Q2 2021 Owl Rock Capital Corp Earnings Call
[music].
Good morning, and welcome to the Owl Rock Capital Corporation second quarter, 2021earnings call.
I would like to remind our listeners that 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 search and fees that are outside the company's control.
Actual results may differ materially from those in forward looking statements as the result of a number of factors, including dose described from time to time and Owl Rock capital Corporation's filings with the Securities and Exchange Commission the.
The company assumes no obligation to update any forward looking statements and.
The reminder of this call is being recorded for replay purposes.
Yesterday, the company issued its earnings press release and posted and earnings presentation for the second quarter ended June 30th 'twenty 'twenty 1.
This presentation should be reviewed in conjunction with the company's form 10-Q filed on August 4th and fifth.
The S E C. The.
The company will refer to the earnings presentation throughout the call. Today. So please have the presentation available to you as a reminder, the earnings presentation is available on the company's website.
We'll now turn the call over to Mr. Craig Packer.
Chief Executive Officer of all Rock Capital Corporation.
Okay.
Thank you operator, good morning, everyone and thank you for joining us today for our second quarter earnings call. This is Craig Packer and I'm CEO of Owl Rock Capital Corporation, and the cofounder of blew out and joining me today is Alan Kirshenbaum, our CFO and C. L O. Jonathan Lamm. Recent addition to our senior management team and Dana.
The funny, our head of Investor Relations.
I'll start today's call by briefly discussing our financial results for the second quarter before providing an update on the portfolio and the quarter's deal activity.
Afterwards, Alan and Jonathan will cover our financial results in more detail.
And then I will discuss our outlook and make some closing remarks.
Turning to our second quarter financial highlights net investment income for the quarter was 30.
Up from 26 cents per share and the first quarter.
We made substantial progress towards covering our 31 cent quarterly dividend and remain on track to cover it and the second half of the year.
This was driven by a significant increase and both originations and repayments and continued strong credit performance.
Our board has approved the third quarter dividend of 31 cents per share.
We ended the second quarter with net asset value per share of $14.98 from the first quarter.
Credit quality remained strong with an average fair value of 98 consistent with prior quarters.
We are very pleased with the origination activity, we saw this quarter, which represents our third largest quarter since inception.
As a result of this activity our net leverage increased to 1 point out of times approaching the midpoint of our target range of 0.9 to 1 and a quarter of times.
We also saw our pace of sales and repayments accelerate to $743 million with repayment levels now approaching fully ramped levels.
Finally, I would like to take the opportunity to formally introduce Jonathan Lamb, who many of you already know.
Jonathan will become the CFO and COO of all of RCC effective September 1st.
Jonathan brings a wealth of knowledge and more than 20 years of experience. Most recently as the CFO of Goldman Sachs BDC.
We're excited to have him on board and he will be discussing our second quarter financial results and greater depth shortly.
Turning to originations we were extremely pleased with our activity this quarter, both in terms of volume and quality.
Originations were up significantly from last quarter and exceeded Q4, driven by the strong performance of our investment team and a pickup and M&A activity as a result of the continued strong economic backdrop.
Gross originations for the quarter were $1.6 billion with $1.4 billion of funded activity and net funded originations of $663 million.
Our average spread on new commitments was approximately 670 basis points up from 640 basis points last quarter.
Our overall spread increased as a result of our ability to originate some higher spreads unit tranches, particularly on the software sector.
As well as an increase and second lien investments and a new preferred investment.
We are pleased with our success and increasing the average spread on our investments over the last year, which is now roughly 20 basis points higher than it was a year ago.
We believe this reflects the strength of our origination capabilities and relationships and the continued attractiveness of our direct lending solutions.
Along those same lines, we've talked in prior quarters about how we had not yet reached a normalized pace of repayments.
The payment volume was up meaningfully this quarter and we are quickly progressing towards our expected fully ramped and pace of repayments, which will positively impact earnings.
We finished the quarter within the investment portfolio of 11.9 billion across 129 portfolio companies and we are pleased with our strong credit performance the.
And the overwhelming majority of the portfolio continues to perform very well with 93% of debt investments marked above 95 per cent of par.
