Blackstone Secured Lending Fund Q1 2023 Earnings Call
Good day and welcome to the Blackstone secured lending first quarter 2023 investor call.
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At this time I'd like to turn the conference over to Weston Tucker head of Blackstone shareholder Relations. Please go ahead.
Great. Thank you Katie and good morning, and welcome welcome to Blackstone's secured lending first quarter call.
Earlier today, we issued a press release with a presentation of our results and filed our 10-Q both of which.
They are available on the shareholders section of our website www dot be acts as our dot com, we will be referring to that presentation throughout today's call.
I'd like to remind you that this call may include forward looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results.
Do not undertake any duty to update these statements for some of the risks that could affect results. Please see the risk factors section of our most recent Form 10-K.
Audiocast is copyrighted material of Blackstone and may not be duplicated without our consent.
With that I'll turn the call over to <unk> co Chief Executive Officer, Brad Marshall.
Thank you Weston and good morning, everyone.
With me today is Jon Bock co Chief Executive Officer, and we're excited to be joined by <unk>, our newly appointed Chief Financial Officer effective as of close of business today.
Many of you know Teddy is as he has been with Blackstone credit since 2015 first on the direct lending investing team and then in a portfolio manager capacity for our direct lending business. We are excited to have him officially joined the <unk> management team.
Turning to this morning's agenda.
I'd like to start with some high level perspective, before John and Teddy go into the detail of our portfolio and first quarter results.
Turning to slide four.
<unk> reported another strong quarter with significant growth in net investment income higher net asset value and strong credit performance. All in a period that was marked by meaningful uncertainty ranging from commercial bank failures to stubbornly high core inflation.
Net investment income or NII increased 3% quarter over quarter to 93 per share, which represented a 14% annualized return on equity and our highest NII per quarter since inception, primarily driven by rising interest rates that have increased the average yield on our debt investments from 10.
7% last quarter to 11, 4% at quarter end.
This earning power further reflects the quality and strength of our well source portfolio, which as of March 31 was 98% senior secured first lien 45, 2% loan to value.
Using cost basis to measure less than 0.14% of the investments are on non accrual or 0.07% on a fair market value basis, and less than 2% of our assets are marked below 90 at cost.
Our net asset value per share, which increased 7% to $26 10.
From $25 93 previous quarter further reflects portfolio stability.
Earnings power again exceeded our quarterly dividend of <unk> 70 per share, which was increased 17% last quarter and has increased over 30% since the fund's IPO in late 2021.
Our current dividend represents a 10, 7% annualized yield for shareholders based on the higher first quarter NAV of $26 10 per share.
We believe this represents the highest dividend yield for any listed BDC with as much of its portfolio invested in first lien senior secured assets.
Slide five provides additional highlights on our portfolio activity and stability.
And our liquidity position.
First quarter sales and repayments were $109 million matched by $108 million in new investment commitments.
The result of lower net origination was tied to both the seasonally slow period for new deal activity as well as a lower lower overall level of deal volume as private equity sponsored selectively adjust to the new market and rate dynamics.
That said, we are beginning to see more market activity, which may lead to an increase in portfolio of turnover.
Subsequent subsequent to quarter end, we realize our debt and equity investments in west land the impact of which we expect to be accretive to NII by more than <unk> <unk> per share.
In terms of our balance sheet. We also believe we remain well positioned for both defense and continued growth with $1 2 billion of liquidity from cash and our Undrawn lending lines.
Our lending lines were set up two years ago at what are now below market prices with high quality Counterparties, we had zero direct exposure to Silicon Valley Bank.
<unk> Bank and first Republic Bank, and we have less than 1% of all secured debt commitments from regional banks in general.
Turning to slide six.
We ended the quarter with $9 6 billion of investments and leverage of 131 times, which is down from 134 times the previous quarter.
Fortunately, the ending yield of our portfolio, which is 98% floating rate debt expanded over 400 basis points over the last 12 months.
In a moment on this slide I want to outline that each quarter. The market continues to witness increased earnings power associated with floating rate nature of our loans and the attractive fixed rate liabilities.
However, I believe that there is a growing demand for <unk> due to its defensive positioning during these more volatile times.
In fact, if you look at senior secured debt, which is 98% of <unk> sales portfolio composition.
<unk> credit asset class as measured by Cliff water direct lending.
