Q4 2023 Blue Owl Capital Corp Earnings Call

Operator: Hello, and welcome to the Blue Owl Capital Corp. Q4 and fiscal year 2023 earnings call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad.

Hello, and welcome to the Blue Capital Corp, Q4, and fiscal year 2023 earnings call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.

Operator: A question and answer session will follow the formal presentation. You may be placed into question 2 at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dana Sklafanyi, head of BDC Investor Relations for Blue Owl. Please go ahead, Dana.

A question and answer session will follow the formal presentation.

Replacing the question queue at any time by pressing star one on your telephone keypad.

As a reminder, this conference is being recorded its now my pleasure to turn the call over to Dana Sclafani head of BDC Investor Relations for Blue Outwork. Please go ahead Dana.

Dana Sklafanyi: Thank you, Operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's fourth quarter earnings call. Joining me this morning are Chief Executive Officer Craig Packer and our Chief Financial Officer and Chief Operating Officer Jonathan Lamb, as well as Alexis Magid, our Chief Credit Officer, and Logan Nicholson, Portfolio Manager for OVDC. I'd 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' Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC's filings with the FDC. The company assumes no obligation to update any forward-looking statements.

Thank you operator, good morning, everyone and welcome to Blue Arrow capital corporations fourth quarter earnings call. Joining me. This morning are Chief Executive Officer, Craig Packer, and our Chief Financial Officer, and Chief Operating Officer, Jonathan Lamb as long as the Lexus magnet, our Chief Credit Officer, and Logan Nicholson portfolio manager for L. D D C.

I'd 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 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.

Dana Sklafanyi: 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 or warranties with respect to this information. OBDC's earnings release, 10K, and supplemental earnings presentation are available on the investor relations section of our website at blueowlcapitalcorporation.com. With that, I'll turn the call over to Craig.

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 representation or warranties with respect to this information.

Bdcs earnings release, 10-K, and supplemental earnings presentation are available on the Investor Relations section of our website I blew out capital Corporation Dot com with that I'll turn the call over to crack.

Thanks Dana.

Craig Packer: And thank you all for joining us today. We are very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio. Net investment income was $0.51 per share, up $0.02 from last quarter. Our NII increased in each quarter of 2023. We generated new record NII for the fourth consecutive quarter. In total, we earned $1.93 of NII in 2023, up 52 cents, or 37% year over year. Our strong results throughout the year are the outcome of our emphasis on great credit selection and a proactive approach to liability management. Results also benefited from the higher rate environment and continued strong economic conditions. Based on these results, our board has approved another $0.02 increase in our base dividend to $0.37 per share. This is our third two cent increase since the fourth quarter of 2022. This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings, even in a more normalized rate environment. In addition, for the fourth quarter, our board declared a supplemental dividend of $0.08.

Everyone and thank you all for joining us today.

We're very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio.

Net investment income was 51 per share up <unk> <unk> from last quarter.

Our NII increased in each quarter of 2023, and we generated new record NII for the fourth consecutive quarter.

In total we earned $1 93 sets of NII in 2023.

52 cents or 37% year over year.

Our strong results throughout the year or the outcome of our emphasis on great credit selection and a proactive approach to liability management.

Results also benefited from the higher rate environment and continued strong economic conditions.

Based on these results our board has approved another two <unk> increase in our base dividend to $3 seven per share.

This is our third <unk> increase since the fourth quarter of 2022.

This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings.

And then more normalized rate environment.

In addition for the fourth quarter, our board declared a supplemental dividend of eight cents.

Craig Packer: We instituted the Supplemental Dividend Framework in the third quarter of 2022 to allow shareholders to participate in our earnings upside in a predictable manner, and we are pleased to have paid 36 cents per share of supplemental dividends over these last six quarters while also meaningfully growing net asset value. Going forward, we believe shareholders will continue to benefit from this supplemental dividend framework. Net asset value per share increased to $15.45, up 5 cents from the third quarter.

We instituted the supplemental dividend framework in the third quarter of 2022 to allow shareholders to participate in our earnings upside in a predictable manner and we are pleased to have paid 36 cents per share of supplemental dividends over these last six quarters, while also meaningfully growing that asset.

Got you.

Going forward, we believe shareholders should continue to benefit from the supplemental dividend framework.

Net asset value per share increased to $15 45 up five from the third quarter. This represents the highest NAV per share since our inception in the second quarter in a row of record net asset value.

Craig Packer: This represents the highest NAV per share since our inception and the second quarter in a row of record net asset value. As a result of strong earnings and continued NAV growth, we earned a record 13.2% return on equity in the fourth quarter, resulting in an annual ROE of 12.7% for the full year. This is right in line with the expectations we set at our investor day in May. Looking at our borrower's results, we saw continued resilience across our portfolio companies throughout 2023. We came into the year appropriately cautious and prepared for a more challenging economic environment. Over the last 12 months, our borrowers, on average, delivered low- to mid-single-digit growth in both revenue and EBITDA each quarter. They were proactive in cutting costs and raising prices where appropriate to combat inflationary pressure and supply chain challenges.

As a result of strong earnings and continued NAV growth. We earned a record 13, 2% return on equity in the fourth quarter, resulting in an annual ROE of 12, 7% for the full year.

This is right in line with the expectations, we set at our Investor day in May.

Looking at our borrowers results, we saw continued resilience across our portfolio of companies throughout 2023.

We came into the year appropriately cautious and prepared for a more challenging economic environment.

Over the last 12 months, our borrowers on average delivered low to mid single digit growth in both revenue and EBITDA each quarter.

We were proactive in cutting costs, and raising prices where appropriate to combat inflationary pressure at supply chain challenges. These initiatives contributed to the solid performance. We saw this year.

Craig Packer: These initiatives contributed to the solid performance we saw this year. Further, we believe our borrowers are well positioned coming into 2024. Our largest sectors continue to be software, insurance brokerage, food and beverage, and health care, all of which serve diversified and durable end markets.

Further we believe our borrowers are well positioned coming into 2024.

Our largest sectors continued to be software insurance brokerage food and beverage and health care, all of which serve diversified and durable end markets.

Craig Packer: The weighted average EBITDA of our portfolio companies is over $200 million, and we believe this scale provides strategic benefits and operational stability, as many of our borrowers remain market leaders within their sectors. Looking forward, while markets are expecting rates to decline, short-term rates remain elevated, and as a result, we remain focused on potential portfolio company challenges. We believe coverage levels will peak in the first half of 2024 at around 1.5 to 1.6 times interest coverage. We continue to have a small list of borrowers who we believe may see challenges in the months ahead.

The weighted average EBITDA of our portfolio companies is over $200 million and we believe this scale provides strategic benefits and operational stability as many of our borrowers remain market leaders within their sectors.

Looking forward, while markets are expecting rates to decline short term rates remain elevated and as a result, we remain focused on potential portfolio company challenges.

We believe coverage levels will trough in the first half of 2024 at around 125 to one six times interest coverage.

We continue to have a small list of borrowers who we believe may see challenges in the months ahead, our underwriting and portfolio management teams are closely monitoring these situations and we believe any challenges ultimately will be manageable across our portfolio as a whole.

Craig Packer: Our underwriting and portfolio management teams are closely monitoring these situations, and we believe any challenges ultimately will be manageable across our portfolio as a whole. I would note we had a few borrowers migrate lower on our rating scale, but overall, the names on our watch list remain consistent. Based on the visibility we have today and the strong positioning of our borrowers, we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period. While we added one very small position to non-accrual in the quarter for a total of four names, our non-accrual rate remains low, at 1.1% of the fair value of the debt portfolio.

I would note we had a few borrowers migrate lower in our ratings scale, but overall the names on our watch list remains consistent.

Based on the visibility we have today and the strong positioning of our borrowers we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period.

While we added one very small position to nonaccrual in the quarter for a total of four names are nonaccrual rate remains low at one 1% of the fair value of the debt portfolio.

Craig Packer: Overall, our record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process. With that, I'll turn it over to Jonathan to provide more detail on our financial results. Thanks, Craig.

Overall, a record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process.

With that I'll turn it over to Jonathan to provide more detail on our financial results.

Thanks, Craig.

Jonathan Lamb: At the end of the quarter, with total portfolio invest. $12.7 billion, standing debt of $7.1 billion, and total net assets of $6 billion. Our fourth quarter NAF per share was $15.45, a five percent increase from our third quarter NAF per share of $15.40, all attributable to the continued over-earning of our total debt. In terms of deployment, we continue to largely match originations with repayment, and retain a fully invested capital. Repayments increased this quarter to $1.1 billion, which was matched by $1 billion of new investment.

We ended the quarter with total portfolio investments of 12.7 billion outstanding debt of $7 $1 billion in total net assets of $6 billion.

Our fourth quarter NAV per share was $15 45.

A 5% increase from our third quarter NAV per share of $15 40.

Attributable to the continued over earning of our total dividends.

In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio.

