Q4 2020 Owl Rock Capital Corp Earnings Call
Good morning, and welcome to Owl Rock capital Corporation's fourth quarter and year ended 'twenty 'twenty earnings call.
I would like to remind our listeners that past performance is not indicative of future results and remarks made during the call may contain forward looking statements.
Forward looking statements are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside the company's control.
Actual results may differ materially from those forward looking statements as a result of a number of factors, including those described from time to time in Owl Rock capital Corporation's filings with the Securities and Exchange Commission.
The company assumes no obligation to update any forward looking statements.
As a reminder, this call is being recorded for replay purposes.
Yesterday, the company issued its earnings press release and posted an earnings presentation for the fourth quarter and year ended December 31st 2020.
The presentation should be reviewed in conjunction with the company's form 10-K filed on February 23rd with the SEC.
The company will refer to the earnings presentation throughout the call today. So please have that presentation available to you.
As a reminder, the earnings presentation is available on the company's website.
I will now turn the call over to Craig Packer, Chief Executive Officer of Owl Rock Capital Corporation.
Thank you operator, good morning, everyone and thank you for joining us today for our fourth quarter earnings call. This is Craig Packer and I'm CEO of Owl Rock Capital Corporation, and a co founder of Owl Rock capital partners.
Joining me today is Alan Kirshenbaum, our CFO and CLO and Dana Sclafani, our head of Investor Relations welcome to everyone, who is joining us on the call today, We hope you and your families remain safe and well.
I will start today's call by briefly discussing our financial highlights for the fourth quarter before providing an update on our portfolio and deal activity in the quarter.
Then after Alan covers our financial results I will discuss our outlook and make some closing remarks.
Getting into the fourth quarter financial highlights net investment income per share was 29.
I would note that the fee waiver, which was put in place in conjunction with our IPO expired on October 18th 2020, and culminated in total fee waivers of over $200 million.
Were passed on to shareholders via special dividends.
As a result, the fourth quarter NII reflects the impact of our full fee structure for almost the entire quarter.
We ended the year with net asset value per share of $14 74.
Seven cents from the third quarter or 15 cents, excluding the payment of the final special dividend distribution.
This reflects our third consecutive quarterly NAV increase since the Covid crisis hit in the first quarter of 2020, which.
Which is a result of both the improved market conditions and demonstrated resilience of our borrowers.
As a result, our current NAV is only down only 3% versus the end of 2019.
Looking forward for the first quarter of 2021, our board has declared a regular dividend of 31 per share. The same amount we have paid each quarter since our IPO.
As a reminder, in addition to our regular dividend for the fourth quarter. We also paid the final of our six previously declared special dividends of eight cents per share for shareholders of record as of December 31.
We saw a very strong origination activity this quarter, a topic I will spend more time on shortly and this provided for solid portfolio growth and an increase in leverage.
We ended the quarter with leverage of <unk> 87 times, which is up from four six times at the at year end 2019.
We continue to be pleased with the progress we have made towards our targeted range of <unk> nine to one in the quarter times.
Optimistic about the current market opportunity set and believe our favorable market position will allow us to continue to invest in attractive opportunities as we work to grow the portfolio, which when fully deployed we expect will be approximately 11 5 billion.
Regarding our balance sheet, we remained very well capitalized with $2 1 billion of liquidity.
I would highlight that on December eight we issued 1 billion of unsecured notes at our most attractive pricing level to date.
We believe having a significant portion of our financing liabilities as unsecured provides us with optimal financial flexibility and allows us to prudently manage our capital structure.
In addition, we are pleased with the continued progress we've made on lowering our cost of financing.
We'd also like to welcome Melissa Wyler, who has joined <unk> board of directors as an independent director.
Right.
Melissa brings a great deal of experience in the credit space, including most recently at Crescent capital, where she served on the management Committee and oversaw several credit businesses and we look forward to working with her as we continue to pursue our objectives for our shareholders.
Lastly on December 23rd Owl Rock capital group, which is the parent of <unk> investment adviser and dial capital partners announced that they are emerging to foreign Blue L capital Blue.
Blue our enter the public market by a business combination with Ultramar acquisition Corp, a special purpose acquisition company.
As noted in our definitive proxy statement filed on January 27th this triggers a change of control in the advisory agreement.
Special meeting has been scheduled for March 17th for shareholders to vote, whether to approve the proposals outlined in the proxy.
We are pleased to note that we recently received word that the independent proxy advisory firms ISS and glass Lewis both recommended that OCC shareholders vote for the proposals.
We also note that there are no expected changes to <unk> investment strategy team or process as a result of the transaction.
While there remain many steps prior to the closing of the merger. We are certainly excited about the opportunities that this expanded platform may provide for OCC.
Turning to the portfolio, we continue to be proud of the strength of our credit performance over the course of a very challenging year.
We are pleased that the core thesis of our investment strategy has borne such strong results and that our focus on credit selection and downside protection have served us well.
