Q1 2024 BlackRock TCP Capital Corp Earnings Call
Operator: Ladies and gentlemen, good afternoon. Welcome everyone to BlackRock TCP Capital Corp's first quarter 2024 earnings conference call. Today's conference call is being recorded for replay purposes. During the presentation, all participants will be in a listen-only mode.
Ladies and gentlemen, good afternoon, welcome everyone to Blackrock TCP Capital Corp, 's first quarter 'twenty 'twenty four earnings Conference call. Today's conference call is being recorded for replay purposes.
During the presentation, all participants will be in a listen only mode.
Operator: A question and answer session will follow the company's formal remarks. To ask a question, please press the star key followed by the digit 1. I will repeat these instructions before we begin the Q&A session. Now, I would like to turn the call over to Katie McGlynn, Director of the BlackRock TCP Capital Corp Investor Relations Team. Katie, please proceed.
Question and answer session will follow the Companys formal remarks to ask a question. Please press the star key followed by the digit one.
Repeat these instructions before we begin the Q&A session.
And now I would like to turn the call over to Katie Mcglynn director of the Black Hawk TCP Capital Corp, Investor Relations team Casey. Please proceed.
Kathleen McGlynn: Thank you, Emily. Before we begin, I'll note that this conference call may contain forward-looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance. Forward-looking statements involve risks and uncertainties, and actual results could differ materially from those projected. Any forward-looking statements made on this call are made as of today and are subject to change without notice. Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified.
Kathleen McGlynn: Thank you Emily before we begin I will note that this conference call may contain forward looking statements based on the estimates and assumptions of management at the time of such statements and are not guarantees of future performance.
Kathleen McGlynn: Forward looking statements involve risks and uncertainties and actual results could differ materially from those projected.
Kathleen McGlynn: Any forward looking statements made on this call are made as of today and are subject to change without notice. Additionally.
Kathleen McGlynn: Additionally, certain information discussed and presented May have been derived from third party sources and has not been independently verified.
Kathleen McGlynn: Accordingly, we make no representation or warranty with respect to such information. Earlier today, we issued our earnings release for the first quarter, and it's March 31, 2024. We also posted a supplemental earnings presentation on our website at www.tcpcapital.com. To view the slide presentation, which we will refer to on today's call, please click on the Investor Relations link and select Events and Presentations. These documents should be reviewed in conjunction with the company's Form 10-Q, which was filed with the SEC earlier today. I will now turn the call over to our chairman and CEO, Raj Vig. Thanks, Katie, and thank you for your
Kathleen McGlynn: Accordingly, we made no representation or warranty with respect to such information.
Kathleen McGlynn: Earlier today, we issued our earnings release for the first quarter ended March 31, 2024, we also posted a supplemental earnings presentation to our website at www Dot TCP capital Dotcom.
Kathleen McGlynn: Cause you to a slide presentation, which we will refer to on today's call. Please click on the Investor Relations link and select events and presentations.
Kathleen McGlynn: These documents should be reviewed in conjunction with the company's Form 10-Q, which was filed with the SEC earlier today.
Kathleen McGlynn: I'll now turn the call over to our chairman and CEO Raj Vig.
Rajneesh Vig: Thanks, Katie, and thank you for joining us for TCPC's Q1 2024 earnings call, which is also officially the first earnings call for TCPC as a combined entity, following our successful combination with our former affiliates, BlackRock Capital Investment Corp, and Corp BCI.
Rajneesh Vig: Thanks, Katie and thank you for joining us for <unk> Q1, 2024 earnings call, which is also the official rate.
Rajneesh Vig: First earnings call G. P C as a combined entity.
Rajneesh Vig: Oh sure successful combination.
Rajneesh Vig: Blackrock capital investment Corp for CRC.
Rajneesh Vig: Today I'm joined by our President, Philip Tseng, and our CFO, Erik Cuellar. We are also joined today by Michaela Murray, who will be taking over the investor relations role from Katie McGlynn, who is leading the firm to pursue other opportunities. I'd like to officially welcome Michaela to the show.
Rajneesh Vig: Today I'm joined by our President Phil Tseng.
Rajneesh Vig: Our CFO Eric <unk>.
Rajneesh Vig: We're also joined today by Sheila Murray will be taking over the Investor relations role from Kingdom anyway, who is leaving the firm to pursue other opportunities.
Rajneesh Vig: Yes.
Speaker Change: I'd like to officially welcome adherent to the show.
Rajneesh Vig: As a reminder, Katie has been a valued member of the... and PrivateNet Platform since 2008, and she was instrumental in structuring and closing the recent merger. She's been a great partner, friend, and will be sorely missed. We, of course, wish her well in her future endeavors. For today, I will begin with a few comments on the successful completion of our merger with BCIC. I'll then provide an overview of our first quarter results. Phil will follow with an overview of the investment environment and our portfolio and investment activity, and Erik will then review our financial results as well as our capital and liquidity in greater detail.
Speaker Change: As a reminder, changing as a valued member of TCR T C team and private debt platform since 2018.
Speaker Change: He was instrumental in structuring and.
Rajneesh Vig: Closing the recent merger.
Rajneesh Vig: She has been a great partner brand and will be sorely missed we of course wish her well in her future endeavors.
Rajneesh Vig: For today I'll begin with a few comments on the successful completion of our merger with <unk>.
Rajneesh Vig: I'll then provide an overview of our first quarter results.
Rajneesh Vig: Phil will follow with an overview of the investment environment, and our portfolio and investment activity and Eric will then review our financial results as well as our capital and liquidity in greater detail.
Rajneesh Vig: Finally, I will wrap up with a few comments on the opportunities we see ahead before taking your questions. As I mentioned earlier, during the first quarter, on March 8th, we closed our affiliate merger with BCI. As a reminder, since BlackRock's acquisition of TCP's platform in 2018, the investment activities of both TCP and BCIC were managed by one..., are under the current leadership.
Speaker Change: Finally, I will wrap up with a few comments on the opportunities. We see ahead before taking your questions.
Rajneesh Vig: As I mentioned earlier during the first quarter on March 18th.
Rajneesh Vig: We closed our affiliate merger with <unk>.
Rajneesh Vig: As a reminder, since Blackrock acquisition of Tcp's platform in 2018.
Rajneesh Vig: Investment activities of both T. C. P. G N V CIC were managed by watching our.
Rajneesh Vig: Under the current leadership.
Rajneesh Vig: The merger simply formalizes a combination of these two materially overlapping portfolios that delivers meaningful value for our shareholders through the greater scale and targeted operating efficiency. This includes a lower overall fee structure for the larger combined company, the likelihood of more efficient access to capital, and income accretion for the company and, ultimately, for our shareholders. From this point forward, we will be discussing financial results with NT on a combined basis. Now, let's begin with a review of the highlights of our first quarter results. I am pleased to report that for the first quarter of 2024, TCPC delivered adjusted net income of $0.45 per share, an increase from $0.44 per share in the prior quarter.
Rajneesh Vig: The merger should we formalized the combination of these two materially overlap in portfolios.
Rajneesh Vig: Delivers meaningful value for our shareholders.
Rajneesh Vig: Greater scale and targeted operating efficiency.
Rajneesh Vig: This includes a lower overall fee structure from a larger combined entity.
Rajneesh Vig: The likelihood of a more efficient access to capital and income accretion for the company and ultimately for our shareholders.
Rajneesh Vig: From this point forward, we will be discussing financial results.
Rajneesh Vig: Our combined basis.
Rajneesh Vig: Our run rate NII remains among the highest in TCP's history as a public company, and our annualized net investment income return on equity for the quarter was 14.7%, and NII continues to benefit from relatively higher base rates and spreads. During the first quarter, our NAF declined 6.4%, primarily due to net unrealized losses on portfolio companies previously discussed, including our investment in two Amazon aggregators, Thrazio and Razor, along with our equity investment in advance. The write-downs in the first quarter were mostly the result of circumstances specific to a handful of companies.