Most of our borrowers have returned to normalized operating levels and many experienced the strong performance in Q2.
While we are closely monitoring COVID-19 developments, we have a positive outlook for the overall economy and the second half of the year as consumer demand for the rebounds.
We believe this will continue to drive good results for our borrowers.
We continue to see sequential improvement and names and our lowest rating category those names rated 4 or 5.
These have decreased from 1.9% to <unk> 5 per cent of the portfolio of quarter over quarter.
While we continue to have a small number of challenged credits or non accruals remain extremely low with only 2 investments on non accrual status at the end of the quarter, representing less than <unk> 5 per cent of the portfolio based on fair value 1 of the lowest levels and the BDC sector.
Before I turn it over to Jonathan to discuss our financial results I would like to take a moment to discuss 2 recent announcements we made.
A few weeks ago, we announced an increase and capital commitments toward joint venture loan funds the bagel Lake the.
And has generated an attractive average quarterly ROE over the past 3 years of approximately 10%.
Or do you see increased its commitment to $325 million and in addition increased its economic ownership to 87, 5% from 50%.
We are also excited to bring a nationwide life insurance as a new partner and the J D.
And why that's been a meaningful OCC shareholders since inception and purchased the remaining 12.5% economic interest from UC regions effective June 30th.
Regions remains a very significant or C C shareholder and a valued long term partner across the broader blue al platform.
In conjunction with these changes the joint venture will be referred to as <unk> Senior loan fund going forward and our disclosures.
I also want to touch on the CFO transition, we announced this week effective September 1st Jonathan will become the CFO and C O L a or C C.
Alan will remain an officer of the company as an executive Vice President and serves as the CFO of Blue al the parent of OFC senior adviser.
Jonathan comes to us with tremendous experience as the BDC CFO and I'm excited to work closely with him going forward.
I would also like the thank Alan for his extraordinary contributions to OCC since inception Alan.
Alan has played a critical role and the great success. We've enjoyed to date of building a best in class operational and financial infrastructure for all of our C suite, which we believe to be 1 of our key competitive advantages.
Al will now say a few words before turning it over to Jonathan.
Yeah.
Thank you Craig good morning, everyone to begin and I Echo your comments, Craig we are thrilled to have Jonathan on board with Us and know that his deep experience and a wealth of knowledge will serve all of our XI XI very well.
Before I turn it over to Jonathan to go through the results I'd like to briefly reflect on how we strategically approached the construction of our species balance sheet.
C C now benefits from what we believe is 1 of the strongest funding profiles and the industry.
Even though our C C scale since inception, we knew it was critical to have the diversified financing landscape and we embarked on building of balance sheet that would provide financial flexibility and ample liquidity from multiple financing sources. In addition to developing a large diverse bank group that provides us with a 1 billion and of half of revolving credit capacity.
We have also issued almost $4 billion across 8 unsecured bond deals and over 1 and a half billion dollars across 6 yellows to efficiently finance our balance sheet, we've been able to meaningfully improve pricing since our first issuances in both cases, I am confident with Jonathan as CFO and cello her where she she will continue to.
Optimize its financing profile and deliver strong risk adjusted results for our shareholders with that I'll turn it over to Jonathan.
Thank you Craig and Alan for the kind words, and I'm excited to be part of the team and look forward to talking more with all of our investors and our other stakeholders.
We ended the second quarter with total portfolio of investments of $11.9 billion.
Outstanding debt of $6.4 billion and total net assets of $5.8 billion.
Net asset value per share increased to $14.90 as of June 30, compared to $14 of 82 cents as of March 31.
We ended the quarter with net leverage of 1 point of times debt to equity approaching the midpoint of our target range of <unk> 9 times to 1 and a quarter of times.
And with $2.2 billion and available liquidity.
Our dividend for the second quarter was 31 cents per share and our net investment income was <unk> 30 per share.
Total investment income for the second quarter was 249 million up from 222 million and the first quarter as a result of the $22 million increase and interest income.
Afflicting the progress we made of net portfolio deployment as well as from an increase and prepayment related income.
On the expense side management and incentive fees were $69 million, reflecting continued growth and the portfolio and interest expense was $54 million up from the prior quarter as we modestly grew our leverage.
