Q4 2020 FS KKR Capital Corp Earnings Call
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Okay.
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue the standby. Thank you for your patience.
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Good morning, ladies and gentlemen, welcome to the S. Fs KKR Capital Corp, 's fourth quarter of 2020 earnings Conference call.
Your line will be in a listen only mode. During remarks by if that's the case management.
At the conclusion of the Companys remarks, we will begin the question the answer session and what's the time I will give you instructions on entering the queue. Please.
Of note that this conference is being recorded.
At this time, Robert <unk> head of Investor Relations will proceed with the introduction of Mis.
Upon you may begin.
Yeah.
Thank you good morning, and welcome to F. Fs KKR capital Corp's fourth quarter 2020 earnings Conference call. Please.
Please note that Fs KKR capital Corp may be referred to as S. K the fund or the company throughout the call.
Today's conference call is being recorded and an audio replay of the call will be available for 30 days.
The replay information is included in the press release, the <unk> issued on March one 2021.
In addition F. S. K has posted on its website a presentation containing supplemental financial information with respect to its portfolio and financial performance for the quarter ended December 31 2020.
A link to todays webcast and the presentation is available on the Investor Relations section of the company's website under events and presentations.
Please note that this call is the property of F. S. K any unauthorized rebroadcast of this call in any form is strictly prohibited.
Today's conference call includes forward looking statements and we ask that you refer to <unk>. Most recent filings with the SEC for important factors and risks that could cause actual results or outcomes to differ materially from these statements.
<unk> does not undertake to update its forward looking statements unless required to do so by law.
In addition, this call will include certain non-GAAP financial measures for.
For such measures reconciliations to the most directly comparable GAAP measures can be found in <unk> fourth quarter earnings release that was filed with the SEC on March one 2021.
Non-GAAP information should be considered supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.
In addition, these non-GAAP financial measures may not be the same as similarly named measures reported by other companies to obtain copies of the company's latest SEC filings. Please visit <unk> website.
Dan Pietrzak, Chief investment Officer, and co President.
Brian Gerson co President and Steven Lilly Chief Financial Officer also joining us on the phone are co chief operating officers drew O'toole and Ryan Wilson.
I'll now turn the call over to Michael.
Thank you Robert and welcome everyone to Fnf's KKR Capital Corp, 's fourth quarter 2020 earnings Conference call.
Given the enormity of the events, which occurred during 2020, we continue to feel humble as we gathered to discuss our financial and operating results.
We also acknowledged that while there are compelling reasons for many of the world's have hope for a return to normalcy.
Ill never be the same for those whose lives have been directly impacted by the effects of COVID-19.
The fourth quarter of 2020 was without question a positive quarter for F. S. K.
During the quarter, our investment teams originated approximately $613 million of new investments, we experienced an increase in our net asset value and we again out earned our target of 9% annualized dividend yield on our net asset value.
In addition to the successes, we announced the proposed merger of S. S K and F. S. K R.
We amended our senior credit facility to extend its maturity by one year and we access the public markets, becoming only the third BDC in the history of the industry to raise $1 billion of more than a single unsecured debt offering.
We accessed the debt capital on the extremely attractive terms, thereby not only fortifying our balance sheet, but also locking in attractive long term cost of capital.
From an operating perspective, our adjusted net investment income was 72 cents per share for the fourth quarter, which was 12 <unk> per share above our quarterly dividend of <unk> 60 per share and also <unk> <unk> per share above our public guidance at the end of the third quarter.
From a liquidity perspective, we ended the quarter with approximately $1 4 billion of available liquidity with no meaningful near term debt maturities.
Looking forward, we expect our first quarter net investment income to approximate 61 cents a share.
As such our board has declared a distribution of <unk> 60 per share for the first quarter, which equates to an annualized yield of nine 6% on our net asset value of 25.2 cents as of December 31, 2020.
While we continue to believe a 9% annualized dividend yield is achievable, we acknowledged that should competitive pressures and spread compression occurred to the point that such of yield is not achievable and are investing focus will continue to be protection of principal first with the old second.
Yeah.
From a merger perspective, we anticipate the proxy solicitation period will begin this month and will conclude at each of S. S case, and the FSA our shareholder meeting scheduled for May 21, 2021.
