call over to arm and.

Thanks, Matt and good morning, everyone. The.

And the rebound and credit and equity markets that we saw in 'twenty and 'twenty has continued into 'twenty and 'twenty, one supported by still vulnerable, but improving economic conditions and consumer sentiment as well as exceptional fiscal and monetary stimulus.

The rollout of COVID-19, vaccines and commitments by the new administration to accelerate that process provide reasons to believe you're nearing the final stages of this public health crisis, adding to investor confidence.

All of that noted valuations feel elevated and might not necessarily reflect the current macro conditions or the prevailing outlook for graduate of economic growth. This year.

He also of the pace of inoculations remains on uncertainty and projections for GDP growth of humans and entered the pandemic and the second half of calendar 'twenty and 'twenty one.

While hopeful we're also cautious about assuming too much about the final outcome at this stage.

With that sense of caution and mine we continue to approach new investments defensively. We think it is important the view market exuberance with the critical line and to avoid terrorists and investment opportunities. We remain focused on protecting the downside and our investments and seeking appropriate compensation for risk taken.

Even oaktree scale and resources, we are able to invest across multiple markets with diversified businesses and.

This enables us to focus our portfolio on stable and lower risk sectors.

Notably, including those largely unaffected, where even positively impacted by COVID-19.

Continuing to identify compelling opportunities in my life Sciences, and technology companies that are delivering health care solutions, we're capitalizing on the increased level of digital commerce.

Yeah.

We're also seeing more direct lending opportunities and support of leveraged buyouts of the businesses that are proving resilient and the face of the pandemic and ones that are not easily underwritten via traditional cash flow based methodologies.

That's what all of these.

Finally, as we did last year, we continued to carefully study the rescue lending landscape and the area and which we have found.

And the opportunities, including two of investments that we made and the first quarter and I will discuss in more detail shortly.

As Matt noted we are also exiting positions and which we believe there is limited further upside, including some of our lower yielding broadly syndicated loan positions.

Now turning to the overall portfolio performance.

At the end of the first quarter the portfolio was well diversified with one $7 billion of the fair value of across 115 companies.

86% of the portfolio was invested in senior secured loans.

Our median portfolio of company EBITDA at December 31 was approximately $123 million larger than the typical middle market company as we continue to favor larger and more diversified businesses.

And as always.

We remain in close contact with management teams and private equity sponsors and generally our portfolio of companies have the necessary liquidity to manage through the current environment.

Our strong credit quality reflects us we have only one investment on nonaccrual as Matt noted and amendments and interest of modifications continue to be very long.

Turning now to investment activity during the quarter without numerous opportunities and companies with attractive risk reward profiles and defensive sectors as well as the unique opportunities requiring specialty structured terms.

And I'd like to take a moment to discuss in more detail a few compelling investments, we've made and the quarter.

Now on the site as a provider of Iot applications and cloud services, the middle market companies and the U S with recurring revenue accounting for three fourths of its income.

The company saw financing and connection with the planned acquisition and Oaktree was the sole provider of of $75 million of second lien term loan with pricing of LIBOR, plus eight and 5%.

What was the S. L was allocated $23 million of the loan total.

When core is an independent low cost aftermarket services and parts provider for the commercial aerospace sector working with the diverse base of several hundred of airline customers due.

Due to the pandemic and the grounding of over 50% of the global fleet Airlines of deferred maintenance to preserve liquidity.

When course on alone the bridge from the current challenging environment, one would expect it will be a resurgence in need of the pairs as airline travel rebounds, and post pandemic and they'd pent up demand.

Oh, sorry was the sole provider of of $50 million, Firstly incremental term loan with a $30 million, firstly and delayed draw term loan able to be drawn by the company through September of this year.

The term loan was priced at LIBOR plus seven 5%.

DSO was allocated $27 million of the alone.

Latam Airlines is one of the world's largest airlines and it is the largest airline in Latin America the cut.

And he filed for chapter 11 bankruptcy protection to restructure its debt and ensure operational continuity of the business adopted to the pandemic line.

Latam such a range of significant amount of capital as part of its restructuring and this led to and over $800 million total commitment from Oaktree.

