Q2 2023 Blackstone Secured Lending Fund Earnings Call
Speaker 1: Please stand by.
Please standby.
Speaker 1: Good day and welcome to the Blackstone Secured Lending second quarter 2023 investor call. Today's conference is being recorded. During today's call, if you need any operator assistance, please press star zero. If you would like to ask a question during today's presentation, please press star one on your telephone keypads. At this time, I'd now like to turn the conference over to Ms. Stacy Wong, head of stakeholder relations. Please go ahead, ma'am.
Good day and welcome to the Blackstone secured lending second quarter 2023 Investor call. Today's conference is being recorded during today's call. If you need any operator assistance. Please press star Zero. If you would like to ask a question. During today's presentation. Please press star one on your telephone keypad at this time I'd now like to turn the conference over.
To Ms Stacy Wang head of stakeholder relations. Please go ahead ma'am.
Thank you.
Speaker 2: Good morning and welcome to Blackstone Secure Lending second quarter call. Earlier today we issued a press release with a presentation of our results and filed our 10Q, both of which are available on the shareholders section of our website, www.bxsl.com.
Good morning, and welcome to Blackstone's secured lending second quarter call earlier today, we issued a press release with a presentation of our results and filed our 10-Q, which are available on the shareholders section of our website www.
Dot com.
Speaker 2: We will be referring to that presentation throughout today's call. I'd like to remind you that this call may include forward-looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duties.
We will be referring to that presentation throughout today's call.
I'd like to remind you that this call may include forward looking statements, which are uncertain and outside of the firm's control and may differ materially from actual results.
Not undertake any duty to update these statements.
Speaker 2: For some of the risks that could affect results, please see the risk factor section of our most recent annual report on form 10K. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I'll turn the call over to BXSL's Co-Chief Executive Officer, Brad Marshall.
For some of the risks that could affect results. Please see the risk factors section of our most recent annual report on Form 10-K.
This audiocast is copyrighted material of Blackstone and may not be duplicated without consent with that I'll turn the call over to <unk> co Chief Executive Officer, Brad Marshall.
Speaker 3: Thank you, Stacey, and good morning, everyone. Joining me today is Co-Chief Executive Officer John Bach and our Chief Financial Officer Teddy DeLoos.
Thank you Stacey and good morning, everyone.
Joining me today as co Chief Executive Officer, John Bock, and our Chief Financial Officer Deloach.
Speaker 3: Turning to this morning's agenda, I'd like to start with some high-level thoughts on the market and the portfolio, before turning it over to John and Teddy to go into more details on the portfolio and our second quarter results. So, turn it over to John and Teddy to go into more details
Turning to this morning's agenda I'd like to start with some high level thoughts on the market and the portfolio before turning it over to John and intent to go into more details on the portfolio and our second quarter results.
So turning to slide four.
Speaker 3: CXSL reported another strong quarter, which was highlighted by our record quarterly net investment income per share, an increase in our base dividend distribution, increased net asset value, and continued strong portfolio credit performance.
<unk> reported another strong quarter, which was highlighted by a record quarterly net investment income per share an increase in our base dividend distribution increased net asset value and continued strong portfolio credit performance.
Looking at the details net investment income or NII increased 14% quarter over quarter, and 71% year over year to <unk> record of $1 six per share, which represents a 16, 2% annualized return on equity.
Speaker 3: Looking at the details, net investment income, or NAI, increased 14% quarter over quarter and 71% year over year to a BXSL record of $1.06 per share, which represents a 16.2% annualized return on equity.
Speaker 3: In the quarter, we also announced a 10% increase to the third quarter base dividend distribution of 70 cents per share to 77 cents per share, which represents an 11.7% annualized distribution on our June 30th net asset value per share.
In the quarter, we also announced a 10% increase to the third quarter base dividend distribution of <unk> 70 per share to <unk> 77 per share, which represents an 11, 7% annualized distribution on our June 30, net asset value per share one of the highest among our BDC peers.
Speaker 3: one of the highest among our BDC peers with as much of its portfolio invested in first-lane senior security assets.
With as much of its portfolio invested in first lien senior secured assets and we covered our second quarter dividend by 151%.
Speaker 3: And we covered our second quarter dividend by 151%.
Speaker 3: From a portfolio perspective, we continued our focus on protecting investors capital. During the quarter, 100% of the investments we made were first-lane senior secured with an average loan to value of 43.8%.
From a portfolio perspective, we continued our focus on protecting investors' capital.
During the quarter of 100% of the investments. We made were first lien senior secured with an average loan to value of 43, 8%.
Speaker 3: As of June 30th, BXSL's portfolio is 98% firstly in Senior Secured, with a 46.5% average loan to value.
As of June 30, <unk> portfolio is 98% first lien senior secured with a 46, 5% average loan to value.
Speaker 3: has a minimal non-acroll rate of 0.14% at Amortized Costs or 0.07% at Fair Market Value. And has only 1% of debt investments marked at Fair Value below 9%.
As a minimal non accrual rate of 0.14% at amortized cost or 0.07% at fair market value and is only 1% of debt investments marked at fair value below 90.
Speaker 3: Our net asset value, which increased to $26.30 per share from $26.10 the previous quarter, reflects portfolio stability.
Our net asset value, which increased to $26 30 per share from $26 <unk> the previous quarter reflects portfolio stability.
Speaker 3: Slide five provides additional highlights on our portfolio activity and strong liquidity.
Slide five provides additional highlights on our portfolio activity and strong liquidity position second quarter sales and repayments were $465 million in line with what we communicated on previous calls.
Speaker 3: Second quarter sales and repayments were $465 million in line with what we communicated on previous calls.
Proceeds from sales and repayments were primarily used to reduce leverage to our targeted range of one to one five times and other proceeds were used for new investments of $117 million. Additionally, we generated $7 2 million of realized gains in the second quarter associated with.
Speaker 3: Proceeds from sales and repayments were primarily used to reduce leverage to our targeted range of one to 1.25 times. And other proceeds were used for a new investment of 117 million. Additionally, we generate a 7.2 million of realized gains in the second quarter, associated with our exit of west.
With our exit of Westland.
And while equity positions only account for one 2% of the portfolio. We continue to be very strategic about those commitments. For example inception to date BSL cash proceeds from realizations of equity positions totaled $95 million on a total of $52 million invested.
Speaker 3: And while equity positions only account for 1.2% of the portfolio, we continue to be very strategic about those commitments. For example, in section to date, BXL cash proceeds from realizations of equity positions total 95 million on a total of 52 million invested across those.
Across those positions west unrealized in the second quarter, and 2023 and data side in the third quarter of 2022.
Speaker 3: Western Realize in the second quarter in 2023 and data site in the third quarter of 2020.
Speaker 3: Looking forward, we expect our deal pipeline to continue to build if economic strength continues to exceed expectations.
Looking forward, we expect our deal pipeline to continue to build its economic strength continues to exceed expectations.
Speaker 3: Just as Blackstone was early to spot inflation, we are beginning to see it fall across our ecosystem of portfolio.
Just as Blackstone was early to spot inflation.
We are beginning to see it fall across our ecosystem of portfolio companies for.
Speaker 3: For example, within the Blackstone portfolio on a year over year basis, input costs grows just 1.7% and shipping costs are now back to pre-COVID level.
For example, within the Blackstone portfolio on a year over year basis input costs Rose just one 7% and shipping costs are now back to pre COVID-19 level.
Speaker 3: As you've heard us say in the past, we continue to expect an economic slowdown due to the impact sustained higher rates. What does this mean for-
As you've heard us say in the past we continue to expect an economic slowdown due to the impact of sustained higher rates. What does this mean for private credit markets.
With the slowdown comes caution and scarcity of capital, resulting in a reshuffling of debt capital providers as commercial banks continue to retrench private credit markets continued to expand.