Looking at our internal credit ratings, our portfolio remains quite stable with overall results largely consistent with last quarter.
<unk> and our one or two rating categories, which are names performing in line with or exceeding our expectations at the time of underwriting comprised.
Approximately 90% of the fair value of the portfolio.
The percentage of our lower names is 10% of fair value down from 12% last quarter.
While we certainly have a small number of credits which remain challenged the vast majority of our portfolio continues to demonstrate solid financial performance and has proved to be resilient in the face of an uncertain economic environment.
While we remain vigilant about the economic impacts of Covid and recognize that the winter months have seen stricter lockdowns in certain geographies. We would note that the adverse economic impact has been less severe than what we experienced in the spring of last year businesses have adapted and based on what we're hearing from our borrowers many are continuing to recover toward.
Pre COVID-19 operating levels. Despite these ongoing challenges.
Amendment activity this quarter remained modest with three material amendments our amendment activity peaked in the second quarter at eight amendments for the last two quarters, our pace of amendments has moderated to more ordinary levels where.
Where we do have amendments we continue to see financial sponsors provide support in these situations either through material debt pay downs or additional equity support pick.
Pik interest represents less than 5% of 2020 annual total investment income and no new borrowers were moved to pick interest in the quarter.
As of quarter end, we had one that name on nonaccrual, representing 5% of the total cost of the portfolio and <unk>, 3% of fair value down from two names representing two 1% of the portfolio on a cost basis last quarter CIB.
CIBC global remains on non accrual status and no new borrowers were added to non accrual status in the quarter.
Swipe acquisition Corp, a manufacturer of gift cards and hotel key cards, which was placed on non accrual in the third quarter was moved back to accrual status in the fourth quarter as a result of our capital structure right sizing.
As I noted on our last earnings call commensurate with swipes debt restructuring owl rock has become the controlling shareholder of the company.
As this is the first time in our history, where we've had to take control of a borrower I would like to spend a minute here.
Remain very supportive of the business and management team and continue to believe in the long term sustainability of the company.
In order to best position the company in the near term, we rightsize the outstanding debt amount in equities the remainder of the debt balance.
In contrast, the quick resolution, we had on national Dentex last quarter, which was repaid at par.
We recognize that this process will likely have a longer runway.
Working closely with the company to maximize the long term value of our position we are well prepared for this moment by having proactively made significant investments in our workout and portfolio management team over the last two years and we will bring the full resources of our platform to bear in order to support the company going forward.
Moving on to originations, we saw robust investment activity in the fourth quarter, reflecting increased levels of M&A across the market.
As I noted on last quarter's call improving economic conditions and market strength stimulated M&A activity from private equity firms with increased sales processes and tack on acquisitions for portfolio companies, particularly for those least impacted by Covid.
Al Rock was well positioned to capture share in this more active market environment. We are very pleased with the investments we made.
Gross originations for the quarter were $1 $5 billion with funded originations of $1 3 billion.
We had sales and repayments of $520 million from net funded activity of $755 million.
For context, while this is one of our strongest quarter quarters ever it is not a record for us and we've exceeded these quarterly volumes on multiple occasions before.
Three positions were fully repaid or exited and we had partial pay downs or sales across 10 borrowers.
Given the strong market conditions, we took the opportunity to sell some high quality, but lower spread paper at attractive prices.
This is the type of mix shift you can expect to continue to see as we optimize the portfolio as it reaches full deployment.
In the quarter, we added 12, new portfolio companies and provided incremental capital from 14 existing borrowers as we saw a significant amount of strategic acquisition activity across our borrowers.
We are pleased to see the benefits of our growing incumbency positions as our borrowers are able to turn to us to support their strategic initiatives and we're able to deploy additional capital into businesses, we know well and where in some cases, we have years of experience with the company.
We're pleased with the volume of investments we closed in the fourth quarter, which includes three large unit tranche or stretch first lien facilities and our sole commitment to a second lien facility for PCI pharma services as well as the increased yield we were able to achieve while still maintaining our focus on credit quality.
The weighted average spread of new investments was roughly 690 basis points, which helped increase our total portfolio spread to 655 basis points for.
For frame of reference at the time of our IPO portfolio spread was 610 basis points and that has increased consistently in each quarter. Since then.
In addition to the economic terms of leverage levels covenants and documentation terms were all attractive on the investments we made.
As I noted earlier, our portfolio at quarter and now stands at over $10 8 billion across 119 portfolio companies. We're very happy with the continued strong credit performance of our borrowers now I'll turn it over to Alan to discuss our financial results in more detail.
Thank you Craig good morning, everyone I'm going to start off on slide seven of our earnings presentation, where you can see that we ended the fourth quarter with total portfolio investments of $10 8 billion outstanding debt of $5 3 billion and total net assets of $5 7 billion.
