Q2 2023 Blue Owl Capital Corporation Earnings Call
Greetings and welcome to Blue Arrow Capital Corporation second quarter 2023 earnings at this time, all participants are in a listen only mode.
And answer session will follow the farm our presentation if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now like to turn the conference over to Dana Sclafani head of Investor Relations. Thank you you may begin.
You operator, good morning, everyone and welcome to Blue Our capital Corporation second quarter earnings call. Joining me. This morning are Chief Executive Officer, Craig Packer, Our Chief Financial Officer, and Chief Operating Officer, Jonathan Land and other members of our senior management team.
That's referring to the company by its new name and ticker obesity throughout todays call just part of a broader rebranding after baidu one that became effective in July yeah. All that business is now known as to our credit platform and all of our D. C. Now reflect the new naming convention, including for all capital Corporation.
Like to remind our listeners that remarks made during today's call may contain forward looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described in <unk> filings with the SEC.
The company assumes no obligation to update any forward looking statements.
Certain information discussed on this call and in our earnings materials, including information related to portfolio companies was derived from third party sources and has not been independently verified the company makes no such representations and warranties with respect to this information.
Where do you see the earnings release 10-Q, and supplemental earnings presentation are available on the Investor Relations section of our website and flew out capital Corporation Dot com with that I'll turn the call over to Craig.
Thanks, Dave Good morning, everyone and thank you all for joining us today.
As Dana mentioned Blue our recently completed full rebrand as part of its effort to bring together, California complementary businesses as a market leading provider of capital solutions. This included renaming the business platform as well as all funds and products, including me all rock Bdcs.
However, importantly for Ob <unk> investors. This change has no impact on the investment team the day to day operations, where strategy of the company or the broader blue our direct lending business.
Turning now to our second quarter results, we delivered another quarter of continued NII growth and strong credit performance. Our net investment income increased $2 48 per share from <unk> 45, SaaS last quarter.
This is our second consecutive quarter of record NII and is driven by the earnings power of the portfolio today's higher rate environment.
In addition to higher rates. We also saw a benefit from an increase in one time fees related to repayments and amendment activity, which as Youll recall have been negligible for the last several quarters.
The growth in NII continues to translate into additional cash distributions for our shareholders.
Our board has approved a supplemental dividend of <unk> <unk> per share for the second quarter and.
In addition to our previously declared <unk> 33 regular dividend.
Resulting in total dividends of <unk> 40 for the quarter.
When factoring in the base and supplemental components. This quarter's total dividend payout represents an approximate 30% decrease from our 31 quarterly dividend a year ago.
Our annualized Roe.
On NII for the second quarter increased to 12, 6% up 50 basis points from last quarter.
We continue to believe that we will be able to deliver at our ROE in excess of 12% for the full year based on our current outlook for rates and credit performance.
We view this ROE level is very attractive in today's market.
<unk> represents a significant increase from last year's nine 5% Roe.
Net asset value per share increased to $15 26 up 11 from the first quarter, marking the highest NAV per share since our IPO in 2019.
This gain was primarily driven by an over earning our dividend by nine.
Net unrealized gains and losses were also modestly positive.
Partially reflecting an improving market environment and the accretion of our investments towards par.
Our non accrual rate remains low at just <unk>, 9% of the fair value of the portfolio. We have three names on non accrual as of quarter end, having added one small position this quarter.
As we look at our borrowers operating performance for the quarter. We continued to see solid results with modest growth in both revenues and EBITDA.
Companies have been able to maintain previously executed price increases.
<unk> benefited from lower input costs from supply chain normalization.
Continuation of increased consumer demand post COVID-19.
This isn't to say that we don't expect to see some pockets of stress at some point.
But our borrowers have been proactively preparing for more difficult economic conditions for a while now given the well telegraphed rate increases.
And we are well prepared to address concerns as they arise.
Every quarter, our underwriting and portfolio management teams look at each of our borrowers and evaluate liquidity and coverage metrics in the context of both the higher rate environment and the company's operating performance.
While the higher for longer rate environment has been a negative factor.
Credit performance has been a positive one and net net the overall picture remains stable.
Consistent with our view in prior quarters, we believe interest coverage ratios will transport trough levels of mid one times down from one nine times today.
We expect to see this trough in the first half of 2024 and believe that most borrowers will maintain an adequate coverage cushion and strong credit performance through this period.
That said as we have discussed before we expect higher for longer rates to impact a small number of our borrowers.
