Q3 2024 Blue Owl Capital Corp Earnings Call

November 7, 2024

Operator: Good morning, everyone, welcome to Blue Owl Capital Corporation's Q3 2024 Earnings Call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Michael Mosticchio, Head of BDC Investor Relations. Please go ahead.

Unknown Executive, Jonathan Lamm

Speaker Change: Good morning, everyone, and welcome to Blue Owl Capital Corporation's third quarter 2024 earnings call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to Mike Masticio, Head of BDC Investor Relations. Please go ahead.

Michael Mosticchio: Thank you, operator, and welcome to Blue Owl Capital Corporation's Q3 Earnings Conference Call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the Q3 ended September 30, 2024. These should be reviewed in conjunction with the company's 10-Q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation, and 10-Q, are available on the investors section of the company's website at blueowlcapitalcorporation.com. Joining us on the call today are Craig Packer, Chief Executive Officer, Doran Nicholson, President, and Jonathan Lamm, Chief Financial Officer.

Mike Masticio: Thank you, operator and welcome to Blue Owl Capital Corporation's third quarter earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the third quarter ended September 30th, 2024.

Mike Masticio: These should be reviewed in conjunction with the company's 10Q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation, and 10Q are available on the investor section of the company's website at Blue Owl Capital Corporation dot com.

Mike Masticio: Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President, and Jonathan Lamm, Chief Financial Officer.

Michael Mosticchio: I'd like to remind listeners that remarks made during today's call may contain forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of 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. 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. With that, I'll turn the call over to Craig Packer, Chief Executive Officer of OBDC.

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.

Speaker Change: The company makes no such representations or warranties with respect to this information. With that, I'll turn the call over to Craig Packer, Chief Executive Officer of OBDC.

Craig Packer: Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered strong Q3 results driven by continued portfolio performance and robust investment activity. We achieved ROE for the quarter of 12.4%, our seventh consecutive quarter of double-digit ROE and dividend yield, reflecting our attractive asset base and the resilient credit quality of our portfolio. As of quarter end, our net asset value per share was $15.28, just off from historical highs. The fundamental performance of the portfolio remains strong and our non-accrual rate remains well below the industry average. OBDC continues to over-earn the base dividend, enabling us to pay $0.05 per share supplemental dividend. Jonathan will share more on our financial performance in a moment. We're very pleased with our results this quarter. We think it's important to put them into context of what we're seeing in the broader markets.

Craig Packer: Thanks, Mike. Good morning, everyone, and thank you all for joining us today.

Craig Packer: We delivered strong third quarter results driven by continued portfolio performance and robust investment activity.

Speaker Change: We achieved ROE for the quarter of 12.4%, our seventh consecutive quarter of double-digit ROE and dividend yield, reflecting our attractive asset base and the resilient credit quality of our portfolio.

Speaker Change: As of quarter end, our net asset value per share was $15.28, just off from historical highs.

Speaker Change: The fundamental performance of the portfolio remains strong, and our non-accrual rate remains well below the industry average. OBDC continues to over-earn the base dividend, enabling us to pay 5 cents per share of supplemental dividend, and Jonathan will share more on our financial performance in a moment.

Craig Packer: Since we spoke to you last quarter, the interest rate outlook has shifted considerably. The market is now recalibrating based on an expectation of additional rate cuts over the remainder of the year as inflation has eased. When rates increased over two years ago, we took decisive action to ensure our shareholders would benefit from expected earnings momentum while maintaining ample cushion on our base dividends. We introduced a variable supplemental dividend framework and modestly increased the base dividend. Both of these initiatives were designed to deliver predictable cash flow to our shareholders. As floating rate investors, we recognized that the elevated rate environment would not last forever. By implementing a programmatic supplemental dividend, it allowed OBDC shareholders to benefit from the higher returns associated with the increased rate environment while providing the predictability of our base dividend.

Speaker Change: Since we spoke to you last quarter, the interest rate outlook has shifted considerably. The market is now recalibrating based on an expectation of additional rate cuts over the remainder of the year as inflation has eased.

Speaker Change: As floating rate investors, we recognized that the elevated rate environment would not last forever, and by implementing a programmatic supplemental dividend, it allowed OBDC shareholders to benefit from the higher returns associated with the increased rate environment while providing the predictability of our base dividend.

Craig Packer: This move has proven beneficial since launching the supplemental dividend structure 2 years ago. OBDC shareholders have received a total of $0.47 of supplemental dividends per share, reflecting our commitment to ensuring our shareholders benefit from our earnings momentum. In Q3, OBDC's base dividend coverage was 127%, one of the highest among BDC peers, providing us with ample confidence in our ability to navigate the rate environment ahead. To put this in context, given current market rate expectations, we believe our base dividend will be covered throughout 2025. Depending upon how fast rates decrease, we may continue to generate excess income and pay modest additional supplemental dividends. Turning to the market environment, while M&A activity remains subdued, we continue to find attractive risk-adjusted opportunities to deploy capital and stay at our optimal portfolio leverage for enhanced returns.

Speaker Change: This move has proven beneficial since launching the Supplemental Dividend Structure two years ago.

Speaker Change: OBDC shareholders have received a total of 47 cents of supplemental dividends per share, reflecting our commitment to ensuring our shareholders benefit from our earnings momentum.

Speaker Change: To put this in context, given current market rate expectations, we believe our base dividend will be covered throughout 2025.

Speaker Change: Depending upon how fast rates decrease, we may continue to generate excess income and pay modest additional supplemental dividends.

Speaker Change: Turning to the market environment, while M&A activity remains subdued, we continue to find attractive risk-adjusted opportunities to deploy capital and stay at our optimal portfolio leverage for enhanced returns.

Craig Packer: Even during times of muted industry deal activity, we leverage our differentiated scale and broad origination platform to maintain strong deal flow and selectivity. Our growth as a platform has resulted in a large number of incumbent lending positions. With our $128 billion of assets under management and credit, we have a deep pool of existing borrowers and sponsor relationships we can draw upon for deal flow, even in a period of modest new buyout activity. Across our platform, we are a lead or co-lead lender on roughly 90% of deals, administrative agent on approximately 65% of our investments, and have the ability to commit over $1 billion to any single investment. This significant presence typically makes us the first call when a new financing for one of our portfolio companies is in the works, driving significant deal flow.

Speaker Change: Even during times of muted industry deal activity, we leverage our differentiated scale and broad origination platform to maintain strong deal flow and selectivity.

Speaker Change: Our growth as a platform has resulted in a large number of incumbent lending positions.

Speaker Change: With our $128 billion of assets under management and credit, we have a deep pool of existing borrowers and sponsor relationships we can draw upon for deal flow, even in a period of modest new buyout activity.

Speaker Change: Across our platform, we are a lead or co-lead lender on roughly 90% of deals, administrative agent on approximately 65% of our investments, and have the ability to commit over $1 billion to any single investment.

Craig Packer: To that end, roughly two-thirds of our originations this quarter were deployed into our 435 existing borrowers in refinancings or add-on acquisitions. We believe this reflects not only the confidence we have in our portfolio companies, but also the trust that private equity sponsors place in us as a preferred financing provider. We also have one of the largest direct lending teams in the industry, with over 120 investment professionals, coupled with several complementary credit strategies at Blue Owl. The scale across both Blue Owl Capital and our credit platform is one of our most significant competitive advantages that provides us the ability to generate significant deal flow through our sourcing capabilities. This has allowed us to remain highly selective, even as we deployed over $9.5 billion across the platform this quarter.

