Owl Rock Capital Corporation Q1 2023 Earnings Call
Yeah.
Good morning, and welcome to the Owl Rock Capital Corporation first quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation, if anyone should require operator assistance there.
The conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to our host Dana Sclafani head of IR. Thank you you may begin.
Thank you operator, good morning, everyone and welcome to Owl Rock capital Corporation's first quarter earnings call. Joining me. This morning are Chief Executive Officer, Greg Packer, Our Chief Financial Officer, and Chief Operating Officer, Jonathan Lim and other members of our senior management team.
Like to remind our listeners that remarks made during today's call may contain forward looking statements 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 the forward looking statements as a result of a number of factors, including those described in our SEC filings.
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 representation or warranty with respect to this information.
Do you see the earnings release 10-Q, and supplemental earnings presentation are available on the Investor Relations 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 another quarter of very strong results driven by continued growth in earnings and strong credit performance.
Net investment income for the first quarter was 45 cents per share a four cent increase from the prior quarter and a 14th that increase compared to a year ago.
This is a new record quarterly NII for the company.
I want to start by putting this strong quarter in context.
Going into the third quarter of last year, we were confident that rising rates and continued credit performance, we're going to drive significant improvement in earnings.
As a result, we increased our regular dividend by two sets and they added a formulaic supplemental dividend to a quarterly dividend structure.
We recognized that we would significantly outperform the regular dividend and a rising rate environment wanted to create a predictable mechanism to share that upside with shareholders.
Compared to the second quarter of 2022, the average base rate in the portfolio increased roughly 300 basis points and the NII has grown by over 40%, which has driven the growth in our supplemental dividend.
For the first quarter, our board approved a supplemental dividend of six cents per share, which is an increase of two cents from the prior quarter.
This is in addition to our previously declared <unk> 33 regular dividend.
Which results in total dividends of 39 cents for the quarter.
In total this represents an annualized dividend yield of over 12% based on the current share price, which we believe is very attractive in today's market.
We also delivered an orally <unk>, 1% for the quarter.
And we would expect to deliver an Roe.
In excess of 12% over the full year based on our current outlook for rates and credit performance.
Our continued earnings growth is complemented by the strength of our portfolio net asset value per share increased to $15.15 up 16 cents or 1% from the fourth quarter.
The majority was driven by over earning our dividend by eight cents and by roughly eight cents of net realized and unrealized gains in our portfolio.
The average mark on our debt positions this quarter increased to 97 six.
97 last quarter. However, the primary driver of this change was the improved marks on certain debt investments, which were restructured during the quarter.
Excluding those.
What's changed in the Mark on the remainder of the debt portfolio was roughly 15 basis points.
We also benefited from the increase of the Mark the equity investment in our senior loan fund, reflecting improved public market loan trading levels.
In addition to higher rates our results were driven by the strength of our credit quality, which is reflected in our very low non accrual rate, which stands at just two 3% of the fair value of the portfolio.
With only two names on nonaccrual as of quarter right.
We're very pleased with these results and believe we are in a position to maintain this level of earnings power and credit performance in today's environment.
That said, we continue to expect and are prepared for more challenging conditions in the back half of the year.
Like many in the market, we had been anticipating a shift in consumer demand on the back of the higher rate environment.
Subsequent contraction in the economy.
We remain vigilant and are proactively analyzing our portfolio.
So more to last quarter, we have not yet seen any early signs of challenges across her borrowers who continue to deliver stable operating performance.
Revenue and EBITDA are growing at a modest, albeit slowing pace.
LIBOR borrowers are experiencing improved profitability as a result of receding supply chain disruptions and lower input costs.
We also take comfort that our portfolio is primarily comprised of senior secured first lien investments with low loan to values across companies that have strong financial sponsor back.
We're closely monitoring the interest coverage levels of our borrowers.
As we expected reported interest coverage.
To decline, finishing the quarter with a weighted average coverage ratio of 2.2 times, we fully recognize that the current rate environment as it works its way through borrowers financials will reduce interest coverage levels over the course of the year.
We believe average interest coverage on our portfolio will trough around one and a half times the second half of this year.
This will undoubtedly pressure liquidity at some borrowers more than others. However, we believe we have good visibility into the small number of borrowers which could be most effective and therefore, we think that these challenges will be manageable.
Further as we've said before most of our borrowers benefit from financial and operational support from sophisticated financial sponsors.