Has generated consistent returns.
Ranking as the top first or second performer in fixed income and 13 of the past 18 years since Blackstone and GSO launches private credit strategy.
Normally one down year, which was during the great financial crisis.
And prior to the GSC the average loan to value is 66% versus 57% in 2022 and 45% <unk>.
Part of the focus on limiting risk in our portfolio is to focus on larger deals our leadership in large private credit transactions, where we have led or being the sole lender and approximately 50% of the $1 billion plus direct lending deals is.
It is important as we have control over the outcome in these deals.
That focus on building right lending to the right businesses, which some may consider to be a first line of defense continues to generate solid returns for <unk> shareholders.
Comparing our NAV returns to public market benchmarks <unk> generated a total return of three 4% in the quarter compared to three 2% for leveraged loans three 6% for high yield bonds, 3% for investment grade bonds.
John will speak more to the portfolio later in the call.
Additionally, there was a second line of defense to protect capital often just as important as the first but goes less recognized by investors that is the potential value AD manager can bring to the portfolio. After investments are made many of you have heard us outline the benefits.
One credit value team, formerly Blackstone credit advantage, but I'd like to put a few numbers behind this value add.
Recall, we have an internal Blackstone team of 109 professionals, who work with our portfolio companies, including over 20 professionals in Blackstone credit.
This team offers the scale and operating capabilities of the Blackstone network to our portfolio of companies to drive both revenue and cost synergies to the benefit of the portfolio companies and the private equity sponsor.
We believe these benefits are unique to Blackstone credit and they provide substantial value to our shareholders.
Let me share some detail with two examples where we held the equity.
Last summer, we realized our position the company called data site, a leading provider of virtual data room or DDR services in which <unk> had invested in equity and warrants alongside the debt commitment which was never call.
Recall <unk>, our independent platforms used to host and share highly confidential files and manage workflows by leveraging the Blackstone value creation team.
In the broader Blackstone network, we were able to identify and help data site execute on meaningful cross sell opportunities and cost savings.
One important element to assist data site was blackstone's over 93 introductions across the Blackstone ecosystem, including Blackstone internal teams, the Blackstone portfolio companies advisors and private equity partners.
Subsequent to quarter end as I mentioned earlier, we realized our investment in Westland Canadian insurance brokerage business and its sale of broad Street partners. We first invest in Weston in 2021 and have provided a combination of debt and equity based growth capital that helped turn them from a regional broker into.
Our national scale player with nearly twice the operating profit.
With the help of our advisor expertise, we provided support on their it transformation to support growth, culminating in a payoff that we expect to be accretive to NII by more than five a share.
Across these two investments <unk> invested $207 million and received $265 million and proceeds on the sales of 28% increase.
On our initial investment in addition, the <unk>.
$28 million of interest we received during our hold period.
Remember, we offer cross sell cost saving and advisory opportunities to all of our board at no additional fee because we understand the end benefit to the investment portfolio.
And while we are a lender first with a portfolio overwhelmingly invest in first lien senior secured loans are operating platform allows us to realize additional equity upside or helped de risk our debt investments data site and Westland are two very recent and successful case studies of how truly.
Unique our platform and our capital can be for the companies that we partner with.
Generally across our direct lending business.
Stansell majority of the portfolio companies that are introduced to the valuation creation team actively participate in the program.
And while we have a large portfolio monitoring team is one of the largest in the world and private credit we go beyond that with our own resources and infrastructure to drive outcomes that benefit.
That benefit not only our portfolio companies, but also our shareholders and real tangible ways.
With that I'll turn it over to John to speak about the portfolio.
Thank you, Brad and echoing your comments on strength in periods of uncertainty, let's again see what a defensive portfolio looks like so jump to slide seven.
Let's start with seniority.
98% of <unk> investments are in first lien senior secured loans and over 95% of those are the companies owned by private equity firms or other financial sponsors who have access to additional equity capital to support their companies.
Portfolio is highly advertised with an average loan to value of 45%.
But it's not just that we're senior in the capital structure more importantly, we're focused on seniority with companies with the right size and in the right industries.
Focusing on size of our portfolio companies have a weighted average EBITDA of $179 million relative to $128 million as of the first quarter of 2022, as we continue to Orient the portfolio to larger more durable businesses, let's jump to slide eight.
