Q2 2023 Ares Capital Corporation Earnings Call
And in the accompanying slide presentation for this call.
In addition, a reconciliation of these measures may also be found in our earnings release filed this morning with the SEC on form 8-K.
Certain information discussed on this conference call and the accompanying slide presentation, including information relating to portfolio companies was derived from third party sources has not been independently verified and accordingly, the company makes no such representations or warranties with respect to this information the company second quarter ended June 30th 2023 earnings presentation.
It can be found on the company's website at Www Ares Capital Corp, Dot com by clicking on the second quarter of 2023 earnings presentation link on the homepage of the Investor resources section of our website.
Ares Capital Corporation's earnings release, and Form 10-Q are also available on the company's website.
Now I'll turn the call over to Mr. Kipp severe Ares capital Corporation's Chief Executive Officer Kip.
Thanks, John .
Hello, everyone and thanks for joining our earnings call today.
Here with our co President Mitch Goldstein and courts Schnabel, our Chief Financial Officer, Penni Roll, our Chief operating Officer, Jana Markowitz and other members of the management team.
I'd like to start by highlighting our second quarter results and I'll follow that with some thoughts on the economic environment and the current market.
This morning, we reported strong second quarter results, our core earnings per share of 58 cents.
Increased 26% year over year, primarily driven by the benefit of higher interest rates on new and existing investments.
Our GAAP earnings per share for the quarter were 61 cents.
By our strong core earnings and a modest increase in the overall value of our investment portfolio.
These results led to another quarter of sequential growth in our net asset value per share to $18 58.
We are pleased with these results and we think it's important to put them into context of what we're seeing in the broader credit markets.
Over the past two decades direct lenders have demonstrated their ability to be a stable source of capital supporting the growth of U S companies, even when bank and syndicated capital markets are volatile and hard to access.
More recently this trend has accelerated and direct lenders such as areas of stepped in to fill the void.
Although second quarter transaction activity remained slower than recent history. It picked up compared to the first quarter and the firming tone of the capital markets is an important step towards greater M&A deal activity.
Importantly, we are seeing direct lenders gained significant share is 85% of new issue LBO financing in the U S was completed by direct lenders.
And less volatile market. This percentage would typically be lower and transactions, particularly the large deals would be more heavily weighted towards the broadly syndicated bank loan and high yield markets.
Direct lending also continues to be increasingly active away from the LBO market is direct lenders completed one five times as many non buyout financings as the broadly syndicated market during the second quarter. According to data by LCD.
As it relates to our business the number of deals we reviewed in the second quarter increased 20% over the first quarter. This includes certain incumbent portfolio companies seeking incremental financing opportunities, which provides us with a steady source of differentiated originations.
Overall, we're sourcing many compelling transactions and we're cautiously optimistic that a recent pickup in activity will translate into a higher level of closed transactions.
During the second quarter market pricing and terms continue to be highly attractive as it relates to our new deals.
And our new loans are well above historical averages leverage levels are lower and equity contributions or higher.
Similar to the existing portfolio most of our new investments are floating rate deals that benefit from higher base rates.
Market data provided by LCD underscores our view that the current vintage of buyout transactions has the highest level of equity support of any time in history.
At the same time the risk adjusted returns in our lending business are historically very attractive as spread per unit of leverage which measures returns relative to risk our 15% better than the 10 year average we.
We believe the current vintage ranks as one of the best for our lending business in the past 10 years.
Within this attractive and growing market, we continue to enhance our leading market position, we believe our large and long tenured U S. Direct lending team of 170 investment professionals delivers a compelling brand in the market and this provides us with many intangible benefits, particularly in sourcing.
Given the impact of our participation in the value we add in transactions. We believe we sometimes get more looks on new opportunities and have an ability to negotiate preferred terms with our counterparties.
In recent periods, we've taken additional steps to further support our sourcing and credit advantages.
Spending on our extensive sponsor and non sponsor coverage over the past five to 10 years. We've continued to develop a significant amount of industry expertise specifically in software and technology specialty health care financial services infrastructure, and power and sports media and entertainment to name a few.