Rajneesh Vig: Now, let's begin with a review of the highlights of our first quarter results.
Rajneesh Vig: I am pleased to report that for the first quarter of 2024.
Rajneesh Vig: T C. P. C delivered adjusted net income of 45 cents per share.
Rajneesh Vig: Increased from 44 cents per share in the prior quarter.
Rajneesh Vig: Our run rate.
Rajneesh Vig: Among the highest in Tcp's history as a public company.
Rajneesh Vig: And our annualized net investment income return on equity for the quarter was 14, 7%.
Rajneesh Vig: <unk> continues to benefit from relatively higher base rates base rates and spreads.
Rajneesh Vig: During the first quarter, our NAV declined six 4%, primarily due to net unrealized losses on our portfolio of companies previously.
Rajneesh Vig: <unk>, our investments into Amazon Aggregators Raphael and razor.
Rajneesh Vig: Along with our equity investment in a bedroom.
Rajneesh Vig: The write down in the first quarter are mostly the result of circumstances specific to a handful of companies and as we have stated before we do not believe these situations or any indication of a broader credit challenges in our portfolio the.
Rajneesh Vig: And as we have stated before, we do not believe these situations are any indication of broader credit challenges in our portfolio. The majority of our portfolio of companies continue to report revenue and margin expansion, with many generating... Sustain Performance Improvement. That said, I again want to provide commentary on a few of the names that contributed to the Portfolio Markdown. Duraggio and Razor both operate in the Amazon aggregator space, and as we have discussed on previous calls, the aggregators are consolidators of small to medium-sized brands that sell through Amazon's market-leading third-party platform.
Rajneesh Vig: The majority of our portfolio of companies continue to report revenue and margin expansion with many generating sustained performance improvements.
Speaker Change: That's it I again want to provide a commentary on a few of the names that contributed to the portfolio markdowns.
Speaker Change: <unk> and razor, both operate and the Amazon aggregator space and as we've discussed on previous calls.
Speaker Change: <unk> are consolidated in our small to medium sized brands that sell through Amazon market, leading third party platform.
Rajneesh Vig: This sector was initially impacted by COVID-related supply chain issues, and then by slowing growth and online consumer spending as supply chain issues alleviated, resulting in excess inventories and over leveraged balance sheets. Given the persistent operating and liquidity challenges that resulted, Thravio, one of the largest standalone aggregators, opted for a balance sheet restructuring via a Chapter 11 filing in February 2024, which we supported given the net benefits Although a fair bit of work remains ahead of us, we expect, ultimately, broad data to emerge with a lower and more manageable debt structure, as well as a leaner and more efficient operating profile.
Speaker Change: This sector was initially impacted by Covid related supply chain issues, and then by slowing growth in online consumer spending at.
Speaker Change: Supply chain issues, alleviated, resulting in excess inventories and over leveraged balance sheets.
Speaker Change: Given the persistent operating and liquidity challenges that resulted in <unk>, one of the largest and more aggregators.
Speaker Change: For a balance sheet restructuring chapter 11 filing in February 2024.
Speaker Change: Which we supported given the net benefits from that process.
Speaker Change: Although a fair bit of work remains ahead of US we expect ultimately Roger to emerge with a lower and more manageable debt structure as long as a leaner and more efficient operating profile.
Rajneesh Vig: This should allow the company to remain a leader in the sector and to focus on a return to profitability post-emergence in what we continue to believe is a long-term and viable and attractive business. By contrast, Razor Group did not. Instead, Razor Group opted to address challenges via consolidation and acquired Perch in March, solidifying the Combined Entities position as a global leader in the space. Similar to Thrasio's stand-alone restructuring effort, we expect the strategic combination to drive a more efficient operating structure than either company could have achieved in the near term alone.
Speaker Change: It should allow the company to remain a leader in the sector and just focus on our return to profitability Hershey versions and what we continue to believe they will.
Speaker Change: Long term and viable and attractive industry.
Speaker Change: By contrast ratio.
Speaker Change: Right.
Speaker Change: By contrast radio group officer address challenges via consolidation and acquired perch in March.
Speaker Change: The combined entities.
Speaker Change: As a global leader in the space.
Speaker Change: Similar to <unk> Standalone restructuring effort, we expect the strategic combination to drive a more efficient operating structure that either company could have achieved in the near term stand alone.
Rajneesh Vig: We also believe that further consolidation and cost optimization are likely to continue in this space, and ultimately, there will be fewer, larger-scale, and better capitalized vendors serving. We will continue to update you on the progress of each of these as we are able. Next, I'll discuss Edmenta, an online learning provider which, as we noted last quarter, is navigating a reversion to a more normalized but still positive demand environment. Demand for its tools and services spiked during the pandemic, but that has since corrected following the successful return to in-person attendance at many schools. Relative to pre-pandemic levels, digital education and remote learning services continue to grow in popularity and prominence, and Edmentum remains well positioned in an industry with positive secular trends.
Speaker Change: We also believe that further consolidation and cost optimization are likely to continue in this space and ultimately there will be fewer larger scale and better capitalized vendors serving it.
Speaker Change: We will continue to update you on the progress of each of these as we are able to.
Speaker Change: Next I'll discuss in Metro.
Speaker Change: Online learning provider, which as we noted last quarter.
Speaker Change: Obligation a reversion to a more normalized but still positive demand environment.
Speaker Change: Demand for its tools and services spikes during the pandemic.
Speaker Change: That has since corrected following the successful return to in person attendance and many schools.
Speaker Change: Relative to pre pandemic levels digital education, and remote learning services continue to grow in popularity and provenance and I've met some remains well positioned in an industry with positive secular trends.
Rajneesh Vig: As a reminder, our current investment in Mentum is a residual equity position after we receive full repayment on our loan to the company. As a long-standing player in the direct lending space, our team has experienced lending across market cycles and has developed unique expertise and a proven track record of success working through challenging credit situations. We are leveraging this expertise, believe we have the right teams in place, and are proactively working with management teams, equity owners, and other lenders to improve performance and achieve positive outcomes for our investors. Most importantly, outside of these situations, the credit quality of our portfolio remains strong.
Speaker Change: As a reminder, our current investment investments did a residual equity position.
Speaker Change: After we received full repayment on our loans to the company.
Speaker Change: As a long standing player in the direct lending space. Our team has experienced lending across market cycles and has developed unique expertise and a proven track record of success working through challenge credits challenging credit situations.
Speaker Change: We are leveraging this expertise I believe we have the right teams in place and are proactively working with management teams equity owners and other lenders to improve performance and achieved positive outcomes for our investments.
Speaker Change: Most importantly outside of these situations.
Speaker Change: Credit quality of our portfolio remains strong.
Philip M. Tseng: As of March 31st, 2024, our internal risk rating was relatively unchanged from December 31st, 2023 and reflects the fact that the majority of our portfolio companies are substantially in line or ahead of base case equity. Our Board of Directors declared a second quarter dividend of $0.34 per share, which implies a 132% NII coverage based on our first quarter adjusted NII. The second quarter dividend is payable on June 28th to shareholders of record in due course.
Speaker Change: As of March 31, 2020 for our internal risk rating was relatively unchanged from December 31 2023.
Speaker Change: It reflects the fact that the majority of our portfolio companies are.
Speaker Change: Were substantially in line or ahead of base case expectations.
Speaker Change: Our board of directors declared a second quarter dividend <unk> 34 per share, which implies a 132% NII coverage based on our first quarter adjusted NII.
Speaker Change: Our second quarter dividend is payable on June 28 to shareholders of record of June 14th.
Philip M. Tseng: We have always taken a disciplined approach to our dividends with an emphasis on stability and strong coverage for more recurring net investment income. Throughout TCPC's 12-year history, we have consistently covered our dividends with recurring net investment income and have also paid several special dividends, including in the most recent quarter. Now, we'll turn it over to Phil to discuss our investment activity and portfolio.
