Q1 2021 Owl Rock Capital Corp Earnings Call
Ladies and gentlemen on your call will continue to be placed on music hold on the conference begins the conference will begin momentarily. Thank you for your patience.
[music].
Good morning, and welcome to our rock capital Corporation's first quarter 2021 earnings call I would like to remind our listeners that remarks made during the call may contain forward looking statements forward looking statements are not guarantee of future performance or results and involve a number of risks and uncertainties that are outside of the company's control.
Actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described from time to time in our rock capital Corporation's filings with the Securities and Exchange Commission income.
And assume 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 first quarter ended March 31st 2021. This presentation should be reviewed in conjunction with the company's form 10-Q.
On may 5th with the S. E C D comfortable referred to the earnings presentation throughout the call. Today. So please have that presentation available to you as a remind us what your earnings presentation is available on the Companys 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 first quarter earnings call. This is Craig Packer and I'm CEO of Alt Rock Capital Corporation on 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 has join.
US on the call today.
I will start today's call by briefly discussing our financial highlights for the first 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 view on the current market and make some closing remarks.
Getting into the first quarter financial highlights net investment income per share was 26 as we had expected NII was down this quarter and Allen will provide more detail on this later on the call.
We'll also discuss our future earnings outlook in my closing remarks.
We ended the quarter with net asset value per share of $14 82 up eight cents from the fourth quarter.
The average fair value Mark on our portfolio is 98 per cent of par back to where it was before COVID-19.
We believe that the full recovery of the value of our assets over the course of the year reflects the strong credit quality of our portfolio and investment process.
Looking forward for the second quarter of 2021, our board has declared a regular dividend of <unk> 31 per share. The same amount we have paid each quarter since our IPO.
We are pleased with our origination activity this quarter, although as we expected volumes across the market were lower than the fourth quarter given the pull forward of deals at the end of last year.
We ended the quarter with net leverage of 0.92 times, which is up from eight seven times last quarter and up from <unk> six times year over year.
We've made steady progress to get to the low end of our targeted range of 0.9 to one on a quarter in.
And expect to modestly increase our leverage within that range in the coming quarters.
In addition, our balance sheet remains strong with $2 5 billion of liquidity available today, and we continue to lower our overall cost of financing.
As mentioned on our last call we held a special meeting on March 17th for shareholders to approve the change of control in our advisory agreement in connection with the Blue Al transaction.
We received shareholder approval for the proposal and appreciate our shareholders overwhelming support for what we believe will be a beneficial expansion of our platform that will provide improved sourcing capabilities and expanded platform resources for RCC.
Earlier this week ultimate announced that it will hold a special meeting on may 18th for its shareholders to approve the business combination with dial in owl rock capital.
If the proposals are approved the business combination is expected to close on may 19th.
Turning to the portfolio our credit performance remains very strong.
We're optimistic about the economy, given the pace of vaccinations and businesses reopening and our fundamental outlook for the performance of our portfolio companies is positive for the rest of the year.
Across our portfolio, we continue to see many borrowers showing positive trends and operational and financial performance trending trending back towards or in some cases already achieving pre COVID-19 performance levels.
Across the portfolio, our borrowers saw on average nearly 10% EBITDA growth in the LTM period.
We expect to see this strength continue in coming quarters.
We believe that economic conditions will continue to improve over the course of the year and our borrowers are well positioned for this environment.
We believe one of the key drivers of the strong positioning of our overall portfolio is the strength of our largest industries, including software health care insurance food and beverage and distribution.
Any of these companies many of the companies in these sectors.
Either only modestly impacted by COVID-19 and rebounded quickly or in certain cases actually saw revenue grow faster on the COVID-19 environment.
In particular, I want to call attention to the software sector, which is our largest sector.
We like software businesses, because they often have predictable and consistent recurring revenue streams and many are experiencing growth well in excess of the broader economy.
This trend continued throughout the COVID-19 period.
In addition, the software loans, we provide often give us above average returns solid credit documents on the lowest loan to value of any of the sectors, we invest in.
For other sectors, which were more meaningfully impacted including consumer products education and childcare. We're now seeing a nice recovery and the outlook is strong as these businesses are expecting meaningful growth in 2021.
Certainly a small number of sectors have been more acutely impacted including travel leisure and aerospace.
We have a few investments in these sectors, although they are a small portion of the portfolio.
Still even here we have seen recent outperformance versus the revised forecast and are seeing reasons to be cautiously optimistic given the pace of reopening trends and improved travel industry performance metrics since the beginning of the year.
