Q3 2024 Nuveen Churchill Direct Lending Corp Earnings Call
Welcome to Naveen Churchill Direct Lending Corps' third quarter 2024 earnings call. At this time, all participants are in a listen-only mode.
A brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
Speaker Change: I'd like to turn the call over to Robert Porn, Head of Investor Relations. Please proceed.
Robert Porn: Good morning and welcome to Naveen Churchill Direct Lending Corp's third quarter 2024 earnings call. Today I'm joined by NCDL's Chairman, President and CEO Ken Kencel and Chief Financial Officer Shaul Vichness.
Robert Porn: Following our prepared remarks, we will be available to take your questions.
Today's call may include forward-looking statements.
Such statements involve known and unknown risks.
Robert Porn: uncertainties and other factors, and undue reliance should not be placed thereon.
our industry, our beliefs and opinions, and our assumptions.
Robert Porn: Actual results may differ materially from those expressed or forecasted in the forward-looking statements.
Robert Porn: We ask that you refer to the company's most recent filings with the SEC for important risk factors.
Robert Porn: Any forward-looking statements made today do not guarantee future performance, and undue reliance should not be placed on them.
Robert Porn: The company assumes no obligation to update any forward-looking statements at any time.
Robert Porn: Our earnings release, 10-Q, and supplemental earnings presentation are available on the investor relations section of our website at ncdl.com
Speaker Change: Now I would like to turn the call over to Kendra.
Kendra: Thank you, Robert, and thank you, everyone, for joining us on the call today.
Kendra: I'd like to start by discussing our results for the third quarter, and then I'll provide some thoughts on the current market and economic environment and our outlook for the coming months.
Kendra: After that, I'll hand the call over to Shai for a more detailed discussion of our financial performance.
Robert Porn: Overall, we are very pleased with the returns we generated this quarter.
Speaker Change: for flanking the strength of our platform, the earnings power of NCDL, and the continued growth of the private credit markets.
This morning, we reported strong third quarter results.
We delivered net investment income of $0.58 per share.
Speaker Change: fully covering a regular quarterly distribution of $0.45 per share and our $0.10 per share special distribution.
Our investment portfolio continued to perform well.
primarily driven by the strength of our senior loan investments.
and we had no new non-accruals during the quarter.
Speaker Change: Investment activity during the third quarter, with approximately $226 million of new originations
Robert Porn: was primarily focused on senior-secured, first-lien loans from our traditional middle-market pipeline.
Robert Porn: As we discussed last quarter, now that NCDL's portfolio is essentially fully rammed,
Robert Porn: We are focused on rotating out of higher-priced, lower-spread, upper-middle-market positions and into our traditional middle-market pipeline, which benefits from wider spreads and generally more attractive terms.
Robert Porn: Our strong results in the quarter led to an increase in our net asset value to $18.15 per share at September 30.
Robert Porn: from the $18.03 per share that we reported as of June 30.
Robert Porn: As we look towards the end of the year and into 2025, we remain optimistic about NCDL's positioning as a leader in the core middle market.
Robert Porn: given our long-standing performance track record, deep network of sponsor relationships, and extensive LP commitments across the broader Churchill platform.
Robert Porn: which enable us to continue to see a wide range of attractive investment opportunities.
Robert Porn: As we assess the overall market, credit quality and portfolio company performance remain strong despite the persistence of elevated interest rates.
Robert Porn: As inflationary pressures on borrowers eased moderately, we saw a long-anticipated 50-basis coin Fed rate cut in September.
Robert Porn: The other theme we've observed is an increase in the competitive dynamics in the private credit market.
Robert Porn: which drove additional spread compression in Q3, albeit at a slower pace than in the second quarter.
Robert Porn: In the face of increased competition, we believe that our focus on the core middle market enables us to remain largely insulated from the pricing pressure, increased volatility, and generally weaker terms that we see in the upper middle and BSL markets.
We believe that traditional middle market companies...
Robert Porn: with EBITDA of between $15 million and $75 million tend to be lower levered, better structured, less cyclical and more focused on growth industries such as business and healthcare services.