Our focus on the upper end of the middle market is rooted in our belief that this area provides a compelling value opportunity and the data bears this out.
Note that recent data from Lincoln suggested upper middle market companies with greater than $100 million of EBITDA maintained a similar credit spread per unit of leverage compared to middle market businesses, but larger companies grew more than twice the rate of smaller companies in 2022, and it had substantially lower default rate.
Since 2018 and for reference <unk> had less than 2% of its portfolios and companies, earning less than $30 million of EBITDA.
Which have historically had those higher covenant default rates now many of you know Lincoln as a leading valuation provider to private credit in the BDC space as they value and review over 4000 private credit investments each quarter now slide nine focuses in our industry exposure.
Where we believe investing in better companies and better neighborhoods drive sustained returns over time. This means focusing on key sectors with low default rates low capex requirements, such as software health care providers and services and professional services, which account for over 35% of the investment portfolio now.
Diving into the portfolio quality further jump to slide 10.
We compare the <unk> portfolio to the Lincoln International private markets database and you can see that our weighted average EBITDA of $179 million is more than double the market average of $80 million last 12 months EBITDA growth for our portfolio of companies was nearly triple that of the benchmark and importantly on.
Profitability, our portfolio companies have EBITDA margins that are 25% higher.
Now, let's talk interest coverage.
As mentioned last quarter. This is a stat that gets widely shared on other listed BDC earnings calls, but as we've mentioned previously the way it's calculated by BDC managers varies widely in some cases certain sectors or types of loans are excluded in other cases managers exclude negative EBITDA companies both the.
Decisions that obscure the averages and leave investors looking for better transparency. So when we calculate interest coverage. We include all private companies EBITDA, including companies that have borrowed on a recurring revenue loan in companies that may have amended some of their interest obligations to pick after initial underwriting net.
We compare our portfolio to the Lincoln database, which we believe is the representative proxy for that entire credit market now.
We currently sit at a last 12 months average interest coverage of two one times today.
Which is slightly higher than the market average of one eight the Lincoln.
This difference remains resilient when we run interest rates at 5% through the portfolio, which brings our average interest coverage to one seven times compared to the market at one four and we attribute this stability to our focus on larger more profitable higher growth businesses yet.
We also hear from investors and other market participants that it's less about averages, particularly the averages that are obscured by exclusions and much more about the tails.
Mainly the percent of one's portfolio below an interest coverage ratio of one times on a forward basis using higher base rates if.
If we flow through 5% interest rates, reflecting the lower end of the fed funds target range. Today, we can see that be xsl would've had roughly 7% of its portfolio with an ICR below one compared to the private credit database or market, which is approximately twice that.
And in the 5% interest rates example of that estimated 7% of our portfolio below and a 1% or one times interest coverage three.
3% is related to a single transaction that we initially structured with a low ICR given the anticipated ramp of the EBITDA generation that company continues to perform and expand its profit margins. So discerning investors will be right.
Averages will not tell the story of direct lending performance, the <unk>, well and we seek to limit our tail risk.
With a focus on larger better businesses and more stable sectors, and we continue to see favorable results.
Blackstone fulfill his conservative credit culture on a foundation of structural protections for Investor capital and we do this always while focusing on larger transactions note that when Blackstone leads or co leads the vast majority of our deals they have structural protections against asset stripping collateral lease to <unk>.
<unk> any shifting of assets out of our collateral package and almost none allow for uncapped EBITDA add backs all materially better than when compared to the leveraged loan market.
Now, let's just turn to amendments for a moment, we work with our companies constructively in the regular course to provide an idea scope and so of the 45 amendment requests that we received this quarter, 98% were related to M&A add on activity and other benign technical amendments such as sulfur.
Hedging or reporting we did not have any situations, where we provided immediate pick flexibility due to the inability to pay interest or principal and turn to slide seven.
Slide 11, sorry about that as Brad mentioned, we increased our dividend distribution to 70 cents a share with a current dividend yield at NAV of approximately 10, 7% and that was up 17% from the last quarter and has increased over 30% to be clear last quarter two quarters ago.
Relative to the funds IPO in late 2021. So importantly, we believe this 10, 7% dividend yield at NAV is supported by a high margin of safety when you compare it to <unk> net income yield of 14% and it further reflects our view that the best dividend policy.