Speaker 3: But the slowdown comes caution and scarcity of capital, resulting in a reshuffling of debt capital providers. As commercial banks continue to retrench, private credit markets continue to expand.
Speaker 3: Through the first half of the year, private credit managers, including Blackstone Credit, executed 108 of the 120 leveraged bio deals that came to mark.
Through the first half of the year private credit managers, including Blackstone credit executed 108 of the 120 leveraged buyout deals that came to market.
Speaker 3: We see this as a result of the benefits that come with private credit solutions, such as flexibility, certainty, and confidentiality as compared to uncertainty in the public market.
We see this as a result of the benefits that come with private credit solutions, such as flexibility certainty and confidentiality as compared to uncertainty in the public markets.
Speaker 3: Looking at our activity, the number of deals we consider has more than doubled in the last quarter, as private equity sponsors look to deploy capital. We believe these transactions represent a healthy funnel for BXSELP to deploy into and are in line with BXSELP's core strategy. Predominantly, first lane, senior security exposure, and historically, recession, resilient sectors, we know very well.
Looking at our activity the number of deals we considered has more than doubled in the last quarter as private equity sponsors look to deploy capital. We believe these transit transactions represent a healthy funnel for <unk> deploy into and are in line with <unk> core strategy predominantly first.
<unk> senior secured exposure and historically recession resilient sectors, we know very well.
Speaker 3: We believe that we will see deal activity continue to pick up over the remainder.
We believe that we will see deal activity continue to pick up over the remainder of the year.
Our weighted average yield on debt investments at fair value increased from 11, 4% last quarter to 11, 8% at this quarter end, primarily driven by higher base rates yield.
Speaker 3: Our weighted average yield and debt investment fair value increased from 11.4% last quarter to 11.8% at this quarter end, primarily driven by higher base.
The yield on new debt investment fundings during the quarter averaged 12% while yield on assets repaid or sold down during the quarter averaged 11, 3% boosting our weighted average yield in the portfolio importantly base rates on our 99% floating rate portfolio.
Speaker 3: yield a new debt investment funding during the quarter average 12% while yield on assets repaid or sold down during the quarter average 11.3%. Boosting our weighted average yield in the portfolio. Importantly, base rates on our 99% floating rate portfolio expanded approximately 400 basis points since second quarter of last year.
Banded approximately 400 basis points since second quarter of last year.
Turning to slide six.
Speaker 3: We ended the quarter with $9.3 billion of investments, average fund leverage of 1.26 times, and ending leverage of 1.15 times, down from 1.33 times and 1.31 times, respectively, last quarter.
We ended the quarter with $9 3 billion of investments.
Average fund leverage of 126 times and ending leverage of 115 times down from 133 times and 131 times, respectively last quarter.
Speaker 3: We also remain well positioned with $1.8 billion in liquidity, including cash and borrowing capacity, to lean into a growing pipeline.
We also remain well positioned with $1 8 billion in liquidity, including cash and borrowing capacity to lean into a growing pipeline.
One of the key benefits of having a scaled platform like Blackstone credit.
Speaker 3: One of the key benefits of having a scale platform like Blackstone Credit is our ability, not just to participate in deals, but to create and lead them. In 82% of Black's BXSL's portfolio, Blackstone Credit served as the sole or lead lender.
As our ability not just to participate in deals, but to create and lead them and 82% of blacks <unk> portfolio Blackstone credit served as the sole or lead lender.
Speaker 3: We value the ability to drive outcomes, whether on the front end with credit documentation, or later in life of the loan, should the company face challenges.
We value the ability to drive outcomes, whether on the front end with credit documentation or later in life of the loan should the company faced challenges.
Speaker 3: Further, being part of the world's largest alternative asset manager, with over a trillion dollars in assets under management as of June 30th, 295 billion of which comprises Blackstone credit insurance, we have the opportunity to build an investment network which we can offer investors distinct advantages.
Other being part of the world's largest alternative asset manager with over a trillion dollars in assets under management as of June 30.
295 billion of which comprises Blackstone credit insurance.
We have the opportunity to build an investment network, which we can offer investors distinct advantages.
For example, we leverage our sector expertise and insights across the Blackstone platform with over 100 senior advisors.
Speaker 3: For example, we leverage our sector expertise and insights across the Blackstone platform with over 100 senior advisors, 50 data scientists.
<unk> data scientists.
Speaker 3: and force 170 employees and technology and innovations, providing valuable perspectives as we make investment decisions and manage our portfolio.
470 employees in technology, and innovations, providing valuable perspectives as we make investment decisions and manage our portfolio.
Speaker 3: Having this data advantage by being part of the largest alternative platform globally is a key differentiating factor. Whether it comes in the form of sourcing investment opportunities or diligently seeing these opportunities in the market or looking at business trends.
Having this data advantage by being part of the largest alternative platform globally is a key differentiating factor whether it comes in the form of sourcing investment opportunities.
Diligence ing these opportunity.
In the market or looking at business trends.
With over 450 professionals Blackstone credit has the scale and bandwidth to form investment opinions and over 3000 corporate issuers that we currently invest in globally.
Speaker 3: With over 450 professionals, Blackstone Credit has a scale in bandwidth to form investment opinions in over 3,000 corporate assures that we currently invest in global.
Speaker 3: We also have one of the largest leveraged loan and CLO platforms managing over $100 billion in liquid credits. This scale in our liquids business, in addition to our private origination platform, is a huge step up.
We also have one of the largest leveraged loan and CLO platforms managing over $100 billion in liquid credit.
This scale in our liquids business. In addition to our private origination platform <unk>.
Speaker 3: helps drive incumbent deal flow and has led to over $12 billion in new private credit opportunities for blackstone credit over the last two and happy
Helps drive incumbent deal flow and has led to over $12 billion of new private credit opportunities for Blackstone credit over the last two and a half years. Additionally.
Speaker 3: Additionally, within BSXL, over 95% of deals we've committed to in the past quarter, were issuers with whom Blackstone had a pre-existing relationship.
Additionally, with NPS XL over 95% of deals we've committed to in the past quarter, where issuers with whom Blackstone had a preexisting relationship.
Speaker 3: And finally, Blackstone credit provides more than just capital to our portfolio.
And finally.
Blackstone credit provides more than just capital to our portfolio companies <unk> borrowers are offered the full access to Blackstone credits value creation program.
Speaker 3: DXSL borers are offered the full access to Blackstone Credit's value creation program.
Speaker 3: We believe the sets Blackstone created a part with our differentiated platform broad network and dedicated teams who can partner with portfolio companies to add value after we make a lot.
We believe this sets Blackstone credit apart with our differentiated platform broad network and dedicated teams who can partner with portfolio companies to add value. After we make a loan.
Speaker 3: We believe these are important points of distinction. One, that complements our strong results, and strengthens our ability to continue to drive attractive risk-adjusted returns for our endists.
We believe these are important points of distinction one that complements our strong results and strengthens our ability to continue to drive attractive risk adjusted returns for our investors.
Speaker 3: You see some of that in the numbers today, not just in the returns which we have previously discussed, but also underlying credit performance.
You see some of that in the numbers today not just in the returns, which we have previously discussed.
Also underlying credit performance only 0.14% of amortized cost or 0.07 of fair market value of the portfolio is on nonaccrual.
Speaker 3: Only 0.14% of amortized cost was 0.07 of fair market value. Of the portfolio is unnonacrural.
Speaker 3: Just 1% of our debt investments are currently marked blown up.
Just 1% of our debt investments are currently marked below 90.
Speaker 3: and only 0.22% of our portfolio at cost has asked for performance.
And only 0.22% of our portfolio at cost has asked for performance related amendments this quarter.
Also the quality of our earnings remains very high with limited onetime fee driven income and non pick interest accounting for 96% of total interest income.
Speaker 3: Also, the quality of our earnings remains very high with limited one-time feed driven income and non-pick interest accounting for 96% of total interest.