Robert Porn: When backed by the operating expertise and capital support of leading private equity sponsors.
Robert Porn: We believe all the elements are there to generate a strong value proposition for investors.
As a result,
Robert Porn: We believe that the risk-adjusted returns available to scaled, highly-selective managers like Churchill with deep, long-standing private equity relationships in the core middle market are among the most attractive in the private credit market today.
with respect to the macroeconomic environment.
Robert Porn: We believe a healthy and resilient U.S. economy will continue in the near term.
Robert Porn: We continue to see steady revenue and EBITDA growth from our portfolio companies.
with Inflationary Pressures Moderating.
Robert Porn: We will continue to prioritize opportunities to deploy capital in core middle market senior loan investments as we pursue portfolio growth and diversification as a public company.
Robert Porn: We feel this asset class to provide strong long term risk mitigation characteristics, including floating rates.
Robert Porn: Generally lower leverage.
Robert Porn: Traditional financial covenants in our core middle market transactions.
Robert Porn: One of the key benefits and differentiating factors of N. C. D. L is the power of incumbency that the Churchill platform provides.
Robert Porn: We continue to source attractive investment opportunities from our existing portfolio companies and we believe that continuing to invest in these companies that we know well leads to better long term credit performance and reduces underwriting risk.
Robert Porn: In terms of credit quality.
Robert Porn: Company performance across our overall portfolio remains strong and healthy.
Robert Porn: Reflecting the quality of the deal flow we've experienced over the last several years.
Robert Porn: Our weighted average internal risk rating remained at four point too.
Robert Porn: Versus an original rating of 4.0 for all of our investments at the time of origination.
Robert Porn: And our watch list remains at a very manageable level of five 6% of fair value.
Robert Porn: Additionally, we are pleased with the credit fundamentals within the M. C D L portfolio.
Robert Porn: With portfolio company total leverage.
Robert Porn: Of 4.9 times.
Robert Porn: Interest coverage.
Robert Porn: Two one times on a first lien senior loans.
Robert Porn: And a weighted average asset yield of just below 11%.
Robert Porn: These metrics are a direct result of conservative structuring and relatively low attachment points that we target when underwriting new transaction.
Robert Porn: This conservative approach has served us well and the elevated rate environment.
Robert Porn: And we would expect these metrics to improve as rates come down further over the remainder of 2024 and into 2025.
Robert Porn: During the third quarter, we did not add any new non accruals.
Robert Porn: And the level of non accruals remained very low as of quarter end.
Robert Porn: At roughly one half a percent of fair value and one 4% of cost.
Robert Porn: With a highly diversified portfolio of over 200 companies and only three names on nonaccrual status. We believe this metric compares favorably versus BDC industry averages.
Robert Porn: We remain focused on diversification as a key risk mitigation tool and our investment portfolio.
Robert Porn: This has been achieved with a continued high level of investment selectivity.
Robert Porn: Facilitated by the significant proprietary deal flow, our sourcing engine is able to generate from the breadth and depth of our private equity relationships.
Robert Porn: As of September 30, we had 202 companies in our portfolio and our top 10 investments represented only 14.1% of the total portfolio.
Robert Porn: Down from 14, 4% as of June 30.
Robert Porn: This diversification is critical as we seek to maintain exceptional credit quality and originate additional attractive opportunities.
Robert Porn: Looking ahead, we believe we are well positioned for continued strong performance for the remainder of the year and into 2025, particularly.
Robert Porn: Particularly given our standing as one of the largest and most active bdcs focus on the core middle market.
Robert Porn: As we've spoken about in the past.
Robert Porn: Our outlook is driven by our approach to portfolio construction and management.
Robert Porn: With three key factors worth reiterating.
Robert Porn: First.
Robert Porn: N D. D. L has a strong focus on a high level of portfolio diversification across a number of key metrics.
Robert Porn: We have constructed a defensive portfolio that is balanced.
Robert Porn: Across multiple measures.
Robert Porn: Whether you're looking at sponsor position size or industry.
Robert Porn: We've achieved this level of diversification across all our different investment vehicles across the platform.
