Q3 2022 Owl Rock Capital Corp Earnings Call
Hello, and welcome to the Owl Rock Capital Corp, Q3, 2022 earnings conference call and webcast. At this time all participants are in a listen only mode.
Anyone should require operator assistance. Please press star zero on your telephone keypad.
Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded its now my pleasure to turn the call over to your host Dana Sclafani head of Investor Relations. Please go ahead Dana.
Thank you operator, good morning, everyone and welcome to Owl Rock capital Corporation's third quarter earnings call. Joining me. This morning are Chief Executive Officer, Craig Parker, 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 statement.
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 the forward looking statements as a result of a number of factors, including those described in our SEC filings with the SEC.
The company assumes no obligation to update any forward looking statements.
Certain information discussed on this call and in our earnings materials, including information related to portfolio companies was derived from third party sources and has not been independently verified the company makes no such representation or warranty with respect to this information or Ccs earnings release, 10-Q, and supplemental earnings presentation are available on the investor.
<unk> section of our website at Owl Rock Capital Corporation Dot com with that I'll turn the call over to Craig.
Thanks, Dana good morning, everyone and thank you all for joining us today.
We are pleased to report very strong results and are announcing today, a number of shareholder friendly initiatives that reflect this strength.
Our net investment income in the third quarter was 37 cents per share up five from last quarter.
20% in excess of our previously declared <unk> 31 per share quarterly dividend.
This is the highest quarterly NII, we have earned since the first quarter of 2020.
We are very pleased with the significant growth in earnings, which was largely driven by the pull through of higher rates on our investments.
We have seen a dramatic move in base interest rates.
<unk> up roughly 350 basis points this year.
The impact of this move drove our third quarter results and will further increase earnings in the fourth quarter.
The earnings power of our portfolio is strong and growing.
We are announcing today that we expect to earn at least 39 of net investment income per share in the fourth quarter.
This estimate assumes a continuation of the very low repayment environment, we have seen.
Any increase in repayment activity in future quarters would provide further upside to NII.
We are putting out this guidance because we have clear visibility on the impact that electric base rates will have on fourth quarter NII and we are confident in our portfolio.
The credit quality of our borrowers remains strong.
As seen in the consistency of our internal portfolio ratings and average marks of our investments as well as the two 5% increase this quarter.
<unk> per share to $14 85.
We are also announcing several capital actions to ensure that our shareholders benefit from this earnings momentum.
First we are increasing our regular quarterly dividend.
Our board has declared a fourth quarter dividend of 33 per share up <unk> <unk> from our third quarter dividend of 31 per share.
We also want to ensure our shareholders benefit from the consistent earnings we expect in excess of our regular dividend going forward.
As such we are introducing a new quarterly supplemental dividend in addition to our regular dividend.
For the third quarter, our board has declared a supplemental dividend of <unk> <unk> per share.
Jonathan will discuss the framework for this dividend in more detail later in the call.
Assuming the supplemental dividend is constant in the fourth quarter.
A combined 36 per share dividends would generate an annualized yield of 12% at occ's current trading levels.
We believe the increase in the regular dividend and the addition of the supplemental dividend is a balanced approach to maximize distributions to shareholders.
The increase in our regular dividend reflects our confidence in the earnings power of the portfolio and positions us to evaluate further increases in the future.
While the supplemental dividend provides additional predictable cash flow to shareholders.
While fundamentals are strong and we are increasing shareholder distributions our stock continues to trade at a significant discount to NAV.
As a result, we are also announcing that OCC and blew our employees each intend to purchase stock in the open market to take advantage of this discount.
First Occ's board authorized a new $150 million repurchase program, which replaces our previous program.
Our employees have opted to participate in that investment vehicle that intent to buy an additional $25 million of overseas feedstock.
In the near term the company plan and the investment vehicle intend to purchase $75 million of stock in aggregate.
A portion of which will be executed under programmatic <unk>. One plans. So they are able to continue buying after the trading window closes.
Our board and the Blue all employees believe it is an attractive time to be buying OCC shares and we value this alignment between the company.