Most of the yourself participated alongside of our flagship opportunities funds and this deal which was attractively structured and priced at LIBOR, plus nine seven and 5% on the cash basis or 11% Pik.

And well see us all of it was allocated $60 million of Islam.

And as Matt noted our pipeline continues to be robust as we are currently evaluating unique and attractive private investment opportunities across a broad set of industries and our strong liquidity along with the resources of Oaktree put us on an excellent position to pursue these opportunities now and.

And what we hope and a stable growth environment of the pandemic subsides.

Now I'll turn the call over to Mel to discuss our financial results in more detail.

Thank you arm and good morning, everyone.

And what's your self generated strong financial results and the first quarter.

Total investment income was $38 2 million down from $43 6 million and previous quarter the.

The $5 4 million decline.

The lower interest income based on lower make whole interest and OID acceleration from loan payoffs as Matt noted earlier.

Net of expenses for the first quarter totaled $28 2 million.

$9 1 million sequentially.

The increase was driven by higher accrued part II incentive fees.

This was partially offset by lower part one incentive fees, mainly due to the decrease in investment income.

For the quarter, Oh, CSL reported net investment income $10 million and adjusted net investment income of $19 6 million.

Or seven cents and 14 cents per share respectively.

As a reminder, we define adjusted NII as NII, excluding capital gains incentive fees or part two incentive fees.

During the first quarter most of the sale of crude a total of $9 5 million and part two incentive fees.

This amount was mostly due to $48 million and net unrealized gains and the portfolio during the first quarter.

It is important to note that while GAAP requires us to take unrealized gains into account when accruing part two incentive fee expense each quarter.

T cell will only pay part two incentive fees annually and to the extent that it has realized gain and fedex fees realized and unrealized losses at year end.

Turning to credit quality, which continues to be very strong and.

Net noted at quarter, and we had one investment on nonaccrual, representing three basis points of the total portfolio at fair value.

And from 10 basis points from the prior quarter.

The decrease was primarily due to the successful exit of Atlanta, where.

While we realize a full par recovery on our debt investment and.

And recorded a total gain of $23 million.

During the quarter all of our portfolio companies made their scheduled interest payments.

And since March only one company has converted its cash interest payments to pik.

Moving to the balance sheet during the quarter refund of $242 million of investments and received $161 million and payoffs and exits.

Our net leverage ratio decreased the 0.70 times from point of seven four times at September 30th Rift.

Reflecting the increase from that.

We also had 103 million of unsettled purchases at December 31.

Most of which have funded in January.

Adjusting for this timing difference net leverage would have been approximately <unk> eight zero times, a quarter and how.

Over still just below the low end of our leverage target range of 85 to 1.0 times.

As of December 31, total debt outstanding was $700 million and had a weighted average interest rate of two 7%.

On the secured debt represented 43% of our total debt at quarter end.

And our next scheduled maturity is in 2024, when our credit facility comes up for renewal.

At quarter, and we had total liquidity of approximately 424 million and.

Including $24 million of cash and $400 million of Undrawn capacity on our revolving credit facility.

Unfunded commitments were 198 million with approximately 150 million this amount of eligible to be drawn immediately.

As the remaining amount is subject to certain milestones that must be met by portfolio of companies.

And the first quarter, we expanded the capacity of our revolving credit facility by $100 million.

Adding the new lender for $75 million and having an existing lender increased its commitment by $25 million.

Our total revolver commitment is currently $800 million.

And importantly.

Both Moody's and Fitch maintained investment grade ratings on the OS yourself.

With both citing our successful progress to date and exiting non core investments the strength and quality of Oaktree and our lower leverage relative to peers.

Shifting now to the Kemper joint venture.

As of December 31, the JV had $341 million of assets invested in senior secured loans to 56 companies.

This compared to $313 million of total assets invested and the same number of companies last quarter.

Assets increased quarter over quarter, mainly due to the deep the increase and the market value of its investments.

And net portfolio growth as purchases exceeded sales and repayments.

As a result of the underlying portfolio of depreciation OS yourself, and that's makes and the JV were written up by $8 million or 7% from the prior quarter.