Speaker Change: We have always taken a disciplined approach to our dividend with an emphasis on stability and strong coverage from our recurring net investment income.
Speaker Change: Throughout TCP 612 year history.
Speaker Change: We have consistently covered our dividend through recurring net investment income and have also paid several special dividends, including the most recent quarters.
Speaker Change: Now I will turn it over to Phil to discuss our investment activity and portfolio.
Speaker Change: Yeah.
Philip M. Tseng: Thanks Raj.
Philip M. Tseng: I'll start by providing an update on our portfolio and highlights from our investment activity during the first quarter, and then provide a few comments on the investment environment. In the first quarter of 2024, we invested $20 million primarily in junior secured loans. Employment in the quarter included loans to four new and three existing portfolios.
Philip M. Tseng: I'll start with providing an update on our portfolio and highlights from our investment activity. During the first quarter and then provide a few comments on the investment environment.
Philip M. Tseng: In the first quarter of 'twenty 'twenty four we invested $28 billion, primarily senior secured loans deployments in the quarter included loans to four new and three existing portfolio companies.
Philip M. Tseng: Consistent with our strategy, our emphasis remains on companies with established business models and proven core customer bases that make them more resilient across economic cycles. In reviewing opportunities, we emphasize transactions where we are positioned as a lender of influence, where we have a direct relationship with the borrower and the ability to leverage our more than two decades of experience, negotiating field terms and conditions that we believe provide meaningful downside protection. We believe this has been a key driver of our low realized loss rates over our history.
Philip M. Tseng: Consistent with our strategy our emphasis remains on companies with established business models and proven core customer basis that make them more resilient.
Philip M. Tseng: Economic cycles.
Philip M. Tseng: In reviewing new opportunities, we emphasized transactions, where we are positioned as a lender of influence.
Speaker Change: Where we have a direct relationship with the borrower and the ability to leverage our more than two decades of experience in.
Speaker Change: And negotiating deal terms and conditions that we believe provide meaningful downside protection.
Speaker Change: We believe this has been a key driver of our low realized loss rates over our history.
Philip M. Tseng: We also see emerging opportunity on the horizon as pent-up M&A transactions come to market. As the bid-ask spread and valuations for higher-quality assets narrow, we expect market participants who have been sitting on the sidelines to accelerate the pace of M&A due to the lower debt service cost for prospective borrowers. And based on our conversations with market participants, we're optimistic about activity in the near to intermediate term.
Speaker Change: We don't see emerging opportunity on the horizon.
Speaker Change: M&A transactions come to market.
Speaker Change: As the bid ask spread and valuations for higher quality assets narrow, we expect market participants who've been sitting on the sideline can be more active.
Speaker Change: Actual interest rate cuts should help to catalyze a pick up in M&A due to the lower debt service costs for prospective borrowers.
Speaker Change: And based on our conversations with market participants were optimistic about activity in the near to intermediate term.
Philip M. Tseng: In this environment, our industry specialization continues to be an advantage and to provide two key benefits for us. First, it enhances our ability to assess and effectively mitigate risk in our underwriting when we negotiate terms and credit documentation.
Speaker Change: In this environment our industry specialization continues to be an advantage as it provides two key benefits for us.
Speaker Change: First it enhances our ability to assess and effectively mitigate risk in our underwriting when we negotiate terms and credit documentation.
Philip M. Tseng: And second, it expands our deal sourcing capabilities with sponsors and non-sponsors who value our industry experience, which lends itself to more reliable execution for borrowers. Follow-on investments in existing companies continue to be an important source of opportunity for us. About half of the capital we deployed in the last 12 months was to existing corporations. One of the recent investments made during the first quarter was an investment in PMA asset management. TMA is a leading money market asset manager serving local government, K-12 education, and other public sectors.
Speaker Change: Second it expands our deal sourcing capabilities with sponsors and non sponsors who value our industry experience, which lends itself to more reliable execution for borrowers.
Speaker Change: Follow on investments in existing companies continues to be an important source of opportunity for us.
Speaker Change: About half of the capital will be deployed over the last 12 months.
Speaker Change: <unk> to existing portfolio.
Speaker Change: What are the recent investments made during the first quarter was investment PMA asset management.
Speaker Change: PMA is a leading money market asset managers, serving local government.
Speaker Change: Through 12 education and other public sector entities.
Philip M. Tseng: The company provides its public sector clients with a comprehensive suite of investment advisory, fund administration, and capital markets advisory services. BlackRock provided capital to support a sponsor's acquisition of PMA. We believe this investment offers an attractive, risk-adjusted return and provides a unique opportunity to invest in a scaled money market asset manager that has the ability to sustain able growth. New investments in the first quarter were offset by dispositions and payoffs of $24 million.
Speaker Change: The company provides public sector clients with comprehensive suite of investment Advisory Fund administration and capital markets Advisory services.
Speaker Change: Blackrock provided capital to support the sponsors acquisition a PMA.
Speaker Change: We believe this investment offers an attractive risk adjusted returns and provides a unique opportunity to invest to scale money market manager that had 58.
Speaker Change: Growth over its history.
Speaker Change: Yeah.
Speaker Change: New investments in the first quarter were offset by dispositions and payoffs of $24 million.
Philip M. Tseng: As part of our ongoing portfolio management, we closely monitor and directly engage with our existing portfolio companies, proactively assessing both current and projected performance relative to our original underwriting. In the limited situations where performance is below our expectations, we're engaged with the management teams and the owners to proactively drive performance improvements and ensure our capital remains well protected. Managing situations where capital may be at risk is a top priority for us, and we believe our 20 plus years of experience in managing portfolios through the cycle is a significant competitive advantage.
Speaker Change: As part of our ongoing portfolio management, we closely monitor and directly engaged with our existing portfolio companies proactively assessing both current and projected performance relative.
Speaker Change: So our original underwriting assumptions.
Speaker Change: In the limited situations, where performance is below our expectations, we're engaged with the management teams and the owners to proactively drive performance improvement insure our capital remains well protected.
Speaker Change: Managing situations, where our capital may be at risk is a top priority for our team and.
Speaker Change: And we believe our 20 plus years of experience in managing portfolios through cycle.
Speaker Change: Is a significant competitive advantage for TCP.
Philip M. Tseng: We are pleased to report that the majority of our portfolio companies continue to deliver revenue growth and margin expansion as they successfully navigate the higher rate environment, lingering inflation, and general uncertainty in the economy. We believe this reflects the durability of companies in the middle market as well as our ability to pick the right industries and the right companies and to structure transactions that are good for our borrowers and for our investors. Now I'll turn to our portfolio. As a reminder, these figures relate to our consolidated portfolio following the merger with. At quarter end, our portfolio had a fair market value of approximately $2.1 billion.
Speaker Change: We are pleased to report that the majority of our portfolio companies continue to deliver revenue growth and margin expansion as they successfully navigate the higher rate environment lingering inflation and general uncertainty in the economy.
Speaker Change: We believe this reflects the durability companies in the middle market as well as our ability to take the right industries and the right companies and to structure transactions that are good for our borrowers and for our investors.
Speaker Change: Now I'll turn to our portfolio as a reminder, these figures relate to our consolidated portfolio following the merger with <unk>.
Speaker Change: At quarter end, our portfolio had a fair market value of approximately $2 1 billion.
Philip M. Tseng: Ninety-one percent of our investments were senior secured debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration. At quarter end, our diversified portfolio consisted of investments in 157 companies, and our average portfolio company investment was 13 and a half. As the chart on slide 7 of the presentation illustrates, our recurring income is distributed broadly across our portfolio, and is not reliant on income from any one company. In fact, more than 75% of our portfolio companies each contribute less than 1% to our recurring income.
Speaker Change: 91% of our investments were senior secured debt spread across a wide range of industries, providing portfolio diversity and minimizing concentration risk.