Looking at our internal credit ratings, our portfolio remains quite stable with overall results largely consistent across the last few quarters.
Names in our one or two rating categories remain at roughly 90% of the fair value of the portfolio.
The percentage of our low rated names rated three or four is largely unchanged now below 10% and there were no names in the lowest five rating category.
No material amendments were signed in the quarter going forward, while we expect to have amendments from time to time, we believe the period of elevated amendment activity due to COVID-19 has ended.
As is typical we would expect to have discussions with a small number of borrowers occasionally as part of our ordinary course portfolio management activities.
As of quarter end, we continued to have just one name on nonaccrual, representing 0.5% of the total cost of the portfolio and <unk>, 2% of fair value.
No new borrowers were added to non accrual status in the quarter.
Moving on to originations, we were pleased with our investment activity this quarter.
Gross originations were $864 million with 684 million of funded activity.
Net funded originations were $172 million, reflecting $512 million of combined sales and repayments.
We received full or majority repayments from six borrowers, which we had anticipated given the strength of the financing and M&A markets as well as the vintage of some of our investments.
In addition, similar to last quarter, we took the opportunity to sell some high quality, but lower spread paper at attractive prices.
We added eight portfolio companies in the quarter active.
Activity with new borrowers was well diversified across six sectors and we were pleased with the terms we obtained.
We also executed add ons for 11 borrowers as we continue to see the benefits of incumbency.
Almost all of our investments this quarter were first lien or unit tranche term loans.
We certainly evaluated many second lien deals, but ultimately our bar for these types of deals remains high we did not close on any new second lien investments.
Our average spread on new commitments was six 4%, which we feel is attractive given our activity was largely in first lien and unitranche facilities.
Overall, the portfolio yield was flat with last quarter at eight 1%. Despite the fact that public loan market saw spreads tightened and 75 basis points over the quarter.
This reflects our ability to originate new deals at attractive spreads and to continue to optimize the portfolio.
Our portfolio now stands at over $11 $2 billion across 120 portfolio companies, we're very happy with the continued strong credit performance.
<unk> was formed in 2016 as we now approach the targeted fully ramp size of our portfolio. Our focus is shifting from portfolio construction to portfolio optimization.
We expect to see repayments increase and as we get repayments, we will look to redeploy that capital in unit tranche or on occasion select second lien investments.
We will maintain the same rigorous credit quality standards and selectivity that we have employed since inception.
Having looked at over 5000 opportunities across the platform and ultimately closing on less than 5% of those deals.
Now I'll turn it over to Alan to discuss our financial results in more detail.
Thank you Craig good morning, everyone to start off on slide seven of our earnings presentation. You can see that we ended the first quarter with total portfolio investments of $11 2 billion outstanding debt of $5 5 billion and total net assets of $5 8 billion, our net asset value per share increased to $14 80.
Two cents as of March 31, compared to $14.74 as of December 31.
We ended the quarter with net leverage of 0.92 times debt to equity and two and a half billion in liquidity pro forma for post quarter end financings our dividend for the first quarter was 31 cents per share and our net investment income was 26 cents per share.
As you recall from my remarks last quarter, we had four cents per share in one time items that benefited us, including two cents per share from the national Dentex, Paydown and two cents per share from the partial quarter of fee waiver as a result, the fourth quarter without the benefit of these one time items would have been 25 per share.
So as compared to that we grew NII by an additional penny per share to 26 cents. This quarter. This reflects the full quarter benefit of Q4 originations plus the net benefit of new originations and sales and repayments in the first quarter.
And please note that while we had approximately $500 million of sales and repayments roughly half of that was from sales, which do not provide the same NII benefit as we see from repayments since sales do not generate accelerated amortization of OID or prepayment fees as a result fees from repayments continued to lag our expectations.
As Craig and I have been discussing over the past year or so we do expect repayments to pick up later this year based on the continued seasoning of our portfolio.
I would also note that we had some higher yielding repayments early on in the court as Craig also noted our originations were largely first lien investments, which once again were weighted towards the end of the quarter and as a result, the net one penny per share of growth in NII is not reflective of the full benefit of Q1 originations in.
In addition dividend income was lower this quarter, which also impacted NII by approximately one penny per share the contribution from one portfolio company declined by $4 million from last quarter. However, while the company continues to have strong performance. Its dividend is variable and may fluctuate based on operating results and seasonality.
Thinking ahead to the rest of this year, we expect interest income to continue to increase each quarter over the coming quarters as we modestly increased our leverage within our target range and as we optimize the left side of our balance sheet as Craig just noted.