Boxes are also preparing for a tougher environment later in the year and we've seen sponsored positioning their companies more defensively.
This includes cutting costs, putting projects on hold and shoring up liquidity.
Lastly, when these situations do get more stressed we have the tools in place to ensure that we are in dialogue early and often with borrowers and their sponsors.
This information flow and our strong documentation and covenant protections and ensure that we have a seat at the table at the early signs of trouble.
We cannot work with the sponsors were generally incentivized to put in additional capital to provide near term support in order to protect the longer term value of their investment.
For these reasons, we believe we are well prepared for the further for further challenges to come.
As we said before while we may see increased levels of stress, we believe defaults or potential losses will be manageable and will be more than offset by the continued strength of our earnings across the balance of the portfolio.
We are proud of the highly diversified well insulated portfolio we adult.
Our borrowers have the advantages of size scale and sponsor support as we enter a potentially a more challenged environment and we believe this will serve us well.
With that I'll turn it over to Jonathan to provide more detail on our financial results.
Thanks, Craig.
Ended the first quarter with total portfolio investments of $13 2 billion outstanding.
Outstanding debt of $7.4 billion in total net assets of $5 $9 billion.
Our NAV per share was $15.15, a 1% increase from our fourth quarter NAV of $14 99.
This increase was driven by the continued strong performance of our borrowers and our continued over earning the dividend.
We continued to see the impact of the broader slowdown in M&A and refinancing activity on new investment activity across the market.
Funded activity for our portfolio remained modest at roughly $94 million, which reflects the low repayment activity we continue to see.
Turning to the income statement.
We are pleased with the continued strength of our earnings. We believe this quarter's NII represents a sustainable level in the current rate environment.
We could see further upside if repayments pick up or dividend income from our strategic equity investments in the senior loan fund increase.
Conversely, you could also see a decline in NII if rates drop.
Non accruals increased although.
Although we do not currently see evidence of either happening in the near term.
As a result, we believe that we will be able to deliver our ROE in excess of 12% for the year and provide attractive dividend income to our share.
We have also continued to work towards our previously announced repurchase target of $75 million through the <unk>.
Combined buying power of the company's share repurchase program and the Blue owl employee investment vehicles.
As of May 10, and incremental $22 million of RCC stock was purchased bringing total stock purchase to 74 million at an average price of $12.22 of which 49 million was repurchased by the company.
For the second quarter of 2023, our board has declared a <unk> 33 per share regular dividend, which will be paid on or before July 14th to shareholders of record as of June 30.
Our board also declared a supplemental dividend of six cents per share for the first quarter of 2023, which will be paid on June 15 to shareholders of record on May 31.
As a reminder, we instituted a supplemental dividend on the back of our continued earnings momentum to ensure that our shareholders benefit from the higher rate environment.
We expect to continue to evaluate our dividend policy going forward to ensure we are striking the optimal balance of sharing upside while also protecting the stability of the dividend across all market environments.
Additionally, we have a flexible balance sheet with a well diversified financing structure.
We ended the quarter with net leverage of one point to one times largely unchanged from where we ended the prior quarter and within our target range.
We also had liquidity of $1 $7 billion well in excess of our unfunded commitments of approximately $940 million.
Lastly, this quarter, we saw some stress in the market as the banking sector crisis played out.
In response, our financing team rigorously analyze the impact of a number of potential outcomes on our liability structure.
We found that we have no material exposure to be affected banks and we saw no impact to our fund operations.
We believe this highlights the quality of our balance sheet and the benefit of having diverse funding sources.
We deliberately built our balance sheet have a significant amount of unsecured bonds over 50% of our liabilities today.
Our revolver is made up of a large diversified group of 19 lenders led by large global banks.
This allows us to have material overcollateralization on our secured facilities and.
And we have structured those facilities to have limited mark to market exposure.
We have over 60 unique finance partners across our secured facilities.
In addition, our weighted average cost of debt remains low at 5.2% and we have no near term maturities.
For these reasons, we remain pleased with the strength of our liability structure and believe it will serve as a competitive advantage, providing the portfolio with flexibility and durability across market environments.
With that I will turn it back to Craig for closing comments.
Thanks, Jonathan.
To close I'd like to touch on the current market environment, which remains a very attractive one for direct lending.
With the public market, mostly unfavorable for new issuance, we continue to see direct lenders financing nearly all of the deals that are coming to market.
These opportunities are attractive because they are for high quality borrowers with enhanced spreads documentation and leverage levels.