Speaker 3: We continue to believe that our focus on credit quality will be reflected in our numbers as you measure those against our peers. With that,
We continue to believe that our focus on credit quality.
We will be reflected in our numbers as you measure those against our peers.
With that I will turn it over to John .
Speaker 3: Thank you Brad and let's turn to the portfolio. Jump to slide seven.
Thank you, Brad and let's turn to the portfolio jumped to slide seven.
Speaker 3: As Brad mentioned, we heavily stress our seniority because of the economy flows and interest burdens elevate on businesses overall. We see the top of the capital structure as most defensive for in that-
As Brad mentioned, we heavily stress our seniority because as the economy slows and interest earnings elevate businesses overall, we see the top of the capital structure as most defensive for investors. So importantly, 98% of <unk> investments are in first lien senior secured loans and over 95.
Speaker 3: importantly, 98% of BXSL investments are in first lean, senior secured loans, and over 95% of loans are to companies owned by private equity firms or other financial sponsors who generally have access to additional equity capital to support their company.
Loans are to companies owned by private equity firms or other financial sponsors who generally have access to additional equity capital to support the company's now the portfolio is highly <unk> with an average loan to value of 46, 5%.
Speaker 3: Now the portfolio is highly equitized with an average loan to value of 46.5%.
Speaker 3: But as we often say, it's not just that we're senior in the capital structure. More importantly, we're focused on senior loans with companies of the right size and the right industry.
But as we often say it's not just that we're senior in the capital structure more importantly, we're focused on senior loans with companies of the right size in the right industries.
Speaker 3: focusing on size. Our portfolio companies have a weighted average EBITDA of 183 million, relative to 149 million as of 2Q22, as we continue to orient the portfolio to larger, more durable businesses. Slide eight focuses in our...
Focusing on size our portfolio companies have a weighted average EBITDA of $183 million relative to $149 million as of <unk> 22, as we continue to Orient the portfolio to larger more durable businesses.
Mid eight focuses in our industry exposure.
Speaker 3: where we believe investing in better companies and better neighborhoods drives strong returns over time. This means focusing on key sectors with low default rates and lower CapEx requirements, such as software, healthcare providers and services and professional services, which account for over 35% of the investment portfolio. Diving into portfolio quality further, jump to slide 9.
While we believe investing in better companies and better neighborhoods drives strong returns over time. This means focusing on key sectors with low default rates and lower capex requirements, such as software health care providers and services and professional services, which account for over 35% of the investment portfolio.
While we believe investing in better companies and better neighborhoods drives strong returns over time. This means focusing on key sectors with low default rates and lower capex requirements, such as software health care providers and services and professional services, which account for over 35% of the investment portfolio.
Diving into the portfolio quality further jump to slide nine.
Speaker 3: We remain steadfast in our approach to invest in larger companies based on the simple belief that larger scale businesses handle the adversity of economic cycles better than smaller ones. And here's what supports that view.
We remain steadfast in our approach to invest in larger companies based on the simple belief that larger scale businesses.
Handle the adversity of economic cycles, better than smaller ones and here's what supports that view.
Speaker 3: As this slide shows, the relative risk adjust to returns of spread per turn of leverage for large deals, as well as middle market deals as measured by the Lincoln Senior Debt Index, is effectively the same at 158 basis points. But notice,
As this slide shows the relative risk adjusted returns of spread per ton of leverage for large deals as well as middle market deals as measured by the Lincoln Senior debt index is effectively the same at 158 basis points.
But noticed some key differences.
Speaker 3: Larger companies with over a hundred million of EBITDA have grown at over five times the rate of smaller companies with less than fifty million dollar in EBITDA. Larger companies also default much less often with a default rate that is less than one fifth that of middle-larget companies, which is why we remain steadfast in our belief that larger-scale businesses handle the adversity of economic cycles better.
Larger companies with over $100 million of EBITDA have grown at over five times the rate of smaller companies with less than $50 million in EBITDA.
Larger companies also default much less often with the default rate that is less than one fifth that of middle market companies, which is why we remain steadfast in our belief that larger scaled businesses handle the adversity of economic cycles better and.
Speaker 3: And on slide 10, we can see BXSL's company fundamentals compared to the private credit market as measured by the link and see your debt index. And as you can see, BXSL's portfolio has a weighted average EBITDA of 183 million compared to the private credit market average of 87 million. And this larger focus has yielded companies with stronger EBITDA growth year over year and also companies that are 30% more profitable.
And on Slide 10, we can see <unk> company fundamentals compared to the private credit market as measured by the Lincoln Senior debt index and as you can see.
The sales portfolio has a weighted average EBITDA of $183 million compared to the private credit market average of $87 million and this larger focus has yielded companies with stronger EBITDA growth year over year and also companies that are 30% more profitable.
Speaker 3: Now that this stuff tails into a discussion on interest cover.
This dovetails into a discussion on interest coverage and remember interest coverage is a stat that gets widely shared on other listed BDC earnings calls, but as we've mentioned previously the way it's calculated by BDC managers varies widely in some cases certain sectors or types of loans are excluded in other cases manner.
Speaker 3: And remember, interest coverage is a stat that gets widely shared on other listed BDC earnings calls. But as we've mentioned previously, the way it's calculated by BDC managers varies widely. In some cases, certain sectors or types of loans are excluded and other cases managers exclude negative EBITDA cumbersome.
<unk> exclude negative EBITDA company.
Speaker 3: When we calculate interest coverage, we include all private companies, EBITDA, including those that have borrowed on a recurring revenue loan. Next, we compare our portfolio to the industry database to give a sense of relative portfolio quality. So let's dive into it.
When we calculate interest coverage. We include all private companies EBITDA, including those that have borrowed on a recurring revenue loan.
Next we compare our portfolio to the industry database to give a sense of relative portfolio quality, so let's dive into it for.
Speaker 3: For BXSL, the last 12-month average interest coverage ratio was two times.
<unk>. The last 12 months average interest coverage ratio was two times, which is slightly higher than the market average of one five times and this shows that <unk> portfolio companies generate greater earnings with which to pay their interest when compared to the broader market average now.
Speaker 3: which is slightly higher than the market average of 1.5.
Speaker 3: And this shows that BFFS portfolio companies generate greater earnings with which to pay their interest when compared to the broader market average.
Speaker 3: Now, this difference remains resilient when we run interest rates forward at 5%, which brings our average interest coverage to 1.7 times versus the private credit markets at 1.4.
This difference remains resilient when we run interest rates forward at 5%, which brings our average interest coverage to one seven times versus the private credit markets at one four.
Speaker 3: We attribute this ability to our focus again on larger, more profitable, higher growth businesses.
We attribute this to lead to a focus again on larger more profitable higher growth businesses.
Speaker 3: Yet, we also hear from investors and other market participants that it's less about the averages.
Yet we also hear from investors and other market participants that it's less about the averages and more about the tail.
And so on an LTM basis, <unk> had approximately 2% of its portfolio with an ICR below one but.
Speaker 3: And so on an LPM basis, BXSL had approximately 2% of its portfolio with an ICR below one. But it's more relevant for investors to evaluate the percentage of one's portfolio below an ICR of one on a forward basis using higher base rates.
But it's more relevant for investors to evaluate the percentage of one's portfolio below an ICR of one on a forward basis using higher base rates.
Speaker 3: And if we throw flow through base rates of 5%, we can see that we would have roughly 8% of our portfolio with an ICR below one compared to the Lincoln database which tracks the broader market, to that roughly 17% more than double BXSL exposure. And to be clear, of that 8% with one times ICR at 5% base rates,
And if we throw flow through base rates of 5%. We can see that we would have roughly 8% of our portfolio with an ICR below one compared to the Lincoln database, which tracks the broader market does it roughly 17% more than double <unk> exposure and to be clear.
That 8% with one times ICR at 5% base rates over 3% would be tied to a single transaction that was structured with a low ICR given it was a high growth company with significant level of equity cushion embedded in the deal and it's exhibited growth year over year.