Can support both a steady and stable distribution and long term NAV growth and with that I'll turn it over to Ted.
Thanks, John and thanks for the introduction Brett.
I'm excited to be part of the management team and look forward to spending more time with folks here on the phone in the coming months.
I will spend a few minutes on our operating results summarize our investment activity and give some color into the pipeline activity, we see on the ground today.
I'll start with our operating results on slide 12.
In the first quarter of 2023, we generated our highest quarterly net investment income to date of $149 million or <unk> 93 per share, which was up 45% year over year as we continued to see the benefit of higher base rates flowed through earnings on a predominantly floating rate firstly.
<unk> portfolio.
Our net investment income yield in the quarter was 14%.
Total investment income was up $79 million or approximately 43% year over year to $265 million in the first quarter.
Importantly, we maintain a policy by which no origination fees are paid to the manager mitigating conflicts associated with originating any particular transaction.
In addition, 100% of upfront origination fees are amortized over the life of our loan. This results in a more stable income picture versus recognizing fees upfront, particularly in an environment, where origination and repayment activity is lower.
To that end fee income was less than $1 million in the first quarter due to below average repayment volume of 109 million yet we still generated earnings that represented 133% coverage to our dividend payment.
Payment in kind or Pik income was about flat quarter over quarter and represented less than 4% of total investment income.
As John mentioned, we are encouraged by our borrowers ability, thus far to manage through higher financing costs and higher base rates and we had no new amendments in the quarter providing for flexibility.
Moving down the P&L net expenses were up $33 million compared to last year's first quarter, driven primarily by higher interest expense.
GAAP net income in the quarter was $139 million or <unk> 86 per share up from 63 per share a year ago.
Realized markdowns of approximately $15 million in the quarter were the primary driver of a $2 million capital gains incentive fee reversal or approximately <unk> <unk> per share benefit to net investment income.
Turning to the balance sheet on slide 13.
We ended the first quarter with $9 6 billion of total portfolio investments of which approximately 98% are floating rate loans with a weighted average yield of 11, 4%.
This compares to $5 5 billion of outstanding debt with a weighted average cost of just 468%.
The spread between our floating rate assets and low cost mostly fixed rate liabilities has helped to offset the impact of rising rates on our average cost of debt.
As Brian previously mentioned sales and repayment volume of $109 million was matched by new investment activity of $108 million.
90% of which was related to portfolio activity, where we have incumbency.
To give some context for the pipeline we have seen an increasing activity in recent weeks, both as it relates to new opportunities and portfolio activity, where we retain incumbency, which.
<unk> represents a significant competitive advantage from our scale and presence in the market.
We believe this represents a strong foundation for new originations for <unk> cell to the extent capacity increases from repayment volume or new share issuance.
Lastly, as a result of strong earnings in excess of the dividend in the first quarter NAV per share increased to $26 10.
Up from $25 93 last quarter.
Next.
Slide 14 outlines our attractive and diverse liability profile.
Which includes 58% of drawn debt and unsecured bonds and an average fixed rate of less than 3%, which we view as having been a key advantage while the fed increased the quality of the policy rate by 500 basis points since the beginning of 2022.
Additionally, <unk> ended the quarter with $1 2 billion of liquidity and cash and immediately available, but undrawn unsecured leverage capacity.
Our debt to equity ratio was 131 times down from 134 times last quarter.
Additional repayments realized subsequent to quarter end will help support deleveraging towards our target of approximately one and a quarter times.
Importantly, we ended the quarter with a 0.14% non accrual rate at cost versus the BDC market average of two 2%.
March 31, we maintained our three investment grade corporate credit ratings.
Additionally, we have a low level of near term debt maturities with just 6% of commitments maturing within the next two years and an overall weighted average maturity of three six years to that end in March we amended our $500 million Big Sky facility with Bank of America, which further expanded our revolving period by two years with no price.
<unk> step up until September 2024 importantly.
Importantly, <unk> sales model is very different from some of the regional banks that have had issues, we do not hold deposits.
We run a little over one turn of leverage while banks typically run above 10 turns of leverage we do not hold fixed rate with liquid assets to cover funding obligations and we manage the duration of our liabilities to match or exceed the expected duration of our assets.
As mentioned, we have available liquidity of $1 2 billion at quarter end, which we believe is sufficient to repay the $400 million bond maturing in July of this year should we choose to do so this will maintain ample pro forma leverage capacity for unfunded commitments, which at quarter end totaled approximately 600.