Repayments increased this quarter to $1 $1 billion, which was matched by $1 billion of new investment fundings.

Jonathan Lamb: This was a sizable increase compared to the roughly $390 million of repayments we saw in the third quarter and is consistent with our belief that we will see an increase as the market environment continues to be more favorable for retail. We ended the quarter with net leverage at 1.09%, down slightly from a prior course, but largely reflective of the timing of repayments versus new originations in the turning to the. We earned a record $0.51 per share in the fourth quarter, up from 49 cents per share in the prior. The increase in NII was driven by roughly one and a half cents a quarter increase in Accelerated driven by a pickup in repayments, as well as modest increases in our dividend and interest for the fourth quarter. The $0.08 per share supplemental dividend will be paid on March 15, 2021 to shareholders of record on March 15.

This was a sizable increase compared to the roughly $390 million of repayments, we saw in the third quarter.

And it's consistent with our beliefs that we will see an increase in repayments as the market environment continues to be more favorable for refinancings.

We ended the quarter with net leverage at 1.09 times down slightly from the prior quarter.

This is largely reflective of the timing of repayments versus new originations in the quarter.

Yeah.

Turning to the income statement.

We earned a record 51 cents per share in the fourth quarter up from 49 cents per share in the prior quarter.

The increase in NII was driven by roughly one and a half cent quarter over quarter increase of accelerated income driven by a pickup in repayments as well as modest increases in our dividend and interest income.

For the fourth quarter, each cent per share supplemental dividend will be paid on March 15, two.

Shareholders of record on March 1st.

Jonathan Lamb: Reflecting the Supplemental and the previously declared 35-Cent Regular, shareholders will receive total dividends of $4,300, which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter. For the full year 2023, the board also declared a first quarter regular. 37, which will be paid in April to shareholders of record as of March. Proforma for our new increased regular, coverage remains robust. 138.

Reflecting the supplemental in the previously declared 35 regular dividend.

Shareholders will receive total dividends of 43.

Which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter.

For the full year 2023, we paid a total of $1 59 per share in dividends, an increase of 30 cents or roughly 25% from the prior year.

The board also declared a first quarter regular dividend of 37.

Which will be paid on April 15.

The shareholders of record as of March 29.

Pro forma for our new increased regular dividend coverage remains robust at 138%.

Jonathan Lamb: We finish the year with spillover as a result of meaningful over-earning of our dividends, inclusive of our supplements, throughout. Turning to the balance, we continue to proactively manage our liability structure to maximize returns to our shareholders. In the fourth quarter, we increased our revolver.

We finished the year with 30.

The spillover income as a result of meaningful over earning of our dividends.

<unk> of our supplemental dividends throughout 2023.

Turning to the balance sheet, we continue to proactively manage our liability structure to maximize returns to our shareholders.

In the fourth quarter, we increased our revolver capacity to $1 9 billion.

Jonathan Lamb: $1.9 billion, and continue to maintain a robust liquidity position, which increased to $2.1 billion. This is well in excess of our unfunded commitments to our portfolio. In January, we opportunistically raised $600 million in new five-year unsecured debt. A portion of the proceeds will be used to repay our 400 million unsecured debt that matures in April.

She needs to maintain a robust liquidity position, which increased to $2.1 billion.

This is well in excess of our unfunded commitments to our portfolio companies.

In January we Opportunistically raised $600 million, new five year unsecured notes.

A portion of the proceeds will be used to repay our 400 million unsecured notes.

Mature in April 2024.

Jonathan Lamb: Taken together, these actions will modestly improve our overall cost of unsecured finance, increase our total unsecured debt as a percentage of total, 61. We continue to be very focused on maintaining a well-laddered liability and Lowering Our Fear. The spread on this new issuance represents one of our tightest spreads. Additionally, we were able to swap this new issuance at a rate of S plus $212,000, which when taken together with The BDC bond market continues to deepen and expand with new, We are pleased to see investors' recognition of OBDC's high-quality portfolio and continued support, which allowed us to drive improved pricing for this issuance, even at a higher rate, as we have since inception, continue to be proactive in addressing our financial needs, deepening our investor base and improving our liability. With that, I'll turn it back to Craig for closing. Thanks, Jonathan.

Taken together these actions will modestly improve our overall cost of unsecured financing.

Increased our increase our total unsecured debt as a percentage of total debt to 61%.

Yeah.

We continue to be very focused on maintaining a well ladder liability structure and lowering our financing costs.

Spread on this new issuance represents one of our tightest spreads to treasuries.

Further we were able to swap this new issuance at a rate of <unk>, plus 212 basis points.

Which when taken together with the maturity of the April 2024 notes.

Accretive to ROE for our shareholders and attractively priced relative to our current secured financing costs.

The BDC bond market continues to deepen and expand with new investors we.

We are pleased to see investors recognition of <unk> high quality portfolio and continued performance, which allowed us to drive improved pricing for this issuance even in a higher rate environment.

As we have since inception, we continue to be proactive in addressing our financing needs.

<unk> to deepen our investor base and improve our liability costs.

With that I'll turn it back to Craig for closing comments.

Thanks, Jonathan.

Craig Packer: To close, I wanted to spend a minute on what we're seeing in the market today and what we expect for 2024. We continue to see deal activities pick up in the fourth quarter. As Jonathan noted, we had over $1 billion in both originations and repayments in OBDC. This nearly equates to the total activity we saw in the first three quarters combined across our broader Blue Owl Direct Lending platform. We deployed over $8 billion in the quarter, the highest quarterly level since 2021.

To close I wanted to spend a minute on what we're seeing in the market today and what we expect for 2024.

We continued to see deal activity pick up in the fourth quarter.

As Jonathan noted, we had over $1 billion in both originations and repayments no BBC.

This nearly equates to the total activity we saw in the first three quarters combined.

Across our broader blue al direct lending platform, we deployed over $8 billion in the quarter, the highest quarterly level since 2021.

Craig Packer: We continue to believe the scale of our platform is an advantage for OBDC as our large origination effort allows us to efficiently match our repayment and deployment activity each quarter in order to maintain a fully invested portfolio and to scale up deployments in quarters where repayment activity is higher. We closed on several attractive new deals in the fourth quarter, including the billion-dollar-plus financings for PetFed, New Relic, and IFS Envoy, all three of which Blue Owl serves as lead arranger and administrative agent. We believe our role as administrative agent on these large deals demonstrates the private equity firm's confidence in our platform and, as importantly, positions us to maintain frequent dialogue and to have the greatest influence on credit documentation in terms.

We continue to believe the scale of our platform is an advantage for Ob D. C. As our large origination effort allows us to efficiently match, our repayment and deployment activity each quarter.

In order to maintain a fully invested portfolio and to scale up deployments and quarters for repayment activity is higher.

We closed on several attractive new deals in the fourth quarter, including the $1 billion plus financings for pets at new relic and Iff's envoy all three of which blew out served as lead arranger and administrative agent on.

We believe our role as administrative agent on these large deals demonstrates the private equity firms confidence in our platform and as importantly positions us to maintain frequent dialogue and to have the greatest influence on credit documentation in terms.

Craig Packer: Furthermore, we continue to benefit from incumbency across our portfolio, with significant add-on activity for our current borrowers in the quarter. As noted earlier, repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits. We expect repayment activity to continue to revert to these higher, more normalized levels, which could generate meaningful repayment income for OBDC.

Further we continue to benefit from incumbency across our portfolio with significant add on activity for our current borrowers in the quarter.

As noted earlier repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits.

We expect repayment activity to continue to revert to these higher more normalized levels, which could generate meaningful repayment income Pearl BDC.

Craig Packer: Looking forward, we expect to see increased market activity throughout 2024. We believe there is a substantial pent-up desire for private equity firms to return capital to LPs by exiting companies, and increased clarity on the rate environment could drive more activity. That said, to date, activity in the first quarter has been lighter, which is consistent with the typical seasonality we see after many issuers seek to transact before year-end.

Looking forward, we expect to see increased market market activity throughout 2024.

We believe there is substantial pent up desire for private equity firms to return capital to Lps by exiting companies and increased clarity on the rate environment could drive more activity.

That said to date activity in the first quarter has been lighter which is consistent with the typical seasonality we see after many issuers seek to transact before year end.

Craig Packer: Reflecting this dynamic and with strengthening public and private markets, we've seen some pressure on spreads across new investment opportunities. However, we continue to see larger and larger companies doing direct deals. Credit quality is some of the highest we've seen in our history, and the structures and terms on new deals remain attractive.

Reflecting this dynamic and with strengthening public and private markets, where you're seeing some pressure pressure on spreads across new investment opportunities.

However, we continue to see larger and larger companies doing direct deals the credit quality of some of the highest we've seen in our history.

And the structures and terms on new deals remain attractive.