Leverage at the JV was one two times a quarter and down slightly from the September quarter.

Now I will turn the call back from that.

Thank you Mel.

While the environment continues to be uncertain and we nonetheless generated strong operating results for the first quarter.

And the defensive repositioning that we've carried out since 2017 has largely been completed and we had a strong quarter of originations.

We continue to feel very good about our current holdings, our overall pipeline of potential transactions remains robust and we expect to continue to identify compelling investment opportunities throughout the fiscal 'twenty and 'twenty one.

And the last two quarters, we have generated and an improved return on equity compared to prior quarters, which is evidence that our efforts and this area are paying off and we continue to believe that Ocs L is well positioned to deliver a higher return on equity.

We remain focused on positioning the portfolio for and improved yield by rotating out of lower yielding investments and into higher yielding proprietary loans during the quarter, we exited and $35 million of these types of investments and as of quarter and I don't know of 13 billion of senior secured loans priced at or below LIBOR plus four point.

5% remained and the portfolio on.

New investments during the quarter came in and an average yield of eight 7%. So there's continued upside to be realized over time.

Another opportunity for us to increase our E is deploying more and leverage at the portfolio level as Mel mentioned, we were operating below the low end of our long term target of 8521 times. So we would expect to continue to enhance returns and as we make incremental investments and the play higher leverage however, we will own.

And the grow the portfolio as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward.

Finally, the Kemper JV continues to present the opportunity for us to improve returns as of yearend. The JV was Levered 1.2 times and had $50 million of investment and capacity.

Believes the disciplined growth of the JV will also be accretive to ROE over time and <unk>.

<unk>, we are very pleased with our strong first quarter results were also looking forward to the pending merger with the oce aside as we believe that this combination of benefits shareholders of both the O C. S L and O CSI true scale portfolio of diversity and expect the earnings accretion.

We are excited about the future for the combined company and remain optimistic that we will continue to identify new attractive risk adjusted investment opportunity and.

And he has to deliver improved returns to our shareholders.

And you for joining us on today's call and for your continued interest and L. C. S. L.

With that we're happy to take your questions operator, please open the lines.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And the first question will come from Devin Ryan of JMP Securities. Please go ahead.

Okay, Great day, good morning, everyone.

Good morning, Good morning, Dan.

The first question here, just given the overlap between yourself and the CSI on the investment side and expectations that the merger will be relatively seamless it would be great. If you could give some additional granularity on expectations for the cadence of investment activity in the coming quarters as you reposition the portfolio.

And really what I'm trying to get out here is the here. The the comments about you know very strong pipeline and obviously expectation for investment versus some of the comments around valuation and more.

Marketing Super and so I'm, just trying to think about kind of the push coal and all of that.

Sure Devin the Xyrem and.

So in terms of.

And the overlap with those CSI and then the cadence of investing after the merger is closed so in terms of non overlapping investments.

The.

And Oh, CSI, but not unnoticed yourselves, it's about 33% of the Ocs I portfolio at this point of which 25 percentage points are actually public securities that can be treated.

And about 47, or so million dollars of par value of.

Of private positions that will take a little bit of a longer time to to rotate so it's a pretty manageable rotation. After the close of the the merger the that we can effectuate, a we think that we could effectuate.

The rotation, but that will obviously have you have you alluded to will be predicated on our ability.

And to continue to originate attractive loans.

And just maybe the maybe we could talk a little bit about the markets I'm sure others will be asking about what we're seeing and the market These days and.

And I would say you know as you know and private credit there. It's not like you can pay all of the private credit with the same paintbrush and there is no middle market sponsor finance and you know and support of Albinos Theres, some mezzanine and within that the second lien.

And then more typically of of what we like doing or the non sponsor loans that are harder to predict the timing of their more structured they're harder to find they are they take longer to execute.

And so that's kind of the the the other side of of what we and what we do here.

What I would say is that on the sponsor side, especially the more typical first lien or unitranche loans that market is back to pre COVID-19 competitive levels.

Whereby you of private equity sponsors are coming to market, there's no on their blasting out of.

