Q4 2020 Ares Capital Corp Earnings Call
Good afternoon, welcome to Ares capital Corporation's fourth quarter and year ended December 31st 2020 earnings Conference call. At this time, all participants will be in a listen only mode. As a reminder, this conference is being recorded.
On Wednesday February 10th 2021.
I will now turn the conference over to Mr. John <unk>, managing director of Investor Relations.
Thank you Tom now, let me start with some important reminders comments made during the course of this conference call and webcast as well as the accompanying documents contain forward looking statements and are subject to risks and uncertainties.
<unk> actual results could differ materially from those expressed in such forward looking statements for any reason, including those listed in its absolutely true filings there.
<unk> Capital Corporation assumes no obligation to update any such forward looking statements. Please also note the past performance or market information is not a guarantee of future results. During this conference call. The company may discuss certain non-GAAP measures as defined by SEC regulation G. Such as core earnings per share or core EPS. The company believes that core EPS provide.
The useful information to investors regarding financial performance because it is one method the company uses to measure its financial condition and results of operations.
A reconciliation of core EPS to the net per share increase or decrease in stockholders' equity, resulting from operations. The most directly comparable GAAP financial measure can be found in the accompanying slide presentation for this call. In addition, the reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
Certain information discussed on this call and the accompanying slide presentation, including information relating to portfolio companies was derived from third party sources and has not been independently verified and accordingly, the company makes no representation or warranty with respect to this information.
The company's fourth quarter and year end December 31st 2020 earnings presentation can be found on the company's website at Www Dot Ares capital Corp, Dot com by clicking on the fourth quarter 2020 earnings presentation link on the homepage on the Investor resources section of our website.
Ares Capital Corporation's earnings release, and 10-K are also available on the company's website.
Now I'll turn the call over to Kip to hear Ares Capital Corporation's Chief Executive Officer.
Thanks, a lot John.
Hello, everyone and thank you for joining us on here with our co President Michael Smith, and Mitch Goldstein, Our Chief Financial Officer, Penni roll and several other members of the management team.
I want to start by highlighting our strong fourth quarter and full year results and then provide some thoughts on our position in the current market conditions.
This morning, we reported record fourth quarter core earnings of 54 cents per share, which concluded a strong year for Ares capital despite the very challenging backdrop.
We are proud of how our team managed through the difficult conditions created by the COVID-19 pandemic and we believe our strong performance validates our ability to perform in challenging market conditions.
Our fourth quarter results were driven by the largest new commitment volumes, we have made in any quarter of our 16 year history.
The significant origination activity, partially reflects the growing scale of our direct sourcing platform.
This includes the expansion of origination and other credit oriented strategies across the Ares platform.
It also reflects the disruption of our market experienced beginning in March and continuing through the middle of last year due to the pandemic.
Markets began to normalize towards the end of the summer and the direct lending markets on a real resurgence of activity towards the towards the end of the year as markets began to normalize our.
Our GAAP earnings per share of 89 for the fourth quarter were driven by these healthy activity levels as well as sizable net unrealized gains are reflection of our strengthening investment portfolio.
Overall, our core EPS was $1.74 per share for the year, well above our pay out a regular quarterly dividends totaling $8 60 per share.
Our net asset value per share ended the year at $16.97, which is up approximately 9% since the March 31 2020 drawdown.
Since the markdown in portfolio values that we experienced in March we've recovered a significant majority of the decline as of year end.
In conjunction with the economic and capital markets recovery during the back half of the year, our skilled direct origination platform allowed us to see a large and varied set of opportunities in the financing market.
During the second half of the year, we evaluated approximately 1700 investment opportunities on a run rate annualized basis.
This is a 5% increase when compared against the opportunities evaluated during the full year 2019.
This large and expanding pipeline has enhanced our ability to be selective and allows us to invest in what we believe are the strongest companies.
And not surprisingly our 2020, new deal selectivity rate of approximately 3% was one of the lowest for us in over a decade and below our historical average of approximately 4%.
In addition to this we are finding many larger companies interesting and attractive the average EBITDA for the company as we evaluated during the year increased 53% as compared to last year underscoring the expansion of our opportunity set in terms of both number and size of borrowers.