Robert Porn: And it represents a consistent commitment embedded in Churchill's DNA.
Robert Porn: Second.
Robert Porn: We have a rigorous investment process that puts credit quality above all else.
Robert Porn: As we look for opportunities to underwrite we focus on high quality market, leading businesses that operate in recession resistant industries with leading market positions and high barriers to entry backed by top tier private equity sponsors.
Robert Porn: Our strong deal flow and unique sourcing model enables us to maintain a rigorous investment process and strong credit discipline.
Robert Porn: We're also carefully attuned to the interest burden facing golf or existing portfolio companies as well as new borrowers.
Robert Porn: This consideration influences our conservative approach to structuring new transactions with lower overall leverage and tighter covenant packages.
Robert Porn: Discipline is crucial.
Robert Porn: Typically in an environment, where spreads are tighter in terms of more aggressive.
Robert Porn: That is why we're willing and able to walk away from certain deals that we assess our to rescue.
Robert Porn: And the third factor that is especially important as our highly differentiated origination and sourcing model.
Robert Porn: We enjoy strong private equity L P relationships.
Robert Porn: Over nearly two decades Churchill has worked with approximately 500 middle market private equity firms.
Robert Porn: In fact today Churchill has commitments to over.
Robert Porn: We're 310, leading U S middle market private equity funds and sits on over 245 advisory boards.
Robert Porn: We have been and continue to be a trusted and established investor in the core middle market with deep long term relationships.
Robert Porn: Which provides N C D L with a strong information and sourcing advantage.
Speaker Change: Before handing it over to Shai I'd.
Shai: I'd like to add that we are extremely proud of our team and our recent results are evidence of their hard work and dedication.
Speaker Change: We believe M. C. D. L is uniquely positioned for long term success and remain optimistic about the company's outlook.
Speaker Change: And we believe <unk> is well positioned to benefit from increased transaction activity that we expect.
Shai: In 2025.
Shai: And now.
Speaker Change: I will turn the call over to Shai to discuss our financial results in more detail.
Shai: Thank you Ken and thank you all for joining us to review our third quarter results.
Shai: For Q3, we generated net investment income of 58 cents per share compared to 57 cents per share in the second quarter of 2024.
Shai: Our total investment income increased by $5 2 million or 9% quarter over quarter, driven by higher interest income as a result of continued strong deployment and increase leverage utilization, which helped to offset the modest tightening in spreads that we saw during the quarter as well as the decline in base rates.
Shai: In October we paid a total dividend of <unk> 55 cents per share consisting of our regular dividend of 45 cents per share and a special dividend of 10 cents per share.
Shai: In aggregate this 55 cent dividend equates to an annualized yield of approximately 12.1% based on our quarter end net asset value.
Shai: As a reminder, the 10 cent per share special dividend that we paid in October was our second of four special dividends that we declared at the time of our IPO earlier this year.
Shai: The two remaining special dividends will be paid to the second quarter of 2025 to shareholders of record as of November 11th of this year and February 12 2025.
Shai: As discussed previously we intend to operate with a supplemental dividend program that sees us paying out a portion of the excess earnings over and above our regular dividend, allowing us to deliver the benefits of higher returns in the current environment to shareholders as well as grow our N a V.
Shai: Our total GAAP net income for the quarter was 67 cents per share compared to 37 cents per share in the second quarter.
Shai: Our third quarter net income was positively impacted by nine cents per share of net realized and unrealized gains.
Shai: We generated approximately two cents per share of realized gains on repayments and sales and seven cents per share of unrealized gains primarily due to improved credit metrics for a number of our portfolio companies.
Shai: The realized gains on sales were generated from selling out of select upper middle market positions. As we continued to rotate out of more liquid positions with lower spreads into our traditional middle market pipeline deals.
Shai: Our debt to equity ratio at the end of the quarter was 1.11 times, which is consistent with the guidance. We previously provided and within our target leverage range of one to 1.25 times.
Shai: During the quarter, our net asset value per share increased to $18.15 from $18.03 at June 30th.