Our net asset value per share increased to $14.74 as of December 31, compared to $14 67 as of September 30, we ended the quarter with leverage of 0.87 times debt to equity and $2 1 billion in liquidity our dividend for the fourth quarter was 31 cents per share plus.
Our final special dividend of <unk> <unk> per share and our net investment income was 29 <unk> per share.
On the next slide slide eight I'm going to talk through in a bit of detail the results of our revenues and expenses for the fourth quarter.
You can see total investment income for the fourth quarter was $221 million up $34 2 million or 18% from last quarter.
This increase was primarily driven by increased interest income.
Our ability to continue to grow the portfolio and progress towards our leverage target. This increase also includes income we booked in the fourth quarter related to the full pay down of National Dentex, which was <unk> <unk> per share on.
On the expense side, what you'll see is a large increase in net expenses, primarily driven by our fee waiver exploration.
And increased interest expense total expenses were $112 9 million up 11, and a half million dollars or 11% from last quarter.
You will also see net expenses, which is total expenses net of our fee waiver of $104 9 million up $44 1 million for the quarter. We did still have $8 million of fee waivers in the fourth quarter since the fee waiver didnt terminate until October 18th which is about <unk> <unk> per share benefit to NII. This.
That will go away for next quarter.
So to try to summarize here a bit we're we're really pleased with our progress in building the portfolio the activity level in the quarter allowed us to grow the portfolio at attractive spreads, which will help us.
Which will help allow us to generate the expected earnings power to cover our dividend by the second half of the year as.
As we look to the first quarter. There are a few items I want to call attention to as I've mentioned, there are two nonrecurring items in the fourth quarter that we will not have the benefit of in the first quarter. The <unk> <unk> per share of revenue from the national Dentex, Paydown and the two cents per share from the partial quarter fee waiver. Some of this four cents per share we expect will be parsed.
We offset by interest from new investments in the first quarter and a full quarter's benefit of income from our investments made in the fourth quarter, the majority of which closed in December.
As a reminder, we had previously expected our NII would get the fee waivers expired and then improve as we approached our leverage target. So consistent with that we should see NII per share down a little in the first quarter versus the fourth quarter before coming back up in the second and third quarters. This year.
However, I would note there are a number of factors that will impact NII in any given quarter, including origination and repayment levels.
A few final closing comments before handing back over to Craig.
We continue to be well positioned in the industry given the strength of our balance sheet.
We issued the largest bond ever in the BDC space in December a 1 billion dollar issuance at our lowest cost to date and our credit spreads have continued to tightened since that issuance. We very intentionally have built a well diversified financing landscape diversifying the number of facilities. We have the types of facilities and number of lenders, we partner with matching duration.
In the left and right sides of our balance sheet is another important aspect of our landscape our weighted average debt maturity is over six years and we do not have any debt maturities until June of 2023.
We continue to have one of the lowest leverage levels in the industry at 0.87 times debt to equity.
As of December 31, we had $2 $1 billion of liquidity.
In total now we have issued $3 billion of unsecured debt, which brings us to our current funding mix of 56% unsecured debt because of this we continue to have a meaningful amount of excess collateral for our secured facilities and we continue to have a significant cushion to our regulatory asset coverage of 150%.
Overall, we believe our funding profile continues to be very sound and we continue to be in a very good position. Thank you all very much for your support and for joining us on today's call Craig back to you.
Thanks Alan.
To close I wanted to share our thoughts on the current market and touch on some of the earnings levers we have available to us.
Market conditions in the fourth quarter were very constructive as we saw robust investment activity across the direct lending space.
Given how well our platform performed during COVID-19 and our strong balance sheet liquidity and relationships. We believe private equity firms wanted to work with us on their most important transactions.
As we look to the first quarter market conditions remained strong and we've continued to see M&A financings drive activity levels there.
There was some pull forward of deals and the strength seasonally strong fourth quarter. So we expect deal activity will be down in the sector in the first quarter relative to Q4 <unk>.
Repayments may pick up given the robust syndicated market conditions, while it's hard to predict specific timing. We do expect many sponsors will look to refinance or engage in sale processes.
The deal opportunities, we are seeing a broad based across industries.
<unk> focused on less COVID-19 impacted sectors and are finding interesting opportunities across some of our largest sectors, where we tend to have deep industry knowledge and high conviction in the broader industry fundamentals.
Before I close I want to touch on some of the levers we have to drive higher earnings over the next few quarters.
I've spoken on in previous calls as this remains a focus for us given the expiration of the fee waiver.
As I've highlighted previously the biggest driver of expected earnings growth is the continued expansion of our portfolio as we move towards our target leverage level.
With that in mind, we are certainly pleased with our origination activity this quarter, which allowed us to make significant progress on our leverage metrics.
Based on our current progress, we expect to get to target leverage by the second half of the year.
Although the pace of portfolio growth will depend on both repayments and origination activity.
In addition, as our portfolio matures, we expect to benefit from higher levels of prepayments, which should result in increased income and prepayment fees.