For the year, we estimate that we reviewed more than $500 billion of financing opportunities, which is a roughly 20% increase over our estimate for 2019.
As I alluded to earlier the growth in the amount of transactions. We are reviewing is partially driven by the continued scaling of our capabilities at Ares management.
We believe that the culture of collaboration across the Ares platform and the increased investment that Ares has made expanding into new verticals and capabilities meaningfully enhances the opportunity set for Ares capital.
With over 145 U S direct lending investment professionals and relationships with approximately 550 private equity sponsors. We believe we have the largest U S direct lending team in the industry.
Beyond this footprint Ares has a strong European direct lending platform with more than 60 professionals that manage distinct and separate funds.
This enables us to cover the private equity community globally and positions Ares capital to see incremental deal flow from European sponsors investing in the U S as well as select cross border investment opportunities.
We also believe that the continued expansion of other credit teams at Ares management has further augmented our market reach and brings additional opportunities to the company.
Finally, the breath of our platform has allowed Ares capital the benefit from deeper industry specialization that continues to develop.
At the firm in areas like software.
Health care is.
Infrastructure and sports media and entertainment.
We will provide more detail later in the call, but the quality of the portfolio has improved since the difficulties of this past spring when we saw temporary business closures and general economic turmoil for many companies.
During the fourth quarter, we collected 99% of contractual interest due on the L. T M weighted average EBITDA growth of our portfolio companies accelerated reaching a healthy 5% during the fourth quarter up from about 2% a quarter ago.
It's worth noting that we continue to see faster growth among our upper middle market companies in excess of $100 million in EBITDA compared to those below $50 million on EBITDA.
The further strength strengthening of our portfolio is also reflected in other credit metrics that we report on a quarterly basis.
Non accruals were five 1% at amortized cost and three 2% at fair value at the end of the third quarter.
These non accruals declined three 3% at amortized cost and 2% at fair value at the end of the fourth quarter.
Our weighted average portfolio grade of three points Youre also improved versus last quarter's two nine and in line with our historical average.
Finally, I'd like to highlight the strong liquidity position on capitalization of the company.
The strength of our balance sheet and the depth of our liquidity has proven to be a significant weapon that we continue to use support of our existing borrowers during these periods of economic uncertainty and recovery.
We had $2 $6 billion of excess liquidity at the end of Q1 2020 and have now grown this on invested capital to over $4 billion at year end.
As penni will expand upon shortly we continue to access efficient forms of financing to further enhance the company's funding profile and we have continued to lower our cost of financing.
We believe Ares capital is a very strong balance sheet today that will provide us with all the tools, we need to work through 2021 and beyond.
I'm now going to turn the call over to penni to provide more details on our fourth quarter and full year 2020 financial results.
Thanks, and good afternoon, our core earnings per share of 54 cents for the fourth quarter of 2020 are higher than both the 39 cents for the third quarter of 2020, and the 45 cents for the fourth quarter of 2019.
Our GAAP earnings per share for the fourth quarter of 2020, we're 89 cents.
It compares to a dollar and four cents for the third quarter of 2020, and 48 cents for the fourth quarter of 2019.
Our GAAP earnings per share for the fourth quarter of 2020 included 78 cents of net unrealized gains offset by 43 cents of net realized losses.
As Kipp mentioned, we closed the year with a very strong fourth quarter that helped drive our full year core earnings per share of $1.74.
And along with recovering valuations our GAAP net income per share of a dollar in 2014 sets. This compares to a dollar on 89 cents and $1.86 respectively for 2019.
Our fourth quarter core earnings of 54 cents were driven by strong recurring interest and dividend income and a larger than usual level of capital structuring service fees of $93 million from new origination and capital markets activities.
Our net unrealized gains on investments of $332 million for the fourth quarter of 2020, primarily reflect continued tightening of credit spreads relative to the end of the previous quarter and performance improvement in certain names.
At December 31, 2020, our stockholders' equity was $7.2 billion, resulting in a net asset value per share of $16 97.
As compared to $7 million or $16.48 a share.
September 32020, and 7.5 billion or $17.32 at December 31, 2019.