Craig Packer: Finally, on behalf of the entire OBDC management team, I want to reiterate how pleased we are to have delivered another quarter of impressive results. We are grateful to the investment and portfolio management teams who continue to assess new opportunities, carefully monitor our portfolio companies, the financing team who continues to optimize our liability structure, and the entire Corporate Solutions Group, which supports the company's complex operations. As a result of these efforts, we delivered a total return of more than 40% to shareholders in 2023. We once again delivered record NII and a record high NAV per share, ultimately providing a 12.7% ROE for the year to our shareholders.

Finally on behalf of the entire <unk> management team.

To reiterate how pleased we are to have delivered another quarter of impressive results.

We are grateful to the investment and portfolio management teams, who continue to assess new opportunities carefully monitor our portfolio companies.

The financing team, who continues to optimize our liability structure.

And the entire corporate solutions group, who support the company's complex operations.

As a result of these efforts we delivered a total return of more than 40% to shareholders in 2023.

We once again delivered record NII and a record high NAV per share.

Ultimately, providing a 12, 7% ROE for the year to our shareholders.

Operator: We are also pleased to be able to raise our regular dividends, which we believe reflects our continued confidence in the portfolio. We are entering 2024 on a strong footing and believe we are well positioned for the year to come. With that, thank you for your time today, and we will now open the line for questions. Thank you. We will now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.

We were also pleased to be able to raise our regular dividend, which we believe reflects our continued confidence in the portfolio.

We are entering 2024 on strong footing and believe we are well positioned for the year to come.

With that thank you for your time today, and we will now open the line for questions.

Thank you, we'll now be conducting a question and answer session if you'd like any place in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to move your question from the queue for participants using speaker equipment may be necessary to pick up your handset before.

Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. Our first question is coming from Brian McKenna from Citizens J&P. Your line is now live. Okay, great. Good morning, everyone.

Pressing star one one moment, please while we poll for questions.

Our first question is coming from Brian Mckenna from citizens JMP. Your line is now live.

Okay, great. Good morning, everyone. So maybe just a question on credit quality to start the portfolio was clearly in a very strong position today, but could you just provide any details on the one company you added to non accrual during the quarter and then is there any update on the other three companies just in terms of resolving knees and then more broadly can you talk about the size.

Craig Packer: So maybe just a question on credit quality to start. You know, the portfolio is clearly in a very strong position today, but could you just provide any details on the one company you added to non-accrual during the quarter? And then is there any update on the other three companies just in terms of resolving these?

Craig Packer: And then, you know, more broadly, can you talk about the size of your portfolio management team today? How much has the related headcount grown over the last couple of years? And then, you know, where is the team spending a lot of their time today, just given the, you know, low level of non-accrual? Morning, Brian. You shoved like four questions in there, so you're going to have to remind me before I get to the first couple.

To your portfolio management team today, how much is it related head count Crown over the last couple of years and then you know where is the key spending a lot of their time today just given the.

The low level Oh, no non accruals today.

Good morning, Brian you sort of like four questions in there.

First of all.

Craig Packer: Look, overall, we continue to be really pleased with the credit quality of the portfolio. I think it's pretty striking, you know, think back a year ago when rates were as high as they were across the space. I think there was a lot of concern about how direct funding credit quality would hold up. And here we are, more than a year into this higher rate cycle, and we're really happy with credit quality across the board. I would say the space, as our overall, has also been really strong.

Look overall, we continue to be really pleased with the credit for all credit quality of the portfolio.

It was pretty striking I think back a year ago rates rates as high as they were.

Across the space I think there was a lot of concern about how direct lending credit quality will hold up and here we are more than a year into this higher rate cycle.

We're really happy with credit quality across the board I would say the spaces are overall has also been really strong.

Craig Packer: And I think it really is a testament to the quality of the companies that are coming into the direct lending space, which is as high as it's higher than it's ever been. We had a really de minimis position in a company, Ideal Image, that was less than $15 million of exposure in OVDC. We had some really small exposures in several other funds, and it was a business backed by a couple of private equity firms that we do a lot of business with and had some operational challenges, and it just is in a position where we felt it was... You can find me at www.caseyanddodd.com. Beyond that, the other three names, there is nothing to report.

It really is a testimony to the quality of the companies that are coming into the direct lending space, which is high as is higher than it's ever been.

We had a really de minimis position.

And a company.

All image that was less than $50 million of exposure in <unk>.

Some really small exposures and several other funds.

And it was a business backed by private equity firms that we do a lot of business with and had.

Some operational challenges.

It just is in a position where we.

We felt it was.

Properties to put it on nonaccrual and were working through with the borrower and the.

Sponsors.

Our plan going forward.

So it's.

It's a credit specific issue.

That business is not reflective of any any greater credit issues.

Craig Packer: In the case of, um, two of them, well, I guess one of them, we've, we've taken over the business; the other two, you know, to work with the existing, um, sponsors and, you know, I'll just call out one of the names, CIBT, cause I think it's interesting. There's a business that's not been on the gold roster for several years now, and it's sponsors that have worked really diligently over the last four years to try to rehabilitate the company in light of changing travel patterns and the like and continue to own the business and support the business, and we and the other vendors in the capital structure work with them. We continue to have that particular position marked at a very low price, but we'll see, we're hoping to do better, we'll just have to see, but it really is a testament to how hard the private equity firms work to avoid giving up on the companies, and that's very much central to our model. I think you asked about resources; we have added significantly to our portfolio management and workout resources. Our investment team overall is about 115 people; there's probably about 15 of those 115 that are doing full-time portfolio management and workout. Our approach to workout here is, some have the same approach, and some are different.

Yes.

Beyond that the other three names.

Nothing to report.

In the case.

Two of them well I guess one of them we've taken over the business the other two.

Work to the existing <unk>.

Sponsors.

I'll just call out one of the named CIBC, because I think it's interesting. This is a business that non accrual roster for several years now was significantly impacted by COVID-19 as a travel oriented business.

Yes.

Sponsors that worked really diligently over the last four years to try to reverse.

I'll take the company in light of changing travel.

Patterns and the like and continue to own the business and support the business and we and the other lenders in the capital structure working with them.

We can see now how that particular position March a very low price.

But.

I will say, we're hoping to do better.

But it really is a testimony to.

How far the private equity firms work to avoid giving up the companies and thats very much central to our model.

I think you asked about resources, we have added significantly to our to our portfolio management and workout resources.

Our investment team overall about 15 people Theres, probably about 15 of those 115 that are.

Full time portfolio management and workout our approach workout gear is somehow the same across some are different we have our existing.

Craig Packer: We have our existing underwriting team that stays involved in the credits; even if they go into workout, they know the company's the best, and we think that connectivity and consistency are very valuable to maximizing recovery. So beyond our workout team, which is more than enough size, we really use our whole team. My other firms have a different approach; it's a little more accepting, and pushing in the workout group, if you will. So I feel very comfortable that we have the capacity. You know, there was a business PLI that we took over during COVID, you know, it's been restructured, we, you know, we own that business today, not cool anymore. But if you, if you walk through the marks of our debt and equity position, you know, what you will see is that position, although we took a realized loss way back in 2020.

Writing team that stays involved in the credits even if they go into work out they know the company is the best.

And we think that connectivity and consistency is very valuable to maximizing recovery. So.

Beyond our workout team wishes, which is more than enough size.

Use our whole team my other firms have different approach more assertive pushing into the workout group if you will.

So I feel very comfortable that we have the capacity.

There was a business that we took over during COVID-19.

It's been restructured we own that business day.

Sure.

But if you if you walk through the marks our equity position what you.

You'll see US acquisition, although we took a realized loss way back in 2020, if you take the combined value of our debt and equity in that company today, it's pretty much on top of what our original basis was in the business. When we first made the loan but haven't realized yet so I'm not.

Craig Packer: If you take the combined value of our debt and equity in that company today, it's pretty much on top of what our original basis was in the business when we first made the loan. We haven't realized that yet. So I'm not I'm not, you know, declaring victory, but I think it's headed in the direction where we'll be able to report at some point that we are declaring victory.

Declaring victory, but I think it is headed in a direction, where we'll be able to report at some point that we are declaring victory.

Craig Packer: And I think it's again, a testimony to our ability to have a very long time horizon, to take over a business, work with an existing management team or supplement that with new management team, and to play for long-term value creation. And I think that's core to being a scale direct lending business that we are; part of our value proposition is maximizing recovery. I think PLI will be hopefully a great case study when we realize it in our ability to do that. So Brian, I think I got most of it. If I missed any, I'll give you one more shot.

Again, a testimony to our ability to have a very long time horizon.

To take all of our business to work with the existing management team or supplement that with new management team.

To play for long term value creation, and I think that's that's core to being a scaled direct lending business that we are part of our value proposition is maximizing recovery.

Hopefully a great case study when we realize it on our ability to do that so Brian.

Most of it I missed any.

Sure.

Craig Packer: Yeah, no, that's great. Appreciate all that color, and I'll hop back into the queue and congrats on another great quarter. Thank you. Thank you. The next question is coming from Casey Alexander from the Cubs.