Further we have continued to originate loans at higher spreads in recent quarters, we expect to be able to continue to lift our overall portfolio spread as we deploy capital into new investments get repaid on some higher quality, but lower spread investments.
In addition, we believe we should continue to lower our overall cost of debt, which will further benefit earnings.
Taking these factors into consideration we feel confident that there are a number of levers that we can use to increase our NII.
As I've said on previous calls we believe we are on track to cover our dividend from earnings by the second half of this year and until then we expect to continue to pay a regular dividend of <unk> 31 per share each quarter subject to our board's approval.
To close I'd like to highlight what we built over the last five years from the significant progress we've made over the past year.
We believe our market position is strong and we remain well positioned to be a direct lender of choice for private equity sponsors and borrowers and a very active time in the market.
Portfolio stands today at $10 8 billion in investments comprised of roughly 80% first lien positions with an average spread on investments of 655 basis points.
From a credit perspective, we only we have only one name on non accrual status, which accounts for 3% of the fair value and <unk>, 5% of the cost of the portfolio.
We maintained meaningful downside protection on our investments with an average loan to value below 50%, which has remained consistent since inception.
Our platform is bolstered by the strength of our balance sheet, we maintained four investment grade ratings, which allowed us to raise a significant amount of unsecured debt at attractive levels taken together, we feel we have built a diverse a defensive portfolio of scale supported by an attractive financing profile, which we believe provides a strong foundation for us to build on.
For years to come.
Thank you for joining us today, we appreciate your continued interest and support and look forward to speaking to you again next quarter.
Operator, please open the line for questions.
As a reminder, if you would like to ask a question. Please press down from the number one on your telephone keypad.
Ask that you. Please limit your questions to one and one follow up you May press star one again to rejoin the queue for additional questions.
Our first question comes from Robert Dodd with Raymond James.
Your line is now open.
Hi, guys I just had one.
All of them if I can on.
This does that question Craig on Slide 13, obviously, we can see that.
Ben.
The light Blue line like the up to 655 now I mean.
Given the.
The competitiveness of the environment I mean, you made comments about that could be refinancing weights as well okay.
How aggressive some areas of that day market I'll maybe.
Like the BSL market, which is not exactly what you did but.
Where should we get to see you sound very confident that you can continue to take that spread higher maybe.
Oh I thought so.
Well.
We reconcile the very very competitive.
And the fact that you expect that spread to continue to expand somewhat I mean is there a mix shift that you're talking about within that could you clarify that.
Sure Robert Thank you very much.
So the first point I'd make is we don't need very much spread expansion to cover our dividend. This significant increase in earnings is going to come just getting to our target leverage and repayments the smallest factor is.
<unk> spread expansion.
So its maybe a penny a share based on our math. So it's not the driver we have been able to achieve spread expansion and you and you touched on it it's really more about mix shift part of the way, we scaled OCC and you're familiar with us as we were investing.
And we want we're so careful about credit quality and so we put a pretty substantial amount of the portfolio Gilliand plus a paper.
That was first of all the true first lien paper at relatively low spreads in many cases below 500 over and so part of what we're saying is as that paper as we paid or we sell it this quarter, we sold a couple of positions.
To either other direct lenders or into the syndicated market. When we can replace that paper with with Unitranche paper that carries you know at least 100 hundred and 50 basis points more spread we have found opportunities to increase our spread or just organically on new deals from fourth quarter, we had very attractive pricing on new deals unit tranche and.
We did one or two second liens, we will continue to do those but I acknowledge the premise of your question at this moment in time sitting here on February 24th.
It's a competitive market, but we all know that comes and goes over the course of the quarter over the course of the year and I suspect, we'll continue to find a really nice market opportunities to get to get wider spreads, but I think the bigger driver is mix shift.
Got it I really appreciate that color and I can kind of follow on from you.
The other side.
The the compression we're seeing it in borrowing costs expenses I mean, as you said you did a $1 billion at three four.
Without asking you to pin it down exactly but how how low do you think you can take either your unsecured volume cost. So maybe all in borrowing cost versus where it is today.
Sure.
Alan you want to Oh, Yes of course, thanks, Robert We look we do think we can continue to tighten cost on the right side of the balance sheet over time and we've been in the process of optimizing how we look at our financing landscape cut costs are definitely roofing tighter there as well.
Our bought our bonds trade 50 bps, our bonds trade 50 basis points tighter today than than what we thought 3.4 was pretty good but theyre trading 50 basis points tighter.
Tighter than that we're well aware of some of the more recent prints.
Our bonds, but you could take 50 basis points across the $3 billion bond complex, obviously, the bonds are not callable, but but there are some real opportunities there over the next year or two to reduce our borrowing cost further.
Yes, I mean to that point, but it's been two more add ons to two.
Just this week with at premiums to what the issue that not that long.
Yeah.
Just because you brought out Robert So I think it's a broader point for the space.