We would expect the proposed merger to close shortly after receiving approval by F. S K and F. S K, our shareholders and other customary closing conditions.
Assuming the timeline remains of scheduled we expect the proposed merger to close during the month of June.
As we turn to 2021, we do so not only with gratitude for the many accomplishments of our team over the last year, but with enthusiasm for what is to come as we plan to combine S. K S. K off this combination.
<unk> will create a single BDC with the size scale market reach balance sheet strength and investing discipline to become a premier provider of capital the companies operating in the upper middle market.
And with that I'll turn the call over to Dan and the team to provide additional color on the market in the quarter.
Thanks, Michael.
The recent earnings calls we have focused on certain macro observations.
Our views that the high yield markets would continue to be robust.
The reemergence of corporate M&A activity would lead to a rebuilding of BDC investment pipelines.
And the governmental intervention in the economy would continue.
Are playing out largely as we expected.
As we move into 2021, we believe sustained governmental investment and spending on initiatives in education infrastructure health care supply chain resilience and clean energy will continue to garner of focus and attention.
Combining these elements of governmental involvement in the economy with an expected rebound in consumer spending inflation targeting by the federal reserve and of the outlook for operating companies, which includes relatively easy year on year comps. We believe 2021 has many of the key ingredients to be of year filled with.
Meaningful economic growth opportunities.
Within the BDC industry, we believe company and platform size increasingly will lead the way of strategic Differentiators. According to a recent study by Dechert LLP, 49% of private equity firms surveyed reported that the utilized private credit interchangeably with the syndicated loan markets.
And the same firms reported a 35 per cent increase in their use of private credit over the last three years.
Statistics like these illustrate how competitive the private credit alternatives can be when they are able to be delivered on a scale, which is relevant to larger borrowers.
We believe the KKR credit platform, which is one of the few platforms able to operate at such scale is poised to continuing attracting this new transaction volume, thereby leading to more attractive long term growth prospects.
As private credit continues to grow as the distinct asset class are.
Our goal is to position ourselves as favorably as possible to capture more than our fair share of the corresponding increase in transaction volume.
During the fourth quarter, the Fs KKR advisor of closed on approximately $1 9 billion of total investments across our BDC franchise $613 million of which we're in where would the NFS cats.
Despite the volume of it of investments we originated during the quarter, we remain very focused on structure and invest for quality.
Our closure rate as compared to transaction screened of under 3%. During 2020 is actually a little bit lower than our historical closure rate of approximately 4%.
In addition, approximately 60% of our F. S. K originations this quarter came from opportunities and companies previously invested in by KKR.
Illustrating the power of incumbency and our relationships.
Our $613 million of total investments combined with $498 million of net sales and repayments when factoring in sales to our joint venture equated to net portfolio growth of $115 million during the quarter.
During January and February 2021, we closed $267 million of investments and we experienced $346 million in repayments.
While it's impossible to be precise like other larger platforms, we do expect of higher than average level of repayments. During the first part of 2021, given the elevated levels of liquidity in the syndicated markets.
A few quarters ago, we began providing detailed investment performance metrics for the CFS KKR adviser.
The updated information is summarized as follows.
Since the first day care advisor was formed through December 31, 2019, we had made approximately $3 $2 billion of new investments in F. S. K and we experienced 42 basis points of cumulative of appreciation.
And from the same starting point through December 31, 2020, we have originated approximately $4 $5 billion of new investments of F. S. K I haven't experienced 44 basis points of cumulative of appreciation.
We continue to be pleased with the investment performance. Our team has been able to deliver for the last three years and we believe these data points continue to illustrate the manner in which we are turning the investment portfolio toward what we believe to be more conservative investment structures and companies with more defensible operating positions.
This information is detailed on slide 12 in our investor presentation on our website.
And with that I'll turn the call over to Brian to discuss some investment portfolio of specifics.
Thanks, Dan.
As of December 31, our investment portfolio had a fair value of $6 78 billion.
Consisting of 164 portfolio companies.
This compares to a fair value of $6 six $5 billion and 172 portfolio companies as of September 30 of 2020.
At the end of the quarter, our top 10 largest portfolio of companies represented approximately 22% of our portfolio, which remains in line with our results for the last several quarters.
