Q2 2023 Sixth Street Specialty Lending Inc Earnings Call
[music].
Okay.
Good morning, and welcome to fifth Street Specialty lending, Inc. Second quarter ended June 32023 earnings Conference call.
At this time all participants are in a listen only mode. As a reminder, the conference is being recorded on Friday August 4th 2023, I will now turn the call over to MS can be van Horne head of Investor Relations.
Thank you before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward looking statements statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results.
A number of risks and uncertainties actual results may differ materially from those in the forward looking statements.
Number of factors, including those described from time to time in fifth Street Specialty lending Inc. Filings with the Securities Exchange Commission. The company assumes no obligation to update any such forward looking statements yesterday. After the market closed we issued our earnings press release for the second quarter ended June 30 of 2023 and posted a presentation to the Investor resources section of our website.
At Www Dot sixth Street specialty lending dot com the presentation should be reviewed in conjunction with our Form 10-Q filed yesterday with the SEC six three specialty lending Inc. Earnings release is also available on our website under the Investor resources section unless noted otherwise all performance figures mentioned in today's prepared remarks are as.
And for the second quarter ended June 32023, as a reminder, this call is being recorded for replay purposes I will now turn the call over to Joshua easterly Chief Executive Officer Uptick Street specialty lending Inc. Thank.
Thank you <unk> good morning, everyone and thank you for joining us.
With us today is my partner and our President Bo Stanley and our CFO Ian Simmonds spark.
For our call today I will provide highlights for this quarter's results and then pass it over to Bo to discuss activity levels in the portfolio.
Ian will review, our quarterly financial results in detail and I will conclude with final remarks before opening the call to Q&A.
After market closed yesterday, we reported second quarter financial results with adjusted net investment income per share of 59 cents corresponding to an annualized return on equity of 14, 2% and adjusted net income per share of <unk> 64 cents corresponding to an annualized return on equity of 15, 4%.
From a reporting perspective, our Q2 net investment income and net income per share inclusive of accrued capital gains incentive fee expenses were 58 cents and.
63 cents, respectively. The one <unk> per share difference between adjusted and reported metric is a non cash expense related to accrued fees and unrealized gain for the valuation of our investors.
This quarter's net investment income continues to reflect the strength and the core earnings power of our portfolio as we over earned our quarterly base dividend by 28%.
As we've discussed in prior periods of portfolio turnover remains lower in this environment with only 4% of total investment income this quarter coming from activity related fees.
Net investment income was largely result of sustained elevated portfolio yields driven by higher underlying reference rates based on the current shape of the forward curve. We expect that the that we expect that the interest rate environment will continue to support our core earnings in excess of our base dividend through 2024.
Without.
Any activity related income.
We believe the BDC sector is near peak earnings given the current forward curve is downward sloping from here without with that being said, we think the value proposition.
Our return on equity on a spread basis remains strong the difference between this quarter's net investment income.
Net income of $5 <unk> per share was <unk> <unk> per share from net unrealized gains and <unk> <unk> per share from realized gains on investments.
Through the first six months of 2023, we have generated an annualized return on equity on adjusted net investment income and adjusted net income of 13, 9% and 16% respectively. We were pleased with these results, particularly given we increased operating areas on a per share basis stood at <unk>.
And in which we raised incremental equity through a share issuance.
He will speak through the framework framework of our of our approach to raising capital in a moment.
Our results for the first half of the year, we believe we will outperform.
Relative to the guidance, we provided on our year end 2022 earnings call of 13 to 13, 2% return on equity for 2023.
The macroeconomic environment remains more complex related to lever credit the importance of sector selection asset mix and financial leverage becomes more significant.
Each of these elements conveys.
The risk levels of risk in the portfolio. We believe our portfolio effect reflects a conservative path across all these vectors in terms of sector swap share work.
<unk> investors and generally avoid industries that are outside of the risk of loss for creditors.
Asset mix is 91% first lien representing a significant lower risk of loss given default default compared with second lien sub debt exposures and finally, we remain well within our target leverage range with significant cushion to the regulatory limit.
As a reminder, the use of leverage has both ways as it magnifies, both returns and losses.
We believe that our conservative approach across these vectors will help us continue to deliver industry, leading returns to our shareholders through cycle.