<unk> Universe remains limited and we believe we have good visibility into these names. We continue to estimate that this group represents approximately 10% of the portfolio that group, 5% are the most at risk names.
Our portfolio management team and workout professionals in coordination with the underwriting deal teams are closely monitoring these situations and as needed. We are in ongoing dialogue with select borrowers on potential solutions.
<unk>, we will continue to reassess our entire portfolio each quarter.
Identifying any signs of stress as interest rate and economic conditions evolve.
We believe any credit challenges will be manageable and will be more than offset by the continued strength of our earnings in this environment.
Looking back as we entered this year there were concerns about how private credit and fair and a higher rate environment, but some speculated that we would see significant increases in credit distress or defaults.
Now that we're halfway through the year this has not yet come to bear.
Today, our portfolio is delivering record NII and credit performance across our borrowers are strong.
I wanted to take a moment to reflect on why the direct lending sector in general and the Blue our platform in particular have outperformed some of these expectations so far.
First clearly the U S economy has fared better than expected led by a robust consumer demand and a continued rebound of consumption following COVID-19.
This is benefited companies across most industries and.
In addition to this economic durability, we believe the strong performance is the result of the unique attributes of direct lending.
As well as our approach to building resilient Ob DC portfolio.
We have always believed that direct lending provides many structural advantages compared to the public markets as.
As private lenders interacting directly with borrowers were able to do more thorough due diligence.
Ongoing access to management teams have the ability to customize documentation and terms to provide optimal downside protection.
Our capital structure as our streamlined typically with only one lender group.
Only a few lenders in each deal.
Unlike public market investors, who often target matching an index.
Direct lenders can concentrate on non cyclical sectors and completely avoid more volatile exposures.
We don't have to be in every deal we have the benefit of selectivity and we can stick to what we like.
Further within the broader direct lending opportunity set we have blue al have deliberately focused on high quality upper middle market sponsor backed companies market, leading businesses and have staying power.
This is why we haven't had to pivot our strategy in response to changing economic conditions we.
We have always prioritized credit quality over the marginal return.
So today, we see direct money doing well as an asset class and the Ob DC portfolio, achieving new earnings Records and this is because we have structured our approach to design our portfolio to do well even in times like these.
With that I'll turn it over to Jonathan to provide more detail on our financial results.
Thanks, Craig.
We ended the quarter with total portfolio investments of $12 9 billion.
Outstanding debt of $7 billion.
Total net assets of $5 9 billion.
Our second quarter NAV per share was $15 26.
An 11% increase from our first quarter NAV per share of $15 15 centers largely attributed to the continued over earning of our dividend.
And considering the total dividends paid over the last year.
Along with the NAV growth of five 4% driven largely from portfolio appreciation in excess earnings. This represents a total return of 15, 3% over the period.
Funded activity for our portfolio increased slightly as we saw higher levels of deal activity across the market.
<unk> had $183 million of new investment commitments for the quarter.
We also received $566 million of repayments and sales in the quarter, reflecting the first signs of return to more normalized repayment levels.
Turning to the income statement.
As Craig mentioned, we earned a record 48 per share in the second quarter up from 45 per share in the first quarter.
Increase was largely driven by higher repayments in onetime fee income.
We were pleased to complete our previously announced repurchase target of $75 million through the combined buying power of the company's share repurchase program and the blue our employee investment vehicle.
The company repurchased a total of $4 1 million shares at an average price of $12 22 per share, which was accretive to net asset value by approximately <unk> <unk> per share.
The third quarter of 2023, our board has declared a <unk> 33 per share regular dividend.
Which will be paid on or before October 13 to shareholders of record as of September 29.
Our board also declared a supplemental dividend of <unk> per share for the second quarter of 2023.
Which will be paid on September 15 to shareholders of record on August 31.
Since we instituted the supplemental dividend in the third quarter of 2022.
We have paid out 20 of additional dividends per share.
This dividend structure provides increased income to our shareholders, while also allowing us to build NAV through over earning our dividend.
As a result, we have 19 or so.
Spillover income through the end of the second quarter.
<unk> continues to benefit from its flexible balance sheet and well diversified financing structure.
We ended the quarter with net leverage of 114 times down slightly from where we ended the prior quarter and within our target range.
We also had liquidity of $1 8 billion.
Well in excess of our unfunded commitments of approximately $800 million.
With that I will turn it back to Craig for closing comments.
Yes.
Thanks, Jonathan.
To close I'd like to spend a bit more time on our outlook for the second half of this year and how we expect to deliver for our shareholders.
We are seeing an increase in deal activity across the market and our pipeline of new opportunities has picked up.
