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: 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: Actual 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: 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: 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 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
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: The earnings press release earnings presentation, and 10-Q are available on the investors section of the company's website.
Craig William Packer: 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 William 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, which 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 William Packer: Good morning, everyone and thank you all for joining us today.
Craig William 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 William Packer: Net investment income was 47 cents per share for the quarter equating to a 12, 1% return on equity.
Craig William 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 William Packer: We once again delivered a compelling ROI, while also growing the book value of our portfolio.
Craig William Packer: Since we spoke to you last quarter the interest rate outlook has shifted considerably.
Craig William 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 William 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 William Packer: At the same time the U S economy has remained solid.
Craig William 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 William Packer: Given our focus on floating rate investments our earnings benefit from a prolonged higher rate environment.
Craig William 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 William 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 $0.37 regular dividend, reflecting the $0.02 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 $0.10. In addition, our board has declared a supplemental dividend of $0.05 for the quarter, which equates to a nearly 11% dividend yield.
Craig William Packer: Since inception, we have worked hard to ensure that we deliver attractive returns to our shareholders across all rate environments.
Craig William Packer: This has allowed us to pay a stable or growing regular dividend in each quarter since our IPO 2019.
Craig William Packer: For the first quarter, we pay the thirty-seventh that regular dividend, reflecting the two cent increase that our board approved last quarter.
Craig William Packer: Even at this higher level of regular dividend is well covered as we over earned the dividend by 10 cents this quarter.
Craig William Packer: In addition, our board has declared a supplemental dividend of five cents for the quarter for a total dividend of 42 cents, which equates to a nearly 11% dividend yield.
Craig William 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 William 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 and the higher rate environment.
Craig William Packer: Looking to our portfolio companies on average we continue to see steady top and bottomline growth on both a quarter over quarter and year over year basis.
Craig William 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 William 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 William 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 William 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 William Packer: Across the portfolio our average interest coverage ratio is currently one six times.
Craig William 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 borrowers have been paying shelf 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.
Craig William 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 William Packer: We're currently at trough coverage levels and should remain here.
Craig William Packer: Despite the higher rates, we haven't seen any pickup in stress across the across the portfolio.
Craig William 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 in our investment, will allow us to optimize our outcomes.
Craig William Packer: 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 William 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 William Packer: We believe our recovery focused underwriting paired with our leadership position on our investments will allow us to optimize our outcome outcomes.
Craig William Packer: We serve as an administrative agent or a 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 William 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 and control 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. 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.
Jonathan: Which remains unwavering, even as economic conditions shift.
Craig William Packer: With that I'll 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. While these repayments were matched by a comparable level of new originations, new funding was only approximately $1 billion in the quarter.
Jonathan: Ended the quarter with total portfolio investments of $12.4 billion outstanding debt of $7 billion.
Jonathan Lamm: And total net assets of $6 billion.
Jonathan Lamm: Our first quarter NAV per share was $15 47 another.
Jonathan Lamm: 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: 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 from 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 1.9.
Jonathan Lamm: Yes.
Jonathan Lamm: Okay.
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 5 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: 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: And I was down four cents per share from the prior quarter.
Jonathan Lamm: Primarily 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, 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 14th to shareholders of record on may 31st.
Jonathan Lamm: The board also declared a second quarter regular dividend 37 centers, 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 30 cents per share, which is a strong advantage that provides stability to our regular device. 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: 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: 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 2021. 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.
Jonathan Lamm: In the first quarter, Moody's revised or Bdcs outlook to positive from stable and Fitch upgraded <unk> to triple B flat with a stable outlook.
Jonathan Lamm: We hope this trend of differentiation and the various agencies will continue in the near future.
Jonathan Lamm: With that I'll turn it back to Craig for closing comments.
Craig: Thanks, Jonathan to close I'll spend a few minutes on the current market environment and what we're seeing today.
Craig William 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 William Packer: Terms of activity the first quarter was lighter overall and what the market was generally expecting.
Craig William 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. 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 William Packer: While we continue to believe there are substantial pent up desire for private equity firms to return capital to Lp's like exiting companies and that increased clarity on the rate environment could drive more M&A activity, we have not yet seen this materialize.
Craig William Packer: 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 William Packer: Many borrowers were able to take advantage of the supply demand imbalance to access the public market and refinanced higher spread loans.
Craig William 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. However, 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, and we'll see private credit step up to serve as the primary capital provider. And at other times, the public markets will be more active, and activity will be balanced between the two markets, which is what we're experiencing now.