All employees and our shareholders.
I would also like to spend a minute on the economic outlook.
The current fed monetary policy environment market consensus expectations indicate we will enter a recessionary environment in the near term medium term and we are well prepared for that outcome.
A recession in conjunction with the higher rate environment will likely cause increased pressure on borrowers in the leveraged finance market and elevated levels of credit challenges.
As we have said many times since inception, we have been in upper middle market lender.
We believe this approach positions us well coming into this environment that our companies will fare better than most.
Our borrowers are large with an average EBITDA of approximately $160 million and benefit from strong competitive positioning we believe larger companies were able to generate more stable results as they benefit from deeper customer relationships and increased pricing power with suppliers there.
They have greater financial flexibility, often benefiting from noncore assets, they can sell to enhance liquidity or de lever.
And our office strategically important in their market, making them attractive to acquirers.
We are always focused on investing in stable non cyclical annuity life businesses and sectors like software insurance brokerage and health care.
Our investments are primarily first lien loans and are supported by significant equity cushions with an average loan to value ratio of roughly 45%.
The vast majority of our investments are supported by sophisticated financial sponsors who.
We will provide both operational and financial resources, which is particularly valuable evolving economic conditions.
We recognize that some companies will have challenges over the life of our investments and have built a robust portfolio management process, which allows us to proactively identify areas of concern.
Who work directly with our borrowers to understand and mitigate issues.
To date, we have not yet seen evidence of economic weakness in our borrowers operating performance.
Across our 180 portfolio companies. The vast majority saw top line revenue growth and their latest financial reporting with an average increase in revenues of 7% and EBITDA up 4% quarter over quarter.
Of course, we're not just looking at the current performance of our borrowers were also looking forward and are acutely focused on the impact of a higher rate environment on cash flows.
We have roz various sensitivity analysis looking at implied interest coverage in a period, where higher rates are sustained and reflected in our full year cash flows even in these scenarios. We believe that the vast majority of our borrowers will maintain adequate interest coverage cushions.
In addition, most of our borrowers are entering this period with ample available liquidity.
And we believe most would benefit from additional sponsor support if needed.
So while we remain vigilant, we take great comfort that our portfolio was built to endure challenging times and we believe any defaults or ultimate losses in the portfolio will be manageable, especially in light of our material of our materially higher earnings trajectory.
With that I'll turn it over to Jonathan to provide more detail on our financial results.
Thanks, Craig.
Ended the third quarter with total portfolio investments of $12 8 billion outstanding.
Outstanding debt of $7 2 billion.
And total net assets of $5 8 billion.
Our NAV per share was $14 85.
First our second quarter NAV of $14 48.
An increase of two 5%.
This increase was driven by the continued strong credit performance of our borrowers and a relatively flat spread environment.
At quarter end, our net leverage remains within our target range at one eight times net debt to equity.
Slight decrease from last quarter.
Repayment activity remained low in the third quarter, which drove a modest quarter of originations given the portfolio is fully invested.
We also ended the quarter with liquidity of $2 $1 billion well in excess of our unfunded commitments of approximately $1 billion.
Roughly half of which are revolvers.
Turning to the income statement.
Our net investment income was <unk> 37 per share <unk> <unk> above our previously declared third quarter dividend of <unk> 31 per share.
As Craig mentioned earlier, our board declared a <unk> 33 per share regular dividend for the fourth quarter, which will be paid on or before January 13, 2023 to shareholders of record as of December 31.
This <unk> increase in addition to the three supplemental dividend represents a 16% increase in our quarterly distributions.
I'd like to spend a few minutes discussing the framework for the new supplemental dividend, which is also laid out on page 17 of our earnings presentation.
The supplemental dividend will be variable each quarter.
<unk> at 50% of NII in excess of our regular dividend rounded to the nearest penny and subject to certain measurement tests.
It will be approved by our board announced with quarterly results and paid in the following quarter.
Yes.
So for the third quarter, our board declared a supplemental dividend of <unk> <unk> per share, which is 50% of the difference between our NII of <unk> 37 per share and our previously declared <unk> 31 per share third quarter dividend.