There has been increased private equity auction activity and refinancing discussions.
In addition, we continue to see good demand for Ed on financings for our existing borrowers.
We'd like this type of deal flow as we are able to invest in borrowers, we already know well and want to continue to support.
In addition to traditional repayments. We are also seeing more refinancing like amendment activity, where sponsors who have well performing portfolio companies with upcoming maturities of preferred to delay exiting are engaging us in discussions in these situations sponsors are asking us to provide.
Modest additional maturity runway in exchange for attractive measure it economic increases.
The public to private takeover activity has slowed from last year's levels, but we still see new opportunities coming in.
Often these are four smaller deal sizes and the Mega deals we saw in 2022.
Overall, we are pleased with the current opportunity set for new deals and recently committed to two very attractive financings. The OLED pad illustrate these favorable conditions.
Just last week will allow committed to lead the financing for two market, leading businesses, new relic and worldwide clinical trials.
Both of these companies are market leaders with consistent and growing revenue streams in their respective sectors of software and healthcare two of our strongest sectors.
We're backing premier private equity firms with whom we have worked with multiple times before.
Serving as administrative agent and the largest lender on both of these facilities, which have a combined total of more than $3 billion of first lien financing.
Okay.
Looking at our pipeline today economics and terms remain attractive.
Leverage and LTV levels remain conservative.
With the reopening of public loan markets in recent months, we have seen some pressure on spreads which were at unusually high levels.
However, spreads still remain elevated relative to what we've seen over recent years and we can still earn 12% all in on new unit tranche investments.
We believe that there is pent up demand from sponsors and borrowers to resume buying and selling assets and refinancing capital structures.
The outlook for the rate environment and economic conditions stabilize.
We expect to see a meaningful increase in deal activity, resulting in new investment opportunities.
To close I'd like to thank all of you who joined US for our first Investor day, we.
We had a tremendous turnout and we were pleased to have an engaging day a covered our business in significant detail.
We hope everyone came away with a better appreciation of our people our process and our portfolio.
During the event, we shared our roadmap for the ways. We believe we can continue to increase overall Roe.
We continue to invest in our specialty financing portfolio companies, which deliver accretive returns across well diversified underlying portfolios.
We expect to see increased portfolio turnover once deal activity resumes, which will provide both an opportunity to reinvest that capital and to generate enhanced fee income.
Lastly, credit performance is always our top priority and we will continue to drive the strength and stability of our returns.
But those are for those who are not able to attend I would encourage you to visit the investor days section of our website, which includes a full webcast of the event and presentation materials.
We remain very confident in our portfolio and the resiliency of what we've built.
Believe we are well positioned for what's to come.
With that thank you for your time today, we'll now open the line for questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
May press Star two if he would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Casey Alexander with Compass point. Please proceed.
Hi, good morning, and thanks for taking my questions I've got a few.
Fairly simple ones here.
If I read it right you still have one.
$100 million left on the share repurchase program would it would it be fair to characterize it from this point forward.
It's less programmatic and more discretionary than it has been in the past.
Hey, Casey Good morning, Yes, I think that's fair I think that we were pretty clear in.
In previous discussions that we intended to execute on the $50 million company purchase and $25 million employee purchase in the near term.
And we and we've done that.
We're very pleased with how the stock has performed.
The program is still open, but I think it'll be more opportunistic from here, particularly with the nice performance in the stock.
Okay. Secondly, there has been a bit of a year over year pickup and in pick income can you contour that relative to your comments about working with your portfolio companies.
Sure the vast majority more than 90% of our Pik income.
Is from deals that were structured as pik.
From the beginning.
Not for credit concerns, but for particular.
Reasons specific to a bar.
Company.
Growing quickly and with like some flexibility.
Loan that we make that for structural reasons, it's more arduous to be serviced and cash pay and we're asked to make a pick and that plus 90% of the situations. We feel we're getting really nicely compensated for allowing that flexibility. There's typically a limit to it up two or three years and frankly, it's just a good trade.
Good use of our capital up to do so.
And so that that pic percentage.
The portfolio has grown over the course of the year as you noted not because of credit growing credit concerns just because we've chosen to do.
Those deals a bit more you'll note this quarter, our pik income is down and that's because we got a repayment of our largest single Pik position, which was a great example of everything I, just said really high quality loan structured as pick for particular reasons to the borrower and.
Hey.
Decided on their own to repay a significant amount of that and therefore, our pick income went down.
Excellent. Thank you last question and I'm going to ask you to put on sort of the Prognosticators hat here.