Speaker 3: Over 3% would be tied to a single transaction that was structured with a low ICR, giving it was a high growth company with significant level of equity cushion embedded in the deal and its exhibited growth year over year.
Speaker 3: Now let's dive into that 17% stale stat once more because I believe it further outlined why our focus on larger transactions is the right one for investments.
Now, let's dive into that 17% still stat once more because I believe it further outlined why our focus on larger transactions is the right. One for investors note that of the 17% of companies in the private credit market with an ICR below one over 70% are companies with EBITDA.
Speaker 3: Note that of the 17% of companies in the private credit market with an ICR below one, over 70% are companies with EBITDA less than 50 million. And so we believe the suring investors will be right. Average is won't tell the story of direct lending performance. The tales will. And we seek to limit tail risk through our focus on better, larger businesses and historically resilient sectors. And we can take this fee favorable results.
Less than $50 million and so we believe discerning investors will be REIT averages won't tell the story of direct lending performance the tails will and we seek to limit tail risk through our focus on better larger businesses and historically resilient sectors and we continue to see favorable results now it's Brad.
Speaker 3: Now, as Brad mentioned, Blackstone has built a conservative credit culture on a foundation of structural protections for investor capital. So note that when Blackstone leads or co-leads, the vast majority of our deals have structural protections against asset stripping transactions. And almost none allow for uncapped cost savings or synergies or addbacks to even thought. And that is all materially better than the syndicated loan market. And so turning to
<unk> mentioned Blackstone has built a conservative credit culture on a foundation of structural protections for Investor capital. So note that when Blackstone lead or co lead the vast majority of our deals have structural protections against asset stripping transactions and almost none allow for untapped cost savings or synergies or add.
<unk> EBITDA and that is all materially better than the syndicated loan market and so turning to amendments we work with our portfolio companies constructively in the regular course to provide an idea scope of what we saw this quarter. We had 85 amendments of which 78% were related.
Speaker 3: We worked with our portfolio companies constructively in the regular course to provide an idea scope of what we saw this quarter. We had 85 amendments of which 78% were related to transitioning to SOFR or other technical adjustments and 20% were related to M&A or other add-on activities.
Transitioning to sofa or other technical adjustments and 20% were related to M&A or other add on activity. We saw only two amendments related to performance, which represents zero to 2% of our portfolio at cost or zero to 1% at fair market value and we believe those two.
Speaker 3: We saw only two amendments related to performance, which represent 0.22% of our portfolio cost, or 0.21% of fair market value. And we believe those two amendment discussions were constructive and will ultimately support.
Discussions were constructive and will ultimately support.
Speaker 3: full recovery on our invested capital. At turn to slide 11.
Full recovery on our invested capital and turn to slide 11.
Speaker 3: As Brad mentioned, we recently increased our Q3 dividend distribution to 77 cents a share. With the current dividend yield at and the above approximately 11.7% well covered by our earnings.
As Brad mentioned, we recently increased our Q3 dividend distribution to <unk> 77 cents a share with a current dividend yield at NAV of approximately 11, 7% well covered by our earnings.
This distribution is up 10% from our second quarter and over 50% up since the first quarter of 2019, when we made our first distribution and we believe that speaks to the fund's ability to deliver for our shareholders and with that I'll turn it over to Ted.
Speaker 3: This distribution is up 10% from our second quarter and over 50% since the first quarter of 2019, when we made our first distribution. And we believe that speaks to the funsability to deliver for our shareholders. And with that, I'll turn it over to Teddy. Thanks, John . I'll start.
Thanks, John .
I'll start with our operating results on slide 12 in the second quarter <unk> net investment income was a record $171 million or $1 <unk> per share, which was up 71% year over year.
Speaker 4: The second quarter, BXSL's net investment income was a record $171 million or $1.6 per share, which was up 71% year.
Speaker 3: Our revenues were up 103 million or 55% year of year driven by increased interest income primarily due to higher rates.
Our revenues were up $103 million or 55% year over year, driven by increased interest income primarily due to higher rates payment in kind or pik income represented less than 4% of total investment income.
Speaker 3: came in in kind or pick income, represented less than 4% of total investment.
Speaker 3: In the second quarter, we also realized 13 million of non-recurring income in the form of accelerated income from repayments at another 5 million in fees, which added 9 cents per share of benefit to NII in the quarter, net of the impact of incentives.
In the second quarter, we also realized $13 million of nonrecurring income in the form of accelerated income from repayments and another $5 million in fees, which added nine <unk> per share benefit to NII in the quarter net of the impact of incentive fees.
Speaker 3: Gap net income in the quarter was $145 million or 90 cents per share from $0.47 per share a year ago despite $37 million of net unrealized losses in the quarter.
GAAP net income in the quarter was $145 million or <unk> 90 per share up from 47 per share a year ago, despite $37 million of net unrealized losses in the quarter.
Speaker 3: Turning to the balance sheet on slide 13, we ended the first quarter with 9.3 billion of total portfolio investments, of which approximately 99% are floating rate loans with a weighted average yield at fair value of 11.8.
Turning to the balance sheet on slide 13, we ended the first quarter with $9 3 billion of total portfolio investments of which approximately 99% are floating rate loans with a weighted average yield at fair value of 11, 8%. This.
Speaker 3: This compares to $5 billion of outstanding debt with a weighted average cost of just 4.8%.
This compares to $5 billion of outstanding debt with a weighted average cost of just four 8%.
Speaker 3: that spread between our floating rate assets and low cost mostly fixed rate liabilities, provides the company with a potential for additional earnings growth if rates continue to rise.
The spread between our floating rate assets and low cost mostly fixed rate liabilities provides the company with the potential for additional earnings growth if rates continue to rise as.
Speaker 3: As a result of strong earnings in excess of the dividend in the second quarter, NAV per share increased to $26.30 up from $26.10 less.
As a result of strong earnings in excess of the dividend in the second quarter NAV per share increased to $26 30.
Up from $26 10 last quarter.
Speaker 3: Next, slide 14 outlines our attractive and diverse liability profile, which includes 64% of drawn debt in unsecured bonds at a weighted average fixed coupon of less than 3%, which will leave you as a key advantage in this rising rate environment.
Next slide 14 outlines our attractive and diverse liability profile, which includes 64% of drawn debt and unsecured bonds at a weighted average fixed coupon of less than 3%, which we view as a key advantage in this rising rate environment.
Speaker 3: We maintained our three investment grade corporate credit ratings and ended the quarter with 1.8 billion of liquidity in cash and undrawn debt available tomorrow. We believe this provides us with significant flexibility and-
We maintained our three investment grade corporate credit ratings and ended the quarter with $1 8 billion of liquidity in cash and Undrawn debt available Tomorrow. We believe this provides us with significant flexibility and cushion.
Speaker 3: Well, the average fund leverage was 1.26 times over the quarter. Ending leverage was 1.15 times, both down from last quarter.
While the average fund leverage was 126 times over the quarter ending leverage was one five times both down from last quarter.
Speaker 3: Based on our pipeline activity, we would expect to remain within our target of one times to 1.25 times through the balance of the year.
Just on our pipeline activity, we would expect to remain within our target of one times to one five times through the balance of the year.
Speaker 3: Additionally, we have low level of debt materities in the next few years, with only 12% of debt maturing within the next two years, at an overall weighted average maturity of 3.6 years. And lastly, near the end of the quarter, we issued 125 million of equity under our ATM, or at the market program, to both large institutional and individual investments.
Additionally, we have low level of debt maturities in the next few years with only 12% of debt maturing within the next two years and an overall weighted average maturity of three six years and lastly, near the end of the quarter, we issued $125 million of equity under our ATM or at the market <unk>.
Graham to both large institutional and individual investors.
