Q4 2022 Oaktree Specialty Lending Corp Earnings Call

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Good day and welcome. Thank you for joining the Oaktree specialty lending Corporation's fourth our fourth physical quarter year and year end 2022 Conference call. Today's conference call is being recorded and at this time all participants are in a listen only mode, but will be prompted for a question and answer session. Following today's prepared remarks.

Now I would like to introduce Michael <unk> head of Investor Relations, who will host today's conference call. Mr. Mike <unk> you may begin.

Thank you operator, and welcome to Oaktree specialty lending Corporation's fourth fiscal quarter and year end conference call.

Our earnings release, which we issued this morning.

Opening slide presentation can be accessed on the investors section of our website at Oaktree specialty lending dot com or.

Our speakers today are Armen again, Chief Executive Officer, and Chief Investment Officer, Matt Penndot, President and Chris Mccown, Chief Financial Officer and Treasurer.

Also joining us on the call today for the question and answer session is Matt Stuart our Chief operating officer.

Before we begin I want to remind you that comments on today's call include forward looking statements, reflecting our current views with respect to among other things.

The timing or likelihood of the closing of the merger with Oaktree strategic income too.

The expected synergies and savings associated with the merger.

And we didn't realize the anticipated benefits of the merger and our future operating results and financial performance.

Our actual results could differ materially from those implied or expressed in the forward looking statements.

Please refer to our SEC filings for a discussion of these factors in further detail.

We undertake no duty to update or revise any forward looking statements.

I'd also like to remind you that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase any interest in any Oaktree fund.

Investors and others should note that Oaktree specialty lending uses the investors section of its corporate website to announce material information.

Company encourages investors the media and others to review the information that it shares on its website.

That I would now like to turn the call over to Matt.

Thanks, Mike and welcome everyone. Thank you to all on the call for your interest in and support of O C. S. L.

We finished our fiscal year with strong momentum driven by increasing asset yield productive origination activity and excellent credit quality full.

Full year fiscal 2022 adjusted NII was 71 cents per share up from 64 cents for fiscal 2020. One these results reflect the growth and the earnings power of our portfolio over the course of the year.

And by higher interest income from our predominantly floating rate portfolio.

Continued portfolio repositioning and optimization and ongoing credit stability importantly, this marked our highest annual level of adjusted net investment income under oak trees management.

It presents the tremendous progress we have made since taking over management of the company five years ago.

Importantly, we are well positioned for the year ahead as rising interest rates have bolstered the earnings power of our portfolio.

86% of our loans are floating rate and we expect our interest income will continue to rise in tandem with increasing base rate.

The strength and consistency of our earnings as well as the potential for continued solid results. Our board increased our quarterly dividend by 6% to 18 cents per share.

This was the 10th consecutive quarterly increase and it represented a 16% increase from the distribution, we announced a year earlier, notably our dividend is up nearly 90% pretty much pre pandemic level at the close of fiscal 2019.

Our board also declared a special distribution of 14th per share primarily as a result of increased taxable income derived from our foreign exchange hedge positions as well as certain taxable equity gains.

Turning to our fourth quarter results adjusted net investment income per share was <unk> 18 cents for the quarter compared with 17 fence for the prior quarter.

We reported NAV per share of $6.79 down one 5% from the prior quarter and down six 7% from a year earlier.

The quarterly decrease primarily reflected credit spread widening on debt investments and unrealized losses on certain equity investments.

Really upset by undistributed net investment income.

Looking more closely at the portfolio.

We originated $97 million of new investment commitments in the fourth quarter. Most of these were private placement transactions to a diverse group of companies and the yield on new debt investments was nine 9%.

We received $146 million from Paydowns and exits in the fourth quarter.

This included exits and paydowns of lower yielding investments as like gains to their previous fair value.

We continue to selectively reinvest proceeds into higher yielding attractive opportunities.

Given our experience across multiple cycles, and our ability to draw upon the breadth of the Oaktree platform. Our origination activity continues to be strong in the current quarter and while credit markets have experienced one of the most challenging years on record we are finding some of the most attractive opportunities we've seen in a long time.

Credit quality remains pristine.

Continue to have no investments on non accrual. This reflects the breadth of our sourcing and our disciplined and prudent approach to investing selectively across a wide range of opportunities.

