Q3 2024 Blackstone Secured Lending Fund Earnings Call
Thank you. Thank you.
Speaker Change: Good day and welcome to the Blackstone Secured Lending Third Quarter 2024 Investor Call.
Speaker Change: Today's conference is being recorded. If you require operator assistance at any time, please press star zero. At this time, all participants are in a listen-only mode. If you would like to ask a question, please signal by pressing star one on your telephone keypad.
Speaker Change: If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. At this time, I'd like to turn the conference over to Stacy Wang.
head of stakeholder relations. Please go ahead.
Stacy Wang: Thank you, Katie. Good morning and welcome to Blackstone Secure Lending Fund's third quarter conference call. Joining me today are Brad Marshall, Co-Chief Executive Officer, Jonathan Bock, Co-Chief Executive Officer, Carlos Whitaker, President, and Teddy Desloge, Chief Financial Officer, and other members of the management team.
Stacy Wang: Earlier this morning we issued a press release and slide presentation of our results and filed our 10-Q, both of which are available on the shareholder section of our website www.bxsl.com.
Stacy Wang: We will be referring to that presentation throughout today's call. I'll let you remind you that today's call may include forward-looking statements which are uncertain and outside of the firm's control and may differ materially from actual results.
Stacy Wang: We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the risk factors section of our most recent annual report on Form 10-K. This audio cast is copyrighted material of Blackstone and may not be duplicated with outcome sets. With that, I'll turn the call over to Brad Marshall.
Brad Marshall: Thank you, Stacy, and good morning, everyone. Thanks for joining our call this morning.
Brad Marshall: Before we dive into details with John, Carlos, and Teddy, I'd like to begin with some high-level thoughts related to our third quarter results.
Brad Marshall: DXSL reported another strong quarter of results with active deployment, growth in net investment income, increased net asset value, and continued solid credit performance.
Be strong.
Brad Marshall: Results, quarter over quarter, reflect the significant power and the scale of the Blackstone platform.
Brad Marshall: One of the many differentiating factors we have in private credit space.
Brad Marshall: In addition to being the largest third-party private credit business, Blackstone is the world's largest private equity platform, the world's largest owner of commercial real estate, and the largest discretionary allocator to hedge funds.
Brad Marshall: The interconnectivity we have as a firm has allowed us to grow our credit platform into the largest business unit of Blackstone, further helping us make disciplined and timely investment decisions which ultimately benefit our shareholders.
Let's turn to our results.
Brad Marshall: Our NII of $0.91 per share represents a 13.4% annualized return on equity and is up from $0.89 per share in the prior quarter.
Brad Marshall: Further, net asset value per share increased by $0.08 to $27.27, from $27.19 per share last quarter.
Brad Marshall: is well covered at 118% and represents an 11.3% annualized dividend yield.
Brad Marshall: One of the highest among our traded BDC peers with as much of their portfolio invested in first lien senior secured assets with BXSL at 98.7%.
Brad Marshall: Return drivers also remain strong. As of quarter end, VXSL has an 11.2% weighted average yield on performing debt investments, with 0.2% of investments on nonaccrual at cost.
Brad Marshall: The third quarter also marked another first for both the BDC industry.
Brad Marshall: and BXSL. In September, Moody's upgraded the credit ratings for both BXSL and our non-traded BDC from BAA3 to BAA2, making Blackstone the only manager with two BDCs with that distinction.
Brad Marshall: These ratings, along with our investing discipline, may help us to further drive down the lower cost of capital and focus on investing in what we believe are higher quality assets in BXSL.
Brad Marshall: We continue to ramp up our origination for both committed and funded investments. We ended the quarter with 1.1 billion in new commitments and 956 million in fundings, marking our fourth consecutive quarter of over a billion dollars in commitments and our highest quarter of fundings since 2021.
Brad Marshall: Last quarter we discussed our broad coverage model and the prospect for increased deal flow as short-term rates were projected to fall.
Brad Marshall: We have seen a pickup in BXSI's investment pipeline as well.
Brad Marshall: Since Q1 of last year, we have seen an over two times increase in the number of deals in our BXCI pipeline. Further, BXCI was sole or lead lender in over 70% of our deals this quarter.
Brad Marshall: putting us in a position to control deal structures and documentation.
Brad Marshall: The XCI scale allows us to be relevant for the full range of midsize to larger businesses that are looking to grow.
Brad Marshall: Looking at the broad macro environment, we've continued optimism for a soft landing. The other week we saw the lowest level of initial jobless claims since May and repeated jobless claims also appear to be leveling off.
Q3 GDP growth came in at 2.8% annualized.
Brad Marshall: with what we view as current strong growth and at least a pause in labor market weakening.
Brad Marshall: We believe there is momentum to carry the current economic expansion forward until the support from Fed rate cuts is felt throughout the market.
Brad Marshall: For private credit, we believe this means that 2025 may look a lot like 2021 from a deal activity standpoint.
Economic growth is sufficient.
Brad Marshall: private equity dry powder is high, market clearing prices moved higher.
Brad Marshall: And as such, we expect a pickup in the M&A activity, which should be supportive for both deployment and repayments, which we believe to be positive for our investors.
With that, I will pass over to my colleague, Jonathan.
Thank you, Brad. And let's turn to slide six.