Speaker Change: At quarter end, our diversified portfolio.
Speaker Change: Estimates and 157 companies.
Speaker Change: Our average portfolio company investment was $13 5 million.
Speaker Change: As the chart on slide seven of the presentation illustrates our recurring income is distributed broadly across our portfolio. It is not reliant on income from any one company in fact more than 75% of our portfolio companies each contribute less than 1% to our recurring income.
Philip M. Tseng: 80% of the portfolio is firstly providing significant downside protection, and 97% of our debt investments are floating rate. The overall effective yield in our debt portfolio is 14.1%, reflecting the benefit of higher base rates and wider spreads on new investors. Investments in new portfolio companies during the quarter had a weighted average effective yield of 14.7%, exceeding the 14% weighted average effective yield on equity. However, to date, we have had no prepayment income in the sector.
Speaker Change: 80% of the portfolio are firstly, providing significant downside protection and 97% of our debt investments are floating rate.
Speaker Change: The overall effective yield on our debt portfolio was 14, 1%, reflecting the benefit of higher base rates and wider spreads on new investments.
Speaker Change: Investments in new portfolio companies during the quarter at a weighted average effective yield of 14, 7% exceeding the 14% weighted average effective yield on exited positions.
Speaker Change: To date, we've had no prepayment income for the second quarter.
Speaker Change: Yeah.
Philip M. Tseng: In looking forward, we believe we're well positioned to continue to deliver attractive returns, given that our team has one of the longest track records in direct lending of any of us. Irrespective of when the Fed rate cuts commence, we believe we will be in a slower growth and an elevated rate environment for the foreseeable future and could see a range of macroeconomic scenarios. But in periods like this, we believe our experience and our deep industry knowledge provide us with advantages that result in strong results throughout various market cycles.
Speaker Change: And looking forward, we believe we're well positioned to continue to deliver attractive returns given that our team has one of the longest track records indirect lending in any of our publicly traded BDC.
Speaker Change: Irrespective of when the fed rate cuts come in we believe we'll be in a slower growth and an elevated rate environment for the foreseeable future and could see a range of.
Speaker Change: Macroeconomic scenarios.
Speaker Change: Just curious like this we believe our experience and our deep industry knowledge provide us advantages.
Speaker Change: Strong results.
Speaker Change: Wow various market cycles.
Philip M. Tseng: The market environment that prevailed over the past year is changing. For a large part of 2023, we saw wider spreads, we saw more conservative leverage profiles, and generally stronger structural protection. However, for much of this year so far, we've seen a broader repricing, and we expect this means managers have to work harder to identify deals with favorable economics and favorable structure. As we know, in the last quarter, there has been an increased bifurcation of the direct lending market, which continues to persist today.
Speaker Change: The market environment that persisted over the past year is changing.
Speaker Change: For a large part of 2023, we saw wider spreads we saw more conservative leverage profiles and generally stronger structural protections.
Speaker Change: However for much of this year so far.
Speaker Change: <unk> seen a broader re pricing and we expect this to continue.
Speaker Change: This means managers have to work harder to identify deals with favorable economics and favorable structures.
Speaker Change: As we noted last quarter. There has been an increased bifurcation of the direct lending market, which continues to persist today.
Philip M. Tseng: Many have observed more borrower-friendly trends, such as tightening pricing and covenant-like deal structure. These are especially prevalent in the upper middle market for large cap direct lending, given the robust return of banks to that segment. However, in the corporate market, where we focus, there's been less impact by the, We continue to benefit from lower leverage overall in the presence of maintenance, The New York Times, all of which lead to generally higher, We continue to see a durable yield premium for our transaction flow relative to the products in the area. Now, I'll turn it over to Erik to walk you through our financial results as well as our capital and liquidity.
Speaker Change: Many have observed more borrower friendly trends, such as tightening pricing and covenant light deal structures.
Speaker Change: These are especially prevalent in the upper middle market or large cap direct lending market.
Speaker Change: Given the robust return of banks to that segment.
Speaker Change: However, in the core middle market, where we focus.
Speaker Change: There has been less impacted by this trend.
Speaker Change: We continued to benefit from lower leverage overall in the presence of maintenance covenant and for you all.
Speaker Change: All of which lead to generally tighter documentation crashed.
Speaker Change: We continue to see a durable yield premium for our transaction flow relative to the broadly syndicated market.
Speaker Change: Yeah.
Speaker Change: Now.
Speaker Change: I'll turn it over to Eric to walk through our financial results as well as our capital and liquidity position.
Eric: Thank you Phil.
Erik L. Cuellar: As Rajneesh noted, our net investment income in the first quarter benefited from the increase in base rates over the last 21 months and what's 45 cents on an adjusted basis for the quarter. A detail in the earnings press release, adjusted NII excludes amortization of the purchase accounting discount resulting from the merger with BCIC and is calculated in accordance with GAAP. The full reconciliation of adjusted NII to GAAP NII, as well as other non-GAAP financial metrics, is included in the earnings press release and 10-Q.
Eric: As Ralph noted our net investment income in the first quarter benefited from the increase in base rates over the last 21 months.
Speaker Change: What's <unk> 45.
Eric: On an adjusted basis for the quarter.
Eric: As detailed in the earnings press release.
Eric: Adjusted NII excludes amortization of the purchase accounting discount, resulting from the merger with <unk>.
Speaker Change: And is calculated in accordance with GAAP.
Speaker Change: A full reconciliation of adjusted NII to GAAP NII.
Speaker Change: Other non-GAAP financial metrics is included in the earnings press release and 10-Q.
Erik L. Cuellar: Today we declare the second quarter dividend of 34 cents per share. We remain committed to paying a sustainable dividend that is fully covered by our net investment in, regardless of the interest rate environment, as we have done consistently over the last 12 years.
Speaker Change: Today, we declared a second quarter dividend of <unk> 34 per share.
Speaker Change: We remain committed to paying a sustainable dividend that is fully covered by our net investment income.
Speaker Change: Regardless of the interest rate environment as we have done consistently over the last 12 years.
Erik L. Cuellar: Investment income for the first quarter was $0.90 per share. This included recurring cash interest of $0.78, non-recurring interest of two cents, recurring discount and fee amortization of three cents, and peak income of $0.05. Pick Income remains in line with the average over his, Investment income also included $0.02 of dividend income.
Speaker Change: Investment income for the first quarter was <unk> 90 per share.
Speaker Change: This included recurring cash interest of 78%.
Speaker Change: Nonrecurring interest of two cents.
Speaker Change: Recurring discount and fee amortization of <unk>.
Speaker Change: And Pik income of <unk>.
Speaker Change: Pik income remains in line with the average over our history.
Speaker Change: Investment income also included <unk> <unk> of dividend income.
Erik L. Cuellar: Operating expenses for the first quarter were $0.35 per share, including $0.21 of interest and other debt expenses. Incentive fees in the quarter totaled $5.8 million, or $0.09 per share. Operating expenses for the quarter reflected the impact of the lower management fee rate since the closing of the transaction on March 18. We expect other synergies and expense savings to materialize over the next few quarters. Net realized losses for the quarter were $168,000, or less than a penny per share. Net unrealized losses in the first quarter totaled $23 million, or $0.37 per share, primarily reflecting unrealized markdowns on previously discussed investments, as Raj described earlier.
Speaker Change: Operating expenses for the first quarter were 35 per share, including 21 sense of interest and other debt expenses.
Speaker Change: Incentive fees in the quarter totaled $5 $8 million or <unk> <unk> per share.
Speaker Change: Operating expenses for the quarter reflected the impact of the lower management fee rate since the closing of the transaction on March 18.
Speaker Change: We expect other synergies and expense savings to materialize over the next few quarters.
Speaker Change: Net realized losses for the quarter were $168000 or less than a penny per share.
Speaker Change: Net unrealized losses in the first quarter totaled $23 million or <unk> 37 per share.