We continue to focus on senior secured investments as our portfolio consisted of 59% of first lien loans and 65, 2% senior secured debt as of December 31 in.
In addition, our joint venture represented 10 five per cent of the portfolio and our asset based finance investments represented 14%.
Equating to an additional 25 per cent of the portfolio, which is comprised predominantly of first lien loans or asset based finance investments, which we believe have the meaningful principal protection.
The weighted average yield on accruing debt investments was eight 8% as of December 31, 2020, as compared to eight 6% at September 30 of 2020.
In terms of color surrounding the repayments, we experienced during the quarter approximately 50% of our repayments were related to the investments made by the <unk> KKR advisor since its establishment in April 2018.
While we dislike losing these assets we appreciate the market's view of their quality.
One investment in particular was an am general, which was which was originated in December 2016.
And general designs engineers manufacturers and supports the specialized vehicles for commercial and military customers.
Notably the from the military range vehicle.
We increased our investment in April 2018 by funding our pro rata share of the $75 million upside for the first lien term loan which was used to refer to refinance the company's second lien term loan.
In December 2018, again increased our exposure.
$160 million incremental first lien term loan, which was used to finance the shareholder distributions.
Over the life of our investments with the help of the KKR Global Institute team KKR developed a contrarian view on am general and the sustainability of how the demand.
This allowed us to earn attractive economics on a well structured security, which benefited from both financial covenants and significant amortization.
Our $108 4 million dollar of investment was repaid in full during the fourth quarter as the company was sold.
Another of investment Athena health was repaid during February of this year Athena.
Athena Health is the cloud based health care Technology company offering electronic Health Records and revenue cycle management software, the ambulatory and hospital companies.
In February of 2019, we co led a $800 million second lien and $600 million preferred equity investment the <unk>.
Of course, the acquisition of the company by a group of financial sponsors.
<unk> hundred $13 million second lien and $71 million preferred investments were repaid in full pursuant to a comprehensive refinancing of the company's balance sheet.
These types of investments and outcomes are exactly the types of investing model and track record we are seeking to build.
During the fourth quarter, we experienced net portfolio appreciation of $65 million. The total amount of realized and unrealized depreciation we experienced across the portfolio during the quarter was the $175 million.
And our realized and unrealized depreciation totaled $110 million during the quarter.
As Dan alluded to in his comments the.
The roughly 50% of the investment portfolio, which was attributed to the Fs KKR adviser has recovered 100% of the depreciation we experienced earlier in the year due to COVID-19.
We are pleased with the with these results just as we are pleased with significant progress we made during the year restructuring certain legacy investments and positioning the portfolio for future growth for.
Finally from a non accrual perspective as of the end of the fourth quarter. Our non accruals represented approximately six 6% of our portfolio on a cost basis, and two 5% of our portfolio on a fair value basis compared to 8% on a cost basis and two 8% on of fair value basis.
As of September 30th the.
The decline in non accruals was due to the removal of three investments Chisholm was sold dei was restructured and the Z Gallery was exited.
We did not place any new investments on non accrual in the fourth quarter and.
And with that I'll turn the call over to Steven to discuss our financial results in more detail.
Thanks, Brian.
My comments will be framed primarily on the color behind our results, thereby hopefully framing them in a transparent and easily understandable manner.
First the $16 million increase in our total investment income quarter over quarter was impacted by the following.
We experienced an increase of $5 million in our interest income primarily due to the investment activity of belt, which Dan spoke of.
Offset by repayments of certain average yielding assets across our investment portfolio.
Our fee and dividend income increased by $10 million during the fourth quarter as compared to the third quarter.
The largest components of our fee and dividend income included $19 million of dividend income from our joint venture during the quarter.
As many of you know we typically expect this recurring dividend income to approximate between 15 million and $20 million on a quarter to quarter basis.
Other dividends from various portfolio companies totaled approximately $11 million during the quarter as dividend paying portfolio of companies continue to recover from the COVID-19 related events of last spring.
Finally fee income totaled $12 million during the quarter, representing an increase of $9 million quarter over quarter. The.
The increase was directly tied to our origination and repayment activity during the fourth quarter.
Our interest expense increased by $2 million during the quarter as we paid down a portion of our senior credit facility with proceeds from the $1 billion bond issuance, Michael mentioned earlier and the interest rates are slightly different between these two instruments.