Speaker 3: This is backed by our pipeline activity in Blackstone scale and capabilities, which we believe allow us to deploy capital at moments where it's most valuable to drive strong investor.
This is backed by our pipeline activity and blackstone's scale and capabilities, which we believe allow us to deploy capital at moments, where it is most valuable to drive strong investor returns.
Speaker 3: In closing, we believe BXSL is very well positioned to generate earnings in excess of our dividend as rates on our 99% floating rate investment have continued to reset higher.
In closing, we believe <unk> is very well positioned to generate earnings in excess of our dividend as rates are 99% floating rate investments have continued to reset higher we remain positive about the outlook given our defensive portfolio position built to overemphasize Pax the economy, where we see resilience while.
Speaker 3: We remain positive about the outlook given our defensive portfolio position built to overemphasize Pox the economy where we see resilience while avoiding areas of risk.
Riding areas of risk balance sheet capacity to deploy into a strong market environment continued healthy core underlying company fundamentals, we see in the portfolio and elevated earnings power tied to higher base rates. All of this is backed by Blackstone's platform advantage, providing for premier sourcing.
Speaker 3: balance sheet capacity to deploy into a strong market environment continued healthy core underlying company fundamentals we see in the portfolio and elevated earnings power tied to higher base.
Speaker 3: All of this is backed by Blackstone's platform advantage, providing for premier sourcing resources and an infrastructure built to protect investors' caps.
Resources, and an infrastructure built to protect investors' capital.
Speaker 3: With that, I'll ask the operator to open it up for questions.
With that I'll ask the operator to open it up for questions. Thank you.
Speaker 1: Thank you and as a reminder if you'd like to ask a question please signal by pressing star 1 on your telephone keypad. If you're using a speaker phone make sure your mute function is turned off to allow your signal to reach our equipment. And we'll now go to our first question from KC Alexander from Compass Point.
Thank you and as a reminder, if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if youre using a speakerphone make sure. Your mute function is turned off to allow your signal to reach our equipment and we will now go to our first question from Casey Alexander from Compass point.
I have two.
Two.
Yes, Hi, I have.
Speaker 5: Yeah, hi, I have two fairly simple questions. One, Brad, you discussed the gains that you've made on the equity investments, but equity investments are also a very small percentage of the portfolio.
Two fairly simple questions. One Brad you discussed the gains that you've made on the equity investments equity investments are also a very small percentage of the portfolio.
Speaker 5: you know, and investors have taken a lot of comfort in, you know, the very high first-lean exposure, particularly in this cycle. But really, what's kind of the sweet spot for equity investments? How much would you grow that sleeve that could lead to, you know, additional incremental NAV accretion in the future, assuming those investments are relatively successful?
And investors have taken a lot of comfort in the very high first lien exposure, particularly in this cycle, but really what's kind of the sweet spot for equity investments.
How much would you grow that sleeve that could lead to.
Additional incremental NAV accretion in the future assuming those investments are relatively successful.
Speaker 6: Yes, sure. Thanks, Casey. So you should not expect us to grow that sleeve.
Yes sure. Thanks Casey.
So you should not expect us to grow that sleeve.
Speaker 6: materially from where we are today, where we've made equity investment.
Materially from where we are today, where we've made equity investments, it's where we strongly believe we are adding some value across Blackstone. So if you look at Westland.
Speaker 6: It's where we strongly believe we are adding some value across Blackstone. If you look at Westland, we provided them with debt capital, growth capital, and we invested in the equity with the view that we could expand them from being a regional player into a national player. And over that short time period, we more than doubled the value of our equity.
We provided them with debt capital growth capital.
And we invest in the equity with the view that we could expand them from being a regional player into a national player.
And over that short time period, we more than doubled the value of our equity.
Speaker 3: In data site, similarly, we took a position in that company on the debt and equity side because we thought we could roll their products out across the broader Blackstone Group and drive equity values. So it's going to be very, very precision and where we invest in equity. I highlight that on the call because...
Data site. Similarly, we took a position in that company on the debt and equity side, because we thought we could roll their products out across the broader Blackstone group and drive equity value. So it's going to be very very precision and where we invest in equity I highlight that on the call because.
Speaker 3: If you look at our platform, we're trying to deliver more than just capital.
If you look at our platform.
We're trying to deliver more than just capital to these companies.
Speaker 3: trying to add value, whether it's through our debt investments and helping them grow their equity thesis or taking a little bit of equity to get our investors some participation in that upside. So it's really important as you think about not just the equity positions, but also as we go through a softer economic period, we are going to be leaning on our value creation team a lot more than we have historically.
We're trying to add value, whether it's through our debt investments and helping them.
Grow their equity thesis or taking a little bit of equity to get our investors. Some some participation in that upside so.
It's really important as you think about not just the equity positions, but also as we go through a softer economic period.
We're going to be leaning on our value creation team.
A lot more than we have historically.
Alright, great. Thank you my second question is yes.
Speaker 5: Yeah, you had net repayments for the quarter and at the same point in time you raised capital, bringing the leverage ratio down to a very manageable level and giving you some capacity. What's the real sweet spot for the leverage ratio? Would you like to hold it up around 1.2 or somewhere between 1.2 and 1.25 to maximize the earnings power of the portfolio? Or are you okay where you're at now? Yeah.
Yes.
Net repayments for the quarter and at the same point in time, you raised capital, bringing the leverage ratio down to a very manageable level and giving you some capacity, what's the real sweet spot for the leverage ratio would you like to hold it up around 1.2 or somewhere between one two and $1 25 to maximize the.
The earnings power of the portfolio or are you, okay, where youre at now.
Yes, Thanks Casey.
Speaker 4: You know, what I would say is, historically what we've said, target range one to one and a quarter times. Her Brad comments, we are seeing an increase in the pipeline.
What I would say so historically, what we've said target range, one to one and a quarter times.
Per brad's comments, we are seeing an increase in the pipeline.
Speaker 4: Pipelines deals we're looking at is up about two times over the first quarter and for the deals we deployed in the last quarter, the return on those unlevered is about 12%. So we also want some capacity to deploy. We think ending at 1.15 does provide some of that capacity.
<unk> deals we're looking at is up about two times over over the first quarter and for the deals we deployed.
In the last quarter. The return on those Unlevered is about 12%. So we also want some capacity to deploy.
Think ending at 1.15 does provide provide some of that capacity.
Alright, Thank you for taking my questions.
Speaker 1: Thank you all. Next go to Aaron Signific from City.
Thank you we'll next go to Erinn Cigna, Victor <unk> from Citi.
Thanks to the increase in investment activity Youre seeing in your pipeline.
Speaker 7: Thanks. The increase in investment activity you're seeing in your pipeline, what are the conversations with sponsors that are seeing the opportunity for those to start to get a little bit more, I guess, back to normal to some extent?
What are the conversations with sponsors that are seeing seeing the opportunity for those to start to get a little bit more I guess back to normal to some extent.
Speaker 3: Yeah, I would say the driver there, Aaron, is around valuation.
Yes, I would say the driver there.
Aaron is around valuation.
Speaker 3: Taking a bigger step back, if you look at the amount of, and we spend a lot of time with advisors, so if you think about our platform, we obviously cover sponsors, but we spend a lot of time with advisors, and they're kind of the tip of the spear from the deal activity standpoint.
Taking a bigger step back if you look at the amount of and we spent a lot of time with advisers. So do you think about our platform. We obviously cover sponsors, but we spent a lot of time with advisors.
There are kind of the tip of the spear from the deal activity standpoint.
Speaker 3: I think which is why we're seeing probably more, you know, of a pipeline grow than others.
I think which is why we're seeing probably more.
Our pipeline growth.
And then others.
Speaker 3: What they would say is that the amount of deals on the shelf that are ready to come to market is the highest that they've seen in over a decade.
What they would say is that the amount of deals.
On the shelf that are ready to come to market is the highest that they've seen in over a decade.