More recently, we've formalized these industry specializations, creating eight dedicated industry teams and enhance the significant sponsor and non sponsored coverage that we enjoy today.
We believe that formalizing. These teams has further contributed to the strength of our process and our risk management capabilities and made us an even more compelling partner for sponsors and for portfolio companies.
Despite companies dealing with higher borrowing costs, we believe corporate fundamentals remain solid perhaps stronger than we would've expected our portfolio of companies continue to perform well and we see no evidence of what many believe is an imminent recession.
Credit quality has been stable and inflationary pressures have begun to show some easing or.
Our weighted average portfolio grade is flat quarter over quarter and slightly better than our 15 year average.
Our non accruals at cost decreased slightly and remained well below our own and BDC averages over the past 15 years.
Despite the construct constructive view that we maintain on the economy and the portfolio. We are paying particular attention to the cash flows at our portfolio of companies.
EBITDA continues to grow nicely as Cort will describe in our portfolio interest coverage ratio remained relatively stable quarter over quarter.
While some market participants are calculating interest coverage ratio test using actual interest expense over the past 12 months.
Don't necessarily think is particularly relevant we calculate the ratio using pro forma annual interest expense using market rates at quarter end.
If we instead there'd be calculation using the actual interest expense over the past 12 months our portfolio interest coverage ratio would have been 30% higher for the second quarter or approximately two one times.
The loan to value in our portfolio continues to be conservative and at quarter end, we estimate it to be around 43%.
There's significant invested capital and valued beneath us and most capital structures a lot of it supplied by large and well established private equity firms with whom we have great relationships and do repeat business.
We continue to believe that a lot of the focus should and will be on the behavior of our partners who own the equity in these businesses and we would expect solutions for companies needing assistance to come from a partnership approach between lenders and these partners if history is any indication.
So as a result of these dynamics and the company's overall performance feel confident about the results we were able to deliver for the second quarter and our competitive positioning going forward with that let me turn the call over to penni to provide more details on our results and our strong balance sheet position.
Thanks, Ken for the second quarter of 2023, we had core earnings per share of 58 times compared to 57 cents in the prior quarter and 46 cents in the second quarter of 2022.
We continue to see the benefits of higher base rates on our predominantly floating rate portfolio in the second quarter of 2023, as our interest and dividend income increased both from the prior quarter and the second quarter of the prior year.
Our income was bolstered by higher capital structuring fees as compared to the prior quarter. Despite a generally continued slower origination environment in the quarter.
On a GAAP basis, we reported GAAP net income per share of <unk> 61 cents for the second quarter of 2023 compared to 52 cents in the prior quarter and 22 cents in the second quarter of 2022.
Our higher GAAP net income per share in the second quarter of 2023 benefited from modestly higher portfolio values during the quarter.
Our stockholders' equity ended the quarter at nearly $10 $4 billion or $18 58 per share, which is an approximate 1% increase in NAV per share over the prior quarter.
Our annualized return on equity this quarter was greater than 12, 5%.
Either one measures this on a core or a GAAP basis.
This strong level of profitability further builds upon our long term track record of a 12% GAAP based annual return on NAV since inception.
Our total portfolio at fair value at the end of the quarter was $21 $5 billion up from 21.1 billion at the end of the first quarter.
Collecting net fundings from the portfolio.
The weighted average yield on our debt and other income producing securities at amortized cost was 12, 2% at June 32023, which increased from 12% at March 31, 2023, and nine 5% at June 32022.
The weighted average yield on total investments at amortized cost was 11%, which increased from 10, 8% at March 31, 2023, and eight 7% at June 32022.
Yields on our portfolio reflect the continued increases in interest rates.
Shifting to our capitalization and liquidity we ended the second quarter with a debt to equity ratio net of available cash of 1.07 times as compared to 1.09 times a quarter ago.
Our liquidity position remains strong with approximately $4 $7 billion of total available liquidity, including available cash.