I think it's a very encouraging sign for BDC shareholders. The strong reception that BDC bond deals are getting in the investment grade bond market and I speak of al rock, but I speak of some of the other high quality managers as well.
I think this is a bit of a sea change.
I'd like to think we in a part helped drive which is getting more investment grade bond buyers into the unsecured bond market for Bdcs I still think we print too wide my opinion, but I think it's nice to see spreads continue to tighten I think that there's general opportunities for spreads across the sector to continue to tighten and beyond.
What we might do relative to the others.
Got it thank you and I agree with you on endpoints as well.
Okay.
Thanks Robert.
Our next question comes from Ryan Lynch with <unk> W. Your line is now open.
Hey, good morning, Thanks for taking my questions.
First of all you had to.
Got you.
The leverage where you guys plan on operating and obviously you guys have a leverage target of <unk> nine to 1.25, that's a pretty wide range.
Given the current market dynamics today, given where we're just kind of coming out of this.
Significant economic downturn, we're within that target range would you like to operate.
Sure I'll start and I can chime in I'm Ryan Thanks.
So the range is as you said <unk> 91 in a quarter.
And we are we're balancing a number of constituencies when we think about exactly where we're going to land there, obviously leverages accretive for our shareholders, particularly with our low borrowing costs, but we obviously also want to make sure that we are have a really strong balance sheet in the eyes of the rating agencies and the investment grade bond buyers as well.
If you were modeling US right now I think probably.
Right.
Right now the appropriate place to model us would be one times I think that's the right balance of those two.
And we still have some work to do to get to that one time. So I think that's really where I would set set your expectations. We certainly think our portfolio, particularly the high quality portfolio that we built and a great credit performance could withstand higher leverage, but we from a financial policy standpoint, we really want to make sure we've got a super.
Our strong balance sheet, and making sure leverage as comfortable as part of that and that's the commitment we've made to the agencies and to the investment grade bond community.
We were proud of earning the trust of the agencies and the investment grade bond buyers, even while were private BDC and want to continue to deliver strong results there.
So one times is probably a good number to model one.
Okay understood and then you guys. Obviously, you know how to have a good view of market dynamics and see a wide range of deal flow in the market I would just love to get your guys' take on.
What are you guys seen in terms of.
Firms structures and leverage today in the market.
February.
2021 timeframe and how does that compare.
With with levels than we were seeing you know kind of pre COVID-19.
Sure.
So.
I'm going to extend the lens a bit because I think it's instructive of how things have migrated.
Obviously.
When COVID-19 hit spreads blew out we all know that.
In the summer we were we were active in the summer we didn't do a lot or is it a lot deals to do but at that point.
<unk> got significant premiums to pre COVID-19 levels.
I would say Directionally 150 basis point premiums to pre COVID-19 levels by the fourth quarter, we were still getting a very nice premium to pre COVID-19 levels, but it was not as wide as the COVID-19 wise, so that premium might've been more like.
75 to 100, instead of $1 52.
Day. My view is we are still wider than pre COVID-19 levels, but it's probably more like 50 basis points wider not 75 to 100.
There are certainly deals that might be inside of the 50 and there are deals that are wider than 50, but if I was just going to give you a metric to give you a sense beyond just the pure spread.
I think the leverage levels remain reasonable the covenant structures remain reasonable.
Private equity firms are putting significant checks into the deals that they do so the loan to values are reasonable.
And even at with even at only a 50 basis point premium to pre COVID-19 levels.
If you're talking about printing unit tranche I'll just to pick a number of L. Plus 600, with a floor, you're earning close to 8% on that.
Going to move up and down but to give you a give you a sense.
Mhm, Okay and that's helpful.
That's all from me I appreciate the time today.
Great. Thanks, Ryan.
Our next question comes from Mickey Schlein with Ladenburg. Your line is now open.
Yes, good morning, everyone, Craig I wanted to follow up on the.
Asset mix question.
I noticed that at fair value as a proportion of the portfolio and unit tranche has been trending down I realize that that ratio skewed by.
Station in the equity portfolio, but I would like to understand whether you still like the unit tranche markets our risk adjusted return in the current environment since that seems to be an important part of your plan turns a day.
Dividend from NII.
Sure I don't think it's moved moved too much maybe a couple of percentage points.
Our unit tranche, we very much like and I would say, it's probably the type of loan we're most interested in making.
Frankly part of what you're seeing in the reduction in the percentage is we have to make a judgment every quarter on what's considered a unit tranche and.
And we do that and try to be in a pretty analytical way and over time as our company. Some of our unit tranche original unit tranche loans are doing really well and so they're deleveraging and so their characteristics are becoming that of first lien rather than unit tranche. So it's not that we're seeking less unit tranche, but it's really a sign of the quality of the unit tranches.
That we are investing it so don't read anything into a lack of appetite for unit tranche we are concern.
It's our first priority I would say, we like the additional spread that you can get dollar one attachment it fits really well with that upper middle market sponsor target base.