The increase in our net asset value during the fourth quarter of 2020 was primarily driven by the net unrealized gains.
Despite the significant unprecedented market volatility, which impacted portfolio values in the first quarter, we saw a steady recovery of values during the remainder of the year, resulting in a more modest full year net realized and unrealized losses of $310 million.
We have recovered a significant amount of the NAV per share decline, we recorded in the first quarter at the start of the COVID-19 pandemic with this recovery, we had only a modest two per cent decline in the company's NAV per share over the year.
Our total portfolio at fair value at the end of the quarter was $15 $5 billion and we had total assets of $16 $2 billion.
As of December 31st 2020, the weighted average yield on our debt and other income producing securities at amortized cost was 9.1 per cent.
The weighted average yield on total investments at amortized cost was eight per cent.
As compared to 9.1 per cent and seven 8%, respectively at September 32020, and $9 six per cent and eight 6% respectively. At December 31 2019.
At December 31, 2000, 2084 per cent of our total portfolio at fair value was in floating rate investments. Additionally, excluding our investment in the SDLP certificates 84 per cent of the remaining floating rate investments had an average LIBOR floor of approximately 1.1 per cent.
Which is well above today's current three month LIBOR rate.
Now, let's shift to our capitalization and liquidity.
As of December 31st.
Our debt to equity ratio net of available cash of $213 million was 1.17 times up from one point O seven times at the end of the third quarter.
As of the end of the year and pro forma for our recent bond offering we had more than $4 billion of total available liquidity.
To recap a busy capital activity year for us during 2020, we closed on over $2.4 billion of new financing commitments significantly increasing our liquidity across both unsecured and secured financing options. Once again, we demonstrated our ability to access.
Diverse and cost effective sources of capital even in the most challenging of times.
Last year, and we remained active in the capital markets, taking advantage of very favorable market conditions with an opportunistic unsecured debt issuance of $650 million at the lowest all in coupon in BDC history of 2.15 per cent.
As a reminder, our next term debt maturity is not until January of next year and the earliest maturity of our bank credit facilities is September 2024.
Overall, we are happy with our capital structure today, and we believe it remains one of our most significant competitive advantages positioning us well to remain active investors.
Before I conclude I want to discuss our undistributed taxable income and our dividends for 2020, despite the pandemic driven challenges for a significant portion of the year. We once again out earned the dividends, we paid resulting in an increase in our undistributed taxable income.
We currently estimate that our spillover income reached a dollar and seven cents per share at the end of 'twenty 'twenty, an increase of 11 cents per share from 2019 level.
We believe having a strong and meaningful undistributed spillover supports our goal of maintaining a steady dividend through varying market conditions and sets us apart from many other bdcs that have no such spillover to speak of.
To that end. This morning, we announced that we declared a regular first quarter dividend of 40 <unk> per share, which is consistent with the regular quarterly dividend paid throughout 2020.
This first quarter dividend is payable on March 31st 2021 to stockholders of record on March 15th 2021.
Now I will turn over the call to Michael to walk through our investment activities for the quarter and the year.
Thanks, Penni I'd like to spend a few minutes, providing more detail on our investments and portfolio performance for both the year end and importantly, the fourth quarter of 2020.
I will then provide an update on post quarter end activity and our backlog and pipeline.
During 2020, our team originated $6 7 billion of new investment commitments across 142 transactions, including $3 9 billion of commitments just 59 companies in the fourth quarter.
Our investments throughout the year came from a diverse set of high quality companies across more than 20 distinct industries.
The EBITDA of the companies we financed this year range from 4 million to $731 million, which underscores the breath of our opportunity set and capabilities we.
We finished the year with 350 portfolio companies and we remained highly diversified with an average hold position at fair value of only 0.3 per cent.
Focusing on our significant fourth quarter investment activity approximately two thirds of the new fundings came from income and borrowers which on average have been clients of ARCC for the past five years.
Our position as an incumbent lender provides meaningful and differentiated sourcing advantages and enables the company to stay invested through ownership transfers and allows us to provide additional capital to companies that has exhibited strong performance over multiple years.