In today's market environment, we're focused on the health of our existing portfolio of companies, we see reference rates increased significantly since March of 2022.
Borrowing cost of borrowing costs have risen dramatically.
The challenge for any for many businesses.
We are closely monitoring certain key metrics across our portfolio companies such as an interest coverage, which has declined to two one times on a weighted average basis across our core portfolio companies was not materially different from 2.2, we reported last quarter as a reminder, our interest coverage metric assumes we apply.
I referenced rates at the end of the quarter, the steady state bar or EBITDA.
I believe that our metric is a better representation of the position of our borrowers as opposed to look back metrics such as LTE M.
More importantly, the weighted average portfolio metrics that we track are the tails, which we can be hit in the averages. We believe the tails the tails within credit portfolios or increase increasing which can be a.
Sign of potential issues that come <unk>.
Do you view, the Levered loan index as a proxy.
The percentage of the index components with a bad price below 70 has more than doubled over the last 12 months from two 8% as of June 2022, 6% as of June 2023, Despite the material increase in loans traded below 70, though the weighted average.
Average bid price at the index has actually increased over the same period from $92 one to $94 two thereby disguising the tails.
Although the leveraged loan index is not a perfect comparison to private credit portfolio and private credit portfolio. We do believe the data illustrates the dispersion of that may exist with some private credit portfolios.
The tails are aware of the issues will rise which are minimal in our portfolio.
Based on the methodology I described a moment ago less than 5% of our core portfolio companies, which represent 91% of the portfolio by fair value have interest coverage below 1.0 acts.
Additionally, non accruals remained less than 1% of the portfolio by fair value.
And amortized cost with only one portfolio company on nonaccrual status and no new vessels added to medical SaaS during the quarter at.
At quarter end net asset value per share was <unk> 74 up 15 cents per share or 90 basis points from net asset value per share at.
At March 31 of 16 category.
The growth was primarily driven by continued over any of our base dividend.
The accretive equity raise.
Net unrealized and realized gains for investors.
Yesterday, our board approved a base quarterly dividend of <unk> 46 per share to shareholders of record as of September 15th payable.
On September 29.
<unk> also declared a supplemental dividend of <unk> <unk> per share related to our Q2 earnings to shareholders of record as of August 31 payable on September 20th.
Our Q2 2023 net asset value per share adjusted for the impact of the supplemental dividend of <unk> 68.
We estimate that our spillover income per share this quarter is approximately 90.
As always we will review the level of undistributed income as the year progresses to ensure we minimize potential return on equity drag for the.
From the excise tax with that I'll pass over to Bo to discuss this quarter's investment activity.
Thanks, Josh I'd like to start by sharing some observation on the broader market backdrop in particular, the activity levels across both public and private markets.
Credit issuance was primarily driven by refinancing and M&A activity, which have both declined in 2023.
Refinancings have dropped off as the higher spread environment essentially represents an asset for issuers holding a lower spread than the market level today.
As for M&A activity, there continues to be a bid ask spread where sellers want yesterday's price and buyers want today's price.
With fewer issuers coming to market the top of our originations funnel is narrower but this is offset for us by the shift towards private credit over the past few quarters.
Our pipeline has remained robust given the increased market share we are seeing as alternatives for borrowers are generally as constrained as ever before.
Access to the broadly syndicated loan and high yield markets have generally only return for near investment grade credits.
This limited access to public markets have increased the number of high quality credits, we are seeing a direct lenders.
We believe the opportunity set continues to be interesting with plenty to take advantage of while remaining selective.
As John mentioned earlier, the operating environment for borrowers right now is challenging which has highlighted the importance of credit selection and disciplined underwriting.
Turning to this quarter's activity, we had $260 million of commitments of $240 million of fundings across six new investments and.
<unk> sciences to four existing portfolio companies.
Of the $260 million and $240 million of commitments and fundings for the quarter $248 million and $227 million, respectively were in new investments, which we believe to be a better vintage than we've seen in some time.
As an illustration of the high quality borrowers and the opportunity set across the sixth Street platform, we exited and closed on a $2 6 billion senior secured credit facility.
With 75 million was allocated <unk> to support advent International's take private of Max our technologies.