You should expect us to continue to see unit tranche in a meaningful way just like we did in the fourth quarter, where it was our two biggest trucks for the quarter.
Thank you for that.
And looking at the market overall.
How do you feel about the loan markets balance between supply and demand when you think about the cave shape recovery cash.
Capital providers, including folks like you are all eager to find borrowers who are performing well during the pandemic they seem to have an endless supply of.
Capital available.
And you know that could portend more compression in loan spreads as the year progresses, so I'd like to get your view on <unk>.
Planned demand and also just what level of LIBOR floors.
Just to get right now.
Sure just to clarify are you at when you say the loan market and you're talking about the public market or our market or sort of a combo of both your markets. The leveraged loan market and as you know EBITDA is lower.
Yeah Yeah.
<unk>.
Look we I think that Theres, a very healthy balance between supply and demand in any one month.
Or any one quarter it can move to be one direction or the other it was not long ago, where I would say there was there were borrowers that wanted to borrow that couldn't easily obtained.
Active terms right except to go back to.
Late summer into September and I think the borrowers would not have said they could've got whatever whatever they want but as the economy has improved given the.
Feds actions certainly opened up by the fourth quarter, but we got really attractive terms in the fourth quarter. I mean look you look at the rates that we got in the fourth quarter. So I'd say I'd say that speaks to a pretty healthy environment, where high quality companies can get financing in the direct lending market from high quality firms like al rocket at a fair rate.
<unk>.
And you know, 8% plus which we think is very attractive.
There'll be periods of time, where that tightens in periods of time, where we're that widens out are we really focus on the private equity community and the private equity firms have multiples of the amount of capital that the direct lenders have multiples.
Trillium plus of our dry powder in the private equity community and so that's really what we serve there are times of the syndicated market gets very strong and that can be a competitive alternative right now we're in one of those moments where the syndicated market is really strong but in this market for 30 years and my experience that doesn't last forever and it will swing and so that penny.
Oh and can move move a bit.
But I feel really good that we'll continue to find deals that we do that we like at good terms that terms may be a bit better a bit worse any one moment of time, but.
But we're in it for the long term building out a long term portfolio of the ones. We make are five to seven years. So.
We're not trading these things in and out and I think we're going to continue to find plenty of things to do.
Thank you for that great. That's very helpful. I have a couple more questions, but I'll get back in the queue. Thanks.
Thanks, Mike.
Our next question comes from Devin Ryan with JMP Securities. Your line is open.
Yeah.
Thanks, Good morning, everyone.
Good morning.
Kevin how are you doing.
I'm doing terrific. Thanks.
A follow up just on the leverage question in conversation.
Want to get a little bit more context, if possible here clearly you are making good progress and there's still room to get to the one times, but should we be thinking about the one times is more kind of an intermediate term levels just the portfolio.
Settles in and then we can maybe start to think about getting towards the midpoint, which is an important point of wait times or something above the mid point.
Over a longer period or.
Change in the operating backdrop.
A little more context would be helpful. As I. Appreciate there is still room to get the one time, so not to put the cart before the horse here.
Sure.
Again, I think if you're modeling us I would run at a one times obviously the investments we make are a bit lumpy and repayments are lumpy and so.
We can't measure it as precisely down to 200 basis points of leverage and so I suppose at any one moment in time, one times could be slightly higher or slightly lower but but I think in the.
You know you should model us at one times now.
We evolve at Owl rock and then we evolved over the last five years as folks will remember you know there was a regulatory change where you couldn't go to two times and that changed I mean, I certainly wouldn't want to describe this as a set in stone forever, but I think in the near term, it's not we're not signaling as an intermediate step we're still going that's our target but.
But I suppose that there may be a quarter, where it's slightly higher slightly lower based on on deal flow.
Okay got it. Thank you and then a follow up here just with.
The Blue House back moving forward it doesn't seem that much of a change for RCC holders, but you guys have been able to spend some more time with the dial team in recent months since that was announced I'm curious if there's any other synergies you guys see there that could flow down to RCC or any other.
Your thoughts with that transaction.
Sure I mean, obviously I'm limited in what I can say at this point.
And we put a lot of information out publicly.
We in particular have pointed to opportunities on the origination side, obviously dial has wonderful relationships with many leading private equity firms and that's.
Al rock bread and butter in terms of the client base that we serve so in particular, we think that's a very attractive opportunity.
We are limited in how much detail I can go into but we're excited about the merger everything's on track and when the deal closes.
We will be sure to come back to this group and talk in more detail about the power of that combination.
Okay I appreciate it I'll leave it there, but congrats on another quarter.
Quarter of notable progress here.
Okay, great. Thank you.
Our next question comes from Casey Alexander with Compass point Your line is open.
Yeah, Hi, good morning.
You know part of the reason that you've been asked six times about the leverage question is that yeah. The analytical community has seen people who target one time and given the vintage that you originated so many of your assets in.
