Q2 2022 Owl Rock Capital Corp Earnings Call
Greetings and welcome to the Owl Rock capital Corporation's second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the speaker's remarks to register a question. Please press star one on your telephone Keypad. Please press star two.
Two to remove your question from the queue. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded its now my pleasure to turn the call over to Dana Sclafani head of Investor Relations. Thank you Dana you may begin.
Operator, good morning, everyone and welcome to Owl Rock Capital Corporation second quarter earnings call. Joining me. This morning are our Chief Executive Officer, Craig Packer, Our Chief Financial Officer, and Chief Operating Officer, Jonathan Lamb, and other members of our senior management team.
I'd like to remind our listeners that remarks made during today's call may contain forward looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described in our filings with the SEC.
The company assumes no obligation to update any forward looking statements.
We will also be referring to non-GAAP measures on today's call, which are reconciled to GAAP figures in our earnings press release and supplemental earnings presentation available on the investors relations section of our website at Owl Rock Capital Corporation Dot com with that I'll turn the call over to crack.
Thanks, Dana good morning, everyone and thank you for joining us today.
I'd like to start with our high level results.
We reported net asset value per share of $14 48.
Down from our first quarter NAV per share of $14.88.
This decline was primarily driven by unrealized portfolio markdowns due to credit spread widening experienced across the broader markets.
Our net investment income was 32 per share up a penny from last quarter. This.
This was driven by continued stable investment income due to strong credit performance and an increase in dividend income.
We're also pleased to be able to over earn our dividend without the benefit of meaningful prepayment related income.
Repayment activity continues to be muted.
In addition, the rapid rise in interest rates, we have experienced will meaningfully benefit our NII beginning in the third quarter.
All else equal this will drive a further increase in our earnings even if we do not experience an increase in repayment activity in the second half of the year.
Jonathan will touch more on this later in the call.
During this quarter, we have very clearly seeing a transition in the market environment, which has impacted all asset classes as investors are recalibrating expectations, given a more uncertain economic environment.
And your concerns around the trajectory of fed policy inflation trends and the potential cost of the U S economy have disrupted the markets.
In this environment, we think it's important to make a distinction between market volatility and economic uncertainty.
Market volatility creates an even greater opportunity for us as a direct lender.
As banks have pulled back from providing financing we have seen an increase in demand for our capital and large platforms like ours have stepped in to provide attractive financing solutions for some of the largest deals getting done.
The second quarter, we evaluated over 20 opportunities for deals over $1 billion in size.
Which was another very active quarter for these larger deals.
In this environment the certainty of our capital is even more valuable to borrowers.
And we are financing deals with better terms and structures and wider spreads.
Coupled with higher base rates, we believe these loans for large high quality companies offer very attractive risk adjusted returns for our portfolio.
That said, we are highly focused on the current economic uncertainty and its impact on the credit quality of our portfolio.
While we are prepared for a recessionary environment, we have not yet seen that materialize in our portfolio.
Broadly speaking, our borrowers continue to meet or exceed our expectations for performance.
Have not seen an uptick in credit issues with.
We continue to have only one company on nonaccrual status, representing 1% of the portfolio based on fair value one of the lowest levels in the BDC sector and our annualized loss ratio remains very low at roughly 15 basis points.
As an upper middle market lender, we focus on larger companies many of which are leaders in their markets.
Consumer demand remains healthy and while our companies are experiencing some margin pressure from increases in labor and input costs. They have largely been able to pass through those cost increases to maintain healthy profitability.
We focus on non cyclical service oriented businesses with enduring revenue models and have very little exposure to classic cyclical sectors.
The majority of our portfolio is comprised of companies in service oriented sectors, such as software insurance and health care, which we believe are more insulated from a broad economic downturn.
For example, in our largest sector software fundamentals remained strong as software solutions are embedded in their customers' workflows.
Mission critical to day to day operations.
The majority of these investments are structured with conservative loan to values.
Typically well below the roughly 45% average of our broader portfolio.
Additionally, our team has been rigorously analyzing the portfolio given the economic uncertainty.
We evaluated each of our borrowers based on a number of factors, including labor commodity price and supply chain exposure and feel the portfolio is well positioned to withstand economic pressures.
We believe we have built a resilient portfolio that will continue to perform well in a changing economic environment.
Turning to our activity in the quarter or SEC had a modest quarter of originations driven by light repayment volume.
We had expected repayments to modestly increase in the second quarter.
