Q2 2024 Sixth Street Specialty Lending Inc Earnings Call
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Operator: Good morning, and welcome to Sixth Street Specialty Lending Inc.'s second quarter ended June 30, 2024, earnings conference call. At this time, all participants are in a listen-only mode.
Operator: Good morning and welcome to 6th Street Specialty Lending Inc. 2nd quarter ended June 30th, 2024, Erings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Good morning, and welcome to sixth Street Specialty lending Inc. Second quarter ended June 30th 2024 earnings Conference call. At this time all participants are in a listen only mode as a reminder.
Cami VanHorn: As a reminder, this conference is being recorded on Thursday, August 1, 2024. I'll now turn the call over to Ms. Cami VanHorn, Head of Investor Relations. Thank you, Cami. Good morning, everyone, and thank you for joining us.
Operator: As a reminder, this conference is being recorded on Thursday, August 1st, 2024.
Speaker Change: This conference is being recorded on Thursday August <unk> 2024, I'll now turn the call over to Mr. Jeremy Van Horne head of Investor Relations.
Cami VanHorn: I'll now turn the call over to Miss Cami VanHorn, head of Investor Relations. Thank you. Before we begin today's call, I would like to remind our listeners that remarks made during the call may contain forward-looking statements. Statements other than statements of historical facts made during this call may constitute forward-looking statements that are not guaranteed to future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in 6th Street Specialty Lending Inc.
Speaker Change: Thank you before we begin today's call I would like to remind our listeners that remarks made during the call may contain forward looking statements statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.
Cami VanHorn: Filing with the Securities and Exchange Commission. The company assumes no obligation to update any such forward-looking statements.
Cami VanHorn: Yesterday, after the market closed, we issued our earnings press release for the 2nd quarter ended June 30th, 2024, and posted a presentation to the Investor Resources section of our website, www.6treetspecialtylending.com. The presentation should be reviewed in conjunction with our Form 10-Q files yesterday with the SEC. 6th Street Specialty Lending Inc. Earnings release is also available on our website under the Investor Resources section. Unless noted otherwise, all performance figures mentioned in today's prepared remarks are as of and for the 2nd quarter ended June 30th, 2024.
Operator: As a reminder, this call is being recorded for replay purposes.
Joshua Easterly: I will now turn the call over to Joshua E. Sterley, Chief Executive Officer of 6th Street Specialty Lending Inc.
Joshua Easterly: Thank you, Cammy.
Cami VanHorn: With us are our president, Beau Stanley, and our CFO, Ian Simmonds. On June 30th, our net asset value per share reached a new all-time high of $17.19. The Higher-for-Longer Interest Rate Environment provides support for BDC operating earnings, but the tails within portfolios are growing on the mark. Our Q2 quarterly results reflected a continuation of these needs. Before passing it to Bo, I'd like to take a big step back to emphasize that we're in the business of creating value for shareholders.
Joshua Easterly: Good morning, everyone. And thank you for joining us. This is our president, both Stanley and our CFO, Ian Simmons. For the call today, I will provide highlights of this call to his results and pass it over below to discuss activity in the portfolio.
Joshua Easterly: He will review our financial performance in more detail, and I will conclude with final reading remarks before opening the call to executing. Top of the market closed yesterday reported 2nd quarter adjusted net investment income, a 58 cents per share or an annualized return on equity of 13.5%, and adjusted net income, a 50 cents per share or an annualized return on equity of 11.6%. As presented in our financial statements, our Q2 net investment income and net income per share, inclusive of that unwind, a non-cash accrued capital gains and centipede cents, were both a penny per share higher.
Joshua Easterly: At June 30th, our net asset value per share reached a new all-time high at $17.19. Representing an increase of 2.7% year-to-year, an annualized growth of 3.4% since inception, the current impact of special and supplemental dividends were distributed over that time. We don't want to sound like a broken record, but our outlook to the sector review is consistent with what we've said in our previous earnings calls. The higher-for-longer interest rate environment provides support for BDC operating earnings, but the tails within portfolios are growing on the margin. Our Q2 quarterly results reflected a continuation of these themes.
Joshua Easterly: Adjusted net and adjusted net investment income of Q2. Seed are a quarterly-based evident level by 26%. As we assess our projected dividend coverage over the long term, we look at the shape of the forward interest rate curve. As of today, the forward rate curve bonds out at a terminal rate of approximately 3.5%. Based on this curve, we believe that our base dividend at 46 cents per share remains well supported by operating earnings in this interest rate environment. As we ascend our last two earnings calls, we expect to see dispersion between operating and GAAP earnings as a higher base rate interest rate may also only lead to credit deterioration, potential for credit losses.
Joshua Easterly: We started to see this play on Q1 results as net income, or we saw a pure set for approximately 140 basis points below operating all early. We slightly outperform users also in Q1. This dispersion highlights the growing tales within portfolios within talking about for several quarters.
Joshua Easterly: Before passing it to Bo, I'd like to take a big step back to emphasize what we're in the business of creating value for shareholders, and a minimum that means earning our cost of equity; but our goal has always been to exceed it. Given the rapid change in the spread environment and private credit, there's one key question operators should be asking themselves, which is, what does it require spread on investments to earn that cost of equity? This is a framework that guides us to maintain an investment flexibility and display in a competitive market environment. We're actively passing on deals, giving them spreads that would generate an estimated return that is below the industry's cost of equity.
Joshua Easterly: We acknowledge that pricing floor exists in the BTC model and capital should not be allocated and that's within low certain spread.
Joshua Easterly: We'll walk through this in detail now to clearly demonstrate that operating at a successful BDC is about displaying capital allocation. We'll start with the assumption that the average cost of equity for publicly traded BDC is 9.4%. This is based on that data for some Bloomberg across from Pearson, which incorporates a 10-year Treasury rate. For simplicity, we'll assume management in the centipede leverage cost of funds and operating for Zora based on the LPM average for the sector. While management in the centipede structure is as well as leverage vary across industry, these minor differences do not result in a different conclusion.
Speaker Change: Start with the assumption that the average cost of equity for a publicly traded BDC is nine 4%.
Speaker Change: This is based on that data source from Bloomberg across our peer set which incorporates a 10 year treasury rate.
Speaker Change: For simplicity will assume management and incentive fees leverage cost of funds and operating expenses are based on the LTM average for the sector.
Speaker Change: While management incentive fee structures as well as leverage vary across the industry. These minor differences to not do not result in a different conclusion.
Joshua Easterly: Using the current three-year software swap rate of approximately 4%, 1.5% OID over a three-year average life, the required portfolio spread to earn a 9.4% cost of equity is approximately 620 basis points over software. It is important to note that this output reflects leverage at the top end of the range indicated by grade agencies to be designated investment grade and is before the impact of credit losses. Historically, annual credit losses have averaged approximately 100 to 130 basis points on assets according to the flood water truck lending index. Including credit losses based on the data, the required spread, applying our cost of equity assumptions 750 to 780 basis points.
Speaker Change: Using the current three year software swap rate of approximately 4%.
Speaker Change: One 5% OID over a three year average life required portfolio spread to earn a nine 4% cost of equity is approximately 620 basis points over sofa.
Speaker Change: It is important to note that this outlook reflects leverage at the top end of the range indicated by rating agencies to be designated investment grade and as before the impact of credit losses.
Cami VanHorn: Historically, annual credit losses have averaged approximately 100 to 130 basis points on assets according to the Cliffwater Drug Lending Index. Including credit losses based on this data, the required spread applying our cost of equity assumption is 750 to 780 basis points. Yesterday, our board approved a base quarterly dividend of $0.46 per share to shareholders of record as of September 16th, payable on September 30th.
Joshua Easterly: To explicitly show why we are passing on deals getting done at a spread of 450 basis points in the low, the return of equity before credit losses is 6.3%, and 3.4% to 4% after loss. At these threats, the sector is not earning its current living yield, let alone its cost of equity. While we acknowledge this must be viewed on a portfolio basis, we outlined the math to be illustrative yet instructive in the path to shareable value integration. For us specifically, our cost of equity is lower than the sector based on the Bloomberg data, and we have had significantly lower credit losses than the long-term industry average.
Joshua Easterly: Taking a look at our portfolio, the weight average spread of new investments is quarter was 6.6%. If we apply a spread of 660 basis points to our unit economics model, including activity-based fees, on a three-year affordable average, leverage at 1.2x, and credit losses between zero and 50 basis points. The output is 11 to 12% return on equity. Again, this math is basically a weighted average of one quarter's new investments, which compares a weighted average spread to the portfolio of a fair value of 8%. This clearly indicates that we are continuing to overcome our cost of equity.