As we end the fiscal year I also want to touch on our entry into a merger agreement with Oaktree strategic income to ink or OSI too, which was announced in September . We believe this transaction represents a compelling opportunity for shareholders about Oh C. S. L and O S. I do we expect it will create a larger.

More scaled BDC with just over $3 billion in total assets increase our trading liquidity and should improve our access to the debt capital markets.

Also anticipate that would create efficiencies and cost savings to drive NII accretion over both the near and long term importantly, consummation of the merger remains on track.

October 24th we filed the registration statement on form N 14, which is currently under review by the SEC. Once the registration statement is declared effective we will schedule. The O C. S L and O two shareholder meetings and begin mailing materials to shareholders.

We expect the transaction will close in the first calendar quarter of 'twenty twenty-three subject to shareholder approval and satisfaction of other closing conditions as outlined in the merger agreement.

And finally this year our proxy statement will include a proposal, which if approved by the shareholders and implemented by the Board would result in an amendment to our certificate of incorporation to effect a reverse stock split of our standing shares of common stock at a ratio of one for three we believe that this will benefit Ocs L shareholders as we bring our stock.

More in line with our BDC peer group and OSI to NAV per share we look forward to receiving your approval for this proposal as well as the OSI to merger with that I would like to turn the call over to Aman to provide more color on our portfolio activity and the market environment.

Thanks, Matt and good day, everyone I'll begin with comments on the market environment.

Although the strength of the U S job market endures and the economy expanded modestly in the calendar third quarter macro conditions continued award careful attention.

So just persistently high inflation tightening monetary policy a surge in U S dollar and slowing consumption weigh on markets and lurk as threats to both the domestic and global economies late in 2022 and heading into 2023.

The federal reserve's aggressive actions to tame inflation by rapidly raising interest rates have dominated the credit market story in 2022, while fixed rate assets are negatively impacted by rising treasury yields most leveraged loans are floating rates that reset higher and generate more income as short term interest rates continue to rise. However.

However, floating rates are a double edged sword rising interest expenses clearly hindered some borrowers when a borrower struggled foodservice floating rate debt. The company's problem can quickly become the loan investors problem.

In mind that while higher interest rates are intended to tame inflation. The process takes time as such companies are facing the prospect of elevated borrowing costs at a time when input costs are at the highest level in four decades in the global economy is slowing.

While many companies were able to pass through cost increases to customers in the first half of 2022. This capacity is now likely look, especially for those that are smaller or in cyclical industries.

Near term default risk is fairly low.

We have limited maturities in the next two years and many still have relatively high levels of cash on their balance sheets because of savings accrue during the height of the pandemic.

Or interest rates rise and the longer they remain elevated the more likely it is that the cracks and loan fundamentals could widen.

Eventually lead to greater instability.

At Oaktree, we have lived through many of these cycles that have been able to capitalize on them, having ample capital a long term perspective, and the conviction needed to withstand short term volatility are all key ways to how we have succeeded in these types of environments and how we plan on continuing to do so.

Looking forward, we believe caution if necessary, but navigating such steady markets.

So continue to draw upon our teams long history of opportunistic investing to identify compelling new deals.

We are prudently growing our portfolio as Matt noted selectively investing across both the sponsor and non sponsor back market, while maintaining excellent credit quality.

With all that in mind, we are focused on relative value and are investing where we can find the best risk. Adjusted returns are utilizing the full scope of increased scale and resources to invest across multiple markets with a diversified group of issuers.

Leveraging <unk> ability to negotiate and structured customized private deals that provide downside protection.

Together, we are carefully deploying capital with favorable terms to further build our portfolio and generate strong returns for our shareholders.

Now turning to the portfolio.

The end of the fourth quarter, our portfolio was well diversified with $2 5 billion at fair value across 149 companies up.

Up from 138, a year earlier.

87% of the portfolio was invested in senior secured loans with first lien loans representing 71%.

Underscoring our emphasis on the top of the capital structure.

Continue to target larger more mature businesses that operate in non cyclical defensive or structurally growing industries that tend to be diversified companies with lower amounts of leverage.

Which we believe reduces risk and contributes are consistently solid credit quality.

Our borrowers have been navigating the current inflationary environment very well and have continued to experience solid performance. Despite the challenging market conditions.

Median portfolio company EBITDA as of September 30 was approximately $130 million.

Modestly from $128 million in the prior quarter.

Leverage at our portfolio companies was relatively steady at five times well below the overall middle market leverage levels.