Speaker 3: They've been paused a little bit because of uncertainty around financing. They've been paused a little bit because of around valuation.
They've been paused, a little bit because of uncertainty around financing.
<unk> been paused, a little bit around valuation.
Speaker 3: With the passage of time, valuations have the gap between the buyers and sellers that come closer together. And sponsors are starting to be a little bit more active, acknowledging the fact that the cost of capital is quite high. So that's why they're adjusting their valuations, they're adjusting their leverage levels.
With the passage of time valuations have the gap between the buyers and sellers as come closer together and sponsors are starting to.
Be a little bit more active acknowledging the fact that the cost of capital is quite high.
So thats why they are adjusting their evaluations they are adjusting their leverage levels.
Speaker 3: And so as we think about the pipeline, we'll continue to add on like others, we'll continue to take privates, but the sponsor to sponsor activity is where we're seeing the greatest uptick in D-elect.
And and so as we think about the pipeline, we will continue to see add ons like others, we'll continue to see take privates, but the sponsor to sponsor activity is where we're seeing the <unk>.
Greatest uptick.
And deal activity.
Speaker 7: And then on the at the market issue, is that something you expected to be fairly regular when you're trading above both valueers, just relative to what you're seeing in the opportunities in the market?
Thanks, that's helpful and then on the the.
At the market issuance is that something that you expect it to be fairly regular when you're trading above book value or is this just relative to what you're seeing and the opportunities in the market.
Speaker 8: you can expect it to be a general part of how we raise equity capital on a go forward basis.
Thank you.
Expect it to be.
General part of how we raise equity capital on a go forward basis.
Speaker 6: There's two major points that sustain a BDC premium above book. One is a steady, stable, and attractive dividend yield, and then two, slowly growing NAV over time.
Theres two major points the sustain a BDC premium above book one is.
Steady stable and attractive dividend yield and then to slowly growing NAV over time.
Speaker 6: And to meet those two goals, you'll want to deploy equity capital or to deploy capital in moments where you have extremely attractive risk adjusted return. And I know you've heard several of our colleagues outlined the golden moment that occurs in private credit. And so you can see that we have the opportunity to grow creatively and so I'd expect it to be a part of what we do want to go forward-based as well, also remaining disciplined with regard to our investment pipeline.
And to meet those two goals, you'll want to deploy equity capital or deploy capital in moments, where you have extremely attractive risk adjusted return and I know you've heard.
Several of our colleagues outlined the moment it occurs in private credit and so you can see that we have the opportunity to grow accretively and so I'd expect it to be a part of what we do on a go forward basis, while also remaining disciplined with regard to our investment pipeline.
Thank you.
Our next question comes from Robert Dodd from Raymond James.
Okay.
Speaker 5: I've got a question on
Great.
First I've got a question on interest.
Interest coverage.
Speaker 5: If I can go on the other you did your color on this has been really helpful in the last couple quarters
If I can.
Color on this has been very helpful over the last couple of quarters.
I'm just wondering if all bdcs from lake wobegon, or something like that because they're going to be different links oversee the 17%.
Speaker 5: I'm just wondering if all BDCs are from Lake Wobegon or something like that, because the number you get from Lincoln, obviously the 17% in yours is half that. Every BDC that I can recall that has actually disclosed a number has been better than.
Uh huh.
Every BDC that I can recall that it is actually disclosed the number has been better than average.
Speaker 5: So, you know, I've got my theory somewhere that is, but any color you can give us on what you would attribute.
So I got my theories on why that is but any color you can give us on what you would attribute.
Speaker 5: that too in terms of the numbers that have been disclosed have generally been the tails in the single digit range.
That too in terms of.
The numbers have been disclosed has generally been the panels in the single digit range.
Speaker 5: And the industry, and I've seen the Lincoln report, and the industry numbers appear meaningfully higher than that when they come from a third party.
And lastly, the ceiling could report in the industry.
Numbers appear meaning the horizon that when they come from a third party.
Yeah.
Speaker 3: Yeah, Robert, we appreciate that. And the questions that you ask, you know, it's a very consistent question that you wanna get to for your investors, but you give a level of inconsistency in your answers because folks try to define it differently. Our major approach was to start by looking at absolutely everything across our portfolio. No exclusions of industries, no exclusions of certain types of loans, and you can recall the stats that I outlined previously. But just looking at our stats isn't enough.
Robert we appreciate that the questions that you ask its a very consistent question that you want to get too for your investors, but you get a level of inconsistency in your answers because folks tried to define it differently. Our major approach was to start by looking at absolutely everything across our portfolio no exclusions of industries, no exclusions of certain <unk>.
Of loans and you can recall the stats that I that I outlined previously, but just looking at our stats isn't enough. There has to be a level of market proxy that you can compare it to and so we work closely with the with the leading index provider in the middle market or in the private credit space Lincoln to generate kind of those results. So I believe.
Speaker 3: There has to be a level of market proxy that you can compare it to.
Speaker 3: And so we work closely with the leading index provider in the middle market or in the private credit space, Lincoln, to generate kind of those results. So I believe it's really just asking the questions and trying to understand what folks effectively exclude. At Blackstone, you can see complete transparency. We want to provide you all the data so the market can make its inferences on our results.
It's really just asking the questions and trying to understand what folks effectively exclude at Blackstone you could see complete transparency, we want to provide you all the data so the market can make a difference on our results.
I appreciate that color. Thank you.
Speaker 3: I appreciate that, Carla. Thank you. Second question on the pipeline and very mentioned kind of likely to be more sponsored sponsored.
Second question on the pipeline and Brad you mentioned.
Likely to be more sponsor to sponsor activity.
Speaker 3: versus maybe follow-ons. So is the mix, do you think that the portfolio is going to shift to more growth in new names and is there anything we can read into the
<unk> versus maybe follow ons.
So as the mix do you think the.
Portfolio going to shift to more growth in <unk>.
Is there anything we can read into the <unk>.
Speaker 3: The economics that, because sometimes a new agreement might have more upfront fees than an add-on which has some
The economics that might get sometimes a new agreement.
From fees and add on which had some.
Most favored nation status in terms of how housing construction, because the fees and maybe even spread.
Speaker 3: most favored nation status in terms of how things are structured in terms of fees and maybe even spread. So can you give us any color on, you know, if that is going to be a shift in the overall mix of the portfolio and does it have slightly different economics currently?
So can you give us any color on.
If that is going to be a shift in the overall mix of the portfolio does have slightly different economics.
Great.
Speaker 3: things change. Yeah so Robert what yeah so what I would say is um as we work through uh the end of the year you will see more names added to the portfolio uh just to give you some statistics around the pipeline um which we highlighted as as um growing nicely.
Thanks, Jake yes, so Robert Yeah. So what I would say is as we work through the end of the year you will see more names added to the portfolio.
Just to give you some statistics around the pipeline.
Which we highlighted as is.
Growing nicely.
Speaker 3: The average yield of the deal, new deals in our pipeline is.
The average yield of the deal new deals in our pipeline is if you take that the fee and amortize. It is about 12 four.
Speaker 3: Take that the fee and amortize it is about 12.4
4%.
Speaker 3: Uh 12.4 percent and the average loan to value Is about 30?
12, 4% and the average loan to value.
It was about 37% so.
Speaker 3: So, you know, John hit on this, but when we talk about the golden moment or age and private credit, this is what we're talking about. We're talking about yields that are exceptionally high.
John hit on this but when we talk about the Golden moment, our agent and private credit. This is what we're talking about we're talking about yields that are exceptionally high.
Because the base rates because of spreads we're talking about leverage that is lower because yields are higher whether you measure that and leverage multiples or loan to value.
Speaker 3: because of base rates, because of spreads. We're talking about leverage that is lower because yields are higher. Whether you measure that and leverage multiples or loan to value. And better companies are the only ones that can access capital. So you have higher quality assets with less leverage.
Better companies are the only ones that can access capital. So you have higher quality assets with less leverage.