Craig William Packer: This represented a shift in the market dynamic compared to last year and with some sizable number of previously public capital structure's refinanced in the direct lending market.
Craig William Packer: We believe this is in line, but the natural market dynamics in which the public and private market coexist.
Craig William Packer: We expect that at times, the public market will pull back more see private credit step up to serve as the primary capital provider.
Craig William 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 William Packer: 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 at lower prices, while new originations came into the portfolio at lower, although still attractive, levels. 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.
Craig William 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 William Packer: Some of this was evident in our portfolio, where certain higher spread positions were paid down or refinance a lower pricing.
Craig William Packer: While new originations came into the portfolio at lower although still attractive levels.
Craig William Packer: Having said that given where base rates are we're 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 William 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. A pickup in M&A activity should drive more deal activity in both the public and private markets and improve the spread environment.
Craig William Packer: While there has been increased activity in the public loan market the secular trend towards direct lending continues.
Craig William Packer: As sponsors increasingly recognize the benefits of private financing solutions.
Craig William Packer: A pickup in M&A activity should drive more deal activity in both public and private markets and improve the spread environment.
Craig William 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 investment, focusing on businesses with scale and very strong credit metrics. The average enterprise value of our second-line borrowers is roughly double that of our first-line position.
Craig William 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 William Packer: I wanted to take a minute to reflect on our approach to second lien investing which has been consistent since inception.
Craig William 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 William Packer: The average enterprise value of our second lien borrowers is roughly double that of our first lien positions. These.
Craig William 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 William Packer: These borrowers typically have performed very well.
Craig William Packer: Looking at the second lien investments, which were refinanced this quarter on average EBITA grew by approximately 50% and these colonies deleveraged by roughly 1.5 turns during the period that we held the loans.
Craig William Packer: So the credit profile of these investments improved significantly and it was natural that they would look to recapitalize.
Craig William 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 William 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 William 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 William Packer: Which we hosted in May of 2023, and which many of you participated in.
Craig William Packer: By to look back on the progress that we have made since then.
Craig William 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 William Packer: Last may we outlined the potential for upside to our share price, which was then trading at 0.87 times book value.
Craig William 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 William Packer: All of which allow us to maintain our track record of excellent credit quality.
Craig William Packer: This is 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 500 and our BDC peers.
Craig William Packer: This was on the back of multiple tangible initiatives to demonstrate our confidence in our portfolio, including increasing our regular dividend.
Craig William Packer: Putting in place our supplemental dividend framework announcing a new $150 million repurchase program.
Craig William Packer: Creating an employee backed investment vehicle to purchase additional shares Lowed B D C.
Craig William Packer: As a result of these activities today Ob D. C is trading at book value <unk>.
Craig William 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 William 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 William Packer: We are pleased to see the market recognize the strength of the portfolio to deliver these returns to our shareholders.
Craig William Packer: With 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 the start key.
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.
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 if they're doing well.
Craig William Packer: So a question on the trajectory of the investment portfolio to start. 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 time, 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 was just the timing of new investments being funded.
Craig William Packer: Funded.
Craig William Packer: Timing of repayments, but just curious your thoughts here and then with leverage where it is getting back down to one times.
Craig William Packer: Should we expect to see the portfolio re expand from here and deal flow 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 William 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 the pace we wanted them to be, it was pretty close, but they weren't quite at the pace we wanted them to be. 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.
Speaker Change: Sure Brian Good morning.
Craig William Packer: We.
Craig William Packer: Deal activity across the market was a little lighter than we would have hoped for given generally strong economic conditions.
Craig William Packer: And so.
Craig William Packer: We had higher repayments and new originations werent quite as it was pretty close.
Craig William Packer: So we delivered just a little bit I think in terms of the outlook.
Craig William Packer: Sitting here in the last few weeks, we've seen a pickup in activity, we'll see if that holds.
Craig William Packer: We'll see if that holds, and my hope is that over the course of the year, 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. We also had a lot of repayments in the quarter, but I'm not sure that that pace of repayments will continue. And so I think we'd be, with 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 William Packer: And my hope is over the course of the year.
Craig William Packer: So activity will pick up.
Craig William Packer: And we'd like to get the leverage.
Craig William Packer: A bit higher in the portfolio.
Craig William Packer: Our target leverage range I think that's achievable.
Craig William Packer: Repayments in the quarter not sure about pace of repayments will continue so.
