Q1 2024 Blue Owl Capital Corp Earnings Call
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Operator: Good morning everyone, and welcome to Blue Owl Capital Corporation's first quarter 2024 earnings call. I'd like to remind 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 OBDC's filings with the SEC.
Good morning, everyone and welcome to Blue Arrow Capital Corporation's first quarter 2024 earnings call.
Operator: The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's 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.
Operator: Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31, 2024. These should be reviewed in conjunction with the company's 10-Q filed yesterday with the SEC. The earnings press release, earnings presentation, and 10-Q are available on the investor section of the company's website at blueowlcapitalcorporation.com. With that, I'll turn the call over to Craig Packer, Chief Executive Officer of
Craig Packer: I'd like to remind 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.
Operator: <unk> results may differ materially from those in forward looking statements as a result of a number of factors, including those described in Ob D. C. 's filings with the SEC. The company assumes no obligation to update any forward looking statements.
Operator: Certain information discussed on this call and in the company's earnings materials, including information related to portfolio companies was derived from third party sources and has not been independently verified.
Operator: The company makes no such representations or warranties with respect to this information.
Operator: Yesterday Blue our capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31 2024.
Operator: He should be reviewed in conjunction with the company's 10-Q filed yesterday with the SEC.
Operator: Earnings Press release earnings presentation, and 10-Q are available on the investors section of the company's website at Blue Arrow Capital Corporation Dotcom.
Operator: With that I'll turn the call over to Craig Packer, Chief Executive Officer of Ob D C.
Craig Packer: Good morning, everyone, and thank you all for joining us today. We are pleased to report another quarter of strong earnings, delivering attractive returns to our shareholders while maintaining our consistently high credit quality across the portfolio. Net investment income was $0.47 per share for the quarter, equating to a 12.1% return on equity. The strength of our earnings and continued credit performance drove another quarter of record net asset value per share at $15.47 for the first quarter. We once again delivered a compelling ROE while also growing the book value of our portfolio. Since we spoke to you last quarter, the interest rate outlook has shifted considerably.
Craig Packer: Good morning, everyone and thank you all for joining us today.
Craig Packer: We are pleased to report another quarter of strong earnings delivering attractive returns to our shareholders, while maintaining our consistently high credit quality across the portfolio.
Craig Packer: Net investment income was 47 cents per share for the quarter equating to a 12, 1% return on equity.
Craig Packer: The strength of our earnings and continued credit performance drove another quarter of record record net asset value per share at $15 47 for the first quarter.
Craig Packer: We once again delivered a compelling ROI, while also growing the book value of our portfolio.
Craig Packer: Since we spoke to you last quarter the interest rate outlook has shifted considerably.
Craig Packer: The market is now expecting rates to continue to stay elevated, but limited to no Fed cuts over the course of the year. At the same time, the U.S. economy has remained solid. We believe this presents a good environment for direct lenders, particularly those like Blue Owl, with a long-term track record of credit selection. Given our focus on floating rate investments, our earnings benefit from a prolonged higher rate environment. At the same time, the performance of our portfolio reflects both the strength of the economy and our high underwriting standards, and therefore, our credit performance has been resilient.
Craig Packer: The market is now expecting rates to continue to stay elevated with limited to no fed cuts over the course of the year.
Craig Packer: At the same time the U S economy has remained solid.
Craig Packer: We believe overall this presents a good environment for direct lenders, particularly those like Blue L. With a long term track record of credit selection.
Craig Packer: Given our focus on floating rate investments our earnings benefit from a prolonged higher rate environment.
Craig Packer: At the same time the performance of our portfolio reflects both the strength of the economy and our high underwriting standards and therefore, our credit performance has been resilient.
Craig Packer: Since inception, we have worked hard to ensure that we deliver attractive returns to our shareholders across all rate environments. This has allowed us to pay a stable or growing regular dividend in each quarter since our IPO in 2019. For the first quarter, we paid a 37-cent regular dividend, reflecting the 2-cent increase that our board approved last quarter. Even at this higher level, our regular dividend is well covered, as we over-earned the dividend by 10 cents this quarter. In addition, our board has declared a supplemental dividend of five cents for the quarter, for a total dividend of $0.42, which equates to a nearly 11% dividend yield.
Craig Packer: Since inception, we have worked hard to ensure that we deliver attractive returns to our shareholders across all rate environments.
Craig Packer: This has allowed us to pay a stable or growing regular dividend in each quarter since our IPO 2019.
Craig Packer: For the first quarter, we paid a <unk> 37 sat regular dividend, reflecting the two cent increase that our board approved last quarter.
Craig Packer: Even at this higher level of regular dividend is well covered as we over earned the dividend by 10 cents this quarter.
Craig Packer: In addition, our board has declared a supplemental dividend of five <unk> for the quarter for a total dividend of 42 cents, which equates to a nearly 11% dividend yield.
Craig Packer: We believe our increased regular dividend combined with our supplemental dividend framework benefits our shareholders by providing an attractive baseline dividend yield with additional predictable income as we over earn the level in the higher rate environment. Looking at our portfolio companies, on average, we continue to see steady top and bottom line growth on both a quarter over quarter and year over year basis. Our borrowers were well positioned coming into this year, having successfully navigated a full year with higher interest rates by growing revenues and profitability, adjusting cost structures, and managing cash flow and working capital where needed.
Craig Packer: We believe our increased regular dividend combined with our supplemental dividend framework benefits, our shareholders by providing an attractive baseline dividend yield, but the additional predictable income as we over on the level and the higher rate environment.
Craig Packer: Looking to our portfolio companies on average we continue to see steady top and bottom line growth on both a quarter over quarter and year over year basis.