<unk> scaled and differentiated enterprise with clear reason to exist in a competitive mode.
In addition to the strong unit economics high free cash flow conversion and low leverage of the business.
Structure of the deal reflected approximately 35% funded loan to value at close with attractive pricing and terms.
On the repayment side, we had three 4% and four partial investment realizations totaling $114 million in Q2.
Our two larger payoffs during the quarter G Treasury mountain higher were driven by acquisitions, which included refinancings.
Since our initial investment in Treasury in 2019, <unk> has supported the company through its growth via amendment facilities and follow on investments.
The company was ultimately acquired and generated a gross unlevered asset level IRR, an MLR of 15, 1% and one 5% respectively for <unk> shareholders.
I'd like to also highlight our payoff from modern higher as the incumbency and this investment assistant fixed we've been winning an opportunity to redeploy the capital in a larger more scaled business with less leverage and at a wider spread.
<unk> III preceded the agent and closed on a new $310 million credit facility issued by higher view, a portfolio company of Carlyle to acquire modern higher and recapitalize our combined business.
<unk> generated a gross unlevered asset level IRR, an MLM, a 14, 5% and one <unk> respectively on the payoff.
Since the update we provided on our last earnings call regarding our investment in bed Bath <unk> beyond we have received approximately 40% of our total investments back through the liquidation process as of July 28.
There have been several puts and takes throughout this ongoing process with key milestones achieved along the way such as receiving reaching a deal with the unsecured creditors Committee.
Based on these developments, we believe the band of outcomes has become more narrowly defined.
We anticipate continuing to receive capital back as this case progresses.
Okay.
As it relates to the rest of our portfolio given the challenges presented in today's investment landscape the health of our existing portfolio companies hold significant importance.
Across our borrowers we are generally observed softness in bookings and slowing growth given the demand destruction trigger by the higher interest rate and persistent inflationary environment.
However, we have not seen an increase in amendment activity related to pick convergence in the last quarter.
The nature of our portfolio investments gives us confidence in the ability of our borrowers to stay on the macro headwinds as the vast majority of our exposure is the software and business services companies.
These business models are inherently more resistant to economic slowdown due to their embedded customer base and high variable cost structures.
The cost structures of these business models, given their ability to maintain and oftentimes expand margins and decelerating growth environments.
Despite the general slowdown on the top line and sales the weighted average EBITDA of our portfolio companies that increased 13, 3% quarter over quarter further highlighting the strength of our sector selection and portfolio construction.
From a portfolio yield perspective yields were up to 14, 1% from 13, 9% quarter over quarter and are up about 320 basis points from a year ago.
Moving on to portfolio composition, and credit staff across our core borrowers for whom these metrics irrelevant. We continue to have conservative weighted average attach and detach points on our loans of <unk> nine times and four nine times, respectively, and a weighted average interest coverage declined marginally from two two times.
<unk> talked to one times driven by the impact of rising interest rates on our cost of funds for our borrowers.
As of Q2 2023, the weighted average revenue and EBITDA for our core portfolio companies was $205 million and $67 million respectively.
Finally, the performance rating of our portfolio continues to be strong with a weighted average rating of one <unk> on a scale of 105 with one being the strongest.
As John referenced earlier, we continue to have minimal non accruals at <unk>, 6% of our portfolio at fair value with no new portfolio companies added to nonaccrual status from the prior quarter.
With that I'd like to turn it over to Ian to cover financial performance in more detail.
Thank you both for Q2, we generated adjusted net investment income per share of <unk> 59.
And adjusted net income per share of <unk> 64.
Total investments were $3 1 billion up from the prior quarter as a result of net funding activity total principal debt outstanding at quarter end was $1 7 billion and net assets were $1 5 billion or $16 74 per share prior to the impact of the supplemental dividend that was declared yesterday.
Our debt to equity ratio decreased from one two times as of March 31 to 116 times as of June 30, and our weighted average debt to equity ratio for Q2 was one to two times.
The decrease was primarily driven by proceeds from the equity raise combined with over earning of the base dividend, which offset our net funding activity during the quarter.
We continue to have ample liquidity with $659 million of unfunded revolver capacity at quarter end against $190 million of unfunded portfolio company commitments eligible to be drawn.