Disadvantage was especially important in 2020 as follow on activity accounted for more than 70% of M&A activity during the year, a new record according to pitch book.
It is also worth mentioning that record origination volumes for us typically follow periods of volatility.
Prior to this quarter, our highest level of new investment activity was the fourth quarter of 2018, following the significant market dislocation at the end of 2018.
During volatile periods, we believe our market share increases as companies increasingly seek the surety of capital and scaled financing solutions we provide.
Much of the fourth quarter's robust investment activity involve transactions that were structured and committed to during the third quarter and the beginning of the fourth quarter when the market backed up and we identified opportunities that had attractive relative values.
For example, the first lien commitments closed during the fourth quarter, and 11% higher spread per unit of leverage and 19% higher upfront fees as compared to the fourth quarter of 2019.
Additionally, we benefited from seeing and financing higher quality companies as those businesses that came to market. During the second half of the year generally had limited impact from COVID-19.
With respect to our portfolio composition.
At fiscal year end 2020.
79% of our portfolio at fair value inclusive of the SDLP investment wasn't secured loans.
Which is consistent with our composition prior to COVID-19.
What has changed more meaningfully as the weighted average EBITDA of our portfolio companies at.
At year end 2020, the weighted average EBITDA reached 156 million up from $139 million at year end 2019, and just $99 million two years ago.
This growing EBITDA underscores the expanding market opportunity for large direct lending transactions and our strong competitive position in this attractive segment of the market.
As Keith described earlier, the overall credit quality of the portfolio continues to improve with a rebounding economy and healthy capital market conditions.
One measure of this is the weighted average loan to value of our last dollar of debt and our corporate borrowers which ended the year below 50%.
This is the most favorable assessment of L. T V. During the past five years and highlights the downside protection, we feel is inherent in our portfolio.
Let me now provide a brief update on our post quarter end investment activity and pipeline.
From January 1st from February 4th 2021.
Made new investment commitments totaling 524 million of which $411 million were funded.
And we exited or were repaid on $1 1 billion of investment commitments, including $260 million of loans sold to I am our vehicles managed by I am.
Generating approximately 13 million of net realized gains on total exits.
As of February sport.
Our backlog and pipeline stood at roughly $685 million and $280 million, respectively, which represents a similar low level to early February 2020.
It's worth pointing out this pipeline reflects a combination of the typical slower start to the year and the robust year end debt pulled forward some demand.
Looking forward, we remain optimistic that the continued firming of economic conditions.
In healthy amounts of sponsor capital on the sidelines may provide a supportive backdrop for stronger deal activity throughout the year.
Note that our backlog contains investments that are still subject to approvals and documentations and may not close.
We may sell a portion of these investments post closing.
With that I'll now turn the call back over to Kim for some closing remarks.
Thanks, Michael.
We continue to move the company successfully through what we hope is the near end of the COVID-19 health crisis around the world disc.
Despite this difficult environment our performance during 2020 was very strong and we closed the year on a high note with our best quarter in the company's history.
We believe our disciplined investment approach broad market reach conservative balance sheet and deeply experienced team of differentiated the company during this difficult year.
I want to end my comments by sending deep appreciation and gratitude to all of our team members who've come together, it's such a difficult time to deliver value for the shareholders.
This is not the first time, we've seen this type of effort from our people and I don't expect it will be the last.
We remain relatively unique as a company in the BDC space a company, that's showing cumulative growth in net asset value over 16 years and cumulative realized gains in excess of realized losses over the same period due to our consistent investment performance. We also continue to be focused on our <unk>.
Earnings exceeding our dividends, which certainly was the case for 2020.
Fiscal year end 2020, once again prove that Ares capital can navigate volatile on disruptive markets and deliver strong performance to investors, while maintaining a constructive presence with borrowers and clients as we did throughout the year.
As the economy is now slowly emerging from this global health crisis, we are seeing growing evidence that these trends are yet again supporting Ares capital's position in the market.
Looking forward, we believe Ares capital's leadership position in direct lending aligns the company to benefit from the continued expansion of the middle market and.
And the secular growth trend of more companies seeking private capital solutions.
Despite the many challenges that 2020 brought we're pleased with the performance that we've delivered for you this year and we feel well positioned for 2021 and beyond.