As we've noted before given continued low repayments over a C. C is currently benefiting from this environment largely through amendments and other repricing events, which continues to help increase the overall spread on our portfolio.
Our growing incumbency positions are also helping to drive additional deal flow and a slower M&A environment.
More broadly we see volatility in the credit markets in general capital constraints of underscored the benefit of scale for direct lending platforms.
Given the potential challenges to come over the near to medium term, we believe that the market environment over the next couple of years will favor larger platforms like ours.
Size and scale are increasingly important when it comes to fund raising deal flow and access to financing as well as hiring and retaining top talent.
And we believe that the strength of our platform will be even more apparent during this time.
When conditions are more challenging people naturally gravitate to the stability and security that larger platforms provide and we expect to be a beneficiary of this dynamic.
Our competitive positioning today is that straw is as strong as it's ever been because of our scale and deep relationships with sponsors and we believe that sponsors and borrowers value our capital both to us as a preferred partner for financing solutions.
Before we open it up for questions I want to spend a few minutes on our upcoming Investor day on May 24th.
This is our first Investor day, and we're excited to have the opportunity to discuss or C. C. As.
As well as our other bdcs in more detail to highlight what differentiates our direct lending platform.
We have a full day planned including sessions with senior members of our investment team discussing our approach to origination underwriting and portfolio management to provide further insight into our disciplined approach and how we have built our exceptional track record.
We will also cover why we believe OCC is well positioned to deliver attractive returns through various market cycles, how the stock offers a compelling total return opportunity.
For those of you that are newer to our story or C. C trades around 85% of net asset value.
Some of our most comparable peers right around 100% of net asset value. So as a result, or you see offers not only the opportunity for an attractive dividend yield, but also the potential for capital appreciation to net asset value. If the stock is able to trade in line with those peers overtime.
We believe the current environment is one where our portfolio will not just farewell.
Outperform.
As we've noted before we're prepared for conditions to get tougher from here.
Made firm in our belief that any challenges will be manageable.
This is because we have been extremely disciplined on credit selection I believe our portfolio will continue to perform very well and generate strong returns.
We have also been proactive in fortifying overseas balance sheet with diversified financing sources.
We seek to maximize flexibility and I've locked in low cost debt with no meaningful near term maturities.
I look forward to seeing many of you at the upcoming Investor Day, and hope that you will come away from the event as confident as we are in our process our people and our strong credit performance.
On behalf of our entire team we look forward to sharing more on why we're so excited about the future of all works you see.
With that as always thank you for your time today, we will now open the line for questions.
Thank you.
And at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
And our first question comes from Casey Alexander with Compass point. Please state your question.
Hi, good afternoon.
I have two questions. One I heard your comment about are expected the interest coverage ratio to decline to one and a half times in the second half of the year.
I didn't hear what it is currently.
And then the second part of my question is what are the inputs stay at that went into that in terms of your assumptions I mean, how much of that is expected company performance versus how much of that is expected.
No rate development.
Oh sure Casey good morning, so the it's 2.2.
Reported if you will through the first quarter, we think its going to trough at one and a half in the back half of this year.
We did do some analysis around performance and it does bake in.
The impact of.
A moderating economy, we expect the economy to two weekend and so we baked that into that number.
But the most significant impact is higher rates and so I I don't have a precise number for you, but if I had to guess, it's 75% rate.
Okay. Thank you Mike.
My second question is Walker Edison was restructured during the quarter.
And yet you chose to keep it.
On non accrual I recognize that it at least based upon the way ive read the schedule of investments.
It's 100% pick right now, but still most of the time when something is restructured.
You know usually it comes off of non accrual I'm curious what your thinking was there.
Yeah, no. It's a it's it's a good observation and you know when and I think it speaks to we tried to be very thoughtful about every decision and investment when we put it on non accrual and evaluate its prospects and you're right. We restructured this position.
Lee, we will restructure our position such that the remaining debt will be.
Par instrument, if you will and on accrual in the case of Walker as a reminder, this is a business that makes ready to assemble home furnishing.
You know things you know coffee tables. It it was significantly benefited from Covid and stay at home and has seen that reverse post Covid. In addition, there have been some supply chain issues. The business, although we did restructure the debt and took out a significant.
Loss on the business continues to face challenges and we felt that at this point given the challenges that it's facing that it was prudent to keep it on non accrual you know this will be a longer road back then than some of our you know we haven't had a lot of troubled investments, but the ones. We've had have been quite quick to <unk>.