Management fees increased by $2 million during the quarter due to the higher amount of average gross assets during the quarter compared to the prior quarter.
The detailed bridge and are in a the per share on a quarter over quarter basis is as follows.
Our starting for Q2 thousand 20, and a the per share of $24 and 2046 cents.
It was increased by GAAP NII of <unk> 63 per share.
And was increased by 53 per share due to an increase in the overall value of our investment portfolio.
Our NAV per share was reduced by our 60 cent per share dividend.
The sum of these activities results in our December 31, 2020, NAV per share of $25 and two sons.
From a forward looking guidance perspective, we expect our first quarter NII per share to approximate 61 cents.
The bridge from our 72 cents per share of adjusted NII during the fourth quarter two of our first quarter guidance is as follows.
Our recurring interest income is expected to decline by approximately $6 million due to a combination of the following <unk>.
Anticipated repayments of certain higher yielding assets during the first quarter.
The effects of the lower origination quarter.
And the fact that there are two fewer days of interest income during the first quarter as compared to the fourth quarter.
We expect recurring dividend income associated with our J D to approximate $15 million during the first quarter.
We expect other fee and dividend income to approximate $20 million during the first quarter.
From an expense standpoint, we expect our operating expenses, including interest expense management fees and G&A cost to remain relatively flat quarter over quarter.
As Michael mentioned earlier, we continue to target of 9% annualized dividend yield on our net asset value per share.
So we acknowledge there will be certain quarters, where our annualized yield may be greater or less the 9% due to quarter to quarter fluctuations in the business from an operational standpoint.
That being said we are pleased that during the last four quarters. Despite the far reaching effects of COVID-19 and the resultant the volatility on most companies investment portfolios, we have been able to exceed our 9% target dividend yield.
In terms of the right side of our balance sheet, our gross and net debt to equity levels for 131 per cent and 119% respectively as of the.
As of December 31, 2020 the.
This compares to gross and net debt to equity of 131 per cent and 120% respectively. At the end of the third quarter.
Our available liquidity of $1 4 billion equates to approximately 20% of the value of our investment portfolio, which remains a very comfortable percentage of <unk>.
$1 billion bond offering in December provided meaningful additional ballast to our already strong balance sheet.
At December 31, approximately 55 per cent of our committed balance sheet and 70% of our drawn balance sheet was comprised of unsecured debt.
We also continue to be pleased with our overall weighted average cost of debt of.
Three 9%.
In terms of debt maturities, we have no maturities until the middle of 'twenty 'twenty two.
Our largest year of maturities is not until 2025 on approximately 45 per cent of our capital structure will roll forward.
As we moved into 2021 and beyond we believe our balance sheet construction represents a significant strength for our franchise.
And with that I'll turn the call back to Michael for a few closing remarks before we open the call for questions.
Thanks Steven.
I referenced earlier in the call. We are in the enviable position of looking back at 2020 with the feeling of significant accomplishment.
Like many companies we experienced challenges however, our management team was disciplined and forward looking as.
As we enter 2021 I'm extremely pleased with the performance of our investment team the strength of our balance sheet and the rotational dynamics of our investment portfolio, which continue to improve.
As we look forward to the closing of our proposed merger with <unk> later this year the.
KKR franchise will become a single BDC with approximately $16 billion of assets on a pro forma basis as of December 31, 2020.
And then just true which is growing rapidly and becoming a major part of the U S credit markets I'm truly excited by our long term prospects and with that operator, we would like to open the call for questions.
Ladies and gentlemen to ask the question do we need the press star one of your telephone to withdraw.
For all your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Casey Alexander with Compass.
Your line is open.
Yeah. Good morning, I have two questions just a more generalized first of all other.
Looking at your new activity I saw that 15% of new activity came in second lien loans. This quarter, which is the first time that you've put some second lien back on balance sheet.
And a little over a year is that sort of a strategic thinking in terms of now hopefully having some economic tailwind behind us or was it more idiosyncratic Lee deal driven.
That's my first question.
Yeah, Good morning Casey.
I would definitely think about it is as more deal driven right I think those points in time, where you know the the syndicated market for second liens could very well be shut the private market alternatives could actually be pretty strong and we can get paid for.