Okay.
Because it's been some of your comments.
It made me think of this question what is really the optimal level of benchmark rates.
That carries the combination of maximizing your income, allowing for the best distribution, but also keeping the least amount of stress on your borrowers where is that mix is it here is it 100 bps below here like Mike.
Whereas we're sort of the honey hole of benchmark rates, where our rock and their borrowers together operate in the most optimal and efficient manner.
Uh huh.
So I'll wrap my head around honey hole, but.
It's a good question.
We feel really comfortable with our portfolio even at today's higher rates.
You've heard on the call and I'll reiterate we have a great degree of confidence that the vast majority of our companies will.
Comfortably able to support their debt, but clearly many of these capital structures were put in place before the rate move and it's pressuring portfolio company cash flows.
From our perspective as a borrower.
It's manageable for the companies and they are managing it.
There's no doubt that if you talk to the Cfo's.
Liquidity is going to be tighter and theyre going to have to work harder to make sure that theyre able to not only.
Service their depth, but run their business. So I suspect I suspect, if we're being thoughtful and honest probably modestly lower rates would be.
Would be.
Better for the overall system.
In terms of both their comfort level and also earning more us earning suitable returns I mean, we were in floating rate investors, we benefit from higher rates, our shareholders benefited from higher rates Youre seeing this now these higher rates are resulting in us paying out more dividends.
And so I don't I wouldn't want rates to go down much more than we are here because it's great for our clients.
You throw out 100 basis points I don't think it's more than that 50 basis 50 to 100.
We'd probably be ophthalmology and by the way while rates are very elevated now and most most.
Most observers expect rates to go down we can debate to 12 months 18 months. So it's really a limited window of time.
As you know where it's at it's for us so.
That is.
Yes, Thats some thoughts.
Alright, great. Thank you very much for that that's all of my questions I appreciate it.
Thanks Casey.
Our next question is from Robert Dodd with Raymond James. Please proceed.
Oh, hi, guys and congratulations on the quarter I a question on credit quality, you can probably guess, it's coming on the detail I appreciate it.
You gave us in terms of color on the average, but and then 10%.
That's hard to say.
Yes.
What percentage of the portfolio currently is not covering interest, but tied to that what percentage of that.
To your point restructure pick club.
And on that basis, so what percentage of your portfolio is structured that way.
No not covenant light now and do you expect that to.
To evolve over time.
There are seven names with interest coverage less than one today.
That number at at sort of peak rates.
We think could be 12.
So seven today 12 at peak rates I don't have a dollar number but my guess is it's probably slightly less.
Percentage basis.
And the portfolio that is that 5% give or take 5%, maybe a few basis points higher.
<unk>.
So that's the group it's the same group of companies that we've been referencing.
<unk>.
Of this interest coverage statistic.
It's just one statistic.
I think it's a nice short hand for us to have conversations at a very high level to give you a flavor for relative stress in the portfolio, but obviously as a lender we looked at much more than just interest coverage statistics on how much liquidity as a company have what's the trajectory.
Working capital needs.
And the like.
So although those names that were talking about those are names that they will.
We should acknowledge are under theyre not they werent structured that way. There was these are names that are under some stress.
That's why they are on our watch list, that's why referring to them of names of notice. It. If it was the name that was around one times coverage, but but structured that way for particular reasons, we wouldnt be highlighting it as a name a name of concern.
So this is this is the universe, but the companies are really doing a nice job of working through this we work with them we're in dialogue with them constantly and the sponsors constantly.
It's not a fast moving object.
We sometimes we can look out we have project since we took out six months nine months and we proactively work with the companies and the sponsors to address problems well ahead of time.
And our confidence on why the universe isn't going to grow stems from the tremendous support from the financial sponsors even in situations, where the coverage is tight.
Our average loan to value in our portfolio was less than 45% and so if you're a financial sponsor and you have a company that is tight on liquidity, but you are but you think.
And then mark there they mark their portfolio as well you think are sitting on an equity investment with substantial value obviously in your own self interest to put some additional capital in the buy some time.
Particularly if you think rates are going to go down and that's the behavior, we're seeing and that's why that's why you're not seeing.
No real pickup in defaults the sponsors are solving the problem, we work with them, we want them to solve it and but it's a very I think a pretty constructive working relationship even in the more stress names.
I appreciate all that color.
Yeah, I definitely lead in Delek Smith.
It's not the only thing that matters that the more fulsome discussion of the east cave.
Helpful as well so on onto the outlook you gave good color on that as well.