However, higher rates reduced refinancing activity and market uncertainty led to a decline in M&A activity.
Even though repayments were low this quarter, where we did receive repayments we were able to redeploy this capital into attractive opportunities.
The portfolio at quarter end was $12 6 billion.
Roughly 75% first lien investments.
And is well diversified across borrowers and industries.
We continue to seek ways to prudently improve returns by targeting specialized lending verticals in the second quarter, we provided an additional $77 million of capital to wing spire and asset based lending business in our portfolio to support their acquisition of Liberty commercial finance and equipment leasing.
Business.
This brings our total commitment to wing spar to $400 million.
Post quarter end, we also announced an increase in our commitment to our senior loan fund, which continues to generate attractive returns are roughly 10% to $500 million.
In addition, the owl rock bdcs, including OCC.
We announced an equity commitment in Aberdeen asset management.
Imaging is a newly formed portfolio company created to invest in a leasing platform focused on railcar and aviation assets.
Following the continued growth and success of wings fire. This platform will also be built organically by a team of industry, leading professionals with a proven track record.
Over the long term, we expect these specialized lending investments will provide further upside to our earnings and asset value.
Now I'd like to turn it over to Jonathan to discuss our financial results in more detail.
Thanks, Craig.
We ended the second quarter with total portfolio investments of $12 6 billion.
Outstanding debt of $7 1 billion.
And total net assets of $5 $7 billion.
Our NAV per share was $14 48.
First our first quarter NAV of $14 88.
This was largely driven by the decline in fair value of our portfolio due to market adjustments from the impact of wider credit spreads.
The weighted average mark on the debt portfolio was down roughly one 1%, which caused the decline in NAV of two 7% considering the impact of leverage.
We finished the second quarter with net leverage of one two times debt to equity, which remains within our target range, our portfolio and outstanding debt remained at consistent levels quarter over quarter and the impact of unrealized losses on our NAV drove a modest uptick in leverage.
In the second quarter, we had roughly $490 million in sales and repayments to $340 million in new funded investments.
<unk> mentioned, our originations for the quarter are primarily a function of repayment volume now that we are at our target leverage.
We also ended the first quarter with liquidity of $1 7 billion.
Well in excess of our unfunded commitments of approximately $1 billion.
Turning to the income statement.
Our net investment income was <unk> 32 per share.
<unk> above our previously declared second quarter Jim.
For the third quarter, our board declared a <unk> 31 per share dividend payable on November 15th to stockholders of record on September 30.
Our total investment income for the quarter was $273 million versus $264 million in the first quarter, reflecting a modest increase in interest income, resulting from rising rates and an increase in dividend income.
This increase in dividend income was a combination of recurring dividends from our existing investments such as winked spire as well as certain nonrecurring dividends from well performing portfolio of companies.
Total expenses of $146 million increased roughly $5 million versus the prior quarter.
Primarily as a result of the increase in base rates on our floating rate liabilities.
Turning to our balance sheet.
We have a flexible balance sheet with a well diversified financing structure.
As we've discussed before we believe having a significant portion of our liabilities and unsecured notes is strategically important and maximizes our financial flexibility.
At quarter end, $4 2 billion or roughly 60% of our $7 1 billion of outstanding debt was an unsecured notes.
With respect to rising rates and the impact on our liabilities approximately 50% of our liabilities are floating rate and exposed to rising rates.
Despite the meaningful increase in rates during the second quarter, our weighted average total cost of debt remains low at three 7% and we have no maturities until April 2024.
As I discussed last quarter, we will see a meaningful benefit from rising rates starting in the third quarter.
As you will recall at the beginning of the second quarter many of our borrowers reset their interest rate election to three months LIBOR, which was approximately 1% at the time.
Slightly above the average floor in our portfolio. So there was a limited benefit to our interest income in Q2.
The second quarter ended with three months LIBOR at two 3%, which meaningfully increase the base rate for those borrowers.
Holding all else equal had our base rates as of June 30 has been in effect for the entirety of the second quarter.
We estimate NII would have increased <unk> <unk> per share to a total of 34 cents per share in Q2.
Additionally, borrowers will continue to reset their interest rate elections throughout the third quarter, which will continue to benefit the yield on our portfolio and be accretive to NII.
The asset yield on the portfolio, reflecting base rate of elections as of June 30th.
Eight 8% up 80 basis points from the prior quarter.