Joshua Easterly: Our track record of generating at 13.5% annualized are we in net incomes for our IPO in 2014, further demonstrates its consistency.
Joshua Easterly: Yesterday, our board approved the base quarterly dividend of 46 cents per share of the shareholders of record as of September 16th, payable on September 30th. Our board also declared a supplemental dividend of 6 cents per share related to our Q2 earnings to shareholders of record as of August 30th, payable on September 20th. Our net asset value per share performed for the impact of the supplemental dividend that was declared yesterday at 1713. We estimate that our spillover income per share is approximately $1.15.
Cami VanHorn: Our board also declared a supplemental dividend of $0.06 per share related to our Q2 earnings to shareholders of record as of August 30th, payable on September 20th, evidenced by an increase in unemployment claims and reduced corporate pricing power. Furthermore, we can maintain a steady deployment pace and further diversify the portfolio through periods of higher competition or lower GELOC capacity. The majority of our payoffs came from ultra-vintage assets, with five of our six full payoffs being 2020 and 2021 investments. We earn four cents per share of activity-based fee income from these realizations, representing an increase from last quarter, but still below our long-term historical average, as older investment realizations contain lower embedded economics compared to newer vintage names.
Bo: With that, I'll pass it over below to discuss this course and the next activity.
Bo: Thanks, Josh. I'd like to start by sharing some observations on the broader macroeconomic environment and how that's impacting deal activity in the private credit markets. Over the last few weeks, the US economy has started to show signs of softness, evidenced by an increase in unemployment claims and reduced corporate pricing power. This data suggests there may be room for rate cuts on the horizon, which we anticipate will encourage a rebound in deal activity from the historically low levels experienced over the past two years. While not yet back to the pre-late rate height levels, green shoots in the deal environment contribute to another busy quarter for our business in terms of deployment and repayment activity.
Bo: In Q2, commitments and fundings totaled 231 million and 164 million respectively across eight new and five existing portfolio companies. We continue to benefit from the size and scale of Six Streets Capital base as we participate in several large cap transactions during the quarter. This underscores the power of the platform as we can toggle between small and large cap opportunities based on where the relative value and risk-reward is appropriate for our shareholders. Further, we can maintain a steady deployment pace and further diversify the portfolio through periods of higher competition for lower deal activity. As a result of our wide organization's funnel, we continue to source new investment opportunities this quarter with 83% of total funding in new portfolio companies.
Bo: to highlight our largest funding in this quarter. We agented in close on a senior secured credit facility to Merit Software Holdings. This investment is reflective of our core competency in the middle market where our direct relationship to this unit is well to be a solutions provider for companies like Merit. Through our connectivity across the 6-3 platform, we had multiple touch points with the company from inception of the business when we executed on the transaction. Additionally, our expertise in niche markets allowed us to move quickly and with certainty tonight to finance this company of best-in-class SMB vertical market software businesses.
Bo: On the repayment side, tight-off spreads triggered a long-awaited reemergence of payoff activity as borrowers took advantage of the opportunity to lower their cost of financing and address near-term absurdities. We experienced 290 million of repayments from six full, four-partial, and 20 structure credit investment realizations, resulting in 127 million of net repayment activity for the quarter. Our repayment activity was largely driven by refinancing, including a takeout by the high yield market, two revives in the private credit market, and one refinancing to a backbone. We also experienced a payoff in our retail ABAL-3, which I'll discuss further in a moment, and opportunistically sold 25 million of our structure credit investments.
Bo: The majority of our payoffs came from older vintage assets, with five of our six full payoffs being 2020 and 2021 investments, and the other being from 2017. We own four cents per share of activity-based fee income from these realizations represented an increase from last quarter, but still below our long-term historical average, as older investment realizations contained lower embedded economics compared to newer vintage names. Following this court as repayments, 58% of our portfolio is represented by investments made after the start of the rate hike cycle. We believe our exposure to newer vintage assets positively differentiates our portfolio relative to the sector and creates the potential for incremental economics through our call protection, accelerated OID, and other activity-based fees should repayment activity persist in the second half of the year.
Bo: Our two largest payoffs toward the quarter, reliant a quest at home care, software solutions were driven by refinancing in the private credit market. While both of these portfolio companies were successful investments for S.L.A.X. generating new teens IRRs on a growth on myver basis, we passed on the refinancing transactions given the reasons jobs violated earlier related to the importance of discipline's capital allocation.
Bo: Another payoff toward the quarter that illustrates a specialized scheme within our portfolio was our investment in 99 cents. We leverage our expertise in the retail asset-based lending space to form our original underwriting thesis back in 2017. Over the 6.7-year-old period, we worked alongside the borrowers; several amendments, maturity extensions, and restructuring ultimately resulted in a company found for bankruptcy under Chapter 11 in April. To support the company during the case, S.L.A.X. provided a DIP term loan that was funded in April and repaid in June. We generated an unlevered gross IRR of 12.7% for S.L.A.X. shareholders on the total investment, including a 12.0% IRR on the original term loan and a 55.7% IRR on the DIP term loan.
Cami VanHorn: Another payoff during the quarter that illustrates a specialized theme within our portfolio was our investment in 99 cents. The weighted average yielded amortized cost of new investments, including upsizes for Q2, was 12.5% compared to a yield of 14.1% on fully exited investments.
Speaker Change: The borrower several amendments maturity extensions and restructurings ultimately resolving the company filing for bankruptcy under chapter 11 in April.
Speaker Change: To support the company during the case, Alex provided a dip term loan that was funded in April and repaid in June.
Speaker Change: We generated an unlevered gross IRR of 12, 7% for <unk> shareholders on the total investment, including a 12.0% IRR on the original term loan and a $55 seven IRR on the debt term loan.
Bo: While this opportunity as it flows, we've seen increased more recently driven by shifts in consumer demand for goods and services and more specifically to experience this post-corder am. We funded a new investment in this theme and expect to see this trend continue in the second half of the year. From a portfolio yield perspective, our weighted average yield on debt and income-producing securities at amortized cost, it went slightly quarter over quarter from 14.0 to 13.9 percent. The weighted average yield at amortized cost at new investments, including up sizes for Q2, was 12.5 percent compared to the yield at 14.1 percent on fully exited investments.
Speaker Change: While this opportunity set ebbs and flows we have seen an increase.
Speaker Change: More recently driven by shifts in consumer demand for goods and services and more specifically to experiences post quarter end, we funded a new investment in this theme and I expect to see this trend continue in the second half of the year.
Bo: To provide some color on investment portfolio today, credit quality remains strong, with total non-cruels limited to 1.1 percent of the portfolio by fair value. Our terminal risk rating improved quarter over quarter from 1.15 to 1.14, with 1B in the strongest. Overall, we are pleased with the performance of our portfolio companies and feel that the management teams of our borrowers have been generally successful and executing on cost-cutting initiatives in managing liquidity through a challenging operating environment. We have not experienced a material increase in amendment requests related to covenants or liquidity, which is another positive indicator of the health of the portfolio.
Cami VanHorn: Overall, we are pleased with the performance of our portfolio companies and feel that the management teams of our borrowers have been generally successful in executing on cost-cutting initiatives in managing liquidity through a challenging operating environment. However, the company has not performed as expected, and our Fair Value mark reflects this assessment. At this stage, the company is in the middle of a strategic process, and there are a range of possible outcomes. To us, that means having choices regarding what to invest in and when to invest. The sector, BDC specifically, given where they borrow and the amount of capital they have to hold, i.e., they can only be 1.25 times leveraged. All right, thanks. Good morning, everyone.
Bo: On a weighted average basis across our portfolio companies, continued top-line growth of approximately 4 percent quarter or quarter has contributed to de-leveraging and sufficient liquidity despite higher interest cost. While spread tighten has led to an increase in repricing requests, this has largely come from portfolio companies demonstrating strong growth momentum in robust performance. Moving on to the portfolio composition and credit stats, across our core borrowers from whom these metrics are relevant, continued to have conservative weighted average at tax and detached points at 0.6 times and 5.0 times, respectively. In their weighted average, it has increased slightly from 2.0X to 2.1X quarter over quarter.
Bo: As a reminder, interest coverage assumes we apply reference rates at the end of the quarter to steady state borrow EBITDA. As of Q2 2024, the weighted average revenue in EBITDA of our portfolio companies was 310.4 million and 104.4 million, respectively.