Yeah, No that's great I appreciate all that color and I'll hop back back into the queue and congrats on another great quarter. Thank.

Thank you.

Thank you next question is coming from Casey Alexander from Compass Point. Your line is now live.

Craig Packer: This point in your line is now live. Yeah, hi, good morning, and thank you for taking my questions. Again, I understand if Brian's question sounded like four because everything is sort of interconnected. Your discussion about tighter spreads, private equity, refinancing is up, private equity wants to return money back, and the fact that you guys work in the upper middle market, does that all combine to what seems like a little bit of a rejuvenation of the broadly syndicated loan market, and is that contributing to some of the tighter spread Good morning, Casey.

Yeah, Hi, good morning, and thank you for taking my questions.

Again, everything you know I understand it Brian's question sounded like four because everything is sort of interconnected.

Your discussion about some tighter spreads private equity.

No refinancings up private equity one to return money back.

And the fact that you guys work in the upper middle market.

Does that all combined to.

What seems like a little bit of the rejuvenation of the broadly syndicated loan market and is that contributing to some of the tighter spreads that you see in the upper middle market.

Good morning Casey.

Craig Packer: I think that's a great word for rejuvenation. The bank's willingness to commit to leveraged finance deals is completely a function of there being a bid from buyers of loans, primarily CLOs, and CLO creation rebounded towards the end of last year and has been quite healthy this year. And the strengthening of the syndicated markets is giving banks confidence to commit to deals. And the market is quite good. And so the banks are willing to commit, and distribute, and the pricing in that market can be attractive for certain companies. And so you're seeing, I would say, a more normalization of the mix of flows. The normal market environment is a fully functioning public market and a fully functioning private market.

I think that I think thats right Greg.

Great work for our rejuvenation.

The bank's willingness to commit to leveraged finance deals is completely a function of.

They are being a bit from buyers loans primarily in.

Youll creation rebounded towards the end of last year and has been quite healthy this year and the strengthening of the syndicated markets is giving the banks confidence.

<unk> committed to deals in the market is is quite good and so the banks are willing to commit distribute and the pricing in that market can.

Can be attractive for certain companies.

And so youre seeing I would say a more normalization of the mix of flows.

The normal market environment.

As a fully functioning public market in a fully functioning on private market.

Craig Packer: The trend has been decidedly towards private market execution and direct lending execution. That trend has been going on for, certainly since the history of our business, and our growth has tracked that trend. But in most normal market environments, in most of our existence, the public markets have been open, the banks have been willing to finance deals, and the sponsors have been increasingly picking direct. But in this environment, they've got choices, and they're making those choices.

The trend has been decidedly towards private market execution and direct lending execution.

<unk>.

That trend.

Has been going on for certainly since the history of our business and our growth is track that trend.

But most normal market environments in most of our existence the public markets have been open.

Thanks to the water and the sponsors have been increasingly picking direct but in this environment, you've got choices, they're making those choices and I think that's a healthy market environment.

Craig Packer: And I think that's a healthy market environment. It does contribute to some of the spread compression. In the first half of last year, the public markets were shut.

It does contribute to some of the spread compression in the first half of last year pulp markets were shot no natural direct lenders such as ourselves.

Craig Packer: And so naturally, direct lenders, such as ourselves, could charge more. But today, public markets are open. And so there's a price check there, and that can contribute to spread compression. To be forthright, I think spread compression is also a function of a really good economy. Expectations of rates are going to come down. It just generally helps with the markets. But direct private credit has raised capital. Now we have capital. Other direct lenders have capital, and so there's competition.

The chart more than today pulp markets are open and so.

There is a price check there and that can contribute to spread compression.

To be to be forthright, I think spread compression also a function of a really good economy.

That ratio will come down and just general health of the markets, but dropped by the private credit has raised capital without water direct lenders are capped.

And so there is competition.

So we're on the tight end of the range of spreads that we've seen in direct lending.

Craig Packer: So we're on the tight end of the range of spreads that we see in direct lending. I think it's kind of trough where it is now, but it's on the tighter end of where things are. So I think that pendulum will swing back and forth. I like to talk about the secular and the cyclical.

I think it's kind of trough, probably where it is now but it's on the tide around where we're at.

Things are.

I think that pendulum.

Will swing back and forth I'd like to talk about the secular and cyclical or secular trend is seems to be the direct lending there'll be cyclical periods of time, where it skews a little more to the public markets.

Craig Packer: The secular trend is going to continue to be direct lending. There'll be cyclical periods of time where it's used a little more in the public markets, a little more in the private markets. Right now, I think it's a pretty healthy balance. And so you're seeing some spread. Okay, thank you.

More to private markets right now I think it's a pretty healthy balance.

And so youre seeing some spread tightening.

Okay. Thank you.

Craig Packer: That's very helpful. My follow-on question is, you know, in the last two quarters, you've raised the base dividend a couple of times in the face of what is generally a consensus that, as you mentioned, rates are going to normalize some. So you've got rates going one way and your base dividend going the other way. What gives you the confidence that you're going to be able to maintain and cover that adequately as rates come down? Is it potential growth of the JV or the specialty finance verticals, or is it expanding the leverage ratio somewhat, kind of a modest ratio right now? But I'm, you know, curious and holistically how you mix all of those things together to make sure that the board has confidence to raise the base dividend again. Sure.

That's very helpful. Mike My follow on question is.

Last two quarters, you've raised the base dividend a couple of times in the face of what is generally a consensus that as you mentioned that rates are kind of normalized some so you got rates going one way and your your base dividend going the other way.

You know what gives you the confidence that.

That you're going to be able to you know.

Maintain and and and cover that adequately.

As rates come down is it potential growth of the JV or the specialty finance verticals.

Or is it expanding the leverage ratio somewhat kind of a modest ratio.

Now, but I'm.

Curious and Holistically, how you mix all of those things together to make sure that the board has confidence to raise the base dividend again.

Sure So I think that.

Craig Packer: So, you know, I think that, um, we tried to be really thoughtful about, about, um, about our dividends. And I would pull the lens back to, you know, more than, you know, about a year and a half ago when it was clear rates had gone up and we felt really confident that the portfolio was not only going to perform but generate a really much higher step function, higher level of income. Um, and we thought about how to, how do we, what's the right way to share that with shareholders? And we introduced this notion of a supplemental dividend. Um, so shareholders would have a very predictable understanding of how, um, our earnings in higher rates or lower rates would flow through to them. Um, we thought that, and we got a lot of great feedback on it. I think that mechanism has worked really well. And so we had our base, our base dividend at that time, um, we raised from 31 to 33 and we had the supplemental. Um, and.

We've tried to be really thoughtful about about about our dividends I would pull the lens back to more of that about a year and a half ago. When it was clear rates have gone up and we felt really confident that the portfolio performed it generate a really much higher step function higher level of income.

We thought about how to how do we what's the right way to share that with shareholders and we introduced this notion of a supplemental dividend.

So shareholders should have a very predictable understanding of how.

Our earnings and higher resort, all rates would flow through to them and we thought that and we got a lot of great feedback on that I think that mechanism has worked really well and so we had our base our base dividend at that time, we raised $31 33 in the supplemental.

Yes.

Craig Packer: You know, what's happened since then is rates have stayed higher for longer, portfolios run extremely well, and look, we've generated terrific earnings, record earnings, four quarters in a row. And so what our shareholders have enjoyed is growing supplemental income on a base that was more than adequately covered. And so we wanted to think hard.

What's happened since then is rates stayed higher for longer portfolios on extremely well and we.

<unk> generates for record earnings record earnings orders are up and so.

What our shareholders have enjoyed is growing supplemental.

Base that was more than adequate adequately covered.

So we wanted to think hard.

Craig Packer: We're not just complacent with that success. We wanted to think hard about whether we have the balance right. And we looked at our peers and their payout ratios, and we did a lot of work around our portfolio and sensitized, as you would expect us to, as rates dropped, and making some thoughtful assumptions about credit performance, do we have a cushion to raise the dividend further? And we felt really comfortable that, even in a lower rate environment and making some appropriate assumptions about credit quality, we have more than enough cushion to raise the dividend by an additional two cents And so we did that, naturally, you know, it's not, this isn't complicated; we invest in flowing rate assets. If rates come down, earnings are going to go down; rates go up, earnings go up.

Placement with that success, we wanted to think hard about do we have the balance right and we looked at.

Our peers in air payout ratios.

A lot of work around our portfolio and sensitized as you would expect us to.

As rates drop.

And making some thoughtful assumptions about credit performance.

Do we do we have cushion.

To raise the dividend further.

We felt really comfortable that even in a low.

Low rate environment, and making some appropriate assumptions around credit quality, we have more than enough cushion to raise the dividends.

An additional two cents a share so we did that.

Naturally.

It's not this isn't complicated we invest in floating rate assets if rates come down our earnings go down rates, well very well for shareholders to understand that.