This supplemental dividend will be paid on December 15th to shareholders of record on November 30.
Yes.
As a result, OCC shareholders will receive a dividend eight times a year we.
We are also accelerating the dividend payment date going forward to roughly 15 days from the record date.
It will allow us to deliver income to shareholders in a more timely manner.
Turning to our balance sheet we.
We have a flexible balance sheet with a well diversified financing structure.
With only 50% of our liabilities exposed to rising rates, our weighted average total cost of debt remains low at four 3% and we have no maturities until April 2024.
From an earnings perspective, we are experiencing a meaningful benefit from rising rates on our investments, which is driving materially higher interest income.
In the third quarter, the average base rate for our portfolio was roughly two 3%, which reflects a mix of phase III elections that effect for the quarter.
We have visibility that our average base rate will increase in the fourth quarter as the elections made as of September 30th have already increased the beginning average fourth quarter base rate to approximately 3% with.
With the likelihood that it will further increase during the quarter as more resets take effect.
Looking forward holding all else equal we expect each additional 100 basis point increase in our effective fee rate from the third quarter's rate of two 3% generate approximately <unk> <unk> per share or a roughly 11% increase in quarterly NII. After.
During the impact of income based fees.
With that I'll turn it back to Craig for closing comments.
Yeah.
Thanks, Jonathan.
The current market opportunity for direct lending is probably the best we've seen since we started our rock in 2016.
Public markets are effectively shut and sponsors are primarily turning to direct lenders.
Our new loans, we are typically earning more than 11% with extended call protection attractive leverage profile and credit protections for high quality strategically important companies.
Given our scale and resources, we're continuing to see solid deal flow and having excellent competitive success and leading a highly attractive investment opportunities.
The opportunity set has further swung our way and we expect that to continue.
However, our discussions with shareholders, we know the topic on their minds is not a market opportunity, but rather the dynamics driving OCC share price, which currently trades at a significant discount to net asset value.
Often this gets frame to us when shareholders ask is there something we're missing.
We believe the answer is no and that Theres a disconnect between where OCC is trading relative to the fundamental credit quality of the portfolio and the future earnings power available for distribution to shareholders.
To put this into context, the current OCC valuation is implying a default rate of more than 20% on the entire portfolio and a 60% recovery rate.
This default rate would be a far worse default rate than the 10% default rate that the leveraged loan market experienced in the great financial crisis.
In the downturn any credit challenges with typically first show up in the form of amendment requests and additional capital needs from our borrowers to date, we have not seen any increase in activity that would indicate heightened stress in our portfolio companies.
We are not seeing any increase in amendment request any increase in request for extra funding or revolver draws or any request to pik loans for performance reasons.
Our watch list remains around 10% or about 15 companies brand has stood for the last two years.
Although we had one small additional nonaccrual this quarter, our non accruals remain much lower than the industry average.
We are extremely careful in our evaluation of accrual status and I would highlight that 90% of our loans are marked at 95 or higher.
100% of our borrowers are current on their interest expense and we have no loans that are in uncured covenant violation.
Another key data point for the health of our portfolio is our quarterly valuation process and corresponding marks.
We have previously highlighted our consistent practices since inception, but feel it bears repeating now.
Every quarter, we use a third party valuation firm to Mark every name in our portfolio.
They provide a valuation point not a range.
The marks on our investments largely increased this quarter, reflecting the continued strong credit performance of our borrowers and relatively flat market spreads.
In addition to the stability of our investments there was also clear evidence of the improving earnings power of our portfolio.
Our portfolio level asset yield has increased to 10, 2% up over 200 basis points from the beginning of the year and we will further increase with higher rates.
Our earnings this quarter well exceeded expectations.
We have put out guidance for a further increase in the fourth quarter.
Of course, a weakening economy will create some portfolio issues, we do not expect to nor.
Nor will be perfect.
We will see some challenges and could see defaults tick up from the current levels, which are at historical lows.
However, we believe these issues will be manageable and the significant increase in earnings we are experiencing will more than offset any modest pick up in losses.