As Josh referenced earlier, we executed a small equity raise during may soon after our Q1 earnings call given our ongoing commitment to transparency I'd like to take a moment to explain the framework of value creation, we established for the issuance of new equity in our business with.
This framework requires the satisfaction of two criterion.
First is that we follow our historical approach of issuing equity at a premium to net asset value per share.
<unk> shares are traded at a premium to the most recently reported NAV per share on 98% of such trading days over the almost nine five years that we have been listed.
On the day, we executed the equity offering our stock closed at 11% premium to the most recently reported NAV per share.
After the applicable discount the price paid by such investors represented a 6% premium to NAV per share. The first criterion was therefore satisfied.
The second criterion requires us to have conviction that we are deploying new capital raised into assets generating estimated returns that exceed our calculated cost of capital in other words, the return on equity available to us our new equity equity exceeds the marginal cost of that new equity.
Walk through the math, noting that there are many ways to look at it but let's assume that our cost of equity is eight 6%, which was sourced from Bloomberg.
Based on this premise we can back into the required return on new assets by applying the cost structure of our business, including the marginal cost of leverage fees estimated credit losses and other expenses to our unit economic model. This calculation resulted in a 10, 1% return on assets required to generate an eight 6% return on <unk>.
QWERTY.
In our case, we deployed the new equity capital into investments with an average asset level yield to maturity of 12, 6%, resulting an estimated ROE of 13, 1% for the capital deployed well above our estimated equity cost of capital.
This illustration indicates that the second criterion was satisfied we note that the return assumptions exclude the incremental benefit we may receive through additional activity related fees associated with these assets.
In addition to confirming that the equity raise exceeds our cost of capital. We also eliminated any material risk of a so called J curve effect on the earnings power of the business are successfully deploying the capital post quarter end into new investments in other words. This is not a case of requiring a visible future pipeline, we had a rate.
Already executed on the immediate opportunity set and the equity raise was a tool to bring our financial leverage profile back within our stated targets.
Since we established this business in 2010, we've operated with the fundamental premise of doing right by our shareholders. We believe our approach to raising equity during the second quarter of this year is an example of applying that philosophy.
Turning now to our liquidity and funding profile, we enhanced both this quarter through the extension of the maturity of our revolving credit facility.
This amendment increased total commitments from $1 $5 85 to $1 71 billion extended the maturity and added two new banks to the syndicate.
Titan capital constraints did however result in two new non extending lenders with a maturity in 2027, rather than 2028.
Our ability to maintain pricing and grow commitments during the recent credit contraction in the banking sector highlights the importance of the size and scale of the sixth Street platform is a key relationship for banks. In addition to our track record of avoiding credit losses.
Size of the facility further improved our liquidity profile, which represents three five times the amount of unfunded commitments eligible to be drawn.
In terms of our debt maturity profile, we have satisfied to maturities in the last 12 months through unused capacity on our secured revolver.
Nearest maturity does not occur until November of 2024. However, we are focused on normalizing our unsecured funding mix by continuing to target incremental funding through the unsecured market, we have been and remain a floating rate borrower and swap all of our fixed rate liabilities to floating to maintain a spread based.
Lending approach this allows us to evaluate the debt capital markets for incremental opportunities without being deterred by the significant increase in treasury yields or volatility in underlying base rates.
Moving to our presentation materials slide eight contains this quarter's NAV bridge walking through the main drivers of NAV growth. We added 59 per share from adjusted net investment income against a base dividend of <unk> 46 per share.
As Josh mentioned, there was <unk> <unk> per share of accrued capital gains incentive fee expenses related to this quarter's net realized and unrealized gains the equity raise including the over allotment shares issued provided <unk> <unk> per share of accretion to NAV.
There was a 13 cents per share positive impact to niv, primarily from the effect of tightening credit market spreads on the fair value of our portfolio and finally other changes resulted in a <unk> <unk> per share decline in NAV from net unrealized losses on investments, partially offset by <unk> <unk> per share of realized gains floods.
From the sale of equity investments.
Moving onto our operating results detailed on slide nine.
Generally at a record level of total investment income for the quarter of $107 6 million up 12% compared to $96 5 million in the prior quarter.