The highlight that we had $1.8 million of non recurring interest expense related to the acceleration of upfront deferred financing fees as we continue to optimize our financing costs through the restructuring of 1 of our clo's.
Turning to the balance sheet, we're pleased with the continued growth of our unsecured financing, while we continue our efforts to reduce our borrowing costs.
We capitalized on strong conditions and the unsecured bond market during the quarter range.
The 950 million across 2 deals at attractive spreads and.
In addition to the long 5 year debt, we issued in April.
And just an additional $450 million and a <unk>.
7 year bond, which priced at a fixed coupon of 2 and 7 day Mr.
And this was our first 7 year bond and should help us to enhance the latter end of our debt maturity profile.
As of June 30, more than 60% of our outstanding borrowings were from unsecured debt.
We will continue to look for opportunities to optimize our liabilities, which may contribute to positive NII growth and the future.
The context or unsecured bond pricing levels of improved over 100 basis points. Since we began accessing the unsecured market and we believe there is additional improvement we can capture on future issuances.
With that I'll turn it back to Craig for closing comments.
Thanks, Jonathan.
Close I'd like to touch on the market environment and discuss our outlook for all of our OCC and the second half of the year.
We were really pleased to have delivered on a number of the objectives, we've talked about and prior quarters.
We are now well within our target leverage range and continuing to grow the portfolio, which has allowed us to make substantial progress towards covering our dividend.
Spy the competitive market backdrop, we're able to deploy capital into attractive investments and drive incremental yield and the portfolio.
The pace of repayments also picked up resulting in a meaningful increase of prepayment related income.
Our credit performance remains extremely strong and is amongst the best and the sector.
And the opportunistic financings and improving financing spreads have allowed us to continue to lower our overall cost of funding.
We are encouraged by our visibility on the third quarter and expect another very solid quarter of originations.
In terms of repayments. We also expect another strong quarter, which should again generate meaningful prepayment income in Q3.
Given our strong origination activity, we are confident we will be able to offset repayments by deploying the capital into new originations at attractive spreads.
In terms of portfolio construction, we will continue to be primarily of first lien lender and will also participate and other opportunities across the capital structure that offer attractive risk adjusted returns.
This includes continued second lien investments investments and funds like our senior loan fund or equity investments and companies like wings buyer.
As well as select structured capital and equity co investment opportunities. However, protecting our principle is paramount to everything we do.
In terms of the market opportunity, while we have seen some increased competition and result and spread pressure.
We are very pleased by the continued growth and demand for large direct lending solutions and particular unit tranches.
Private equity firms are choosing direct loans for more of their large deals which plays to our strength since we generally favor of bigger companies for our portfolio.
This year, we have already evaluated more than 20 opportunities over $1 billion and size and invested in or committed to 8 of these and continue to evaluate others.
And this trend continues to accelerate and it's creating exciting opportunities for large direct lenders like al rock.
We believe we are especially well positioned for this due to our scale platform with a full suite of financing solutions and the large deeply experienced team with strong relationships and the financial sponsor community.
Before I wrap up I want to touch briefly on the Blue Al transaction, which closed on may 20th.
And our rock now operates as a division of the Blue Al and we're excited about the growth of the platform and the opportunities that the expanded business will provide over time we.
We will continue to use the owl rock name and we'll maintain the same focus that we've had since inception, which is providing customized financing solutions to borrowers and financial sponsors.
We look forward to continuing to execute on our long term plan to optimize the occ's portfolio and balance sheet to achieve compelling risk adjusted returns and a stable attractive dividend for our shareholders.
Thank you for joining us today, we appreciate your interest in OCC and look forward to speaking to you again next quarter operator, Please open the line for questions.
Thank you.
At this time I would like to remind everyone and cancer.
And to queue up for question and you May Press Star 1 on your telephone keypad. If he would like to withdraw your question you May press the pound key.
Your first question comes from the line of Devin Ryan from JMP Securities. Your line is now open.
Okay, Great Good morning, Craig and Alan and welcome Jonathan.
The first question here, so clearly another very strong quarter of portfolio great growth.
And you are now at 1 times leverage.
Within reach of covering the dividend now that you're at 1 times.