Portfolio's weighted average interest coverage declined slightly to two seven times as of September 30 from three times in the prior quarter due to rising base rates.

We leveraged the auction platform to originate $97 million of new investment commitments across six new and five existing portfolio companies in the quarter.

The majority of these new investments in terms of dollar amounts were more defensive industries, such as life Sciences and application software, reflecting of a cautious approach to growing our portfolio.

Also participated alongside other oaktree funds and accounts and purchasing to home loan syndications at attractive discounts to par.

Importantly, our origination activity is steady early in our new fiscal year.

Originated over $100 million of investment commitments and five new private deals in the month of October .

In total these deals were attractively priced with a weighted average yield of 12, 6% and 100% were senior secured.

Continued momentum coupled with our robust liquidity and the deep resources of Oaktree positions us well for the year ahead.

Now I will turn the call over to Chris to discuss our financial results in more detail.

Thank you Armen.

You see yourself delivered another quarter of strong financial performance, finishing the fiscal year 2022 on a high note.

For the fourth quarter, we reported adjusted net investment income of $33 $7 million or 18 cents per share up 7% from 31 4 million or 17 cents per share in the third quarter.

The increase was primarily driven by higher interest income, resulting from rising base rates, partially offset by lower prepayment fees and higher interest expense.

Net expenses for the fourth quarter totaled $34 $3 million up 11.5 million sequentially. The increase was mainly due to a $6 $8 million reversal of accrued capital gains incentive fees in the prior quarter that did not recur in the fourth quarter $3 9 million of higher interest expense as a result of the impact of.

Rising rates on the company's floating rate liabilities and slightly higher part one incentive fees and seasonally higher professional fees.

Turning to our credit quality, which continues to be excellent as Matt mentioned, we had no investments on nonaccrual at quarter end.

With respect to interest rates sensitivity Oh C. S. L remains well situated to continue to benefit from a rising rate environment as of September 30th 86% of our debt portfolio at fair value was in floating rate investments are strong earnings in the fourth quarter were primarily.

Primarily due to the higher base rates, which in turn drove our interest income higher.

We expect the most recent rate hikes will continue to have a positive impact on earnings.

Base rates as of September 30th where and in fact for the entire quarter. We estimate that our adjusted net investment income per share would have been about a penny and a half hires resulting in adjusted NII of 20 cents per share.

Now moving to the balance sheet.

Oh, Csl's net leverage ratio at quarter end decreased slightly from the June quarter to 1.06 times.

As a reminder, last quarter, we announced that we were increasing our leverage target higher to a range of 0.9 times to 1.25 times debt to equity. We believe this range is appropriate given our portfolio's strong credit quality and it provides us with increased capacity to deploy capital, where we may see an expanded set.

And the opportunities given the ongoing market volatility.

As of September 30th total debt outstanding was $1.35 billion and had a weighted average interest rate of 4.4% up from three 2% at June 30th due to higher base rates.

Unsecured debt represented 48% of total debt at quarter end up slightly from the prior quarter.

At quarter end, we had ample liquidity to meet our funding needs with total dry powder of approximately $524 million, including $24 million of cash and $500 million of undrawn capacity on our attractively priced credit facilities.

Unfunded commitments, excluding unfunded commitments to the joint ventures were $175 million with approximately $142 million of this amount is eligible to be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies.

Shifting to our two joint ventures.

At quarter end, the Kemper JV had $385 million of assets invested in senior secured loans to 60 companies up from $365 million last quarter, driven by new originations.

JV generated $2 2 million of cash interest income for ocs, ending the quarter up from $1 9 million in the third quarter. As a result of the portfolios continued strong performance and the impact of rising interest rates on floating rate investments.

We also received an 875000 dollar dividend consistent with the prior quarter leverage at the JV was one seven times at quarter end up slightly from the prior quarter.

The Glick JV had $147 million of assets.

As of September 30th up from 142 million at June 30th these.

These consisted of senior secured loans to 43 companies leverage at the JV was one four times at quarter end, and we received $1 $4 million of principal and interest would be payments.

It was yourself subordinated note and the glick JV during the quarter.

In summary, we are very pleased with our financial results for the quarter and full fiscal year, we believe our solid portfolio and strong balance sheet position us well for the year ahead, now I will turn the call back to Matt.