Shai: This increase was attributable to the net realized and unrealized gains during the quarter as well as the excess earnings we generated over and above the regular and special dividends that we paid during the quarter.
Shai: As of September 30th our investment portfolio had a fair value of $2.05 billion compared to a fair value of 1.99 billion as of the end of Q2.
Shai: Similar to the prior quarter the third quarter was a very strong one for us in terms of new origination with $226 million in gross originations and $203 million of gross investments funding during the quarter.
Shai: This increase in the fair value of our assets, which largely attributable to new originations, which accounted for 18 of the transactions done during the quarter totaling approximately $120 million.
Shai: We continue to benefit from add on financing opportunities, which allowed us to generate 11 deals in the form of incremental transactions for existing portfolio companies totaling approximately $46 million.
Shai: Lastly, we saw drawdowns of roughly 37 million on our delayed draw term loans as our portfolio of companies continue to be active in growing the acquisitions.
Shai: Repayments in the third quarter totaled 4.8% compared to 4.9% in the second quarter and remained in line with our long range assumption of 5% per quarter.
Shai: We had full repayments on nine deals totaling $95 million and partial prepayments for another $8 million.
Shai: We also sold $53 million worth of upper middle market transactions during the quarter.
Shai: As we've spoken about in prior calls we continue to benefit from the power of incumbency and our portfolio reinvesting in four of the nine deals that fully repaid during the quarter.
Shai: Additionally, nearly two thirds of the dollars that we invested during the quarter were inter portfolio companies, where we had an existing relationship across the broader Churchill platform.
Shai: On a net basis, we deployed approximately $48 million during the quarter.
Shai: As Ken discussed earlier on the call. The deployment that we saw in Q3 was consistent with our strategy of optimizing NCD Els portfolio.
Shai: We expect to continue to deploy capital primarily into traditional middle market transactions as we complete the rotation of the portfolio away from more liquid upper middle market assets redeploy cash received from repayments and modestly increase our leverage utilization.
Shai: Our total portfolio consisted of 202 names as of quarter end compared to 198 names at the end of the second quarter and remains highly diversified with the top 10 positions, representing only 14.1% of the fair value of the portfolio down from 14, 4% in the prior quarter.
Shai: Our largest exposure is only 1.5% of the total portfolio and our average position size 0.5%.
Shai: We continue to view this high level of diversification by position size as a key risk mitigation tool.
Shai: In terms of asset selection, our new originations during the quarter were again heavily weighted towards traditional middle market senior loans with only 1% of the investments made going into the upper middle market.
Shai: This focus on the traditional middle market segment, we believe will benefit NCD all shareholders as we see meaningfully higher spreads and tighter documentation terms in the traditional middle market versus the upper middle and BSL markets.
Shai: Despite a further tightening of spreads across markets during the quarter. Our continued focus on the traditional middle market segment allowed us to maintain spreads on new floating rate loans at 500 basis points over sofa, which was the same level that we saw in Q2.
Shai: Our weighted average yield on debt and income producing investments at cost declined to 10.9% at the end of the third quarter from 11.3% at the end of Q2, driven primarily by the decline in sofer together with a handful of re pricing transactions during the quarter.
Shai: We continue to remain focused on the top of the capital structure with first lien loans, representing 90.1% of the portfolio at quarter end in line with what we did at the end of the second quarter.
Shai: We also continue to opportunistically invest in junior debt and equity, which comprised eight 3% and 7% of the portfolio overall as of the end of the third quarter.
Shai: As a reminder, we remain committed to the target allocations that we communicated at the time of our IPO with a target of 85% to 90% senior loans and the balance in junior debt and equity co investments with equity staying in the low single digit percentage range.
Shai: Turning to credit quality, our investment portfolio is in very good shape as our weighted average internal risk rating remained relatively steady quarter over quarter at 4.2 as compared to 4.1 at the end of Q2.
Shai: We had no new non accruals this quarter with only three names on nonaccrual status, representing just 0.55% of the fair value of the portfolio and only 1.4% at cost.