Craig William Packer: With 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 William Packer: 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. 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 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 William Packer: I do think that it will.
Craig William Packer: Be.
Craig William Packer: Some spread pressure.
Brian McKenna: Okay, great, and helpful. Thanks, Craig.
Craig William Packer: Given strong market conditions in the public market.
Brian McKenna: Private markets and some continued refinancing of some of the higher spread positions.
Brian McKenna: And I think those trends will generally sort of balance each other out.
Brian McKenna: Higher higher portfolio investments.
Speaker Change: Little bit of wind in our case on spread.
Brian McKenna: 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.
Speaker Change: Whereas on it's hard to predict precisely quarter to quarter.
Speaker Change: The two trends.
Craig William Packer: And then just to follow up, so you and the team have done a great job getting OBDC back to book value and essentially 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?
Speaker Change: Okay, great helpful. Thanks, Craig.
Craig William Packer: 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 you know given how this an OBE are trading I mean do you have any updated thoughts around the timeline of margins between I guess, what ultimately needs to take place before I move forward on merging the two.
Craig William Packer: Uh, sure. Um... We are really pleased with how OBD-E 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 we're really appreciative that the market is seeing the quality of the portfolio and an attractive return profile.
Craig William Packer: Sure.
Craig William Packer: Yeah.
Craig William Packer: We are really pleased with how <unk> has traded post listing we're really pleased with how old BDC is trading out above book value as we go along.
Craig William Packer: I'm coming.
Craig William Packer: And it's really appreciate that Martin is seeing the quality of the portfolio.
Craig William Packer: Oh pile.
Craig William 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 OBDC, 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 William Packer: I would note that there'll be D C. 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.
Craig William Packer: B D C.
Craig William Packer: A potential merger.
Craig William Packer: The 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.
Speaker Change: Nice words delivering attractive shareholder value.
Craig William 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 both 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.
Craig William Packer: Obviously, the portfolios have tremendous overlap and there is no.
Craig William Packer: So logic to why does it makes sense to mine.
Craig William Packer: I've talked previously about the logic of us having one larger publicly traded BDC, but.
Craig William Packer: When we think where each company when the board and we think for each company.
Craig William Packer: Transaction that will deliver value and we will pursue it obviously.
Craig William Packer: And keep us updated on it so certainly an environment with strong credit performance and each portfolio.
Craig William Packer: Australia, well with Bdcs trading at high valuations certainly those are the kinds of conditions that gives you the opportunity to look at those transactions.
Craig William Packer: But, you know, there's complications. OBDE 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.
Craig William Packer: But.
Craig William Packer: There's complications obese he still has no lockups.
Craig William Packer: Isn't come off yet so we'll.
Craig William Packer: We will take all of these factors into account carefully, but but to answer your question I think the conditions are certainly present.
Craig William Packer: For a number of factors that we consider and we will have to consider all the factors.
Brian McKenna: Okay, I'll leave it there. Thanks for taking my question.
Speaker Change: Okay I'll leave it there thanks for taking my questions.
Speaker Change: Thanks, Brian.
Mark Hughes: And our next question comes from the line of Mark Hughes with Truist Securities. Please proceed.
Brian McKenna: And our next question comes from the line of Mark Hughes with true Securities. Please proceed.
Mark Hughes: Yeah, thank you. Good morning. Hey, Craig. Hey, Jonathan. The non-accrual... I'm good, thank you.
Mark Hughes: Yeah. Thank you good morning, Hey, Craig Hey, Jonathan.
Craig William Packer: Non-accrual was still very low, but it ticked up just a little bit. Maybe one company was added to non-accrual. Could you talk about that and then the... The four companies that I think were on non-accrual, any updates there?
Mark Hughes: Okay.
Mark Hughes: Non accruals no I'm good. Thank you nonaccrual 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.
Craig William Packer: The four companies that I think were on nonaccrual and any updates there.
Craig William Packer: Sure, so we actually added two and took one off. But the one of significance was a company called Hard Side. It's a packaged food manufacturer. It's in, it's got some public loans and bonds, and we're in a second lean. And so there are, you know, there are folks that follow the credit. They may have some familiarity with it. It's a large company.
Craig: Sure. So we actually added two one offs.
Craig William Packer: But the one the one of significance.
Craig William Packer: Art side.
Craig William Packer: Packaged food manufacturer.
Craig William Packer: It's in it's got some loans and bonds and we're in a second lien.
Craig William Packer: There's there are a host of all the credits you may have some familiarity with.