Spar and this one is going to be longer and we felt that the right based on our judgment of where the company sits right now it's best to keep it on non accrual we hope to see improved performance and we'll evaluate it quarter by quarter.
Alright, Thank you for taking my questions.
Alright, Thanks Casey.
Our next question comes from Robert Dodd with Raymond James Please state your question.
Oh I got to congrats on the quarter, just I mean Joseph mentioned.
Disruption.
And the fact that liability satisfied on the asset side, I mean, something like wing spot, where you've been putting in more capital. Obviously, they do working capital line think a quick financing all heaviest where regional banks are typically big players. It may be less so going forward. So should we expect a better performance from them.
I thought it may be an acceleration in capital invested in that vehicle given its target market seems to be moved.
Moving in a favorable paperboard production.
As you know as you know we've been really pleased with the performance in wings fire.
A reminder, we built that business organically, you're working with a very experienced management team you know it took a few years for them to sort.
Sort of hit hit the momentum that they're at now, it's performing quite well and delivering.
Very attractive dividends and Roy for four hours you see they're you know we we.
Talk to them regularly and I think theyre seeing good market conditions already just given the environment and we will we do expect to continue to provide additional capital to wings fire as they find opportunities. It stands to reason that if regional banks pull back from credit Suisse.
Port that that will provide additional opportunities for wings fire I don't think we've seen that effect yet, but it stands to reason we will in addition, generally in a weaker economy, you know companies well turn to asset based financing more frequently so I think that I agree with the supposition of your question there'll be more opportunities for wings fire.
And we can put more capital in it and are really attractive returns.
Okay I appreciate that thank you.
Alright, Thanks Robert.
Your next question comes from Ryan Lynch K P. W. Please state your question.
Hey, good morning.
First question I just had.
Have you seen any sort of pullback in funding and in the CLO markets or any sort of slowdown in funding in the CLO market with the sort of disruption that we've seen in the banking sector or is that market.
You know Ben functioning kind of the same kind of pre banking crisis versus post crisis.
Yeah.
So I'm not sure if you're asking about how we are using pillows to finance our portfolios or you're just talking about the general D. S. L. CLO market, yeah, Yeah, sorry about the general DSL market. Obviously, there has been a big shift in demand might be market place.
That's just probably going to continue I'm just wondering if there is further disruption in the CLO fund.
Okay, I think yeah, I think that I think that market is functionally functioning I'm fine I don't think it's a it's the strongest CLO market, we've seen but it's it's a it's a functioning market we have been utilizing it I think it's a little more expensive, but it's it's it's open.
It's not seeing any significant disruption if anything in the last couple of months, you've seen a nice rally in BSL and strengthening conditions overall in that in that part of the market and so I don't think it's an area of weakness or an area of concern if anything.
Functioning fine with upside from here I think would be my characterization of it I don't I don't see it as a particular stress point, if that's if that's what you're asking.
Okay.
Then my other question was I thought you were in kind of.
Uh huh.
It's a difficult market place as far as just the just the economic impacts are hitting some industries greater versus others and some industry is actually a tailwind.
Loved to hear as you kind of look at your portfolio and I know each individual business has probably idiosyncratic things that affect each portfolio company, you're investing but from a higher level.
Is there maybe one industry in your portfolio.
That's maybe outperforming the rest of the group and performing really well in this current economic environment and is there any industry that that's maybe underperforming or has potential headwinds given some of the crosscurrents in the current economic environment.
Sure.
But I would say overall most of our sectors are doing quite well, we're continuing to see revenue growth, we're continuing to see EBITDA growth, it's a little bit slower growth, but still growth and we're seeing generally strong performance across all of our industry groups. We continue to feel software is the best sector and performs the best.
And is continuing to see really strong results.
Across the board for our software companies do.
Do a lot in the insurance space as well insurance brokerage. If you will that's an area that we like and is not a particularly sensitive to the economic cycle and that performs well.
Well as another example of a sector. That's performing there there are individual companies that maybe got impacted to the negative during COVID-19 that are kind of experiencing a ramp but it but I wouldn't cause that I wouldn't call. It any particular theme on the positive in terms of a couple of sectors that or.
Maybe let's say underperforming, but whether it's you know a little some pockets of weakness I'm throwing in the consumer area. There are businesses that we have that were big COVID-19 beneficiaries that are now seeing slower demand because you know that pet that commit that demand. During COVID-19 is has moved away people whore.