That concludes our prepared remarks, and we'd be happy to open the line for questions. Thank you.
At this time, if you would like to ask a question. Please press Star then one on your Touchtone phone.
If you would like to withdraw your question. Please press Star and then two.
Please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow on.
If you have additional questions you may reenter the queue.
The Investor Relations team will be a it will be available to address any further questions at the conclusion of today's call.
At this time, we will pause momentarily to assemble our roster.
The first question comes from John Hecht with Jefferies.
Go ahead.
Good morning, guys. Thanks for taking my questions and congratulations on navigating that.
Strange here.
First question and I think Mike talked about the fee environment with respect to new deals in his some of his remarks, but is there you had a high high amount of capital markets activity that good fee income is there anything changing on the fee margins or your ability to.
Demand fees and deals or is that simply just.
You know our metric of elevated activity.
Hey, John.
Thanks for the question, it's Kevin can you hear me.
I can't say that.
Sure.
I mean, it's mostly driven obviously by a really active origination quarter. If you looked at.
The fee percentage, you know so take fees and divide them by the amount of commitments, it's pretty in line with what we saw throughout.
The year end 2020, if you if you look on an annualized basis as well as in 19.
There were one or two large deals towards the end of the quarter, where we were able to achieve some better than expected sort of capital markets activity on some larger deals that maybe bumped it up a little bit, but it's largely a result of the significant new commitment number.
Yeah.
Okay, and then non related follow up.
You see a pretty sizeable decrease in Npa's was that all performance related you have maybe just the indication of a recovering economy or with some of that.
Weighted into some restructuring activities.
It's both so we had two transactions that we did restructure in the quarter right that came off non accrual so.
Production resource group as well as Vista, where two companies.
Were removed basically of the five total debt were restructurings.
So it's a combination of both John.
Okay. Thanks, very much guys. Thank.
Thank you.
The next question comes from Finian O'shea with Wells Fargo. Please go ahead.
Hi, Thank you I think that's me.
Got it.
Uh huh.
Just to follow up on.
Jon's question, there on the origination level.
I think that was in terms of your capital base and leverage profile, a pretty meaningful if you agree.
Leverage is pretty solid at quarter end there were.
Presumably some sell downs and in Paragon picked it up.
So can you talk about how.
Above trend this was.
For our level of activity I know the market opportunity was really big in the fourth quarter and it's it's growing for you.
But how should we should we think about.
On.
Ares approaching this or.
Starting to sustainably produced this level of origination and in the new environment.
Sure.
No doubt it was unusual I mean I think.
We've even talked about a little bit on the third quarter call.
We expected this very busy fourth quarter really was.
Hmm.
As a result of Q2.
In Q3 for that matter being significantly.
Significantly below what had been our historical kind of new commitments, just if you look back on track them.
And the prior quarters, you know Q1 and before we are ranging somewhere from you know a 1 billion three to as high as $2 four.
The fourth quarter was pretty unusual on that a lot of the deal flow that we close you know where things that.
<unk> had kind of been brewing all year, but but didn't really have a.
From market to close into and with some additional recovery into Q4, a lot of that deal flow carried over so.
It's a it certainly is a result of that I think it's also a result of you know there was concern around the.
The election, there was concerned around taxes under potentially new administration that we now see et cetera. So there is also I think a poll.
Into Q4 potentially from 2021 with folks trying to get transactions done.
By year end, we saw both of those phenomenon occur.
So I think it's an unusual quarter no doubt I mean, I don't expect on a run rate basis, we'd be committing for billings on a quarter to answer the question simply.
That's helpful. Thank you and.
And then we talked about last quarter capstone.
<unk>.
Were you you were at least as it started you were engaged.
Syndication provider.
Provider.
How has that proved to be sort of a onetime.
You know COVID-19 market volatility thing or is that something that you find yourself increasingly open to or potentially engaged in.
Yeah, I think we have been historically, you know open to and engaged in that typically I think as we talked about last quarter.
We we underwrite all of our transactions with comfort.
And holding the entirety of obviously, what we commit to.
But the market really firmed up going into yearend.