So thanks.
New platforms Refis on add ons.
Everything seems to be ramping up right now is it.
Do you expect the mix as we go forward to shift more in that direction.
Obviously, there's a lot of refinancing that has to happen eventually.
But.
Is it going to be more new platforms.
Yes.
Better terms or more add on square.
The terms may carry some legacy.
Relationship benefits and returns might not quite as good as that.
Available on new pack format, I mean, any color you can give about how about that.
Take care.
Okay.
I think that there is a lot of pent up activity in every flavor that that you could consider add ons refinancings.
New buyouts auctions.
So I think all of it is pent up.
We approach any new investment.
With the mind of getting market terms at that time, so I I don't.
Don't think of an add on or.
Any kind of refinancing.
Relationship benefit to it we.
We want to get market terms and the sponsors want to get market terms in both directions, and so there's always discussion back and forth.
So I wouldn't I wouldn't look at the mix and think well one mix would result in better term El new deals will get better terms versus versus Refis I don't think you could draw that conclusion.
May be spent on.
The margin, but I wouldn't I wouldn't that is not how we think about what extent capital we really want to make sure we're getting compensated for it I mentioned it in the script, but I'll just underscore.
Underscore it here, we're quite excited about the deal flow environment.
It may not show up in third quarter completed deals because it takes a while from when we sign a deal to a closing.
But we just signed up to very attractive financings I mentioned in the script for new relic worldwide clinical these.
These are brand new deals sizable I mentioned few minutes ago 3 billion in financing, where leading both we will take the largest piece in both and they all have the same all the attributes of deals that we like in terms of credit quality and economic terms and covenants and protections and so I think we're seeing it now I guess.
That's why I'm. So we're seeing the pick up now it's just going to take a little bit of time for that as a result, and in new investments showing up on balance sheets. I also mentioned there is a bit of spread compression I mentioned it.
I'll re mention it spreads were extremely wide for nine months a year because the syndicated markets were shot spreads have compressed there is still a very attractive and elevated versus where spreads were 18 months ago. So I think it's a pretty reasonable place for borrowers and for for investors.
We are earning 12 plus percent on new unit tranche four sub 40% loan to value first first lien term loans I think it's extremely attractive.
We're fortunate to be in a position to lead.
Lead and have the biggest piece of some of these really attractive deals.
Got it thank you.
Thanks Robert.
Sure.
Our next question is from Ryan Lynch with <unk>. Please proceed.
Hey, good morning, Greg I wanted to follow up on kind of that last comment you just made on spreads I think you kind of alluded to this but.
You said spreads are still fairly wide, but are tightening. Thank you mentioned something about maybe the syndicated market, maybe opening back up and maybe pressuring that but I'd just love to hear what is really the driver behind spreads tightening a little bit because you would think with the <unk>.
Theres more deal activity out there.
You might kind of have the opposite thing happening. So I just wanted to hear is it because of the syndicated market opening up or another reason if it is because of the syndicated market opening up.
What's really the drivers behind that even.
Sure It is.
Mix Youll get some market Theres a lot of components that go into how we price our capital and how the the sponsors make their choices.
And so one component is the sponsors alternative financing in the public markets that was shut for a long time. It's open now the markets are open banks are willing to commit to deals.
And so the sponsors will consider what that pricing might look like the syndicated markets are not well suited for unit tranche financing.
The syndicated markets offered generally first lien financing and if you want additional that you can get that in the form of second lien or high yield bonds generally doesn't have unit tranches of solution in part because the rating agencies would give it not a great rating and therefore, the CLO buyers, who buy all of the syndicated deals wouldn't buy it.
So it's really comparing a unit tranche from a direct lender versus a combination financing from a bank, which has flecks and uncertainty to it but they will try to do that math. So when the banks are open as they are now and they're willing to underwrite the sponsors will compare here's the combination pricing of these two pieces factor in the flex compared to the <unk>.
Certainty that we can provide and they will pay us a premium for it but that premium has to be and somewhat related to what their options are so that's one variable. Another variable is just the general competitive environment for direct lenders to folks have capital are they willing to commit that capital and on what terms.
And so I would say a year ago.
We were not in this camp, but there were some large direct lenders that werent as flushed with capital.
For whatever reason fundraising repayments.
And so we've seen an increased.
Desire by by some direct lenders again, we've been pretty consistent the whole time, but we've seen some network.
Kind of.
A bit more on their heels have been coming in more aggressively and willing to push for tighter pricing.
So those are some of the factors.
And so you've seen some spread compression again.