Craig Packer: Our borrowers were well positioned coming into this year, having successfully navigated a full year with higher interest rates by growing revenues and profitability adjusting cost structures, and managing cash flow and working capital where needed.
Craig Packer: We believe our companies are faring well by design, as we have intentionally invested in large, high-quality businesses in recession-resistant sectors, often backed by operationally sophisticated private equity sponsors who have large equity investments in these businesses. Our portfolio has a weighted average EBITDA in excess of $180 million and an average loan-to-value ratio of less than 45%. Across the portfolio, our average interest coverage ratio is currently 1.6 times. Over the last few quarters, we have expected coverage to peak at around 1.5 to 1.6 times, which is about where we are now. Borrowers have been paying SOFR rates of 5% to 5.25% for more than four quarters.
Craig Packer: We believe our companies are faring well by design as we have intentionally invested in large high quality businesses and recession resistant sectors, often backed by operationally sophisticated private equity sponsors who have large equity investments in these businesses.
Craig Packer: Our portfolio has a weighted average EBITDA in excess of $180 million and an average loan to value ratio of less than 45%.
Craig Packer: Across the portfolio our average interest coverage ratio is currently one six times.
Craig Packer: Over the last few quarters, you have expected coverage to trough at around 125 to 1.6 times, which is about where we are now.
Craig Packer: Borrowers have been paying so if rates of 5% to 5.25% for more than four quarters. So if rates remain in this range over the course of the year as the market currently expects than we are currently at trough coverage levels and should remain here.
Craig Packer: If rates remain in this range over the course of the year, as the market currently expects, then we are currently at trough coverage levels and should remain there. In spite of the higher rates, we haven't seen any pickup in stress across the portfolio.
Craig Packer: Despite the higher rates, we haven't seen any pickup in stress across the across the portfolio.
Craig Packer: We continue to have a small number of borrowers who are on our watch list, but this subset has remained relatively stable over the last few quarters. While companies with more constrained liquidity will likely face heightened pressure in the coming quarters, we believe we have the resources in place across both our team and the financial sponsors supporting these companies to appropriately manage these situations. We believe our recovery-focused underwriting, paired with our leadership position on our investment, will allow us to optimize our outcome.
Craig Packer: We continue to have a small number of borrowers who are on our watch list, but this subset has remained relatively static over the last few quarters.
Craig Packer: While companies with more constrained liquidity will likely face heightened pressure in coming quarters. We believe we have the resources in place across both our team and the financial support sponsors supporting these companies to appropriately manage these situations.
Craig Packer: We believe our recovery focused underwriting paired with our leadership position on our investments will allow us to optimize our outcome outcomes we.
Craig Packer: We serve as an administrative agent or lead lender on the majority of our loans, affording us advantageous access to diligence during the underwriting process, influence in negotiating the credit documentation, and control over any amendment or work-out situation. This is further evidenced in our nonaccrual rate, which remains low at 1.8% of debt investments at fair value across five investments. Overall, our borrowers are growing revenue in EBITDA, the number of challenging positions is small, and our credit performance remains strong. These achievements reflect our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift. With that, I'll turn it over to Jonathan to provide more detail on our financial results.
Craig Packer: We serve as administrative agent or a lead lender on the majority of our loans are affording us advantageous access to diligence during the underwriting process influence in negotiating negotiating the credit documentations.
Jonathan: Troll over any amendment or workout situation.
Jonathan: This is further evidenced in our non accrual rate, which remains low at 1.8% of debt investments at fair value across five investments.
Jonathan: Overall, our borrowers are growing revenue and EBITDA.
Jonathan: The number of challenges positions is small and our credit performance remains strong.
Jonathan: These achievements reflect our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift.
Craig Packer: That I will turn it over to Jonathan to provide more detail our financial results.
Jonathan: Thanks, Craig.
Jonathan Lamm: We ended the quarter with total portfolio investments of $12.4 billion, outstanding debt of $7 billion, and total net assets of $6 billion. Our first quarter NAF per share was $15.47. Another record and a two-cent increase from the fourth quarter, attributable to the continued over-earning of our dividends. In terms of deployment, we continue to see more normalized repayment levels at $1.2 billion. All these repayments were matched by a comparable level of new originations.
Jonathan: We ended the quarter with total portfolio investments of $12.4 billion outstanding debt of $7 billion.
Jonathan Lamm: In total net assets of $6 billion.
Jonathan Lamm: Our first quarter NAV per share was $15 47 sets another record and a <unk> <unk> increase from the fourth quarter attributable to the continued over earning our dividend.
Jonathan Lamm: In terms of deployment, we continue to see more normalized repayment levels at $1.2 billion all.
Jonathan Lamm: While these repayments were matched by a comparable level of new originations, new fundings for only approximately $1 billion in the quarter.
Jonathan Lamm: New funding was only approximately $1 billion in the quarter. Given this gap in net funded activity, we saw a small decrease in leverage again this quarter, ending the quarter at 1.04 times, down from 1.09 times. Turning to the income statement, as Craig mentioned, we earned NII of 47 cents per share, an increase of 4% versus the prior year and one of our highest quarters since inception. NII was down four cents per share from the prior quarter, primarily reflecting our lower average leverage and the impact of the portfolio mix shift, as we saw a large amount of second lien investment repay with capital redeployed into first lien investment.
Jonathan Lamm: Given this GAAP and net funded activity, we saw a small decrease in leverage again this quarter.
Jonathan Lamm: During the quarter at 1.4 times down from one point.
Jonathan Lamm: Yes.
Jonathan Lamm: Okay.
Jonathan Lamm: Turning to the income statement.
Jonathan Lamm: As Craig mentioned, we earned NII 47 cents per share an increase of 4% versus the prior year and one of our highest quarters since since inception.
Jonathan Lamm: NII was down four cents per share from the prior quarter.