You're about to see a quarter sometime in the next few quarters, where you get a $1 billion of repayments and you're going to constantly be chasing that one time, if that's where you believe full deployment is and.
So wouldn't you Shouldnt you Couldnt you.
Try to flex that a little higher just to protect yourself from the vintage that you've previously originated that's about to go into.
Some really significant repayments.
Sure Casey. Thanks, So look the first thing I want to highlight is.
If and when we do get the $1 billion of repayments.
It's going to be really accretive to NII, we're going to have a significant pickup in NII.
Which will go a long way to covering our dividend and be very valuable for our shareholders. So while while youre right repayments create work I, just we have been below repayment.
Pace versus peers for years, and I think were based on what I'm seeing right now in conversations we're having with the private equity firms I think I think there's a good chance that is going to change in the short term and I think that's going to be very accretive.
And so in the sense I'm looking forward to that.
Your.
Again, we don't have the ability to measure this down to a tiny increments, but I guess the quest. The part of your question that I just want to.
Point out because it's where we're being very transparent about this.
We care deeply about our investment grade ratings, that's part of this and we have to balance what we want to accomplish this get at one time, so making sure that we maintain those ratings we will find the right balance we have like in everything we do will find that right balance.
And if there is and you're right we need to leave some cushion for repayments, but we have a prolific ability to originate as we demonstrated again this quarter and a 1 billion free so even if we got 1 billion of repayments. Our platform has the ability to put out 1 billion plus in a given quarter.
So we're not far off from our target leverage.
We're going to work hard to get there recognizing there'll be repayments and we will try to balance getting the.
Most attractive earnings profile.
With the strongest reception from the investment grade bond community and we will continue to deliver it just like we have for five years.
Yeah.
Alright, great. Thank you for that and secondly.
Would you guys like to take this opportunity to give any sort of update on the share repurchase program that you announced last quarter.
I'm sure.
I'm happy to do that we did.
Did not use so just for folks to remind folks we approved $100 million last quarter. Unlike the share repurchase program, we put in place at the IPO, which was programmatic $150 million programmatically, which we used all of that there's.
This $100 million as non programmatic so it's discretionary but it is subject to blackout windows like many other you know as is typical with public up share repurchase programs. We did not use any of the $100 million this quarter the blackout programs.
Strained when we are able to use it.
Candidly the lineup the most attractive market.
Turning to buy the stock from lineup with the blackout program, we're going to continue to work hard at it and and and you know I would expect we would do some I'm pleased to see the stock.
Been moving up nicely over the last few weeks.
We continue to think the stock is undervalued and we will look to use the program.
Based on market opportunities.
Alright, great. Thank you that's all my questions.
Great. Thanks, Casey Thanks Casey.
Our next question comes from Finian O'shea with Wells Fargo Securities. Your line is now open.
Hi, everyone. Good morning, Thanks for having me on.
<unk>.
Craig first question on the portfolio company operating performance you outlined that.
It's returning to pre COVID-19 levels, which is.
Great.
Looking at your I think third slide where you give the revenue and EBIT.
Lately $4 $16 million to $100 million respectively.
Those figures have shown.
Really good.
Performance margin et cetera over the whole year.
So I understand that's adjusted you footnote that.
But just for context now that we've gone through Covid can you give us a recap of what.
Happens to say actual revenue and EBITDA.
For your portfolio and where it stands most recently.
Well I mean these numbers are a reflection of actual revenue and EBITDA. That's why we're showing them, but if your question is more just sort of give you some color on how the companies are doing.
Just generally what I would say is.
One other reasons why I think our portfolio has performed as well as it has is we as in particular, our biggest positions. We're in sectors that were not heavily impacted by COVID-19.
Our software and tech businesses grew during this period of time they didn't shrink.
Food and beverages businesses grew during this period of time, our health care businesses did very well our insurance services business did really well so the biggest sectors. If you go through our six or seven biggest sectors generally those businesses continue to do.
We do well.
Certainly there were some that had revenues that decline, but as you know the overall impact on our portfolio.
<unk> was not significant.
There were there were companies that were more heavily impacted.
They were smaller positions certainly we have a handful of businesses that are travel related that is a sector. Obviously those end markets were down considerably and so for example, we've got a couple of aerospace businesses their top lines were down considerably.
And I would say the companies and the sponsors did a really nice job of offsetting as much as possible the revenue declines with significant cost cuts and so.
Lot of cases that they were able to offset the revenue drops with.
With margin improvements so the EBITDA drop wasn't as much as we had.
Feared.
But overall I.
I would say just based on the end markets our company serve and the quality of the businesses they held up well and that's why.
Performance credit performance has been as strong as it is that's why the average mark in the book is 97 and a half. It's why we have only one non accrual the companies are continuing to do just fine.
Great I appreciate that.
And then just the second question another on the.
Potential bio merger with your manager.
We've all seen the headlines related to pushback from a couple of your peers.
That doesn't concern us obviously on this call.