Looking forward holding all else equal we expect each additional 100 basis points increase in our base rates from the June 30th level to generate approximately <unk> <unk> per share or a 12, 5% increase in quarterly NII after considering the impact of income based fees.
Before I turn it back to Craig I want to underscore the importance of our valuation process to accurately mark each investment in our portfolio every quarter.
As I mentioned, our NAV declined due to unrealized losses, driven by a widening credit spread environment and its not a reflection of deteriorating credit quality in our portfolio.
Evidencing this our internal portfolio readings at the end of the second quarter were consistent with prior quarters with roughly 90% of the portfolio rated one or two our highest rating categories.
Our best in class valuation process includes engaging a third party valuation firm.
Mark 100% of the investments in our portfolio every quarter.
We think this is particularly important for shareholders in a volatile market market environment.
With that I'll turn it back to Craig for closing comments.
Thanks, Jonathan.
To close I would like to provide some commentary on current market conditions and address the economic outlook that we know is top of mind for investors.
As I mentioned before the market volatility has been beneficial to the direct lending market opportunity.
When the fed started to raise interest rates in mid March it prompted heightened volatility and a sell off across asset classes that has persisted since then.
As a result, there has been a noticeable shift in the supply demand dynamics for private credit solutions.
And indirect lenders entered this period fully invested and with lighter repayment volumes capital available for new deals is more constrained.
As a result demand from borrowers for private credit solutions now exceeds available capital.
Our platform remains one of the largest providers of direct lending capital.
The continued growth of the broader owl rock platform, which today has over $55 billion of assets under management and our ability to write large checks keeps us front of mind with sponsors and borrowers we continue to see robust deal flow.
Second quarter was our third most active quarter since inception with over $7 billion in originations across the platform.
As RCC repayments increased we will be able to redeploy those proceeds into an even more attractive opportunity set.
With the public leveraged finance markets effectively shut more borrowers are turning to private credit solutions.
Although the volume of M&A activity is down we continue to see attractive opportunities at better terms and better structures with spreads on new deals widening out 100 basis points or more.
This is demonstrated by the weighted average interest rate of new commitments in the second quarter of nine 5% up more than 200 basis points versus the first quarter.
We continue to see this momentum in the third quarter and across our platform have robust pipeline of committed deals that we expect to close on in the second half of this year.
We believe we have demonstrated our ability to source attractive deals through the various market environments, but.
But as I have said before the credit quality and the performance of our portfolio will remain our highest priority in this new phase of the economic cycle.
As a lender we are focused on the downside. So we are preparing for a potential recession.
We can't forecast, what the timing or impact of recession will look like we are assessing all new opportunities through the lens of a possible economic downturn.
We are also well prepared to work with our borrowers to protect our investments in the event of economic challenges.
We have a rigorous portfolio management process and maintain active dialogue with our borrowers, which we believe enables us to identify any early signs of challenges.
While our borrowers have reported building inflationary pressures many of them have been able to pass on these costs to maintain stable profitability.
We are appropriately cautious on the economic outlook, but take comfort that we are purpose built the portfolio to withstand the macroeconomic pressures by focusing on upper middle market businesses and non cyclical sectors.
We believe the portfolio is also structurally insulated due to our primarily senior secured first lien investments, which benefit from a conservative loan to value on average of roughly 45%.
The portfolio of further benefits from diversification.
With an average position size of 60 basis points today down from 110 basis points three years ago.
Despite the uncertainty of this economic environment, we believe <unk> remains well positioned.
As I outlined before the market supply demand dynamics are favoring direct lenders.
We expect net investment income to grow in the third quarter based on interest rate elections already made to date.
Further we may see additional increases in net investment income in the fourth quarter, if rates continue to rise or repayment activity increases.
In addition to those positive trends, we're also increasing our commitments in our specialized lending verticals.
These vehicles are delivering high returns, which we believe should further enhance or Ccs earnings power.
We believe these <unk> will ultimately benefit our shareholders in the quarters to come.
I wanted to close by highlighting that based on where OCC is currently trading and based on our stated dividends OCC stock is yielding nine 6%.
On a portfolio of well performing primarily first lien term loans, which we think it's a compelling relative value in the current environment.
And with that thank you all for joining us today.
Operator, please open the line for questions.
Certainly it will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing star.
One one moment please while we poll for questions. Our first question is coming from Ryan Lynch from <unk>. Your line is now live.
Hey, good morning.