Speaker Change: To that end, roughly two-thirds of our originations this quarter were deployed into our 435 existing borrowers in refinancings or add-on acquisitions.

Speaker Change: We believe this reflects not only the confidence we have in our portfolio companies, but also the trust that private equity sponsors place in us as a preferred financing provider.

Speaker Change: We also have one of the largest direct lending teams in the industry, with over 120 investment professionals, coupled with several complementary credit strategies that blew out.

Speaker Change: The scale across both Blue Isle Capital and our credit platform is one of our most significant competitive advantages that provides us the ability to generate significant deal flow through our sourcing capabilities.

Speaker Change: This has allowed us to remain highly selective, even as we deployed over $9.5 billion across the platform this quarter.

Craig Packer: Our growing footprint has made Blue Owl an attractive home for leading asset managers, which has helped drive the recent acquisitions of Atalaya Capital Management, which closed in September, and the announcement of IPI Partners in October, the global investment manager focused exclusively on data centers. These acquisitions expand our platform into alternative credit, broaden our capabilities, and enhance our overall deal flow across the platform, ultimately strengthening our ability to drive originations at the fund level in the coming quarters. As we think about our investment approach, we remain focused on direct lending to senior secured investments in the upper middle market. We're seeing strong results from our portfolio companies and the number of challenged positions within the portfolio was small.

Speaker Change: These acquisitions expand our platform into alternative credit, broaden our capabilities, and enhance our overall deal flow across the platform, ultimately strengthening our ability to drive originations at the fund level in the coming quarters.

Speaker Change: Looking ahead, as we think about our investment approach, we remain focused on direct lending to senior secured investments in the upper middle market. We're seeing strong results from our portfolio companies and the number of challenged positions within the portfolio is small.

Craig Packer: These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift. Finally, I want to provide an update on our previously announced merger with OBDE. As we discussed on our last earnings call, we expect this merger will streamline our direct lending platform, enhance our scale with a high-quality, diversified portfolio that offers significant investment overlap, improve our trading liquidity profile for current and prospective shareholders, increase our access to lower cost sources of debt, and finally, drive operational efficiencies and cost savings. We also anticipate that it will drive NII accretion over both the near and long term, with an opportunity for NAV per share accretion. We achieved an important milestone in the merger process in mid-October, when the joint proxy statement of OBDC and OBDE was declared effective by the SEC.

Speaker Change: These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift.

Speaker Change: Finally, I want to provide an update on our previously announced merger with OBDE.

Speaker Change: As we discussed in our last earnings call, we expect this merger will streamline our direct lending platform, enhance our scale with a high-quality diversified portfolio that offers significant investment overlap.

Improve our trading liquidity profile for current and prospective shareholders.

Speaker Change: increase our access to lower cost sources of debt, and finally drive operational efficiencies and cost savings. We also anticipate that it will drive NII appreciation, accretion, excuse me, over both the near and long term with an opportunity for NAFRA share accretion.

Speaker Change: We achieved an important milestone in the merger process in mid-October when the joint proxy statement of OBDC and OBDE was declared effective by the SEC.

Craig Packer: The proxy solicitation process has begun and will conclude at each of our shareholder meetings scheduled for January 8th. Our current expectation is that the transaction will close in January 2025. We encourage all shareholders to review the proxy materials and vote your shares accordingly. As a reminder, the OBDC board of directors, myself included, has unanimously recommended shareholders vote in favor of the proposals on the ballot. With that, I'll turn it over to Doran for additional color on portfolio performance.

Speaker Change: The proxy solicitation process has begun and will conclude at each of our shareholder meetings scheduled for January 8th. Our current expectation is that the transaction will close in January 2025.

Speaker Change: We encourage all shareholders to review the proxy materials and vote your shares accordingly.

Speaker Change: As a reminder, the OBDC Board of Directors, myself included, has unanimously recommended shareholders vote in favor of the proposals on the ballot. With that, I'll turn it over to Logan for additional color on portfolio performance.

Doran Nicholson: Thanks, Craig. We continued to find attractive opportunities to commit capital in Q3, driving strong origination activity and solid earnings despite the persistently low M&A deal flow. During the quarter, we deployed approximately $1.2 billion in new investment commitments, which was roughly in line with repayments. As Craig mentioned, our scale and incumbency creates an advantage, resulting in the majority of our originations this quarter coming from existing borrowers. We were able to achieve larger allocations in some of the largest, highest quality new borrowers in the market. For our refinancing flows, we were actually able to grow our share in many deals across the platform. I would contrast this to Q1, where we saw elevated second lien repayments that did not present us with a reinvestment opportunity.

Logan Nicholson: Thanks, Craig. We continue to find attractive opportunities to commit capital in the third quarter, driving strong origination activity and solid earnings despite the persistently low M&A deal flow.

Logan Nicholson: During the quarter, we deployed approximately $1.2 billion in new investment commitments, which was roughly in line with repayments.

Speaker Change: As Craig mentioned, our scale and incumbency creates an advantage, resulting in the majority of our originations this quarter coming from existing borrowers.

Logan Nicholson: We were able to achieve larger allocations and some of the largest highest quality new borrowers in the market and for our refinancing flows We were actually able to grow our share in many deals across the platform

Speaker Change: I would contrast this to the first quarter, where we saw elevated second lien repayments that did not present us with a reinvestment opportunity.

Doran Nicholson: We added 11 new names into the portfolio and funded Audiotonix, an LBO that Blue Owl committed approximately $1.5 billion to across our platform. Over 96% of this quarter's origination activity consisted of first lien investments, as we continue to believe that first lien and unitranche loans provide the most attractive relative value in the market today. As a result, our first lien investments have grown to 76% of the portfolio from 69% in the prior year. We believe our longstanding and disciplined approach to investing in upper middle market businesses with significant operating histories in non-cyclical sectors has resulted in an attractive, highly diversified portfolio. Our average investment represents less than one-half of 1% of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio borrowers is $112 million, and weighted average EBITDA is $197 million, with an average LTV of 43%.

Speaker Change: We added 11 new names into the portfolio and funded Audio Tonics, an LBO that Blue Owl committed approximately $1.5 billion to across our platform.

Speaker Change: Over 96% of this quarter's origination activity consisted of first-line investments, as we continue to believe that first-line and Unitron's loans provide the most attractive relative value in the market today. As a result, our first-line investments have grown to 76% of the portfolio from 69% in the prior year.

Speaker Change: We believe our long-standing and disciplined approach to investing in upper-middle market businesses with significant operating histories in non-cyclical sectors has resulted in an attractive, highly diversified portfolio.

Speaker Change: Our average investment represents less than one-half of 1% of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio borrowers is $112 million, and weighted average EBITDA is $197 million.

Doran Nicholson: We believe this scale can provide strategic benefits and operational stability as many of our borrowers are market leaders within their sectors. As Craig mentioned, our borrowers are performing well, having navigated the higher rate environment. Across the portfolio, our average interest coverage improved to around 1.7 times, up from 1.6 times last quarter. This is in line with how we thought about our trough coverage in the prior quarter, and we expect to see the benefits of lower base rates flowing through the portfolio companies over the next quarter. Based on the declining forward rate curve, we should expect to see continued gradual improvement in interest coverage. 1 year from now, we project our average interest coverage ratios will be in the high 1 times to low 2 times, assuming these forward rate conditions remain as forecasted and portfolio company performance remains stable.

Speaker Change: with an average LTV of 43%. We believe this scale can provide strategic benefits and operational stability as many of our borrowers are market leaders within their sectors.