Shai: The fair value of the nonaccrual assets increased modestly from the 0.49% that we reported last quarter as a result of modest improvement in valuations in two of the three nonaccrual names.
Shai: Our watch list did see an increase with four names added on a net basis comprised of five downgrades and one upgrade.
Shai: As a percentage of N C deals overall portfolio fair value. Our watch list remains at a relatively low level of only five 6%.
Shai: In terms of leverage utilization our debt to equity ratio increased to 1.11 times as of September 30th compared to 1.04 times as of June 30th.
Shai: We were pleased with this incremental leverage utilization, which was directly in line with our expectations at the time of our IPO.
Shai: As we move through the balance of the year and into early 2025, we expect to continue to be able to deploy capital efficiently and move our leverage ratio up modestly within our target range of one to 1.25 times debt to equity.
Shai: Subsequent to quarter end, we took an additional step towards optimizing our capital structure by paying off and terminating our asset based credit facility with S. N B C, replacing it with borrowings on our corporate revolver, which we repriced down to sopra plus 200 basis points in October.
Shai: This eliminated our most expensive facility, which was priced at sofa, plus $2 65, and will allow us to further reduce our borrowing costs going forward.
Shai: As I mentioned last quarter, we continue to keep a close eye on the unsecured debt market as we evaluate our long term capital structure and are encouraged by the pricing trends in issuance levels that we've seen over the past two quarters.
Shai: With over $361 million available liquidity as of the end of the third quarter and no near term debt maturities, we remain incredibly well positioned to take advantage of attractive investment opportunities and to fund our unfunded commitments and share repurchase program.
Shai: As discussed our focus for the near term is on optimizing the asset mix within the portfolio actively reinvesting cash receipt from repayments, while modestly increasing our leverage utilization.
Shai: Our share repurchase program continues to operate effectively and represents a modest use of our available liquidity.
Shai: Through October 31st we've utilized approximately $14 million under the program, leaving approximately $86 million remaining.
Shai: Finally, our third lockup release occurred on October 21st which saw the remaining 50% of our non affiliated pre IPO shares released from lockup, bringing the total number of shares that are available for trading to approximately 37 million a seven fold increase from the 5.5 million shares that we issued in our IPO.
Shai: As a reminder, at the time of our IPO, we put in place a thoughtful staggered lockup release schedule for our pre IPO shareholders, coupled with the special dividends payable over four quarters that I mentioned earlier.
Shai: Affiliated shareholders for locked up for a full year and non affiliated pre IPO shareholders were locked up for 90, 180 and 270 days.
Shai: Our final lockup release for affiliated pre IPO shareholders will occur on January 24, 2025, and will bring our public float to over 50 million shares.
Speaker Change: I'll now turn it back to Ken for closing remarks.
Ken Kencel: Thank you Shai.
Ken Kencel: In closing I want to congratulate our team on another strong quarter of results as we continued to fully earn both our regular and special dividends on a per share basis.
Speaker Change: We are excited about the prospects ahead.
Speaker Change: As we believe we are well positioned to take advantage of the significant market opportunities and our ability to continue to reward shareholders with an attractive distribution yield.
Speaker Change: I will now turn the call over to the operator for Q&A.
Speaker Change: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press Star two if you like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Once again Thats star one to ask a question at this time, one moment, while we poll for our first question.
Speaker Change: Our first question comes from Brian Mackinnon with citizens. Please proceed.
Speaker Change: Great. Thanks, and I hope everyone is doing well I appreciate all the commentary on your origination platform, a rally or a large network of middle market private equity firms I'm curious, though is there any white space across the broader channel Chair Churchill platform to further penetrate this part of the market in terms of expanding or.
Speaker Change: Adding new relationships from here and I guess, you know are there any other ways to further leverage these relationships that can ultimately drive additional benefits the M. C D L.
Ken Kencel: Yeah. Thanks, Bryan it's Ken no. It's a great question and we focus a lot on you know on the ongoing effort to expand our firms.
Speaker Change: Firms that were seeing youll from and expand our relationship base I'd make a couple of comments. One is we've had pretty good success. There this year.