We are also very proud to have paid the same regular dividend since our IPO, even through Covid and are excited to take this step today to raise our dividend, which we believe we can comfortably cover going forward.
And in light of Occ's earnings trajectory. We think the addition of the supplemental dividend enhances our distribution profile, while leaving us flexibility to evaluate further increases in our regular dividend if performance warrants it.
Further we are pleased to demonstrate the commitment and alignment between the company Blue all employees and OCC shareholders through the new share repurchase initiatives.
Since inception, we have successfully delivered on the objectives, we laid out for the company.
Our returns continued to improve generating an ROE of over 10% in the third quarter up 100 basis points from last year and our credit performance has been one of the best in the space with a loss rate of less than 15 basis points per year since inception.
In the aggregate we hope these comments and the actions we are taking data high level of confidence we have in the outlook for RCC and.
And underscores our continued commitment to deliver value to our shareholders.
With that I will thank you for listening and we will open the line for questions.
Thank you, we'll 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. We ask you. Please ask one question one follow up then return to the Q1 moment. Please while we poll for questions.
Our first question today is coming from Mickey <unk> from Ladenburg Thalmann. Your line is now live.
Yes, good morning, everyone.
Craig Thanks for your in depth prepared remarks, it's it's very helpful.
I wanted to ask a high level question in terms of the volatility in this market environment and how that may be impacting the amount of demand and the sort of demand for your capital.
<unk> been very successful in disintermediation other channels and my sense is that if anything thats accept.
Okay very helpful. Thank you.
Sure. Good morning, Mickey you cut out at the end, but I think I got the gist of your question.
So.
Youre right I mean, we we think this is maybe the best environment. We've seen since we started the business the public markets are shut.
It's well reported that the banks are sitting on $50 billion of leveraged finance inventory that they were unable to sell.
And therefore, they are very unlikely to want to underwrite new deals and if they do the terms will be.
Really difficult to accept and so really I think most if not all opportunities that private equity firms are working on are coming direct to direct lenders.
And Fortunately we are we feel like we're at the top of that list and we're getting called on pretty much every opportunity out there and we get to pick and choose the ones that we find the most attractive.
We have capital across our platform and.
Though it has decreased bite size from our peak, it's more than almost any other lender out there and so we're using it in a selective manner for attractive credits were getting wider spreads today.
We're getting routinely 700 over shell first we're earning more than 11% on unit tranche investments.
Getting more fees more call protection, just general better structures.
So and there are enough deals for us to be very active there certainly is not the same level of deal flow that we saw prior to the market volatility, but since all of the deals are coming in direct lending.
Theres more than enough demand for our capital and frankly, our conversations with the private equity firms. They wish we had more capital theyre, giving us the opportunity to do as much as we would like in each deal and.
And that's sort of pushing us to allocate our scarce capital to their deals. So it is a great environment OCC is fully invested at this point, we're going to continue to stay in our target leverage range and so our deployment out of RCC, specifically is going to be driven as much as anything by repayments, which remained very modest but across the.
Our rock platform.
This is.
Very active time in some of our ramping funds, where we are putting out a considerable amount of capital.
I appreciate that Craig that's really helpful.
And in your prepared remarks, you said that by and large the portfolio is not really showing signs of.
Consistent credit problems, but you did have this one new nonaccrual and I was wondering if that was idiosyncratic or is there something that that company is facing the other.
Other portfolio companies that you've invested in May may start to see as we go into next year.
Sure. So Walker Edison, we put on nonaccrual, it's about an $85 million position I think the issues. There are specific to that company I don't think theres any read through to two.
Two other portfolio companies. They are a supplier of affordable ready to assemble home furnishing So think TV stands.
Consoles.
They were impacted by two things one supply chain issues and two it really benefited from Covid and stay at home and while we had underwritten that that would.
Return to work would impact them I think it impacted them to a greater extent than we had expected. So no no particular read through to the rest of rest of our portfolio.
And we're going to continue to work with the company and the sponsors there, but we felt at this point it was appropriate to put it on non accrual.