Pitch tags to a variety of the middle market direct lenders pricing has taken a little bit of a hit and not as much as one would think well the legal terms are taking a hit in terms of covenant lite and other flexibility around the covenants and other terms in the credit agreement. So you know from.

For us, we're finding and yet again that we are rejecting the whole lot more of that deal flow or just fine and you get less interesting than.

And we are committing to it and and.

So we're turning over a lot of stones with words with very few investments with that said, we will continue to do some middle market sponsor finance, especially with those sponsors that are very close relationships of oaktree that we think have a operational advantage and particular sectors.

We have a few things on the pipeline now already with sponsors that meet that description.

And so we expect that we will we will still originate from deals there, but we are not going to be the typical flow of first lien or unitranche lender out there the BDC or otherwise.

That is willing to kind of cave on legal terms and factory, we would be more willing to cave on financial terms and on legal from just given the background of Oaktree as a as the downside focused.

On a lender on.

And the other side of the house the.

The more of sort of opportunistic non sponsor side.

And as Matt and I mentioned, you know we've been active over the last several quarters and and rescue lending and providing liquidity to sectors and companies that are experiencing some level of dislocation due to COVID-19. We don't expect for that opportunity to fully go away, even with the even with the positive reaction.

And that the market has shown over the last several quarters, but it certainly has declined and the pace of our deal flow of decline we were engaged with the with a very large issuer over the last couple of quarters on the rescue own and in partnership with the opportunities funds and with the exuberance in the March.

<unk> day, essentially we're able to place a bond you know several hundred basis points tighter than what we were willing to provide them in the public market.

And so we recognize that the public markets are taking opportunities from us, but with that said many industries. Many businesses are going to continue to need capital over the next several quarters.

And we will engage and highly structured solutions for those companies in that same theme of non sponsor lending our activity in the life Sciences area continues to be robust we were very active last year and life Sciences. We have a few deals that we're considering right now and the pipeline.

And then are very attractive consistent with our prior structures and the return expectations and we expect will continue and you do that so I know that I kind of went around the world of little bit there on on the.

On the market color.

But we feel pretty good that we will be able to transition the ocs I portfolio over a few quarters, it's not going to be over one quarter of you know.

Two and Ocs L type of portfolio well within the one or two years that we've contemplated it will take just given the strength of our pipeline, especially in the non sponsor area and and it helps that so much of the non overlapping positions our publicly traded securities that frankly are trading quite well.

And during the current and under the current market circumstances.

Yeah.

Okay, that's terrific color of things Vermont.

And then maybe just a follow up here on this one might be a difficult but.

You've had three consecutive quarters of increasing the dividend, which is great and I'm not sure. If you can maybe just help us think about the outlook for the rest of 'twenty, 'twenty, one and and the trajectory and and.

And if you can't give kind of specifics what should investors be looking for and order to think about kind of the the dividend continuing the trend higher from here.

Yeah. Thanks for the questions and we really want to not provide forward looking guidance on things like dividends and earnings we feel really good about the portfolio. The the income of generating and our and our pipeline, but to make predictions I think forward looking with the.

Some of them were just not comfortable doing right now unfortunately.

Yeah, and I think it's Matt the other thing Devin just the you know the debt without phone.

We have as you pointed out and raised the dividend and the last the last three quarters.

We've also had and the in the September quarter, we had.

The large kind of onetime items through the.

And the new stock payment, which you can flow through investment income and.

And this past quarter, we had oven and again also flow through investment income. So you would want and I wanted to be mindful of those one time items. You know if you. If you take if you take those out and just look at our debt investment performance going back to a year ago.

The 10 since a year ago.

As you know 12.2 cents and and the.

September quarter, and $12.04 and this quarter and so looking at kind of the underlying.

And at quarter end quarter, and kind of recurring and.

The portfolio and income is the people to look at one thing. That's that's kind of what we're very focused on you know as we as the board thinks about the dividend.

Yep.

Very helpful. I'll leave it there. Thank you guys appreciate it.

Thank you.

The next question comes from Kyle Joseph of Jefferies. Please go ahead.

Hey, good morning, Thanks for taking my questions congratulations on another strong quarter.