Craig Packer: And you know, every shareholder should understand that it's fundamentals investing in a BDC or something in a BDC like ours. But what we would expect over time is if rates come down, we tend to look at the forward curve, we feel very comfortable continuing to earn our base dividend, but we're putting more of our dividend in the base, and the supplemental will be lower if rates come down. And I think that's the cushion of that supplemental. We just put up 51 cents a share, we raised the base to 37 cents a share, and there was plenty of cushion there. And so we felt really comfortable.

Fundamentals investing.

BDC or something BDC like ours.

But what we would expect over time as if rates come down we tend to look at the forward curve, we feel very comfortable continuing to earn our base dividend but were put.

More of our dividend and the base and the supplemental will be lower if rates come down and I think thats.

Cushing is that supplemental we just put up 51, a share we raised the base 37 cents a share there is plenty of cushion there and so we felt really comfortable so fundamentally answer question. We looked at it Holistically, we're going to just keep doing exactly what we're doing we feel really confident in our portfolio, we don't need to change.

Craig Packer: So to fundamentally answer your question, we looked at it holistically, we're going to just keep doing exactly what we're doing, we feel really confident in our portfolio, we don't need to change any levers, we will continue to do what we have said, stay on our target leverage range, certainly would like to tweak that higher, continue to invest in some of our specialty finance verticals, those are creative, especially in a lower rate environment. But fundamentally, just continue to deliver great credit performance, and we feel good about the new dividend line. Thank you. Thank you. Our next question today is coming from Eric Zwick from Hovde Group. Your line is now active. Thanks. Good morning, everyone.

Any levers we.

We will continue to do what we have said.

Stay in our target leverage range, so I would like to tweak that higher continue to invest in some of our <unk>.

Specialty finance verticals those are those are accretive, especially in a low rate environment.

We continue to deliver great credit performance and we feel good about the new dividend.

Thank you.

Yeah.

Thank you. Our next question today is coming from Erik Zwick from Hovde Group. Your line is now live.

Thanks, Good morning, everyone I wanted to start first with the question on the pipeline and I know in the prepared comments you mentioned that activity had been.

Craig Packer: I wanted to start first with a question on the pipeline. And I know from the prepared comments that you mentioned that activity has been kind of seasonally slow to start, but not out of the range of normal. And just curious, as you look at the pipeline today, what it looks like in terms of the mix of new opportunities versus add-on opportunities, and whether also you're seeing any, you know, commonalities in the kind of themes in terms of industries or the type of companies that are in the pipeline look attractive today. Sure, it's a mix of new opportunities, add-ons, and refinancings. It's a mix.

Kind of a seasonally slow to start, but but not out of the range of normal and just curious as you look at the pipeline today.

What it looks like in terms of the mix of new versus add on opportunities and whether also you are seeing any.

Commonalities in the kind of thing.

Teams in terms of industries or types of companies that are in the pipeline to look attractive today.

Sure Mitch.

Mix new opportunities.

Add ons refinancings, it's a mix.

Craig Packer: I would tell you that it's my hope and my expectation that at some point this year, we'll see a significant pickup in new buyouts. I mean, new buyout activity remains moderate, and I think that that should pick up, given a generally a more stable rate environment, a good economy, sponsors have a lot of capital to deploy, and they really have an imperative to return capital to their LPs, and that should reflect itself in them selling companies that will result in new financings. So I was hopeful we might see that starting in the first quarter. We've seen some, but I wouldn't say it's a real resurgence, but at some point this year, I think we will. So it's a healthy mix; at some point, I think it'll be more skewed to new buyout activity; there are some of those, but it's not, I wouldn't call it robust; I would say it's sort of a reasonable environment that I would expect to increase over time. Thanks.

I would tell you that.

It's my hope.

Slash expectation.

Some point.

This year, we will see significant pickup.

New buyouts.

New buyout activity.

<unk> moderate.

And I think that.

That should pick up given generally more stable rate environment that economy soft somewhat capital to deploy and there really.

Hi.

<unk> returned capital to their Lps and that should reflect itself in.

Selling companies that result in new financings. So I was hopeful we might see that starting in the first quarter seeing some but I wouldn't say, it's a real resurgence, but some point. This year I think we will so it's a it's a healthy mix at some point I think there'll be more skewed to new buyout activity.

There are some of those but it's not it's not I wouldn't call. It robust I would say, it's sort of a reasonable environment.

Expect to increase over time.

Thanks.

Craig Packer: And next, just looking at your common equity portfolio continues to grow in both dollar terms and as a percentage of total assets. You know, how are you thinking about these investments in terms of the overall concentration? And what is your inclination to realize some of the embedded gains and over what potential time frame? Sure.

Next just looking at your common equity portfolio continues to grow in both dollar terms and as a percentage of total assets.

Or are you thinking about these investments in terms of the overall concentration and what is your inclination to realize some of the embedded gains in over what potential timeframe.

Yes.

Sure. So look I think that for shareholders in our less familiar with our company.

Craig Packer: So I think that for shareholders that are less familiar with our company, while technically, all those investments you're referring to are common equity investments. You know, the vast majority of them are equity investors in specialty finance verticals. We're essentially their portfolio companies, OBDCs, where the underlying assets are pools of typically personally senior secured loans. And so the credit characteristic of the vast majority of our common equity, more than half of it, is an income stream to dividend stream of a diversified portfolio of loans underwritten by management teams and companies with deep expertise in the domain that they're investing in. So, again, for those of you who are newer, an example, Wings Fire, which is our asset-based lending business. Fifth Season, which is our life insurance settlement business; American, which is our rail and aircraft business.

<unk>.

While technically all.

All of those investments are referring to our common equity investments.

Asked majority of them.

Our equity investments.

In specialty finance verticals.

We're essentially their portfolio companies for BDC.

Where the underlying assets are pools of typically first lien senior secured loans.

So the credit characteristics of the vast majority of our common equity more than more than half of it is.

An income stream to dividend stream.

<unk> portfolio of loans.

Written by management teams and companies with deep expertise in the domain that they are investing in.

So again for those of you renew or examples we inspire our asset based lending business fifth season, which is our licensor and settlements business average and which is our real rail and aircrafts.

Business. These are all essentially a portfolio of companies that have very diverse pools of assets that generate income.

Craig Packer: These are all essentially portfolio companies that have very diverse pools of assets that generate income. And we are an equity owner, but we are getting an economic, very consistent, predictable, and growing income stream that we think will generate, generally, double-digit borrowings. And we have been building each of these in a very sort of patient, methodical way.

And we are an equity owner, but we are getting an economic very consistent predictable and growing income stream that we think will generate.

Generally double digit Roes.

And we have the ability in each of these are very sort of patient methodical way and in addition to that income stream. If our teams do a good job. We also have an asset and equity investment asset as valuable will be valuable to us valuable to others.

Craig Packer: And in addition to that income stream, if our teams do a good job, we also have an asset, an equity investment asset that's valuable and will be valuable to us, valuable to others, and will create real enterprise value for our ownership stake in those businesses. We've grown that part of our portfolio and will continue to do so, but it would be It would be sort of off-key to think of that as a common equity investment. From an accounting standpoint, it certainly is, but from our standpoint, it's really just a pool of assets that generate income for us, and as we invest more, we will earn more. No plans to realize on any of that.

Enterprise value through our ownership stake in those businesses, we've grown that part of our portfolio and continue to do so but it would be.

It would be sort of off off.

Key of it think of that as a common equity investments from an accounting standpoint, it certainly is but from our standpoint, it's really support.

Assets that generate income to us in that as we invest more we will we will earn more milk.

No plans to realize on on any of that we do have a much smaller number of either equity co investments.

Craig Packer: We do have a much smaller number of equity co-investments. We have a couple of positions. I mentioned PLI a minute ago, where we took over a business, but the combination of what I'll call pure equity is 2% or 3%. It's really de minimis.

We have a couple of positions I mentioned I am going to go or we took over a business, but the combination of like what all pure equity.

Like two or 3%, it's really de Minimis.

Craig Packer: I think this has been a powerful return generator to build long-term income and long-term gain for OBDC, and we'll continue to do so, but I would urge shareholders to spend a minute understanding it and come away really happy with it. When we did our investor day last year, we did a whole section on this. I think all of that's still available on our website, so again, if you're newer, please take a listen. Email us if you're not sure how to get a hold of it, because I think it'll go away.

I think this has been a powerful return generator to build long term income and long term gain for <unk> and we will continue to do so, but I would urge shareholders to spend a minute understanding it would become a way I think we're really happy with it.

We did our Investor day last year, we did a whole section on this.

All of that is still available on our website. So again if your newer.

So please.

Take a lesson, perhaps email us.

I'm not sure how to get hold of it honestly I think it will come our way.