I understand that's helpful.
Thats. It from me. This morning I appreciate your time as always and congrats on a very good quarter.
Thanks Mickey.
Thank you. Your next question today is coming from Robert Dodd from Raymond James Your line is now live.
Hi, guys. So just on the theme of <unk>, congratulations on the quarter as the new dividend program et cetera, but on the team.
Of credit I mean, as you said correct I mean, 10% of the portfolio on your internal watch list Walker Edison was was one of your most markdown asset so it's been well flagged.
Ken.
In advance of going on.
But can you give us any more color about any themes.
Yeah, probably just inflation et cetera et cetera in the tail of the portfolio. She said that the vast majority of fine that means one minus the vast majority of there were some incremental problems can you give us any color on what the themes of there and you said you are not seeing amendment requests.
When when do you think that might start to happen.
Sure.
Look I don't want I don't want to skip the headline the vast majority of our companies are doing really well, 7% revenue growth, 4% EBITDA growth.
And Thats really the message, we certainly have companies that have had issues and it's really the same group of companies. This quarter that would have showed up.
Year ago, or 18 months ago.
So they're the issues are not different.
Then than they were because the companies have idiosyncratic things going on in their business.
I will certainly acknowledge that.
There is there is margin pressure and the companies that there is strong demand.
I think across the board.
Economy remains strong.
But there is margin pressure, which depending upon the company depending upon the sector will show up as increased labor costs increased supply chain increased commodity prices.
What have you and so there is some margin pressure.
Throughout the portfolio and that's why the EBITDA is not growing as fast as the revenues.
We're not seeing say.
When is it going to show up.
<unk>.
I hope it never shows up.
We are not seeing declining results, but we understand that.
That the fed is quite clearly committed to.
Two addressing inflation theyre going to keep raising rates until inflation comes in line and at some point.
Most people and we certainly would expect that to cause an economic contraction.
So when that happens.
It stands to reason that that will pressure some of our companies are they are they are certainly paying higher much higher interest rates. They don't have as much cushion as they did.
And so that will start to pressure.
So.
The answer to your question is you tell me when.
When when the economy will slow and that was when we will see a pickup in amendments and the like.
Yes.
I, just don't know second quarter third quarter, it's just guesswork at this point, but it's not any different guests worked for us than it is for any other lender or any other vendor out there, but I will tell you.
It's it's the portfolio and the companies are doing I think meaningfully better than the way our stock is trading our stock is trading as if we're having lots of issues in the portfolio and we are not.
Understood I think hold on.
All the sentiment currently is credit is doing a lot better than the stock market makes it look like so.
One more follow up if I can kind of flipping the other way on when its going to happen pre pay activity and repayments, obviously, obviously low again.
Expected that.
And your guidance assumes that that continues for Q4.
How long do you think that can persist.
Can essentially.
Yes.
Do you think we'd likely to see some rebound in that next deal or is it just going to persist.
As long as the states.
Clarity and economic outlook.
And the idea any color.
Sure.
We obviously track carefully the maturities of all of our borrowers and there's not a there's not a significant pickup in maturities in the next year or really even the year. After so theres not a contractual reason why we should see repayments pick up.
I think it's going to be driven by bye bye.
A general resumption in M&A activity.
Which is I would expect to happen when there is just a little more clarity.
Out of the course of the.
The rate environment and the economy.
Right now most private equity firms they have lots of capital.
But theyre looking at the same factors, we're talking about and they would like to pay less for companies because they're taking into account. Some of this near term uncertainty sellers don't want to sell for less and sell there.
Isn't really an ideal time to put the company up for sale because you don't want to take less than I think they perceive that whatever issues were going through now are going to be relatively manageable duration and so theres a bit of a standoff typical ebb and flow of an M&A cycle is nothing profound at some point you get clarity on the economy clarity on rates and I would expect M&A.
Activity to pick up so again.
Yes.
Just be totally guessing, but by the second or third quarter of next year could you see that in by certainly by the back half of next year or are we seeing repayments pick up it's certainly possible, but we just to be clear that's for.