Jonathan Lamm: Really reflecting our lower average leverage and the impact from portfolio mix shift as.
Jonathan Lamm: As we saw a large amount of second lien investments repay with capital redeployed into first lien investments.
Jonathan Lamm: In addition, we saw a modest impact from a non-recurring item in the interest exchange. Turning to our dividends, The board declared a supplemental dividend of five cents per share for the first quarter, which will be paid on June 14th to shareholders of record on May 31st. The board also declared a second quarter regular dividend of $0.37, which will be paid on July 15th to shareholders of record as of June 28th. We continue to accumulate spillover income because of the over-earning of our dividends.
Jonathan Lamm: In addition, you saw a modest impact from a nonrecurring item in interest expense.
Jonathan Lamm: Turning to our dividend.
Jonathan Lamm: The board declared a supplemental dividend of five cents per share for the first quarter, which will be paid on June 14 to shareholders of record on may 31st.
Jonathan Lamm: The board also declared a second quarter regular dividend 30.
Jonathan Lamm: Which will be paid on July 15th to shareholders of record as of June 28.
Jonathan Lamm: We continue to accumulate spillover income because of over earning our dividend.
Jonathan Lamm: We estimate our spillover income is currently approximately <unk> 30 per share, which is a strong advantage that provides stability to our regular dividend.
Jonathan Lamm: We estimate our spillover income is currently approximately 30 cents per share, which is a strong advantage that provides stability to our regular demos. OBDC continues to benefit from its flexible balance sheet and well-diversified financing structure. We ended the quarter with liquidity of $2.4 billion, well in excess of our unfunded commitments of approximately $1.1 billion. As a reminder, in January, we opportunistically raised $600 million in new five-year unsecured notes, which were subsequently swapped to floating rates.
Jonathan Lamm: Oh BDC continues to benefit from its flexible balance sheet and well diversified financing structure.
Jonathan Lamm: We ended the quarter with liquidity of $2.4 billion well in excess of our unfunded commitments of approximately $1 $1 billion.
Jonathan Lamm: As a reminder, in January we Opportunistically raised $600 million in new five year unsecured notes, which were subsequently swapped to floating rate.
Jonathan Lamm: A portion of the proceeds was used to repay our 400 million unsecured notes that were set to mature in April 2024. The remaining proceeds were used to pay down a portion of our secured debt. Since our last earnings call, we saw further differentiation from the rating agencies and the BDC sector towards recognizing the highest quality issuers. In the first quarter, Moody's revised OB-DC's outlook to positive from stable, and Fitch upgraded OB-DC to triple B flat with a stable outlook. We hope this trend of differentiation by the various agencies will continue in the near future. With that, I'll turn it back to Craig for closing comments.
Jonathan Lamm: A portion of the proceeds were used to repay our 400 million unsecured notes that were set to mature in April 2024.
Jonathan Lamm: The remaining proceeds were used to pay down a portion of our secured debt.
Jonathan Lamm: Since our last earnings call. We saw further differentiation from the rating agencies in the BDC sector towards recognizing the highest quality issuers and.
Jonathan Lamm: In the first quarter, Moody's revised <unk> outlook to positive from stable and Fitch upgraded Ob D C to triple B flat with a stable outlook.
Jonathan Lamm: We hope this trend of differentiation from the various agencies will continue in the near future.
Jonathan Lamm: With that I'll turn it back to Craig for closing comments.
Craig Packer: Thanks, Jonathan to close I'll spend a few minutes on the current market environment and what we're seeing today.
Craig Packer: To close, I'll spend a few minutes on the current market environment and what we're seeing today. In terms of activity, the first quarter was lighter overall than what the market was generally expecting.
Craig Packer: In terms of activity the first quarter was lighter overall and what the market was generally expected.
Craig Packer: While we continue to believe there is substantial pent-up desire for private equity firms to return capital to LPs by exiting companies and that increased clarity on the rate environment could drive more M&A activity, we have not yet seen this materialize. The public loan markets were significantly more active than they were in 2023, with the vast majority of this activity being repricing or refinancing transactions, which do not generate new loan supply. Many borrowers were able to take advantage of the supply-demand imbalance to access the public market and refinance higher-interest loans.
Craig Packer: While we continue to believe there are substantial pent up desire for private equity firms to return capital to L. PS by exiting companies and that increased clarity on the rate environment could drive more M&A activity, we have not yet seen this materialize.
Craig Packer: The public loan markets were significantly more active than they were in 2023 with the vast majority of this activity being repricing or refinancing transactions, which do not generate new loan supply.
Craig Packer: Many borrowers were able to take advantage of the supply demand imbalance to access the public market and refinance higher spread loans.
Craig Packer: This represents a shift in the market dynamic compared to last year when we saw a sizable number of previously public capital structures refinanced in the direct lending market. We believe this is in line with the natural market dynamics in which the public and private markets coexist. We expect that, at times, the public market will pull back.
Craig Packer: This represented a shift in the market dynamic compared to last year. When we saw a sizable number of previously public capital structure's refinanced in the direct lending market.
Craig Packer: We believe this is in line, but the natural market dynamics in which the public and private market coexist.
Craig Packer: We expect that at times, the public market will pull back most private credit step up to serve as the primary capital provider.
Craig Packer: We'll see private credit step up to serve as the primary capital provider, and at other times, public markets will be more active, and activity will be balanced between the two markets, which is what we're experiencing now. At the same time, we've also seen increased fundraising in the private credit market. As a result of these trends, we have seen some pressure on loan spreads this year. Some of this was evident in our portfolio, where certain higher spread positions were paid down or refinanced with lower prices, while new originations came into the portfolio at lower, although still attractive, levels.