We believe our significant amount of dry powder positions us well to continue to support our existing portfolio commitments to remain active in the current investing environment and to have no refinancing risk with respect to next year as term debt maturities.
We declared a third quarter 2023 dividend of 48 cents per share, which marks the 56th consecutive quarter of steady or increasing dividends.
This dividend is payable on September 29, 2023 to stockholders of record on September 15th 2023, and is consistent with our second quarter 2023 dividend.
With that I would like to turn the call over to court to walk through our investment activities for the quarter.
Thanks Patty.
I'm now going to spend a few minutes, providing more details on our investment activity and our portfolio performance and positioning for the second quarter.
I will then conclude with an update on our post quarter end activity backlog and pipeline.
In the second quarter, we originated $1 2 billion of new investments across 46 different transactions as broader middle market sponsors and businesses continued to value Ares as a consistent and reliable source of capital.
Underscoring the breadth of our market coverage the EBITDA of the portfolio companies, we finance during the quarter ranged from below $20 million to over $1 billion.
And we were the lead arranger on 77% of the transactions we closed in the second quarter we.
We believe that our ability to lead transactions is an important benefit of our scale, providing us greater control over capital structures pricing and documentation and longer term better tools to drive successful credit outcomes.
We continue to find compelling value in today's market.
This is demonstrated by the first lien investments we originated in the quarter, which had a weighted average yield in excess of 11, 5%, but leverage of only four to five times debt to EBITDA.
Underscoring chips earlier point about the historically attractive relative value, we are able to achieve on our new investments the weighted average LTV of our second quarter commitments, including our junior capital investments was below 40%.
We also believe the breadth and quality of our incumbent portfolio provides differentiated access to attractive new investment opportunities.
We continued to invest in what we believe are our strongest portfolio companies as over 70% of our transactions during the quarter were to existing borrowers many of whom are executing tuck in acquisitions or seeking growth capital and have elected to grow with us as their financing provider of choice.
Our portfolio continues to perform well and we are seeing a lot of stability within our credit metrics.
We believe this is largely due to our defensively positioned portfolio and market leading companies with high free cash flow in resilient industries.
In the second quarter, the weighted average annual EBITDA growth rate of our portfolio companies with a healthy 7% in line with historical levels and the weighted average portfolio grade of our borrowers at cost was stable with last quarter at three one.
As we have discussed in the past we are carefully monitoring the impacts of inflation.
While our portfolio of companies are not immune the percentage of the portfolio that we estimate to be highly impacted by inflation risk has improved modestly and is now at the lower end of our 5% to 10% range as we are seeing some improvements from supply chain pressures.
All of these factors resulted in our non accrual rates continuing to be well below historical levels are.
Our non accruals at fair value improved modestly from one 3% last quarter to one 1% this quarter, while our non accrual rate at cost also improved from two 3% last quarter to two 1% this quarter and remains well below our 3% 15 year historical average.
And the <unk> BDC average of three 8% for the most recent 15 year period available.
Looking forward, we remain confident about the performance of our portfolio in part due to our disciplined approach to risk management and portfolio diversification, which reduces the single name risk in the portfolio.
Our $21 5 billion portfolio at fair value is diversified across 475 different companies in 25 different industries.
This means that any single investment accounts for just 2% of the portfolio on average and our largest investment in any single company, excluding SDLP in Ivy Hill.
Just 2% of the portfolio.
We believe we have the greatest level of portfolio diversification of any publicly traded BDC.
In addition to the benefits of diversification in our portfolio. There is a meaningful amount of enterprise value beneath us.
The weighted average LTV of our portfolio is 43% inclusive of our second lien and subordinated investments.
On average these junior capital investments are a meaningfully larger companies in defensive industries and with significant equity capital supporting our positions.
At quarter end, our entire junior capital portfolio had a weighted average EBITDA in excess of $400 million.
And a weighted average LTV of less than 50%.