What I would think about sort of attractive risks there and when you also you know when we when we do think about second liens, where thinking about even bigger companies that we're targeting on the unit tranche.
We're thinking about structure is important we're trying to get private credit terms into the into that document of where all we're really forcing the the overall structure to be covenant light because we don't want of covenant in front of us when we have of second lien.
And then just another you know we also will take advantage of of certain situations. You know one of the deployment names in Q2 was or I'm sorry. In Q4 was it was the COVID-19 impacted name.
<unk> thought the the debt instrument was interesting it was probably 11% odd yield.
Testing all of it was it was the name of those actually already sort of taken out but.
The deal driven.
Okay, great. Thank you.
Secondly, can you discuss I mean, obviously the the fourth quarter deal market was fairly robust can you discuss how you see it rolling over into Q1.
And also if you could.
You know give us some insights into some of the restructuring work that you guys did during the fourth quarter and subsequent I think that would be helpful as well.
No sure happy to and then probably two questions in there right. So.
Q4 was definitely a robust quarter for us I think you saw.
Of the pent up demand catching up from things that may have been put on on pause for for Q2 and Q3 of them I think we're very happy with the numbers that we see here you see the overall kind of BDC franchise, just talked about in my comments.
Roughly $1 $9 billion, we feel good with where we sit with regard to the balance sheet of of F. S. K.
Q1, always a little bit slower right. I mean people are are racing to get deals done before.
For the holidays before the end of the year of your that'd have to rebuild pipelines. So I would say you know January felt slow February we've seen of rebuilding our pipeline of rebuilding of deal activity I think thats going to continue I think 'twenty. One is gonna be a pretty active here you know I think the thing that we're just mindful about as you know the syndicated.
<unk> are pretty.
Sort of rich right now and you know activity there is real.
So I think us like others, we'll see a certain amount of repayments across the portfolio, but in some ways. We would expect that as these companies grow as the successful they can access all of those different markets. So yes.
I think thats the way we think about.
The activity levels in terms of restructuring is probably the two biggest ones to point out. The first is a company called D. I I would think about it as a as the high end speaker business.
You know very sort of consensual partnership deal with the sponsor.
We.
The <unk> a large portion.
Of.
Of our existing debt, we put in new money to be supportive of what we view as a highly accretive acquisition theyre doing.
So that you know during the course of 2020 was pretty negative overall P&L of that but we think that companies you know quite well positioned to go forward it actually.
Has the real potential for a significant recovery.
The restructuring work, we did the second that I would note which is belk.
S. K was mainly of second lien holder there again also a consensual deal.
We think that that debt write off and hopefully reduce the interest burden will.
It will allow the company to go forward on the on a productive basis, you know they they were in and out of bankruptcy effectively in one day.
I think Casey those are probably the two biggest names I think of a lot of credit goes to the team on that as we've talked about on prior calls you know we built a dedicated workout function considering the size of the portfolio the ability to do these consensual deals I think is having that team on board.
Thank you, Dan I'll step out and let others ask some questions now thank you very much. Thank.
Thank you.
Thank you. Our next question comes from Finian O'shea with Wells Fargo Securities. Your line is open.
Hi, good morning, Thanks for taking my question.
First on the dividend.
The dividend.
Stephen I sort of talking about the 9% target can you remind us.
You were intending to reach six of that.
Post the merger.
Or will it still be variables somehow and and if so can you provide more color on.
You know the sensitivities or for what drives the variability will it be you know.
<unk>.
Depreciation or is it more.
Interest income.
Yeah.
Over the line the income statement type.
Type of drivers.
Sure.
Well.
Stephen you've taken of NGL hedging of Youre going to grab it.
Oh, okay. Okay.
Thank you.
I would say in terms of.
Post merger, we have not made any definitive conclusion of whether the.
The strategy that we're utilizing now will carry forward I think despite any additional announcement you should assume that it will but obviously, we will evaluate the market at that time I would note for you that if the merger word of closed today based on the guidance that we have given.
Then we would be that would equate to a 60 cent dividend.
For the combined for the combined entities of 60 cents of the NII I should say.
As we think about.
Where how we calculate on a quarter to quarter basis, whether to pay.
Exactly 9% of our on an annualized basis the bar.