On the expense side, you can see that management and incentive fees increased from $55 million net of the final fee waiver in the fourth quarter to $63 9 million and interest expense increased from $42 4 million in the fourth quarter to $48 1 million in the first quarter.
And as we expect expenses not to meaningfully change other than management fees and interest expense continuing to slightly increase with leverage going up.
And as I've mentioned in the past, we continue to focus on optimizing our funding costs in that regard. We had two notable transactions. We did that helped further us in reducing costs on the right side of our balance sheet, we priced our sixth CLO. This one for $260 million of incremental financing at a blended spread of 149 basis points.
On a great print and very cost efficient for us.
And we issued our seventh bonds. This one for 500 million of incremental financing at a fixed coupon of two and five eighths percent our tightest printup.
So overall, we feel we are in a good position starting off the year, we feel we continue to be on track to earn our dividend in the back half of this year and we have one of the strongest funding profiles and balance sheets in the industry. Thank.
Thank you all very much for your support and for joining us on today's call Greg back to you.
Thanks, Alan to close I wanted to share our thoughts on the current market and provide some perspective on how we're thinking about our earnings trajectory over the course of this year as.
As we had anticipated market conditions in the first quarter were constructive, but overall market activity was down relative to the very active levels seen in the fourth quarter.
While the market is competitive we continue to find attractive investments with appropriate risk adjusted returns.
We're pleased with both the level of deal activity and the quality of the deals we are seeing.
Overall, the credit quality leverage levels and covenant packages, we see on our pipeline have not changed although we are seeing some spread compression given strong market conditions and the continued strength in the syndicated market.
We continue to prefer sectors, which have been either less COVID-19 impacted or which have rebounded quickly from the economic impact.
Lastly, we are pleased that we continue to be successful in winning the deals that we want to win and names in situations, where we have high conviction around the asset and the sponsor we were able to demonstrate the value of our platform and often take a sole or lead position in these deals.
That's a great example of this it was recently announced that Al rock is leading the $2 3 billion dollar you to trust loan to finance Thoma Bravos acquisition of Calypso, which is which is expected to close later this year. We believe this will be the largest unit tranche facility ever done in the U S and is a reflection of our.
To provide attractive sizable financing commitments for top tier investment opportunities. It also highlights our expertise in the software space.
<unk> reflects the continued growth of the private credit space as increasingly large larger borrowers are choosing direct lending solutions over the syndicated market.
Given our large capital base owl rock is very well positioned for this trend.
Overall, we believe that a strongly recovering economy and accommodative monetary policy will create attractive investment opportunities and our market outlook is positive for the rest of 2021.
I also wanted to wanted to touch on the outlook for our earnings and dividend coverage over the remainder of the year.
As we expected first quarter NII was temporarily down however, we expect it will make meaningful progress in the second quarter towards earning our dividend and believe we are still on track to fully cover our dividend from NII on the second half of the year.
We don't typically provide forward guidance, but I can say that sitting here today. As we are we are expecting a very active second quarter in originations in excess of the first quarter and more in line with the fourth quarter.
<unk> is driven by both new deals and the benefit of our incumbency positions on.
On the new deal front, we're seeing opportunities from a variety of sponsors and across the technology health care insurance and consumer sectors.
And as many private equity sponsors continue to execute buy and build strategies across portfolio companies through tuck in M&A, we believe our permanent capital scale and flexibility it gives us a sourcing advantage.
For the second quarter. We also have visibility on increased repayments, which will generate additional fees from accelerated OID and call protection.
Based on the net effect of the pipeline barring something unexpected we believe we will continue to modestly increase our leverage level as well as improve earnings in the second quarter.
As a result, we expect Q2 earnings to grow and to make solid progress towards covering our <unk> 31 per share dividend, which we ultimately expect to occur in the second half of this year.
To close with some thoughts on our portfolio at first highlight that since 2016 OCC has deployed $17 billion of capital across 165 borrowers given the scale of the platform. We are very proud to have had only one single investment loss to date.
Annualized loss rate of roughly 10 basis points since inception, and two have come out of this challenging period with only one investment on non accrual at 0.2% of the fair value of the portfolio.
Further the average portfolio Mark has rebounded to pre COVID-19 levels and more than 90 per cent of the portfolio. Today is marked above 95 cents on the dollar.
We think our portfolio offers an attractive yield we have roughly $11 billion of directly originated senior secured loans with strong covenant protections on an average spread of LIBOR plus 650 basis points with an average mark of 98, we think that's a very compelling asset mix relative to other asset classes for example, when <unk>.
Paired to the S&P leveraged loan index, which currently yields approximately 375%.