You know all of the products or whatnot and aren't ordering as much at the same time, there. There's some buildup cost pressure and some consumer businesses and that's resulting in some pockets of underperformance in consumer Walker Walker would be an example of the Walker has got I think bigger issues, but that that would be an example of what I'm describing.
Similarly in the health care space, a small portion of our health care and not all of it but a small portion we're seeing pressures on labor cost either just rising labor costs or inability to get labor, that's resulting in a more overtime or lower capacity utilization at.
At the same time some of those providers are not able to pass through price increases immediately they've got contracts and the like so again. This is just a small portion of our health care business I don't want you to draw that observation to all of it but those are a couple of examples of parts of our portfolio, where you know there's some.
Some alpha underperformance, but relatively limited in the context of our book.
Okay. That's helpful. I appreciate the time today.
Thanks Ryan.
The next question comes from Mark Hughes with Truest. Please state your question.
Mark Hughes your line is open please limit yourself.
Alright, we will move on to the next question.
Our next question comes from Kevin faults with JMP Securities. Please state your question.
Hi, Good morning, and thank you for taking my questions you know with leverage at your stated target I know that the level of investment activity was largely driven by notching deployments to repayment activity, but I'm curious how you would categorize the investment landscape right. Now you know how attractive are the deals you're reviewing relative to other vintages and also if recent turmoil in the banking sector has created.
Even more compelling investment opportunities for all.
Sure.
We said this last quarter I'd say again, it's I think it's probably the best environment. We've seen since we were a public company for new investments spreads remain elevated.
Base rates were obviously high in addition, we are getting very.
Very attractive OID upfront and higher than typical call premiums. So you know what does that mean, we're getting 12% to 13% on unit tranche.
Versus 77, 5% a year ago I.
Throw this word around lately, but I think that's pretty extraordinary to be able to earn 12%, 13% on first lien unit tranche debt at 45% loan to value.
I think it's extremely good value and are the deals we're doing are of high quality as well the businesses are of high quality, they're large and they're leaders in their field, so and we're getting good documentation. So it's just across the board. The deals that we're doing I think are really really attractive for them.
Portfolio and in the funds that we manage that have more capital we're doing as much as we can in those funds so great environment for direct lending.
The trends are public to privates is one driver of deal flow add ons for existing portfolio companies is another so when we see things that we like we like them a lot.
In terms of opportunities from the banking sector I'm, you know I'm I'm pretty balanced about this I've been asked it a lot I think that.
You know, we do upper middle market private equity backed deals that's generally not where we're competing with regional banks you know, we're generally competing with other direct lenders and we're competing with the syndicated markets and in the large banks that are arranging but not holding loans. That's what we compete with so when the regional banks are pulling back.
That's not really in our bread and butter. It stands to reason that as regional banks or if they are pulling back that there may be companies, where non sponsored companies that just have a harder time getting financing and if and if theres any of them out there listening you should give us a call and we'd love to talk to you, but I would say I don't expect a tremendous amount of that.
Because regional banks are generally not doing non investment grade loans for the most part those pockets.
You know and the reason I say I'm balanced about it and cautious about it is because as regional banks pull back it does impact the economy overall and it impacts conditions for our portfolio of companies who are their customers are getting financing from regional banks. So there may be opportunities I've seen others say.
This could be good for direct lenders I'm going to take more of a wait and see approach on that and just see what is it going to do to the economy.
But there may be there may be select opportunities as well, we'll just have to see how it plays overall I prefer a functioning banking system and a strong economy.
And and I, you know I hope, we get to that.
Okay, that's really great insight and then just one more can you provide an update on portfolio company leverage.
Portfolio company leverage so we talked about interest coverage a portfolio company leverage is probably in mid sixes ish.
Okay, So no real change quarter over quarter.
No.
No.
That's what I meant that EBITDA has been slightly up leverages up I mean, its really the interest obviously that the interest is.
Actual interest paid is what what has moved and that's why the coverage ratios have moved that the debt to ebitdas is pretty much flat.
Sure that makes sense I'll leave it there congratulations on the nice quarter.
Great. Thank you.
Your next question comes from Kenneth Lee with RBC capital markets. Please go ahead.
Hi, good morning, Thanks for taking my question.
It's obviously very attractive direct lending markets right now.
Wonder if you could share your thoughts on how would you characterize the overall competitive environment.