NAV.
We take into account the NII, we've generated in the quarter and if theres. The surplus there we sort of think about pain, 95% of that surplus somewhere less than 100 Aldo.
As we sit today, we feel pretty comfortable where spilled back is so.
Can be a little more aggressive there.
And then perhaps some folks.
And we also obviously taking into account what's going on within the portfolio and you know as we think about is the NAV.
Changes if it moves off overtime, we certainly will wait into that of a quarter of the components of those changes so.
It's frankly, a lot of a lot of what you said does go into the calculation on a quarter of quarter basis in different ways, but again, if you look at us as well as some of the peers that we have in the industry I think of.
9% annualized yield on one's NAV.
As is the very reasonable target.
As Michael said in his comments, we think still achievable.
In today's market.
Okay great.
And then the.
Question for perhaps Michael or Dan or.
You know when you won.
As you.
Hopefully conclude the that's the scare of merger.
And in energy assets.
The stabilizing.
<unk> is an eventual S E T.
Combination of something on the table for you if the.
It's the right conditions of our in place.
Yes, I can.
Take that if the if Michael wants to add to it that's that's.
Good day, I think that that's not something that you know.
Where.
The rest of contemplating at this time I think there is a broader question around sort of energy. We've we ran the the.
Of the business historically pretty light on energy credit I think there's a lot of reasons to think that there could be you know an opportunity. There I think oil price is up 60 odd percent, but I think there'll be a pretty high bar just for the overall sector for us.
Okay. Thanks, that's all for me congrats on the quarter.
Thank you for them.
Thank you Ben.
Our next question comes from John Hecht with Jefferies. Your line is open.
Yeah.
John can you hear us.
John Heck your line is yeah, I apologize guys.
I was on mute can you hear me now.
Yep.
Thanks, very much for a lot of made of taking my questions.
So first one is that the with respect to the first quarter guidance.
Well actually with respect to kind of more of the market commentary you were talking about.
Kind of the ability to pay of 9% yield is a little bit obviously tied to competitive factors and to overall liquidity in spreads and the overall market with respect to the competitive factors I'm wondering if you can if you can discuss any more detail there how is that influencing total kind of basis.
Right in the market now and then how has that also influencing structures.
Dan you did talk about.
Out of the focus has been structural protection in the deals.
Yeah, John Thanks for that question.
The market for sure is competitive but I think in many ways I think the wall Street is always a competitive place.
You know and I think you'll probably see that a little more in months like January when maybe one deal volume of sort of less.
If you can maybe take a broader view of of just how the market has evolved over the past year is clearly it's been an eventful year.
I think where we sit today.
Yeah, there is a little bit more discipline as it relates to the.
The structure of loans review of of EBITDA adjustments, albeit you know there is discussions around how do you look at that sort of COVID-19 moves. So I think it's a little bit more discipline in there I think pricing has come back clearly to pre COVID-19 levels, maybe even a little bit of inside can pick considering where the overall.
The rate environment has gone.
From our perspective.
We've built out our origination footprint to quite frankly be able to see as many deals as possible and then try to be of selective as possible to do those deals that we want to do I think we've.
Felt good about that but I think we acknowledged that the competitive market.
But like I said in response to the Casey's question I do think it's going to be of pretty active year in 'twenty, one and you know I think we feel good with how we're positioned going into them.
Okay and follow up question and I guess, the would be the commentary a little it would be also a little bit about the active market that you just referenced but if you look at floors and spreads and you think about call. It the cohorts of of originations from your portfolio is there a way to think about how much of the portfolio.
Yeah, it would be subject to call of prepayment risk over the next couple of quarters and how are you thinking about that.
Of that concept over the course of the year given those characteristics.
Yes, it's a good question.
I think in many ways, you're most of all of our underwriting.
Our along the.
We're expecting these companies to grow and then to either be sold.
Or potentially refinancing of the syndicated market.
That said I don't think we're necessarily off our historical view of that this.
The portfolio like this will turn every.
Three of half sort of for years.
I think that may not be perfectly straight line it could be weighted more in one quarter than other but I think if you looked at it over a constant for the 12 months sort of period that probably lines up pretty well.
You know what.