Speaker Change: As Craig mentioned, our borrowers are performing well, having navigated the higher rate environment. Across the portfolio, our average interest coverage improved to around 1.7 times, up from 1.6 times last quarter.

Speaker Change: This is in line with how we thought about our trough coverage in the prior quarter, and we expect to see the benefits of lower base rates flowing through the portfolio companies over the next quarter.

Speaker Change: Based on the declining forward rate curve, we should expect to see continued gradual improvement in interest coverage.

Speaker Change: One year from now, we project our average interest coverage ratios will be in the high one times to low two times, assuming these forward rate conditions remain as forecasted and portfolio company performance remains stable.

Doran Nicholson: Within our portfolio, the sustained earnings growth of our borrowers continues to be the most significant driver of credit health. Overall, our borrowers are growing revenues and EBITDA in the mid-single digits year-over-year. We'd note that earnings growth of our borrowers ticked up modestly quarter-over-quarter as well. Our portfolio companies have the advantages of size, scale, and sponsor support, which we believe will continue to serve us well. We remain confident in the resilience of our portfolio across varying economic environments and the changing rate landscape. Our non-accrual rate in our debt portfolio remains low at 70 basis points of fair value, reflecting the removal of one name from non-accrual and no new additions this quarter. One of the primary indicators of health of our portfolio is our internal rating system.

Speaker Change: Within our portfolio, the sustained earnings growth of our borrowers continues to be the most significant driver of credit health.

Speaker Change: Overall, our borrowers are growing revenues and EBITDA in the mid-single digits year-over-year. We'd note that earnings growth of our borrowers ticked up modestly quarter-over-quarter as well. Our portfolio companies have the advantages of size, scale, and sponsor support, which we believe will continue to serve us well.

Speaker Change: We remain confident in the resilience of our portfolio across varying economic environments and the changing rate landscape.

Speaker Change: Our non-accrual rate in our debt portfolio remains low at 70 basis points of fair value, reflecting the removal of one name from non-accrual and no new additions this quarter.

Speaker Change: One of the primary indicators of health of our portfolio is our internal rating system. In the third quarter, our investments internally rated 3 to 5 actually declined modestly, which is another encouraging sign of the underlying health and stability of our investments.

Doran Nicholson: In Q3, our investments internally rated three to five actually declined modestly, which is another encouraging sign of the underlying health and stability of our investments. Finally, the subset of names on our watch list remains steady quarter-over-quarter, and we do not see any material pickup in amendment activity or other signs of stress. I also want to spend a moment on our PIK exposure, an area of heightened focus in the market. As we have said before, over 80% of our PIK income was structured as such at initial underwrite, and more than half of our PIK exposure is in the form of first lien investments. In addition, PIK exposure remains stable year-over-year and quarter-over-quarter in the portfolio. In fact, these PIK names represent some of our best investments.

Speaker Change: And finally, the subset of names on our watch list remains steady quarter over quarter, and we do not see any material pick up in amendment activity or other signs of stress.

Speaker Change: I also wanna spend a moment on our pick exposure, an area of heightened focus in the market.

Speaker Change: In addition, pig exposure remains stable year over year and quarter over quarter in the portfolio.

Doran Nicholson: A recent example in the quarter was our preferred equity investment in Citrix, which was originally underwritten with PIK in 2022, carried PIK interest at inception of F plus 12%, and recently had flipped to cash pay. Due to the company's strong performance, Citrix refinanced the preferred equity with senior debt, and we generated an IRR north of 20% and a MOIC of 1.5 times. Our portfolio continues to be stable and resilient, giving us confidence in our ability to deliver attractive risk-adjusted returns for our shareholders. Now I'll turn over the call to Jonathan to provide more detail on our Q3 financial results.

Speaker Change: In fact, these pick names represent some of our best investments.

Speaker Change: A recent example in the quarter was our preferred equity investment in Citrix, which was originally underwritten with PICC in 2022, carried PICC interest at inception of S plus 12 percent.

and recently had flipped to cash pay.

Speaker Change: Due to the company's strong performance, Citrix refinanced the preferred equity with senior debt, and we generated an IRR north of 20% and a MOEC of 1.5 times.

Speaker Change: Our portfolio continues to be stable and resilient, giving us confidence in our ability to deliver attractive risk-adjusted returns for our shareholders. And now I'll turn over the call to Jonathan to provide more detail on our third quarter financial results.

Jonathan Lamm: Hey, Doran. Our financial performance for Q3 demonstrated the consistency of our earnings despite the changing market environment. We ended Q3 with total portfolio investments of $13.4 billion, outstanding debt of $7.8 billion and total net assets of $6 billion. Our Q3 NAV per share was $15.28, reflecting the impact of credit-related markdowns on a select few investments. We believe our NAV demonstrates the resilience of our portfolio as it remains near our historical highs. Turning to the income statement. We earned net investment income of $0.47 per share, down $0.01 from the prior Q, driven by maintaining leverage toward the higher end of our target range and stable repayment-related income.

Hey, Logan.

Jonathan Lamm: Our financial performance for the third quarter demonstrated the consistency of our earnings despite the changing market environment.

Jonathan Lamm: We ended the third quarter with total portfolio investments of $13.4 billion, outstanding debt of $7.8 billion.

and total net assets of $6 billion.

Our third quarter NAVs per share was $15.28.

Jonathan Lamm: reflecting the impact of credit-related markdowns on a select few investments.

Speaker Change: We believe our NAV demonstrates the resilience of our portfolio as it remains near our historical highs.

Turning to the income statement.

Speaker Change: We earn net investment income of $0.47 per share, down $0.01 from the prior quarter driven by maintaining leverage toward the higher end of our target range and stable repayment related income.

Jonathan Lamm: Similar to prior quarters, we meaningfully over-earned our base dividend, resulting in the board declaring a $0.05 supplemental dividend for Q3, which will be paid on 13 December to shareholders of record on 29 November. The board also declared a Q4 base dividend of $0.37, which will be paid on 15 January to shareholders of record as of 31 December. As Craig mentioned earlier, we believe OBDC is well positioned for a lower rate environment. OBDC's base dividend is well covered by our earnings, with 127% dividend coverage. Further supporting our distributions is our spillover income. We finished the quarter with approximately $0.41 per share of spillover as a result of meaningful over earning of our dividends, which is a strong advantage that provides stability going forward.

Speaker Change: Similar to prior quarters, we meaningfully over-earned our base dividend, resulting in the board declaring a five cent supplemental dividend for the third quarter, which will be paid on December 13th to shareholders of record on November 29th.

Speaker Change: The board also declared a fourth quarter base dividend of 37 cents, which will be paid on January 15th to shareholders of record as of December 31st.

Speaker Change: As Craig mentioned earlier, we believe OVDC is well positioned for a lower rate environment.

Speaker Change: OBDC's base dividend is well covered by our earnings, with 127% dividend coverage.

Further supporting our distributions is our spillover income.

Speaker Change: We finished the quarter with approximately 41 cents per share of spillover as a result of meaningful over-earning of our dividends.

which is a strong advantage that provides stability going forward.

Jonathan Lamm: In terms of our asset sensitivity to lower rates, if rates are cut by an additional 50 basis points, and assuming no other changes to our portfolio, we would expect NII to decrease $0.02 per share over the next quarter. Despite these potential headwinds, we feel very comfortable with our base dividend level amid the evolving rate environment, and any reductions in rates will take time to impact our earnings. We encourage investors to refer to the interest rate risk section of our 10-Q for additional information on OBDC's asset sensitivity. Moving to the balance sheet. We continue to optimize and enhance our liability structure to deliver strong performance to shareholders. We finished the Q3 with net leverage of 1.23 times within our target range of 0.9 times to 1.25 times based on originations that were generally in line with repayments.