And and I'm sure of a bit of of <unk>.
Clearer picture on earnings power of the portfolio can you maybe share your thoughts around intermediate term leverage range of you consider optimal and the current environment.
Oh sure sure Devin.
Look we arrange of this point neither 1 of the quarter I think were comfortable operating anywhere within that range. As you know we're now at 1 times on the net basis, we think we're comfortable being there and frankly I would expect that we would operate somewhere between there and 1.1.
On the on them and.
And sort of center of gravity.
We look around the portfolio is concerned the support that we're very focused on keeping and a really strong ratings from the rating agencies. We're in constant communication with the agencies and believe that the we'll continue to have good investment grade ratings and that and that range.
And it's obviously very dependent upon flows and any 1 quarter, so could dip a little higher a little lower depending upon when deal of plan within a quarter, but.
But I know 111 to $1, 1 that's probably the right range for folks to be modeling and again could be could be a bit higher or lower.
Yeah.
Okay, Great very helpful and then just.
Follow up maybe touching on the prepayment activity and.
And the outlook I know, it's episodic so.
It's a bit hard to predict and I heard the quarter to day comments, but are you seeing any change in some of the factors that have been driving and the elevated activity.
Is there as you look out.
Beyond maybe the next quarter or 2 do you think that the trajectory could shift a bit and and any other color there would be helpful. Thanks.
Oh sure.
So we get repaid the the.
Most of the most typical reasons, we're getting repaid or <unk>.
Company is getting sold and you know the buyer the redoes the readout at the capital structure.
And he goes public and uses the IPO proceeds to repay debt company.
The company growth through acquisition and gets to a size, where it makes sense to refinance and then.
And then occasionally we get refinanced either the direct marketer and the syndicated market to just lower costs. That's the mix I would say right now and I haven't I'd have to go back and and study it but my sense and just from from.
And from my seat is there is a lot of M&A activity.
Where sponsors of the velocity of companies.
The the velocity of the sponsors are buying and selling companies has picked up in part because of the much stronger economic conditions and so you know as the economy has picked up.
M&A spirits, or kindled and and by sellers are thinking thats, a good time to sell buyers and the thing is a good time to buy and so we're just seeing a really nice pace of of M&A activity that results in the company's getting bought and sold from a price oftentimes from 1 sponsor to another or shortly companies get sold from financial sponsors to strategic buyers as well but.
And the sponsors that and you know that.
<unk> got properties debt during COVID-19.
M&A activity slowed.
We're still I think feeling the.
The catch up effect of that as the economy has recovered and sellers of finding on the businesses of recovery. It's a good time to sell so I I don't know if that gives you a flavor for it so a little more of an M&A oriented obviously the financing markets are strong so financing activity is good the IPO market and what's the mix of all of those things, but probably a little more weighted to <unk>.
2 M&A velocity right right at this moment.
Yeah, Okay. No that is helpful. Appreciate it and I'll leave it there. Thanks so much.
Thanks Devin.
Your next question comes from the line of Robert Dodd from Raymond James Your line is open.
Hi, guys and congrats on the quarter and if it hadn't been for that 1.8 million and I think you would have and the dividend this quarter and not just in the <unk>.
On on just on the.
And what part of the Thanks, Craig you gave some.
Comments.
So you can focus on first liens are you willing to add more secondly that goes all the way back to the IPO, you've always said that.
And some other thing so.
What kind of mix.
And what could firstly and go down to I guess, some tightening and would you be happy at 80.
Or would you be willing to go a little bit lower than that.
If you had the second lien.
Goodbye.
And and and more the fun type structures I mean, any any color on on what you kind of look quite target mix of comfort mix would be first yeah. This is the out the big categories.
Sure.
So.
We were running and you know and the in the high 70 is now close to 80%.
<unk>.
And we would be look we make decisions 1 deal at the time.
As you and I appreciate you're reminding folks, but we've said for a while now that we like second liens and we like doing them, but we just have a very high credit bar, our second lien exposure is around 17%.
And I'd be very comfortable taking that number into the twenty's and mid twenty's and maybe even even high twenty's and in this.
The certain kind of deal environment, we get shown a lot of second lien opportunities, we just say no to almost all of them.