I think from loan structures, just going back to your question I think of LIBOR floors are still very prominent and private credit deals I think we've seen a little bit of pressure on them to go down from 1%, but we're hoping the market does hold the line there.
You still do sort of see call approach that you can kind of benefit from that on the other side.
But I would I would think about that as the three and a half sort of for your comment. If you think about the numbers of that for our BDC platform.
Roughly $16 billion of assets. It means you need to sort of originate roughly.
$4 billion to $5 billion per annum.
To kind of quote unquote stay flat and I think we've got the platform to do that.
Thanks, very much I appreciate the comments.
Thank you.
Our next question comes from Paul Johnson with <unk>. Your line is open.
Good morning, guys. Thanks for taking my questions.
So I wanted to know how should investors sort of.
Think about the the write ups.
In assets of the appreciation this quarter as well as just kind of the stability around the value just given the current credit issues in the portfolio.
The investors.
You expect any potential more upside appreciation of book value. If the economy remains as strong as it is today.
Yeah No. Good question Fair question, maybe a couple of points there to sort of note I mean, we did talk about slide 12, the sit on our investor presentation.
I think we've been.
Happy with what we've seen in terms of this roughly $4 $5 billion of investment instead of a made sense.
Of this partnership and this advisor started.
So I think there's a you know.
Hopefully a good story there and obviously there is constant work to do as it relates to that I think you saw or you heard about some of the restructurings that we've done this quarter, we'd like to think that there is.
You know some some upside nodes, there, but I think broad stroke.
I think we feel pretty good where the book is positioned right. I mean, there was you know of.
A fair amount of legacy names that took some real pain.
The Q1, Q2, I think COVID-19 exacerbated a lot of that unfortunately, there was some.
You know sort of true realized losses, there, but when I think about the the totality of the portfolio looking at that performance on 12.
Of the Investor presentation looking at just how the book is positioned again, I think we feel pretty good as we're sitting here today.
Okay. Thanks for that.
And then for.
For the borrowers that did require assistance you know either by the sponsor of the lenders probably usually both could you talk.
About these companies that did receive assessed the assistance you know how they've performed I guess, so far year to date.
You know how you just how you feel about that part of your portfolio or are you comfortable with the adjustments that you've made to get these borrowers in a position to repay debt or do you think at this point, it's still just too early to tell.
No. It's a fair question I mean, it's probably a little bit subject to the to the underlying credit themselves.
Can think about one name.
You know that we had to do of almost of many.
Net of restructuring in April of 2020 of the sponsor ended up putting in new money, but that new money.
Was forced to be Parry with our debt, that's not something where should they usually comfortable with at all but we wanted that to get done.
The company has actually had a sort.
The meaningful contract wins that was the name we've actually upgraded.
In our risk ratings.
From a for a sort of up two of three so I think youre seeing some positive outcomes. There are handful of the names that are in the the the direct COVID-19 impact of the spaces.
Maybe it's a little bit.
Still too early to tell that said the the support they got from the sponsors was strong.
I think we had more than a handful of deals where equity was put in by the sponsor and returned for covenant relief et cetera, the covenant relief et cetera.
And they've taken a lot of cost out of these businesses as well so.
I think most of the things that we would've thought about you know where.
We were dealing with.
That is just more of the events like Youre talking about I think those companies were pretty decently positioned.
Sure.
And.
As far as you know the obviously the direct money marks that you've gone through a lot of growth and development of since the last cycle.
And now that we appear to be coming out of another one in and obviously one is we're talking about today you know the required a decent amount of cooperation with sponsors.
Companies to provide waivers amendments et cetera.
You know how do you view do you I guess, you know the borrowers and the private equity sponsors demand for for direct lending capital I guess kind of moving forward in the cycle. I mean, do you think there's a higher propensity for for many of your companies.
To the kind of maintained sort of of preference towards the institutional direct lending markets, just because of all of that flexibility.
Provided or do.
Do you expect kind of the the pricing and liquidity of the BSL market remain a it's the major competitor for the institutional markets.
I think it's more of the former I mean, you are right. The market's grown a lot I think the market.
The use this word is almost institutionalised itself right.
Comes of the big lending platforms.
I think in some ways the stress the that Covid broad was.
Probably.
All of welcome challenge to see how people funded revolvers and funded delayed draw term loans.