Unknown Executive, Jonathan Lamm

Terms of our asset sensitivity to lower rates.

If rates are cut by an additional 50 basis points,

Speaker Change: Despite these potential headwinds, we feel very comfortable with our base dividend level amid the evolving rate environment and any reductions in rates will take time to impact our earnings.

Speaker Change: We encourage investors to refer to the interest rate risk section of our 10-Q for additional information on OBDC's asset sensitivity.

Moving to the balance sheet.

Speaker Change: We continue to optimize and enhance our liability structure to deliver strong performance to shareholders.

Speaker Change: We finished the third quarter with net leverage of 1.23 times, within our target range of 0.9 times to 1.25 times.

based on originations that were generally in line with repayments.

Jonathan Lamm: During the quarter, we enhanced our liquidity position by increasing our revolver capacity by approximately 30% or $585 million across six lenders, bringing OBDC's total revolving facility to $2.6 billion. This reflects the strong relationships we have built with our bank partners and represents the importance of the Blue Owl platform. As of quarter end, total liquidity stood at $2.1 billion, well in excess of our unfunded commitments. We believe we can further reduce costs through the synergies and liability optimization resulting from our anticipated merger with OBDC III. We remain very pleased with our results and with what we have accomplished with our liability structure. Now I'll hand it back to Craig to provide final thoughts for today's call.

Speaker Change: During the quarter, we enhanced our liquidity position by increasing our revolver capacity by approximately 30% or $585 million across six lenders, bringing OBDC's total revolving facility to $2.6 billion.

Speaker Change: This reflects the strong relationships we have built with our bank partners and represents the importance of the Blue Owl platform.

Speaker Change: As of quarter end, total liquidity stood at $2.1 billion, well in excess of our unfunded commitments.

Speaker Change: Additionally, we believe we can further reduce costs through the synergies and liability optimization.

We're listing from our anticipated merger with OBDE.

Speaker Change: We remain very pleased with our results and with what we have accomplished with our liability structure.

Craig Packer: And now I'll hand it back to Craig to provide final thoughts for today's call.

Craig Packer: Thanks, Jonathan. Since inception, we have delivered strong ROEs and constructed a resilient portfolio with a very low loss ratio of approximately 20 basis points. We believe this performance reflects our commitment to credit quality and a long-term approach in managing our credit business and OBDC. We've built our direct lending platform with this long-term mindset, ensuring our portfolio and dividend framework will perform well across all interest rate and economic environments. Looking ahead, we are confident that our strong origination capabilities will allow us to maintain a fully invested, high quality portfolio. While lower rates will impact OBDC's earnings, they will also reduce interest expense for our portfolio companies, enhancing their performance and potentially leading to increased M&A activity. New activity has been light in recent quarters, with historically tight spreads driven by strong capital inflows into both public debt and private credit funds

Thanks, Jonathan.

Craig Packer: Since inception, we have delivered strong ROEs and constructed a resilient portfolio with a very low loss ratio of approximately 20 basis points.

Speaker Change: We believe this performance reflects our commitment to credit quality and a long-term approach in managing our credit business and OBDC.

We've built our direct lending platform with this long-term mindset.

Speaker Change: Ensuring our portfolio and dividend framework will perform well across all interest rate and economic environments.

Speaker Change: Looking ahead, we are confident that our strong origination capabilities will allow us to maintain a fully invested, high-quality portfolio.

Speaker Change: While lower rates will impact OBDC's earnings, they will also reduce interest expense for our portfolio companies, enhancing their performance and potentially leading to increased M&A activity.

Speaker Change: New activity has been light in recent quarters, with historically tight spreads driven by strong capital inflows into both public debt and private credit funds.

Craig Packer: This has put pressure on pipelines across the BDC sector, resulting in new joint ventures between direct lenders and established banks as they seek to expand origination efforts. At Blue Owl, we have not needed to pursue these strategies. As you've heard me say today, our investment in our team, our scale, our sponsor relationships, and our long-term investment thesis have carried us through both outsized market activity and more challenged economic cycles. We believe the current market trends will not persist indefinitely. Eventually, the supply-demand imbalance will improve. Lower rates could result in increased deal activity as companies invest more in growth initiatives, potentially spurring a wave of M&A and improving pricing as deal activity increases.

Speaker Change: At Bluelow, we have not needed to pursue these strategies. As you've heard me say today, our investment team, our investment in our team, our scale, our sponsor relationships, and our long-term investment thesis have carried us through both outsized market activity and more challenged economic cycles.

Speaker Change: We believe the current market trends will not persist indefinitely. Eventually, the supply, demand, and balance will improve.

Speaker Change: Lower rates could result in increased deal activity as companies invest more in growth initiatives, potentially spurring a wave of M&A, and improving pricing as deal activity increases.

Craig Packer: In the meantime, while we wait for the market to recalibrate, our portfolio remains healthy, credit quality is strong, and we're confident in our ability to continue to deliver attractive returns to our shareholders. We're pleased to be entering this changing macroeconomic environment from a position of strength. With that, thank you for your time today, and we will now open the line for questions.

Speaker Change: In the meantime, while we wait for the market to recalibrate, our portfolio remains healthy, credit quality is strong, and we're confident in our ability to continue to deliver attractive returns to our shareholders.

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

Operator: Thank you. Our first question is from Brian McKenna with Citizens JMP. Please proceed.

Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad.

Speaker Change: 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we pull for questions.

Brian McKenna: Okay, great. Good morning, everyone. Just a question to start on yields and spreads for new deals today. The average yield on new commitments totaled sub-10% in the quarter. I know there's a few different drivers kind of within that, and it's also more challenging to predict in the near term. Where do these go from here? Do you think we're close to the bottom in terms of spreads? What makes you confident that private credit yields will continue to be in excess of public credit markets?

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Craig Packer: Sure. Good morning, Brian. Thanks for the question. Spreads on new deals today are as low as 475. Some are 500. There's probably one or two that are 450. I would say 475 is probably the center of gravity for the tight spreads for attractive deals. We're certainly doing deals that are wider than that. My sense is spreads are troughed there, based on just activity in the last three months or so. I think that's about where it's troughed, and we're not seeing things come tighter than that. I don't think there's meaningful risk that it will come tighter than that. Still, given where SOFR is, that still, as you noted, still generates a 10+% absolute return, which we think is very attractive.

Sure. Good morning, Brian. Thanks for the question.

Spreads on new deals today are...

Speaker Change: As low as 475, some are 500, probably one or two that are 450, but I would say 475 is probably the center of gravity for the tight spreads or attractive deals. We're certainly doing deals that are wider than that.

Speaker Change: My sense is spreads are trough there based on just activity in the last three months or so. I think that's about where it's trough. You're not seeing things come tighter than that. I don't think there's

Meaningful risk that it will come tighter than that.

Speaker Change: So, you know, given where SOFR is, that still, as you noted, still generates a 10 plus percent

Craig Packer: I do think we're at a cyclical trough, and my hope is in the next year or so, if M&A picks up, and the public markets cool a bit, that spreads will widen to a more normalized level. As to your question, relative to public markets, and I think you know this, but maybe some of the listeners don't, public market spreads are significantly tighter than 475 over. Public market spreads are 300, 325 over. The private markets continue to offer 100-plus basis point premiums, ignoring the fact that we also get underwriting fees that are not available to the public market investor. The private markets continue to generate substantially higher returns, differentiated returns versus the public markets. I'm hopeful that spreads at some point will normalize.