Speaker Change: Out 30% increase in firms are where we're doing you know new doing doing new deals with those firms.
Speaker Change: So in that sense, you know expanding those relationships deal wise. The other thing I would say is that we have as I think youre aware, an ongoing allocation to new investments and new private equity funds.
Speaker Change: Every year, so each year, we're adding seven to 10, new private equity L. P relationships, obviously those relationships or are based upon an assessment of their performance their track record their history of investing in complementary industries, such as software and health care and business services.
Speaker Change: So we have both the effort to broaden out our relationships it with with deal activity, but also new L. P relationships being brought into the fold on an annual basis and we're constantly scouring the market environment for four high quality firms, maybe spinning off from existing relationships.
Speaker Change: <unk> ships of ours or otherwise. So so there is a continued white space, which is driving increase in you know that the scope of our investment activity, but I can't overstate, how important those relationships are to driving deal flow and investment activity about 75% of our senior lending activity is with firms, where we have an L. P relation.
Speaker Change: Shifts so we've done the homework we've done the research we understand their performance and their track record and obviously the ongoing dialogue with them as an L. P drives tremendous continuity and and deal activity with them.
Speaker Change: Okay, Great. That's helpful. Thanks, Ken.
Speaker Change: And then just a question on deal activity more broadly.
Speaker Change: Sponsor deals are starting to pick up here, but we really haven't seen a real inflection yet in related activity I think getting some clarity around the election helps but you know what are you seeing across the platform today in terms of new deal flow and has there been any change in tone with sponsors more recently and then from here I know a lot can change in happen across.
Speaker Change: Markets, but what do you see as the biggest driver for an acceleration in sponsor M&A entered 2025.
Speaker Change: Sure well you know it's quite interesting we actually have seen a continued increase in deal activity as we've gone through 2024, you know I think certainly clarity around interest rates a recognition that rates have peaked.
Speaker Change: Peaked and are obviously coming down I think is is lending to more clarity around.
Speaker Change: Opportunities in the marketplace I think it's it's late leading lending itself to our buyers and sellers coming together more regarding price and underlying terms. So deal activity as we see it actually has already begun to pick up in fact if.
Speaker Change: If you look across our platform.
Speaker Change: Q2 was a very strong player a quarter for us in terms of deal activity Q3 was even stronger if you look at our level of activity in senior lending in 2024, it's up over 60% year over year from 2023.
Speaker Change: And we're up about 30% overall, including all of our investments a year over year on the platform, So senior lending up 60% and quarter over quarter activity has been very strong so.
Speaker Change: I think a lot of that is attributable to the fact that in the core middle market.
Speaker Change: The the primary amount of activity is really new deal L. L. B O activity in fact about 88% of the activity in the core middle market lending space is new deals.
Speaker Change: And I think that you know is certainly benefiting us in terms of you know our level of investment activity and deal flow across the platform. So we're super busy right now and and we continue to be our pipeline's quite good going up going into the fourth quarter and we expect you know a very very very solid quarter as we move forward.
Speaker Change: Got it thanks, I'll leave it there and congrats on another strong quarter.
Speaker Change: Thanks, Brian.
Speaker Change: The next question comes from Maxwell picture with choice. Please proceed.
Speaker Change: Hey, good morning, I'm on for Mark Hughes.
Speaker Change: Can you give us a sense on how amendment activity was if any in the quarter.
Speaker Change: Yeah, Hey, Max it's at shy I'm happy to comment on that.
Speaker Change: We really didn't see a big pick up quarter over quarter, you know one of the things that we commented on both last quarter and this quarter and you see it.
Speaker Change: Kind of in the yield metrics in the portfolio. This phenomenon around repricing of existing transactions for borrowers that we know and like and they're performing.
Speaker Change: Continued quarter over quarter, but.
Speaker Change: It really wasn't an uplift if anything it was kind of a moderation of that trend.
Speaker Change: And you also see that kind of translate into kind of the spreads that we were able to realize on investments quarter over quarter, we've actually been pretty stable on new floating rate investments at roughly 500 over sofa and.