We have also successfully executed on the portfolio diversification, we set out to achieve at inception.
Today, the portfolio is well diversified across 29 industries in the top 10 positions make up only about 20 per cent of the total portfolio debt.
Continue to our focus on sponsor backed upper middle market names with a weighted average EBITDA of $104 million across our borrowers. Our platform is further bolstered by the strength of our balance sheet, which remains well capitalized and diversified across financing types with maturities well matched to our assets taken together, we feel we have built a diverse and defensive portfolio.
So a scale supported by an attractive financing profile.
Lastly, I would note the benefits that we see resulting from broader owl rock platform with.
With total AUM of 28 billion much of it coming from permanent capital. We view this capital pool to be a source of strength on a significant differentiator.
On the scale allows us to support a large high quality investment team, including a significant group of originators, which produce a large funnel of deal opportunities and allow us to remain highly selective.
<unk> also invested significantly in underwriting expertise portfolio management resources, as well as finance middle and back office and.
In addition, our scale keeps us top of mind for private equity sponsors who turned to us for sizable customized financing solutions.
Finally, we're very excited about the continued growth of the platform and the sourcing opportunities that we expect to generate as a result of the blue al transaction closing.
We look forward to discussing the book our platform in more detail in the quarters to come.
We believe the outlook for the second half of the year looks strong and we look forward to leveraging our competitive advantages to continue to deliver attractive risk adjusted returns for our shareholders.
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. Yes. As a reminder to ask a question you need to press star one on your telephone to withdraw your question press. The pound key your first question on line of Devin Ryan from J P. Morgan Securities J P M Securities.
Yeah, I think Kevin from JMP.
I appreciate you taking my questions on I guess first one here.
We appreciate your repayments.
Somewhat hard to predict but you just did.
Comment on your expectation for kind of higher level in second quarter and I know that's factored into the outlook. If you think about kind of the back half of the year. If current conditions continue with the expectations that were just kind of in a higher repayment environment with that got.
Got it.
For the quarter here and that's factored in or how are you guys thinking about that more broadly just with debt.
You kind of constructive conditions.
Sure.
Well, let me try to break that into two pieces.
I made the comments a couple of minutes ago that we expect to see higher repayments in.
In the second quarter.
I'll just call your attention to something that Alan said in his remarks, but I think it's important for us about half of our <unk>.
Repayments. If you will this first quarter half of those were sales that weren't repayments. We sold the position. So we only had about 250 million of actual repayments and we expect that number to go up materially in the second quarter on that.
That obviously is very impactful for earnings because as we get true repayments, we are able to recognize.
The OID that remains on those investments and oftentimes prepayment penalty. So we're calling attention to that because it generates earnings and free actual repayments were light in the first quarter.
But the broader point.
To your broader question of how are things looking.
The two biggest drivers of repayments or when one of our portfolio company gets sold.
And the new buyer comes in I'm, Redoes, the capital structure and or a refinancing I would say, it's more tilted to the first one.
And so it's more driven by M&A.
Our experience than it is.
Our strong market, where we're getting refinanced out we certainly get refinanced out from time to time, because we wanted to upper middle market companies that have access to the syndicated markets.
But I would say more often it's companies getting sold.
On the environment that we're in is a very constructive on on M&A M&A volumes were very high cash.
Particularly given the economic outlook and it's also one where theres a strong syndicated market. So we expect.
Sales of our companies and refinancings to pick up in our case in particular.
We've just had very low repayments, which is somewhat a function of the vintage of our portfolio as well as you know COVID-19 I think pushed out some of the repayment activity so relative to what we've been experiencing the last couple of years in our case specifically.
Think repayments will pick up to a normal level not to an excessive level and that's very healthy for earnings and something that I think will be good book.
Good in terms of dividend coverage. So I think it's going to be one that that all the managers will experience meaningful and robust levels of repayments.
Given given the trends on siding.
Okay, great color there. Thank you.
Some quick here on kind of industry focus is obviously, you've done a great job navigating the pandemic and leaned into the REIT sectors in areas like technology and health care.
We have been active I'm curious with the backdrop kind of evolving here and potentially a strong economic recovery and a vaccine available are there any industries or maybe pockets that are emerging as maybe more attractive risk reward series that debt.
Maybe you weren't as interested in over the last 12 months, but maybe you are kind of harping on the radar in areas that.
Are more attractive or maybe a little bit less saturated.
From an opportunity perspective.
Yeah.
So we.
To state the obvious when we make a loan it's 567 years, and so and where we hold it to maturity and so on.
We're we really consider ourselves long term in orientation and fundamental credit investors.