Let's start on your net interest margin and if you go online and just and give us a sense for on the yield side of things obviously, it sounds like spreads have tightened, but there's still some ongoing portfolio of rotation opportunities. So give us a sense for how you're seeing the portfolio yield trending obviously, it's been shining and the right direction.

And then on the cost of fund side or are we kind of at the at the bottom here are there any opportunities to reduce that and get a sense for both of the and we can figure out and margins.

Yeah.

And all of that all of them.

And I'll go first and I think on the you know on.

The.

On the liability side, we've got obviously the.

Unsecured notes you know that the cost on that and then we have the revolver and we've increased we've got some really strong support from from our banking group.

And you know the decrease the size of that Oh, and the last two quarters and on the sample on capacity. There. So you know kind of on the next the next dollar that we need to borrow we would borrow from the from the revolver, which as you know of LIBOR plus 200, and so I think that's you know and that's pretty solid on the you know on the asset side the last quarter.

And you know the yield of eight 7%.

You saw the the.

And the yield on the absence of monopolies was obviously lower than that so you know we don't do the honest point out of the kind of predict what the asset yield is going to be each quarter and what's gonna roll off but you know if you. If you look and we did last quarter and you would get you know the other besides drawing the revolver and the other place we go to fund assets.

Would it be the seller of low yielding assets and you just pick up the spread on the assets sales.

If something comes out of it at LIBOR plus.

500, 400 and goes it goes on and you know of LIBOR, plus 706 hundred theres that spread interest.

It just it is hard to predict kind of you know each quarter what the.

What what's going to be refinanced and we've seen more.

And well.

And the end of last quarter, and so far this quarter and theres been more refinancing activities as the market had been robust.

So and it's just hard to predict that because a quarter ago, we weren't seeing that and that will ebb and flow, but I think that gives you a sense of kind of what we're trying to do on the asset side in terms of new originations on the asset side and in terms of so on and the lower yielding assets.

And then on the liability side.

Yeah, Yeah, that's right.

And you look at our if you look at our origination and the last couple of quarters, and that's consistent with where we would like to continue to originate.

So it's not like we are looking to go tighter than that.

And we're certainly not looking to take on equity like risks and anything we originate and so that's really the the origination and youre seeing from us and that's kind of where our intention is going forward and we do have I mean, if you just look at our positions and we do have a significant enough.

Portfolio and she is all of that is yield and that has a coupon of LIBOR, plus 450 or lower and that can be rotated now it'll it's predicated on the pace of our repayments as well on on positions that we would ordinarily have liked the cat, but just given the market.

And with market strength and those are being you know to some extent taken from us, but we are we certainly have a targeted portfolio that we would like to exit and rotate into higher yielding instruments consistent with a couple of last few quarters of origination.

Got it very helpful. Thanks.

And then there's like the ask one on on credit and obviously, it's been very solid and way better than we would have initially expected last spring, but can you give us a sense for kind of amendment activity trends Youre seeing I know you mentioned that only one investment has made to pick and then just give us a sense for revenue and EBITDA.

The growth or performance and the fourth quarter, and and how that compared to the third quarter for the portfolio of Bradley.

Sure the Xyrem and.

So yeah.

On the amendment and side, it's been very quiet, we continue to only have one name on nonaccrual and one name.

And subject to an amendment or a pick up we have not been contacted and are not engaged.

With any other kind of material issues and the portfolio around and poor performance.

So we feel really good about it.

The really good about that.

I don't expect for us to have a meaningful uptick in and defaults.

And in the.

Based on the information on hand today.

In terms of performance of the underlying companies, it's hard to generalize, but I would say that because of those industries that are most sensitive to COVID-19 and I was.

And we do have some exposure there you know we have we have some entertainment related businesses and are focused on live events.

And we have some leisure oriented positions and these are not very large positions and the portfolio, but we do have the sun.

Those two areas.

As well as some of the airline oriented and aerospace and defense oriented businesses that we have are the most impacted from a top line perspective, obviously of businesses with exposure to live events R V.

Very little to no revenue and they are there and cost cutting mode, a cash flow of preservation mode.

And in the instances, where we have exposure there the cause.

And these are sitting on a lot of the cash and have very strong sponsor.