Million.
With over 40% expiring by the end of this year if unused.
We continue to balance the attractiveness of the market opportunity today indirect lending and quality of our pipeline, but our focus on managing the balance sheet toward our target of approximately one and a quarter times leverage we may see additional repayments materialize beyond the approximately $200 million realized subsequent to the end of the first quarter.
<unk>, which would further support deleveraging and capacity for new deployment with that I'll pass it back over to Brad.
Thanks Teddy.
Blackstone has been investing in cycles for over 37 years, and Blackstone credit in private credit for 17 years.
Since the very beginning our investment committee has been working together navigating through cycles, and we delivered a 12 basis point annualized realized loss rate indirect lending through our track record as of March 31.
We have 100 spec slides industry advisors to support our underwriting.
We cover over 3000 companies across across private and liquid credit strategies.
And we have 300 investment professionals globally across 17 offices.
And what we believe you one of the largest teams in the industry at 57, and our CIO office specialized and active portfolio management.
While we remain highly disciplined in an uncertain macro environment, we believe the dynamics at play and create a once in the general duration opportunity for direct lending and remain positive about the outlook for <unk> shareholders as a result.
And with that I'll ask the operator to open it up for questions. Thank you.
Thank you once again, if you would like to ask a question. Please press star one on your telephone keypad. We ask you limit yourself to one question and a follow up to allow everyone an opportunity to ask questions.
We'll take our first question from Finian O'shea with Wells Fargo.
Hi, everyone. Good morning.
A question for Brad.
I guess for one is the post quarter repay you noted in the presentation is that going.
Syndicated and then can you touch on the general potential for your portfolio.
Being large first lien well performing et cetera.
To flow out into the BSL channel.
Yes, sure so to answer your question on the first.
On the asset Westland.
Corporate is buying that asset.
And yes, they are using.
Public debt to fund that acquisition.
On your second point around.
The syndicated markets I would say that continues to be.
A market that hasnt fully recovered.
But as some of the larger assets outperform and look to lower their cost of capital.
There is an opportunity for there to be more turnover.
And the portfolio and we would get our call protection on those assets.
But.
As I look across the opportunity set then.
We have about $30 billion of assets in our pipeline right now so I think the.
<unk>.
IC turnover as a potential very positive from an earnings standpoint, because the pipeline is so large.
For us that will be easily will be able to easily replace them.
Okay, Great. That's helpful. And then a follow up I think you touched on this.
I apologize if I didnt hear the full answer.
The fee income has been pretty anemic can you remind us if any any of the fees are retained at the advisor level and.
Relatedly would you expect this to eventually pickup for the BDC.
Yes, I'm happy to take that and thanks No no fees are retained at the advisor level to answer your first question and to answer. Your second question I think it somewhat depends on market volumes as Brian mentioned, we are seeing an increase in activity across our pipeline has been the case for the last couple of months.
And that could lead to more repayment volume, which would drive our fee income and accelerated OID as well.
When we do a deal then.
That upfront OID gets amortized over the life of loan, which Teddy highlighted.
And I'll be a little more emphatic then Ted.
Manager does not scraped fees for the benefit of the manager every fee that we generate goes to investors.
Thanks, so much.
Thank you we will take our next question from Casey Alexander with Compass point.
Hi, good morning first off.
In past quarters, you've had a chart that discussed it when all resets slowed through the portfolio what the earnings power might be have we pretty much captured all of the resets at this point in time or is there additional flow through that could punch earnings a little bit higher.
Thanks Casey.
We just put some numbers to it our average base rate earned in the quarter was right around four 7% across our portfolio.
Versus the three month LIBOR spot rate at 331 of close to five 2%. So what we would say that there is still some some juice left to see just based on where rates are today.
Historically, we have shown that chart.
We run that through our analysis today, that's an extra <unk> or so of earnings potential just from base rates.
Alright, great. Thank you secondly.
Well I appreciate the statistic that only 2% of your portfolio is trading at 90, <unk> below 90% at cost do you know what across the portfolio with the average discount to par value that the portfolio is priced at right now.
I'm just trying to get at how much potential NAV accretion there might be when you start to get repayments on the portfolio.
So our average mark as a percentage of par.