And the other piece, which I, which I touched on on my comments and you didn't ask about it but up and I'll bring it up is because I do think the the other part of our portfolio of the equity preferred investments and survey of Lake investments and wing spire that all approximates give or take 5% now I think that that number could go up as well.
We were it's very there's only there's only a handful of investments that comprise that on primarily our investments and so they go on wings fire.
Couple of equity and debt 1.1 at 1 P. L Peel out of which we all of which we took over but we're seeing some interesting structured capital opportunities. We did 1 this quarter per company called <unk>, which was previously and are and our portfolio, where we got a structured preferred and so that 5% I think could grow over time to high single digits, maybe even approaching 10 so.
Just to come back to it if we took our second lien over time to the low Twenty's and took the others to the.
High single digits.
That would get your first lien down to something.
70% down from you know close to 80% today something like that over time, we're not.
Targeting that but if you want a sense of what we're aware of where it might go I think that that gives you a sense.
I really appreciate that and just kind of touching on I mean, obviously when you do of second lien debt.
To your point in the credit box.
Typically not doing the second lien deal from the $50 million EBITDA loss right.
The much bigger companies.
On on that side on the equity I mean beyond the buttons on the switches.
The different animals, and Charlie weigh your preferred equity where youre willing to do that is that.
Same kind of characteristics you done we'd be willing to do that 1 on larger businesses or any color on that from.
Yeah.
I think that's right I think even even larger and our bar is obviously, even that much higher for anything that structured capital debt might be again, I don't want I don't overstate. This we did that we were doing these like 1 of quarter, it's not I don't want it and make it seem like we're doing lots of these what's happened is that valuations are quite.
Hi, right now on financial sponsors and having to pay very significant price is to buy companies.
And the leverage is not going up that much that that GAAP is being filled by by more and more equity from the financial sponsors and so we're seeing we're getting approached for companies. We like maybe we're doing this the way we're doing the second lien and the sponsors of writing and even bigger equity check beneath us and they're saying you know can you structure, something where we think we're getting downside protection through <unk>.
<unk> structure, and we're getting low to mid teens type rates of return those are interesting, but our bar is extraordinarily high on those even beyond the second lien for obvious reasons and for your bit youre, a bit you're a bit deeper.
We won't do you won't see us do a lot for smaller companies as you know and you touched on our second lien bar.
Our average EBITDA across the portfolio of 100 million of EBITDA and our second liens are closer to 200, might've EBITDA and <unk>.
And so on the bar for preferreds will be even that much higher.
Got it thank you.
Thanks Robert.
Your next question comes from the line of Mickey Schlein from Ladenburg. Your line is open.
Good morning, Craig and Hello to Jonathan.
Craig I don't want to beat a dead horse, but I wanted to follow up on the second lien and unit trains of question I do appreciate that rock is still somewhat transitioning from its pre IPO portfolio, but I'd like to ask you. How we should think about the additional credit risk he might be introducing by the higher allocation.
2 of those 2 segments and what's the Delta and spreads today for those deals versus first liens.
Sure.
Well, if there's nothing new here, we've been doing unit tranche since inception, we've been doing second lien since inception.
Our unit tranche gets we the depending upon where on our disclosure of it gets included as first lien today, it's about a third of the overall portfolio as unit tranche, what we have done and maybe this is what youre alluding to is as we built the portfolio. We wanted to scale relatively quickly, but we wanted to do it safely and so we put a lot of.
High quality, but lower spread on first lien paper and the book, we still have of $1 billion of what I'll call true first lien at L $5, 50, or less and the book.
And we've been working to cycle out of that and put it into a higher spread unit tranche on.
On paper.
The tranche. So so if I just use the <unk> $5.50 of the dividing line unit tranche today is anywhere from $5.50 to 700, depending upon the credit there has been some spread compression there you know a lot of them.
The unit tranches, and our book it and kind of all 600 to $625.650, but new unit tranches are coming more of a 5 handle and <unk>.
Leans today are coming anywhere from <unk> $6.50, the L 800, depending upon the credit.