Protection.

And then and and several of those situations or the other theres, so many situations, but and most of them on their.

Their recent buyouts by sponsors and and the when we did reach out to the sponsors over the course of the last 12 months. The response was you know, we'll let you know if we need incremental liquidity. We don't think we will we think we can manage the cash and by the way there's no way we're letting the scope. So don't think that you have.

The distressed opportunity on your hands on.

And so it's been it's been very positive now of those businesses. The most directly impacted their revenues could be down as much of a 70 or 80% year over year, a more typical is down 30 or 40% year over year and.

And the very deeply impacted sectors, but away from the the.

Covid sensitive names.

On the revenues, especially in the last couple of quarters have been flat to slightly up year over year and in some cases, there are businesses that we and invested in that of benefited from COVID-19, including fast food restaurants, including the life Sciences businesses That've been nice surprises to the upside of the technology oriented businesses.

And that provide cloud cloud computing related services are doing quite well as one might imagine we've.

We've been involved with a few recent check out the OS and the last couple of quarters around that are that provide services for remote computing they've been doing really well. So again, it's kind of all over the all over the place and thankfully. We just don't have very much exposure that is deeply exposed to COVID-19 and where.

We do have that exposure of the companies either have the ability to cut costs, you know of essentially to the bone.

Or are they have a very strong sponsor are standing behind them and and willing to put the money, if and when and if and when it's not needed.

Got it very helpful. Thanks, a lot of for answering my questions.

No problem. Thank you.

The next question comes from Finian O'shea of Wells Fargo Securities. Please go ahead.

Hi, everyone and good morning.

The first question on Oh CSI for.

For those of US who are a little less familiar.

You put the glick JV on to non accrual due to COVID-19 volatility.

And that's obviously, a big investment that weighs a bit on portfolio yields are you able to update us on on how you think about that.

I'm being non accrual that is.

Sure.

What's going on non accrual this last quarter as well.

And.

And as you noted it is related to COVID-19 related volatility of sensitivity.

The the assets and the Glick JV of appreciated and valued fairly considerably over the last few quarters and so we will consider.

Bringing back the.

That oh that position on off of non accrual every quarter, we will always consider that a we didn't feel comfortable doing it. This quarter. We will reevaluate next quarter I don't want to provide forward looking guidance, but where we are.

Happy about the performance of the underlying assets both in terms of a lack of default experience, but also in terms of market a market price appreciation.

I'll also add and that although we are not.

On the accruing interest on the JV It is generating positive net income.

Net income.

And we're using that to pay down and the subordinated notes and grow NAV. There. So that is a benefit the shareholders.

Yeah, I'm very well thank you.

Art. The note that we have on the growth JV is actually much higher today as of 12 31, the versus 12 31 and 2019.

So just to give you a sense of our R. R.

Our perception of our feeling around that position.

Okay. Thank you and then on one of your legacy names and.

C S L of Dominion diagnostics.

And that's been pulling on the revolver it looks like a little more of this quarter are you able to give us any color on.

You know what's behind that.

Sure So dominion.

Actually the beneficiary of the pandemic. They they are pretty actively involved with COVID-19 testing.

On the company is actually performing as a result of that you know better than what we would have expected. It certainly of its core business is certainly still.

Suffering, but but it's it's it's doing better than what we the thought I would need to get back to you on the details, but I have around the revolver draw and in particular, but I I know that the business.

It has needed to staff up as well as by working capital and support of this COVID-19 testing business.

Okay. Thank you and just the small final question obviously.

Obviously, a very good quarter for you guys on on you know NOI and NAV.

Just on it and it had meant being exited.

I assume there was some.

Top line income that you received the spin on non accrual for a while was that is that correct. It for one and and was that a material impact your top line the and met them.

Income that you may have realized this quarter.

I'll ask Mel or bad cans on that question and I'm not sure.

Sure and in terms of of Minton.

The majority of.

The income generated there was below the line as has realized gain as I mentioned in my prepared remarks, it was about $23 million.

Okay. So one of them all.

It wasn't a lot and and investment income.

Yeah. It was the material. It's it's not like we can go back and recognize interest income, but during the time it was on the on non accrual so.