Speaker Change: Primarily reflecting unrealized markdowns on previously discussed investments as Raj described earlier.
Erik L. Cuellar: The net increase in assets for the quarter was $5.1 million, or $0.08 per share. As of March 31st, we have five portfolio companies that are non-accrual, representing 1.7% of the portfolio at fair value and 3.6% at cost. During the quarter, we added two portfolio companies to the non-accrual status, including Aventive, previously known as Secura, as well as Gordon Brothers, a pre-existing non-accrual portfolio company from the acquired BCIC portfolio.
Speaker Change: The net increase in net assets for the quarter was $5 $1 million or <unk> <unk> per share.
Speaker Change: As of March 31, we had five portfolio companies on nonaccrual.
Speaker Change: Representing one 7% of the portfolio at fair value and three 6% at cost.
Speaker Change: During the quarter, we added two portfolio companies to nonaccrual status.
Speaker Change: Including <unk> previously known as secure us as.
Speaker Change: As well as Gordon brothers, a preexisting non accrual portfolio company from the acquired <unk> portfolio.
Erik L. Cuellar: Turning to our liquidity, our balance sheet positioning remains solid, and our total liquidity increased to $409 million at the end of the quarter, relative to our total investments of $2.1 billion. This included available leverage of $286 million and cash of $121 million. Unfunded loan commitments to portfolio companies at quarter end equaled 4% of total investments, for approximately $91 million, of which only 57 million were revolver commitments.
Speaker Change: Turning to our liquidity.
Speaker Change: Our balance sheet positioning remains solid.
Speaker Change: And our total liquidity increased to $409 million at the end of the quarter.
Speaker Change: Relative to our total investments of $2 $1 billion.
Speaker Change: This included available leverage of $286 million and cash of $121 million.
Speaker Change: Unfunded loan commitments to portfolio companies at quarter end equal to 4% of total investments.
Speaker Change: Approximately $91 million.
Speaker Change: Of which only $57 million were revolver commitments.
Erik L. Cuellar: Net leverage excluding SBIC debt for the quarter is 1.08 times, well within our target range of 0.9 to 1.2 times leverage. Our diverse and flexible leverage program includes three low-cost credit facilities, three unsecured note issuances, and an SBA program. Given the modest size of each of our debt issuances, we are not overly reliant on any single source of finance, and our dead maturities remain well-laddered. Additionally, we are comfortable with our current mix of secured and unsecured finance, and we expect to address the upcoming maturity of our 2024 notes in the near future.
Speaker Change: Net leverage excluding spic's debt for the quarter is 1.08 times well.
Speaker Change: Within our target range of <unk> nine to one two times leverage.
Speaker Change: Our diverse and flexible leverage program includes three low cost credit facilities.
Speaker Change: Unsecured note issuances and then.
Speaker Change: SBA program.
Speaker Change: Given the modest size of each of our debt issuances, we are not overly reliant on any single source of financing.
Speaker Change: Our debt maturities remain well ladder.
Speaker Change: Additionally, we are comfortable with our current mix of secured and unsecured financing.
Speaker Change: We expect to address the upcoming maturity of our 2024 notes in the near future.
Speaker Change: Okay.
Erik L. Cuellar: Combined, the weighted average interest rate on our outstanding borrowings, including debt assumed as a result of the merger, increased modestly during the quarter to 5.08%. That average interest rate is up only 217 basis points since March of 2022, while base rates increased more than 500 basis points during this period. This is the result of our lower overall cost of capital. Now, I'll turn the call back over to Raj. Thanks, Erik, since we took TCPC public with Deliverance, a 10% annualized return on invested assets, and an annualized cash return of 9.7%.
Speaker Change: Combined the weighted average interest rate on our outstanding borrowings, including debt assumed as a result of the merger increased modestly during the quarter to 5.08%.
Speaker Change: That average interest rate is up only 217 basis points since March of 2022.
Speaker Change: While base rates increased more than 500 basis points during this period.
Speaker Change: This is the result of a lower overall cost of capital.
Speaker Change: Now I will turn the call back over to Raj.
Rajneesh Vig: Thanks, Eric.
Rajneesh Vig: Since we took <unk> public in 2012.
Rajneesh Vig: A 10% annualized return on invested assets and an agila annualized cash return of nine 7% to our shareholders.
Erik L. Cuellar: We are very proud of these results, which include performance during periods when base rates were substantially lower than they are today. We believe this performance remains at the high end of our peer group due to our ability to consistently identify attractive middle market investors at Premium Yields and to deliver exceptional returns to our shareholders across markets. Following our successful merger with BCIC, we look forward to continuing to deliver financing solutions to our borrowers and to structured transactions. Unattractive return. And with that operator, please open the call for questions. Thank you. As a reminder, if
Rajneesh Vig: We are very proud of these results which include performance during periods when base rates were substantially lower than they are today.
Raj Vig: We believe this performance remains at the high end of our peer group and speak to our ability to consistently identify attractive middle market investment opportunities.
Raj Vig: Premium yields and to deliver exceptional returns to our shareholders across market cycles.
Raj Vig: Our successful merger with <unk>, we look forward to continuing to deliver financing solutions to our borrowers and infrastructure transactions that deliver attractive returns to our shareholders.
Speaker Change: And with that operator, please open the call for questions.
Operator: Thank you. As a reminder, if you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press star followed by two to remove yourself from the queue. We will just take a brief pause to allow the queue to fill. So as a reminder, that is start followed by the number one on your telephone keypad for any questions today. Our first question today comes from the line of Robert Dodd with Raymond James. Robert, please go ahead; your line is open. Good morning.
Speaker Change: Thank you.
Speaker Change: That he would like to ask a question. Please do so now by pressing star followed by the number one on your telephone keypad.
Speaker Change: Can you change your mind or you feel like your question has already been <unk>.
Speaker Change: <unk> Kim Amiga so from the key.
Speaker Change: We will just take a brief pause to allow the T cell.
Speaker Change: Yeah.
Speaker Change: As a reminder, that is star followed by the number one on your telephone keypad for any questions today.
Speaker Change: Our first question today comes from the line of Robert Dodd with Raymond James Go ahead. Please.
Robert James Dodd: Please go ahead your line is open.
Robert James Dodd: Morning, well, afternoon, I guess. On the flash, you know, except for the advocates on aggregator space, I mean on flash here particularly, I mean the bankruptcy got resolved, I think, after quarter end. And I just want to clarify, I think in the docs and the discussion was implied recovery below the mark that you currently have it carry. Is that... Factored in, or because you disagree about the valuation of the business long term potentially, or is it because it happened after the quarter end that was not fully known at the time you were evaluating?
Robert James Dodd: Good morning.
Speaker Change: Afternoon.
Robert James Dodd: One one glass et cetera, the aggregates all goodness.
Rajneesh Vig: Robert, I think I got most of that question, but I think the question was, is the bankruptcy after quarter end? Is that correct?
Robert James Dodd: Particularly I mean the bankruptcy.
Robert James Dodd: Good results I think after quarter end and I just wanted to clarify I think in the docs and the discussion was.
Robert James Dodd: And fiber comfortably below the mall.
Speaker Change: We have it.
Speaker Change: Carried that is that fair.
Robert James Dodd: Today, though because it.
Robert James Dodd: Do you disagree about the sandwich business.
Robert James Dodd: Or is it because that happened after the quarter and that was not fully.
Robert James Dodd: At the time you evaluate some of these positions.
Robert James Dodd: Yeah.
Speaker Change: Robert I think I got most of that question, but I think the question was is the bankruptcy.
Robert James Dodd: After quarter end is that correct.
Robert James Dodd: It was resolved at the quarter end, right? I mean, it was finalized and... what I read was an implied value, you know, to senior lenders which is obviously lower than the current mark that you have that carried out. So is that a disagreement with the valuation, which is fine, or is it that it wasn't factored in yet because
Robert James Dodd: It would strike was resolved after the quarter ends right I mean, it was finalized.