But again I don't view this is new for those of you who have followed us when we started 5 years ago, we had $35.40 per cent of the book of second lien and we'd been running extremely low at 17%. So it's really I'd say just been the being at a very low level and were talking about moderating that back up.
We have states, we've stayed flat and second lien and the last couple of quarters. So it hasnt gone up but but the question I was asked was what would you be comfortable taking it up to and obviously, we want to give folks a flavor for that.
But most of our activity continues to be first lien most of it continues to be unit tranche, but if we find chunky second liens to do.
We will do halfway through them to the right credits.
And to follow up on that Craig do you given the current market conditions would you be comfortable.
With the majority of the portfolio and unit tranche as opposed to pure first lien.
Yeah.
Well again, the third of the portfolio today is the unit tranche.
You know, it's it's so yes, it'd be coming from I'd be comfortable taking having all of our personally and begin the tranche. We think the unit tranches is really ideal for for BDC and the reason is because you get a higher spread but you attach of dollar ones. So this great downside protection.
But again with the high credit bar.
No. We just we find and we wind up having.
And our mix and by the way some of our first lien is it's a first lien and from a credit standpoint from a leverage standpoint from a loan to value.
All of your standpoint, but it's more we're able to get higher yield because the credit might be a trickier underwrite and so it's more of a stretch first lien debt piece. If you will draw the terms of art.
But we.
Unit tranche is of core to what we do it's of course offering for direct lending and particularly in the tech sector. We're seeing some really attractive very large unit tranches that we continue to be very active and.
And Craig My last question, just considering your deep relationships across the financial community how actively does blue.
Al Rock, specifically sales first out pieces of the unit tranche or do you prefer to hold the entire deal and on your balance sheet.
We we hold we hold the hold the whole deal the.
The construct that youre, describing where of lender does the unit tranche and sells the first out.
And when we started al rock I would say that was the that was off and the the predominant method.
Method that lenders used and sold the first out to try to boost returns I think theres been a real change there Mickey that that's not often done and that most lenders and the market and certainly we typically just hold it all and part of that is the borrowers prefer to just have 1 counterparty and even though.
And that that financial engineering is being done behind the scenes. The borrowers are aware of it and don't particularly welcome having that uncertainty introduced into the equation. So we we hold at all I mean, there may be 1 deal on our book that structured from a particular way, but almost all of them we hold it all and I'd say, that's the trend across the industry now most certainly.
And certainly in the middle Upper Middle market, most most lenders just hold at all.
And rather than the slice of that.
I appreciate that Craig that's it from me I just wanted to thank Alan for.
Our relationship and all of the hard work he did to put together.
All rock'n'roll RCC much appreciate it thanks for your time.
Thanks, Mickey that was the right kinds of the thank you.
And again, if he would like to queue up for a question you May press star and the number of 1 on your touch Tim and Pat.
Your next question comes from the line of Casey Alexander from Comcast Point. Your line is now open.
Hi, good morning, I like the Echo.
These comments the banking Allen for a great work and and very definitive information flow in our work and trying to cover this company and welcome Jonathan to the platform. Most of my questions have been asked and answered but.
I would ask the generally in a quarter that is active and deployments and repayments.
Such as this 1 there is almost some immediate activity. The they had also tended to slip over the quarter into the third quarter. So I'm just wondering.
Are there any deals that pushed out into the third quarter. The that might give me some insight into deployment activity in the third quarter and also you know some view as to how repayments are shaping up and this quarter.
Sure.
So.
I mentioned this briefly and then and the comments, but I'm happy to underscore it.
We have visibility on our third quarter, it's going to be a very active 1 from an origination standpoint, I would say again it depends on when everything winds up closing and you just even when you have high visibility until close that youre not sure, but I would expect it to be in line with with the second quarter.
Possible, possibly exceed it but in line with it repayments also we have have really nice visibility on and similar comments at least at least in line if not if not exceed.
Yes, there are.
And I won't get into specific deals, yes, there were deal Theres a couple of deals that closed in the beginning part of the of the third quarter, but Mike commented sort of more.
Driven by just our near term pipeline, which we're seeing and map out on a daily weekly basis, and what we expect to have close over the next.
The next month or so it's quite it's quite it's quite active.