Craig Packer: And at other times public markets will be more active in activity will be balanced between the two markets, which is what we're experiencing now.
Craig Packer: At the same time, we've also seen increased fundraising in the private credit markets. As a result of these trends we have seen some pressure on loan spreads this year.
Craig Packer: Some of this was evident in our portfolio, where certain higher spread positions were paid down or refinance a lower pricing, while new originations came into the portfolio at lower although still attractive levels.
Craig Packer: Having said that, given where base rates are, we are still earning over 11% in total yield across the portfolio, which we believe remains a very compelling rate of return for a portfolio comprised of predominantly first lien loans and high quality upper middle market companies. While there has been increased activity in the public loan market, the secular trend toward direct lending continues, as sponsors increasingly recognize the benefits of private financing solutions. A pickup in M&A activity should drive more ideal activity in both the public and private markets and improve the overall spread environment.
Craig Packer: Having said that given where base rates are we are still earning over 11% and total yield across the portfolio, which we believe remains a very compelling rate of return for a portfolio comprised of predominantly first lien loans and high quality quality upper middle market companies.
Craig Packer: While there has been increased activity in the public loan market the secular trend towards direct lending continues as sponsors increasingly recognize the benefits of private financing solutions.
Craig Packer: A pickup in M&A activity should drive more deal activity in both public and private markets and improve the spread environment.
Craig Packer: One notable theme this quarter was the refinancing of many of our second lien loans, with roughly 40% of our existing second lien positions repaid this quarter. I wanted to take a minute to reflect on our approach to second lien investing, which has been consistent since inception. We've always had a very high bar for a second-lien investor, focusing on businesses with scale and very strong credit metrics. The average enterprise value of our second-league borrowers is roughly double that of our first-league position.
Craig Packer: One notable theme this quarter was the refinancing of many of our second lien loans with roughly 40% of our existing second lien positions repaid this quarter.
Craig Packer: I wanted to take a minute to reflect on our approach to second lien investing which has been consistent since inception.
Craig Packer: We've always had a very high bar for our second lien investments focusing on businesses with scale and very strong credit metrics.
Craig Packer: The average enterprise value of our second lien borrowers is roughly double that of our first lien positions.
Craig Packer: These borrowers typically have performed very well. Looking at the second lien investments which were refinanced this quarter, on average, EBITDA grew by approximately 50%, and these companies averaged by roughly 1.5 turns during the period that we held the loan. The credit profile of these investments improved significantly, and it was natural that they would look to recapitalize. Across these names, we realize more than 1.3 times our money on average, a strong track record that reflects our team's highly selective approach and deep underwriting capabilities.
Craig Packer: These borrowers typically have performed very well.
Craig Packer: Looking at the second lien investments, which were refinanced this quarter on average EBITA grew by approximately 50% and these companies deleveraged by roughly 1.5 turns during the period that we held the loans.
Craig Packer: So the credit profile of these investments improved significantly and it was natural that they would look to recapitalize.
Craig Packer: Across these names we realized more than 1.3 times, our money on average a strong track record that reflects our team's highly selective approach and deep underwriting capabilities.
Craig Packer: Finally, I'd like to take a moment to note that we are approaching the one-year anniversary of our first BDC Investor Day, which we hosted in May of 2023 and which many of you participated in. I'd like to look back on the progress that we have made since then.
Craig Packer: Finally, I'd like to take a moment to note that we are approaching the one year anniversary of our first BDC Investor day, which.
Craig Packer: Which we hosted in May of 2023, and which many of you participated in.
Craig Packer: Like to look back on the progress that we have made since then.
Craig Packer: Last May, we outlined the potential for upside to our share price, which was then trading at 0.87 times book value. We believe we can achieve a higher valuation for our shareholders by continuing to share in more detail our story with the market, including how we approach underwriting, portfolio construction, and portfolio management, as well as the emphasis we place on a flexible liability structure. All of which allow us to maintain our track record of excellent credit quality.
Craig Packer: Last may we outlined the potential for upside to our share price, which was then trading at 0.87 times book value.
Craig Packer: We believe we can achieve a higher valuation for our shareholders by continuing to share in more detail our story with the market, including how we approach underwriting portfolio construction and portfolio management as well as the emphasis we place on our flexible liability structure.
Craig Packer: All of which allow us to maintain our track record of excellent credit quality.
Craig Packer: This was on the back of multiple tangible initiatives to demonstrate our confidence in our portfolio, including increasing our regular dividends, putting in place our Supplemental Dividend Framework, announcing a new $150 million repurchase program, and creating an employee-backed investment vehicle to purchase additional shares of BDC. As a result of these activities, today, OBDC is trading at book value. Investors who purchased shares of OBDC on Investor Day have received a 30 plus percent total return, broadly outperforming the S&P and our BDC peers.
Craig Packer: This was on the back of multiple tangible initiatives to demonstrate our confidence in our portfolio, including increasing our regular dividend.
Craig Packer: Putting in place our supplemental dividend framework announcing a new $150 million repurchase program and creating an employee backed investment vehicle to purchase additional shares will be D. C.
Craig Packer: As a result of these activities today Ob D. C is trading at book value <unk>.
Craig Packer: Investors, who purchase shares of Ob D. C. On Investor Day have received a 30 plus percent total return broadly outperforming the S&P and our BDC peers.
Craig Packer: We are pleased to see the market recognize the strength of the portfolio and deliver these returns to our shareholders. With that, thank you for your time today, and we will now open the line for questions.
Craig Packer: We are pleased to see the market recognize the strength of the portfolio and to deliver these returns to our shareholders.
Craig Packer: That thank you for your time today, and we will now open the line for questions.
Operator: Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing start.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for.
Operator: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please pull for questions.
Operator: One moment, please, while we pull for questions. And our first question comes from the line of Brian McKenna with Citizens JMP. Please proceed.