Absolute return, which we think is very attractive.

Speaker Change: But I do think we're at a cyclical trough, and my hope is in the next year or so, if M&A picks up, and the public markets cool a bit, the spread will widen to a more normalized level.

Speaker Change: As to your question relative to the public markets, and I think you know this, but maybe some of the listeners don't.

Speaker Change: Public market spreads are significantly higher than $4.75 over. Public market spreads are $300, $325 over. And so the private markets continue to offer 100-plus basis point premiums.

Speaker Change: Ignoring the fact that we also get underwriting fees that are not available to the public market investor.

Speaker Change: So the private markets continue to generate substantially higher returns, differentiated returns versus the public markets, and I'm hopeful that spread at some point will normalize.

Brian McKenna: Okay, that's super helpful. Just for my follow-up, the Blue Owl platform more broadly continues to expand capabilities, including within alternative credit, and then in other higher growth areas like infrastructure and data centers. There's clearly going to be quite a bit of capital needs within both of these markets. What does this ultimately mean for lending opportunities across all your BDCs? Do you think you'll look to lean in here over time? Is there any way to frame the yield opportunity here relative to regular way direct lending?

Speaker Change: Okay, that's super helpful. And then just for my follow up, you know, the Blue Owl platform more broadly continues to expand capabilities, including within alternative credit, and then in other higher growth areas, like infrastructure and data centers, you know, there's clearly going to be quite a bit of capital needs within both of these markets. So, you know, what does this ultimately mean for lending opportunities, you know, across all your BDCs?

Speaker Change: Do you think you'll look to lean in here over time and then is there any way to frame the yield opportunity here relative to regular way direct lending?

Craig Packer: Sure. As folks know, Blue Owl Capital has done a small number of strategic acquisitions or mergers in the last year or so, as you noted, including a significant expansion into the alternative credit space with our acquisition of Atalaya Capital Management. Our recently announced transaction of a large hyperscale data center business, IPI. Our expansion in the insurance space. I think these are all really terrific opportunities for our direct lending platform and our BDCs. We are not changing the strategy of our BDCs. We're going to continue to be focused on upper middle market sponsor-backed lending to recession-resistant sectors as we have since inception. We are going to now have just a meaningfully larger ecosystem in both the sponsor and non-sponsor world in really high-quality assets, working with teams that have generated very significant returns to investors in their respective asset classes.

Yourself as you noted

Speaker Change: Including a significant expansion into the alternative credit space with our acquisition of Adelaide.

Speaker Change: or recently announced transaction of a large hyperscale data center business IPI or insurance or expansion of the insurance space. I think these are all really terrific opportunities for our direct funding platform and our BDCs.

We are not changing the strategy of our BDCs.

Speaker Change: We're going to continue to be focused on upper middle market sponsored back lending from recession resistant sectors as we have since inception

Speaker Change: But we are going to now have a just a meaningfully larger ecosystem in both the sponsor and non-sponsor world in really high quality assets, you know, working with teams that have generated very significant returns to investors in their respective asset classes.

Craig Packer: Having that all under one roof and one credit platform and one asset manager platform, it's going to significantly expand our deal flow. I think there will be select opportunities where we can invest and scale across the Blue Owl platform that will create select opportunities.

Unknown Executive, Craig Packer, Unknown Executive, Jonathan Lamm

Craig Packer: To put high quality, predictable income generating assets into our BDCs. That's a strength we haven't had before, and now we're going to have it. Again, I don't want to create a concern about strategy drift, but I do think that the scale of having a $120 billion credit platform now is going to create just new avenues for deal flow. Sponsors that might not have thought we've had a relevant source of capital will now call us for new deals. Companies that may not have thought of us as a financing source will now be able to call us. Founder-owned businesses will call us, and those folks don't always necessarily know where their capital needs can best be met on our platform. It could just also generate run-your-way direct lending opportunities as before, but now people are calling us and being directed to the right place.

Speaker Change: But I do think that the scale of having a $120 billion credit platform now

is going to create just new avenues for deal flow.

Speaker Change: Sponsors that might not have thought we had a relevant source of capital will now call us for new deals. Companies that may not have thought of us as a financing source will now be able to call us.

Speaker Change: Founder Owned Businesses will call us and those folks don't always necessarily know where their capital needs can best be met on our platform. And so it could just also generate regular way direct lending opportunities as before, but now people are calling us and we can direct it to the right place.

Craig Packer: Not to mention all the additional underwriting resources we'll have under one roof. I'm quite excited about this opportunity. In terms of the return profile, each of those businesses I mentioned, the insurance business is a little bit different because it's investment grade orientation. The alternative credit business generates returns really on access to the direct lending model. In the data center business, returns have been very attractive, and more importantly, credit quality and counterparts they have in that business are extremely high. It's a huge positive to OBDC shareholders to have this all under one roof and no negatives, as far as I can see.

Speaker Change: Not to mention all the additional underwriting resources we'll have under one roof.

So I'm quite excited about this opportunity.

Transcripts provided by Transcription Outsourcing, LLC.

that the investment, the alternative credit business generates.

Speaker Change: returns really in excess of the direct learning model in the data center business. Returns have been very attractive and more importantly credit quality, the counterparts they have in that business are extremely high. So it's a huge positive to OBDC shareholders to have this four-under-one roof and no negatives as far as I can see.

Brian McKenna: Okay, I'll leave it there. Congrats on another strong Q.

Craig Packer: Thank you.

Okay, I'll leave it there. Congrats on another strong quarter.

Operator: Our next question is from Casey Alexander with Compass Point. Please proceed.

Thank you.

Speaker Change: Our next question is from Casey Alexander with Compass Point. Please proceed.

Casey Alexander: Hi, good morning, Craig. Thanks for taking my questions. I kind of whiffed on the combination of dividend income and fee income this quarter, and that's on me. I'm kind of wondering where you feel sort of the correct cadence is in sort of the run rate of Q2 or the run rate of Q3, at least for the next couple quarters, until you're able to consummate the merger, then the answer to that question might be different.

Hi, good morning, Craig. Thanks for taking my questions.

Speaker Change: I kind of whiffed on the combination of dividend income and fee income this quarter.

And that's on me.

Speaker Change: But I'm kind of wondering where you feel sort of the correct cadence is, you know, in sort of the run rate of the second quarter or the run rate of the third quarter, at least for the next couple quarters, until, you know, until you're able to consummate the merger, then the answer to that question might be different.

Craig Packer: Sure. Well, Casey, we would never say that you whiffed. You might have hit one off the bat into the stands, I wouldn't call it a whiff. We do recognize that your numbers might have been a bit different than ours. Jonathan can add some additional color. I think there were a couple components maybe in your model that might've been a bit off, other investors may have the same questions. One is that we do have a really significant amount of dividend income from some of our investments, either in businesses like Wingspire or Senior Loan Fund, as well as investments in some preferred stocks and the like. In Q2, approximately that generated about $51 million of income. This quarter, it was down a few million dollars. There's nothing particular there.

Speaker Change: Sure, I'll start and Jonathan, um, say, uh, well, Casey, we would never say that you whip. You might've, you might've hit one off the bat into the, uh, into the stands, but I wouldn't call it a whip.