Our compelling junior capital track record, which includes annualized loss rates of less than 20 basis points over our nearly 20 year history supports our continued strategy of seeking attractive risk adjusted returns through selective deployment into this asset class.
Finally, I'll provide a brief update on our post quarter end investment activity and pipeline.
From July one through July 19th 2023, we made new investment commitments totaling $211 million of which $119 million were funded.
We exited or were repaid on $118 million of investment commitments.
As of July 19, our backlog and pipeline stood at roughly $470 million.
Our backlog and pipeline contained investments that are subject to approvals and documentation and may not close or we may sell a portion of these investments post closing.
I will now turn the call back over to Kip for some closing remarks.
Thanks, a lot.
In closing, we believe that our portfolio continues to demonstrate strong overall performance and we are well positioned to navigate any potential future economic challenges. We believe our many long term competitive investing advantages the strength of our balance sheet and the defensive positioning of our portfolio should allow us to deliver.
<unk> performance in <unk>.
Tractive risk adjusted returns for our shareholders.
We are hopeful that activity will pick up as volatility subsides and as market participants have a more certain outlook.
The direction of interest rates and the economy, and we stand ready to capitalize on this highly attractive new invest in climate.
Various capital we believe it that this is a good time to focus on our diversified portfolio and our sourcing underwriting credit and portfolio management strength with a view to delivering strong financial results and a significant level of core earnings from our diversified portfolio.
As always we appreciate you all joining us today, we're happy to open the line now for questions.
At this time, if you would like to ask a question. Please press Star then one on your Touchtone phone if he would like to withdraw. Your question. Please press Star then two please note as a courtesy to those who may wish to ask a question. Please limit yourself to one question and a single follow on if you have additional questions you may reenter the queue.
The Investor Relations team will be available to address any further questions at the conclusion of today's call.
Our first question comes from the line of Melissa Wedel with Jpmorgan. Please proceed with your question.
Good morning, Thanks for taking my questions today.
I wanted to touch on and actually some of the activity that you disclosed in the press release.
For the quarter for <unk> today.
Noted that I think.
It was 49%.
And preferred and fixed rate deals so far in <unk>, which was down I think a decent amount crime.
<unk> levels in terms of fixed rate allocation was hoping you could just elaborate on that and what you're saying.
Thanks for the question Melissa nothing nothing that for me it jumped off the page nine quarter looking at it. It's one frankly single fixed rate large preferred investment that skews the mix on a pretty small denominator, yes. The other thing to add maybe to that would be.
Some of these preferred investments, we actually were able to get warrants and equity upside kickers as well so the fixed rate component doesn't capture the totality of the return yes.
Understood.
Yes.
As a strategy going forward, but the uncertainty the rate environment or.
Is your willingness to allocate some more fixed rate deals started increasing energy more amenable acute requests from borrowers for that thank you.
Not really I think mostly just to follow on I think this is just literally a single circumstance of one negotiated deal with one particular company.
Sure.
Our next question comes from the line of Finian O'shea with Wells Fargo Securities. Please proceed with your question.
Hi, everyone. Good morning can you talk about.
Change there are gone and what that might mean near or long term for the SDLP.
To be honest, not and a lot of detail.
And that that news is pretty new.
We're excited and then I think our partners at Paragon or are feeling good about having a large institution to partner with.
My guess is that man group is going to want to run <unk> on the way, it's been run and continue to grow it I would expect that that relationship with them would be unchanged, but since the news is new I don't really have any confirmation beyond that.
Great.
Perfectly understandable. Thank you.
Just a follow up for does Ares BDC.
Our receive or is it interested in allocation from the.
Aires alternative credit line.
From that business.
For sure I mean, as we say all the time, we think we are.
Real beneficiaries of the BDC of the breadth of our credit platform here. So.
What we've typically excluded has been what we're doing in Europe for the most part we really run that standalone, but everything else that we're doing.
<unk> credit benefits, the BDC and alternative credit for sure can be can be part of that.
Very good thanks, so much.
Youre welcome.