Thank you, Chris our strong financial results for the quarter enabled us to generate an annualized return on adjusted net investment income of 10, 7%. We have generated an average <unk> of just under 10% over the last four quarters. While we are pleased with our recent results. We believe Oh C. S. L remains well positioned to me.

Our strong ROE going forward.

First we believe CSL continues to be positioned well for this rising rate environment as Chris noted earlier with the vast majority of our investment portfolio in floating rate assets. We expect that further increases in base rates will positively impact our net interest margin.

Additionally, with our increased leverage target range, we have the opportunity to continue deploying more leverage at the portfolio level. However, we will only grow the portfolio as we find opportunities that are consistent with our investment approach that we believe offer an attractive risk reward.

And as we have discussed on prior calls we continue to benefit from higher are we is being generated at our joint ventures.

The fourth quarter, both joint ventures delivered always in excess of 13% as they are benefiting from the rising rates and modestly higher and higher levels of leverage as they prudently grow their portfolios and.

In conclusion, we are very pleased with our strong fourth quarter and full year financial results against the volatile market backdrop, our portfolio is healthy and we are well positioned to capitalize on this increasingly attractive investment environment with our expanded leverage target and ample dry powder. Thank.

Thank you for joining us on today's call and for your continued interest in OCC yourself with that we're happy to take your questions. Operator, Please open the lines.

Yeah.

Thank you and we will now begin the question and answer session.

That's a good question.

You ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

And at this time, we will pause momentarily to assemble the roster.

Our first question today comes from Kevin Volts with JMP Securities. Please go ahead.

Hi, good morning, and congratulations on a nice quarter.

Let's start with digging in a bit more on the investment landscape and how youre thinking about leverage you had a fairly normal quarter in terms of repayments and on the other side origination activity was relatively light. So I'm curious if that was intentional deleveraging of the portfolio or more so driven by the attractiveness of it that's an option that you were seeing in the market in the September quarter.

Thanks for the question this is armen.

I think part of it is we are just cautiously navigating the markets. We received repayments that were as part of our especially our non sponsor lending activities.

Catalysts that occurred and those borrowers that that generated a repayment we were careful about where we redeployed in how we redeployed.

But also there is a little bit of an end of quarter timing dynamic we did originate a very substantial amount of new deal flow in the month of October that.

Could have happened in the in the fiscal fourth quarter. So we were just really managing a forward pipeline irrespective of the absolute ended the quarter.

But staying quite vigilant on credit quality and not really looking to jump.

I'll jump back up backup the truck and in this current market environment.

Yes.

Okay that makes sense and then my follow up is related to Pik income, which I think on the absolute it's relatively immaterial, but it did increase roughly 16% compared to the June quarter.

Just curious if you could talk about what drove the increase whether that was an amendment driven or if you're if you originated or purchased new investments that were structured with a pik component.

Yeah, I'll give you a general answer the Xyrem and then I'll hand, it over to Chris, but Big picture. We did not have any amendments that were material that caused that increasingly picking comment was origination of new.

New investments, especially in our life Sciences area that are characterized as pick up it is not indicative of any change in credit quality at all I don't know, Chris if you have anything to add to that no longer and I think that covers it great.

Great.

Okay. That's it for me and thank you for taking my questions.

Thank you.

And our next question will come from Bryce Rowe with B Riley. Please go ahead.

Oh, Thanks, just maybe maybe follow up on that line of questioning from Kevin there.

Armenia, yet you noted in the prepared remarks, the 12, 6% yield on the new private deals that you've done so far in October can you can you talk a little bit about the pipeline as the pipeline kind of look what quite that which would obviously be a good thing and then wanted to also kind of dig.

Again to the mix of sales versus repayments for for.

For this for this last quarter, if you if you want thanks.

Sure Yeah, just in terms of the pipeline I would say that the October quarter.

I think is indicative of the pricing that we are generally seeing for our type of deals in the market.

You know we are we are also seeing a broader market widening in more traditional sponsor oriented direct lending as well that got ourselves as well as our peers consider.

So yeah, I mean, I feel very good about.

The pipeline as we sit here today in terms of pricing we are still quite vigilant in terms of credit quality are really not knowing.

How deep a recession, if a recession were to occur you know how how deep will it go you know what when will the markets recover.

So we aren't really looking to.

Significantly increase our leverage and and originate.

Is your pro cyclical so, but yes, I would say generally speaking the pipeline is quite strong and the pricing is meaningfully wider today than what it was nine months ago for example.