Speaker Change: We do, we do recognize that your numbers might have been a bit different than ours. Um, Jonathan can add some additional color. You know, I think there were a couple of components maybe in your model that might have been a bit off and other investors may have the same questions.

One is that we do have a really...

Speaker Change: a significant amount of dividend income from some of our investments.

Speaker Change: on either in in businesses like Wings Fire or Senior Loan Fund as well as as well as investments.

and some preferred stocks and the like.

Speaker Change: In the second quarter, approximately that generated about $51 million of income.

Craig Packer: Really all of these, I think, or most of them, most of it is not contractually defined income. It's based on the underlying performance of an individual pool of assets, or it might be a variable dividend that a particular company declares. It can move around quarter to quarter based on what's going on in those underlying assets, a few million dollars + or -. Historically, H1 of this year is about $50 million. This quarter is $47. Next quarter, we'll just have to see. It could be up a bit. The other piece, I think in your numbers was some fee income really primarily related to repayments. As folks know, Q2, we had significant really exceptional repayments given the low rate environment. There's a lot of refinancing done.

Speaker Change: On this quarter it was down a few million dollars. There's nothing particular there. Most, really all of these, I think, or most of them, most of it.

Speaker Change: It's not contractually defined income, it's based on the underlying performance of an individual's whole assets.

Speaker Change: or it might be a variable dividend that a particular company declares and so it will, it can move around quarter and quarter based on what's going on in those underlying assets, a few million dollars positive or negative. Historically,

Speaker Change: The first half of this year is about $50 million. This quarter is $47 million.

Unknown Executive, Jonathan Lamm

Speaker Change: As folks know, second quarter, we had significant, you know, really exceptional repayments given the low rate environment with a lot of refinancings on. And so this quarter, we had, you know, some nice income generated by repayments, but it wasn't off, it was off of that.

Craig Packer: This quarter we had some nice income generated by repayments, but it was off of that accelerated number in Q2. Looking ahead to Q4, the dividend income, again, the same zip code, hope a bit higher. The prepayment trouble, just have to see how the quarter ends. It could be in the same zip code maybe a bit higher or a bit lower. I don't know, Jonathan, if you have anything to add. No. I think you hit on everything right there. If, Casey, that helps you. You had really effectively projected an up number relative to the prior quarter. I think hopefully that straightens it out.

Speaker Change: Accelerated number in the second quarter. Um, and so looking ahead to the fourth quarter, you know, the fee income, excuse me, the dividend income, I'd be in the same zip code, he'll pull up a bit higher. The pre payment income will stop to see how the quarter ends.

Unknown Executive, Craig Packer, Unknown Executive, Jonathan Lamm

Casey Alexander: All right. Well, listen, thank you for taking my question. I appreciate the clarity, and the only people who don't whiff are people who don't swing, so I'll still take it as a whiff. Thank you.

Speaker Change: Alright, thank you for taking my question. I appreciate the clarity and the only people who don't whip are people who don't swing so I'll still take it as a whip. Thank you.

Craig Packer: All right. Thanks.

Operator: Our next question is from Mickey Schleien with Ladenburg Thalmann. Please proceed.

Alright, thanks a lot.

Speaker Change: Our next question is from Mickey Sheeland with Lattenberg-Thalman. Please proceed.

Mickey Schleien: Yes. Good morning, everyone. Craig, I just wanted to touch on the non-sponsored market. Everybody's talking about how spreads are so tight in the sponsored market, et cetera. You do have a non-sponsored segment. I was wondering if you could just review how large that is within your organization. What proportion of your portfolio is non-sponsored, and how do the economics compare there?

Yes, good morning, everyone.

Speaker Change: Craig, I just wanted to touch on the non-sponsored market, you know, everybody's talking about how spreads are so tight in the sponsored market and

Craig Packer: Sure. We've done non-sponsored deals since inception. That's part of our business plan. Associations, one of our single largest investments, it's not a sponsor-owned company. We will do them regularly. Although we generally strongly prefer sponsor-backed companies for the reasons that are obvious. They bring significant capital, governance, resources, and they can, particularly if a business is struggling, they can add all those features. That's typically not the case in a non-sponsor deal. We're going to continue to prefer a sponsor, but we will do non-sponsors selectively for really attractive companies, where we get to know the ownership group and the management team extremely well. It probably goes without saying, but all BDCs focus on sponsor business because the velocity of capital and the investment opportunity in the sponsor world is much higher than the non-sponsor deal.

Unknown Executive, Jonathan Lamm

Speaker Change: I'm sure we've done non-sponsored deals since inception. That's part of our business plan. Associa is one of our single largest investments. It's not a sponsor-owned company. And so we do that regularly, although we generally...

Speaker Change: Strongly prefer sponsor-backed companies for the reasons that are obvious they bring

Unknown Speaker, Unknown Speaker,

Speaker Change: But we will do non-sponsors selectively for really attractive companies, you know where we get to know

Unknown Speaker, Unknown Speaker, Unknown Speaker, Unknown Speaker,

Craig Packer: Sponsors have significant pools of capital and spend every day thinking about ways to deploy that capital and generating lending opportunities for us. Non-sponsor companies can go years without generating any activity. It's much more idiosyncratic. It's very difficult to invest capital and scale in the non-sponsor space. We seek those opportunities, we make investments, but I think our bar for non-sponsors is just higher given the lack of some of the sponsor oversight. I think that's true today, and it was true as we started the business. In terms of the terms that you can get for non-sponsor, it varies based on the credit opportunity. I don't think it's inherently meaningfully wider. I think that on the margin, the sponsors are clearly have a deep expertise and work with law firms that have deep expertise in negotiating.

Speaker Change: Sponsors, you know, have significant pools of capital and spend, you know, every day thinking about ways to deploy that capital generating lending opportunities for us Non-sponsored companies can go years without generating any any activity. So it's much more idiosyncratic

Speaker Change: It's very difficult to invest capital on scale in a non-sponsored space.

So we seek those opportunities.

Speaker Change: We make investments, but I think our bar for non-sponsors is just higher given the lack of some of the sponsor oversight, and I think that's true.

Speaker Change: Today is as true as we started the business in terms of.

The terms that you can get for non-sponsored.

Speaker Change: You know, it varies based on the credit credit opportunity. I don't think it's

Speaker Change: and Carol D., meaningfully wider. I think that, you know, on the margin, the sponsors are clearly, you know, have a deep expertise, and work law firm that deep expertise in negotiating, and so they'll push maybe in a way that a non-sponsor, you know, might not always have the same goals. A non-sponsored company.

Craig Packer: They'll push maybe in a way that a non-sponsor might not always have the same goals. A non-sponsor company cares an awful lot about who their lender is, because they're typically a founder-owned business, and that relationship is critical for a number of reasons. There'll be other goals that may not be the last basis point or the last credit protection. I don't think you're going to see a dramatically wider spread for non-sponsor opportunities. It's not a really different market, and so I think we'll continue to focus on sponsor.

Speaker Change: cares an awful lot about who their lender is, you know, because it's

Speaker Change: and the founder of Business. That relationship is critical for a number of reasons. And so there'll be other goals that may not be the last basis point.

Speaker Change: for the last credit protection. But I don't think you're gonna, I don't think you're going to see a dramatically wider spread for for for non sponsor opportunities. You know, it's not it's not a really different market. And so I think we'll continue to focus on sponsor.