Speaker Change: And I think that's indicative of a market where activity, yes is picking up as Ken just hammer down in terms of new deals, but I would say the pace of repricing if you will.
Speaker Change: And those those related amendments as moderated quarter over quarter.
Speaker Change: Got it. Thank you and you had mentioned you're you're top of the capital structure priority.
Speaker Change: But can you comment on how spreads in competition for the junior debt is holding up.
Ken Kencel: Yeah, I I'd covenant, it's Ken on <unk>.
Speaker Change: I'd say you know it's interesting if you look at our junior debt strategy. It is heavily grounded in those L. P relationships in fact, but virtually 100% of our of our junior capital investments are coming directly from those L. P relationships, So where there is a a a a subordinated debt invest.
Speaker Change: <unk>.
Speaker Change: You know it is it is very much coming straight from the private equity from where we have that that O P connectivity in that history and the same frankly for for equity co investments. So you.
Speaker Change: You know, while senior lending is probably 75% or so L. P relationships.
Speaker Change: It's highly curated and coming directly from the sponsors if you look at the overall pricing in our and our junior capital.
Speaker Change: That.
Speaker Change: Business, it's been extremely stable, it's been running you know around 13.
Speaker Change: Three quarters to 14% on a consistent basis really over the entirety of 2024.
Speaker Change: So we are seeing.
Speaker Change: So some very attractive opportunities obviously, its a much smaller percent of the portfolio overall, we're being very selective, but where we can get good relative value, where we're dipping into those opportunities and again, we're not out in the market competing on price with other subordinated lenders, we're really seeing those.
Speaker Change: <unk> directly from the sponsor where where they have you know a situation and then they need a junior capital lender and we're obviously a long standing partner of theirs.
Speaker Change: Okay I appreciate the answers thank you both.
Speaker Change: Thank you.
Speaker Change: Once again to ask a question. Please press star one on your telephone keypad. Our next question comes from Derek Hewett Bank of America. Please proceed.
Derek Hewett: Good morning, so what's the size of that upper middle market portfolio that will be.
Speaker Change: Be rotated to the core middle market strategy, and then from a yield perspective, what are what are the unlevered yields of those two strategies. So we can kind of get a sense of what the potential could be for topline growth.
Speaker Change: Yeah, Hey, Derek its shy. Thank thanks for the question.
Speaker Change: Couple of comments, there I would characterize kind of the upper middle market, you know more liquid asset portion of the portfolio at circa $200 million.
Speaker Change: Relative to the 2 billion so call it 10%.
Speaker Change: And that number obviously has come down a little bit since our IPO as you recall, obviously, we called in all of our sort of uncalled capital that we raised in the private phase pre IPO and then.
Speaker Change: The $100 million or so that we raised in the IPO that we deployed.
Speaker Change: And we've been busy sort of rotating into.
Speaker Change: The middle market, the traditional middle market pipeline and you saw that with the roughly $50 million of sales that we executed on I.
Speaker Change: I would caution, though that you know again not all of those assets are going to be readily liquid or readily liquid necessarily at a price that we like so we're gonna be thoughtful about how we execute on that rotation strategy going forward, but I would expect that we continue to execute on that have successfully as we have done over the prior quarter in terms of the differential.
Speaker Change: Yields and you kind of see it show up you saw it last quarter you see it this quarter in terms of the yield pickup if you will I would say that that premium.
Speaker Change: For traditional middle market relative to be S. L. Certainly.
Speaker Change: Thomas the upper middle market sort of somewhere in between is as wide as call. It 200 basis points. So historically that's range between 100 to 200 basis points in terms of that spread between traditional middle market E. S. L and I would say it's at the wider end today, because that spread tightening has really impacted the BSL market as that has come back.
Speaker Change: Really strong with increased liquidity, there I would say in our market and that spread tightening has been had been much more modest so we're executing today call it in and around 500 as you saw.
Speaker Change: In the materials and in the BSL and upper Middle market. You know you could be down in the in the three hundreds low three hundreds from a spread perspective, so hopefully that gives you some context there.
Speaker Change: Thank you.