Brian McKenna: And our first question comes from the line of Brian Mckenna with citizens JMP. Please proceed.
Brian McKenna: Thanks, Good morning, Craig and Jonathan. I hope you both are doing well.
Brian McKenna: Thanks, Good morning, Craig and Jonathan you both are doing well.
Brian McKenna: So question on the trajectory of the investment portfolio to start. So it declined 2% in the quarter. It seems like the majority of the decline was just the timing of new investments being funded and then the timing of repayments. But I'd be curious about your thoughts here. And then with leverage, where it is getting back down to one times, should we expect to see the portfolio re-expand from here as deal flow is set to pick up? And then, I guess what I'm getting at, what does all this mean for the trajectory?
Brian McKenna: Question on the trajectory of the investment portfolio to start so it declined 2% in the quarter. It seems like the majority of the decline with just the <unk>.
Brian McKenna: Investments being funded.
Brian McKenna: And repayments, but just curious your thoughts here and then with leverage where it is getting back down to one times.
Brian McKenna: Should we expect to see the portfolio re expand from here and deal flow is set to pick up and then I guess, what I'm getting at what does all this mean for the trajectory of NII following a $15 million sequential decline in the quarter.
Craig Packer: Sure, Brian, good morning. Deal activity across the market was a little lighter than we would have hoped for given generally strong economic conditions. And so we had higher repayments, and newer donations weren't quite at pace. It was pretty close, but they weren't quite at pace.
Speaker Change: Oh sure Bryan good morning.
Craig Packer: We.
Brian McKenna: Deal activity across the market was a little lighter than we would have hoped for given generally strong economic conditions.
Brian McKenna: And so.
Speaker Change: We had higher repayments and new originations foreign quite at Asa was pretty close but aren't quite at pace. So.
Craig Packer: So we delivered just a little bit. I think in terms of the outlook. You know, sitting here these last few weeks, we've seen a pickup in activity. We'll see if that holds, and my hope is, over the course of the year, that deal activity will pick up, and we'd like to get the leverage a bit higher in the portfolio, staying within our target leverage range. I think that's achievable.
Brian McKenna: We delivered just a little bit I think.
Craig Packer: In terms of the outlook.
Craig Packer: Sitting here in the last few weeks, we've seen a pickup in activity, we'll see if that holds.
Craig Packer: And my hope is over the course of the year that activity will pick up and we'd like to get the leverage.
Craig Packer: A bit higher in the portfolio and the same.
Craig Packer: Our target leverage range I think that's achievable.
Craig Packer: We also had a lot of repayments in the quarter. I'm not sure that that pace of repayments will continue, and so I think we would, with a pickup in deal activity at some point over the next quarter or two, be able to get the leverage back up and earn back some of that income. I do think that there will continue to be some spread pressure, you know, given strong market conditions in the public market and the private markets and some continued refinancing of some of the higher spread positions.
Craig Packer: Repayments in the quarter not sure our piece of repayments will continue so.
Craig Packer: He was a pickup in deal activity at some point over the next quarter or two we should be able to get the leverage back up and earn back some of that income.
Craig Packer: I do think that it will be.
Craig Packer: Some spread pressure.
Craig Packer: Strong market conditions in the public market.
Craig Packer: Private markets and some continued refinancing of some of the higher spread positions and I think those trends will generally sort of balance each other out.
Craig Packer: And I think those trends will generally sort of balance each other out, higher portfolio investments with a little bit of wind in our face on spread. And so, you know, we may be a bit, we may see a bit of that leak in the second quarter but sort of expect to pick it up as the year wears on. It's hard to predict precisely from quarter to quarter, but those are the two trends.
Craig Packer: Higher higher portfolio investments with a little bit of wind that are based on spread.
Craig Packer: And so we may be a bit we may see a bit of that in the second quarter, but sort of expect to pick it up.
Craig Packer: Whereas on it's hard to predict precisely quarter to quarter.
Craig Packer: The two trends.
Brian McKenna: Okay, great, and helpful. Thanks, Craig.
Speaker Change: Okay. Great helpful. Thanks, Craig and then just a follow up so you and the team has done a great job getting all BDC back to book value essentially trading decently above that so given how they can OBE are trading I mean do you have any updated thoughts around the timeline of merging these BDC I guess, you know what ultimately needs to take.
Speaker Change: Before I move forward on merging the two.
Brian McKenna: And then just to follow up, so you and the team have done a great job getting OBDC back to book value, and it's actually trading decently above that. So given how this and OBDE are trading, do you have any updated thoughts around the timeline of merging these BDCs? And I guess, you know, what ultimately needs to take place before I move forward on merging the two?
Brian McKenna: Sure.
Brian McKenna: Yes.
Brian McKenna: We are really pleased with how it will be D. He has traded post listing we're really pleased with how old BDC is trading out above book value.
Brian McKenna: Coming.
Brian McKenna: And it's really appreciate that the market is seeing the quality of the portfolio and attractive return profile.
Brian McKenna: I would note that there'll be D C wallets above book value still trades at a discount to some of our peers and so we think there's still the opportunity for price appreciation.
Brian McKenna: Do you see.
Brian McKenna: In terms of a potential merger.
Speaker Change: I don't have any update other than what we said at the time of the listing bogey. We choose we continually look at what's best for the shareholders of both companies and discussed this with our board each company regularly.
Brian McKenna: Its words delivering attractive shareholder value.
Speaker Change: Obviously the portfolios.
Brian McKenna: Tremendous overlap in there.
Brian McKenna: And industrial logic to why does it makes sense to mine.
Brian McKenna: And we have talked previously about logic of us having one larger publicly traded BDC, but.
Brian McKenna: Thanks.