Our next question comes from Erin.
And you know, which with Citi. Please proceed with your question.
Thanks, It sounds like structures and leverage.
Leverage levels are attractive here.
Are you seeing any kind of opening up yet of.
Sponsors willing willingness to invest in.
Yeah.
What do you think the timeframe will be till until you start to see deal activity start to increase.
That's probably the hardest one area.
Actually asked the senior folks.
Here I think you'd get a range of different responses in terms of optimism pessimism or whatever it may be I would probably say somewhere in the middle I mean look we've seen the pipeline pick up a little bit specifically, we actually saw the number of deals that we review increased each month during the second quarter. If that's any indication is picking up a little bit.
But as I said in the prepared remarks, I think different folks have a very different view.
Or at least theres not consensus perhaps around the direction of the economy or the trajectory for rates are they going to stay higher for longer they are going to be rate cuts. This year, which I don't think we see on the table anymore early into next year, if the economy weekend. So.
Look I mean, anecdotally, we're starting to see things pick up but it's the middle of the summer, it's a really difficult time to gauge that.
Fair Fair answer.
The.
The other question I had was just in terms of funding.
You've always had a nice balance between secured and unsecured funding.
Are you thinking about.
Funding going forward, you don't really have anything on the unsecured side I guess coming due until next year.
Turning to pending but I think the answer is we don't really have a change in our view of how we're going to do things, but you should pile onto that general comment if you'd like to yeah. Yeah. I would just say likely I think it's more of the same we have a view of having a very solid.
Balance sheet liability structure that shows ladder maturities and a nice mix of secured and unsecured.
For the 24 maturities that are effectively resolved at this point, we have $4 $7 billion of liquidity available we've done a lot to go.
The capacity that we have and therefore, I think there's no refinancing risk going into next year, but we're going to continue to look at the markets and as we've done in the past be as opportunistic as we can about thinking about how to access those markets to continue to fill it out our ladder maturities over time.
Okay.
Our next question comes from the line of Ryan Lynch with <unk>. Please proceed with your question.
Hey, good morning.
Following up on the previous question on kind of market activity.
I was just curious obviously theres been a big decline in kind of LDL of sponsor activity.
Recently, and I know, you said that youre, starting to see a little bit of pickup in activity.
But those are obviously coming off very low levels are very low base and so my question is do.
Do you think you can see a significant pickup in an LBO sponsor activity base.
Base rates stabilize around these levels or a little bit higher is that enough just to really good sponsors interested just to have that sort of clarity or do you think do you actually have to have the fed cutting base rates.
So that the cost of capital is actually cheaper for some of these deals.
Yes, I mean again I'm.
I'm not sure that's a hard question I appreciate the question that Ryan.
If.
Seller expectations for where they hope to sell companies to sponsors go down.
The current level of races, probably fine.
And then the counterpoint as decreases in rates in 2024, perhaps and beyond I think it should.
Lucent activity levels up and make it make it a bit busier.
<unk>.
We're seeing folks try to put capital structures together with the current base rates right and again activity is going up from here, but the cost of debt is much much higher and you just have to factor that into the model in terms of how you think about buying something right now.
Why everything sort of slow and a bureau period of just feeling things out.
I don't think its.
An unwillingness on the part of sponsors to invest I think it's just.
The uncertainty, creating a difficult environment to transact between buyers and sellers. So.
I do think that the more certainty there is.
The higher the likelihood that we're going to see a pickup in transaction activity.
Okay understood.
And then it feels like the economy has been much more resilience than people were expecting certainly when their predictions.
Six to nine months ago resection occurring in 2023.
But while the overall economy seems to be pretty resilient I would assume that there are certain sectors that are maybe you guys, whether it's your own portfolio or broadly speaking are seeing particular weakness are there any sectors that.
That you are more concerned over may be feeling.
More weakness in what would otherwise be considered more of a a little.
More resilient.
Economy.
Not not really Ryan I mean, as you know and many others probably on the call know we try to position the portfolio defensively in terms of industry mix. So I think the places where you're likely to see.