First question I had was Jonathan in your prepared comments, you mentioned that dividend income was up pretty meaningfully. This quarter, you mentioned that with the combination just higher recurring dividend income via like wings fire, but then there was also some nonrecurring income.
Dividend income in the quarter could you maybe quantify or help us understand how much nonrecurring income that that occurred this quarter. Just so we can kind of model out a better run rate for that going forward.
It was about $6 $8 million.
One dividends from what dividend income from one portfolio company.
Okay perfect.
Great.
Sorry, just to make a point of it.
Because I think it's important.
The dividend, we got was from <unk>.
You May recall is one of the only credit problems, we've had in our history.
It's early but we now own 100% of P&I, we're managing the company with recovering quite nicely from its challenges.
So while still early.
It had really good results really good liquidity, we were able to.
Take the dividend out.
It gives you a sense of the direction of <unk> and again, one of the only companies we've ever had challenges whether it's now heading into kind of really solid direction.
Okay.
Good contracts as well and that's good to see that performing <unk>.
Much better than starting at just to piggyback pace kind of stick with it.
Yes.
You mentioned.
Hi, Neil.
SMB strategy.
Hi.
Okay.
Armed how you guys decided to go into that space did you guys hire a team to do that or you guys kind of peal people away from from other places in the firm and then just kind of longer term kind of talk about.
Two years out obviously incredibly hard to predict but like what are your hopes like two years out or what sort of size. This.
That this strategy and grow to in the potential returns it can generate just ballpark obviously.
Sure.
Sure.
So we.
We get approached all the time.
About opportunities in specialized lending verticals.
And most of them don't meet our criteria.
Although we although we like them, we're really sticklers for the right combination of market opportunity a team culture.
We were.
Our approach and that had a dialogue with the team.
That had worked together previously and other alternative asset platform that has decades of experience in this space.
And they were looking for.
Yeah.
Backing and thought our our capital base would be ideal an ideal partner for them and so we had long discussions and got to know them extremely well.
And felt they were really ideal.
Type of opportunity because we really liked they are conservative.
The conservative approach to investing in our space that can be challenging for others.
They've done this for a long period of time, they are very risk averse, we're going to take a highly diversified approach to investing.
In rail and air aircrafts.
But really not about capital accumulation, but just really picking their spots.
So it just fit and we think we can get really nice returns and it will and we'll be able to grow it.
What's different here versus wings fire is wing spire, we invested completely out of our RCC.
And in this investment we invested out of multiple funds. So while we think the opportunity of this scale is significant.
That growth will come not only in OCC, but in other funds. So.
We do expect it to grow but may not scale quite quite to the size of wingspan given occ's ownership stake as only a portion.
So.
So.
Without getting too they haven't put a dollar in the ground. So it's all sort of.
Sort of a hypothetical but I would say I wouldn't expect it over time to match wings fire in its size.
But over the next couple of years that we had $300 million working I think that'd be that'd be a terrific outcome, but it's going to take time. So it's I don't want I don't want overstate it.
Okay. That's good background on that and then just one more if I can.
Your core sort of dividend are seeking your core sort of <unk>.
Earnings have increased quite meaningfully.
Recently, and then I do really appreciate the commentary that you provided on kind of where you are from.
Rising base rate standpoint, and how that would have impacted Q2 earnings back.
So as we look kind of going forward in the way interest rates are expected to go higher from there it looks like.
Operating earnings should be well above the dividend for the foreseeable future and potentially even accelerating so could you just remind us what overall the board or <unk> company's policy from from a dividend payout standpoint, because I believe you guys are going to be over earning about by quite a bit. So you can just remind us on how you guys are thinking about core dividends versus supplement.
Dividends in conjunction with our.
Core NII.
Sure.
It might be worth.
Just to go through the math, a little bit if you don't mind, just we'll go through it just to make sure everyone's square because there's a couple of moving pieces and Jonathan if I get this wrong correct me, we reported 32.
About a penny and a half of that is the CLI dividend, so I would kind of back that out.
Core earnings because we're acknowledging is a one timer Jonathan talked about in the script just based on elections already made to date that adds about <unk> <unk>.
We will get additional benefit from rates as borrowers continue to take new elections in the third quarter. So directionally, we're not sure exactly what that will add but for the purpose of this intellectual discussion say that at least the penny that gets it to about 34.
It could be higher could be lower I'm, just giving you the building blocks.