Bo: There were no new investments added to non-cruel status store in the quarter.
Ian Simmonds: With that, I would like to turn it over to my partner, Ian, to cover our financial performance in more detail. Thank you, though. The Q1 we generated adjusted net investment income for a share of 58 cents and adjusted net income for a share of 50 cents. As of June 30, our weighted average debt to equity ratio for Q2 was 1.17 times. The decrease was primarily driven by our net repayment activity during the quarter.
Ian Simmonds: As mentioned on last quarter's call, we closed an amendment to our $1.7 billion revolving credit facility in April, including extending the final maturity at $1.5 billion of these commitments through April 2009. Moving on to upcoming maturity, we have reserved for the $347.5 million of 2024 notes due in November under our revolving credit facility. After adjusting our unfunded revolver capacity as of quarter-end for the repayment of those notes, we have liquidity of $862 million. To go a step further, if we assume we utilize undraw the revolver capacity to reach the top end of our target leverage range of $1.25 times debt to equity, and further drawdown for our eligible unfunded commitments, we continue to have $398 million of access to liquidity.
Ian Simmonds: Beyond the 2024 notes, our debt maturity profile is well-rounded with materials in 26, 28, and 29 throughout outstanding unsecured notes. As we said in the past, the unsecured market is our primary source of funding, and we continue to have access to this form of financing at levels that is increased in attractiveness over the course of the year. We have been pleased to see the broader development of the unsecured market over the last few years, and viewed as a positive for tier selects and the sector.
Ian Simmonds: Seventy to our presentation materials, site eight contains this quarter's NAV bridge. Walking through the main drivers of NAV growth, the over-alignment shares issued in April related to our equity rate in February resulted in two cents per share uplift to NAV in Q2. We added 58 cents per share from adjusted net investment income against our base dividends of 46 cents per share. There was a three cents per share positive impact to NAV. Primarily from the effect of tightening credit markets frames on the fair value of output portfolio. Net unrealized losses from portfolio company specific events resulted in 8 cents per share decline in NAV.
Speaker Change: There was a <unk> <unk> per share positive impact to NII.
Primarily from the effect of tightening credit market spreads on a fair value of our portfolio.
Speaker Change: Net unrealized losses from portfolio company specific events resulted in <unk> per share decline in NAV.
Ian Simmonds: This was primarily related to the markdown of our investment in lithium technologies from 91.25 to 76.75 quarter of a quarter. The company has not performed as expected. Out their value mark reflects its assessment. At this stage, the company is in the middle of the strategic process, and there is a range of possible outcomes. Other changes included 5 cents per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realizations. And 2 cents per share uplift from net realized gains by investments primarily from structured credit sales during the quarter.
Speaker Change: This was primarily related to the markdown of our investment in lithium technology from 90, 125 to $76 75 quarter over quarter.
Speaker Change: The company has not performed as expected and our fair value Mark reflects this assessment.
Speaker Change: At this stage of the company is in the middle of a strategic process and there is a range of possible outcomes.
Speaker Change: Other changes included <unk> <unk> per share reduction to NAV as we reversed net unrealized gains on the balance sheet related to investment realization and <unk> <unk> per share uplift from net realized gains on investments primarily from structured credit sales during the quarter.
Ian Simmonds: As for our operating results detail in slide 9, we generated a record $121.8 million in investment income for the quarter. Up 3% compared to all $117.8 million in the prior quarter. Interest and dividend income was $112.2 million, slightly above the prior quarter of $112.1 million. Other fees representing prepayment fees and accelerated amortization of upfront fees from unscheduled paydown were higher at $4 million compared to $1.5 million in Q1, driven by increased activity-based fees from the elevated repayment activity experience. Other Intel was $5.5 million compared to $4.3 million in the prior quarter. Native Census, excluding the impact of the non-tash reversal related to unwinded capital gains and sentancies, were 66.8 million, up slightly from a 65.4 million in the prior quarter, driven by expenses incurred during the quarter, the annual and special shareholder meetings that were held in May.
Ian Simmonds: Our weighted average interest rate on average debt outstanding increased slightly from 7.6% to 7.7%, given by our funding mixed shift towards unsteal financing, given net repayment activity led to lower outstanding on our lower cost revolver. Following the repayment of the 2024 Notes in November, there will be a small positive economic impact of almost the technical share quarterly in 2025, as the implied funding mixed shift will lower our weighted average cost of debt.
Speaker Change: 25, as the implied funding mix shift will lower our weighted average cost of debt.
Ian Simmonds: Before passing it back to Josh, I wanted to circle back to our ROT's metrics. For the year-to-date period, we generated annualized adjusted net investment income of $2.32 per share, corresponding to a return on equity of 13.7%. This continues to our previously stated target range for adjusted net investment income of $2.27 to $2.41, corresponding to a return on equity of 13.4% to 14.2% for the full year. We maintain this outlook heading into the second half of 2024.
Speaker Change: Before passing it back to Josh I wanted to circle back to our <unk> metrics.
Josh: A year to date period, we generated annualized adjusted net investment income of $2 32 per share corresponding to a return on equity of 13, 7%.
Speaker Change: This compares to our previously stated target range for adjusted net investment income of $2 27 to $2 41 corresponding to a return on equity of 13, 4% to 14, 2% for the full year.
Speaker Change: We maintain this outlook heading into the second half of 2024.
Joshua Easterly: With that, I'll turn it back to Josh for concluding remarks.
Speaker Change: With that I'll turn it back to Josh for concluding remarks.
Joshua Easterly: Thank you, Ian. Doing the same significant goals in the private credit market. There's no surprise that competition has increased and spread some growing debt. An investment manager, as an investment manager, we view this time as an opportunity for the differential of business as being not only disciplined investors, but disciplined capital allocators. To us, that means having choices regarding what's invested and when done best. We create this option out in our business in two ways. First, we've decided our capital base for the opportunity set. This means running second-strand balance sheet so that we can operate with a target leverage range without broader market participation deals that we do not think present appropriate risk of just returns or means are required return on equity.
Josh: Thank you Ian during this time of significant growth in the private credit market. It's no surprise that competition has increased and spreads have granted tighter.
Joshua Easterly: We've confiscated the objective by taking a thoughtful approach to growth, regardless of our ongoing ability to raise capital. Second, the investing is investing in a platform that has a wide origination funnel. Despite the competitive to upwind the backdrop like this today, we remain active. Yes, but because of the benefits of the six-room platform. This wide range of deal flow allows us to make calls and wealth of value toggle between large capital mill market exposure waiting in the sector of things. And most importantly, pass on investments that do not mean to the screen term and ask what return for a follow-up or shareholders.
Joshua Easterly: At Discipline Investors, we make these choices with shareholder returns top of mind, which we believe leads to better credit selection and ultimately translates to a lower credit loss of the long term and better shareholder experience.
Operator: With that, thank you for the time today. Operator, please open the line for questions.
Operator: Thank you. At this time, as mentioned, we'll now conduct the question-and-answer session. To ask a question, you'll need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile our question and answer roster.
Speaker Change: Withdraw your question Press Star one again, please stand by while we compile our question and answer roster.
Phineon O'Shea: Our first question comes to the line of Phineon O'Shea with WFS. Your line is now open.
Speaker Change: Our first question comes from the line of Finian O'shea with W. F. S. Your line is now open.
Phineon O'Shea: Hey, everyone. Good morning. Taking some of the opening comments on the market.
Finian O'shea: Hey, everyone. Good morning.
Speaker Change: Taking some of the opening comments on the market.
Joshua Easterly: There's a rapid change in private credit. You noted assuming that references the amount of capital that's been raised and so forth. And then you're passing on a lot of deals due to yield, the cost of capital. Would you say this relates to the deals you're passing on? Does it relate to a market deterioration and credit underwriting? Or are there more firms out there that can do complexity at scale?
Speaker Change: The rapid change in private credit you noted assuming that.
Speaker Change: References to the amount of capital that's been raised and so forth and.
Speaker Change: Then then how youre passing on a lot of deals.
Speaker Change: Due to yield the cost of capital.
Speaker Change: Would you say this relates to.
Speaker Change: The deals you are passing on does it relate to <unk>.
Joshua Easterly: Nathan, good morning. So it's in the straight kind of sponsor stuff, sort of vanilla stuff. I think I would flag two things. One is that our concern is that it's not really credit deterioration or credit underwriting deterioration, even in those deals. It's just that the sector, BDC specifically, given where they borrow the amount of capital they have to hold, i.e., they can only be 1.25 times leverage. And fees and expenses, all that good stuff, put some at a place in the cost curve where those assets at certain prices no longer create a return equity that meets or exceeds the cost of equity of the space.