Real spikes in defaults are places, where we try to have very little or no exposure.
Yes.
<unk> agree with your comment that the economy is actually.
Performing materially better than I might have expected 12 months ago. If you had asked me in terms of where we'd be.
In the summer of 'twenty three so.
I don't know if a soft landing.
Is really in the cards, obviously the newspapers seem to imply that there is a chance of that now but look for the back half of the year borrowers just I said this in the prepared remarks have less cash flow deleveraging less quickly and we need to be focused on every company in every industry to make sure that we're doing what we need to do from a risk manage.
<unk> perspective, but when we look across our industry mix. There is no one particular place where we feel more concern rather than.
In the aggregate.
Okay. Thanks, Kevin I appreciate it thanks for that.
Sure. Thanks.
Our next question comes from the line of Kenneth Lee with RBC Capital markets. Please proceed with your question.
Hi, good morning, and thanks for taking my question just in terms of any potential future capital raising needs.
Wondering if utilization of the ATM equity program is still the preferred method here or would you be open to any sort of block transaction.
<unk>.
I mean, I think the simple answer to that is we felt like we have been able to grow the company.
Modestly modestly through the ATM program at an accretive cost effective way. So we'll probably stick to that is the primary source of where we go from here.
The leverage level is in a very reasonable level at the end of this quarter. So we feel confident that we have dry powder enough to take advantage of what we think are compelling environment. So for now I think the ATM program is going to prove to be sufficient.
Got you very helpful. There.
That's all I have thanks again.
Sure. Thanks for the question.
Our next question comes from the line of Casey Alexander with Compass point. Please proceed with your question.
Yes, thank you and sort of give us your comments about the economy performing better than you would expect can you give us some color on on the pace of amendments and modifications in the portfolio and are you actually doing less of that than you might have it also might have expected at this point in time.
Yes.
It's less than certainly it was although there is still some activity there Casey I would put it I would call it sort of middle of the road right. It's not very active but certainly it's part of the.
Discussion that we're having with owners of all these companies say that again may not be meeting plan may not have as much cash flows they expected.
I call it just ordinary course.
Okay. Thank you and secondly did mentioned.
Spillover there is in on a per share basis.
I did not but it was the same as last quarter. So if you look at what we estimate to be carrying forward from 2022, and 23, it's stable at $650 million or $1 19 a share.
Terrific. Thank you very much I appreciate it.
Thanks for the question Casey.
Our next question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.
Hi, Thanks for taking the question.
Your comments, obviously, a reduced cash flow et cetera, and that's across the portfolio, but EBIT dollar still growing etcetera and interest coverage in aggregate is pretty good can you give us color on.
How much of the portfolio will.
Does have interest coverage below one <unk>.
At peak.
So call it $5 50, and then related to that.
For those that Australia, how what's.
What's the.
Step up right so to speak from the responses in terms of stepping up and providing incremental capital to that proportionate.
The portfolio.
Yes.
We always direct people on that Robert thinking about companies that have.
Probably insufficient or less than we'd like cash flow really point, you to the mix of ones and twos in the portfolios, which again is our underperformers materially underperformers of the ones and twos or kind of what I think of as the watch list.
So that number is up to well less than 10% today.
I'm sorry to follow.
I'm going through so many questions here, but what was that.
What proportion of those businesses all of the sponsor stepping up.
100% incidence level 19.
How are the negotiations come the holiday coming through and supporting those businesses or you having to do.
More I mean, I think I think they have generally and if you look at the.
Pic percentages of our portfolio, it's kind of a.
It's a three year low at this point so the playbook during Covid, where we actually provided belief from paying cash interest is not really part of the playbook today.
I would say that we've seen good sponsorship support in situations that are required to but the way. It's progressing just to maybe try to give you all a little bit more color is even if a company has a longer term problem with the capital structure, where interest payments, perhaps look to high with the with the base rate being there.