We need to recognize the small amount and.

And the current quarter, but the majority was a realized gain.

Okay. Thank you.

The next question comes from Melissa Wedel of J P. Morgan. Please go ahead.

Good morning.

Wanted to touch base quickly on some of them of the new deployments this quarter and comparing that to sort of the levels of yields from last quarter.

I want to make sure I'm thinking about the strength, but your slide deck, we're showing about 240 millions of points this quarter at a and average yield of eight 7%.

First of all of us.

And you know 146 last quarter it turns from 6% so.

Yeah.

Can you provide some context around that and if there's anything sort of missing from the number that we should be factoring in.

Yeah. Thanks for the question. So on the quarter ended September 30th obviously began.

July 1st and <unk> and during the summer months the activity around rescue loans in particular was was higher than what it what it was and the and the following quarter for the quarter ended 12, 31, and and frankly, what we're seeing today and the market.

So we were our yields were highly.

The quarterly or the yields on our new our new investments and originations were highly correlated with that rescue lending opportunity.

When the is that the opportunity of subsided we are.

Dealing with with issuers that are far less you know part of less desperate and have potentially other options.

Those are opportunistic lenders and the middle market direct lenders that were you know fairly frozen and this in the second calendar quarter and they started coming back towards.

The towards the mid mid to late part of the calendar third quarter to quarter ended September 30, and so on.

On the the rescue lending and it's really the the the rescue lending part of the business that was driving those double digit type of.

The type of yields.

And and that's out of the decline so has our average yield.

And on new originations.

And okay.

And also just just the there was one position that we originated and.

And the month of August Might've gotten fund in early September.

That was a 14% loan to a single borrower and it was and it's and it's a decent size, it's the new egg transaction.

And it probably skewed that quarter of little bit because of because of that one transaction and.

And those we continue to look for those types of deals.

And that is not of rescue loans actually that it's just a highly structured and break and frankly, a pretty interesting one we will always.

And we'll always look for these non sponsored transaction, but this is just evidence that you know that the dot part of our business can be quite lumpy, we might have a quarter, where we do very little and and in the non sponsor area that we might have a quarter.

Like the quarter ended September 30 of well, we have the new agro, new star or something like that but really one or two deals my massively skew the average.

Okay understood, that's really helpful and I guess as a follow up on that day.

The.

And how much visibility into sort of evergreen and pipeline.

Anything big and I think.

Yeah, I can't put numbers on it but you know if you follow the broadly syndicated loan market.

That is a pretty good indication.

For what we expect to see and the middle market landscape as well potentially on the lag basis and the.

The broadly syndicated loan market.

The best 90% of that market. So if you exclude the bottom 10% because of the default risk or interest trading low birth of idiosyncratic reasons that passed 90% is trading pretty close to par or even above par at this point and.

And it's resulted in the month of January and a significant repricing wave and the broadly syndicated loan market and in fact, we have seen a couple of second lien positions that we recently clubbed up and and took on and in 2020.

Repaid through the upsizing of our broadly syndicated first lien.

And so the upside of the first lien and.

And take out the entirety of the second lien and to reduce their cost of debt.

And it's hard for me to predict the the volume of that impact on the go forward basis, but the the market color that I would give you today is that especially in the month of January.

Become quite active.

And it's and it's not surprising given the fact that there's been so many inflows retail inflows into broadly syndicated loan funds as well as CLO creation.

That has driven those prices are prices higher and the brought one last data point for you on the broadly syndicated loan market and the index was up about 135 basis points and the month of January alone.

It's a very very big month, and it is driven by the technicals there I I expect that given the technical and given such a strong fund raising and.

A year and 2020, but I'll also and the last few quarters, just middle market direct lending funds have been very actively fund raising.

I suspect that there would be.

And increase and repayment activity in the more flow oriented L. B O back part of the market.

Just a part of the market, that's very heavily trafficked and and the call protection is not material and typically only about a year and then some elevated call a call premium and so I would expect some some repayment activity to pick up even in the middle market.

Over the next couple of quarters, if these current market technicals persist.

Okay, great. Thanks, so much.

Okay.

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