Joshua Easterly: So we find that in the sponsor stuff. If you look at our, we talked about our spreads for this quarter, which was predominantly sponsor stuff, which was I think above the sector and above our earning of cost of equity. If you look at what we funded quarter to date, it's 20 basis points, 20 to 30 basis points wider than that. And if you look at what's in the pipeline, it's significantly wider than that because it has shifted from sponsor to non-sponsor stuff. And so, for example, in the pipeline is like 860 spread, and that's before fees, and that's predominantly non-sponsor stuff.
Joshua Easterly: So I think it's mostly in the sponsor stuff.
Joshua Easterly: And again, I think the relationship of how the size of your origination platform, your capabilities compared to the size of your capital, are really, really important. And, you know, we'll continue to create shareholder value.
Finian O'shea: I think the relationship of how.
Speaker Change: The size of your origination platform your capabilities compared to the size of your capital are really really important.
Speaker Change: And being able to continue to create shareholder value.
Phineon O'Shea: Thank you. It's very helpful.
Speaker Change: Yes.
Operator: Thank you.
Speaker Change: That's very helpful. Thank you and.
Phineon O'Shea: And a follow-up on Europe that seemed to be most of your new deals this quarter. Can you remind us of the footprint you have there? Is there growth in that, or was this more, you know, those were the best deals you saw this quarter in the market? Yeah, yeah. So look, I would say when you look at Europe, I think it's you're referring to by number, but probably, you know, not necessarily by dollar amount. So, by dollar amount, I don't think that's a true statement; by number, that is a true statement. Under the exempt of relief, you know, strategy is we want to make sure S.O.X.
Speaker Change: A follow up on Europe.
Speaker Change: That seem to be.
Speaker Change: Most of your new deals this quarter can.
Speaker Change: Can you remind us of the footprint you have there is is there.
Speaker Change: Growth in that or was this more.
Speaker Change: We're the best deals you saw this quarter.
Joshua Easterly: has the ability to continue and invest in deals. And so it needs to take a position day one in those investments. And so allow those positions that you're referring to or small kind of toe hole positions. Our platform in Europe is growing. It's been very successful. We've been in that market for a long time. And, you know, quite frankly, in the moment, the risk-return better on the sponsor staff is better in Europe than it is in the US. I think, Bo, you would agree with me on that.
Bo: Yes, for sure. So, but again, I think it's by number, not by dollar. By dollar, phenomenal US. So, we like the risk return.
Bo: For example, you know, one of the larger things we did was add event, which was a bio of the kind of the eBay auction assets in Europe. And, you know, that as a, you know, a nice spread compared to what you can find in the US.
Phineon O'Shea: Thanks so much.
Operator: Thanks, and have a good day. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Brian McKenna: Our next question comes in line of Brian McKenna with Citizens JMP. Your line is now open. All right. Thanks. Good morning, everyone. So you talked a lot about the turnover within the portfolio since the Fed started beginning raising rates. You know, you've recycled a lot of capital over the past few years. Obviously, that's been good for the portfolio repositioning.
Speaker Change: Okay.
Speaker Change: Our next question comes from line of Brian Mckenna with citizens JMP. Your line is now open.
Operator: So you've talked a lot about the turnover within the portfolio since the Fed started beginning raising rates. You've recycled a lot of capital over the past few years. Obviously, that's been good for the portfolio repositioning, but how should we think about the turnover from here and this continued rotation into new vintages and loans? And then, I guess, what does all that mean for the underlying performance of the portfolio from here? Our next question comes from Mark Hughes with Truist Securities. Your line is now open, Mark.
Brian McKenna: Alright. Thanks, good morning, everyone. So you've talked a lot about the turnover within the portfolio since the fed started beginning raising rates you heard.
Brian McKenna: Cycled a lot of capital over the past few years, obviously, that's been good for the portfolio repositioning, but how should we think about the turnover from here and this continued rotation into new vintages of loans and then I guess, what does all that mean for kind of the underlying performance of the portfolio from here.
Brian McKenna: But, you know, how should we think about, you know, the turnover from here in this continued rotation into new vintage loans. And then, yeah, I guess what does all that need for kind of the underlying performance of the portfolio from here?
Joshua Easterly: Yeah, hey, hey, Brian. So I would frame it. So just I would that I think the premise is slightly wrong, which is that portfolio, which is nice, which is mostly post great hiking cycle vintage was predominantly driven by that we were slightly below our target leverage going into the rate hiking cycle. So plus we did, we were able to raise that we had a convert. And I think we did a two up to two races. So it's really that it wasn't the portfolio rotation or the portfolio composition changed not because of turnover. So our total has been light post great hiking cycle.
Speaker Change: Yeah, Hey, Brian So I.
Speaker Change: Wood frame it.
Joshua Easterly: You can see that in a starting to pick up, but you can see that actually in the activity-based fees. I think going forward. It's a set of pivots, which it's so like they set that up to pivot in September. Deo activity picks up, spreads come in, spread spreads has already started come in, but deo activity picks up. My guess is there will be more natural kind of turnover in the portfolio, which will, you know, from an economic basis in the short term. So actually, we're benefiting from because activity based fees will pick up, and so is activity based fees pick up.
Joshua Easterly: So this was the first quarter we had a little bit of, you know, we had a low net repayments and activity-based fees picked up this quarter slightly. Okay, how cool.
Speaker Change: We align with that.
Brian McKenna: Thanks.
Speaker Change: Okay helpful. Thanks, and then just a bigger question here, Josh would be great just to get your thoughts on the broader macro clearly theres a lot of puts and takes takes looking out over the next year longer term rates have come in quite a bit recently, there's likely going to be several rate cuts into 25 capital markets activity is accelerating.
Brian McKenna: And then just a bigger question here, Josh. You know, we'll be great. Just get your thoughts on the broader macro. You're clearly there's a lot of puts in takes, takes looking out over the next year. You know, longer term rates have come in quite a bit recently. There's likely going to be several rate cuts into 25, several market activities accelerating. Public equity credit markets are performing well. But if this seemed like the economy is slowing here. So, you know, how are you guys thinking about the macro over the next year? And, you know, what's the basic expectation for some of these moving pieces when you're underwriting your deals today?
Speaker Change: <unk> public equity and credit markets are performing well, but it does seem like the economy is slowing here. So how are you guys thinking about the macro over the next year and what's the base case expectation for some of these moving pieces when you're underwriting new deals today.
Speaker Change: Okay.
Joshua Easterly: So, it's a tricky; it's a tricky environment. Actually, I'm pretty bullish about the advantages of today. Those advantages are, are based on I are underwritten in that higher rate environment. Where, where you haven't had the tailwind of the fat, fat cutting rate and the stimulus of the man that comes with a rate cut. So you got to be bullish on, on, on, on the last couple of years. There's advantages post rate hiking cycle given down to writing standards that improved. There was, you know, rate clarity, and you were in a tightening cycle. So, I think that that I think is helpful.
Speaker Change: So it's a tricky.
Speaker Change: It's a tricky environment actually I'm pretty bullish about the vintages of today those vintages are.
Speaker Change: Yeah.
Speaker Change: Are based on.
Speaker Change: Our underwritten in a higher rate environment.
Joshua Easterly: I think that the recent images will perform really, really well.
Joshua Easterly: But there's going to be tails. The tails are going to be in the previous images. You're most definitely started to see that. We talked about this for like three quarters, which is, you know, this idea of tails and the diverges between operating ROEs, which will be higher than, get total economic or gap ROEs. So the difference between NII and NII. You see that a little bit. I think you'll see that continue a little bit. So, you know, I'm, you know, the economy is most definitely softening, which is allowing the Fed to pivot, the Fed pivot, which should lose their financial conditions.
Joshua Easterly: Those should spur to man and get the economy going again at a stable level. So, I'm relatively constructive on the macro.
Joshua Easterly: There's most definitely going to be tails, and there's most definitely be cohorts like the consumer, especially lower end, that are, that are, that there will be pinch points and pain points. And then I'll find geopolitical, geopolitical, who knows. Yep. Got it.
Brian McKenna: All right. Great. Thanks. I'll appreciate it. Thanks. Have a great day.
Operator: Thank you.