Craig William Packer: It's had some headwinds on costs and a bit of a bit of weakness on customer demand, and so we marked it down pretty meaningfully and felt, at this moment, it was appropriate to put it on not a cool We're still earning cash interest on it. But you know, we made the judgment, as we did on every name, in totality, that we felt it was appropriate to put on not a cool The other names were quite small, So I don't think it's worth necessarily going into No updates on the other non-accruals. You know, we work these positions hard to try to maximize our ultimate recovery And no particular developments, you know, to call out.
Craig William Packer: So large company had some some headwinds on cost.
Craig William Packer: And then a bit of weakness.
Craig William Packer: Customer demand and so we.
Craig William Packer: We marked it down pretty meaningfully and belts.
Craig William Packer: This moment it was appropriate to put it on non accrual.
Craig William Packer: We're still earning cash interest on it but we made the judgment as we make every name.
Craig William Packer: In totality that we felt it was appropriate to put it on non accrual.
Craig William Packer: The other names was quite small.
Craig William Packer: His work necessarily going into no updates on the other non accruals.
Craig William Packer: We are we work these positions hard to try to maximize our ultimate recovery.
Craig William Packer: They're all marks. We think appropriately we look at the marks and the not a cool status for all these names plus other other names each quarter to make sure we're properly accounting for them, and so no really hard side was the development this quarter.
Craig William Packer: 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 gains each quarter to make sure we're properly accounting.
Craig William Packer: And so no really hard side.
Craig William Packer: This quarter.
Craig William Packer: Yeah.
Craig William Packer: understood. Any broader trends in amendment activity?
Craig William Packer: Understood.
Craig William Packer: Any a broader trends and amendment activity.
Craig William 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.
Craig William Packer:
Craig William Packer: Consistent with the last few quarters amendment activity.
Craig William Packer: As I would say modest we have how would your amendments few material amendments each quarter every quarter. We have a large number of minor amendments housekeeping type of amendments, but we had a few material amendments this quarter no no change there is a few each quarter.
Craig William Packer: The lack of pickup in serious amendment activity really speaks to this.
Craig William Packer: The strong underlying performance of the company as the company has continued as well the economy seems to be a good one.
Craig William 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 go down. And so, despite higher debt service, the companies are finding ways to manage through that, resulting in continued moderate amendment activity.
Craig William Packer: The growth in all of our sectors revenues and EBITDA.
Craig William Packer: And so despite higher debt service companies are finding it.
Craig William Packer: Finding ways to manage through that and resulting in continued moderate.
Craig William Packer: Amendment activity.
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 William 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 taking out of one of our COOs.
Jonathan Lamm: It was a little less than a penny, but close to a patio was related to effectively the take 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
Speaker Change: And then with the capital markets activity this quarter, how does that what's the incremental.
Jonathan Lamm: Your mental impact on our 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 accreted it.
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 a 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, all and 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: On the one handle your second liens are we paying quite nicely.
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.
Craig William Packer: 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, you know, they tend to be much bigger companies. But what's your view on whether you would actually increase that from here? And is that realistic if the first lead BSL market comes back, and all of the second leads tend to be behind that? So, is there room to grow it, and would you like...
Craig William Packer: What 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 like to actually increase from here and is that realistic if the person. The BSL market comes back in a little bit secondly tend to be behind that so it isn't that room to grow.
Craig William Packer: And would you like to.
Craig William Packer: Okay.
Craig William 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. We are, we favor 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 they generate meaningfully higher spread. And so if those opportunities present themselves, then we'll do them. If they don't, we won't either.
Speaker Change: Thanks Robert.
Craig William Packer: Waqar posted second lien has been really consistent since inception.
Craig William Packer: We only do them on on really high quality businesses that are large and under and stable with lots of equity cushion beneath us.
Craig William Packer: We are we were favorable on doing second liens and those types of companies if the attachment point and the detachment point R.
Craig William Packer: Our.
Craig William Packer: Appropriate and obviously the reason, we like them as they generate meaningfully higher spread.
Craig William Packer: So if those opportunities present themselves then we'll do that.
Speaker Change: No we won't.
Craig William Packer: The environment in the last six to nine months hasn't been a lot of second leans. 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 William Packer: This the environment in the last six months just hadn't been a lot of second liens the sponsors are drilling.
Craig William Packer: Financing.
Craig William Packer: So we haven't seen a lot we certainly havent seen ones that were attractive to us. So yeah. In this market environment happy So one primarily first lien portfolio the personally percentages.