Alright, great. Thank you Craig very helpful and I appreciate you taking my questions.
Sure. Thanks Casey.
So thank you very much.
Your next question comes from the line of Kenneth Lee from RBC Capital markets. Your line is open.
Hi, Thanks for taking my question.
Just 1 on the senior loan fund JV.
Wondering if you could just remind us again, the potential benefits of RCC and how you think about potential of allocation towards that JV and the near term. Thanks.
Well I'm on.
Not sure of it well I'll try to answer the question and maybe missing some nuance to it.
We are <unk> or <unk>.
We've changed the name.
Published all of.
The use of big of lakes since that's the name of everybody's familiar with it's been a wonderful partnership we had for UC reagents are terrific partners and it.
And it's a it's really of first lien.
The strategy not unit tranche, all first lien.
Direct and and syndicated first lien term loans, we've earned about a 10% ROE at that JV, and we think that growing and it's a great investment for RCC, the benefits from or Ccs sourcing capabilities and and we.
And the desire to grow it and think it's just a terrific.
<unk> opportunity for our investors.
And and discussions with you see and what they what their strategy and what they had going on it just I think we mutually agreed and they're wonderful partners that this would be a good time for us to essentially bring and the new partner. So we were able to grow and increase the size of the JV and the increase occ's exposure to it on quite significantly to 320.
And 5 million its going on that's not.
That's our commitment and it's going to take time for us to fully invest that and get all of that money working.
And then and as part of it we brought and nationwide life insurance. So we also know extremely well.
As the new partner there going forward so.
No change to how we operate the JV, it's primarily in this.
The environment, primarily doing syndicated first lien term loans that we have identified as a part of our underwriting process and deals we've looked at and.
And so we'll just be able to increase over time, our the amount of money OCC has working and and grow that too I think and the most recent quarter, we had about $4 million of.
Of dividend overtime that number when we get all of that working which is going to take some time should be $7 million per quarter, which is up I think.
Eric.
Got you very helpful. And then just 1 follow up if I may on the liability side wondering if you could elaborate on any specific further optimizations.
And you've seen the near term the funding mix. Thanks.
Well we were.
We were definitely quite active this quarter, we feel really good about where are we where we are from we'll call. It the 3 legs of the stool and.
In terms of having the corporate revolver, having dropped down the SPV as well as CLO financings and our unsecured so we're quite happy with the mix there.
The the $1.8 million.
And <unk>.
Okay.
The accelerated expense that we took the us because we were reducing pricing and.
And our shallows. So we continue to actively look at those.
And and find ways to and we'll be looking to find ways to optimize that and then in addition on the.
On the unsecured side certainly as we mentioned spreads have continued to come in our spreads have continued to come in and we certainly will look to be active over time, there, but we feel really good about our liquidity position. So.
More of about an optimization game right now.
Got you great very helpful. Thanks again.
Thank you.
Your next question comes from the line of Finian O'shea from Wells Fargo Securities. Your line is now open.
Hi, good morning.
First question on on the yields this quarter.
Craig and team I. Thank you all.
<unk> guided that we would see the improvement from from Repays and we it looks like we of course saw that.
And is this about what you expected in terms of the portfolio yield.
Or was there a little extra.
From.
Hire.
More more juicy.
Repays and any color there on what we should sort of model out.
We.
<unk>.
Very pleased with the yields on new investments this quarter.
And the increase.
The increase and spreads.
This comparison of spreads we were able to put on this quarter versus the first quarter. It was a nice pickup which was driven by.
Getting some really high quality, particularly software unit tranches.
And the nice spreads and we did some second liens and 1 preferred and and the mix of that first quarter. We didn't do any any second lien. So the mix was helped on the spread basis, but the unit tranches were higher and.
And I was pleased we're seeing others report and I think that where we're at.
Outperforming on that regard in terms of where we're adding new deals and enable the increase the overall spread and the overall yield on the portfolio over the last year over the last quarter, we talked about R. R.
Desire to 2.
To rotate a bit and get a little more spread and the portfolio without sacrificing credit quality and I think where you are seeing.
Tangible evidence that we are succeeding on that so I'm pleased with that.
In terms of the outlook that'll get that'll be a more challenging the spread of the market is competitive and there is some spread pressure and.