Brian McKenna: Each company when the board and we think for each company. It was a transaction that will deliver value we'll pursue.
Brian McKenna: So it obviously.
Brian McKenna: Hmm.
Speaker Change: Updated on it so certainly an environment with strong credit performance and each portfolio.
Brian McKenna: We did post Australia, well with Bdcs trading at high valuations certainly those are the kinds of conditions.
Brian McKenna: Give you the opportunity to look at those transactions.
Brian McKenna: But.
Brian McKenna: There's complications obese he still has.
Brian McKenna: Lockups lockup hasnt come up yet so.
Brian McKenna: We'll take all these factors into account carefully, but but to answer your question I think the conditions are certainly present.
Speaker Change: For a number of factors that we consider and we will have to consider all the factors.
Speaker Change: Okay I'll leave it there thanks for taking my questions.
Speaker Change: Thanks, Brian.
Craig Packer: Uh, sure. Um...
Brian McKenna: And our next question comes from the line of Mark Hughes with true Securities. Please proceed.
Craig Packer: We are really pleased with how OBDE has traded post-listing. We're really pleased with how OBDC is trading now above book value. You know, as you know, a long time in coming, and it's really appreciative that the market is seeing the quality of the portfolio and an attractive return profile.
Craig Packer: I would note that OBDC, while it's above book value, still trades at a discount to some of our peers, and so we think there's still the opportunity for price appreciation for OBDC. In terms of a potential merger, I don't have any update other than what we said at the time of the listing of OBDD, which is that we continually look at what's best for the shareholders of both companies and discuss this with our boards at each company regularly with an eye towards delivering attractive shareholder value.
Craig Packer: Obviously, the portfolios have tremendous overlap, and there's an industrial logic to why they make sense combined, and we have talked previously about the logic of us having one larger publicly traded BDC. But, you know, when we think for each company, when the board and we think for each company, there's a transaction that will deliver value, then we'll pursue it, obviously, and keep folks updated on it. So, certainly, an environment with strong credit performance in each portfolio, with both stocks trading well, and BDCs trading at high valuations, those are the kinds of conditions that, you know, give you the opportunity to look at those transactions.
Speaker Change: Yeah. Thank you good morning, Hey, Craig Hey, Jonathan.
Craig Packer: Hey.
Craig Packer: Non accruals no I'm. Good. Thank you nonaccrual bill are very low, but it ticked up a little bit maybe one company added to non accrual could you talk about that and then the.
Craig Packer: But, you know, there's complications. OBDD still has lockups. The first lockup hasn't come off yet. So, you know, we'll take all these factors into account carefully. But, to answer your question, I think the conditions are certainly present for a number of factors that we would consider, and we'll have to consider all the factors. Okay, I'll leave it there.
Brian McKenna: Okay, I'll leave it there. Thanks for taking my question.
Mark Hughes: And our next question comes from the line of Mark Hughes with Truist Securities. Please proceed.
Brian McKenna: The four companies that I think were on nonaccrual any any updates there.
Mark Hughes: Yeah, thank you. Good morning. Hey, Craig. Hey, Jonathan. The non-accrual... I'm good, thank you. Non-accrual is still very low, but it ticked up just a little bit, maybe one company added to non-accrual. Could you talk about that and then the four companies that I think were on non-accrual, any updates there?
Mark Hughes: Sure. So we actually added two one offs.
Mark Hughes: But the one the one of significance.
Speaker Change: Our side.
Craig Packer: Sure, so we actually added two and took one off, but the one of significance was a company called Hardside. It's a packaged food manufacturer. It's got some public loans and bonds, and we're in a second lien. So there are folks that follow the credit that may have some familiarity with it. It's a large company. It's had some headwinds on costs and a bit of weakness on customer demand.
Mark Hughes: Packaged food manufacturer.
Craig Packer: It's in it's got some loans.
Craig Packer: Loans and bonds and.
Craig Packer: We're in a second lien.
Craig Packer: There's there are a host of Hollywood.
Craig Packer: Some familiarity so large company had some some headwinds on cost.
Craig Packer: And a bit of a bit of weakness.
Craig Packer: Customer demand.
Craig Packer: And so we marked it down pretty meaningfully and felt at this moment it was appropriate to put it on not cool. We're still earning cash interest on it, but we made the judgment, as we make on every name in totality, that it was appropriate to put it on not cool. The other name was quite small, so I don't think it's worth necessarily going into.
Craig Packer: So.
Craig Packer: We marked down pretty meaningfully and gels.
Craig Packer: This moment it was appropriate to put it on non accrual.
Craig Packer: We're still earning cash interest on it but we made the judgment as we make every name.
Craig Packer: In totality that we felt it was appropriate to put it on non accrual.
Craig Packer: The other names was quite small.
Craig Packer: It's worth necessarily going into no updates on the other non accruals.
Craig Packer: No updates on the other non-accruals. We work these positions hard to try to maximize our ultimate recovery, and there are no particular developments to call out. They're all marked. We think appropriately. We look at the marks and the non-accrual status for all these names plus other names each quarter to make sure we're properly counting. The really hard side was this development this quarter.
Craig Packer: We work these positions hard to try to maximize our ultimate recovery.
Craig Packer: And no particular developments to call out there all March we think appropriately look at on the March and the non accrual status for for all these names plus other other names each quarter to make sure we're properly accounting.
Craig Packer: So no really hard side was the development this quarter.
Mark Hughes: understood. Any broader trends in amendment activity?
Craig Packer: Understood.
Craig Packer: Any a broader.
Mark Hughes: <unk> and amendment activity.
Craig Packer: It's really been consistent with the last few quarters. Amendment activity is, I would say, modest. We have a few amendments, a few material amendments each quarter. Every quarter we have a large number of minor amendments, housekeeping-type amendments, but we had a few material amendments this quarter, no change; there are a few each quarter.