Craig Packer: Now I'm going to leave, but I would hope you're excited about what we're building and some of these faculty members. That's a helpful explanation. And last one for me, just looking at slide 13, there was about a $100 million increase in the portfolio companies rated either four or five. So I'm wondering if you could just talk a little bit about the recent developments as companies that drove the downgrades during the quarter. Yeah, we, um, you know, I alluded to this on the call, you know, our overall percentage rate at 3.45, which for us is underperformance, stayed the same, but I made a point of calling out on the call that we did have an increase amidst those 345s in the 4-5 category. We don't put out individual ratings disclosure on each name, but you'll note we certainly have a couple of names on And so that, one of the movers was not a foolish name.

I believe I would hope excited about what we're building and some of these hurdles.

That's a helpful explanation and last one for me.

Just looking at slide 13, there was about a $100 million increase in the.

Portfolio companies rated either four or five so I'm wondering if you could just talk a little bit about the recent developments at that accompanies that drove the downgrade.

During the quarter.

Yes.

I alluded to this on the call out.

Sure.

Our overall ranked percentage right at $3, five which for US is under performance.

Stayed the same but.

But I made it a point to point out on the call that we did have an increase missed those three for us in the four five category.

<unk>.

We don't put out individual ratings of disclosure on each name, but youll note.

We certainly we certainly have a companies on non accrual and so so those one of the movers was non accrual.

Craig Packer: The other was one of our more significant marks down this quarter. What I would offer you is, at this point in the cycle, given where rates are, we have expected, and we mentioned it again on this call, and we mentioned it pretty consistently in our earnings calls, that we would expect to have a few credit issues, just given the magnitude of the rate move. And so a couple of those downgrades are reflective of credits that have been performing well below expectations, combined with a higher debt burden starting to catch up to them. But what I would say is the fact that the 345s as a grouping have stayed stable; essentially, that's our watch list. Because our watch list has stayed stable, we're not adding new names of concern; there are really just less than a handful of names that have been a concern for a year, and that concern is growing as their credit problems continue to fester in a high-rate environment.

There was one of our more significant marks down.

This quarter so.

I wouldn't.

What I would offer you is at this point in the cycle, given where rates are we havent had expected and we mentioned a gallon. This call Ive mentioned it pretty consistently our earnings calls that we would expect to have your credit issues.

The magnitude of the rate move.

So couple of downgrades were reflected both credits that have been performing well below expectations combined with higher debt burden.

And hats off to them.

But what I would say is the fact that the three grouping hesitate stable essentially that's our watch list because our watch list has stayed stable, we're not adding new needs are concerned.

There is really just less than a handful of names that have gone up.

Churn for a year and that concern is growing.

There are credit problems could see a faster and higher rate environment. So that's what that is I don't want to minimize it and these are these are the areas platform bump those time on with our workout team.

Craig Packer: So that's what that is. I don't want to minimize it; these are the areas I spend the most time on with our workout team and hope that we can reverse course on a couple of these, but they are of concern, but again, you're talking about the overall portfolio, 1.7% of the portfolio in aggregate, so it's a very small pool of a few names that we're going to continue to spend a lot of time on. I appreciate the answers, Craig. Thanks for taking my questions today. Great, thank you. As a reminder, that's Star One to be placed into the question queue. Our next question is coming from Paul Johnson at KBW. Your line is now active. Yeah, good morning.

And hope that we can reverse course on couple of these but they are a concern, but again you're talking about the overall portfolio.

One 7% of the portfolio in aggregate so its a very small pool of a few names that we're going to continue to spend a lot of time on.

I appreciate the answer it's Greg Thanks for taking my questions today.

Great. Thank you.

As a reminder, that star one to be placed in the question queue. Our next question is coming from Paul Johnson with <unk>. Your line is now live.

Yeah. Good morning, Thanks for taking my questions.

Craig Packer: Thanks for taking my questions. Kind of looking just on fee income going forward, obviously, it was a very active quarter for you guys, but a slower year overall. I mean $16 million or so in fee income on a $13 billion portfolio. Do you think in the relatively near term, maybe this year, there's potential to generate some fairly meaningful fee income there to offset some of the potential decline from rates? Yeah, I mean, this quarter, we had a billion dollars in sales and repayments, and we had some, you know, a fair amount of prepayment-related income, as we said, that was some of the driver of the earnings. And I think that you can certainly expect, relative to last year, where there was very muted activity, an increase, and for some of that fee income to represent, you know, an offset to, you know, the rates, depending on those rate moves will be dollar for dollar. We could, we couldn't say, depending on the magnitude of those rate moves, but certainly a pickup in that activity will mute or dampen overall activity. The decline in the income rate.

Kind of looking just at on fee income.

Going forward, obviously, it was a very active quarter for you guys, but.

Slower year.

Overall in the $16 million or so of fee income.

$13 billion portfolio.

Do you think.

In the relatively near term maybe over this year and.

There is potential to generate some.

Fairly meaningful fee income there to offset some of the potential.

The client from from rates.

Yeah.

This quarter, we had we had $1 billion.

Sales and repayments some a fair amount of.

Prepayment related income as we said some of the driver of the earnings and I think that.

You can certainly expect relative to last year, where there was very muted activity.

An increase in for some of that fee income to represent an offset to two.

So the rates depending on those rate moves will it be dollar for dollar.

Certainly we could we couldnt say, depending on the magnitude of those rate moves but certainly.

And that activity will.

In overall activity will will mute or dampen.

Craig Packer: Hey, I hope at some point I talked about a world where there's a real pickup in M&A activity and that in that world, there's been a reason that we see meaningful pickup in fees as well as accretion. You know, so I expect it to happen. I mean, numbers are a little bit better this quarter, but they've been sort of frustratingly low. I expect it to happen at some point.

The decline in income from rates.

I hope at some point I talked about a world, where there's real pick up in M&A activity in that role who stand a reason that we would see meaningful pickup in and fees as well as accretion.

So I would expect it to happen this numbers and it's a little bit better this quarter, but it's been sort of a frustratingly low I expect it to happen at some point I don't want to not necessarily saying it will happen first quarter, either but at some point and a much more robust M&A environment it should pick up nicely.

Craig Packer: I don't wanna, not necessarily saying it will happen in the first quarter either, but at some point, in a much more robust M&A environment, it should pick up. Thanks, and I guess, you know, as you know, the leveraged loan market starts to come back, you know, there's more syndicated activity. I mean, do you expect to potentially see some of those deals that are in the pipeline today potentially flip over to the liquid market? Um, we, I expect to see, again, the public markets are wide open today. It's not something we have to wait to see. It's already happening now.

Thanks, and I guess you know as.

The leveraged loan market starts to come back.

Theres more syndicated activity I mean, do you expect to potentially see.

Some of those deals that are in the pipeline today potentially flip over to the liquid markets.

We expect to see again, the public markets are wide open to that.

Something we have to wait and see it's already happened is happening now.

Craig Packer: In our pipeline of deals we're looking at, sponsors are actively making choices about how they want to finance them. And today, despite a wide open public market, they continue to choose direct money for certain deals and the public market for certain deals, you know, as it has been and as it will be. And that's an ordinary course decision to make.

Our pipeline of deals we're looking at the sponsors are.

Actively making choices about how they want to finance today, despite wide open public market. They continue to choose direct money for certain deals in the pulp market for certain deals.

As it has been and as it will be.

Ordinary course decision making.

Craig Packer: I would expect in this environment that we'll get repaid from some companies that choose to refinance in the public markets. We've seen a little bit of that. I expect we'll continue to see some of that, particularly really high quality companies in our portfolio that have been there for a while, they have performed, de-levered, and can get good execution. So that will generate some income from us. It's sort of the normal cycle of life, if you will.

I would expect in this environment.

We paid from some companies that choose to refinance in the public market as we've seen a little bit of that I expect will continue to see some of that particularly really high quality companies. Our portfolio has been there for a while they perform delever.

You can get a good execution.

That will generate some income from us.

Normal normal circle life, if you will I would expect us to continue to do that so I think it is just that.

Craig Packer: I expect us to continue to do that. So I think it's just a normalized market. I think we had an environment a year ago when it wasn't a normal environment. Everything was going direct. You know, if we went back, we would have cautioned you not to assume that it would stay that way forever. That was not a normal state of affairs.

A normal a normalized market I think.

You know kind of an environment a year ago when.

Everything was going direct.

We bought back.

We would caution you not to assume that will stay that way per hour that was that was not a normal state of affairs as normal state of affairs and a healthy one and one that we can continue to have good success originating deals and getting repayments in our portfolio of investments.

Craig Packer: This is a normal state of affairs, and a healthy one, and one that we can continue to have really good success, originating deals, and getting repayments, and keeping our portfolio of investments. Thanks. I appreciate that. And then, you know, public valuations have been surprisingly strong last year and into this year, you know, in the growth market, the tech sector, I mean, really the broader market, the public markets as a whole. I feel like that's maybe been a little bit contrary to the kind of what's going on in the private markets last year with the adjustment to, you know, higher peak rates. I'm just curious, you know, how does that affect the companies in the upper middle market that you're looking at today?