In terms of our sales and our and.

A replay of this I don't know Matt Stewart, if you want to if you want to chime in and give a little bit of a sense for the.

Well, a little bit of a sense of that rotation.

Sure, It's Matt Stuart M. It was it was a mix of ball there were some significant repayments received on a few portfolio companies throughout the quarter and then we also sold during the quarter.

A few names either higher dollar priced term loans and rotated into some better opportunities or privates and you also had some lower yielding opportunities.

We've been holding on to for a long time that we were able to rotate into some of the private pipeline that arm had mentioned that came in October . So it was it was a mix of bulk rough numbers is kind of a 75% of repayments and 25% sales on those.

Okay. That's helpful and then maybe one more for me on the.

On the JV, you noted increased levels of income higher portfolios and higher leverage within both.

Our balance sheet leverage with within both J vs is the intention to kind of continue to to build some leverage here or will be level out.

Over the next couple of quarters.

Yeah. This is Arvind I don't think we could give forward looking guidance on that.

But I would generally say that in the broadly syndicated loan market, which is really the majority of the asset base in those joint ventures, we did see volatility in the markets, we saw buying opportunities at nice discounts.

Well structured paper.

And that's why the leverage went up you know because we were buying assets.

But I wouldn't want to make a forward looking statement because our consideration in perception of that market may change.

I couldn't tell you, whether it'll sort of level off here or grow, but we like the we like the positions we own we'd like the physicians, we bought and that's why the leverage went up a little bit. Okay. That's helpful color I appreciate it thanks for taking the questions.

Thank you.

And our next question will come from Erik Zwick with Hep D Group.

Yeah.

Good morning, guys.

Good morning to start just.

Asking a question about the weighted average yield on the new debt commitments out here in the most recent quarter I thought the nine 9%, which was kind of below the 10.6 and in the whole portfolio and I would have expected that to be maybe higher to what you referenced that you're seeing in October with the 12th handle on it. So curious if you could just provide any color whether that was related to.

And you know some certain specific borrowers that were you know larger and maybe lower risk or things like that that drove that yield up.

Most recent quarter here.

Yeah.

I can't say that I have a an apples to apples comparison.

That would help you.

That would help you.

Figure out the differences I don't think that the new origination and in October or is that all reflective of higher risk.

I think it's just kind of you know borrower specific.

Borrowers specific one to the next that that creates a little bit of a delta.

I don't I can't say that I have any sort of specific.

So that would help answer that question.

Yeah. We did he did we did however, we did however.

Yeah, I think one maybe driver of that is we did buy some large hung bridge loans that you might have heard of in the market that we're holding on the bank balance sheets.

As well as some smaller bond issuances that were that were also hung and generally speaking I would say the yield to maturity.

On those positions.

This was lower than what we typically see on a private so I think that might have skewed the numbers a little bit.

But what I would say about those purchases, whether there's a hung deals or the bonds.

They're at dollar prices that are meaningfully lower than the average in the market and create an opportunity for convexity kind of pull it apart.

In the very high quality credit.

And over a recovery period of two or three years, rather than to maturity. The total return opportunity and those types of situations would either meet or exceed that we thought what we typically would see in a near par priced private loans. So I think there is a little bit of a maybe a little bit of a.

Disjoint, there, but when you're buying discounted paper in the public market and you're comparing against near par paper in the private market. There is a yield to maturity difference, but probably not a yield to recovery basis.

That makes sense. Thank you for the athlete explanation there.

My question I had today was regarding I think you mentioned for your portfolio companies. The debt service coverage ratio was down quarter over quarter from three to $2 seven but that 2.7 is still I think meaningfully above a number of your your peer so I'm just curious as you're talking to your company staying in touch with them.

How are they were failing about the the operating environment are they slowing down and investment for growth or potentially.

You know deleveraging and in light of having a younger their interest go up or how are they feeling at this point that you cannot.

Provide any anecdotal evidence there.

Sure and this will be kind of broad, but I would say first of all the the the decline in the fixed charge coverage is mainly due to an increase in base rates.

It isn't really due to any sort of degradation on on in a meaningful way.

Credit quality or performance.

But with that said I would make the following comments. The first is generally speaking companies that we cover in the market either in our portfolio are outside of our portfolio.

Are seeing rising commodity and labor costs and the impact that that has on their bottom line.

And therefore, they are increasing prices. So generically I would say companies are seeing increases in revenue really driven by higher prices rather than greater volumes sold.