Robert James Dodd: What I meant was implied value.
Robert James Dodd: Two senior lenders, 20% retrofits.
Robert James Dodd: Which oversees low within the color Mark.
Robert James Dodd: So is that a disagreement with the valuation which is fine or is it that it wasn't factored in yet because it hasn't been resolved yet.
Rajneesh Vig: Yeah, so let me I think I understand the question. So the VAT keep in mind, our evaluation procedures are done through a third party. And they'll take into account all the circumstances at the time of the evaluation. The bankruptcy process is kind of a different process where the evaluations that are being put forth may be more strategic, depending on where you are in the capital structure. So will there be differences? Potentially, yes. Are they, are folks looking at it for the same purpose? Not necessarily.
Speaker Change: Yeah. So let me let me I think I've got a quick question, so the vast chemo or valuation procedures.
Robert James Dodd: <unk> done through third party.
Speaker Change: I'm, sorry, I'll take it.
Speaker Change: And they'll take into account.
Speaker Change:
Robert James Dodd: Oh.
Robert James Dodd: Also on the circumstances at the time of the evaluation.
Robert James Dodd: The bankruptcy process is kind of a different process, where evaluations that are being put forth.
Robert James Dodd: Maybe more strategic.
Robert James Dodd: Where you are in the capital structure.
Robert James Dodd: So will there be differences potentially yes are they are folks looking at it for the same purpose not necessarily and I guess, what I would say is we have maintained the valuation process and policies.
Rajneesh Vig: And I guess what I would say is we have maintained the valuation process and policy that we think you know are appropriate for portfolio marketing. The bankruptcy itself was, you know, really a collective decision to do some additional financing, clean up the capital structure, and other liabilities. But I will say for any company, and not just Rossio, but in general, where there is a restructuring either in or out of court, you're just going to see, as you know, Robert, more volatility, and maybe variance in marks until the ultimate realization.
Robert James Dodd: We think are appropriate for the portfolio markets.
Robert James Dodd: The value that the bankruptcy itself was.
Robert James Dodd: Really a collective decision something that was more strategic tool to do some additional financing and clean up the capital structure and other liabilities.
Robert James Dodd: But I will say for any company not just Roger but in general where there is a restructuring either in or out of court youre just going to see as you know Robert more volatility and maybe variance in March until the ultimate realization.
Rajneesh Vig: That probably happens here, that probably happens with the other aggregators, and it has happened with Admenta, where ultimately, we're doing, you know, right by the process, giving all the information that's available, including the filings, but ultimately, the realization is cash-based, and I think in the case of inventiveness, even though the equity is volatile, we've taken over cash and the original debt off at par plus, and here the And Robert, as it relates to the 331 mark, this loan actually has had some trading activity even through the bankruptcy process, so it's quoted, and that's what drove the mark at 331.
Robert James Dodd: That probably happens here that probably happens with the other aggregators.
Robert James Dodd: And it has happened within Mercer, where ultimately work we're doing.
Robert James Dodd: Right process, giving all the information that's available including the filing.
Robert James Dodd: Ultimately the realization is.
Robert James Dodd: Cash based and I think in the case of advancement.
Robert James Dodd: Even though the equity is volatile.
Robert James Dodd: Our cash and the original get off at par plus I'm hearing the effort is going to be maintaining that.
Robert James Dodd: The rigor of evaluation, but really focusing on the recovery on a realized basis, which will probably be.
Robert James Dodd: A couple of years of work in restructuring, but but yes, the valuations may differ.
Robert James Dodd: Our our folks will take the operating results in hand.
Speaker Change: I don't think theyre going to necessarily take the bankruptcy valuation as a face value.
Speaker Change: Versus the information, we give them around forecast projections and things of that sort of hopefully that answers your question.
Speaker Change: And Robert.
Speaker Change: Zero.
Robert James Dodd: Okay.
Robert James Dodd: And Robert as it relates to the 331 Mark.
Robert James Dodd: This loan actually I've had some trading activity he ran through the bankruptcy process.
Robert James Dodd: So it is quoted and that's what drove the Mark at 331.
Robert James Dodd: Got it. Thank you. I understand. Yeah, there's a lot of moving parts in that. Then next question.
Robert James Dodd: Got it. Thank you I I understand there's a lot of moving parts in that.
Robert James Dodd: I mean, I think Phil said you expected activity in the market to pick up, and I may have written this down wrong, as rates decline. So, looking at the curve today, and it moves around a lot, right, rates aren't really projected to decline materially at all this year, based on the curve today, and that'll change. So, you know, can you give us any more... I mean, are you expecting the activity lane level to remain very moderate, so long as rates stay here, or are there other factors? Yeah, that's a good point.
Robert James Dodd: Okay.
Robert James Dodd: New spirit.
Robert James Dodd: You expect activity in the market.
Robert James Dodd: And I'll, let Linda.
Robert James Dodd: Donald.
Robert James Dodd: Its decline.
Robert James Dodd: Yes.
Robert James Dodd: Looking at the curve today and it moves around a lot Mike.
Robert James Dodd: So that'll be protected falling materially.
Robert James Dodd: Tool this year based on the curve today and that will change that.
Speaker Change: So could you give us anymore.
Speaker Change: We're expecting.
Speaker Change: The the activity.
Speaker Change: Level two remains heavy model it so long as rates stay here or was there other factors.
Robert James Dodd: Yeah.
Philip M. Tseng: Yeah, that's a good point. You're right.
Philip M. Tseng: The four-year curve is dramatically different than it was, let's say, a few quarters ago. A few quarters ago, folks were expecting rates to kind of stabilize down in the mid-high 3s in about 18 months, but I think we're now looking at probably closer to the mid-4s. So you're right, rates are not expected to come down as dramatically. So we are moderating our expectations because real rate cuts will drive higher equity valuations and more processes will probably get done.
Speaker Change: Yes, that's a good point.
Speaker Change: Right. The forward yield curve is dramatically different than it was let's say a few quarters ago, a few quarters ago.
Speaker Change: Hopefully we're expecting.
Speaker Change: Great.
Speaker Change: <unk> down in the.
Speaker Change: Mid to high threes, and about 18 months, but I think we're.
Speaker Change: Now looking at probably closer to mid <unk>.
Speaker Change: <unk>.
Speaker Change: So youre right rates are not expected to.
Speaker Change: To come down dramatically. So so we are moderating our expectations, because we already touch will drive more.
Speaker Change: Higher equity valuations and and and more processes probably get done.
Philip M. Tseng: But I think the fact that rates have normalized here isn't sure folks are really expecting it. We are continuing to hear from market participants, whether they're investment bankers or private sponsors, that there are a lot of processes underway. There are a lot of non-process processes, too.
Speaker Change: But I think.
Speaker Change: Fact that rates have normalized here I'm.
Speaker Change: I'm not sure folks are really expected to increase.
Speaker Change: Given what's been pop out in the market last few weeks, but we are continuing to hear from market participants whether their investment bankers or private sponsors that there are a lot of.
Speaker Change: Processes underway, there are a lot of nonprofit processes.
Speaker Change: Meaning there are a lot of pre marketing of deals trying to do some price discovery.
Speaker Change: On an asset.
Speaker Change: And so that tells us that there is some momentum underway. The second is we're continuing to hear from.
Philip M. Tseng: [inaudible] clients out there, institutional investors, that they are continuing to demand distributions coming back from. So they're putting more and more pressure in order to give more money for future businesses to get money back. And so what you're seeing are GPs trying to really, you know, test the market. But two, if they're not selling businesses outright, then they are looking at other ways of distributing capital back to their clients, like dividend recaps, maybe some continuation type vehicles.
Speaker Change: Clients out there institutional investors that they are continuing to demand distributions coming back from their GP.
Speaker Change: They're putting more and more pressure in order to give more money for future visitors to get money back and so what youre seeing.