To think about it and then we would expect to get additional benefit in the fourth quarter, where if rates stay where they are now and you get the full benefit in the fourth quarter.
And then there'll be some additional benefit that Jonathan gave you the 100 basis points of <unk>.
You can kind of work up your own number from there.
And Thats, all assuming modest repayments, which.
We're ahead.
I had expected them to pick up by now, but they haven't so we're not baking in an increase in repayments anymore. Because it's just it's just we're not sure what's going to happen.
And so that's I think a good framework to think about it.
We we.
We will have conversations with the board we have conversations every quarter.
We if we get.
Comfortable as they're suggesting that the rate environment is going to stay where it is credit remains strong the outlook, we're significantly over earning our dividend will have the conversations with the board.
And consider options.
I think that obviously everything's on the table.
To increase the base dividend or we could go.
Some more special special dividends based on increases, it's just going to be so situations specific at the time.
It's hard to really totally speculate right now everyone appropriately as sort of envisioning this rate environment in this rate environment staying here for the foreseeable future and its quite possible by the end of the year.
<unk> view on the rate environment. So.
I can promise that the board is very engaged and we want to continue to deliver great returns for shareholders and if we're comfortable.
That the earnings will continue to be good we would look seriously about ways to two to share that with the shareholders. So.
I don't know if that answers your question, but that's about it no not that's a very helpful framework for for how you guys are thinking about it.
I appreciate the time today and your taking my questions.
Thanks Ryan.
Thank you next question today is coming from Robert Dodd from Raymond James Your line is now live.
Hi, guys, just going back to the specialized lending.
And I mean, obviously wink Spa Liberty commercial now imagine I mean.
Obviously these are all coming.
We're going to be enormous individually will be sizable.
By the addition of imaging.
In your comments you clearly haven't stopped.
Looking at other opportunities to add.
These.
That said of course.
Could you give us any color.
Would you like that to be.
Percentage.
The portfolio I mean, obviously first liens now now 75% that wing spar is still only about three 5%.
Of assets.
The portfolio. So can you give us any more color.
How much you'd like that type of pilot to high security with asset back to cash.
Cash flow loans.
To be as a percentage of mix.
Yes. It is.
It's a good question I don't have I won't give you I don't have a precise answer.
But you are right directionally.
<unk> in the senior loan fund.
Or in.
Three maybe four three and a half 4% ZIP code each when they are fully when they are fully invested.
I think each of those we could continue to grow.
Mid single mid single digits could it get to 67% of peace.
We're going to be driven by what we see as the market opportunity. If we continue to see and winked spire in senior loan fund the opportunity to invest in.
And the asset class, we're really confident in where we can generate 10% Roe to our shareholders.
And we're confident that sustainable I think that's terrific for RCC and we will continue to add capital so really guided by the opportunity set not buy.
Some broad portfolio construction top down I think that average and as I mentioned.
Probably isn't going to get to the same size just because we're splitting it amongst other funds.
I guess, what I would observe is there are peers of ours that have.
20, plus percent of their portfolio in these types of assets and and do and do quite well with them and so I think there is plenty of room for us to grow.
And this if the opportunities are there and maybe add additional verticals and.
And it's quite accretive.
So I.
Yeah.
If the combination of all of these over the next couple of years got to be closer to 10% or 12% it would be very accretive, but still much less than other peers and I think plenty of room to run so.
So we haven't we haven't really sat down its associated so opportunity driven rather than portfolio. The last thing we're going to do is give our give sort of like give a target in that people.
Alright, the returns so we're going to be disciplined about it I'm really really proud of what the <unk> team has built we built that from scratch and it took a year or similar patient and I remember those early calls you guys had press me like what's it going to be what's going to be honest, it's going to take time. We are not we're building. This for the long haul, but you're really seeing the fruits of that effort and we're going to.
Turning to plug away at Amgen will be hopefully hopefully some of our success.
And just touch on that I mean, they took wing spar I think roughly two years.
Therefore, it made its cigna.
A significant commitment of capital.
First distribution is that the kind of timeframe.
It's not going to be still going to be six months before imaging.
Yes.
Okay.
Look average in.
I think could be a little faster than that enables they haven't put a dollar out and the team the team is working.
The team has been getting ready and so there. They are an established team that had been working together previously that know each other well so theres not the hiring.
<unk>, if you will they're already together.
And so I suspect it will we have the opportunity to be in.
The market.
Faster than wings fire, but but but I don't I can't be more precise than that until <unk>.