And we're seeing that and I touched on that a couple of questions ago, but I'll sort of repeat it here.
Given how strong all of the credit markets are of the public markets private markets capital raising and private markets there of spread pressure.
And so we're seeing that and I don't think it'll be more challenging and the next quarter or 2 to also increase and maybe we'll see.
Reduction and spread for free.
The new deal activity, we just have to see how it all how it all lands, obviously any 1 quarter. It doesn't it doesn't move the needle for the overall portfolio, but but but I would say our second quarter was an unusually strong 1 just the.
Deals, we were able to sign up and on.
And pick our spots and and probably a little more pressure across the industry and now in the third quarter.
Of the very well that's helpful and can you talk on these I guess, let's call the Mega unis or something you're and involved in the pipeline.
That's in front of the market or at the market could you talk about the nature of these deals I know you often go into the.
The advantages of private credit with the.
The certainty and the privacy and and so forth, but is there any.
And you know sort of pocket of.
And where were these are coming from are they are they.
Middle market companies, graduating and just sticking with the private credit solution, because that's what they know and like or is it.
Syndicated names kind of.
Dipping down for the advantages of of private execution is there any sort of clear.
Area, where we're seeing this this pipeline come from.
Sure I think the single biggest driver is the continued success and growth of software.
And software is used throughout.
And all of the economy.
And the and the.
All of the different.
Companies that have been formed and the last.
5 to 10 years to help cut.
Companies governments.
The people schools.
Run their lives run their businesses the.
The modern life runs on software and these companies have theres there are many.
Terrific businesses that have been developed to serve that need and the these companies all have grown rapidly as all of those constituencies have adopted software more and more to 2 from to run their activities and those companies can be controlled by venture capital firms private equity firms.
But there are also a number of them that are public and and so we're seeing 1 of the drivers for unit tranche is there've been several very large take privates of companies and the software space by financial sponsors.
And so they are the.
Coming from just the the growth and need for those companies and the desire for financial sponsors to all of them. It's the most active area from financial sponsors.
And to invest in and there.
There are firms that spend all the time and the software space, but I would say most most private equity firms at this point are we spending some of their time.
And these businesses take real skill to underwrite.
And you need and industry expertise to understand the business models theyre not theyre not simple and straightforward we've invested heavily in our team and our team's expertise. We think is really best in the industry and so.
We are finding ourselves and a really great competitive position and and valuations of very high and I think the sponsors like the ease of use of using of unit tranche to help finance that deal.
The apparatus of doing of syndicated deal.
It's cumbersome it doesn't it takes time.
And the constituencies in that space don't always understand software and the same manner and and.
And the loan to value on these on the software on loans is often actually quite modest and.
And I say that 1 because theyre good highlights the attractive loans, but to frankly ease of use and execution and simplicity and knowing who your lender is and having certainty.
Or are really important and given its actually a modest amount of the overall capital structure. The fact that of course, more which it does potentially versus syndicated deal and it doesn't necessarily move the needle for the sponsor either and they're growing rapidly and so they just want to get stuff done quickly with lenders They trust and I think that the transformational.
The thing that's happened and the last handful of years and we've been a part of this and we're not the only 1 is much bigger pools of capital and our available where you can do a $1 billion to $3 billion direct lending deal and you can do it with a very small group of lenders that you know well and trust and and.
And move quickly and so would that big pool of capital it's creating.
Even more desire for sponsors to use them for their buyouts and so I think this trend is accelerating and we're really well positioned for it.
Great. Thank you, Craig and and congratulations Mr. Lam for on the new appointment.
Thank you Fred.
There are no further questions at this time.
Now I will turn it back over to Mr. Craig Packer.
Great.
And in closing I'm going to I'm going to add my own. Thank you the Allen.
He's not going very far and it's still going to be obviously, working very closely with us, but Alan and Jim had been an incredible partner to me and to our whole team and.
Really deserve a lot of credit for everything that we've built at <unk> and an owl rock and.
We will still be interacting with them all the time, but really his imprint on what we felt there'll be felt for many years to come so thanks to Alan and thanks to all of you for joining and we look forward to talking to you soon.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
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