Speaker 3: uh earning uh yields that are almost twice as high as what they were a couple years ago this is the moment uh in private credit where you can drive you know equity-like returns uh by being senior first lean in the capital structure
Earning.
Yields that are almost twice as high as what they were a couple of years ago. This is the moment in.
In private credit where you can drive.
Equity like returns by being senior first lien in the capital structure.
Speaker 3: So, you will see more names and you will see some add-ons and we're excited for investors for BXSL to continue to benefit from an earnings sample.
So you will see more names and you will see some add ons.
And we're excited for investors.
<unk> continued to benefit from an earnings standpoint.
Thank you.
Speaker 1: Thank you, that's our reminder ladies and gentlemen, it is Star One for a question. We'll next go to Ryan Lynch with KBW.
Thank you and as a reminder, ladies and gentlemen, it is star one for a question well next go to Ryan Lynch with <unk>.
Yeah.
Hey, good morning, Thanks for taking my questions and nice quarter.
Speaker 9: Hey, good morning. Thanks for taking my questions in nice quarter. First question I had was kind of a followup on kind of the deal environment.
First question I had was kind of a follow up on kind of the deal environment.
You mentioned deal activity likely.
Speaker 9: You mentioned, you know, DO activities, likely picking up advice.
The advisor is seeing more and more conversations going on.
Speaker 9: conversations going on. I'm just curious, in the past, you know, six months or so, do you activities been down, but the quality of deals have been very high. It feels like there's been a lot of add-ons, but really only it feels like the highest quality company.
Just curious.
In the past.
Six months or so deal activity has been down.
Quality of deals have been very high it feels like there's been a lot of a.
A lot of add ons, but really only it feels like that the highest quality companies are the ones that are they are able to transact.
Speaker 9: that are able to transact. I'm just curious, if going forward to deal volume or an M&A is gonna pick up, does that mean that they're also you expect, kind of subpar or not as high of quality deal?
Curious if going forward of deal volume or an M&A is going to pick up does that mean that there are also you expect kind of.
Subpar are not as high of quality deals to start to slip into two those M&A processes and so it might actually mean that overall originations may in fundings may actually not pick up.
Speaker 9: start to slip into those M&A processes. And so it might actually mean that overall originations may, and fundings may actually not pick up because you have to be more selective in the environment, or you expect the quality of deals to sort of remain as high as they have in the last six to nine months.
Because you have to be more selective in the environment or do you expect it to the quality of deals to sort of remain as high as they have been in the last six to nine months.
Thanks, Bryan I would say, it's the latter I think what you're what you're seeing in some of these deals that have not come to market.
Speaker 3: What you're seeing in some of these deals that have not come to market, the seller was expecting to get, you know, for example, a 22 times multiple because it's been growing, it generates a lot of free cashflow and they were holding onto kind of that valuation, whereas the buying community, you know, is factoring in a higher cost of capital and so is willing to pay 18 times.
The seller was expecting to get for example, 22 times multiple because it's been growing it generates a lot of free cash flow.
And they are holding on to that valuation, whereas the buying community.
Factoring in a higher cost of capital and so I was willing to pay 18 times. That's a gap that's four turns of of enterprise value.
Speaker 3: That's a gap, that's four terms of enterprise value, but obviously 18 times.
But obviously 18 times.
Speaker 3: EBGA would indicate a very high quality business. It's that quality and that type of business that we're seeing come back into the market where the seller is willing to accept something lower than their expectation, which was driven by often valuations in 2021 and the first part of 2022.
EBITDA would indicate a very high quality business, it's it's that quality and that type of business that we're seeing come back into the market, where the seller is willing to accept something lower.
Then their expectation, which was driven by often valuations in 2021 and the first part of 2022. So it's Brian it's really hard for a marginal business to afford 12, 4% cost of capital.
Speaker 3: So it's Ryan is really hard for a marginal business to afford 12.4% cost of capital.
Speaker 3: unless they take on a diminimous amount of debt. So that's what's driving the quality of assets coming into market. It's a higher-casual business. It's ones that can grow through an economic period of slowness. And so we expect that the quality of asset in this rate environment will remain very good.
Unless they take on a de minimis amount of debt. So that's what's driving the quality of assets coming into markets, a higher cash flow business, it's ones that can grow through an economic.
Period of slowness.
And so we expect that the quality of asset in this rate environment will remain very good.
Okay. That's helpful color.
Speaker 9: Okay, that's helpful color. The other one I had was.
The other one I had was you.
Speaker 9: Credit quality is really good in the portfolio, and John , I also really appreciate the details you gave on.
Credit quality is really good and the portfolio that.
And John I also really appreciate it.
The details you gave on interest coverage.
Both from from your portfolio as well as the.
Speaker 9: industry. I'm just curious you said you had 85 amendments in score only to
The broader industry I'm just curious you said you had no.
85 amendments this quarter only two were related to performance I'm just curious.
Speaker 9: just curious were those those amendments that you made this quarter was it just were they both related to switching from cash to some level or total PIC in those amendments and was there any sort of any sort of
Are those those amendments that you made this quarter was it just.
Were they both related to switching from cash to some level of our total pik.
Those amendments and was there any sort of.
Any sort of.
I guess.
Speaker 9: comfort or any sort of give back provided by the private equity sponsor in those deals in order to make those events.
Comfort or any sort of give back provided by the private equity sponsor in those deals in order to make those amendments.
Yes. Thanks, Ryan This is Terry I'm happy to take that.
Speaker 4: Yeah, thanks Ryan. This is Teddy. I'm happy to take that. So just to reiterate the stats, you are right, 85 amendments. Most of those, 98 percent...
So just to reiterate the stats you're right 85 amendments most of those 98% due to so for add ons M&A or other benign activity. Two were two were quote unquote performance related one was the covenant amendment that came with material prepayment and we're actually seeing some improvement in that business.
Speaker 4: due to SOFR, add-ons, M&A, or other benign activity?
Speaker 4: Two were, you know, quote-unquote performance-related. You know, one was a covenant amendment. That came with material prepayment, and we're actually seeing some improvement in that business.
Speaker 4: The other was a one-quarter interest deferral. I can't get into too much detail on this call, but we've since received some pretty positive news that that will be a full recovery of our principal. Both of those marked, you know...
The other was a one quarter interest deferral can't get into too much details on this call, but we have since received some pretty positive news that that will be a full recovery.
Our principal.
Both of those marks.
Bob 90 at the end of the quarter, so nothing material to point to there.
Speaker 4: above 90 at the end of the quarter. So, you know, nothing material to point to there. Okay.
Okay.
Understood I appreciate the time today.
Speaker 1: Thank you. Our next question comes from Kenneth Lee from RBC Capital Markets.
Thank you. Our next question comes from Kenneth Lee from RBC capital markets.
Speaker 10: Hi, good morning. Thanks for taking my question. Just given the relatively attractive spread in terms on your originations, you're seeing one of these talk a little bit about what your scene terms of competitive activity has been in the recent changes.
Hi, good morning, Thanks for taking my question.
Just given the relatively attractive spreads in terms on your originations Youre seeing I Wonder if you just talk a little bit about what youre seeing in terms of competitive activity.
Has there been any recent changes thanks.
So thanks Ken.
Speaker 3: So, thanks, Ken. I'll take that. It's Brad. So, on the competitive side, you've seen, on the larger end of the market, the competitive dynamic remains very favorable, largely because the public markets have a harder time
That it's Brad so on the competitive side.
You've seen on the larger end of the market.
The competitive dynamic remains very favorable largely because the public markets.
Have a harder time.
I'm taking.
Speaker 3: taking on these new LBOs, banks are a little bit more reluctant to underwrite, to distribute risk into that market. The large end of the market where we spend, as you know, a lot of time and energy and focus to use our scale to our advantage, you know, that part of the market remains quite attractive.