We're not traders were not trying to pick our moment in the market and because we know economic conditions over the life of our loans are going to go up and down and we've got to pick credits that were going to withstand that.
So.
We think we've been well served throughout inception sticking to businesses that are going to indoor regardless of the business cycle and regardless of where we are going on a growing out it's not to say of course that we don't pay attention to where we are on the cycle and on the margin that can.
Influence us on the margin, but I would say I don't we're not.
You Shouldnt expect to see us after five years of really avoiding cyclicals to try to bet on cyclicals now because the economies.
Really really potentially be very strong here.
Companies might do well for a year or two but we would be concerned what happens after that.
As I said in my remarks, the sector. We have found the most attractive and it is our largest sector. When we have really differentiated expertise is software and technology generally but software in particular.
We continue to find that sector, particularly interesting and.
And we'll have to put a lot of resources to it.
Certainly there are sectors that were impacted by COVID-19 that have now recovered very quickly and so I would say those are sectors. The pockets of health care that are really kind of shut during COVID-19 that now open back up and I think we would be very open minded about doing though is where we might not have been six.
Months ago, So, we'll certainly adjust the dial there, but I for al Rock you Shouldnt expect to see us really make any significant changes in the sectors. Other managers may view it differently and there may be good value in making a bet on the cycle, but it's just not really how we run the portfolio.
Yeah.
I appreciate that thanks for the color.
Great. Thanks, Kevin.
Thanks, Kevin.
Your next question on line of Robert Dodd from Raymond James.
Hi, guys. Thanks.
Thanks for taking the question.
Oh on the prepay it obviously does.
You talked about elevated prepayments next quarter each.
It does generate piece, there's two components to be sort of an accelerated OID and prepayment fees.
Sure.
10 is with COVID-19 kind of aging of the portfolio somewhat.
Happy.
H.
The call protection PA.
A chunk of assets and we should expect the OID or you're still going to collect the accelerated OID and call protection on the repayments. So do we have to kind of.
We set the cycle for that debt.
The call protection component within the portfolio starting to be paid hopefully that makes sense.
Yeah, It's a great question, Robert and I'll I'll do my best to answer it but I don't have a precise answer to mathematically, but I'll try to give you the themes.
I calculated this or we calculated this but just this is.
This is this is information thats publicly disclosed we've got about 170, <unk> hundred $70 million of OID on the books today, just OID. So if every loan repaid tomorrow, which obviously isn't going to happen, but that would be 44 cents a share of NII now.
Gonna get spread over the next few years I'm not in any way, suggesting that's going to happen this year, but I'm just giving you a specific number for part of your question.
That's very material if those loans got repaid on average over the next three years that would equate to <unk> of NII per quarter, just from the amortization of OID any prepayments will come on top of that we will get.
On call premiums will come on top of that I don't have it at my fingertips, what that would amount to but just the OID alone has quite substantial share to the thrust of your question have we quote aged out of it.
We one of the attractive elements of the loans. We offer is they don't have.
Tremendous amounts of call protection, it's usually a year or two and maybe it's you know prepay up all at one or two or one on one oftentimes what happens is some of the highest quality companies or some of the best performers. They repay you quickly because they.
They know the business does really well or two later they prepay. So I don't think it's going to go to zero.
But I I think it'll be more weighted to the amortization of OID. So I don't think that there's some.
Impediment for us getting the kind of income pickup that we're expecting.
I really appreciate that granularity on just one.
One more if I got on the on the dividend the pool five 4 million.
This quarter.
It's variable.
And this may be more obviously, you don't control the dividend per se, but would you expect that this level is the low end of the valuable range or is it the middle of the range, we should expect going forward or any color on that would be helpful.
Oh sure.
The investment we're referring to.
Is is more on which is I think it's growth shows up on our schedule of investments as windows holding.
It's been a terrific investment.
Different type of investments on our normal investment its an equity investment.
But it's in a company with with with no debt on it so they were shareholder and they they pay out a portion of their income in the form of dividends and we enjoy those dividends.
You went back and looked at it you would you would see.
It's been an extraordinarily profitable investment we originally invested a little over $50 million and we've already received.
<unk>.
The $13 million of dividends. So that's that's really extraordinary.
The variable is going to move up and down based on the performance of the business and the timing of when they choose to pay dividends I think it's reasonable to assume this first quarter.
Is it a good go forward to project out, but it is a variable it's variable and it's.
It's a business that's just driven by their underlying activity level and so if you tweaked it lower than that I wouldnt. It wouldnt be upset about that either but theyre going to be quarters, where it does really well like the fourth quarter and book seat I, It's just not gonna be as predictable.