Mark Hughes: Our next question comes in line of Mark Hughes with Truest Securities. Your line is now open, Mark. Yeah. Thank you. Good morning. Your heart rate on the deals on the deal flow. Good morning. Is that changed materially over the last six months? If you're having to be more selective on how was that working out in terms of your success rate? Yeah, I would say, look, when you look at to, I'll say generally our headway probably is materially a little bit lower maybe. I mean, I think what's changed is there's credits we like at prices we don't.
Ian Simmonds: Your hit rate on the deal flow this morning, has that changed materially over the last six months, just if you're having to be more selective? How is that working out in terms of your success rate? I'll say, generally, our head rate probably is materially a little bit lower, maybe.
Speaker Change: When you look at <unk>.
Speaker Change: Q.
Speaker Change: I would say generally our heavier probably is materially a little bit lower maybe I mean, I think whats change is this credits we like at prices we don't.
Ian Simmonds: I mean, I think what's changed is there are credits we like at prices we don't. And, you know, we're very cognizant of driving shareholder return and return on equity and that the things we do today will generate return on equity for 2025 and 2026. We just don't like the prices.
Mark Hughes: So, and, you know, we're very cognizant of, you know, driving shareholder return and return on equity, and that the things we do today will generate the return on equity for 25 and 26. And even though that we have a back book with a higher yield, we want to be cognizant of making sure we are in our return and equity. So, I think our hearing is similar, except that there are things that we like: the credits. We just don't like the prices. Yeah, I am.
Speaker Change: And we're very cognizant of.
Speaker Change: Driving shareholder return and return on equity and.
Speaker Change: And that the things we do today will generate the return on equity for 25 and 2000 effects.
Speaker Change: And even though that we have a back book with a higher yield we want to be cognizant of making sure. We earn a return on equity. So I think our Henry similar except that there are things that we like the credits.
Speaker Change: We just don't like the prices.
Joshua Easterly: The average commitment; this may be just an unfair snapshot, but the average commitment was a little lower in 2Q, say compared to 4Q. Are you seeing more opportunity at the smaller end of the market? No, I mean, no, that's the reflection of the co-investment strategy where, where in European deals or large cap deals, SLAC for European deals is taking a smaller position. And so, you know, there's like a whole bunch of under European deals like $5 to $6 million are dragging it down. But if you look at like the core positions like merit, at event, you know, those are, you know, kind of $35, $40 million commitment.
Speaker Change: Yes.
Joshua Easterly: So, it's a little bit more of that just participation in how the co-investment, the new co-investment order reads. Yeah, I think you mentioned the more co-holes. And then, a ton of questions, the, you described how spreads in the pipeline are looking better as you've shifted from the sponsor to non-sponsor. Is that the broader market helping support that, or the more intentionality on your part? I mean, the great thing about being part of, you know, as people know, $6 to $80 billion platform and having this wide aperture that, you know, we get to toggle between things.
Speaker Change: You know we get the toggle between things. So we did this quarter non sponsor we did.
Joshua Easterly: So, you know, we did, you know, this quarter non-sponsor, we did a Pellis, which was a health spec format deal. We like that space. We like; I think there's probably more to come. We did a retail ABL financing that consumers weaken. That saves these are capital again. And that was done post-corder end, which is a non-sponsor deal. So, we were, you know, we kind of, the great news is having a big, wide top of the funnel is we get to be picking and choosing and making sure we're driving shareholder returns.
Speaker Change: Ah Palace, which was their health spec pharma deal.
Speaker Change: We like that space.
Speaker Change: We like.
Speaker Change: Ah.
Speaker Change: I think there's probably more to come we did a.
Speaker Change: Our retail ABL financing that consumers weekend that phases of capital again.
Speaker Change: And that was done post quarter end, which is a non sponsored deal. So we were we kind of the greatness of having big wide top of the funnel as we get to be picky, and choosy and making sure we're driving shareholder return.
Mark Hughes: Okay, I appreciate it.
Operator: Thank you.
Speaker Change: Okay. Appreciate it thank you.
Operator: Thanks.
Operator: How great day.
Speaker Change: Thanks have a great day.
Operator: Thank you. Our next question comes to the line of Mickey Schleien with Latinburg. Your line is now open. Yes, good morning, everyone. Josh, not to beat a dead horse here, but I wanted to ask you a follow-up question on spreads. Do you think the issue of a massive supply of private debt capital that's overwhelming, you know, the potential for the Fed to cut rates that's causing this spread tightening, or do you think we're approaching some sort of a floor? It's a great question, Mickey. By the way, it's good to hear from you. I don't think we heard from the last one, two, or any folks.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line is Mickey Schlein with Ladenburg. Your line is now open.
Mickey Schlein: Yes, good morning, everyone.
Mickey Schlein: Josh not to beat a dead horse here, but I wanted to.
Ian Simmonds: Yeah. I want to ask you a follow-up question on spreads. Do you think that it's just this issue of a massive supply of private debt capital that's overwhelming the potential for the Fed to cut rates that's causing this spread tightening, or do you think we're approaching some sort of a floor? Yeah, look, I have a whole thing about this.
Mickey Schlein: Ask you.
Mickey Schleien: So it's good to hear your voice. You always have very good questions.
Joshua Easterly: My, my sense is the private credit, private capital has been institutionalized. There was a lot of allocators that had now understand the value proposition. So they've allocated capital. And so that's on the supply of capital. On the demand for capital given the M&A environment, there wasn't that natural demand from M&A. And so my sense is that we'll get back to the equilibrium here shortly, with the Fed cutting and more M&A picking up. And so, but we were kind of in this supply kind of outpaced demand early on.
Joshua Easterly: And we can, you know, we've always wanted to be very disciplined. And then, you know, the incentives for managers to put that to work and earn fees, et cetera. Those are real incentives. And we've always tried to fight those and acknowledge those incentives and fight those incentives and think about the long term of shareholder experience. So my hope is that with more demand coming from a loosening, a loosening environment that was driving M&A and will drive investment in capital growth, that the supply and demand kind of will get more imbalanced. That's good to hear.
Mickey Schlein: Tom.
Tom: Shareholder experience. So my hope is that with more demand.
Tom: From a loosening.
Speaker Change: Our Lucerne loosening environment that will drive.
Speaker Change: M&A and we will drive investment in Capex and growth.
Speaker Change: The supply and demand kind of it will get more imbalanced.
Speaker Change: That's good to hear.
Joshua Easterly: And if I could follow up, Josh, with this sort of disintermediation of the commercial banks, it's occurred over the last many years and the rise of private credit. Do you think what do you think the probability is that, you know, we'll see more regulation of private credit. And do you think there's systemic risk developing that will come to light down the road? Yeah, look, I have a whole thing about this. The systemic risk point is a little bit silly. And I think the first thing I would say is that, unlike the banking system, the taxpayers haven't written a put for private credit.
Speaker Change: And if I could follow up Josh.
Speaker Change: The sort of disintermediation of the commercial banks that's occurred over the last many years and the rise of private credit do you think what do you think the probability is that.
Speaker Change: We'll see more regulation of.
Speaker Change: Private credit.
Speaker Change: Do you think theres systemic risks developing.
Speaker Change: That will come to light down the road.
Ian Simmonds: The systemic risk point is a little bit silly, and I think the first thing I would say is that, unlike the banking system, taxpayers haven't written a check for private credit. And the systemic risk really comes from a little bit of that, some of that put obligation for taxpayers, and that the Fed has effectively, through the FDIC program, backstopped asset choices. The second thing is that most systemic risk has come from an ALM issue, and private credit match funding. There's no ALM.
Speaker Change: Yeah look.
Speaker Change: Hello.
Speaker Change: I have a whole thing about this though.
Speaker Change: The systemic risk point of view is a little bit silly.
Speaker Change: And I think that the.
Joshua Easterly: And the systemic risk really causes, you know, comes from a little bit of that. Some of that put obligation for taxpayers. And that that is effectively through the SEIC program. Backstopped. for Banks. The second thing is, most systemic risk has come from an ALM issue, and which is that people are long assets in short liabilities, and that does not exist in private credit. And private credit is match funded; there's no ALM. You know, we talk about this often, but I think the average life of our assets funded with leverage is like two and a half years versus leverage is like four years.
Ian Simmonds: You know, we talk about this often, but I think the average life of our assets funded with leverage is like two and a half years versus leverage of four years. And so we actually have small reinvestment risk, let alone liquidity risk, and that's where most. The third thing I would say is BDP specifically in private credit as compared to the bank. That's very helpful. And I appreciate your clarity on that. And my last question, Josh, just switching gears. Lithium Technologies, which I think is part of Coral's, if I'm not mistaken, is a customer care, you know, software-based customer care company.