Until they get their website up and then get the type of machinery going so stay tuned.
I would bet, it's probably a little bit faster because they they are probably.
Ill take anything away from Wink spire, I think I think this team is probably a little closer they're starting now they're not going to spend six months, starting or you're going to start now.
Got it thank you I appreciate it.
Sure. Thanks Robert.
Thank you next question is coming from Casey Alexander from Compass Point. Your line is now live.
Yes, hi, good morning.
Kind of want to make sure that I understand the dynamics of what I'm looking at.
And have relatively.
Worthwhile expectations for the future when I look at the unrealized losses that you took in this quarter and the previous quarter.
The total about $240 million.
But understanding your comment.
I would guess that most of those are recoverable over time.
As these positions work their way back to zero absent any credit issues.
It could pop up but if they don't.
We should expect to see most of those unrealized losses reversed in future periods.
As these positions to work your way back to par and kind of eliminate some of the <unk>.
<unk> that you've taken for spread widening am I thinking about that correctly.
You are absolutely right.
Absolutely look were.
<unk>.
We think Jonathan setup I, just want to underscore it since inception, we've taken the approach we Mark every name every quarter, we use an outside third party to do it I think it's best in class process.
And but.
Quarters like this the market is off.
Material spread with material spread widening and so.
The assets get marked down, but theyre unrealized losses, our credit performance continues to be exceptionally strong.
And if those loans ultimately get repaid at par then you will get a 100% return of that of those unrealized losses, yes, youre right losses could pop up.
But the overall.
The overall credit quality is still very strong and we feel really good that we're going to get.
Vast majority of that back when the loans get repaid or spreads tightened backed out I mean, it doesn't have to pop back and we've seen that we saw that post COVID-19 right I mean, it all widened out co post during COVID-19 minute pop back two quarters later.
Well I think the market should appreciate the banner in which the market book with a great deal of integrity and.
I just want to make sure that investors realize that there is call. It 60 cents a share of embedded NAV.
And the fact that you that you have done so with your book.
And so.
I would certainly factor that into my valuation going forward. So I appreciate you taking my questions.
Thank you. Thank you I appreciate it.
Thank you next question is coming from Kevin <unk> from JMP Securities. Your line is now live.
Hi, Good morning, everyone and thank you for taking my questions.
The portfolio of credit quality is in great shape with only one investment on non accrual are there certain verticals you have exposure to that you view as more at risk in the current environment, whether that's due to inflation labor challenges geopolitical risk of recession peers, which you are monitoring more closely as the macro environment continues to evolve.
Thank you.
The answer is really no. There's no particular sectors I mean, we have been very consistent since the beginning we like recession resistant companies. We like stable cash flows that are going to they're going to.
Holdup.
Whatever economic environment, and if you look at our top five to seven sectors.
Every quarter since inception, you'd see they're remarkably consistent and software in insurance in healthcare and food and beverage.
So there is no we obviously given whats the economic worries and inflation, we had the team our team did a great job. We did a deep dive on a number of all the variables that you just described European exposure commodity price exposure labor cost exposure.
To really make sure that we had a really firm handle on the risks in the portfolio and we came away.
Very encouraged by what we saw there is no particular sector that we have heightened anxiety on.
We certainly have some companies that have some raw material exposure or labor exposure relatively modest really modest percentages.
We are at heightened risk our watch list. If you will are 345 rated names continue to be in the same ZIP code that we've been at for really the last couple of years.
And so it tends to be more idiosyncratic I would say where do we pay the most attention to the companies that have consumer exposure the companies that sell through big box retailing or the supermarkets.
Those are the ones I would say, we keep an eye on them given fears about weakening consumer demand.
Potential cost cost pressures.
We learned that big companies. These companies have been proactive to push through price increases to get ahead of it.
And they seem.
They seem successful at doing it doing so.
So we're cautiously optimistic but we recognize the environment is uncertain. So.
So I don't I don't have any particular sectors I'm worried about we just tend to have particular credits that are on our watch list.
Okay that all makes sense and then one more just looking at new investment commitments on slide five of the presentation.
The weighted average interest rate on new investment commitments was nine 5%.
This quarter, which is up about 210 basis points from prior quarters can you just quantify how much of that increase was due to spread widening on new transactions as it appears that asset didn't materially change.
Sure I mean, it's obviously a light quarter, but it's about.