But as it relates to the BDC and direct lending franchise are you seeing any pushback from the private equity manager constituencies within the dial network.
Oh not at all no I think I'm not at all I think that we.
We've built our business around being a great partner for private equity firms and Dow has done the same thing.
The dial in we have terrific brands in there.
The private equity community and this is an opportunity to do more with the private equity firms and the reception we've gotten has been very supportive.
And encouraging and I think that you know what I'm excited about what we're going to be able to do going forward on a combined basis. When the deal closes. So no no no not only no pushback I think its been encouraging and an endorsement of the transaction.
Great. Thank you Craig.
Thanks Vince.
Thanks, Dan.
Our next question comes from Kenneth Lee with RBC capital markets. Your line is open.
Hi, Thanks for taking my question just in.
Terms of potential new investments over the near term I think in the past you've talked about aiming towards the upper middle market segments.
Wondering if you know.
If there's going to be any change or could we see even potentially larger EBITDA ranges for free.
No particular borrowers and Relatedly.
Wondering if you could just comment on any expectations for average new investment sizes going forward. Thanks.
Sure in terms of size of company.
I think we really feel validated during COVID-19 as to our sweet spot being that upper middle market.
The average $100 million EBITDA.
I think it's actually been pretty consistent over the last couple of years.
We love financing bigger companies than that I mean, I'd love to we'd love 200, moving 300 million EBITDA companies, we tend to do those more with second liens those bigger companies generally although there are exceptions and we have seen billion dollars plus unit tranches the bigger the company the more likely theyre not doing unit tranche and it might be more of a second lien opportunity.
We also look at smaller deals I mean, we they don't influence the numbers terribly terribly. So you won't see them, but we do finance businesses that might be 25, or 30 million of EBITDA. That's the credit that we really like but our sweet spot is in that <unk>.
70 million to 101 hundred $10 million EBITDA business and and the good news is that the opportunity set is growing.
Five six years ago, those companies didn't do direct deals the pool of capital wasn't there for them to take advantage of and and now with us and the rise of some other large direct lenders.
The private equity firms have now realized that they can do large financings on direct and not go to the syndicated markets and many of them become more and more comfortable with that and I think the opportunity set.
We will continue.
To grow.
So.
I don't think Youll see a change I think in any one moment in time could skew a little higher or lower depending particularly depending on what's going on in the syndicated markets.
And he was a second part to your question, but maybe if you could just remind me of that.
It was just.
Expectations for average investment sizes.
Yes, I mean, we've been pin right around 90 million pretty consistently.
As you know when we make an investment at owl rock one of the benefits of our larger platform is we can speak for a bigger check and be a more appealing financing parties. So we're very routinely and investment into OCC as it's coming at the same time investment in other owl rock managed funds.
So we've been averaging about 90 $90 million or so so I think that's that's as good an assumption as any.
Depends upon how big the deal as we saw things appropriately like 1% to 2% position sizes. So.
You can be.
Basically 90 million Bucks is just under 1% couple of hundred million Bucks just under 2% we have very few north of that.
Great. That's all I have thank you very much.
Thank you Ken.
Our last question comes from Mike He Schlang with Ladenburg. Your line is open.
Yes, just a few follow up questions.
Alan was there anything material in dividend income other.
And then more holdings and what is the outlook for dividend income given that you sold them.
We did not sell the more positioned for that.
You should expect a similar on a go forward basis.
More has been a strong contributor.
And so you should expect similar.
Okay.
And what were the main drivers of the realized loss this quarter other than more and swipe.
It was not a realized loss on more.
So I would have been the realized loss.
Okay.
Just thinking about the right side of the balance sheet.
How do you think about mitigating the potential squeeze on earnings.
Down the road when the fed begins to potentially raise rates.
In other words would you consider.
Creasing, the proportion of your debt liabilities at fixed rates or swapping into fixed rates.
I think the great way about how we're set up here is we're entirely floating rate on the left side of the balance sheet. So Mickey if you look in the back of the Q or K, we always put that interest sensitivity table in there and you could see that as rates rise our NII rises I think quite quite considerably.
So I don't so I feel very comfortable about.
Set up there.
So what is the average LIBOR floor in the portfolio.
Brian I don't know I don't know about about 80 about 85 bps.
<unk> got 85 bps.
Okay. That's helpful. Thank you Alan just just on worth more.
We'll call you offline I don't what Youre looking at them, but we havent sold more it's been a great performer generating lots of dividend income. So I will if theres something that makes it look like we either took a loss or we sold that will help buck where that alpha.
That'd be my mistake.
Yeah no worries. Thank you.
Okay. Thanks, Mickey Thank you.
There are no further questions in queue at this time I'll turn the call back over to Craig Packer for closing comments.
Okay. Thank you all for joining we appreciate your support look forward to talking to you again in the future I hope you're all your families remain safe and well.
And have a great day.
This concludes today's conference call you may now disconnect.
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