And as a debt investment because it's just inherently a variable dividend.
Okay got it thank you.
Alright, Thanks, Robert Thanks, Robert.
Next question on line of Mickey <unk> from Ladenburg.
Good morning, Craig and Allen.
Craig I found your comment about the record sized unit tranche deals are very interesting.
I'm curious with that in mind.
How do you manage the structuring of as those deals.
Given the size of the company the size of the loan.
Visa visa the frothiness in the in the broader market, where where I imagine this company may be able to go if say they choose and obviously the broad mark to broader markets pricing is very tight and deal terms are very loose when we think of covenants. So.
Essentially I'm asking how do you attack that market without taking on the risk of the broader market.
Okay.
Well, let me.
I'm not sure you might have to re ask the question, but I'll give you an answer and see if I get close enough.
On the Calypso deal is an example of a trend that we've seen over the last few years I mean, frankly since the inception of Al Rock, we're certainly not the driver of it but we're certainly one of the leaders in it which is.
With bigger pools of capital, we can offer a bigger solutions for direct lending for the private equity firms and.
We we are.
There are many reasons why a private equity firm fixed day direct lending solution. It's not just the rate it's not just what the covenant packages. They liked the privacy they like the certainty they like to know who their vendors are in the other windows will be there when there are opportunities and challenges.
We we we are seeing greater and greater receptivity to directly on solutions, and it's penetrating deeper and deeper into the leveraged finance markets.
You've been a beneficiary of it and we've seen the billion dollar unit tranche and now and now we're.
We're seeing a $2 billion unit tranche.
So I think that trend is in our favor and I would say.
Just to be slightly pointed about it. This is in a moment in time, where the syndicated markets are on fire and yet it's still trending in that direction and if you think there'll be a moment in the next couple of years, where the syndicated market.
Gets choppy then that trend will accelerate in my opinion.
So it's a positive for our business, it's very much at the core of why we started al rock to go to provide those kinds of solutions.
They are certainly very a spear.
Spirited discussions with private equity firms about what rate we charge in the covenants on all that but we continue to feel really good we get maintenance covenants, we get the spreads that you can see.
You know that we're continuing to get our spreads in excess of the market. I'd also just remind you in terms of our economics, we get a premium to the syndicated market, but we're also able to capture the fees that would otherwise go to pay to the banks to distribute the deal. So that's economics that are not incremental to this.
Bonser, but benefit our investors and so that's part of the economic proposition for direct lending.
Well, so I'm not sure I answered your question, but hopefully.
You are welcome to ask something that I didn't quite get it.
No no that was very much my question and I appreciate that.
<unk>.
A couple of similar questions what is the outlook for a dividend if any from wind spire, which is actually now larger than sabbatical.
Good question, we're really pleased with what we're building our wings fire.
We continue to.
Put more capital in there and they are building their portfolio out, we're being very thoughtful and Dave Watson and the team that runway inspired very thoughtful about a construct the portfolio.
I want to make sure that we build for the long term there and.
Im optimistic over the next year.
Here are few quarters, we'll be able to report some progress on a dividend out of <unk> I don't want to be too precise about it but it's trending in the right direction and that'll that'll obviously help our earnings as well.
Craig could you give us, perhaps a range of Roe or expecting on wound spire.
Yes.
We wouldn't have done windstar, if we didn't think we could get on a row at or above the ROE and our overall portfolio and I hope its an excess but if you want to just make something in.
You could take the average average ROE for al rock and use that as a proxy.
I'm really enthusiastic about wing spire, but but we also try to under promise and over deliver so I.
When we have the results to report will go into it and a lot of detail.
But over the next few quarters, but getting to a run rate consistent with our rock ROE would probably be a reasonable assumption to make.
Okay, I appreciate that and I'm not sure of Alan already mentioned it.
What is the amount of undistributed taxable income per share that you have.
We don't Mickey.
We don't have undistributed distributions.
Okay. So.
But you did accrue some excise tax right Allen.
I believe we did.
Okay, I'll, probably follow up with you on that later than what was it those are all my questions. I. Appreciate you taking my questions. Thank you.
Thanks Nicky.
Next question final Paul Johnson from K B W.
Hey, good morning, guys I'll be brief I most of my questions have been asked but I.
Hi.
One of my questions was just around your.
Your debt stack you guys are obviously built a pretty attractive low cost liability structure, but I'm kind of curious so going forward, what your appetite would be for additional.
On secured debt just obviously given the extremely low cost sort of available to bdcs issue at today.