Especially if you look back last like happier a year or so thanks.
I think it's a it's a good competitive environment you know it has been for a while and we there are there are you know we consider ourselves and there's a small handful of lenders in this category. The large platforms that have a lot of capital resources relationships the intellectual.
Capital the financing to be relevant to do the large upper middle market deals that we like and there's just just a small handful of us that can do those end up.
And we you know we are finding that we're seeing all the opportunities that are out there and we're having the opportunity to participate in the.
The ones that we like.
And any one deal theres going to be a little back and forth on terms, but I think the market is it's really a lenders market theres not enough capital to do the larger deals lenders bite sizes are down and so its taking that extra effort to arrange the financing and so you know the marginal lender as it has the ability to.
To get a sort of price the deal and so I think it's a good competitive environment I think it's been a good competitive environment for the last a year or so there's always you know little ups and downs Theres also been reduced.
Inflows generally in the non traded space, which has been a source of incremental capital into into the direct lending space. So as that has contracted a bit it has created more purchasing power for those that have capital like ourselves.
So generally good but deal flow is light as well so that's the counterbalancing factor, but I think as I said a minute ago, great environment for new investments, that's a reflective of a good competitive environment for US you know and obviously.
They brought the syndicated market continues to be.
Its opening back up but it continues to be a weaker and I think you'll see the banks start to commit to deals, we're hearing that and seeing that but they're being very cautious on terms and so even even as the bank start to come back to the market I think direct lenders are still gonna have ample opportunities to commit to deals you know given cautious commitment.
From banks.
Okay.
Gotcha very helpful. There.
And then one follow up if I may.
Just in terms of the the amendment activity you're seeing in the portfolio were there any out of the ordinary amendment activity that you've been seeing more recently thanks.
Nothing out of the ordinary as I. We mentioned there has not been a pickup in amendment activity in terms of volume there hasn't been a pickup in that nature of the amendment activity, we had two or three amendments this quarter, that's about what we typically average.
You know and its the typical kinds of discussions around with borrowers situation specific so it remains a benign environment from an amendment standpoint.
Great very helpful. Thank you very much.
Ernest.
Yeah.
Our next question comes from Mickey Schlein with Ladenburg. Please state your question.
Yes, good morning, everyone.
Craig.
I don't want to beat a dead horse here Theres been a lot of discussion about the lender friendly environment.
Wanted to follow that up and ask you about whether that's opening up some new industries for you to look at you know, there's obviously, the saying Theres no bad deals there is just bad prices for deals.
At the margin are there sectors that look more interesting to you know.
Where pricing is more interesting and sort of gets above your bar and providing incremental investment opportunity for the owl rock platform.
Thanks Mickey.
I'm not ready to sign off on there there are no bad deals are supposition, there's definitely bad deals that we would say no to at any price, but I think I understand the nature of your question book, we have been really consistent to the point maybe.
Of of our boredom on the sectors that we like and you've been on a I'll call our calls and you've heard US say this we like recession resistant sectors. We like businesses that are annuity like cash flows we like businesses backed by private equity in a significant way.
And our biggest sectors, you know software insurance health care food and beverage had been our biggest sectors every quarter. Since we started and it served us well and it's put us in a great spot and a potentially weakening economy two to outperform and so we're.
Not going to deviate from that now you know I don't think we're that's whoever deviate from that so we don't try to zig into <unk>.
Sectors that don't fit that credit profile, because they are cheap or we can get above above average returns.
We just don't do it and every so often there'll be a business within a sector that we don't love that has unique characteristics that are not reflective of that sector and we will do it but we are not we're not.
Seeking to change that risk profile in terms of the investments that we would do and that matches up quite well with the private equity firms that that we work with that those are the sectors that are most active with so so it serves us well some of those other sectors. In addition to having just more cyclicality to them. They're also just.
There are sectors that tend to be financed with much higher loan to value because they're more value oriented sectors for the for the private equity firms and so the one the value tends to be high just not not where we'd like to play so nothing nothing really new to report on that.
That's really helpful. I appreciate your comments.
Comments and that's it for me this morning.
Thank you.
Our next question comes from Erik Zwick with Hovde Group. Please state your question.
Good morning, just one question for me today curious about your thoughts on the trajectory of the portfolio yield.
Going forward, if we take the fed.