At the end of the first quarter was 97 eight.
Great. Thank you very much I appreciate you taking my questions.
We'll take our next question from Kenneth Lee with RBC.
Hi, Thanks for taking my question and good morning.
You're talking to in the prepared remarks about seeing more market activity more recently wondering if could just further expand upon that.
Where are you seeing activity coming from and.
Looking a little bit further out for the rest of the year.
Granted incumbency is going to help.
How dependent are origination volume is going to be on on M&A activity picking up you think thanks.
Yeah, Thanks, Ken I'll take it.
Where we're seeing activity.
Public to private so public companies looking to be taken private by private equity sponsors we're seeing add on.
Financings, we're seeing corporate carve outs, and we're actually seeing a pickup in sponsor to sponsor.
Activity.
Anytime you are in a period of.
Volatility of that bid ask spread is fairly wide.
And with the passage of time that tends to come down so we're seeing valuations come down and more transactions.
As a result of that.
And for Us there.
Reason why our pipeline is so big is because we have such large incumbency and 3000 credits.
Anything that is large we will have to come through.
Blackstone credit.
Anything complicated such as carve outs as well.
And so so I don't think as we think about investing and continuing to invest there would be excess al that we're 100% dependent on what the broader market is seeing because kind of our deal funnel.
Is as busy as it is.
Got you.
Helpful. There.
And.
One follow up if I may.
<unk> been out, earning your common dividend meaningfully I'm wondering if there's any updated thoughts around around dividend coverage and how it could trend over the near term. Thanks.
And this is bock the way I kind of look at it would be.
The best BDC valuations are really defined by two things.
Steady and stable dividend profile, and a slowly and steady increasing and we've seen that over the decades and so in terms of our application of approach here you can see that level of earnings excess.
That excess will continue to build and spillover and flow into <unk>.
And then over time to the extent we approach a cap.
Clearly there'll be some level of special but our focus is on maintaining a stable and steady dividend and then watching now grow as a result of the accretion to NAV excess earnings.
Got you very helpful. There. Thanks again.
We will go next to Robert Dodd with Raymond James.
Hi, guys a couple of questions.
First one on Westland can you reconcile our number for me I think you said more than 5% accretive to NII.
Looking at the Mark that looks to be about $4 5 million.
Embedded prepay.
Prepayment fees in the fair value in the quarter.
That would be about <unk> <unk>. So is that a is that the dividend alone.
With this quarter or.
Or can you.
Inside the difference between where the mark on.
<unk>.
Got it.
Awesome.
On your indications.
The accretion.
Yes, so so remember or maybe not remember, but when we did the deal we gave them both debt and equity with the debt we had warrants attached to that debt.
That.
<unk> increased our discount.
So our OID was was lower but we also had a fair bit of call protection.
So between the call protection and the accelerated.
Alright.
That results in the approximate <unk>.
And at.
So you Didnt Mark up the fair value too.
Seeds for this quarter.
I didn't we didn't market it out.
Yes.
Hum.
One.
On the unsecured that's going to mature in July .
You could obviously you have the liquidity to take it up.
If you just take that up with evolving.
Secure the downtick.
Just over 50%, which is perfectly adequate.
How low.
Markets remain.
Unsecured markets remain disrupted.
And increasingly long period of time.
How low would you be comfortable going.
On the unsecured mix conceptually I mean, obviously the rating agencies like plus but.
Usually well ahead of that.
I'm happy to hit that.
So first if you look at our maturity profile. So we gave the $400 million bond is maturing.
After that the earliest maturity is a floating rate facility in 2025. So the capital structure is pretty set and rock solid until then.
I would say we have the benefit of low cost financing that was put in place really prior to the dislocation and spread widening that we saw last year.
Average spread on our revolver is sofa plus 175.
Potentially use those proceeds.
Payback the bond.
We'll be opportunistic with it right when the market the market opens up and we see a good a good opportunity then we certainly could issue bonds, but to your point, we do have quite a bit of cushion starting at 58%.
We want to manage the rating Robert as well so.
And that's our whole goal in everything we do is minimize risk and maximize earnings.
And so it will be whatever we do in $2025 2026 will be consistent with that.
Got it thank you.
We'll take our next question from Ryan Lynch with <unk>.
Hey, good morning.
First question I had was.