For Occ's earnings Thats, all upside we've baked in like really low repayments for the foreseeable future and all of our commentary on guidance and the tone that we've struck and the dividends that were paying and so to the extent, we get that that's all going to improve NII in fall to the bottom line.
Got it I appreciate it thank you.
Thanks Robert.
Thank you. Your next question today is coming from Ryan Lynch from <unk>. Your line is now live.
Hey, good morning.
Nice quarter, guys and really appreciate the very thorough prepared comments over your business.
One question I did have was.
If you look at your guys' prepared comments regarding kind of the interest rate environment Youre talking about spreads increase seen in gain wider which is providing a more attractive investment.
Opportunity, but yet in the quarter.
Your overall portfolio was written up in I believe it was written up mostly just kind of overall increase in fair values of your debt portfolio, which would assume I think.
That's a fair value.
Valuation process I assume maybe tighter spreads in the evaluation process. So I'm just trying to square those two.
Why was the portfolio overall written up pretty meaningfully, which obviously is a good thing, but I'm trying to understand why the portfolio was written up this quarter pretty meaningfully.
Sure. So just as a reminder, Ryan I know you know this but for the broader group we use the same process. This quarter as we have every single quarter since our IPO.
Frankly, since the inception of al rock, even when we were private BDC, we use a third party evaluation firm named Mark every name every quarter since inception same methodology same practices same discussion.
As you know when we make a new investment it goes in at our cost basis typically call. It 90, 898 and a half depending.
If theres no change to the credit performance or market spreads.
That loan will accrete to par over the life of the loan. So there is general upward trajectory on the marks of all of our names all else equal because they're marching towards their maturity.
The valuation firm that we work with looks at a number of market indices.
To make the judgments about the market spread and.
In addition to the credit performance.
And they look at the same metrics that they've looked at since inception, and the second quarter Youll recall public spreads, which is which are the most visible or meaningfully wider about 150 basis points wider than public loan prices were off about five points. So a meaningful move in the second quarter.
In the third quarter and I know this may surprise, some that don't stare at these market indices every day.
Spreads were basically flat in the public markets in the third quarter, depending upon what index you look at instead of 150 basis point move there was a less than 15 basis point move wider and public loan prices were basically flat quarter over quarter.
Our book continues to have really strong credit performance and so given that strong credit performance most of our loans not only March continue to March to par, but some of them were improving credit performance and had a bump a bit more than that so basically the march to par and a relatively flat spread environment resulted in and move on.
Asset prices are about a point, which is not a dramatic move but I recognize that there are others out there that had modest nap decreases so our asset prices are up about a point and yet and leverage you've got a two 5% increase in NAV.
The average mark in our portfolio is about 97% to see you have some frame of reference.
So it was.
In a relatively spot flat environment for market indices, good credit performance.
You saw a modest increase in NAV up two 5%.
Okay understood thanks for going through that.
That exercise.
The other question that I had was just on the share repurchase I would love to hear your framework of where you guys see the allocation of capital to the share repurchase today at these sort of valuations in the past you guys have had a share repurchase in place. It didn't have I believe the programmatic features that you have.
<unk> and <unk>.
And this new share repurchase so it gives you more flexibility, but I would assume you have to sort of set levels.
That you wanted to be purchasing repurchasing shares at <unk>.
Given the current market opportunities to deploy capital, which has obviously gotten better over the last six months.
Where do you view <unk>.
Share repurchases in comparison to opportunities to deploy capital and how does that change.
If your valuation would increase higher from here or lower from these levels.
Sure.
So we.
We replaced our previous program of 100 million Bucks with a new $150 million program and as you know, we're introducing a programmatic element and the reason for that is and we get asked this a lot why haven't you bought stock.
We are like every public company there are windows, where we were able to buy stock in their windows, where we can and frankly the windows.
The window, where.
Well, if you look in the past year, and we don't disclose the windows, but I will share with you that when the windows have been open stock has traded at a relatively higher multiple of NAV and the more.