Getting 600 625 over on unit tranche.
That's at least 50 basis points wider than the types of 12 to 18 months ago. So it's just it's just the market goes up and down.
And I think it's been a really healthy place now so to your question well there is no more new deals why is it going tighter well.
Supply and demand, yes, there's more new deals, but there's also more capital coming to chase those deals and over the last I would say over the last couple of months that's resulted in this.
Spread tightening, but I think it's kind of leveled out at this point, we will see could go wider could go tighter.
We can get focused on the spread numbers the base rates are extraordinarily high and the credits the deals really attractive. So yeah of course, we would all prefer to get an extra 25 or 50 basis points of course, we'd like that but I just think what's exciting and I mentioned these two deals, but they are indicative of the quality of <unk>.
What we're seeing is extremely high and so and so.
I took a lot of comfort in that.
Mhm, Yeah, that's really really helpful kind of fulsome common channel to all the moving pieces. So that's great.
The other question I had was.
Just going back to the.
The dividend and dividend policy, obviously, you guys had this supplemental dividend policy.
But the core is now when the original quota stat and then raised.
Your earnings have moved up substantially I know the supplemental dividend policy captures some of that but I'm just curious.
The most recent quarter. If you look at the earnings supplemental for next quarter that you guys are projected you guys have about 120%.
Dividend coverage.
Total dividends is that where you want to be or is there any thought to to get that that gives a total dividend payout a little bit closer to earnings.
I'll comment and then Jonathan can add.
Look I've been really pleased with how the supplemental dividend has worked.
When we introduced it was new.
In recognition of higher rates, we knew we'd be earning more on the portfolio and you're trying to strike this balance.
With offering the clear certainty of the stated dividend plus.
The predictability of the supplemental.
Again, it's a tricky.
Everybody wants certainty, but our underlying assets are floating rate and they move around so how do you offer certainty of something thats fundamentally moving around and we think the supplemental construction.
Is a great way to do that.
We increased our base at the time I know you recall from 31 to 33.
Again, what I think it should be clear, but I just want to make sure it's clear.
It's a formula that we're committed to every quarter. So are our investors I think should have a high degree of confidence at these earnings levels exactly what the supplemental will be we basically committed to pay out 50% in excess and then we're building a very nice amount of additional spillover income, which we've never had before.
For a more relatively new public company and so we think that offers additional comfort to investors seeking future two X two or three years now we are consistently able to sock away some additional earnings.
In that in that spillover income so I feel like this has worked out really well shareholders are benefiting from more money in their pocket are also benefiting from increased cushion.
In terms of the guts of your question.
Given the we're going to every quarter, we're going to look at it right, but I'd say, it's an uncertain time for the trajectory of rates.
It's just as we all know that.
And so.
I think that in the very short term.
We probably would want to see some greater clarity on where rates might go over the next two or three years before we would look to change. So I don't think theres any magic formula.
Percentage.
But I do think that the components of the formula are just going to move around a bit here and so we will watch it we're very motivated to.
<unk>.
Deliver.
Capital back to our shareholders.
All shareholders I'm, a shareholder I like getting dividends, we're going to continue to look for ways for increasing them, but we also know that people value consistency and so we don't want to lean into something and then three or six months later.
It does create some unnecessary anxiety about whether it is going to get reduced again I think this formula really does a nice job of balancing those two.
Okay.
I understand.
Thats all from me I appreciate the time today.
Thank you.
Our next question is from Derek Hewett with Bank of America. Please proceed.
Good morning, everyone and congrats on the good quarter, Craig could you talk about your outlook for the we inspire dividends it looks like the dividend is down about a couple of million dollars to two eight on a quarter over quarter basis, but if you look at.
The scheduled investments it looks like the BDC actually added to the investment and then there was a modest write up of the investments during the second quarter.
Sure.
Really as we've talked about multiple times, we created the wings fire business organically working with.
An experienced management team built out a substantial business.
There that we're very happy with the performance they did an acquisition in the equipment finance business.
And so we are we continue to add capital to Wink spire, it's a <unk>.
Diversified pool.
Our underlying asset base loans and.
And equipment finance loans and so we.
We're pleased with the performance, we're going to continue to add capital.
We we at Adobe do you see.
Through our role on the Boeing spire board meet regularly with the wings fire team to determine dividend levels coming out of wing spire.
And softly and carefully and they may go up or down a bit in any given quarter based on what's happening at wings fire. So.
It had increased nicely to $10 million in the previous quarter 8 million. This quarter I think thats the right neighborhood to think about the dividend levels.