Craig William Packer: So in this market environment, I'm happy to run a primarily person-in-portfolio portfolio; the person in percentages, as you know, it's the highest it's been for us in years. So we'll see if our portfolio, if we get an environment where there are more second-lean opportunities that hit our investment criteria, then we would take it, take the percentage back up. 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. So we don't have to solve for percentages.
Craig William Packer: It's the highest it's been for us in years so.
Craig William Packer: Zebra portfolio, if we get all get an environment, where they're more sack and the opportunities that fit our investment criteria. Then we would take it take the percentage back up I'm, certainly comfortable where we were running if not even a bit higher but I just don't I don't see that happening in the short term given all of the deal.
Craig William Packer: Oh that we're seeing.
Craig William Packer: So we don't.
Craig William Packer: I'll solve the percentages, we solve for the best opportunities.
Craig William Packer: We solve for the best opportunities that we're seeing, and right now, it's primarily a unit tranche. And it stands to reason if, given how strong the syndicated market is, that as new deal flow reappears, we'll see more second-lean opportunities as the year unfolds. Haven't seen it yet, but it wouldn't surprise me if we did. And if that's the case, then we'll definitely look at those opportunities.
Craig William Packer: That we're seeing right now is primarily unit tranche.
Craig William Packer: And.
Craig William Packer: It stands to reason if given how strong the syndicated market is that as new deal flow.
Craig William Packer: Peers that.
Craig William Packer: We'll see more exactly opportunities as the euro holds haven't seen it yet.
Craig William Packer: It wouldn't surprise me if we did it.
Craig William Packer: That's the case and we will.
Craig William Packer: Apple strongly looking at those opportunities.
Robert Dodd: Got it. Thank you. On your comment on...
Speaker Change: Got it. Thank you on your comment on.
Craig William Packer: I haven't necessarily seen deal activity materialize yet, which obviously is true. Are you seeing an increase in books coming in, et cetera? Is it 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...
Robert Dodd: Haven't necessarily seen deal activity materialized, yet which are obviously.
Craig William Packer: <unk>.
Craig William Packer: Are you seeing any increase in books coming in the preliminary 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 William Packer: The the stages of the pipeline looked like I mean is it close to a big ramp up of activity or is that just.
Speaker Change: Not really.
Craig William 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. 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.
Speaker Change: Sure. So I made the comment a minute ago. So.
Craig William Packer: Just to repeat it in the last four 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 or new M&A, but not yet.
Craig William Packer: Coming to full fruition.
Craig William Packer: There's some chatter about.
Craig William Packer: You know pure M&A processes pick up with box and the sponsors. So there is some chatter around that sort of too early for me to really say that that's going to result in a lot more deal flow, but first quarter was light.
Craig William Packer: I think that we're seeing green shoots that could result in more deal flow in the next quarter. 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 William Packer: I think that we're seeing green shoots exited resulted more deal flow is next.
Craig William Packer: Yes.
Craig William Packer: The deal flow, we're seeing comments today might notch Goldman Sachs Gordon right that might be third quarter activity. So I think the first half of the year will still be a kind of a light Gulf oil environment, Let me talk about third quarter things have improved.
Robert Dodd: I appreciate that. I did miss that.
Speaker Change: Okay I appreciate that I did miss that thank you.
Speaker Change: Alright, Thanks Robert.
Speaker Change: 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.
Craig William Packer: Thank you. All right. Thanks. Anything else, Robert? That's it for me. Thanks. All right, thank you. Ladies and gentlemen, as a reminder, if you'd like to ask anything,
Speaker Change: Ladies and gentlemen that does it.
Robert Dodd: I wonder if you'd like to ask a question. Please press star one on your telephone keypad.
Craig William Packer: There are no further questions at this time I would like to hand, the call back to Craig Packer for closing remarks.
Craig William 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.
Craig William Packer: Alright, well I guess, we warn everyone out where we'd ask that everything in our prepared remarks, well, we appreciate everyone spending time.
Craig William Packer: With us today have any further questions. Please reach out to our team I'm really pleased with the quarter.
Craig William Packer: And look forward to speaking with everyone soon have a great day.
Operator: This concludes today's conference. If you would please connect your lines at this time. Have a great day.
Craig William Packer: This concludes today's conference.
Operator: ??
Operator: <unk>.
Operator: Connect your lines at this time and have a great day.
Operator: Okay.
Operator: [music].
Operator: Hum.
Operator: [music].