Lower valuation periods have coincided with when the window is closed which is frustrating and so when we put in place. This new program, we wanted to address that and by putting in the programmatic piece to it that allows us to buy stock even when the window is closed and we have to as you're as you're alluding to we've got to put it.
Some metrics around that the volume and price.
So we will do that.
And we will give ourselves the flexibility to take advantage of weakness in the stock.
Generally when the Windows have been open stock is traded at <unk> nine NAV or higher.
They were about <unk>, eight NAV or higher so I won't be specific to take draw conclusions from that but it's a lot a lot more attractive now than it has been when the windows have been opened before.
In terms of just some directional sense.
At 0.8 of NAV, that's about a 12% yield.
I've already commented today, we're able to extend the first lien term loans at about a 12% yield and so there is you could you could make an argument in both directions on the relative attractiveness, keeping the permanent capital, making new investments.
Versus versus buying back the stock at 0.9 of NAV, It's 11%. So certainly in this environment I think I think most shareholders would say you'd rather have us create assets of 12 and buy the stock at 11. If you go below <unk> eight obviously, you've got to quickly get to 13% 14%.
But I will say this we're really frustrated by where the stock trades hopefully that's clear in our actions and what we're doing.
We are where we are given the visibility on earnings performance and while there are attractive investment opportunities. We think it's important that we also address the stock price and the stock buyback as a way to do that and so we're not going to shy away from it either.
I would also add that as I've said, we've got employees upload <unk> are also going to buy shares in the stock and Theres a lot of it was.
Totally optional program that we got very high participation rate in and they obviously know the portfolio quite well. So hopefully that's all red as a sign of confidence in.
And what we're doing.
Okay understood.
I think that makes a lot of sense and I think that does show a nice vote of confidence.
From from the team.
That's all from me I appreciate the time today.
Thanks, Brian .
Thank you as a reminder, that star one to be placed in the question queue.
Our next question today is coming from Kevin <unk> from JMP Securities. Your line is now live.
Hi, Good morning, and thank you for taking my question.
I just wanted to dig into the investment landscape a bit more given the evolution of market conditions over the past three to four quarters I'm curious if you could talk about how that is translated the deal pricing leverage for improved documentation and deal with the originating right now compared to six to 12 months ago.
Sure.
As I said a bit ago, but I'm happy to spend a little more time on it it's a terrific environment for US. These are some of the best investment opportunities that we've seen in six years.
In terms of spreads.
Well, it's hard to be precise about this but call. It nine months ago spread on unit tranche term loans was as tight as $5 50 over.
Today that spread is more like 700 over it depends on the credit summer wider somewhere at 675 over but let's call. It 700 over.
Obviously the base rate nine months ago was 1% we're at our floors. So that was six 5% today.
It's 4% so.
<unk>.
It's 11.
It's almost double just by taking the break this spread in the base rate in addition.
<unk>, we were getting maybe two two and a quarter points in fees today, we're routinely getting as much as three.
Previously our call protection was maybe 101 for a year and then it would go down to par obviously, we don't want to extend capital today only to get repaid in a short period of time. So we are consistently getting call schedules of one O. Three 100 to 101, which means if a loan gets repaid in say the second year.
We've got another two points of return so that adds another 1% annual annualized but I think the most important part point is not the economics. The economics are really attractive, but we're also able to get really good leverage profiles and document structures.
So that we're making great investment decisions.
And so it's harder to be to generalize it depends on the credit, but just on the margin.
There's less capital for each deal, where all underwriting to recession environments, and we're just making sure that everything we're doing is kind of work in this higher interest rate environment in terms of leverage and cash flow and covenants and structure and all the things that we do every day and.
And so I think theres vintage is extremely attractive.
And <unk>.
Both for the economics for the structure.
That's all really helpful. Craig and then a follow up I. Appreciate the detail you provide on a typical borrower borrower profile around how revenue EBITDA and interest coverage are trending can you provide an update on where a portfolio company that leverages currently and how that has trended over the past few quarters.
Sure.
Yeah.
I can tell it we can call you separately with like precise numbers, but generally it's in the low to mid sixes of leverage give or take an interest coverage is at about two five times.