Joshua Easterly: And so we actually have small reinvestment risks, let alone liquidity risks. And that's where most kind of systemic or issues have come with financial institutions. The third thing I would say is, BDP specifically in private credit as compared to banks, hold, you know, somewhere between four, three and five times amounts capital of banks. And so risk bearing capital on BDCs are about 45 to 50%. We think about one times leverage or 1.1 times leverage, and banks they hold, you know, about 8% capital. And so the idea that there is real systemic risk or loss of shareholders given the higher capital and private credit shows off to me as well.
Joshua Easterly: I started this conversation with the idea of return equity, and I would do this analogy for people. If I describe two business models for listeners, one business model is that you win long, you won 8% capital, you win long, you bore short. The other business model, you hold 50% capital, you are totally match funded. And I would say academically, what would be the required return equity of those two business models? My guess is you would say the required return and equity would be a lot lower for the latter business model, the private credit business model.
Mickey Schleien: That's actually not true. The private banks return equity required in private credit and BDCs are about the same, which is the business model of private credit is a much more robust business model given the amount of capital and the robustness of the ALM. Is that helpful, Mickey? That's very helpful, and I appreciate your clarity on that.
Joshua Easterly: And my last question, Josh, just switching gears, lithium technologies, which I think is part of Chorus if I'm not mistaken, is it customer care, you know, software-based customer care company? I realize that at any moment in time, a credit can run into headwinds. I'm more curious whether there's something underlying the headwinds at lithium that would cause you concern over the sector in general, because that is a focus of yours as well, other BDCs. Yeah, lithium is purely idiotocratic. So it probably, like, the one thing I would be critical on the margin of us in the space is that when COVID hit, everybody thought about negative businesses that were negatively negatively impacted by COVID; there were some businesses that were positively impacted by COVID.
Ian Simmonds: I realize that at any moment in time, a credit can run into headwinds. I'm more curious whether there's something underlying the headwinds at Lithium that would cause you concern over the sector in general, because that is a focus of yours and as well as other BDCs. Yeah, look, I think it's I think it's, again, I think the complexity is I think there are sponsor concentration issues where if you have an adverse event with one of your common drugs, See, I don't see them as related. Yeah, that's very helpful.
Mickey Schleien: This was a software business that had a levered engagement online and through social media platforms that was probably a positive tailwind that's unwound, so it's purely idiotic. Okay, I appreciate that. That's all for me this morning. Thank you for taking my questions.
Speaker Change: I appreciate that that's all for me. This morning, Thank you for taking my questions.
Vicki: Thanks Vicki.
Speaker Change: Thank you.
Kenneth Lee: Our next question comes from the line of Kenneth Lee with RBC. Your line is now open. Hey, good morning. Fixer, taking my question. Sounds like, in terms of the new origination investments you're seeing. There might be a little bit of a spectator.
Speaker Change: Our next question comes from the line of Kenneth Lee with RBC. Your line is now open.
Kenneth Lee: Hey, good morning, Thanks for taking my question.
Kenneth Lee: It sounds like in terms of the new originations to investments youre, saying, there might be a little bit of a spread tightening across the industry Wonder if you could just comment about what youre seeing in terms of documentation in terms on some of these newer deals are seeing any changes more recently thanks.
Kenneth Lee: Depending across the industry, wonder if you could just comment about what you're seeing in terms of documentation and terms on some of these newer deals, seeing any changes more recently. Thanks. Yeah, look, I would say document docs have been pretty stable. So I think I did my standards remain, you know, good and private credit. I mean, the question again is, is like, you know, where are we sit on the cost of what's the required term required spread during your cost of equity. And if I was critical in one place, there would be people not understanding where they sit in the cost curve or where they're leading too much into their back book.
Kenneth Lee: Yes look I would say document that's been pretty stable.
Speaker Change: So I think that Orion scanners remain.
Speaker Change: I'll go ahead and private credit I mean, the question again is as I.
Speaker Change: Where we sit on the cost curve, what's the required turn.
Speaker Change: Acquired spread to earn your cost of equity and about critical in one place it would be.
Speaker Change: Now I understand where they fit in the cost curve or where.
Speaker Change: They are lean too much into their back book.
Joshua Easterly: But the things you do today, or they are always in 25 and 26. But the way to average financial evidence and all that stuff is basically the same. The doctor is in pretty good shape. That's right.
Speaker Change: But the things you do today our Roe.
Kenneth Lee: Great. Very helpful there.
Kenneth Lee: And just one follow-up, if I may, just more broadly.
Joshua Easterly: In terms of the more complex investment opportunities, is this something where we have to wait perhaps for more of a macro slowdown before you start seeing more opportunities there, or could we see a potential pickup in complex more complex investment opportunities when MNA activity rebounds as well. Thanks. Yeah, look, I think it's, I think it's, again, I think the complexity is, I think there's two things. One is that tails. We live in an environment with low rates. Cabal got allocated very poorly. The complexity is going to come from that pipeline of yesterday's mistakes. And that's going to be there no matter what.
Joshua Easterly: Then I think I'll also tell when it's at MNA picks up. People will, you know, some of our competitors are a lot of our competitors, quite frankly, that stuff is easier to persecute with less people. And so they'll, their eyes will go that way. And so I think you have two kind of compounding effects, which is the tails are growing, which will provide opportunity for us and complexity. And as MNA picks up, you know, people's natural kind of glare will be focused on that.
Speaker Change: <unk> for us in complexity and his M&A picks up peoples natural kind of glare.
Speaker Change: We'll be focused on that.
Joshua Easterly: And so I think I'm pretty bullish about the next couple of years for our complexity theme. Great.
Speaker Change: So I think I'm pretty bullish about the next couple of years for our complexity theme.
Kenneth Lee: Very helpful. Thanks again.
Speaker Change: Great very helpful. Thanks again.
Speaker Change: Hi.
Paul Johnson: Thank you. Our next question comes from a line of Paul Johnson with KBW. Your line is now open. Good morning, thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of Paul Johnson with <unk>. Your line is now open.
Paul Johnson: Good morning, Thanks for taking my questions.
Paul Johnson: So just with the development of my ability management exercises and the development of recently Pluralsight, realizing obviously Pluralsight's not in your portfolio, but I'm just wondering your thoughts on whether those type of events increase the risk of sponsor concentration issues where if you have an adverse event with one of your common partnering sponsors and there's risk to deal flow, as well as just kind of the calculus of working within lender groups as well. Yeah, so look, I don't really have anything to add in Pluralsight. We're not, we're not that involved; we're not involved, not that we're not that involved, we weren't involved.
Speaker Change: So just with the development of <unk>.
Speaker Change: Liability management exercises and.
Speaker Change: On the development of our recently plurals site, realizing obviously cross that's not in your portfolio, but I'm just wondering your thoughts on.
Speaker Change: Weather.
Speaker Change: Those types of events increased the risk of sponsor concentration issues, where you have an adverse event with one of your common partnering sponsors and theres risk to the deal flow as well as just kind of.
Speaker Change: The calculus of working within <unk>.
Speaker Change: <unk> groups as well.
Speaker Change: Yeah. So.
Speaker Change: Okay.
Joshua Easterly: So I can't add anything specific. I would say my understanding of that situation, that doc seemed like a it was a doc that was kind of not was slightly outside of the range of the existing docs released the docs in our portfolio as I understand it. And the good thing is that it wasn't done. There was no lender-on-lender violence that existed, like you see in the Broadway syndicate, more low market, whether it was a prisoner's dilemma, which is, you know, I got to do it because if I don't do it, somebody else will do it.
Joshua Easterly: And that didn't exist. So, and then you're also seeing, so I think that I don't see that as a I think that they overblown concern and private credit on the sponsor concentration, which I'm not sure they're exactly related. You know, we don't really have, you know, sponsor concentration. Over historically, we've done about 65% sponsor stuff, 35% non sponsor. An existing book today, we have no sponsor above 10%. So it's, and we have like 45 or 50 sponsors in a book. So I don't, I'm not, I don't see, I don't see them related. But I think I answered your question. That's helpful.
Joshua Easterly: Yeah, it's very helpful. I appreciate that. I mean, do you think that that, you know, an event like that is just the result of, you know, bad credit underlying, you know, bad, bad documentation. Or is this, you know, lawyers that are basically at fault here. I would never blame; I can't really speak to; I don't want to speak to plural, so I'm not involved. So I don't have the, you know, things are going to happen in our business. Things, you know, we've been very good on the credit side, and stuff pops up still. So I think it's going to happen.