Speaker Change: It's really been consistent with the last few quarters amendment activity.
Craig Packer: As I would say modest we have LNG amendments few material amendments each quarter every quarter, we have a large number of minor amendments housekeeping type of amendments that you material amendments this quarter no no change there is a few each quarter.
Craig Packer: I think the lack of pickup in serious amendment activity really speaks to the strong underlying performance of the companies. The companies continue to do well. The economy continues to be a good one. There continues to be growth in all of our sectors, and revenues need to top. And so, despite higher debt service, the companies are finding ways to manage through that, resulting in continued moderate amendment activity.
Craig Packer: The lack of pickup in serious M&A activity really speaks to this.
Craig Packer: The strong underlying performance of the company as the company has continued as well the economy seems to be a good one.
Craig Packer: The growth in all of our sectors revenues and EBITDA.
Craig Packer: And so despite higher debt service companies are.
Craig Packer: Finding ways to manage through that and resulting in continued moderate.
Craig Packer: Mmhmm an accident.
Craig Packer: Yeah.
Jonathan Lamm: And then Jonathan, you mentioned a modest impact from a non-recurring, I think, interest expense item. Did you size that, or can you?
Craig Packer: And then Jonathan you mentioned, a modest impact from a nonrecurring I think interest expense item.
Jonathan Lamm: Did you size that or can you.
Jonathan Lamm: It was a little less than a penny, but close to a penny. And it was related to, effectively, the takeout of one parcela.
Jonathan Lamm: It was a little less than a penny, but close to a penny of it was related to effectively the teach out of one of our CLO.
Jonathan Lamm: And then with the capital markets activity this quarter, how does that, what's the incremental impact on interest expense kind of before or after? Oh, so the unsecured that we
Jonathan Lamm: And then with the capital markets activity this quarter, how does that what's the incremental.
Jonathan Lamm: Mental impact on the interest expense kind of before or after.
Jonathan Lamm: Oh, so the unsecured that we issued this quarter relative to the unsecured that we took out, which were on swap, we actually, it was accreted.
Jonathan Lamm: Oh.
Jonathan Lamm: So the unsecured debt, we issued this quarter relative to relative to the unsecured debt, we took out which were on swap we actually it was accretive to interest expense.
Speaker Change: Thank you.
Speaker Change: Thanks Mark.
Jonathan Lamm: Okay.
Operator: As a reminder, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. And our next question comes from the line of Robert Dodd with Raymond James. Please proceed.
Jonathan Lamm: As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Operator: And our next question comes from the line of Robert Dodd with Raymond James. Please proceed.
Robert Dodd: Good morning. On your comments on second leads... 40% repaid in the quarter, and then that got redeployed. So on the one hand, all your second leads are repaying quite nicely, probably faster than you'd like. And then, on the other hand, yes, there was one union on a call, which was the second lead.
Robert Dodd: Good morning on all your comments on second lien.
Speaker Change: What he said we paid.
Robert Dodd: And in the quarter and then that got redeployed.
Robert Dodd: The one handle your second liens are we paying quite nicely probably bathroom.
Robert Dodd: And then on the other hand, yes, there was one new nonaccrual, which was secondly, so can you give us a kind of an update on your thoughts on like way would like that to be.
Robert Dodd: So can you give us kind of an update on your thoughts on where you would like that to be as a percentage of the portfolio? Obviously, spreads can be a little higher, not crazy, because they tend to be much bigger companies. But what's your view on would you actually increase that from here? And is that realistic if the first lead BSL market?
Robert Dodd: The percentage of the portfolio, obviously spreads can be a little higher not crazy because they tend to be much bigger companies, but once you get your view on would you like to actually increase that from here is that realistic if the person BSL market comes back and all of a second lien tend to be behind that so it isn't that room to grow.
Robert Dodd: And would you like to.
Craig Packer: Thanks, Robert. Um, look, our approach to second lean has been really consistent since inception. We only do them on really high-quality businesses that are large and under and stable, with lots of equity cushion beneath us. Um, we are favorable to doing second leans in those types of companies if the attachment point and the detachment point are, are You know, appropriate. And obviously, the reason we like them is that they generate a meaningfully higher spread.
Speaker Change: Thanks Robert.
Robert Dodd: Waqar posted second lien has been really consistent since inception.
Craig Packer: We only do them on really high quality businesses that are large and under and stable with lots of equity cushion beneath us.
Craig Packer: We are we were favorable on doing second liens and those types of companies.
Craig Packer: Cashman point the detachment point are.
Craig Packer: Our.
Craig Packer: Appropriate.
Craig Packer: And obviously the reason, we like them as they generate meaningfully higher spread.
Craig Packer: And so if those opportunities present themselves, then we'll do that. If they don't, we won't. The environment in the last six to nine months hasn't been a lot of second leads. The sponsors are really favored for entrepreneurship financing. And so we haven't seen a lot. We certainly haven't seen ones that were attractive to us.
Craig Packer: And so if those opportunities present themselves then we'll do that.
Craig Packer: They don't we won't.
Craig Packer: The environment in the last six months just hadn't been a lot of second liens. The sponsors are willing third tranche financing.
Craig Packer: And so we haven't seen a lot we certainly havent seen ones that were attractive to us. So yeah. In this market environment I'm happy to have won primarily first lien portfolio the personally percentages.
Craig Packer: So in this market environment, I'm happy to run primarily a person in portfolio. The person in percentages, as you know, it's the highest it's been for us in years. So we'll see about the portfolio. If we get an environment where there are more second lead opportunities that hit our investment criteria, then we would take the percentage back up. But I'm certainly comfortable where we were running. It's not even a bit higher, but I just don't see that happening in the short term, given the deal flow that we're seeing.