Was definitely some challenges in the market with that but I.
I think about US I think we were positioned pretty well from the from a liquidity perspective.
No.
So our view is very clearly that this is going to continue to be of space direct lending private credit that will get more intention.
Tended to be a solutions provider your intended to work sort of well of people.
A certainty of close sort of concept to it so I think overall I think.
We like the tailwind behind it but Brian you should add to the yeah.
I think I think the other thing I'd say is to your earlier point on.
Some of the names that had either.
The relief for sponsor equity I mean, having sort of a single lender of point of contact really facilitates those conversations.
I think for sponsors.
What matters often is not so much.
Necessarily all of these that terms of your paper, but who holds it and the fact that youre working with a single source of capital who can make decisions youre not dealing with 20 individual holders in the syndicate with different bases and their loans and different agendas.
Makes.
Workouts in the amendment.
Quite more.
Quite easier to get done.
Frankly.
And I think sponsors or just the they've seen the product tested and I think it was tested well through COVID-19.
Okay.
Thanks for that those are very thoughtful answers and that's all I have today.
Thank you have a good day.
Once again, ladies and gentlemen, if you wish to ask the question at this time. Please press Star then one of you touched on the telephone.
Our next question comes from Robert Dodd with Raymond James Your line is open.
Hi, guys and congrats on the quarter, if I can first one probably for you Dan.
The comments about second lien and responses of Casey, obviously deal related et cetera, but you've always said from from <unk>.
Way back that you don't want to do a second lien behind behind the covenant with the BSL market being so are you seeing just do you expect to see more opportunities.
The first liens that you could get in behind and should we expect more second lien in the origination pipeline and growth of that in the mix of the portfolio over the course of say this year.
Yeah Fair.
Fair question.
Yes.
I think simply I don't I don't believe that to be the case right I think it's going to be a name by name basis, we're wanting to kind of get behind.
Industry is larger companies, we're very prepared to do that if we think we can earn those outsized returns.
I think when the market is generally.
As punchy as it is on the syndicated side you know the returns that are available for us in the second lien bucket, just usually aren't there right. So.
Sure.
I think well yes.
You might see more covenant light activity because of the syndicated market.
I think the spread environment.
The balance that a bit so I wouldn't expect any real change of portfolio construction.
Got it I appreciate that one.
A couple of other quick ones, if I kind of true up second quarter in a row.
Paid a pretty attractive.
And obviously you didn't pay them for the first half I mean is this.
Is the second half dividend from track kind of is an element of that catch up or is this the kind of run rate dividend that can be expected from that platform.
Going forward.
Yeah, I mean not catch up.
I think much more akin to a run rate.
Obviously that'll be a little bit subject to.
The loans that the originating of repayments there might seeing so it could be some variability the variability around it but more of a steady state number and Youre correct.
The company didn't pay anything in Q1, and Q2, which was the prudent thing to do considering the market environment.
Understood. Thank you and then if I can one mobile quick one on the the liability side, obviously the the.
<unk>.
The unsecured debt you did back in the period of Covid, which added a lot of valuable liquidity and the tonnage for the expensive.
It's redeemable at any time, but it looks like that the retention costs are pretty old list for the next couple of years. So I mean any color on.
Long term planning of when would you expect that to go the maturity or would you expect to get out of it in a couple of years it looks pretty costly until 2020 suite of so any color that the I appreciate it.
I mean, it's we acknowledged that sticks out versus the $1 billion day.
Deal at three 4% even inside of the same calendar year I mean, we I think with with the information that was available to us at the time, you know with the market environment. We saw we were quite happy to take.
Take capital like that.
While it's it is sort of expensive I think it added 25 30 basis points of the world of our overall financing cost that said you should not expect that to be outstanding until its maturity, especially in the current environment. We're in it's really of non call too and then sort of.
Prepay penalty stepped down from there.
Got it thank you.
Thank you Anil currently showing no further questions at this time I would like to turn the call back over to Dan Pietrzak for closing remarks.
Okay.
Thank you all for joining the call today and thank you for your support.
Look forward to talking with you again in the spring, we do hope you and your families remain safe and healthy.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
Thank you.
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Okay.
Okay.
The revenue.
Yes.
Yes.
Yes.
Good day.
Okay.