Operator: I appreciate that. I mean, do you think that, you know, an event like that, Yeah, I appreciate that. Yeah, I was just kind of asking a little bit more broadly about the space, but I appreciate, appreciate the answer. Our next question comes from Melissa Wedel with J.P. Morgan. Your line is now open.
Joshua Easterly: You know, like part of part of our business is a little bit about, or a lot of our business, the only thing about a business is about figuring out what the future looks like. And trying to use a historical and industry structures as an analog for that. And so, you know, we're in, I'm deriding the future because value is based on future cash flows and how the business performs future. And, you know, on the margins, sometimes you're going to get it wrong. And that's, so I think that's important. And, as you like, the industry is fluctuating and where you invest in the capital structure, but I can't speak to plural sites.
Joshua Easterly: Yeah, I appreciate that. Yeah, I was just kind of asking a little bit more broadly on the on the space, but appreciate appreciate the answers. Yeah, that's on the good. Thanks. I would never, I would never blame something on a service provider. So we're principles we own we own our decisions. So like lawyers can't stop the blame on lawyers, you know, they're service providers, were principles. And so we are when there's a when there's a mistake, I own it. We own it as a team. Thank you.
Melissa Wedel: Our next question comes to the line of Melissa Wedel with JP Morgan. Your line is now open. Good morning. Thanks for taking my questions. Most of mine has actually been asked already. Quick clarification. When you talked about the pipeline. You know, kind of going forward.
Speaker Change: [noise] clarification, when you talked about the pipeline are you know kind of going forward did you did I Miss it or did you size that at all for us.
Melissa Wedel: Did you can I miss it, or did you find that at all for us? Yeah, yeah, so I'll hit it real quick like. Look, that the you missed it. It's probably like the near term soft is a couple hundred million bucks like in the, you know, that in this next kind of quarter, I think. That's helpful on the growth side before repayment. Yep, got it. I appreciate that.
Speaker Change: Yeah, Yeah, So I'll hit a real quick like look the misfit, it's probably like the near term stuff is a couple of hundred million Bucks in me that in this next quarter I think.
Speaker Change: If that's helpful on the growth side.
Speaker Change: For repayments.
Operator: Yep, got it. I appreciate that. And then separately, kind of digging into the non-sponsor side a little bit. When we hear non-sponsor, I tend to think those tend to be a little bit smaller companies. They tend to be a bit better on spread, as you specifically mentioned.
Speaker Change: Yeah got it I appreciate that and then separately kind of digging into the non sponsor side a little bit when we hear non sponsor I tend to think those tend to be a little bit smaller companies. They tend to be a bit better on strategies, specifically mentioned, but then I'm also curious as that take longer.
Bo: And then separately, kind of digging into the non-sponsor slide a little bit. When we hear non-sponsor, I tend to think those tend to be a little bit smaller companies. They tend to be a bit better on spread if you specifically mentioned, but then I'm also curious: is that take longer for your team to sort of diligence and close. Do those investments in the timeline any different for you versus some of the larger. More maybe own to syndicated across a few hundred type deals, sponsor deals. Yeah, yeah, so I'll say the buried entry for why I think we feel less competition is for the manager is a much more difficult, less profitable difference.
Ian Simmonds: But then I'm also curious, does that take longer for your team to sort of diligence and close? Or do those investments, is the timeline any different for you versus some of the larger, more maybe syndicated across a few hundred type deals, sponsored deals? Yeah, yeah, so I would say to have, you know, being kind of the debt to equity ratio of where we are today, which will give us room when there are big opportunities to actually participate in.
Speaker Change: For your team to sort of diligence and close.
Speaker Change: Or do those.
Speaker Change: Our investments is the timeline any different for you versus some of the larger.
Cindy: More maybe Cindy.
Speaker Change: Our syndicated across a few one off type deals and sponsored deals.
Speaker Change: Yes, so I would say.
Speaker Change: Barrier to entry for why I think we see less competition.
Speaker Change: As for <unk>.
Speaker Change: The manager.
Speaker Change: As a much more difficult less profitable business.
Bo: It takes longer, it takes more resources, it takes more time, both on the right side on the SM management side. And so it is in the average wife tends to be shorter, and so the return on capital for the management company is a lot lower; the return on capital for our shareholders is a lot higher. And so I think that's why historically, you need specialized resources; it's people in terms of the example I give the people on the ABL stuff. The ABL stuff, the average life is, you know, everybody knows understand the fees in our business, but, you know, if you could earn X fees on something that has an average life of three years.
Speaker Change: It takes longer it takes more resources. It takes more time, both on the right side on the asset management side and so.
Speaker Change: Got.
Speaker Change: It is and the and the average life tends to be shorter and so the return on capital for the management company is a lot lower the return on capital for our shareholders a lot higher.
Speaker Change: And so.
Speaker Change: I think thats why historically.
Speaker Change: You need specialized resources its people in terms of.
Speaker Change: The example, I give the people on the ABL stuff ABL stuff the average life is.
Speaker Change: Everybody knows and understands the fees in our business, but.
Bo: And it's a lot easier to persecute them, earning the same fees on something that has an average life of one and a half years. And it's a lot harder to persecute; you know, it's not shocking what people do. But not always. Actually, sometimes bigger. Yeah, a lot of times bigger. Yeah, yeah. Yeah, the only way to read that is that these are not necessarily smaller opportunities. These are these are large businesses, generally. Got it.
Bo: And it's the use of funds is what strategic M&A or rather? No, sometimes it's down sheet restructuring. Sometimes it's exiting of a bankruptcy. Sometimes it's entering a bankruptcy in a dip. Sometimes it's a bridge to somewhere, but they don't know exactly where somewhere is. If you have an overlavered balance sheet like Farrell Gas, they don't really know when we did that deal where they had an overlavered balance sheet. We were the few years secure. They don't know exactly where it was going. So a whole host of things.
Bo: In our department, R&D, sorry, sorry, development or sex pharmacy. Appreciate it. Thank you.
Speaker Change: And our spec pharma R&D.
Speaker Change: Third development or spec pharma stuff.
Speaker Change: Right.
Speaker Change: I appreciate it thank you.
Speaker Change: Thank you.
Bryce Rowe: Our next question comes in the line of rice. Rowe would be Riley.
Speaker Change: Our next question comes from the line of Bryce.
ROE: ROE with B Riley your line is now open.
Bryce Rowe: Your line is now open. Thanks a lot. Good morning. Maybe wanted to offer one follow-up to Melissa's first question there. You know, helpful to for you all to kind of size up the portfolio in terms of the gross potential, at least over the near term. And you certainly have talked about the potential for increased repayment activity. This year we saw a little bit of it in the second quarter. Kind of curious how you kind of balance or handicap. The second half of the year, from a net perspective, do you think that you'll continue to see some of this repayment activity that will offset originations or possible to see some net growth?
Bryce ROE: Thanks, a lot and good morning.
Bryce: Maybe wanted to offer one one follow up to Melissa's first question there.
Bryce: Helpful too for you all to kind of size up the portfolio in terms of the gross potential at least over the near term.
Speaker Change: And you certainly have talked about the potential for increased repayment activity.
Speaker Change: This year, we saw a little bit of it in the in the second quarter.
Speaker Change: Kind of kind of curious how you how you kind of balance or handicap.
Speaker Change: The second half of the year from a from a net perspective do you think that you know.
Speaker Change: You'll continue to see some of this repayment activity that will that will offset originations.
Speaker Change: Or possible to see some some net growth.
Bryce Rowe: Yeah, I think our base cases were kind of net flat, flatish in is that it, you know, so gross originations will, you know, pick up activity levels, pick up repayments role, which will create economics in the book. But, you know, I think it's net flatish, which we think is good. You know, I would like to have, you know, being kind of the, you know, in our debt equity of where we are today, which will give us room, women's big opportunities to actually participate in them. Yeah, okay. That's helpful, Josh; I appreciate it. And maybe a question around, you know, somebody I think it was both, both it made the comment, but, you know, the comment around lower rates, possibly driving more, more deal flow, you know, at some point in the future.
Speaker Change: Yeah, I think the our base cases, where can that flat flattish is that right.
Bryce: Sure.
Speaker Change: So gross originations will pick up as activity levels pick up.
Bryce: Payments role, which will create economics in the book.
Bryce: But I think net flattish.