If you'd be comfortable issuing more on potentially replacing some of your securitized financing or have you sort of kind of reached a balance that youre trying to maintain and maybe not looking to get too aggressive with more unsecured debt.
Thanks, Paul.
Good day.
It's a good question.
Look we're always keeping our eye on the markets. You saw we just did a nice sized deal a couple of weeks ago.
In terms of unsecured taking out secured we'll continue to look at that we also do the CLO issuances, which is a really efficient way to finance our balance sheet on the series and one I mentioned was just 149 basis points over LIBOR.
So that is really efficient and we continue to focus on optimizing the right side of the balance sheet. So you should expect over time to continue to see us doing CLO issuances as a great way to finance our portfolio and continue to keep an eye on the unsecured markets to see where pricing.
Continues to go there.
Sure Okay I understand.
And lastly, just kind of bigger picture I'm, just curious your guys thoughts on that.
The tax proposal out there being floated.
You know by the President with Congress.
Do you think that.
Any part of that proposals, obviously more specifically around carried interest.
Would that have any effect on possibly accelerating Emma.
M&A deals.
Deals in the near term.
Do you still kind of or do you look at this more of just like a non event just kind of given the sheer amount of capital that's been raised in that.
That sector.
Well.
It's a fair question I.
I think that Theres certainly we saw in the fourth quarter that you know.
The possibility of tax changes drove a good amount of activity getting done by the end of the year now that there are some specifics around the state taxes and cap gains. It certainly stands to reason that that could.
Cause sellers to to want to sell prior to those types of changes so I think it's.
It could be a propellant for M&A activity, which is already.
Very robust I.
I don't think.
I don't think that it's going to alter the trajectory of private equity in general because the trajectory of private equity in general is quite strong there's a trillion dollars of dry powder sitting in private equity firms.
I'm on is going to get invested.
Regardless of what tax regime, we live in.
Anything private equity continues to be.
Raising lots of capital so theres nothing particular in the tax code tax proposed tax changes that.
We've got our eye on the market you know markets tend to adjust to these things and we.
We expect continued robust.
Robust activity as we've been talking about.
Okay.
Thanks for that I appreciate that those are all my questions.
Thank you thanks Paul.
Your next question the line of Kenneth Lee from RBC capital.
Hi, Thanks for taking my question just one on the expectation of seeing meaningful improvement in NII in the second quarter.
Just wanted to get a better understanding of some of the key drivers there and how much of this could.
It could be driven by new investments that were completed in the first quarter and then ultimately generating interest income on a full quarter in the second quarter. Thanks.
Sure.
I'm not going to be Super granular, but certainly part of it is the investments in the in the first quarter that were done towards the tail end of the quarter that will now we'll get the full benefit of but I would say that's the only that's only a modest part of it I mean, where we are we have high visibility on a very robust originations pipeline.
As I said is more in line with the fourth quarter than the first quarter.
We.
We wouldn't say that if we weren't highly confident in it some of the deals already closed and others are expected to close imminently. So so that's the biggest that's the biggest driver and then we also have.
High visibility on actual repayments as well so.
Barring something unforeseen, we expect to make material progress on NII during the quarter.
Based on what we're seeing right now, which we have better.
Better visibility on.
Right. That's very helpful and just one follow up if I may you mentioned that you didn't didn't close on any second lien loans in the quarter I just want to get a little bit more color. What you saw in some of the potential investments in what may be the first lien debt in the unit tranche is more attractive at this point in time.
Vs. Secondly, thanks.
Sure.
We've talked about this over the last few years.
Yes.
For the right situations, we like second liens.
Yeah.
But we're so picky about those situations. So we only we'd really like to do second liens are businesses that are very stable substantial equity commitments and tend to be bigger companies on average than the personally.
Portfolio companies, if our average EBITDA is $100 million across the portfolio. The average EBITDA per our second liens are $175 million or give or take so we tend to do it in bigger companies that have lots of wherewithal.
And so we feel like we're getting the premium spread you get for doing second lien, but get the same equity cushion and just high quality businesses. So.
We just didn't see any of those on in the first quarter that fit our parameters, but but I'm also signaling that we will do more second liens and were at a pretty thin amount of second lien and.
When we do a few I hope I felt folks will remember this quarters, where we did not take it up take it in the overall context, which is we're really selective.
I could easily see our second lien percentage going up in price, but we're going to remain very disciplined.
About it but one quarter's trend one quarter's deal activity doesn't really make a trend it's a small opportunity set but since inception, our bar per second liens have been very high and I think that served us quite well.
Great that's very helpful. Thanks.
Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Your next question on line of Casey Alexander from Compass point.
Hi, just because my attention spans not that great when does calypso close and on a deal like that how would you kind of size the position to the ARCC portfolio.
And you know the closing what type of fees.
<unk> does a deal like that generate.
Yeah.
Casey we.
Since you said your attention span with short I won't I'll give you on Morgan on the ARCC vs. The OCC.
Oh.
[laughter] no problem, we haven't said when it's going to close frankly.
Frankly, it's not our business to say Thoma Bravo. It is buying the company I will defer to them on it we wanted to call attention to it because it's extremely extremely large.
We we one of the benefits of our platform as we have other funds that we manage and so when there's an opportunity like a calypso we can take.
Take a very sizable position in the largest position in a deal like that and we can have a very healthy investment for OCC and.
And put it in our other vehicles as folks many folks know we manage a rock technology Finance Corp, which is which is a dedicated.
Tech <unk>.
<unk> as well so it'll be one of the largest investments across our entire platform as the deal gets closer we'll figure out the exact size based on on.
Where we sit at that moment in time, so I can't I can't I can't be more specific but its a large deal and thats a great opportunity for us on a high quality company too.
Two.
To have a sizable investment in a really terrific business.
Okay. Thanks for that would you but the.
The guidance that you still believe that you can cover the dividend with NII by the second half I mean by the fourth quarter that would kind of be the core run rate.
Not including unusual deals such as our Calypso is that correct.
Yes.
Yeah. Thanks, Thanks for reminding me I meant I meant to cover that.
When we close on a deal.
We need the OID that we take.
<unk> taken that deal we amortize over over the life of loan.
No we don't.
<unk>.
Unusual amounts of income in when we close on deals other managers.
To do that and I'm not.
I'm not going to comment on that but we.
We don't just because we're closing on a big deal unto itself isn't going to drive earnings in that quarter.
For us.
Now occasionally on a larger deal we might we might sell down some that can generate some income, but we're not systematically our earnings are not systematically driven by originations in the way that on a manager that takes all the OID upfront would be so I wouldn't get too focused on one calypso is going to close.
I mean, I should say this just for the sake of clarity.
I'm, assuming that's obvious but we're currently not holding all of the $2 $3 billion clips alone and.
We didn't commit to the entire $2 $3 billion calypso on their other lenders in it with US and then there'll be other lenders that committed on the other one theres that close with us and we will have a very appropriate size for the owl rock funds.
Perfect.
Thank you very much that's very helpful.
Thanks Sanjay.
And your final question comes from Finian O'shea from Wells Fargo Securities.
Yeah.
Hi, everyone. Good morning.
They've got on.
On the originate high.
So the origination outlook is pretty strong it sounds like can you.
Can you touch on the yields are the yield impact.
You'll expect obviously some more activity will help.
But but.
Does the pipeline look.
Flat better worse in terms of net.
New new yields.
So.
The spread in our in the first quarter was was down.
From the fourth quarter.
So the quarter, we just put up I would say our visibility and that reflects I alluded to it in my remarks.
There has been a bit of spread compression.
As the markets have been strong.
The the visibility we have on second quarter sitting here right now.
I would expect spreads to be a bit wider than what we got in the first quarter.
So it'll it'll move around a bit.
But we're continuing to find investments that have a spread consistent with today's weighted average spread in our portfolio in some cases higher or some cases slightly lower but.
Our visibility in the second quarter I would say it's modestly higher.
But I think that.
If the market conditions stay strong.
We're going to stay in this kind of a range.
Okay.
Okay. That's helpful.
And then with the <unk>.
With the adviser.
Couple of press releases attached the owl rock it looks like that.
And it's in its final stages.
With the with the BDC.
Should we expect that.
The management team.
Yourself, Alan so forth.
Mostly remain in place or or will there be any any shuffling around.
Look we're super committed to our strategy and our team and maintaining the success that we've had.
Going forward.
Obviously, it's a bigger platform and will continue to be thoughtful about.
Resources, but if anything we're going to have more resources to be able to dedicate two.
Oh RCC so nothing to report on any changes excited to get the transaction closed here shortly and.
Don't you know.
We will continue to do the best for our shareholders.
Okay very well that's all for me. Thank you.
Thanks Ben.
Thanks Vince.
And I would now like to turn the call back over to Mr. Parker for closing remarks.
Alright terrific. Thank you all for the questions really appreciate the interest.
We're generally accessible so we didn't get a chance to take your questions just reach out we're happy to talk.
Offline and.
<unk> everyone's support and we'll see you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Okay.
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