Speaker Change: Great. Thank you your next question.
Speaker Change: The next question comes from Paul Johnson with K B W. Please proceed.
Speaker Change: Yeah. Thanks for taking my questions can you just.
Speaker Change: Talk a little bit about just the increase in our watch list investments this quarter, obviously non accruals were stable but.
Speaker Change: How would you kind of describe some of the new companies going on watch list this quarter, where they idiosyncratic and kind of what what level of maintenance or are those.
Speaker Change: Company require at this point.
Speaker Change: Yeah. Thanks, Paul for the question. So a couple of comments there right as you look across our portfolio and just the health overall I would say first you know looking at non accruals, obviously, no new non accruals during the quarter. So we were very pleased with the ongoing performance in general.
Speaker Change: When you think about how we manage the portfolio and you know I know, we've got a pretty granular scale running from one to 10.
Speaker Change: I think the moves that you're seeing within the risk rating table that we publish is really emblematic of our proactive portfolio management approach right were pretty quick to downgrade.
Speaker Change: Names are slower to upgrade them and we're really doing that in response to the conditions that we see and as you look at the watch list and that the moves in the categorization. Obviously the further down the list that you move them you know.
Speaker Change: The more maintenance that's required but again overall very good shape, there really arent any sort of trends or themes that you would call out on the names moving around obviously, we use the term idiosyncratic before but that modest increase in the watch list is going to be obviously company specific no.
Speaker Change: No major concerns to highlight and as always we're going to work those situations to maximize value for shareholders here. So again.
Speaker Change: Again key takeaway here is portfolio is in really good shape, obviously, no new non accruals in the movement within the watch list is really just a function of our proactive management of the portfolio.
Speaker Change: Yes.
Speaker Change: Thank you that's all for me.
Speaker Change: Alright, Thanks, a lot Paul.
Speaker Change: The next question comes from Brian Mckinney went citizens. Please proceed.
Speaker Change: Okay, great. Thanks for the follow up I might've missed this but on the stock repurchase plan. It looks like you bought back $14 million of stock to date through October so how much came through in the third quarter how much in October and then just given where the stock is trading currently around 95% of NAV can you just re highlight how the repurchase program.
Speaker Change: Ram is structured and then ultimately the magnitude of buybacks as the discount to NAV widens.
Speaker Change: Yeah. So we haven't exactly the published this specifics Brian on the kind of the percentages at each level, but I can broadly comment as I've done in the past that we are increasing our percentage of average daily trading volume that we purchase under the program as the discount to NAV increases so modest purchases when were close to <unk>.
Speaker Change: NAV and obviously, increasing as a percentage of average daily trading volume as we as we move down in terms of price.
Speaker Change: So that's active it's working.
Speaker Change: And again, we're buying at a discount to NAV I would say the trends in terms of the purchases obviously increased in the last quarter with the increase in volume that we saw as we got more shares coming off of lock up so the amount that's freely tradable.
Speaker Change: Increasing our average volume I think has moved to kind of the 80000 range from sort of 50000 in the prior quarter. So again buying a little bit more shares, but just looking at the for the amount of the program that we've used $14 million of $100 million.
Speaker Change: And based on how we're trading and where we're trading we've obviously got a lot of firepower left on that program and we're continuing to utilize it as.
Speaker Change: As we're at we're trading at a discount here.
Speaker Change: Got it thank you.
Speaker Change: Thank you. Thank you at this time I would like to turn the floor back to Mr. Ken concern for closing remarks.
Ken Kencel: Great well. Thank you all again for joining us on the call today, hopefully you've found information informative and helpful. As you are.
Speaker Change: Assess our.
Speaker Change: Our funded performance, where we're obviously a very very bullish and excited as we move forward here into the fourth quarter feel very good about the investment opportunities, we're seeing and the opportunity to deploy capital I want to thank you all again for joining us and hopefully everyone has a great holiday season, and we'll look forward to our next call in the new year.
Speaker Change: Thank you.
Speaker Change: Todays teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Uh huh.
Speaker Change: Okay.
Speaker Change: Okay.