It's much higher and most of those circumstances, they still have significant cash on the balance sheet. They have access to undrawn revolving credit facilities, which they can use.
There are a handful of interim tools before sponsor probably needs to step up and support the company I would say that is performing with more capital.
And I think Thats. Another reason why activity levels are low I think you see a lot of private equity firms that are really focused on what's going on in the existing portfolio.
Thinking about how to deal with that as much as they are struggling to do new deals.
That gives you a little bit of color I think.
Yes, I'd underscore the first point Kip made though.
Answer your question is spot on and we're not saying when it gets to the point, where the company does need liquidity, we're seeing no change in sponsor behavior in terms of their willingness to support.
Those companies and we spent a lot of time in the prepared remarks talking about the loan to values, but given the given our loan to values in our portfolio on a go forward basis, we certainly would expect to see the same thing.
Got it got it. Thank you then one.
Falloff in Ivy.
Ivy Hill, it's been a tremendously successful business for years now 10% of the portfolio. If we look at the equity.
Yes.
<unk> talked about this on <unk> is there still room to grow that or is 10% of the portfolio.
The cap for the size of that.
Yeah, I mean, we don't really have a cap, particularly on things that have been that successful.
I have acknowledged in a different setting so I'll acknowledge it now that having a 10% exposure to a single name even though we don't really think about it as a single name because there are a host of underlying funds and cash flows. The deliver the return is probably near the upper limit at least for me personally.
So I wouldn't expect it to grow materially from here.
Got it thank you.
Our next question comes from the line of Mark Hughes with <unk> Securities. Please proceed with your question.
Thank you and good morning.
Non accruals are improved this quarter after stepping up for a bit for a quarter or two was there anything from them too.
That improvement was it one off you've talked about inflationary pressure easing with that.
The driver perhaps.
I mean really Mark when you go through it with a little more detail really what happened is we resolved one of the non accruals through a restructuring of a specific portfolio company. So removing that non accruals what actually just from a math point of view took the number down obviously with that I will say just to be clear we didn't see.
Other companies added in a material way right. So but the decrease was really the result of one significant restructuring that we did at a portfolio company.
Understood and then.
With the potential for deal activity to pick up as interest rates improve due.
Do you see maybe some pause.
The.
Expectations for interest rates to decline further and then the question is when do you transact how does it work at this point.
Interest rate cycle.
I mean, I think it's very hard to tell again I think if you have stability in rates. It makes it easier back to one of the earlier questions for buyers to at least understand what their maximum cost of debt financing may be when you set up a model to do a transaction, obviously more compelling for transaction activity would be.
The decline in rates right, where you actually had the expectation for.
Cuts to start coming through but your guess is as good as minus one that when that actually happens if at all so.
I think we kind of are where we are for the time being.
Thank you.
Thanks.
Our next question comes from the line of Bryce Rowe with B Riley. Please proceed with your question.
Great. Thanks, Good morning, Thanks for thanks for taking the question here.
Maybe first one is around balance sheet leverage.
You all have de Levered a bit in the first quarter and maybe even a little bit more here in the second quarter can.
Can you talk about.
Your view on maybe.
Re levering or maintaining at these levels just kind of curious where your comfort level is at this point.
Yes. Thanks for the question I mean, it's the same answer I think as it's been in the past maybe with a modest footnote.
Tend to run kind of between one and one and a quarter times.
The leverage helps drive earnings a little bit, but again, just as a reminder, the.
The bdcs are really not particularly leverage companies right. So going from one five to 1.1 dollars seven times doesn't have a huge impact.
We I think at this point in the cycle, though we'd like to have a lot of liquidity both to pursue new investing and also to make sure that we can invest in portfolio companies to the extent, we want to or need to so.
I think it's really just driven quarter to quarter by how active we are and what the repayment.
Calendar looks like.
That's hard to predict but we feel comfortable with where it is today. If it went up a little bit that would be fine. If it went down a little bit that would be fine.
The earnings are more than supporting the dividend and we felt good about the trajectory here. So we don't feel any need to lever back up.