Just on performance and so we'll.
It's going to be a low double digit maybe one day, a bit higher than that or return or for us I think that's terrific returns and want to continue to invest.
Capital in it so.
Any one quarter could be in that one.
Two in one direction or the other but I think I think this is the right range to think about wings fire dividends.
Okay, great. Thank you.
Thank you.
Our next question is from Mark Hughes with truly Securities. Please proceed.
Yes. Thank you good morning.
With the it sounds like the third quarter off to a good start on origination activity.
Any sense on the net investment.
In.
Kind of coming period, if you've got more repayments, how do you think that'll balance out.
Yes, I just want to make sure im not giving the wrong impression.
Our deal flow today in these couple of deals that we signed up.
Without speaking to any one specific deal you shouldnt read that into translating into origination in the third quarter already in the third quarter now I'm, commenting on the deal flow. We're seeing now that's getting signed up that might close in the next six months nine months. It doesn't it just doesn't get close overnight.
So in the third quarter sitting here right now we had we had.
Moderate.
Origination quarter, we had a nice pickup in repayments.
I'd say net net just sitting here right now the third quarter, probably the repayments were running a bit behind.
Right now in the third quarter, where we landed in the second quarter now Mark can happen over the next six weeks, but I'd say right now so we're running a bit behind it.
Terms of origination, we're probably running on pace, which is a modest quarter. So.
Not going to be a significant pickup in origination maybe a bit of a decline in repayments and net net.
Modest growth in the portfolio were slightly up or slightly down.
Yeah Yeah.
Would you venture to say when do the lines cross.
Walmart the lines are never going to cross because.
We're really targeting a leverage or leverage target right. So we've got our <unk> nine and one in a quarter times leverage target and so.
Where we are.
In essence, the repayments are what drive our originations I mean as a platform.
We're quite active we originated more than $3 billion of deals in the second quarter more than <unk>, our first quarter.
As a platform we're seeing everything.
And our ramping funds are investing.
But for <unk>, specifically, given that we are living with and on the leverage targets that we've been very clear on.
In any one quarter kind of matching up origination.
To match repayments. So if we get modest repayments you should expect to see modest origination.
Now at some point I mean, it's not going to be in the third quarter.
At some point I think youre going to see a.
Dare I say dramatic pickup in repayments, because theres, just a lot of pent up.
Desire for sponsors to exit companies and return capital to their Lps to refinance.
There's just there's a lot of a lot of deals that I think are sort of hovering out there. So at some point it will pick up quite dramatically.
So.
We'll be an environment, where theres lots of repayments and lots of origination, but the net net will probably still be.
It's close to zero as possible so within that that leverage target so does that make sense.
Sure, Doug I'll rephrase, Linda the lines need would be.
The Academy.
If you stare at every quarter.
Youre going to see US you've got it you can't you can't match it up perfectly because prepayments happen when they happen, we'll do deal closes when it happens you can't you can't match it up perfectly, but we're basically at that point, we'd been at that point for the last several quarters, where we are hovering right in that right in that.
One one to one and a quarter times leverage we think that's the optimal level off for US there are some that run a bit higher than that.
Which you can have a view that.
It will help you with returns but.
We care about our bondholders to and so we prefer not to be a bit higher than that I think if you run a bit lower than that.
It's going to hurt your returns and so we prefer I think it's just kind of the sweet spot.
Understood and then the other question the increase in fees in the quarter I think you alluded to amendments in repayments.
The balance of those two and the impact which was more significant.
Mostly mostly related to repayments or refinancing some of it just to characterize economy from an accounting perspective is amendment, but it is not an amendment due to anything happening at the portfolio company, but more theyre doing a refinancing.
Qualify as.
A brand new financing for GAAP. So it gets treated as amendment.
Yes, I will I will add in that.
Although our repayments were higher this quarter the economics that we earn from amendments and fees was even a bit higher than we would have guessed for the mix it wound up being a sort of a lucrative.
Amount of.
Fees. So as you think about our third quarter.
There's probably a penny or two of extra fees in there that were sitting here right now we're not seeing for the third quarter.
Again, it's early but I just.
Shouldn't just to sort of straight lining across even if repayment stay at the same level again, we will see but there were some.
Some exit fees that won't necessarily repeat.
And there.
Are helping that number.
Thank you.
Our next question is from Bryce Rowe with B Riley Securities. Please proceed.
Hi, Thanks, good morning.
Maybe wanted to just to follow up on the discussion around repayments just curious if.
Quarterly repayments were more kind of normal course or.