Walking through the components of income.
Interest and dividend income was $102 6 million up from $92 2 million in the prior quarter, driven by higher OLED yields and net funding activity.
Other fees, representing prepayment fees and accelerated amortization of upfront fees from unscheduled Paydowns was slightly lower at $9 million compared to $1 6 million in Q1, given the slowdown in repayment activity. We continued to experience in Q2.
Other income was $4 1 million compared to $2 8 million in the prior quarter.
Net expenses, excluding the impact of the noncash accrual related to capital gains incentive fees were $57 2 million up from $51 4 million in the prior quarter. This was primarily due to the upward movement in reference rates, which increased our weighted average interest rate on average debt outstanding from six 7% to seven.
1%, coupled with marginally higher average debt outstanding in Q2.
For the year to date period, we generated an annualized return on equity on adjusted net investment income of 13, 9% and on adjusted net income of 16% net.
Net investment income has increased due to the asset sensitive nature of our business and the rise in reference rates and net income has benefited from both net realized and unrealized gains on investments from company specific events as well as the positive valuation impact of tightening credit market spreads.
We believe we remain on track to meet or exceed the high end of our previously stated guidance range of $2 13 to $2 17 of adjusted NII per share for full year, 2023, which corresponds to a return on equity of 13, 2% plus.
With that I'll turn it back to Josh for concluding remarks.
Thank you Ian.
Like to close our prepared remarks here by emphasizing the importance of being as efficient user an allocator of capital.
Capital to invest in this moment the publicly traded bdcs.
Is extremely limited in our sector, given the regulatory limits on leverage and the slowdown in portfolio churn from the higher spread environment. The.
The only way to participate in this environment is by holding capital through lower leverage or raising new capital by issuing equity in terms of holding capital. We started the second half of 2022 at 1.06 times debt to equity compared to an average of $1 two zero for our peer set as capital became limited by leverage ratio.
Those rates across the sector, our leverage profile allowed us to remain highly active in the second half of 2022 and the first half of 2023, despite the slowdown in repayment activity.
Some people refer to this as a golden age for private credit, which we have also been able to participate by issuing equity which requires you to trade at a premium to net asset value.
We believe that our track record for avoiding losses.
And efficiently using shareholders' capital, including a thorough understanding of our own cost of capital within our within a BDC framework has been rewarded by our stock trading above book value.
Our positioning characterized by holding more capital and trading at a premium to book value.
Forgive Src shareholders access to this vintage defined by some of what we believe are the best investment opportunities we have seen.
History over the LTM period, we funded $763 million into new investments, representing 25% of the credit portfolio. We believe that access to the vintages as a benefit to our shareholders and will continue to differentiate our returns from the industry with that thank you for your time today operator, please open up lines for questions.
<unk>.
And thank you.
One moment. Please as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
And one moment for your first question.
And our first question comes from Finian O'shea from WNS. Your line is now open.
Hey, everyone. Good morning.
Appreciate the outline of.
The.
Equity framework in the.
The ability to invest in today's vintage.
With.
Putting all that together does that mean, you'll.
B looking to issue equity more often.
Hey, how are you good.
Good morning.
I wouldn't go that far I think we've done.
<unk> has been public.
March your of.
Of 2014, we've done four primary equity deals.
We've been very disciplined in how we raise capital so.
Thank you.
The answer is when there is an opportunity.
To deploy capital vaccines their cost of capital we will issue equity.
But.
We'll be disciplined in doing that so.
It's environment dependent.
And it's a very high bar for us to issue equity capital.
So I don't think I don't think our approaches chain changing.
Decided to put the math out there.
Because I think it's important to have a framework that people understand.
Framework for the industry. So we wanted the math to be clear.
And so we just wanted to do that but.
Hopefully that helps I don't think our framework is changing.
And also as I aimed pointed out I think we have to view that it is a near term visible pipeline that meets that criteria.
We don't want to do things, where we create earnings drag by deleveraging significantly deleveraging.
The leverage profile of the business.
Sure. Thanks, that's helpful and then can you.
On the pipeline as you mentioned can you kind of touch on the.
Sort of.