Speaker Change: Our GPS trying to really you know.
Speaker Change: Test the market, but two if they're not selling businesses outright and they are looking at other ways of distributing capital back to their clients like dividend recaps.
Speaker Change: Maybe some continuation type vehicles dividend recaps are areas that we saw.
Philip M. Tseng: Dividend recaps are areas that we've Funded, you know, over the course of the past several quarters, you know, for great assets were that deliberate over time where we're happy. I think we're cautiously optimistic, Robert, but I agree that the yield curve not showing a more dramatic reduction is, you know, it is something that we should be, um, watching closely.
Speaker Change: Alright deal profiles that we've funded over the course of the past several quarters for great assets, where that deleverage over time, where we're happy to see pretty good money.
Speaker Change: Situations.
Speaker Change: So I think we're cautious cautiously optimistic Robert but I agree you know.
Speaker Change: The yield curve not showing a more dramatic reduction.
Speaker Change: As you know it.
Speaker Change: It is something that you should be.
Speaker Change: [noise] watching closely.
Speaker Change: Got it thank you and I appreciate that answer then I wonder if I can take it or not.
Speaker Change: Slightly different on X as you mentioned as well that it's harder to find favorable deals and certainly.
Speaker Change: Okay.
Speaker Change: LBO finance.
Speaker Change: Over the last decade, I mean, you have to pull it back.
Speaker Change: You guys have shown a lot more flexibility than some seats.
Speaker Change: In terms of.
Speaker Change: Mr do other kinds of deals.
Speaker Change: Finance retail leasing.
Speaker Change: Areas of the market that you'll look at is that something we should expect to see increasingly over the next couple of years, if the market <unk>, maybe stays a little bit more moderate should we see more of these other verticals for you guys.
Speaker Change: How are you thinking about.
Speaker Change: Operating in this environment hypothetically.
Speaker Change: Activity remains moderate.
Speaker Change: Hello.
Speaker Change: Yeah.
Speaker Change: Yeah, Great question, Robert I think that also you have an insight that perhaps it goes beyond the public vehicle.
Speaker Change: The platform itself, which.
Robert James Dodd: Got it. Thank you.
Speaker Change: Well.
Speaker Change: Well before the BDC was public and I think as you highlight you've always.
Speaker Change: Been able to pay the two things that are a little maybe I won't say opportunistic and risk but.
Speaker Change: Areas that are maybe a little less picked over like the leasing.
Speaker Change: And I think.
Speaker Change: Even aviation or things of that sort.
Speaker Change: I think the one of the benefits of the merger that we don't speak about it as much as the greater scale also allows us to pay for some of those things.
Speaker Change: Yes.
Speaker Change: You take advantage of that.
Speaker Change: I will say this.
Speaker Change: As an additional element you know, even a new LBO activity.
Speaker Change: Now keep in mind that the existing portfolio either through over the last couple of years and I expect going forward will always be a good source of deals add on it.
Speaker Change: <unk> because as the portfolio remains healthy.
Speaker Change: Those companies are put about taking advantage of of less elsewhere, whether it's through M&A or other types of consolidations.
Robert James Dodd: And I appreciate that answer so much that I wonder if I can take it in that slightly different direction as well. I mean, you mentioned as well that, you know, it's harder to find favorable deals, and I certainly think that's the case in, you know, like LBO financing and things like that. Over the last decade, I mean, let's call it that, you guys have shown a lot more flexibility than some BDCs in terms of willingness to do other kinds of deals, you know, ABL financing retail, leasing, you know, other areas of the market that you'll look at.
Speaker Change: To answer your question as we see things that are interesting.
Speaker Change: Areas, where we can do the credit work and we feel comfortable with.
Speaker Change:
Speaker Change: Industry already asset I would say.
Speaker Change: We will take advantage of that and I think the leasing is a good example, we also done.
Speaker Change: No more ABL structures, where theres less of a desire to be exposed to the entity.
Speaker Change: More desired.
Speaker Change: Everybody the discrete asset.
Speaker Change: And I think.
Speaker Change: As the environment.
Speaker Change: And those opportunities our team is very well positioned to take advantage of that but it's always going to be a credit first.
Robert James Dodd: Is that something we should expect to see increasingly over the next couple of years if the market for LBOs maybe stays a little bit more moderate, should we see more of these other verticals for you guys, or not? How are you thinking about operating in an environment hypothetically where LBO activity remains moderate but prolonged? Yeah, great question, Robert. I think that also, you know, you have
Philip M. Tseng: Yeah, great question, Robert. I think that also, you know, you have an insight that perhaps goes beyond the public vehicle, you know, the platform itself, which has existed. Welcome to the BBC West Public.
Speaker Change: Downside protection type type of approach.
Speaker Change: Alright, thank you.
Speaker Change: Thank you thanks for the question.
Philip M. Tseng: And I think, as you highlight, we've always, I've been able to pivot to things that are a little maybe, I won't say opportunistic at risk, but areas that are maybe a little less picked over, like policing, and I think even aviation or things of that sort. I think one of the benefits of the merger that we don't speak about as much is that the greater scale allows us to think through some of those things and perhaps take advantage of that.
Speaker Change: Our next question comes from Christopher Nolan with Ladenburg Thalmann. Please go ahead Christopher.
Philip M. Tseng: I will say just as an additional element, even as new LBO activity is abated, keep in mind that the existing portfolio, even through the last couple of years, and I expect going forward, we'll always be a good source of deals, you know, add-on investments because as the portfolio remains healthy, those companies are good about taking advantage of less help elsewhere, whether through M&A or other types of consolidation.
Christopher Whitbread Patrick Nolan: Our next question comes from Christopher Nolan with Leidenberg Salmon. Please go ahead, Christopher. Hey guys,
Philip M. Tseng: But to answer your question, as we see things that are interesting, you know, areas where we can do the credit work and we feel comfortable with the industry or the asset, I would say, we will take advantage of that. And I think leasing is a good example. We've also done more ABL structures where there's less of a desire to be exposed to the entity but more of a desire to be... covered by the discrete asset, and I think as the environment gives rise to those opportunities, our team is very well positioned.
Christopher Whitbread Patrick Nolan: Hey, guys, Okay, congratulations materially welcome.
Christopher Whitbread Patrick Nolan: Hey, guys. Katie, congratulations. Michaela, welcome. Thank you, Chris.
Christopher Whitbread Patrick Nolan: Thank you Chris.
Christopher Whitbread Patrick Nolan: On the maturing debt that you guys referred to earlier, what's the thought in terms of what you're going to refinance that? Is it going to be... A bond issuance, because you, and for that, are you able to leverage your investment grade rating, do you think? You're going to turn to bank finance.
Christopher Whitbread Patrick Nolan: On the maturing debt.
Christopher Whitbread Patrick Nolan: As referred to earlier.
Christopher Whitbread Patrick Nolan: What's the thought in terms of where you're going to refinance but is it going to be.
Speaker Change:
Speaker Change: Bond issuance because you.
Speaker Change: Are you able to leverage your investment grade rating do you think or.
Speaker Change: Turn to bank financing.
Erik L. Cuellar: Yeah, good, good question. We're certainly looking to address those maturities in the near future. And we're very happy with what we've seen in the capital markets within our sector. So I definitely think that'll be a factor. We also like our current mix of secure versus unsecured. So all of that will come into play. We really the only reason we hadn't addressed it to this point was depending on the transaction, and we just wanted to wait till that was done to be able to address the maturity, but we plan to do so in the near term.
Speaker Change: Yes, Chris Good question, we are certainly looking to address those.
Chris: Those maturities in the near future.
Chris: We're very happy with what we've seen in the capital markets within our sector.
Chris: So definitely that that'll be a factor we also like our current mix of of.
Chris: Secured versus unsecured.
Chris: So all of that will come into play we.
Chris: Really the only reason we hadn't addressed it to this point was the pending.