And in markets like that.
Sometimes pricing relative to where you underwrote tightens and your desire to hold decreases.
Decreases maybe from where it was on an underwriting basis. So we've set a fully functioning.
Capital markets and quote syndications team up to take advantage of tightening markets like that on reduce holds the names that we see as potentially less interesting by the time, they close versus when we underwrote them.
And that's sort of the story with capstone on to get into that deal in detail, but you know look we've done that historically in the past and in and tightening markets were absolutely opening to maximizing our advantages just to generate excess fee income in transactions, where we see final holds being lower than we may have expected at underwriting.
Very well. Thank you congrats on the quarter, that's all from me.
Thanks, Dan.
The next question comes from Ryan Lynch with K VW. Please go ahead.
Hey, good afternoon, thanks for taking my questions.
First one I just wanted to talk about your liability structure. Obviously, you know first of all congratulations Han on on.
On that debt offering.
You guys did in January that was on a historically low rate.
And so with doing something like that you guys have always had very low unsecured debt costs, but I would say that the one you did recently it was kind of a game changer, because that that kind of falls right in line with the cost of your revolvers and so assuming that the market for unsecured debt doesn't changes and obviously.
That can fluctuate depending on market conditions being able to issue debt close to unsecured debt at close to 2% does that change. The way you all are thinking about utilizing your revolvers in the future.
Sure I'll start and I'll, let penni chime and we're obviously not on the same place, which will probably have some some thoughts I mean look we're thrilled with the debt issuance being able to issue on the unsecured markets.
Two and change percentage is pretty attractive to your point really relative to being able to.
Drawdown secured facilities at roughly the same cost you know give or take.
I don't think it changes our approach.
To be honest I mean, we still want a balance of floating rate.
Debt and fixed rate debt on that we're not.
Looking to be particularly interest rate sensitive on the liability structure.
And we value the duration on the ladder maturities that the unsecured market offers us but more than anything we've said this in the past Ryan I'll, just say look we're thrilled about that cost of capital, but we're trying to maintain a very flexible balance sheet that just allows us to run the company with again excess liquidity and.
The flexibility to stick to our investment approach, which has worked well over a long period of time.
Okay I understand.
And then my follow up would be you know obviously there was a ton of just market activity. You gave various reasons why on the fourth quarter had accelerated activity just as a market standpoint, obviously ares benefited from mad buying on being a extremely robust quarter from originations and commitment standpoint.
On my question was though.
Was there any do you think any structural shifts that occurred during COVID-19 that actually pushed more deals.
Sponsor backed deals to direct lenders, obviously those trends have already been in place for several years now but was there anything that debt maybe structurally shifted during COVID-19 that debt even accelerated those trends.
Yeah, I mean, we'll see I mean, we we Mike on.
And his portion on the prepared remarks, but look I think during uncertain times private capital solutions tend to be more valuable right syndicated deals can be tougher to get done.
Market volatility et cetera is not something that folks want to take on in two.
2020 was certainly a year, where you could argue there's a heck of a lot of market volatility right. So I do think just increased acceptance increased preference for private capital deals has just been reinforced.
And to Mike's prepared comments to look I think the consistency with which we approach both our existing borrowers and the new deal market throughout 2020 really resonates for people right, because particularly well for all of our clients is going to say, particularly private equity you only do a couple of deals per year, but gossiping with the folks that aren't private equity backed.
Youre talking about.
Families are entrepreneurs or whoever owns these assets and companies that are only going to do a transaction.
One they do with Ares capital you know once on a pretty long while right. So not only do you want the certainty of a private solution, but you obviously value a partner more who.
You know, it's going to be there for the long haul right who's shown consistency, who has shown stability who hasn't.
Closed their doors for new business, so to speak for any period of time and we're fortunate we didn't we didn't do that so I think we were playing defense on the existing portfolio pretty front footed about wanting to.
Do new deals you know throughout 2020 and that again to Mike's prepared comments should help us continue to improve kind of our market share relative to the competition.
Gotcha that makes sense.
Appreciate that those comments those are all my questions I have today and not really nice quarter guys.
Right I appreciate it.