The quantity and quality of that obviously things are good as you mentioned right now but are they are they still really good as the pipeline builds.
How bigger along as the pipeline. Thank you.
Yes, I think thanks.
I think the.
Pipeline I think is.
It's still actually pretty good.
Although I think we're seeing.
A couple more.
Yeah.
Pay offs.
In Q3.
That were older vintage payoffs.
So I'm not sure it will drive that much activity level fees given call protection is probably run off on some of them, but not all of them. So I don't think I think.
The way, we've kind of look at it is we're going to be.
At least as of now we think we're going to be kind of flattish.
On an net portfolio activity, maybe up a little bit but the portfolio. The pipeline is still good I would say that you have to think about competition.
Uh huh.
Really bulk missed this activity levels are down.
Market shares up.
And competition is really coming from not publicly traded bdcs given their capital constrained.
For the most part becoming firm either.
<unk>.
Bdcs or GP LP structures now I'd say, there is a little bit more competition on the margin.
And so but I hope that helps.
Yes, absolutely and thanks, so much.
Thanks and have a good day.
Thank you.
And one moment our next question.
And our next question comes from Robert Dodd from Raymond James Your line is now open.
Congrats and good morning.
Congrats on the quarter obviously.
I really appreciate the color.
So one question about that you said less than 5% have interest coverage below one.
Currently.
On a go forward basis.
What percentage of those were underwritten.
To be below one if that makes sense.
But Kevin revenue businesses.
Already expected them to be below one or.
What percentage of gotten below one because of under performance.
Yeah. Good question.
Obviously.
Obviously American achievement wasn't underwritten to be that's a COVID-19 impacted business.
And so there is a handful of names.
There is I think four names or four or five names and I would say.
Half of those were kind of.
Underwritten below one and the other half work.
Okay.
We are rapidly investing in their business, yes, yes, yes understood.
And then last one from me on bed Bath and beyond.
Last quarter, you gave us some kind of the last quarter and things have changed since then.
You expect it to connect with their value at that time, plus pretty actually some fairly significant fee income.
Do you still expect to collect the full fair value. That's left this quarter and what are the prospects for fee income from that.
Yes, so what I would say is theres been pushing takes in the liquidation.
For example, real estate came in better inventory a little bit less there is large pools.
<unk> assets and litigation claims Thats still outstanding that have higher volatility of outcomes I think will be determined.
It is hard to tell about the make whole in this moment so I.
I think.
It's.
The structure I think as people know, it's public out there with the with the committee is that we get all of our principal interest and feedback and then we start splitting proceeds past that.
So I think it's.
I would expect us to get our I think our we are 15 points of 16 points.
Now that the litigation is that well I don't think that's the case.
But.
It's going to be dependent.
Depending on on those on those on those outcomes.
Got it. Thank you appreciate that and again, congrats a great quarter.
Thank you.
Okay.
And one moment our next question.
And our next question comes from Ken Lee from RBC Capital markets. Your line is now open.
Hi, good morning, Thanks for taking my question.
Just one on potential ABL opportunity, just given where the macro backdrop is now how do you see these opportunities shaping up over the near term.
Yes, I remain really bullish on the opportunity set honestly going forward.
<unk>.
I think when you think about what's happened.
And I think I've said this before but.
Pre.
Pre COVID-19.
Both cyclical and secular issues on brick and mortar retail.
During Covid you had a moment of uncertainty, but then.
Consumers got a lot of money in their pocket and there was a whole bunch of excess savings and they had nowhere to spend the money except for hard and soft goods.
Versus experiences and so retail over earn significantly which made our capital not needed.
And now the consumers' wallet shares now being moved to experiences.
And away from buying stuff. So I would expect that general retail credit gets worse.
And they're going to look for.
Opportunities to enhance our liquidity profile. So I think we'll be active but I think that that takes some time.
And I think.
I was going to be it should be a pretty good opportunity set and then when you overlay banks, having constrained balance sheets I think it means that probably even a better opportunity for us, but time will tell but we are.
Continued from a platform.
Perspective.
No.
Invest in resources around here that allows us allows.
Allows us to see that flow and underwrite that flow in asset management and asset manage those deals.
Got you very helpful. There.
And just one follow up.
If I may.