Craig Packer: It's the highest it's been for us in years, so well.
Craig Packer: Deeper portfolio, if we get all get an avaya.
Craig Packer: Were there more secondly opportunities that hit R.
Craig Packer: Our investment criteria, then we would take it take the percentage back up I'm, certainly comfortable where we were running.
Craig Packer: Even a bit higher but I, just don't I don't see that happening in the short term given all of this.
Craig Packer: Deal flow that we're seeing.
Craig Packer: So we don't.
Craig Packer: So we don't solve for percentages. We solve for the best opportunities that we're seeing. And right now, it stands to reason, given how strong the syndicated market is, that as new deal flow reappears, we'll see more second lead opportunities as the year unfolds. I haven't seen it yet, but it wouldn't surprise me if we did. And if that's the case, then we'll, you know, we'll, we'll strongly look at those opportunities.
Craig Packer: So we don't solve the percentages, we solve for the best opportunities.
Craig Packer: We are seeing right now is primarily unit tranche.
Craig Packer: And.
Craig Packer: It stands to reason if given how strong the syndicated market is that a new deal flow reappears that we'll see more exactly.
Craig Packer: Europe holds haven't seen it yet.
Craig Packer: Not surprisingly, we did and if that's the case and we will.
Craig Packer: Apple strongly both of those opportunities.
Robert Dodd: Got it, thank you. On your comment on...
Speaker Change: Got it thank you.
Speaker Change: Can you comment on.
Robert Dodd: I haven't necessarily seen deal activity materialize yet, which obviously is true. Are you seeing an increase in books coming in, the preliminary stages of deal activity ramping up, and then it's hitting gridlock when it comes to buyers and sellers agreeing on price, or can you give us a sense of what the stages of the pipeline look like? I mean, is it close to a big ramp up in the activity, or is that just... not really him?
Craig Packer: Sure.
Robert Dodd: I haven't necessarily seen deal activity materialized, yet which are obviously.
Craig Packer: <unk>.
Craig Packer: Are you seeing any increase in books coming in et cetera.
Craig Packer: Remember, how many stages of deal activity ramping up and then it's it's hitting gridlock when it comes to buyers and sellers agreeing on price. So what can you give us a sense of.
Craig Packer: Well the the stages of the pipeline looks like I mean is it close to a big ramp up of activity or is that just.
Speaker Change: Not really.
Craig Packer: Sure, I made the comment a minute ago, so you might not have heard it, but just to repeat it: in the last four or six weeks, we've seen more activity that could result in de novo M&A. Some take private opportunities and some sponsor-to-sponsor opportunities and some add-on acquisitions. So I would say green shoots for new M&A, but not yet coming to full fruition. You know, pure M&A processes pick up with books, and the sponsors have spent some chatter on that.
Speaker Change: Sure. So I made the comment a minute ago. So.
Craig Packer: Just to repeat it in the last four to six weeks, we have seen more activity that could result in de Novo M&A, some take private opportunities and some sponsor to sponsor out opportunities and some add on acquisitions. So I would say green shoots or new M&A, but not yet.
Craig Packer: Coming to full fruition.
Craig Packer: I think there is some chatter about.
Craig Packer:
Craig Packer: Pure M&A processes pick up with books and the sponsors. So there is some chatter around that sort of too early for me to really say that.
Craig Packer: I'm sort of too early for me to really say that that's going to result in a lot more deal flow. But the first quarter was light, you know; I think that we're seeing green shoots that could result in more deal flow as the next quarter goes on. The deal flow we're seeing come in today might not close in the second quarter, right? That might be third quarter activity. So I think the first half of the year will still be a kind of light deal flow environment, but hopefully, by the third quarter, things will have improved.
Craig Packer: Our results in a lot more deal flow, but first quarter was light.
Robert Dodd: Okay, I appreciate that. I did miss that.
Robert Dodd: We're seeing green shoots exited resulted more deal flow as the next.
Robert Dodd: The deal flow, we're seeing comments today might notch Goldman Sachs quarter, right that might be third quarter activity. So I think the first half of the year will still be a kind of a light golf ball environment, hopefully by the third quarter things have improved.
Speaker Change: Okay I appreciate that I did miss that thank you.
Robert Dodd: Thank you. All right. Thanks. Anything else, Robert? That's it for me. All right, thank you.
Speaker Change: Alright, Thanks Robert.
Robert Dodd: That's it for me.
Speaker Change: Alright, thank you.
Operator: Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. There are no further questions at this time. I'd like to hand the call back to Craig Packer for closing remarks.
Operator: All right, thank you. Ladies and gentlemen, as a reminder, if you'd like to ask anything,
Speaker Change: Ladies and gentlemen.
Speaker Change: As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Operator: Yeah.
Operator: There are no further questions at this time I'd like to hand, the call back to Craig Packer for closing remarks.
Craig Packer: Alright, well, I guess we've worn everyone out, or we've answered everything in our prepared remarks. Look, we appreciate everyone spending time with us today. If you have any further questions, please reach out to our team. I'm really pleased with the quarter and look forward to speaking with everyone soon. Have a great day. This concludes today's conference.
Operator: Alright, well I guess, we warn everyone out where we'd ask that everything in our prepared remarks, well. We appreciate everyone spending time with us today have any further questions. Please reach out to our team I'm really pleased with the quarter.
Craig Packer: Look forward to speaking with everyone soon have a great day.
Operator: This concludes today's conference. If you please..., connect your lines at this time. Have a great day.
Craig Packer: This concludes today's conference.
Operator: Please.
Operator: Connect your lines at this time and have a great day.
Operator: Okay.
Operator: [music].
Operator: Hum.
Operator: [music].