If you look at your overall portfolio of composition and maybe your top 10 industries on slide nine.
I know this is probably tough to do because it's going to depend on each individual's individuals' companies' performance, but when you look at those top 10 industries are there any industries that are maybe outperforming your original expectations in this environment and then Conversely are there any industries that are maybe.
In this current environment will just get your opinion on that.
So 90% of our portfolio is in line or exceeding their budget Brian .
So that's a pretty high percentage.
And I would say the areas that are probably outperforming the most.
We will be software.
Healthcare it.
Insurance professional services.
Those would be the largest outperformers.
But each of those sectors on page nine.
Our.
Youll have been and we expect to continue to be very good performers in a market that could see some.
Some headwinds maybe.
Maybe to answer the question differently, where I expect to see more challenges across the market.
Surprisingly well be in cyclicals will be in heavy industrial businesses will be in retail will be a low margin businesses those sectors will arguably.
Feel the full impact of rising rates and higher inflation as well as the slowing economy.
We were very very deliberate when we set up <unk> to be in sectors that we thought could grow through economic cycles.
And the portfolio is Phil Accordingly, you noticed that we don't have a lot of tax thats in this earlier stage negative EBITDA type profile. Some managers have gotten into those could face challenges if they can access the capital markets are they don't cut costs.
Our software businesses are larger.
EBITDA positive and are growing at 14% year over year.
What about your health care business as we've heard from other industry participants that this sector that.
Is facing some pressure.
Particularly with with which wage with wage growth and keeping up with those those costs. How is that sector overall performing relative to your expectations, thus far and what's your expectation for the area.
Yes, the areas you've seen issues and we've seen others.
Some assets to non accrual.
Have been more of these doctor practice offices, which were very reliant on acquisitions and rollouts to mask their lack of cash flow generation.
So as acquisitions have slowed down is that kind of adjustments to the cash flow.
Has ended.
Youre seeing a lot of pressure in those businesses and Youre right <unk> got wage pressure from nurses technicians that are 50 plus percent in.
And those businesses have not been able to pass on those price increases to the consumer or the end user.
And so our exposure.
Two to those types of businesses is very very low.
We have one business.
That's actually on our assets that are marked below.
<unk>.
<unk> W. H CG purchaser, it's called <unk>.
And that is on performing plan, Washington closely, but that's really the only one across the entire portfolio.
Okay. I appreciate you taking my questions today.
Thanks, Bryan we'll take our last.
We'll take our last question from Melissa what else with JP Morgan.
Good morning, Thanks for taking my questions today.
First just wanted to thank congrats.
In safety and the rest of the name team today and I look forward to working with you.
I think a lot of my questions have been.
Asked already and answered.
But I was hoping to get your thoughts on sort of the implications of the forward rate curve.
Im certainly looking at over the next 18 months a couple of hundred basis points decline in forward rates, you've talked about dressing portfolio investments for 5% sustainable rates.
What do you think about what the forward curve is implying in terms of declines and what might you expect to see in terms of spread trends and that kind of environment. Thanks. So much.
Yes, so the forward curve has clearly reflecting.
Few that.
That inflation is a little bit more under control.
And.
And we may be entering.
Slower economic period by the way higher rates are designed to do that so.
Not a surprise.
And so on the one hand thats positive for the portfolio of companies that will help them retain more cash on the business versus paying us.
On the other hand, you may see a slower economic environment. It certainly an environment that we've been planning for.
From a portfolio standpoint.
I think we're.
We're in very good shape.
To head into a slower.
Economic period as it relates to spreads.
Spreads have as.
Feel like they have topped out we are starting to see some spread compression, which by the way will be good for.
Existing marks on assets over time.
And I think what's driving that.
In this sort of environment what tends to happen.
Is and a slower M&A environment, a higher quality businesses tend to come to market first and.
And you would expect those types of businesses to have tighter spreads and then.
Then other businesses and so youre seeing a quality.
Bias in the market right now and Thats driving spreads a little bit tighter than where we were over the past couple of quarters.
Thanks, so much.
Thanks Melissa.
That will conclude our question and answer session. At this time I would like to turn the call back over to Mr. Tucker for any additional or closing remarks.
Great. Thanks, everyone for joining us today and the team is available after the call for any follow up questions have a good day.
Dave.
That will conclude today's call. We appreciate your participation.
Okay.
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