In terms of the Paydowns, a nice pickup in paydowns in the quarter.
Do you see a more sustainable pickup in paydowns, realizing it's obviously very difficult to forecast, but just wondering what are the backdrop could spell a more sustained pickup in paydowns over the near term. Thanks, Yeah. So the paydowns in the quarter what was the exact number in I think it was already.
For three or four realized royalty and one of those we rolled into a larger deal.
So the Paydowns still really really muted.
I expect this quarter, because we have a little bit of visibility that they will pick up like I said on Robert's question, a little bit, but not materially I think historically the book.
And over 30% to 40% a year I think.
LTM period I think it's.
Half that or.
And so I think what changes that is really there's two components that change it one is <unk>.
The absolute level of interest rates going down will help bridge the gap between buyers and sellers and we will probably spur some.
M&A activity.
<unk>.
And then if spreads obviously.
At Titan.
That will create.
Turning to book from refinance activity.
Sure.
And then the third piece of it is that if capital markets generally reopen which they haven't for lower rated credit.
Then obviously that will.
You have repayments from migration.
<unk>.
<unk>.
Larger companies into the capital markets.
That one seems the most out of the money.
I think that's kind of the framework.
Gotcha very very helpful color there. Thanks again.
Thanks, Frank and thank you.
And one moment for our next question.
And our next question comes from Melissa Wedel from Jpmorgan. Your line is now open.
Good morning, I. Appreciate you taking my questions today actually most of them have already been asked but I was hoping you could elaborate a little bit on.
How you are seeing.
I think portfolio company deploying capital I think.
Well I think it was for <unk> companies do add on how are they using that capital or people taking share right now what are they looking to do.
Yeah look I would say most companies in generally are not deploying capital Theyre actually doing just the opposite which they're increasing trying to increase margin profile.
I think.
Roy.
Pay attention to because of this to the non non farm payrolls. This morning, but I think the headline was that got.
Got it slowing.
And so that's kind of been our experience.
The add ons this quarter my guess for some small investments in their business and maybe one or two.
Tuck in.
Uh huh.
Yes, the add ons were actually I think.
Strategic M&A I think there were basically three of those that were strategic M&A.
Which was trading screen.
Florida is one other ones so.
I think I think.
M&A.
But small.
Thanks, Josh.
And thank you.
And my mom.
Question.
Yeah.
And our next question comes from Mark Hughes from <unk>. Your line is now open.
Hey, good morning.
Good morning.
Any reflection you amended your credit facility in mid June .
What was your impression of the appetite of the bank to kind.
Kind of maintain or grow their BDC exposure.
Yeah.
It's a great question.
We've been doing this now what amendment was that in 14, 14th Amendment. So we've done this and look we try to mend every year, we wanted to make sure that we have.
That's kind of our part of our risk management philosophy I would say this is probably our hardest amendment, maybe our second hardest amendment like up in the top two at least.
<unk> is a constraint in banks.
The large non extending.
Amendment was a four.
<unk>.
Our U S subsidiary of a foreign bank debt, we understand exited all there.
BTC exposure.
And so.
We were we were lucky enough I think which is different from the rest of the space to get additional commitments.
But and we grew our facility I think others have actually had to shrink their facility.
It is banks are most definitely capital constrained.
Hugh it's hard not to Miss.
Jamie Diamond out there.
Over the last couple of weeks.
Screaming from the rooftops about the regulatory environment and.
And capital requirements, and then with a whole bunch of cash sorting this happened from deposits to treasuries.
It's very very hard for <unk>.
Banks right now I think the good thing is.
Generally that means that the asset side is better.
But I think it really shows the power of the platform that we were able to grow.
Our facility.
And but it was most definitely.
Harder.
Yes, Sir I think you captured it all.
Good.
And if anybody else is not filling that.
I'd love to talk to them.
I can't imagine people are not having a general comments in six weeks like we're lucky we're benefit where the benefit of a broad $70 billion alternative asset manager that is meaningful to the street and this goodwill.
Good relationships.
Most definitely.
Yes, I appreciate that and this may just be quirk of the.
Youre industry mix, but it looked like human resources support services moved up to third financial services dropped down a little bit is that just.
Some of the investments you made this quarter is there any.