Word at face value that it's just about done hiking and kind of hold for higher for longer and I realize that the LIBOR and sofa curves don't necessarily agree with that but if we were to hold in that scenario I think it would be safe to assume that the majority of the improvement in the portfolio yield is in but would you still expect maybe in kind of a gradual.
Opportunity for improvement is as old.
<unk> vintages roll off and Youre able to put on.
Newer fundings and commitments at higher spreads or is that a safe assumption or are there other things, we should be thinking about as well. Thanks.
Okay.
Yeah, no. It's a good question look I think.
There's still a little bit more benefit from the higher rates in the next quarter or so we experienced about a 4.5% base rate in the first quarter base rates are obviously at 5% now so I think we've got a little more to go there and in terms of.
Fitting from the higher rates that have already happened on the lag effect you know, we we look at the forward curve and take that to be as reasonable a guess as to what what's going to happen as anything and so we would expect.
By the end of this year rates to be lower and certainly by the end of next year rates to be further lower and so that's going to roll through.
We.
You know even with those lower rates, we're gonna have terrific earnings at our C. C. Because there is still much higher than they were a year ago and in our spreads are are elevated as well so even in a environment. If you take the forward curve and take it as gospel, we should have very strong earnings this year and next.
So I feel really well positioned on that to your question is there some can be grinded spread even higher I mean.
This is something we've been really focused on and if you've watched watched us quarterly you know we have for.
For the last six quarters really been able to grind spread higher than the portfolio as we rotated out of some lower spread investments, it's been a very active and deliberate strategy patient thoughtful and we've been able to achieve that our average spread today is about six 670 over that I think that's probably.
One of the highest in the space so.
There are some lower spread investments and the book that we did 12 to 18 months ago and as you suggest as they get refinanced will have a chance to replace those with more market spreads.
So, possibly we could do a bit better.
Really depends where market spreads spreads go is as the market strengthens so I don't want to promise, what we will do better I promise, we'll try but I think our spread is very is very high already relative to the peers again unit tranche today is coming about $6 50 to 725 over so you know to the extent to the extent I'll just do this math.
Ask quickly if we had 10% of the book at $5 75 over and we could replace 10% of the book at $6 75 over you know that's 100 basis points, you know you're talking 10 basis points across the book. So you know we will I hope, so, but but but we'll have to we'll have to see how that aligns with where new deals are coming at the time that is happening.
I appreciate your thoughts thank you.
Thank you.
Our next question comes from Mark Hughes with Truest. Please state your question.
Yes, Thank you and good morning.
Mark How're you doing it on the trajectory.
Good I'm, good I hope you're well.
Just a question on the trajectory of.
New fundings of new commitments versus what gets repaid or sold them as the market opens up a little bit did those move in parallel or does one kind of move ahead of the other as the.
You know the cycle progresses, so to speak.
Sorry, Mark I heard you, but I'm not sure I followed it you just what move in parallel.
Just the trend in new commitments versus the pay downs.
Okay.
Yeah.
Precede the other as we look where we're you know we've got a point in item one a quarter.
Get leverage where were towards the higher end of that I think that's the ideal place to be we really would.
I would like to stick there, we don't want to exceed it and it sort of.
No.
You know get get you know get beyond our leverage target, but we'd like to be at the higher end. So essentially we're matching new new investments two repayments and so as we get visibility on repayments, we will try to match up as best we can new investments to take their place I mean, it's.
Can't be totally precise about it because the deals don't don't happen every day, but we're pretty good at matching them up certainly within a quarter.
No we can match them up pretty well, if we got in an environment.
Where this significantly elevated repayments you know, perhaps there there'd be a bit of a lag, but I you know I don't we're a long way from that but a more just modestly increasing repayment environment we would.
You know a layer in new deals I mean, we are doing new investments on our platform weekly and so there there are opportunities sitting here today for us to put more in RCC, where just sizing them to keep leverage you know pretty pretty flat. So we can be nimble as the repayment opportunities present themselves.
Understood. Thank you.
Thank you.
Thank you and there are no further questions at this time out hand, the floor back to Craig Packer for closing remarks alright.
Alright terrific. Thank you all for listening and I really encourage everyone to tune into our Investor day, we are quite excited about it you're going to get I think a much deeper understanding of our team our process a lot of topics, we touched on today and so please tuned into it if you need any help on how to get access to it you know just.
Reach out to our team and we will we will help you there. Thank you and have a great afternoon.
Thank you. This concludes today's call all parties may disconnect.
Yeah.