It's about split rate underlying rate 50, 50 underlying rate and wider spread but I'm glad you asked about that number because I think it's a pretty attractive number and I buy your calling people people's attention to it and the average rate we're getting on new investments is 200 basis points higher than a quarter ago, and what I'm happy to share is that is that.
The ZIP code, we're investing in in the third quarter as well as we're signing up new deals. This is where unit tranches coming it's coming close to 10%.
So it's really as we put on new investments.
Really attractive environment unit tranche today, coming close to 10% versus 7% not that long ago, It's a very meaningful move in the <unk>.
Direct lending environment and that's why we're so excited about the opportunity set that we're seeing right now.
That's certainly good to hear I'll leave it there congratulations on a nice quarter.
Thank you.
Thank you and next question is coming from Mickey <unk> from Ladenburg. Your line is now live.
Yes, good morning, everyone.
Craig.
Wanted to briefly follow up on wings fire.
Maybe this is quarter to remind us.
Who are <unk> customers and as an ABL lender to what extent.
Just the volatility we're experiencing actually create a tailwind for wings fire.
Sure So wings buyers.
Borrowers are our companies in a variety of industries.
They work with both sponsor and non sponsor backed companies. They are they tend to be the companies that we inspire is lending to tend to be smaller than the companies. Our arguments to I would say, it's more classic middle market or even lower middle market.
But no. It's just a diversified customer base, but they are an asset based lender and this is and they do a terrific job and their underwriting first and foremost is ensuring that.
There is enough assets to support support the loan and they will also look at other appropriate credit metrics on the health of the borrower.
That's one of the reasons why we like that space.
And I would expect their opportunity set so in this environment. They will also get the benefit of rising rates obviously.
But I would expect them to get increased demand from customers.
Who maybe going through challenges in their business and have to pivot to an asset based lending solution versus a cash flow solution that they might otherwise have preferred or where banks may be cutting back I don't think.
The Wingstop team Hasnt reported to me that's like early shoots of opportunity there I expect it to be to increase over time, they have a very nice pipeline.
We really like the acquisition Liberty fits them quite nicely and so that opens up.
Finance vertical for them, but I would be hopeful over the next six or nine months.
If we have the kind of economic challenges that many expect that that will be bullish for wings fire to continue to find good deals and more spread.
That's helpful commentary Craig one other question from me this morning.
There's been a lot of discussion today in this call about the directionality of interest rates.
I'll look at the forward curve is it actually is rates coming down towards the end of next year, but I've been around long enough to know that I don't know I don't think the market knows where rates will be a year from now or two years from now but my question is.
In terms of risk management.
Given that rates certainly in the near term, we're going to claim or have already climb meaningfully to the portfolio of sort of average cash interest coverage ratio and and where would LIBOR or so for fed funds or whatever you want to talk about half to go before you get concerned about it.
<unk> coverage.
Sure.
So interest coverage EBITDA to interest coverage is in the high twos today.
With a 300 basis point rate move it would get down to about two times directionally.
So we have plenty of room.
And some of our borrowers have hedged or in some way shape or form.
Perfect data on that so some of them may have some submit against on that.
But I think directionally, what I would say is for the kind of rate increases the market is expecting our borrowers should.
Certainly certainly have less cushion, but they should be.
The appropriate cushion to continue to service their debt.
Despite the kind of rate increases that we're talking about.
I understand that that's that's interesting and helpful. That's it for me this morning, and congrats on the quarter.
Thank you.
Thank you next question is coming from Kenneth Lee from RBC. Your line is now live.
Hi, Good morning, Thanks for taking my question just one quick one about the comments about robust deal flow, if M&A and refinancings are slowing down.
What's driving that the deal flow there. Thanks.
Sure the high yield market and the public the leveraged loan market are basically shot.
So while overall M&A activity is down a portion of that activity that's going to direct lenders is up significantly the banks are basically not writing new leveraged finance commitments.
Many of them are sitting on commitments that they've made previously that they are unable to sell which makes them quite reluctant to sign up for new commitments and so the sponsors are coming directly to the direct lenders and particularly to us.
For financing their deals and there is there is M&A activity.
For example, yesterday Thoma Bravo announced the take private of the company called Ping identity.
Financing that we are leading earlier this week, New mountain announced an acquisition of some assets from a public company Perkin Elmer another financing, we're leading our deals and we are getting.
For a shot at them and getting really attractive spreads and better structures and better terms and the other thing that we are pushing for as we recognize market conditions may change. So we're trying to get more call protection, because we want to make sure as we put capital out now we get the benefit of that so the other the other point I would make.