What kind of productivity on your part two.
To get in front of what might be higher origination visibly.
We look forward.
Well I'm not sure. If this is going to answer your question.
Okay.
We.
Fundamentally the decision on when we get repaid and a <unk>.
<unk> credit is a function of what the company is up to them what the sponsors up too.
There is certainly probably name or two we wouldn't be disappointed if they repaid us but those tend to be more challenged situations that have lost the ability to do so so I think it's just the healthy to healthy activity of a well performing portfolio and sponsors and companies on their own timetable deciding when to.
Refinance or want to grow through acquisition.
You mentioned it in the script, but I think one of the interesting things.
As we get we got approached.
A handful of times this quarter were.
The sponsor and their hope would have exited the company. This past year. They wanted to sell the company, but the environment was one where they didn't think it was a wise time to sell the company, but they might've had a maturity in two or three years, so being prudent they don't want to wait too long to address the maturity, but they are not quite ready to sell and so although engaged.
And his discussion where they say look we'd like another year of runway. So that there's no gun to our head and were willing to pay for it and if it is a well performing business.
<unk>.
We're happy to engage in those discussions it's very constructive.
We've been in the credit we know well, we're not changing our exposure and we will have a fulsome.
Review of the terms and the covenants and basically price in what we think is attractive to us to give them another year or two which is typically.
Can include getting at giving us a fee increasing the spread adding call protection.
Tightening of Covenant basket those are the menu of things that we look at.
And the private equity firms really like that because.
This is one of the great attributes of direct lending they can call us up have one conversation, we can turn that around in a couple of weeks and they can be done in the syndicated markets. It's just not possible, it's not possible to get it done and even if he could get it done it could take months and months and so this is this is something that we do well and I think it.
<unk> built a lot of.
Connectivity and loyalty with a private equity firms when they see that user friendliness of the private credit solution and we like it because we get to keep all alone two company, we already have that we like and with better economics, and which is likely to exit in the next year or two and so that type of activity happened in the second quarter.
And I think youll see more of that at some point, you're going to just going to see deal with deal activity resume and they'll exit but in the meantime. This is one of the ways that were working with private equity firms to have a win win.
And Craig is that is.
Is that process or is that more of a dialogue or part of the ongoing dialogue or is.
Is it again using network productivity are you being proactive.
To get in front of those maturities or is it the private equity firm, that's trying to be proactive to get in front of it just kind of curious how how the Conversely, we thought we are our team talks to the sponsors all the time.
All the time, I mean weekly and we're talking about that were certainly covering every company quarterly and we're talking to the Cfo's.
Their bank.
The revolving credit provider, they give us reporting nothing thats sneaking up on us nothing thats sneaking up on them.
A fluid ongoing dialogue.
We part of our job is to make sure. They know what options they have available and what we can support part of their job is to talk to their lenders and asked what the art of the possible is.
There are times, we have these discussions we can spend six week going back and forth and they decided to wait.
This is a key.
A constant level of dialogue.
That.
It's not one or the other it's just constant back and forth and a tight partnerships that we have with our companies.
Not to digress too much but we had a our second annual CFO conference just a couple months ago, We did our Investor day, which was terrific. We did a whole separate event just for the CFO of our companies and brought them to New York with 50 Cfo's spent today with US we had some really good content, we are close to our companies we don't.
Wait for problems they don't want to.
Problems are.
Constant dialogue with them.
Got it maybe one more for me.
You've got plenty of availability on the revolving line.
Debt capital markets have kind of open back up.
To a higher extent here here recently, just curious how youre thinking about that.
The April 24 unsecured maturity at this point.
Yes, I mean look we've got as I think I've mentioned in the script, we've got a significant amount of liquidity in excess of.
Our unfunded commitments and so the way that we're looking at that maturity is we want to be opportunistic about it. We think we have we have options elsewhere on our platform.
We've been successful in issuing unsecured we can go to that here, where we can take it out with the revolver because we've got plenty of capacity. So we have that optionality and so we're not in any rush to make any.
Make any decisions with respect to it we will see what.
What makes most sense from an economic perspective in the market as we get closer.
Awesome. Thanks, Jonathan I appreciate you all stand today.
Thank you.
We have reached the end.
A question and answer session I would like to turn the conference back over to Craig Packer for closing comments.
Well. Thank you all some great questions and say, we're really pleased with the results.
Encouraged by the stock movement and excited to keep delivering strong results for the back half of the year. So hope everyone enjoys their day and thanks for spending some time with us.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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Okay.
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Yeah.