The next question comes from Devin Ryan with JMP Securities. Please go ahead.
Great Good afternoon guys.
Maybe just to follow up a little bit on the pipeline commentary I appreciate some of the detail and kind of where we sit relative to last year.
Can maybe just give us a little flavor for your.
Pricing terms today, you know are we all the way back to pre COVID-19, there as well or how things have evolved over the last few months, obviously quite a bit of tightening, but curious if there's any other nuances within that.
Yeah. Thanks for the questions I mean, you know theres not a lot beyond that I mean, you kind of summarized it look things have.
Come back in to be more competitive in a bit tighter here, which is obviously why you see our backlog and pipeline that's more in line with what we've seen historically, obviously my called that out in his prepared remarks, comparing where we were kind of at this point 2021 versus 12 months ago as we kicked off 2020.
I'd say that the quality of the underwriting and frankly, the quality of the businesses that we've seen are higher right and we made the comment too that most of them now that we're out of the depths of March and April are less.
Covid sensitive company is right, it's more regular way and of course with that comes.
Folks willing to be more aggressive on leverage or terms I think that the quality of the underwriting though his resettle on you know folks have have used this in terms of.
You know leverage in negotiations with Counterparties company's borrowers et cetera to try to structure really smart deals for lenders and that that's continuing.
But look things have rallied back and you know it it is more competitive for sure now than it was when we were coming through the spring and summer obviously, when we're taking on a lot of this backlog and.
Pipeline that we closed into this fourth quarter.
But nothing nothing earth shattering beyond that Devin.
Right, Okay, I appreciate that and then.
Just on the unit tranche side originations were very strong there can you just remind us how youre defining unit tranche and just.
Broadly the appetite there.
They're just kind of what youre seeing around demand.
Yeah, I mean, it's a unit tranche is hard because you know people will look at it different ways. I mean, we've been doing doing that type of business a long time I mean, typically what we're doing in the unit tranches were taking what historically has been a three party deal right, where they're senior and subordinated debt or senior and junior capital on combining it into one loan that we can commit to <unk>.
<unk> without flex underwriting that and holding that for the most part on our own account. So it just makes life easier for borrowers that allows for a more even pay down of debt structure typically less call protection et cetera, but it's really meant to replicate what a borrower could get in our mind in a deal where they chose to to raise senior and junior capital on.
Two separate tranches to keep it simple.
Perfect.
Thanks, Kip and a great quarter.
Thanks, so much I appreciate it.
As a quick reminder, if you have a question. Please press star and then one to be joined into the question queue.
The next question comes from Melissa Wedel with JP Morgan. Please go ahead.
Good morning, guys. Thanks for taking my questions.
I just wanted to touch on.
Fully on the leverage and how you're thinking about that on your.
Sort of reaching a.
The higher end on your target leverage range, especially when we think about some of the activity post quarter end.
Could imply for flat, maybe a little bit higher.
From where you ended the December quarter. So how how are you managing that on our portfolio.
Yeah. So I mean, it's it's actually right in line with the range that we've communicated in the past right, we typically feel pretty comfortable running somewhere between one and one on a quarter times. So well you know numerically it looks like it's on the upper end and we talk about future backlog and pipeline. We all we also don't lay out what we expect for future repayments so for us nothing unusual.
Usual nothing out of the ordinary.
You know, we'll see how the activity levels go in terms of the things to Mike's point about some of the things in backlog and pipeline, probably don't close right and we've got deal flow, obviously that we're working on today that will get into that backlog and pipeline through the back of the quarter.
So really I don't have any thoughts on that other than it's ordinary course.
Okay.
And wanted to touch on something that you've referenced a few times, where he talked about the sort of debt.
On the attractiveness of larger EBITDA companies.
You know as you.
Put some interesting fast on your slide deck, as well about extending sort of debt the.
The size of your average commitment on that.
On a term of the average.
And everything is fine.
And so just wanted to make sure we're thinking about that the right way, it's not a function of that.
Quality of the companies or broader macro outlook anyway, you know how does that impact any sort of prepayment.
Sees our term debt you're right into sales.