But that is being offset by the by the labor and commodity cost inflation and therefore on our cash flow from a cash flow perspective, or an EBITDA perspective, they arent seeing tremendous growth on that line generally I would say yeah. There's some that are doing better on the EBITDA line some doing worse.

And I think they are all being mindful of our cash balances and liquidity.

Because of the uncertain economic backdrop that we're in right now I wouldn't say that anybody is kind of ringing the alarm bells and worrying too much about an increase in default rates right now.

But it is a risk factor that we watch very closely in the market and our portfolio.

And look to you know asbestos we can.

Make sure that we are invested in companies that could or would weather an economic cycle really well with excess cash flows with a built with levers that they can pull to manage their liquidity through what could be.

Rough patch, but obviously nobody knows right now.

That's helpful. Thanks for taking my questions today.

No problem. Thank you.

And our next question will come from Ryan Lynch with K B W. Please go ahead.

Hey, good morning.

First question I had I wanted to follow up on your commentary regarding hung deals I think you said you had two hung deals that you guys participated in in the September .

September quarter, I would just love to hear what was the thought process behind knows those deals how is that in market activity.

Going right now are you seeing a lot of those in the market places that you know more.

Do you expect to participate in and then also.

On the on that note what were the size of those two hung deals and then also where do you guys classify those in your security types are those classified as private placements. Because you guys only had about 4 million of the secondary market I would've thought those would have been classified as a secondary market.

Purchases.

Great. So so we bought $10 million to $12 million of each boats were first lien primary issuances.

I don't think they're listed as private placements for primary primary so we list them as primaries.

On the balance sheet.

Now in terms of the market overall.

These are the hung deals tend to be the largest deals in the market that we're committed to by the investment banks over the last 12 months, they're typically not small deals for those banks or the hole sizes or the commitment sizes for the banks are in the billions.

And so the reason that's important is these tend to be very very large borrowers owned by very very large private equity firms putting in very very large equity checks they tend to be the leaders in their respective industries and so from an underwriting perspective.

Ignoring the capital structure for a moment these companies tend to be quite stable through cycles.

So when we see that we say, okay, well what is the right price for these positions given the underlying market backdrop, and we noticed that in light of how large these loans are and how dislocated. The bank syndication market is right now that there is a technical imbalance that has overshot.

The risk profile of the underlying credits in other words, the technical profile is far worse than the credit profile of these particular investments now are there are a lot of these not really there there are dozens and dozens of hung.

Loans that we would be willing to consider but there are several that are in the market now both in U S and in Europe , and just given <unk> global reach.

We do and are looking at several of these types of situations.

I wouldn't be surprised if we participated in.

In more but they're all.

No considered on a one off basis, they're all sort of credit by credit.

Bottoms up underwriting as we would do in a private deal.

And just taking advantage of the technical imbalance that is causing the banks to sell these positions had material losses and create.

Create an attractively priced and yielding.

Asset for the BDC.

Okay that makes sense and that's helpful color on kind of a thought process surrounding those deals and what youre thinking about going forward.

Another question I had was you know you guys have set out of I think you guys have operated the business had a pretty conservative leverage ratio.

And I think you've spoken about you want to keep a conservative leverage ratio and then during times of dislocation to operate Opportunistically grow.

Average during those those dislocations how would you view today's marketplace, because clearly there's very attractive deals that are occurring in the marketplace. Today regarding spreads leverage ltvs are those sort of things, but yet they're also hasn't been a lot of I would say.

Disruption yet flowing through the financials of those businesses today. That's you know maybe theres, some but that's certainly going to grow over the coming quarters and into 2020. Three so do you view environment today with significantly better structures and terms on deals.

Yet we haven't really seen the financial disruption yet do you view that as an opportunistic environment to grow your portfolio or do you have to see that.

That that decline in fundamentals with each business is first that that looks further dislocate the market, where it would be a time to opportunistically grow your portfolio.

Yeah. It's a good question and I think what you need to do is separate technicals from fundamentals so to your point the fundamentals.

<unk> speaking in the market are showing some cracks.

M D.

I wouldn't say that.

<unk>.

The fundamentals are showing some cracks in the economy.

They are not to the level that I would say is indicative of deep distress or rescue lending opportunities, we have not seen them meet material uptick in rescue lending opportunities at this time I would like.

We did in 2020.