And the way that you.
Referred to it we're happy with where we are today.
Okay. That's helpful and maybe a follow up to this.
To this comment kipp.
No no view of imminent recession based on your prepared remarks.
Dividend coverage is extremely strong here at 20% plus.
At what point do you kind of take it take it up another notch in terms of dividend increases I mean, obviously, you've seen some great dividend increases over the last year.
But with that view of no imminent recession, just how are you thinking about dividend levels given that level of dividend coverage.
I think the discussion that we had when we raised the dividend obviously.
Was.
The earnings are well in excess of even the raised dividend level, what's prudent right and the discussion that was much more about that.
The direction of interest rates and it was about portfolio credit quality right. So.
If we pulled a couple of the different levers that could allow us to have a higher dividend or a lower dividend. The one that's the most impactful would be a significant decrease in base rates.
You'd have to model non accruals up a lot to have it have any real.
Impact on how we thought about the dividend today.
Okay.
Its helpful. I appreciate the answers.
Sure. Thanks for the question.
Our next question comes from the line of Eric.
Holy Group.
See with your question.
Thank you and good morning.
Wanted to start I guess, just first with a follow up too.
Something I inquired about last quarter. So in terms of your new commitments, 92% are at floors. This quarter.
I'm curious if the borrowers.
Borrowers accepting of your maybe your request to move that four up a little bit from kind of the 1% level that you've been operating for a while or is that still kind of out of FY <unk>.
We had been trying and we haven't had a lot of luck.
Okay fair enough.
And then my second question is maybe similar to some prior questions, but maybe just thinking about it a slightly different way so looking at new commitments in the quarter.
Up noticeably from from <unk>, but still running well below the level that we've seen in prior years. So I'm curious how much of that is just a reflection of the market and slower deal activity versus maybe caution on your part just given that there's still uncertain economic environment at this point.
I mean, we wish there was more activity.
We're not not particularly cautious I think we're thoughtful about the existing portfolio, but we would love a busier environment. The reality is they are not a lot of opportunistic recaps getting done because people have pretty.
Good balance sheets in place, what's really going to drive a pickup from here is just going to be more M&A activity and as we've mentioned we've got the benefit of having a large diverse portfolio that contributes to a lot of follow on capital opportunities for us, but yes that would be materially busier, we just need the M&A environment to pick up.
Of course, the countered the flip side of that is that repayment activity is also lower than historical levels. So we're getting more duration on our existing loans.
Yes, it's not all bad at all sort of balances out yes, it's a good point.
Makes sense, thanks for taking my questions today.
Yep you're welcome.
And our next question comes from John Rowan with Janney. Please proceed with your question.
Good morning.
Hi, John .
Just talk a little bit about the interest coverage and specifically kind of the ones and twos and I. Appreciate the information you gave and how it's calculated.
And particularly the loan to value rates, which would seem to be compelling for sponsors to step up and help a struggling investment, but I'm curious is there a difference in kind of the ltvs.
Across the portfolio relative to what would be in the ones and twos I'm just trying to gauge.
No.
Yes.
That same.
Reason to step up and support the company is the same and the ones and twos as it is for the rest of the portfolio.
But.
It is not right. So the ltvs are going to be much higher than the underperformers.
Yes, we're marking the equity value to market every quarter and so as there is underperformance of our market and the equity value down.
Theres still might be significant cash equity, there, which would incentivize support but obviously sponsors are going to evaluate performance of the company and.
Lower performance might be harder for them to support.
Okay, and then just what kind of housekeeping question, obviously non accruals came down you did restructure one large loan is that what drove the realized loss in the quarter.
Yes, primarily.
Okay alright, thank you.
Yes, Youre welcome thanks for the question.
And this concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.
I just thank everybody for participating in the good questions and I hope everyone enjoys the rest of the summer we'll be in touch soon thanks.
And ladies and gentlemen, this concludes our conference call for today Goodbye, if you missed any part of today's call.
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Okay.
Yes.