Bryce: Which we think is good.
Bryce: I would like to have.
Bryce: And kind of the.
Bryce: And our debt to equity of where we are today.
Speaker Change: Which will give us room women's big opportunities to actually participate in them.
Speaker Change: Okay without having any new equity.
Bryce: That's helpful. Josh I appreciate it.
Speaker Change: And then maybe a question around you know somebody I think it was though though that made the comment but the comment around lower lower rates, possibly driving more more deal flow.
Joshua Easterly: Can you kind of expand on your thoughts around, you know, what kind of environment behind the lower rates we have in driving that, you know, I guess that type of deal flow and I guess I'm getting at, you know, whether we actually get a real credit cycle for the first time in 15, 20 years. And kind of what that, what that might mean, at least on the onset of, you know, of the lower rates and how deep those rates get. Yeah, look, I don't see, I don't see a real like 2001, 2008 credit cycle. I just don't see that.
Speaker Change: At some point in the future can you can you kind of expand on your thoughts around.
Speaker Change: What kind of environment behind the lower rates, we have in driving that I guess that type of deal flow and I guess I'm getting at.
Speaker Change: Whether we actually get a real credit cycle for the first first time in 15 years 20 years.
Joshua Easterly: But I do think you all have elevated tails. You know, since this is performed relatively well, the portfolio is growing. When you look at last quarter, it's growing you over year, quarter over quarter. So I think, to the Fed's credit, they've done a reasonably good job of trying to kind of get into the soft landing. So I don't see a real credit thought. But I do see that when you take a step back, that capital, you know, pre-COVID post-COVID was misallocated. And, you know, which will, which is created the tails, why you had basically zero, one, zero to one percent interest rates for a long period of time.
Ian Simmonds: You know, relatively well; the portfolio is growing. It's growing. When you look at last quarter, it's growing year over year, quarter over quarter. So I think that, to the Fed's credit, they've done a reasonably good job of trying to kind of get into the soft landing. So I don't see a real credit crunch.
Joshua Easterly: And so there has to be reckoning to some of that misallocation of capital. But I don't see a deep credit cycle, given that businesses have been able to kind of continue to earn; the consumer's been relatively strong. I think this has actually found a pretty decent balance.
Bryce Rowe: Great. I appreciate that. Everybody likes to be pretty; everybody likes to be critical of the Fed. But I think it actually found a, it feels like they've found a pretty decent balance. Got it. Thank you.
Speaker Change: Critical of the fed.
Speaker Change: But I think they've actually found it feels like they've found a pretty decent balance.
Speaker Change: Got it got it thank you.
Robert Dodd: So our next question, which is our last question, comes in a line of Robert God with Raymond James. Your line is now open. Thank you.
Speaker Change: Thank you.
Operator: But I do see that when you take a step back, that capital. Our next question, which is our last question, comes from the line between Robert Dodd and Raymond James. Your line is now open, at the top of the funnel, and the options of what we can pick, and then the acknowledgment of where we send the cost curve and our return on equity. Like, that, to me, is the formula. Now, do I know exactly what options are going to be in the money at the top of the funnel? I don't know.
Speaker Change: Our next question, which is our last question comes from the line of proper time with Raymond James Your line is now open.
Robert Dodd: Morning, Bryce actually just asked the link question. So I'm all about about growth. So kind of a little add on to that. I mean, if you kind of flat this year, should we expect that to be a result of a little bit of rotation. I mean, you talked about here more non sponsored in the quarter coming up. Is that going to be a scene this year, most non-sponsored, maybe more complex deals, but then those turn fast. So what's the maybe not just this year, but do you expect that you'll see more of that then they'll turn faster in 2526 and then you really need the sponsor market pricing to become more acceptable over some period of time in order to keep the portfolio at this size.
proper time: Thank you good morning, Bridgetex you get asked the same question so.
proper time: So it's kind of a little add on to that I mean.
proper time: Do you think if you kind of flat this year should we expect that to be a.
Speaker Change: A result of a a little bit of rotation I mean, you talked about you know more non sponsored in the quarter coming up is that going to be a theme. This year most of the lumps wants it maybe more complex deals, but then there was turn faster so what's the maybe not just this year, but do you expect that youll.
Speaker Change: You'll see more of that and then they'll turn faster in 'twenty five 'twenty six and then you really need the sponsor market pricing to become more acceptable.
Speaker Change: For some period of time in order to keep the portfolio at the site.
Joshua Easterly: Yeah, it's a good question. For us, it's, it's really, how is, let me tell you philosophically how we set up our business because the answer is, I don't know. And if I sit here telling you what I know, exactly how it's going to play out, I, it's kind of silly. Not the question, but just that I have the answers to the question. To me, we've set up our business where we have created a whole bunch of options for shareholders on different strategies: non-sponsored health care spec, farm, retail, sponsored energy, and we go to the top of the funnel.
Speaker Change: Yeah, It's a good question.
Speaker Change: For us yes.
Speaker Change: It's really how is let me tell you philosophically, how we set up our business because the answer is I don't know if I sit here, telling you what I know exactly how it's going to play out.
Speaker Change: It's kind of silly.
Speaker Change: Not the question, but just that I have answered the question.
Speaker Change: To me, we set up our business, where we have created a whole bunch of options.
Speaker Change: For shareholders on different strategies, non sponsored healthcare spec pharma retail.
Speaker Change: Sponsored energy and.
Speaker Change: And.
Speaker Change: We fill the top of the funnel.
Joshua Easterly: And as allocators of capital, we get to say, where does it open the lap where they're really good risk return. on a lever basis and where they provide significant shareholder value and meet the return of equity requirements of our shareholders. And like so like I we really like that model because that model allows us to drive, you know, we've been a public company now for 10 plus years and we've been able, I think it feels longer, to be honest with you. That we've been able to drive shareholder value because that combination of constraint capital, top of the funnel and the options of what we can pick and then the acknowledgement of where we send the cost of and our return of equity.
Speaker Change: And as allocators of capital, we can say where does it overlap with a really good risk return on.
Speaker Change: On a levered basis, and where they provide significant shareholder value and meet the return on equity requirements of our shareholders.
Speaker Change: And like.
Speaker Change: So I.
Speaker Change: We really like that model because that model allows us to drive we've been a public company now for 10 plus years and we've been able I think.
Speaker Change: It fills longer to be honest with you.
Speaker Change: That we've been able to drive shareholder value because of that combination of constrained capital.
Speaker Change: Top of the funnel and the options of what we can pick and then the acknowledgment of where we sit in the cost curve and our return on equity.
Joshua Easterly: Like that to me is the formula. Now do I know exactly what options are going to be in the money in the top of the funnel. I don't know. So enough.
Speaker Change: That to me is the Formula now do I know exactly what options are going to be in the money at the top of the funnel I don't know.
Robert Dodd: Thank you. Awesome.
Speaker Change: Fair enough. Thank you.
Operator: Let's get a hear voice, Robert. Thank you.
Speaker Change: Awesome, that's good to hear your voice Robert.
Speaker Change: Right.
Speaker Change: Okay. Thank you.
Operator: I'm showing no further questions at this time and would now like to turn the call back to Josh Easterly for closing remarks. We really appreciate everybody's thoughtful and engaging questions, and I hope everybody has a great end of the summer with their families. We'll talk in November, and it's going to be a crazy November, of my guess. So I thank you. We're always around. We love the engagement, and we'll keep working hard for our shareholders. Thanks. Thank you.
Josh Easterly: I'm showing no further questions at this time I'd like now like to turn the call back to Josh easterly for closing remarks.
Operator: We really appreciate everybody's thoughtful and engaging questions, and I hope everybody has a great end to the summer with their families, and we'll talk in November. It's going to be a crazy November, my guess. So, thank you. We're always around. We love the engagement, and we'll keep working hard for our shareholders. Thanks.
Speaker Change: Okay.
Josh Easterly: We really appreciate everybody's thoughtful and engaging questions.
Josh Easterly: And I hope everybody has a great end of the summer with their families.
Speaker Change: And we'll talk in November.
Josh Easterly: And it's going to be a crazy November my guess.
Speaker Change: So I think you were.
Josh Easterly: We're always around we love the engagement.
Josh Easterly: And we will keep working hard for our shareholders.
Operator: This does conclude the program, and you may
Josh Easterly: Thank you.
Speaker Change: Does conclude the program and you may now disconnect.
Josh Easterly: Goodbye.
Speaker Change: Yeah.
Speaker Change: [music].