Thanks, I appreciate that.

And then.

Public valuations have been surprisingly strong last year and into this year and the growth market Tech sector, I mean really the broader market to public market as a whole.

I feel like that's maybe been a little bit contrary to the kind of what's going on in the private markets last year with the adjustment to higher peak rates.

I'm just curious how does that affect the companies in the upper middle market that you are looking at.

Craig Packer: I mean, have you seen this kind of multiple expansion that we've had in the public markets, or, you know, I'm just curious how that affects the market that you guys play in. Ah, we continue to see private equity firms have a tremendous amount of capital, tremendous amount of expertise, and really a tremendous track record of finding opportunities to deploy that capital and generate great returns for their investors. Private equity is a very, you know, the institutional LP's like quite a bit, have significant exposures to, and have generated really terrific returns. In excess of public markets, often for many, many years.

Today, I mean have you seen this kind of multiple expansion that we've had and in the public markets or.

I'm, just curious to how that effects.

The market that you guys plan.

We.

We continue to see private and private equity firms.

This modest amount of capital.

Tremendous amount of expertise I'm really a tremendous track record of finding it.

Opportunities to deploy that capital generate great returns for their Lps.

But equity is.

<unk> is a very.

It's a market that the institutional piece like like quite a bit have significant exposures to and have generated really sort of a return in excess of the public markets often on over many many years.

Craig Packer: That's the market we choose to back. We work really closely with private equity firms and, Um, and, you know, they were active last year. It wasn't quite as robust a year as they would all like.

We choose the back we worked really closely with private equity firms.

And.

And they are they were active last year wasn't quite as robust years. They would all like at some point that will pick up in Brazil.

Craig Packer: At some point, that will pick up and resume. But I just want to make a point, which is an obvious one, but I'll make it anyway. We are, on average, lending at 40% of the value. We're lenders. You know, we want to have a lot of equity cushion; we want commitment from the private equity firms in the form of capital and resources. You know, their role is to figure out valuation and whether they can get a great return. Our role is to provide a loan that we feel really confident in a downside scenario, we can get returns on. I think that part of the reason why you haven't seen as much private M&A resuming is that sponsors, I think, are being patient. They see some of what you're seeing.

But I just want to make a point, which is an obvious one but I'll make it anyway.

On average lending at 40% loan to value where lenders.

We wanted to have a lot of equity cushion you want to add.

On the private equity firms and capital resources.

Their role is to ensure our valuation and whether they get a great return on our role as the quiet alone that we feel really confident in the downside scenario, we can get we can get repaid.

I think that part of the reason why you haven't seen as much private M&A resuming sponsors I think we're being patient. So you see some what youre seeing they see the pulp market evaluation and theyre not losses, all companies amortization, we're really confident that you can get the valuation that they observe that means they wait six months a year, they're doing that I think that is.

Craig Packer: They see that the public market valuation is high, and they're not going to rush to sell companies. Once they feel really confident that they can get the valuation that they deserve, that means they wait six months or a year. They're doing that.

Craig Packer: I think that's part of why M&A has slowed down. But I don't want to sound flippant or trite about it, but it's like now our problem. Our problem is that we don't know what's going on. We don't know what's going on. We don't know what's going on. We don't know what's going on.

Hawaii has slowed down.

But I.

I don't wanted to sound.

We're excited about it but right now our call our problem is making sure. We're back in good companies with significant equity beneath us and that Youre going to evaluation comes down meaningfully we're going to be hard and I think that central so our underwriting thesis.

Craig Packer: I think that's central to our underwriting thesis. We don't get distracted by public market valuations that may be ephemeral or even private market valuations that might be a bit too high. We just go for our downside analysis. Assume operational results are off, multiples are lower, will we get our money back?

Don't get distracted by.

Public market valuations at Ivy apparel or or even private market valuations, but my view is you.

We just go through our downside analysis assume operational results are off value multiples are lower when we get our money back.

Craig Packer: And that's how we look at it. Got it. Thanks for that, Craig. Those are all my questions today.

That's how we look at it.

Got it thanks for that Gregg those are all my questions today.

Craig Packer: Congratulations on a good point. Thank you. Next question is coming from Mickey Schlain from Lattinburg, Pullman. Your line is now live. Yes, good morning.

That's on again.

Thank you next question is coming from Mickey <unk> from Ladenburg Thalmann. Your line is now live.

Yes, good morning, I apologize if my question has already been asked but I'm juggling multiple calls.

Craig Packer: I apologize if my question has already been asked, but I'm juggling multiple calls. Craig, you mentioned that the BSL market is normalizing, and I'm interested in understanding how you see that impacting the spreads that you may be able to capture as the year progresses and going into next year. Sure, Mickey, we talked about this a bit, you know, my prepared marks, I mentioned, you know, we've seen spreads tighten. It's tightened because the public markets have been open, they are open, they're normalized, they're not normalizing, they're normalized. And so that's a price check that the private equity firms will look at.

Craig you.

You mentioned that the BSL market is normalizing and.

I'm interested in understanding how you see that impacting the spreads that you may be able to capture.

As the year progresses and going into next year.

Sure Mickey we did talk about this a bit.

We in my prepared remarks, I mentioned that we don't see spreads.

It's tightened because the public markets have been open they are open air normalized not normalizing.

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And so that's a price check that private equity firms to look at.

Generally it's a moderate environment.

Although the market is not a lot of capital biomarker work capital. So we've seen some spread compression.

I think almost all of that has already taken effect.

And have a look at new deals.

Craig Packer: And, you know, generally, it's a moderate deal flow environment, and public markets have a lot of capital; private markets have a lot of capital, so you're seeing some spread compression. I think almost all of that has already taken effect in how we look at new deals, and I don't think it's going to go much higher than we are now, but it's on the tight end of historical ranges. Absolute returns on our lending remain very high because... Mark Hughes, Owl Rock Capital Mark Hughes, Owl Rock Capital Mark Hughes, Owl Rock Capital, sponsors, and companies picking between private and public markets.

And I don't think it can go much higher than we are now on the tight end of historical ranges absolute returns are lending remained very high because.

Current short term rates remain very high.

And so we do a unit tranche at five of the over.

Current base rates, we're still earning 11 plus percent.

But we all recognize that.

There's a good likelihood that in two years that basically it will be meaningfully lower and so over the last over time by the way I think market share coming aggressively exactly how fast rates will come down and what that will look like and maybe there's a bit of a reconsideration.

We're assuming we look at the forward curve, so it's rather tighter livable.

They are more on the annoying category than in the <unk>.

The returns work for us, we still get great returns.

And it's more just a backfill werent typical market.

Sponsored companies picking between private and public markets, we continue to get a premium for private solutions and that premium is not only higher spread but essentially.

Craig Packer: We continue to get a premium for private solutions, and that premium is not only a higher spread, but essentially the OID that we get to underwrite at. What I always like to remind clients and shareholders is that you've got to think about it on a relative basis. You know, we may not be earning as much, but all the markets have tightened, and we're still earning a nice premium, and we'll earn a premium in all market environments. And we'll, you know, the relative premium should stay the same, but the absolute return will move around based on market conditions. So hopefully that gives you a little bit of context. It does indeed.

OID that we underwrite at we continue to offer premium.

To remind clients and shareholders.

You got to think about on a relative basis.

You may not be earning as much but all the markets tighten and we're still earning in ice cream and we earned premium in all market environments.

And will the relative premium should stay the same but the absolute return will move around based on market conditions.

So hopefully that gives it a little bit of context.

Craig Packer: I appreciate it. Thank you very much. Thank you. Thank you. The next question today is coming from Kenneth Lee from RBC Capital Markets. Your line is now live. Hey, good morning.

It does I appreciate it thank you very much.

Thank you.

Thank you next question today is coming from Kenneth Lee from RBC capital markets. Your line is now live.

Hey, good morning, Thanks for taking my question just to piggyback on the broadly syndicated loan questions.

Craig Packer: Thanks for taking my question. Just to piggyback on the Bradley Syndicate loan question, do you anticipate any kind of shift in either the sectors you're focusing on or underwriting or perhaps the types of investments you could be making, either within the capital structure or the size, just given the normalization of the leverage? Thanks. We're really boring on this.

Do you anticipate any kind of shift in either the sectors youre, focusing on or underwriting or perhaps the types of investments you could be making either within the capital structure with the size.

Just given the normalization of the leveraged loan markets. Thanks.

We're really boring on this.

Craig Packer: It's not a lack of thought on our part. We really like... not typical parts of the market. We're not trying to time that common cycle.

It's not for lack of a thought on our part.

We really like recession resistant sectors with very predictable earnings.

Non cyclical parts of the market, we're not trying to time economic cycle, and we try and private equity activity and so consistently where we find the best opportunities software insurance brokerage some parts of healthcare food and beverage services businesses distribution businesses.