Mickey Schleien: Okay. I think I understand. Thanks for that explanation. My follow-up question relates to page 16 of the presentation. I'm just trying to triangulate some math. In the middle of that, sort of the two middle rows where we look at the weighted average interest rate on the new commitments and the weighted average spread. The weighted average interest rate on new commitments dropped by 1.2%, spreads dropped 30 basis points, and SOFR dropped 50 basis points. I'm trying to understand the math there. It may have something to do with my last question, which is, I think if I'm reading it correctly, your allocation to unitranche has declined pretty dramatically the last few quarters, and maybe that's the answer to the question, but I want to understand if there was something else going on there.

Speaker Change: Okay, I think I understand. Thanks for that explanation. My follow-up question relates to page 16 of the presentation.

by 1.2%.

Craig Packer: We're happy to follow up offline and get really detailed. Obviously, this is just focused on new commitments, so it's a relatively small portion of the portfolio, 10% of the portfolio. As we've been talking about, spreads have come down over the last couple of quarters. You can see that just a minute ago, the question was where are new deals coming on a spread basis, and this 5.1 is not far off from what I said a minute ago, 475. That's just where the market migrated to in Q3. The lower base rate, the lower weighted average interest on new investment commitments is obviously a combination of the lower spread and lower base rates. To your question on unitranche, no change there. We continue to focus on unitranche. Spreads on unitranche were lower than they were.

Unknown Executive, Jonathan Lamm

Beyond.

Speaker Change: We're happy to pop off-line and get really detailed. Obviously, this is just focused on new commitments, so it's a relatively small part of the portfolio. It's probably about 10% of the portfolio. As we've been talking about, spreads have come down over the last couple quarters.

Speaker Change: And so, you know, you can see that I just, a minute ago, the last thing was where a new deal is coming on a spread basis.

Speaker Change: Unknown Speaker This 5.1 is not far off from what I said a minute ago for 75. So that's just market, you know, where the market migrated to in the third quarter, and the lower base rate, the lower weighted average interest on new investment commitments.

Craig Packer: As you know, the term unitranche is a bit of a term of art meant to describe a first lien term loan through a leverage level higher than a typical first lien term loan. That's where we continue to play, and that's where I think most BDCs continue to play. The spreads on that product have just come in a bit. That's certainly where our focus continues to be. We will also evaluate, and there's some reporting we put in our filings of exactly how much unitranche we have. We go through a pretty robust process every quarter to look at every loan and determine whether it's still a unitranche. As they improve in credit quality, they often graduate to be a first lien term loan.

Speaker Change: Spreads on Unitronch are lower than they were and so you know as you know the term Unitronch

It's a bit of a term of art.

Unknown Executive, Jonathan Lamm

Speaker Change: the spread on that product or just, or just come in a bit. That's certainly, you know, where our focus, you know, continues to be. And we will also, we evaluate, there's some reporting we put in our filings of exactly how much Unitrons we have. We go through a pretty robust process every quarter to

Speaker Change: Unknown Executive, Jonathan Lamm Unknown Executive, Jonathan Lamm Unknown Executive, Jonathan Lamm

Craig Packer: Quarter to quarter, if you're looking at that disclosure, that'll be not only a function of new deals, but also just how we're freshening up the analysis quarter to quarter. Again, back to your question, what happened in the quarter, new deals coming in, obviously lower spread, base rates coming down generates lower weighted average rate on new investment commitments to about 10%.

Unknown Speaker, Craig Packer, Unknown Executive, Jonathan Lamm

Mickey Schleien: All right. Thanks for that, Craig. Appreciate your time.

Craig Packer: All right. Thank you.

All right. Thanks for that, Craig. I appreciate your time.

Operator: Our next question is from Maxwell Frischer with Truist Securities. Please proceed.

All right, thank you.

Speaker Change: Our next question is from Maxwell Frischer with Truist Securities. Please proceed.

Maxwell Frischer: Hi. Good morning. I'm on for Mark Hughes. The average commitment in new portfolio companies was lower than it's been the past several quarters, as well as the maturity on those. Any purposeful or strategic shift there or just the specific investments made?

Hi, good morning. I'm on for Mark Hughes.

Speaker Change: The average commitment in new portfolio companies was lower than it's been past several quarters as well as the

Speaker Change: Any purposeful or strategic shift there or just, you know, the specific investments made?

Doran Nicholson: Sure. Thanks for the question. It's Doran. Specific to this quarter, it was mostly relative to us being at our target leverage. Our available capital to invest was simply lower, and so our average investment size was lower accordingly. Where in the prior quarter, given what had happened in Q1 with the second-lien repayments that we mentioned, we had more available capital to reinvest, and so our bite size was a little bit bigger.

Sure. Thanks for the question. It's Logan.

Speaker Change: Specific to this quarter it was mostly relative to us being at our target leverage and so our available capital to invest was simply lower and so our average investment size

Maxwell Frischer: Okay, thank you. It looks like OBDE has a less of a priority on common equity investments than OBDC, and I was just wondering how the combined company will prioritize these common equity investments.

Speaker Change: Okay, thank you. And it looks like OBDE has a less of a priority on common equity investments than OBDC. And I was just wondering how the combined company will prioritize these common equity investments.

Jonathan Lamm: It's primarily a function of the strategic equity investments that we have, like investments in our Senior Loan Fund as well as in Wingspire that don't exist in OBDC. As a combined company, obviously all shareholders will have access to that, but you'll see an immediate decline. It gives you the room to grow those strategic investments over time.

Speaker Change: It's primarily a function of the strategic equity investments that we have, like investments in our senior loan fund.

Speaker Change: as well as in Wingspire that don't exist in OBDE. So as a combined company, obviously all shareholders will have access to that, but you'll see an immediate decline, but it gives you the room to grow those strategic investments over time.

Okay, thank you.

Maxwell Frischer: Okay, thank you.

Operator: Our next question is from Robert Dodd with Raymond James. Please proceed.

Unknown Executive, Jonathan Lamm

Okay, thank you.

Speaker Change: Our next question is from Robert Dodd with Raymond James. Please proceed.

Robert Dodd: Hi, guys. I also slightly whiffed, but I haven't struck out yet, so I'm in the same with Casey there. On the interest coverage, obviously, up to 1.7, it was 1.6 last Q. I think the bigger part is at the beginning of the year, there were 17% of the portfolio excluded from that calculation. That's now down to 10%, it's almost been cut in half. That means the share of the portfolio where EBITDA is maybe not applicable is much lower today than it was at the beginning of the year. Can you give us any color on, was that a deliberate rotation? Was that performance at the companies, or, and focus more on cash flow, EBITDA is relevant businesses rather than where the portfolio was maybe positioned a year ago?

Robert Dodd: Hi guys, and I also slightly whiffed, but I haven't struck out yet. So I'm in the same now.

Speaker Change: On the interest coverage, obviously, so up to 1.7, it was 1.6 last quarter. But I think the bigger part is, in the beginning of the year, there were 17% of the portfolio excluded from that calculation. That's now down to 10%, so it's almost been cut in half.

Robert Dodd: So, I mean, you know, the share of the portfolio where EBITDA is maybe, you know, not applicable is much lower today than it was at the beginning of the year.

So, can you give us any colour on...

Speaker Change: Unknown Speaker, Craig Packer, Unknown Executive, Jonathan Lamm, Unknown Executive, Jonathan

Doran Nicholson: Thanks. Well, okay, I don't think there's too much to draw, I do think there's a positive to draw. When there are companies getting excluded from the calculation, it's typically because we might have invested in the company at a point in its life cycle where it's investing in its business and the cash flow is depressed and so it would skew the calculation. We see this particularly in the software space. There's some other structural reason why, from our underwriting standpoint, we don't think it's comparable and would skew the analysis. Our investment approach is pretty clear and simple. We do that in the expectation those companies will eventually normalize and get to a very normal range of interest coverage. I think you're just highlighting model works. It's working.