Okay. That's helpful and thank you for taking my questions and congratulations on a really nice quarter.
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Thank you next question today is coming from Kenneth Lee from RBC capital markets. Your line is now live.
Hi, good morning, Thanks for taking my question.
Just a follow up question on an earlier went around the deal flow.
You talked about seeing a solid deal flow just wondering how that squares with the potential slowdown in M&A activity.
What's driving the deal flow there. Thanks.
Sure I think the single most active pocket for deal flow is in the technology area and software.
Which is a sector that we really like and have its our largest sector across our platform and the largest single sector within RCC, but as folks probably know we have we have several other funds that invest.
Exclusively in technology.
So what youre seeing is private equity firms are looking at some really attractive businesses that are publicly traded with very predictable contractual revenue streams significant growth very sticky business models and their stocks have traded off to the point, where they are attractive take private candidates there is no.
Been a number of these I won't go through them all on this call I think folks generally generally aware of them and we are a leader in providing financing for those take privates.
And so it's an area that we really like we think there is some of the very best credits they have an even lower loan to value than our typical deal in.
Set of 45% many of them is 30%, 35% some less than that 2025%, we get even wider spreads than what we've been talking about good covenant packages, we think they're in.
An area you need domain expertise to be able to underwrite we have it and we're doing it and so thats and these deals are large they're $1 billion to $3 billion at a clip and so in an environment, where many direct lenders don't have as much capital as they did before and we do we can write very substantial checks for those deals and we <unk>.
Been doing that to great success, the other area, where youre seeing activity as the sponsors existing portfolio companies doing add on acquisitions and they are coming to us for more modest amounts of capital to help them continue to grow even in this environment.
Those deals don't make the newspapers they are small $100 million here $150 million there for existing portfolio companies, but obviously, that's the power of incumbency and we have at this point, we've got 300 companies.
Their lender and so they are coming to us to provide that capital what's interesting about that about that dynamic is I would say pretty pretty routinely when we provide that additional capital.
Most of our loans will have some type of MFN structure, essentially where we are repricing the existing loan that we already have.
In conjunction with pricing that incremental capital for the acquisition and so youre seeing and you saw this quarter spreads on our portfolio widened again for the fourth quarter in a row, because we're able to get increased spread on our existing book just by being willing to extend additional capital and sort of taking advantage of that of that.
MFN provision.
So there's plenty to do again OCC itself doesn't have a lot of capital to put out so it doesn't take much deal flow, but across the platform, we're finding robust opportunities in.
Find ourselves in a leadership position in most of the deals that are happening.
Gotcha Gotcha very very helpful. There.
Just one follow up.
And this is also another follow up on an earlier question.
About the the unrealized gains.
And you mentioned doing doing the finalization process a lot of it is driven by much stronger credit performance.
I assume that the credit performance is being driven by the revenue and EBITDA growth that these portfolio companies have been seeing or are there any other factors to note there.
So the single biggest driver of the.
Unrealized gain is just the lapse of time for credit even if it's doing flat that we were just accretive <unk> the loan that's marked below par.
Average loans of 97, we're just creating at the par if the entire credit performance of the portfolio was flat and the markets are flat.
<unk> will go up that is the driver. However, we've certainly had companies that continue to do well within that subset and so they may go up modestly more than the average.
The message is not that we're making some aggressive judgments about how strong companies are doing the messages. We have a large portfolio of performing loans that we feel really confident we can get repaid at par at their stated maturity and theyre going to we're going to continue to accrete up to par and then some of our outperformance will mark up.
More than that.
Got you.
Very helpful. Thanks again.
Thank you.
Thank you we've reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Thank you so much everyone for joining this was a really important quarter for us we put a lot out there in terms of rising dividends forward guidance buybacks.
And the like.
We welcome calls and follow ups, if folks want to talk more about it portfolio is doing really well and we.
We want to make sure we're accessible and if you have any questions or concerns. Please do reach out we'd love to have a chance to chat and with that I Hope you all have a great day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.