Craig Packer: And we track private equity activity. And so consistently, where we find the best opportunities, software, insurance, brokerage, some parts of healthcare, food and beverage, a lot of services businesses, distribution businesses, that's our sweet spot. Those have been our most significant factors for years, and we continue to see a lot of activity there. Software continues to be the best sector that we have. We also have several funds dedicated to the software space, but it's the biggest single industry sector for many of our funds. I kind of like that a lot.

Our sweet spot.

Our most significant factors for years.

To see a lot of activity our software continues to be the best sector.

We offset separate selling pumps dedicated software space, but it's the biggest single industry sector for many of our bonds.

I like that a lot.

Craig Packer: And we're not gonna deviate from that. And so, I think that should be reassuring to investors. We make seven-year loans, and even if we think the economy might be really good for cyclicals for a year or two, we're not willing to underwrite state-of-the-art malware conditions for seven years. And so we think that that's the right approach. So, no change. We lend to a lot of businesses whose underlying economic feature is a very predictable and recurring revenue, the single defining factor of our underwriting process, and you can find those types of businesses that serve a wide end market, depending on what they do, and that's really what we seek out.

We're not going to deviate from that.

And so I think that should be reassuring to investors, we made seven year loans, even if we thought the economy might be really good for cyclicals for year or two.

We're not we're not willing to underwrite.

Now conditions for seven years, and so we think that that's the right approach so no change.

We lend to a lot of businesses that.

The underlying <unk>.

Economic feature is a very predictable and recurring revenue stream.

Single defining factor of our underwriting process.

You can find those types of businesses that serve a variety of end markets, depending on what they do and that that's really what we seek out.

Okay.

Craig Packer: Gotcha. Very helpful there. And one follow-up, if I may. In terms of the new investments, I wonder if you could give a little bit more color in terms of what you've been seeing, terms and documentation on your investments, and whether there's been any change just given the current landscape. Thanks.

Got you very helpful. There and one.

One follow up if I may in terms of the new investments wondering if you just give a little bit more color in terms of what you've been seeing in terms of terms and documentation on your investments and whether theres been any change just given the current landscape. Thanks.

Craig Packer: Overall, terms and protections remain very strong for direct lending, and I would sort of emphasize this, that the protections that we get are significantly better than what's in the public market. That's fundamental to what we do. We care not only about the business and the returns but the credit protections, given our significant exposure to the companies, given that illiquidity that we have, we need to be in a position to protect ourselves, and the CLOs that buy public loans simply don't have nearly the same credit protection, really dramatically different, in particular in areas around protecting our collateral, cash flow leakage, and the like.

Overall terms and protections remained very strong for direct lending.

Underscore the protections that we get are significantly better than what's in the public markets.

That's fundamentally what we do we.

They are not only about the business and the returns, but the credit protections given the hour.

Significant exposure to the companies given the liquidity that we have we need to be in a position to protect ourselves.

In the CLO.

Loans are simply don't have nearly the same credit protections and its really pretty dramatically different in particular in areas around protecting our collateral.

Cash flow leakage MLR.

Craig Packer: So we just get much better credit protections, fundamental; we won't sacrifice that, have not, will not. It's, they're on the edge there, you know, a few things that can creep in when markets are as strong as they are now, which we will do selectively if the rest of our credit protections and economics are appropriate, but I'd say five: fundamentally, on leverage on the deal, on the value of the deal, credit agreements are fundamentally consistent with what we've been doing the last seven or eight years, no change. You'll read about portability and pick, there's a couple of features that have crept in, you know. We do those, you know, in a very, very small number of circumstances for road, right, high-quality credits, and in a very reasoned way; it's not reflective of overall market conditions, but you will see a couple of deals done in that regard.

So we just we just get much better after taxes fundamental you won't sacrifice that.

Not.

It's there on the edge there are few things that can creep in when markets are as strong as they are now.

We will do selectively if the rest of our.

Credit protections that economics.

Or are appropriate.

Yeah.

Fundamentally the leverage on the deal on the value of the deal the credit agreements.

No.

Well be doing last seven or eight years no change you'll read about portability.

Teachers that aircraft in.

We do those very very small number of circumstances for relatively high quality credits and a very reasonable way not reflective of overall market conditions, but you will see a couple of deals done in that matter.

Craig Packer: And I think for the right loans, you know, we're willing to consider those markets willing to do it, but nothing that would sacrifice our credit quality. It's fundamental to us. And I feel really good about that for every loan that we do, and if not, we won't do it. Got you. Very helpful there. Thanks again.

And I think for the right price, we're willing to consider those markets willing to do it but nothing that would sacrifice our credit quality is fundamental.

To us and I feel really good about that for every loan that we do in.

If not we won't do it.

Got you very helpful. There. Thanks again.

Craig Packer: Thank you. The next question is coming from Maxwell Pritchard from Truist Securities. Your line is now live. Good morning.

Thank you. Your next question is coming from Nashville Pritchard from true Securities. Your line is now live.

Good morning, I'm, calling in for Mark Hughes.

Craig Packer: I'm calling in on behalf of Mark Hughes. In your prepared remarks, you mentioned that the net leverage ratio ticked down, which we've seen for the last several quarters. Is there a specific range you had in mind for 2024-25 as investment activity presumably starts ramping up? The readings are the same range we've been at. We set it all on time, 0.9 to one and a quarter.

The prepared remarks, you mentioned that net leverage ratio ticked down, which we've seen for the last several quarters is there a specific range you had in mind for 'twenty four 'twenty five as investment activity, presumably starts ramping up.

The rooms are the same range we've been at five.

$5 91 a quarter.

Craig Packer: You know, this quarter we had a billion dollars for origination, and a billion dollars for repayments. You know, we can't manage that leverage ratio with a scalpel. It's a little bit of just a function of fuel flow.

This quarter, we added $1 billion origination Boeing repayments.

We can't manage that leverage ratio with a scalpel it it's a little bit of just bumps up youll.

On the margin I prefer to be a tick or two higher.

Craig Packer: On the margin, I'd prefer it to be a tick or two higher. But there's nothing deliberate about us trying to tweak it a bit lower. I think it's just a function of fuel flow.

But but.

But theres nothing deliberate about us trying to tweak it a bit lower I think it's just a function of you.

Craig Packer: And, you know, we'll try to optimize a little bit. Our returns are terrific. We're putting up record returns, record ROE, record NII, record NABs. And so I think it should be reassuring that we can do all that and have leverage not be at our feet. We're not stretching to do deals. We're not stretching the max leverage to try to grind out returns. We can do it very

Hello.

And we.

We will try to optimize a little bit.

Our turns are actual revenue.

Putting up record returns rapid row record.

Record apps.

So I think it should be reassuring that we can do all that and have leverage not be we're not stretching to do deals not scratching the max leverage attract lined out returns we can do it very comfortably.

Craig Packer: And it gives us a little bit of an hour-long quiver over time to offset if there's a little bit of a rate we've got. Yeah, that's helpful. And so you mentioned the industries that you find attractive, but are there any particular industries in your portfolio that are having more credit issues than others? Oh, we have very few credit issues. So there are no sectors that have any more credit issues than others. We have almost none.

It gives us a little bit of an hour or whatever.

Time to offset if there is a little bit of rate reduction.

Yes, that's helpful and so you mentioned the industries that you find attractive but are there any particular industries in your portfolio that are having more credit issues than others.

Yeah.

We have very few credit issues. So there's no sector is that having more coverage and others we have almost none.

Craig Packer: I would say overall, really consistent across the board, low single-digit revenue and EBITDA growth. There are a couple of consumer facing businesses that are having a bit of a struggle. There are a couple of industrial businesses that were benefiting when supply chains were, we're, we're loosening up, but maybe maybe they're facing some Commodity Price Pressures or some supply chain challenges.

I would say overall really consistent across the board low single digit revenue and EBITDA growth.

There was a couple of consumer facing businesses that are having a bit of struggle. There's a couple of industrial businesses that were benefiting when supply chains.

We are loosening up but maybe maybe they are facing some.

Commodity price pressures or some supply chain challenges. So let's say every company is doing perfectly well to have a watch list.

Craig Packer: So I say every company is doing perfectly well; you have a watch list. But there's no thematic comments I would make about areas of great weakness, and I think that speaks to the broad strength of our portfolio. Okay, I got it. Thank you. Thank you. We have reached the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments. Thank you so much to everyone for joining us. We're really pleased with the quarter.

But I just note the matic.

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Comments I would make about areas of weakness and I think that speaks to the broad strength of our portfolio.

Okay got it thank you.

Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further closing comments.

Thank you so much for everyone for joining really pleased with the quarter.

Craig Packer: If you have any other questions, please reach out. We'd love to engage with you, and we look forward to seeing you and speaking with you again soon. Thank you. This does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.

Any other questions.

Please reach out to engage with you and we look forward to seeing you again soon.

Thank you that does conclude today's teleconference and webcast you may disconnect. Your line at this time and have a wonderful day, we thank you for your participation today.