Bye.

Thanks. Well, I'm okay. I don't think there's some

Robert Dodd: too much to draw, but I, but I do think there's a positive to draw. I mean, we,

When there are companies getting excluded from the calculation...

Robert Dodd: It's typically because we might have invested in the company at a point in its life cycle where it's investing in its business and the cash flow is depressed and so, you know, it's due to calculation. We see this particularly in the software space.

Robert Dodd: or there's some other structural reason why, you know, from our underwriting standpoint, we don't think it's comparable and would skew the analysis.

Robert Dodd: But, but our investment approach is pretty, pretty clear and simple. We, you know, we do that in expectation of those companies will eventually normalize and get to a very normal range of interest coverage. And so I think you're just highlighting model works, it's working.

Doran Nicholson: We invest in these companies, they improve their credit quality over time, and they became included in the calculation because their statistics are now not going to skew the results. We're going to continue to make those kinds of investments, though, so I don't want to signal it's going to continue to get better because we're going to continue to do deals that where we can get an attractive risk-adjusted return. They may have artificially skewed reported results for a few quarters. I think that's something we do well, it's worked well. We're going to continue to do it. Right now, we're probably a bit of a low point, and it's also probably reflecting the portfolio skewing a little bit more into refinancings and repricings and not enough new deals.

Robert Dodd: Investing companies, they improved their credit quality over time, and they became included in the calculation because

Robert Dodd: because their statistics are now, you know, not going to skew the results.

Robert Dodd: We'll continue to make those kinds of investments, though, so I don't want to.

Craig Packer, Unknown Executive, Jonathan Lamm

Robert Dodd: for a few quarters. You know, I think that's something we do well, work well, continue to do it. Right now, we're probably, you know, a bit of a low point. And

Robert Dodd: and it's also probably reflecting the portfolio skewing a little bit more to refinancings and repricings and not enough new deals. When we get an environment with new deals, some of those may have those same non-comparable measures and the statistic might go up a bit.

Doran Nicholson: When we get an environment with new deals, some of those may have those same non-comparable measures, and the statistic might go up a bit.

Robert Dodd: Got it. Thank you.

Operator: As a reminder, just star one on your telephone keypad if you would like to ask a question. Our next question is from Finian O'Shea with Wells Fargo. Please proceed.

Got it, thank you.

Speaker Change: As a reminder, just star 1 on your telephone keypad if you would like to ask a question. Our next question is from Finian O'Shea with Wells Fargo. Please proceed.

Finian O'Shea: Hey, everyone. Good morning. Craig, I was seeing if you guys can talk about the post-quarter rehash in the SLFs, if that will sort of change in strategy or composition, or anything else to think about.

Hey everyone, good morning.

Speaker Change: Craig, seeing if you guys can talk about the post-quarter rehash in the SLFs, if that will sort of change in strategy or composition or anything else to think about.

Jonathan Lamm: Hey, Finn, it's Jonathan. No real change in the strategy at all. What we're doing is really effectively taking our historical JV, which had long ago been a direct first lien portfolio that's evolved to a mix of some directs and then also some broadly syndicated loans as well. We've created a multi-BDC joint venture where effectively we can allocate out of all of our different BDCs in a much more efficient manner with much more efficient financing from an advance rate and from an interest cost perspective.

Jonathan Lamm: Hey fans, it's Jonathan. No, no real change in the strategy at all. What we're doing is really effectively taking our historical

Jonathan Lamm: JV, which had long, long ago been a direct first lien portfolio that's evolved to a mix of

Some directs and then also some broadly syndicated.

Jonathan Lamm: loans as well. And we're effectively creating, we've created a multi BDC joint venture.

Jonathan Lamm: where effectively we can allocate out of all of our different BDCs in a much more efficient manner with much more efficient financing from an advance rate and from an interest cost perspective.

Jonathan Lamm: What's happening over here is we're effectively moving the assets from the original JV into that multi-BDC JV, and there should be very little friction in terms of really any friction in terms of the returns to OBDC, because they're effectively taking back a pro rata portion of that multi-BDC JV with the transfer of those assets over.

Jonathan Lamm: And so what's happening over here is we're effectively losing the assets.

Robert Dodd: from the original JV into that multi-BDC JV. And there should be very, very little friction in terms of really any friction in terms of the returns to OBDC, because they're effectively kicking back.

Robert Dodd: a pro rata portion of that multi-BDC-JV with the transfer of those assets over.

Finian O'Shea: Okay. It's helpful. Thank you. I guess a follow-up I have you-On unsecured mix, I know things change and everyone's opportunistic, but I guess let's say today, as we look through the merger and the 2025 maturities, how should we think about the unsecured composition, if that will go up or down in a substantial way?

Speaker Change: Okay, it's a little thank you and I guess a follow-up will have you.

Speaker Change: on unsecured mix. I know things change and everyone's opportunistic, but.

Speaker Change: I guess let's say today as we look through the merger and the 25 maturities, how should we think about the unsecured composition if that will go up or down in a substantial way?

Jonathan Lamm: Well, there are a few variables that go into that. We've got the merger closing. Right now we're about 55% on a funded basis in unsecured. That'll come down a little bit as we bring the two companies to about 50%. We've got around $1 billion that's coming due next year. What you should expect from us is that we'll definitively refinance. We don't want to bring that unsecured percentage down too much. That being said, we definitely see the secured financing markets as extremely attractive from a pricing perspective as we see the unsecured markets as well. There is a gap there. I don't think you should see too much of a material movement in terms of the percentages.

Speaker Change: Well, there are a few variables that go into that. We've got the merger closing. So right now, we're about 55% on a funded basis in unsecured. That'll come down a little bit as we bring the two companies to about 50%. We've got

Speaker Change: around a billion that's coming that's coming due next year. And so what you should expect from us is that

Speaker Change: We will, we'll definitively refinance. We don't want to bring that unsecured percentage down too much. That being said, we definitely see the secured financing markets is extremely attractive from a pricing perspective.

Robert Dodd: as we see the unsecured markets as well, but there is a gap there. So I don't think you should see too much of a material movement.

Jonathan Lamm: We definitely have the opportunity on the secured side to reprice some of our higher cost CLOs and other secured financing structures to lower cost over time.

Robert Dodd: in terms of the percentages, but we definitely have the opportunity on the secured side to reprice some of our higher cost CLOs and other finance secured financing structures to lower cost over time.

Finian O'Shea: Thanks so much.

Operator: With no further questions in the queue, I would like to hand the conference back over to management for closing remarks.

Thanks so much.

Unknown Executive, Jonathan Lamm

Speaker Change: With no further questions in the queue, I would like to hand the conference back over to management for closing remarks.

Jonathan Lamm: Okay. Well, look, thanks everyone for joining. We are really pleased with the quarter. As always, we are here to answer any of your questions, so please reach out separately if there is any follow-ups, and hope everybody has a great day.

Speaker Change: Okay, well, look, thanks everyone for joining. We're really pleased with the quarter. As always, we're here to answer any of your questions, so please reach out separately if there's any follow-ups, and hope everybody has a great day.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Speaker Change: Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

Speaker Change: How's it looking, people? A whole new generation! It gets a treat, you can't deny it. Lunch elite!

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Congratulations!

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