During the second and third quarter of 2020.

We were very actively increasing our leverage profile because we did see those types of both market and economic dislocations that created outsized.

Return opportunities in a very managed risk profile that.

That is not the case right now so fundamentally the economy is it is not at a place where I would say its maximum pain.

However, the technicals in the markets generally are ahead and remain ahead of the economy in most you know normal market cycles.

As equity markets debt capital markets are usually moving in anticipation of fundamental move fundamental changes in the economy and so you will always get a situation where the market overshoots. The fundamentals, but then the fundamentals sort of catch up and and and.

And you have a little bit of normalcy, and sometimes the the markets actually rebound faster and you often see a rebound in the market as the fundamentals in the economy are actually bottoming. If you look at prior cycles that actually occurs quite frequently so it's hard to time, it where you have both occurring you have to be mindful of the structures.

That you've put in place.

And the technical pressures in the market around fund flows that may be causing a competitive dynamic that's less than attractive and you have to weigh that against potential future degradation in economic performance of the underlying companies and their ability to pay their principal and interest and other fixed charges.

So right now what would I say in terms of fundamentals technicals is it a great environment to increase leverage.

Yeah, we're seeing great pricing opportunities, we are seeing widening in sponsor led our sponsor owned private credit we're seeing a widening in pricing and improvement in terms in that regard and the sponsor side as well as the non sponsor side a decline in leverage on a per deal basis I would say generally.

Sponsors are putting in more equity and deals are considering these days versus six or 12 months ago. So all things are pointing to a more rational market. Because there are there are direct lenders and other investors that are have taken a step or a half a step back from the markets and and created a more rational Nick.

<unk> dynamic between borrowers and creditors. So that's good but could it get worse, absolutely and so we are going to continue to reserve our leverage because.

Because we think that there probably will be some alpha generating opportunities in direct lending over the next few quarters.

Okay. That's.

It's helpful backdrop and always do appreciate your.

Our prudent approach to it to investing and deploying capital and utilizing leverage.

I just had one final question regarding the special dividend distribution of 14th sense I understand what what what generated those those gains that you guys had I'm just curious I'd love to hear more about the philosophy around the pay out you guys are doing a one time special dividend was there a reason.

They have to pay that out and in a one time shot before yearend why did you guys consider doing.

More hum.

Supplemental type of dividend that was paid out over multiple quarters.

And and how is that 14th sense calculated did you guys do you guys want to run with a level of spillover income do you guys want to eliminate all of it how is that that number.

For the payout decided.

Yeah, Ryan, it's Matt I'll take the kind of the philosophical parts of it and then Chris can walk through the details, but you know we we considered everything you know we looked at them. It's the first time, we've we've.

We've paid this dividend, but at the end of the day the decision was.

Let's return to capital to the shareholders you know lets not pay the excise tax.

You know it.

Yeah.

The excise tax like 4% so in essence, yeah, let's let's return all the capital to the shareholders and let them redeploy it as they see fit rather than kind of using it.

To build the app or a fund internally and pay and pay the tax so that's that's yeah.

That's where we came out philosophically on this and I know some of our peers do two different things, but for us it was.

That's a thought to avoid the excise tax let's pay the distribution to the shareholders.

That's what you know kind of that was the amount of that of of kind of the attacks and I'll. Let her that the income I'll, let Chris talk specifics, but that's philosophically that's kind of how we where are we where we landed.

Yeah, I think Matt I think you covered it pretty well, but that's right you know we looked at what our taxable income was for.

For the year.

You know, what what we would need to pay out to try to minimize or outright avoid that excise tax and that's where we shook out with respect to the 14th special.

Yes.

Okay was there any thought of paying that out over multiple quarters or anything like that or why was the decision to pay before you kind of won one go in and did the you know the closing up the merger to pay that out before that did that have anything to do with it now.

The merger had nothing to do with it. It was it was really it's a it's a it's a calendar year in kind of item. So we paid it out for the calendar year end.

Yeah.

It's just kind of our approach.

But yeah, the merger had nothing to do with it.

Okay I appreciate the time today guys.

And once again, if he would like to ask a question. Please press Star then one.

And there are no further questions I'd like to turn the conference over to Michael with D. C O for any closing remarks.

Thanks, Paul and thank you all for joining us on today's earnings conference call. A replay of this call will be available for 30 days on those two yourselves website in the investors section.

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Yeah.

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