Intentionality there.
No I mean look it.
So when you think about human resources I can tell you as higher deal, which is a software business that that support.
Uh huh.
Human resource managers in the hiring process.
And so I think that position probably grew on the margin with shifted it.
Yeah, Yeah understood. Okay. Thank you.
Great.
One moment please.
And a follow up question comes from Ryan Lynch from <unk>. Your line is now open.
Hey, Brian I think as your first question that you get as many as you want.
Alright, thanks, guys.
I just had two this morning.
You talked about kind of the environment being much better, which is which is pretty obvious and we've heard that a lot from some other bdcs just very attractive deals I'm. Just curious have you noticed then.
That the attractive deals in the environment as well as not a lot of deal activity going on.
Our close rates do you guys have in all Bdcs have that famous funnel slide that they put on us close rates as your close rates substantially increase over the last six.
Six to nine months versus where it has been from a historical standpoint.
Yes.
Great question the answer is yes.
Yes.
Although that I would say in the last.
Three or four months, we've said, we're kind of saying no more.
Things don't hurdle because of the BDC its cost structure, and what kind of have a lower cost structure than the industry.
Or we don't like the credit I think.
We were.
Our close rate if you look at it probably was higher at the end of last year.
In the beginning of this year and is kind of close.
Great meeting I kind of look to book kind of ratio.
But I think most definitely it stepped up just because higher quality credits became available and.
Large credits.
So I think that's true most definitely for the industry, Although I would say that's kind of normalized back in the last couple of months.
Paul anything to add.
We've seen we've seen increasing competition over the last few months.
We will continue to be Super selective and I think on the on the credits that we like that close rate has remained higher than historical times, but we are seeing pockets of competition.
We're going to continue to just pick our spots on what we think are the higher quality names and a structure that makes sense.
Do you have any different view on the frontline of everyday Elisa.
No. It's the same view.
Nothing really to add on that.
Alright, Thanks Grant date everybody's comments on that the other question I had is probably for Ian.
You mentioned you guys are always looking at your capital structure from a liability side.
You guys do have some notes due in 2024, which has some time I'm just curious if you were to.
Issued new notes today.
When you guys.
We issued new notes today and then.
Swapped swap out the rate on those as you guys have done in the past what sort of pricing would you guys expect to get.
Look Ian gave me that struggled the shores, which the market is going to the market is going to tell us I think the way I think the way to think about it as a.
We have $650 million of liquidity.
Our next no due is 300.
347 in November .
<unk>, so year and a half ish there.
Sure.
Bob would affect generally what I would tell you with confidence that is going to be dilutive to earnings because of the funding mix and so we've kind of got a little bit of a lift on earnings because.
The growth in the portfolio because we've refinanced notes.
With lower marginal cost of financing that marginal cost of financing has been about LIBOR 150, when you think about on a marginal basis, because you're getting rid of your commitment fee and so the funding withdrawn funding scribed minus your commitment is about 150, if everything been accretive as a funding mix shift.
Ted I think you can think about it is going to be higher on an absolute basis is going to be dilutive and I don't know if thats.
One penny a quarter or something that when the market is marginally or penny and a half a quarter, but we're most definitely committed to by way I know youre doing the math.
Will it pay a quarter is and then you can figure out what we think the spread should be but.
It's in that range from a penny.
To a penny and a half a quarter.
Delude of.
If we do a <unk>.
The index.
<unk> eligible deal is that is that.
Yes, yes.
The market is going to help with that.
That is ultimately so a relatively small part of our cap structure and so it's not massively dilutive, but funding mix. It is important to us we've committed to have a funding mix.
But it's a good question, but the market is going to healthy the exact spread.
Gotcha.
I appreciate the comments per day, that's all for me.
Great.
Thank you.
And I am showing no further questions I would now like to turn the call back over to Josh easterly CEO for closing remarks.
Great well. Thank you for your support I know, we spent a lot of time with people in the last couple of months.
We love, having those conversations and dialogue please feel free to reach out.
The team if you have any questions and I hope everybody has a good.
Into the summer and Labor day, and we will for sure a fee in the fall.
This.
Today's conference call by participating you may now disconnect.
Okay.
[music].
Yes.