And I think it's an important one there's been a lot of concern over the last couple of years.
The amount of capital raised in the direct lending space has grown whether theres too much capital in the direct lending space a lot of it a lot of folks have asked about that and we've always felt that that concern was misplaced given the massive amount of money in private equity and you're seeing it now.
And that that concern was misplaced because in fact today there is not enough capital in private credit to satisfy the demand that we're seeing from the private equity firms. So I think it's a it's an important evolution of the direct lending market.
It sort of deserves some acknowledgement of just it is a it is still an environment, where there's more dollars from the private equity firms and the need for sizable platforms like al rock to.
To solve their financing needs.
Great that's very helpful color there.
Just one one quick follow up for me in terms of the specialized lending platforms.
It sounds like a potential benefit on the on the return side. There wonder if we just talk a little bit more about how it changes potentially the risk profile for OCC. Thanks.
I don't think it changes the risk profile for RCC.
We are again were the positions in the individual platforms are.
Moderate in size in the context of a $12 $5 billion fund.
Each position we have is really in a portfolio that has many other sub position. So we're not taking any single dam risk.
The leverage that we put on the senior loan fund on wing spar ultimately average rent is modest.
So I don't.
And I've already mentioned that others have dramatically more exposure in the market seems to think that thats totally attractive. So I don't think it really changes the needle for us at all.
Got you very helpful. Thanks again.
Thank you.
Thank you. Our next question is a follow up from Casey Alexander from Compass point. Your line is now live.
Yes, just.
<unk> point.
I noticed that there was about.
750000, our show shares repurchased during the quarter was there a special circumstance surrounding that repurchase because it seems like kind of a one off.
Okay.
Well, we look at it our board has has.
Has approved us repurchasing shares.
And we will look at it we'll look at where the shares are where the stock is trading and if we think that it's an attractive use of our capital we will pursue share repurchases. Obviously, we're balancing that against where we can invest the money.
One thing I, just want to without going.
So detailed that my legal team will yell at me afterwards, we are bound by certain windows based on our reporting when we can and can't purchase shares and so it doesn't we don't always have as much flexibility about when we can do it relative to the market opportunity is folks might realize.
And so.
I've just highlighted a minute ago.
We're investing unit tranche of 10%, we can put money money in the specialty verticals at 10%. So we have to balance that versus the shares but there are times that the shares. We think are very attractive and the board has been receptive to us pursuing that and we'll continue to look at that look at that.
And Avenue, but I would expect it to continue to be modest in size, because we think our capital press system right now.
We're getting great returns from investing it.
Alright, great. Thank you for taking my questions I appreciate it.
Alright, thank you.
Thank you. Our next question is coming from Derek Hewett from Bank of America. Your line is now live.
Good morning, everyone.
Could you provide a little some color on the Pik revenue since its about I think roughly 12% or so and it's I think it's doubled on a year over year basis and at what level.
Would it.
Start to be concerning.
Yep.
For you guys.
Sure. So the vast majority of our Pik interest is.
Is from deals that we structured as pik at the time of underwriting because in particular in the tech and software space companies were growing rapidly and the sponsors would like the flexibility to plough all their cash flow, if you will integral into growth and so.
They asked for that flexibility and we for the right situations are willing to do that much much more modest portion of it is from credit issues and so this is something that we were willing to do for extremely good credits with really low loan to value and good pricing.
In the software space in particular, where most of them are checks.
Checks all those boxes.
So it's not a function of sort of like poor credit quality.
And obviously when the loans get repaid we collect all the cash from the pickup has been growing.
And so there are we havent set a bound to a bound to it.
Ground that grind it a little bit higher.
<unk> bother me too much we obviously have a massive amount of liquidity.
RCC, so not a liquidity issue, it's not a credit issue, we can get great great returns by offering that flexibility its something that that were willing to consider on a case by case basis.
Okay, great. Thank you.
Thank you.
Thank you we reached end of our question and answer session I'd like to turn the floor back over to Craig for any further or closing comments.
Great I appreciate the questions I appreciate the interest we're really pleased with the quarter, but even more we're pleased about the outlook hopefully we made that clear today happy do any follow up questions from folks. If you have them. Thanks for your time and enjoy your day.
Thank you that does conclude today's teleconference and webcast.
Disconnect your lines at this time and have a wonderful day, we thank you for your participation today.