Chris: Transaction and we just wanted to wait till that was done to be able to address the maturity, but we plan to do some of the near term.
Christopher Whitbread Patrick Nolan: All right, and then I read an article where Moody's is taking a dim view on private credit in general. Does your funding cost really turn on just having an investment grade rating?
Speaker Change: Alright, and then I read an article where Moody's has some particular tumor view in private credit in general.
Speaker Change: Hum.
Speaker Change: Does this does your funding costs really turned on to something of an investment grade rating.
Speaker Change: Okay.
Erik L. Cuellar: I mean, I think any credit issuance is correlated to a rating, but I would just clarify that the article, two things, was more broader in scope than honing in on our issues specifically, and it wasn't a downgrade, it was an outlook change, which we have seen them do before, you know, in the past, in the sector. So whether that actually really impacts the pricing, I think is TBD, as we're exploring I also think the net movement in pricing has been favorable over the last, you know, 12 to 18 months. And you can see that in issuance, issues, and issuances that have hit the market. You know, it's a very directly comparable, I think, comparable deal.
Speaker Change: I mean, I think our I think any credit issuance is correlated to our rating.
Speaker Change: Are some of different I would just clarify that.
Speaker Change: Article two things was more broader base than honing in on.
Speaker Change: Our issue specifically.
Speaker Change: It wasn't a downgrade it was outlook change, which we have seen that do before.
Speaker Change: You know in the past in the sector. So what does that actually really impacts the pricing I think it's TBD.
Speaker Change: We're exploring that.
Speaker Change: I also think the net movement in pricing has been favorable over the last 12 to 18 months and you can see that in issuance issues issuances that have hit the market.
Speaker Change: What's been very directly I think comparable comparable deal so stay.
Christopher Whitbread Patrick Nolan: So stay tuned. I think we're going to do, you know, the responsible thing and sort of explore the options. Unknown Executive, Kevin Fultz, Unknown Executive, Kevin Fultz, We are Vaughn Vesters and others. You know, looking at it, we'll, you know, we'll keep that in mind. Okay, that's it for me. Thank you.
Speaker Change: Stay tuned I think we're going to do.
Speaker Change: The responsible thing and sort of exploring the options.
Speaker Change: Obviously, the write up is it's not irrelevant, but how relevant it is sort of TBD.
Speaker Change: And I think for <unk>.
Speaker Change: We've had a very long and well established.
Speaker Change: Investment grade rating in the market, So I think I hope.
Speaker Change: We are our bond investors and others.
Speaker Change: Looking at it will roll out keep in mind.
Speaker Change: Okay. So for me thank you.
Speaker Change: Thank you.
Speaker Change: Okay.
Paul Conrad Johnson: The next question comes from Paul Johnson with KBW. Please go ahead, Paul.
Speaker Change: The next question comes from Paul Johnson with <unk>. Please go ahead.
Paul Conrad Johnson: Yeah, good afternoon. Thanks for taking my questions. I'm just curious, what was the driver of the higher other income this quarter? Was there anything in particular driving that? Was it amendments or dividends or anything like that?
Paul Conrad Johnson: Yes. Good afternoon, thanks for taking my questions.
Paul Conrad Johnson: Just curious what was the driver of the higher other income this quarter was there anything in particular driving that amendments or dividends or anything like that.
Erik L. Cuellar: Yeah, we did have two cents of non-recurring income, just amendments in general, and a couple of prepayments that we received. Anytime that we have any prepayments, it tends to accelerate any unadvertised discount or exit fee that might be linked to that investment.
Paul Conrad Johnson: Yes, we did have.
Paul Conrad Johnson: <unk> <unk> of nonrecurring income.
Paul Conrad Johnson: Just amendments in general in a couple of prepayments that we received anytime that we.
Paul Conrad Johnson: How many prepayments it tends to accelerate any now.
Paul Conrad Johnson: Advertise discount or exit fee that might be linked to that investment.
Paul Conrad Johnson: Got it. Thanks for that.
Speaker Change: Got it thanks for that.
Speaker Change: And then.
Paul Conrad Johnson: And then transcripts provided by Transcription Outsourcing, LLC, software businesses in the portfolio. I know it's not something you've disclosed historically, but I'm just curious. I mean, are any of those ARR loans, and are you able to give any kind of sense of what percent of the portfolio is ARR?
Paul Conrad Johnson: Just kind of higher level.
Paul Conrad Johnson: The portfolio Theres, a decent amount of.
Paul Conrad Johnson: Software.
Paul Conrad Johnson: Businesses in the portfolio and I know, it's not something you've disclosed historically.
Paul Conrad Johnson: I'm.
Paul Conrad Johnson: Just curious I mean are any of those.
Paul Conrad Johnson: Our loans and are you able to give any kind of sense of kind of what percent of the portfolio is.
Paul Conrad Johnson: <unk>.
Paul Conrad Johnson: Yes.
Philip M. Tseng: Yeah, thanks, Paul. So we have disclosed the percentage of software for the ARR deal. But, you know, when we look at our portfolio in a more detailed way, you know, our software and ARR portfolio. So ARR is a subset of our software exposure. But generally speaking, it's been one of the sectors for us that held up the strongest. And the way we think about software actually is not as a broad brush kind of. Industry Exposure. We actually look at it more as a horizontal across a number of end market exposures. So the way we think about it, for example, is as a risk management software provider.
Speaker Change: Yeah. Thanks, Paul So we haven't disclosed the percentage of software or air deal but.
Paul Conrad Johnson: When we look at our portfolio and a more detailed way.
Paul Conrad Johnson: Our software and are are.
Paul Conrad Johnson: Portfolio.
Paul Conrad Johnson: <unk> is a subset of our software exposure.
Paul Conrad Johnson: But generally speaking it's been one of the sectors for us that held up the strongest.
Paul Conrad Johnson: And when we think about software actually is not at a J.
Paul Conrad Johnson: A broad brush kind of.
Paul Conrad Johnson: Our industry exposure, we actually look at more supporters on pool across a number of end market exposures. So the way to think about it for example is a risk management software provider for insurance company for insurance company that has a little bit more but it sure into services market.
Philip M. Tseng: and then, alternatively, a software provider that helps facilitate.
Paul Conrad Johnson: And then alternatively a.
Paul Conrad Johnson: A software provider that.
Paul Conrad Johnson: Helps facilitate e-commerce transactions for retailers that that perhaps is in the retail consumer market.
Philip M. Tseng: Transactions for retailers that are perhaps in the retail consumer market. So we actually view software exposure broadly as less correlated as a group, but much more susceptible to risks on the end market. And when we look at it in that fashion, it's actually quite, quite diversified.
Paul Conrad Johnson: Market, So we actually view.
Paul Conrad Johnson: Got it. I appreciate that. Thanks. That's all for me.
Paul Conrad Johnson: Software exposure broadly is.
Paul Conrad Johnson: Less correlated as a group, but much more.
Paul Conrad Johnson: Susceptible to risks.
Paul Conrad Johnson: The end markets.
Paul Conrad Johnson: And when we look at it in that fashion, it's actually quite a quite diversified.
Speaker Change: Got it appreciate that thanks, that's all for me.
Paul Conrad Johnson: Yeah.
Speaker Change: Thank you Paul.
Operator: We do not have any further questions, so I'll turn the call back to the management team.
Speaker Change: We don't have any further questions. So I'll turn the call back to the management team.
Paul Conrad Johnson: Okay.
Rajneesh Vig: Thank you. We appreciate your participation on today's call. I would like to thank our team for all their hard work and dedication and our shareholders and capital partners for their confidence. Thanks for joining us. This concludes today's call.
Speaker Change: Thank you we appreciate your participation on today's call.
Speaker Change: I would like to thank our team for all their hard work and dedication and our shareholders and capital partners, where their confidence and continued support thanks for joining US. This concludes today's call.
Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your line.
Speaker Change: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.
Speaker Change: [music].
Speaker Change: Yeah.