Taking on these new <unk> banks are a little bit more reluctant to underwrite to distribute risk into that market. The large end of the market, where we spend as you know a lot of time and energy and focus.
To use our scale to our advantage that mark part of the market is remains quite attractive.
Speaker 3: from a competitive standpoint. Small mid-sized market, there's more capital that's come into that market, maybe a little bit more competitive, but at the same time, spreads and all-in structure and documentation remain fairly disciplined from despite kind of more capital coming into that part of the market.
From a competitive standpoint.
Small mid sized market there is more capital that's come into that market, maybe a little bit more competitive but.
At the same time spreads.
And all in structure and in documentation.
Remain fairly disciplined from.
Despite kind of more capital coming into that part of the market.
Gotcha very helpful. There.
Speaker 10: Gotcha. Very helpful there. And then one follow up if I may, in terms of expectations around investment paydown to over the near term, would you expect that to pick up somewhat in tandem as the pipeline builds up for originations? Thanks.
And then one follow up if I may.
In terms of expectations around investment pay downs over the near term.
Would you expect that to pick up somewhat in tandem as the pipeline builds up for originations.
Yes.
Yes.
Speaker 3: Yeah, thanks. So, you know, in the quarter we had 465 line of repayments. Two-thirds of that was really from two transactions. I would say one quarter is not a trend, and we view that as fairly high versus previous quarters, and the current activity was still on the ground. I think generally, if Brad Comments come to fruition and we do see pipeline convert more through the remainder of the year, we do think that would also lead to higher potential refinancing as a result.
Yes. Thanks.
In the quarter, we had 465 million of repayments two thirds of that was really from two transactions.
I wouldn't say one quarter is not a trend and we view that as fairly high versus previous quarters.
Current activity, we see on the ground I think generally.
Brad comment Brad's comments come to fruition and we do see pipeline convert more particularly.
Remainder of the year, we do think that would also lead to higher potential refinancings as a result.
Got you very helpful. There. Thanks again.
Speaker 1: Thank you and again ladies and gentlemen, that is star one for a question. We'll next go to Melissa Whedell from at JP Morgan.
Thank you and again, ladies and gentlemen that is star one for a question well Mexico to Melissa Wedel from Jpmorgan.
Yeah.
Good morning, Thanks for taking my questions.
Speaker 11: Good morning, thanks for taking my questions. Actually, a lot of them have already been addressed, but I was hoping you could remind us of how you're thinking about dividends into the later part of this year, particularly with the earning power of the portfolio so far exceeding even your increased dividend rate in 3Q. Thank you.
We're seeing a lot of them have already been addressed but I was hoping you could remind us of how you're thinking about.
Dividend.
With the later part of this year, particularly with the earning power of the portfolio so far exceeding even your increased.
Did that rate in <unk>. Thank you.
Thanks, Melissa this is back and so when we think of the dividend distribution by these are pass through vehicles.
Speaker 3: So this is Bach and so when we think of the dividend distribution, but these are pass-through vehicles, right? And so the goal is to always ensure that you're distributing and in compliance with Rick tests. I'd start to look at it from an over-earned-
The goal is to always ensure that youre distributing and in compliance with REIT tests.
To look at it from a over earnings perspective so.
Speaker 3: So we have a very healthy level of earnings relative to the strong dividend that we pay out.
So we have a very healthy level of earnings relative to the strong dividend that we pay out and so looking into the future. It's that level of conservatism that we feel quite strongly about so it currently has 77 set dividend and $1 six in terms of earnings and both are steady and Brad It outlined in terms of portfolio activity, we feel very confident.
Speaker 3: And so looking into the future, it's that level of conservatism that we feel quite strongly about. So it currently is 77 cent dividend and a dollar six in terms of earnings and both is Teddy and Bradded Outline in terms of portfolio activity. We feel very confident in the level of earnings profile and dividend support that we offer given this high level of earnings even to the extent that base rates come down because recall is
And the level of earnings profile and dividend support that we offer given this high level of earnings even to the extent that base rates have come down because recall is let's say cost of capital come down and as Brad outlined.
Speaker 3: Let's say Costa capital come down and is Brad outline. That's a bit of a limitation to the activity as portfolio velocity or repayments increase.
A bit of a limitation to deal activity as portfolio velocity of repayments increase. So two you can see the level of earnings power in our book increase as well. So we're confident about you always want to start with an attractive level and sure its well covered from earnings because you get that benefit that I stated at the <unk>.
Speaker 3: So too, you can see the level of earnings power on our book increase as well. So we're confident about you. You always want to start with an attractive level, ensure it's well covered from earnings because you get that benefit that I stated at the beginning. Study stable dividend and attractive payout with growing NAV is what equals an attractive premium for the stock overtime.
Beginning steady stable dividend and attractive payout with growing NAV is what equals an attractive premium for the stock over time.
So just to follow on there we did see an increase in excise tax from Q Institute Q, just going forward should we expect that to be sort of a regular course.
Speaker 11: So just to follow on there, we did see an increase in excite tax from one queue, um, into two queue, just going forward. Should we expect that to be sort of a regular course? condemned. Um, for those who still?"
Yeah.
Speaker 11: line item that we should be modeling or would you look to limit that, you know, as you fill up a cushion.
This line item that we should be modeling or would you look to limit that.
Now as you built that.
Christian.
I think it would come in the form of cost to capital and really what you're seeing as it relates to the investment environment. So 4% excise tax you paid a rate retained capital effectively that was undistributed you find that is an extremely cheap cost of equity now the key is when you retain equity.
Speaker 3: I think it would come in the form of cost to capital and really what you're seeing as it relates to the investment environment. So 4% X size tax that you paid a rate retain capital effectively that was undistributed, you can find out that's an extremely cheap cost of equity. Now the key is when you retain equity, you need to make sure that you're retaining it in a book that's stable.
Need to make sure that you are retaining in our book is stable.
Speaker 3: So you've seen situations to the other extreme where capitals retain but then effectively lost to poor credit performance. So if you kind of look at in a forward basis, that's attractive cost capital. It can be redeployed into a book that's earning attractive ROE and we continue to see ROE's remains strong given where we are. So you can likely expect that to stay.
So you've seen situations to the other the other extreme where capital is retained but then effectively lost throughput credit performance. So if you kind of look at in a forward basis, that's attractive cost of capital. It can be redeployed into our book, that's earning attractive ROE and we continue to see ROE remained strong given where we are so you could like.
We expect that to stay.
Speaker 8: Melissa, just to maybe add to that, we talk about this a lot. We're in a fortune position where our earnings are very, very high.
Melissa just to maybe add to that.
We talked about this a lot we're in a fortunate position where our earnings are very very high.
Speaker 6: And if you look at six of the last eight quarters.
And if you look at six of the last eight quarters, we've either increase the dividend or pay a special.
Speaker 6: We've either increased the dividend or paid a special and in each of those, on average in those quarters, we've had 31%.
In each of those on average in those quarters, we've had 31%.
Speaker 4: you'll cover it your over our dividend. So we want the investor experience to be at the top of our mind. So that's why we talk about it every quarter. That's why you've seen us make changes in 75% of the quarters and we'll continue to assess that with the court.
Coverage over our dividend so.
We want the investor experience to be.
At the top of our mind.
So thats why we talk about it every quarter, that's why you've seen us make changes.
75% of the quarters, and we'll continue to assess that with the board.
Thank you guys.
Okay.
Speaker 1: Thank you, and there are no further questions. I'd now like to turn the call over to Stacy Wong for closing remarks.
Thank you and there are no further questions I'd now like to turn the call over to Stacy Locke for closing remarks.
Thank you that wraps up our call for today. Thank you all for joining US. This morning, and we look forward to speaking to you next quarter.
Speaker 2: you that wraps up our call for today. Thank you all for joining us this morning and we look forward to speaking to you next quarter.
Okay.
Okay.
Speaker 12: I.
Okay.