Yes, so I don't think we're extending them and feel free to I'm not sure where you picked up the longer commitment term the term of the loans that were writing small company a large company frankly arent pardon any different I think the trend that youre seeing in the larger companies actually speaks a little bit to the competitive set which is sort of interesting.
And you know most of the folks on the team have been doing this 20 plus years typically when you're lending to smaller companies tend to 30% or $40 million EBITDA companies Youre able to extract better terms and better pricing and all of that and I think with the amount of capital that's been raised in private credit and in direct lending over the last five years when.
You really pour through it and you analyze it what you'll see is a lot of folks that have what I would argue to be subscale pools of capital to really address any market other than that lower middle market and it forces them into deals where they can compete so we've actually seen it would be more competitive in some of these smaller deals that we've had to just walk away from.
Because we will see the same terms occasionally we even see lower pricing in some of these lower middle market companies and we can achieve on the larger market.
Our larger company deals that we're doing.
And I think that again as a result of the fact that not very many folks have the capital both in terms of scale and flexibility to really approach 100 million or $150 million EBITDA company with a real solution right. So.
So we're seeing just this inefficiency occur in some of these larger businesses.
The stats that we laid out about the performance of those larger companies frankly doesn't surprise us all that much because the larger companies tend to be.
You know more sophisticated better management teams more scale, you know more geographic reach et cetera.
So I'm not surprised that they are performing a little bit better.
So it's probably all those dynamics together.
Impacting the fact that we really like that opportunity set on these larger company transactions, we've done over the last year or two.
Oh yeah.
Yeah, you're welcome thank you.
The next question comes from Robert Dodd with Raymond James. Please go ahead.
Oh, hi, everyone. Congratulations on the quarter and if I can keep on what one of your comments I think to Devin about the kind of pipeline that's coming through now.
High quality businesses and he said people are more willing to be a bit more aggressive on leverage.
We talked about obviously pricing.
As contracted I mean, what would you say you know based on some of these comments that the spreads on the fourth quarter was 11% our net leverage.
A year ago, I mean is that all about.
A vast weighted or you know as left which has gone up has some of that whole Hell did.
In terms of where those terms all with high leverage yeah. I think some of it's held on thanks for the question Robert I mean, as you know look the middle market tends to follow.
The broadly syndicated markets in terms of its pricing right in terms of what is the broadly syndicated loan look like obviously middle market for a handful of reasons you know, we'll always have spreads widened the BSL market.
So as that market's come in.
We'd probably come in a bit I don't think we've given it all back I think where it will be reliant on for 2021 is what are the activity levels right. What does that mean day look like and Q ones historically.
Slow quarter, and especially after such a busy fourth quarter.
It started slow and that doesn't help but the good news is it's picked up a bunch.
Our backlog and pipeline looks healthy.
So I think we'll see I think we will see you know that premium hang on and and you know I think 2021 is actually pretty is.
It is pretty good prospect for investing for the company.
But if I can ask you.
This one I'll go with a hypothetical let.
It is competition does continue to kind of drive away that spread obviously one of the tools you have at your big you could write a big check you couldn't you can potentially obviously sell down and take capital markets activity and maybe skim some syndication fees right. So what should we expect that if the market get smoothed.
On competitive we might see more.
Sell downs skimming, keeping maybe keeping the total economics in a deal on the same even if the coupon goes south because you can you can skip it two other vectors by having no capital markets team and having the ability to like initially a big check and then sell down and keep some of the other economics as well.
Yeah, I mean, it benefited us as you saw on the fourth quarter and obviously, we're positioned to do that to the extent things come in I think my own view is activity levels will pick up I don't think competition is going to get any more heated frankly than it is today pitching new business.
And we can use that tool to answer your question, but I don't I don't see anything unusual changing for 2021.
Okay got it thank you.
Welcome.
Okay.
This concludes our question and answer session I'd like to turn the conference back over to Mr kept of ear for any closing remarks.
Oh thanks.
I appreciate everyone getting on the call I appreciate the time and I hope, you're staying well and look forward to actually seeing everybody in person one of these days, but otherwise we'll we'll catch you on the next earnings call. Thank you.
Okay.
Ladies and gentlemen, this concludes our conference call for today.
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