Jonathan Bock: We ended the quarter with $12 billion of investments at fair value, over a 6% increase from the $11.3 billion in Q2, while adding 26 new borrowers to our portfolio, now totaling 252 companies.
Jonathan Bock: Ending leverage and average leverage were both relatively flat compared to the quarter prior at 1.12 times, and that's in the middle of our target range of 1 to 1.25 times.
Jonathan Bock: We maintained our strong liquidity position at $1.1 billion, comprised of cash and available borrowing capacity across our revolving credit facilities, including ABLs, to lean into that expanded pipeline.
Jonathan Bock: Now our weighted average yield on performing debt investments at fair value was 11.2% this quarter end compared to 11.6% last quarter. And the yield on new debt investment fundings and assets sold and repaid during the quarter averaged 10.5% and 11% respectively.
Jonathan Bock: Now let's take a look at the portfolio and jump to slide 7.
Jonathan Bock: Approximately 99% of BSSL investments are in first lien senior secured loans and 99% of those loans are to companies owned by financial sponsors who generally have significant equity value in these capital structures demonstrated by an average loan to value of 46.5%.
Jonathan Bock: Our portfolio also has what we believe is strong LTM EBITDA base, averaging at roughly $194 million, a 5% increase from last year.
Jonathan Bock: This is two times larger than that of companies in the Lincoln International Private Market Database, and we continued to see strength and performance from larger companies. The bedrock of our portfolio relative to smaller EBITDA counterparts in terms of higher growth and lower defaults.
Jonathan Bock: BXSL's portfolio companies have seen growth rates in line or higher with the broader private credit market as measured by the Lincoln database and over 15% more profitability on an LTME margin basis.
Jonathan Bock: Our fund's performance and portfolio company selection both speak volumes to the consistency
Jonathan Bock: of our investment process and the talent of our people. Most importantly, we believe we've demonstrated a commitment to the foundation we laid nearly six years ago at the launch of the XSL.
Jonathan Bock: Our relentless focus on first lien senior secured debt in lower default rate industries is what we view as a defensive posture for investors.
Jonathan Bock: This is further evidenced by our low non-accrual rate of 0.2% at cost compared to that of our traded BDC peers' average of 2.8% from last quarter.
Now, we continue to emphasize the importance of interest coverage.
Jonathan Bock: The LTM EBITDA coverage based on our average LTM EBITDA for BXSL portfolio companies over the last 12 months.
Jonathan Bock: was 1.7 times in the third quarter, which again compares favorably to the Lincoln database for the broader private credit market at 1.5 times average coverage in Q3.
Jonathan Bock: Now looking at the share of the private portfolio below one times coverage, excluding recurring revenue loans, BXSL is at 3% of fair value versus the Lincoln private credit market being nearly 5 times greater at 15%.
Jonathan Bock: Now looking now at how we continue to grow the portfolio, slide eight focuses on our industry exposure.
Jonathan Bock: As I mentioned earlier, in the third quarter, the number of portfolio companies in BXSL increased to 252, while maintaining focus on investment discipline and defensive positioning.
Jonathan Bock: And 99% of the new private debt investments during the quarter were first-lane seniors secured with an average LTV of approximately 41% on those new portfolio companies, meaning there's significant amount of junior capital beneath our loans.
Jonathan Bock: And I'll conclude with some points on our documents and recent amendment activity. As a reminder, when we negotiate our credit agreements, especially as a leading lender,
Jonathan Bock: We've placed significant focus on control and important document protections. And this is in stark contrast to the syndicated market index where most loans lack these kind of lender protections.
Jonathan Bock: And especially now, when recovery rates in liquid loans over the past 12 months have been depressed relative to their long-term averages, we remain highly focused on including these lender protections in our documents.
Jonathan Bock: Now, amendment activity was down 25% quarter-over-quarter by count, with 48 of BXSL's private borrowers amending documents in the third quarter.
Jonathan Bock: Now, 90% of these amendments were associated with add-ons, M&A, DDTL extensions, and immaterial technical matters or changes to terms.
Speaker Change: And the 10% of amendments representing less than 2% of BXSL's portfolio fair market value, they were associated with restructurings that involved deleveraging our position or new equity contributions by the sponsor that we believe helped support the credit. With that, I'd like to turn it over to my colleague, Carlos.
Thanks, John. Turn to slide nine.
Carlos Whitaker: The XSL maintained its dividend distribution of 77 cents per share.
We continue to deliver yield to shareholders.
Carlos Whitaker: building through steady regular dividends while also growing NAV per share.
Carlos Whitaker: We expect this approach to continue as we believe we are heading into a period of increased deal activity Driven by a pickup in M&A and private equity sponsor activity as managers look to take advantage of lower interest rates
Speaker Change: I echo Brad's point earlier on the strength of BXCI's deal pipeline owed to the scale and platform of Blackstone.
Speaker Change: The BXCI advantages we have allow us to be active with our existing companies while expanding the portfolio with newer borrowers and enhancing the quality of our assets.
Speaker Change: Accordingly, we focus on transactions with borrowers with what we view as strong business models or those that have more sticky customer bases.
Speaker Change: John already provided a few stats on our new deals for the quarter, but just focusing on our top five new investments by fair market value during the third quarter, BXCI was the sole or lead lender in every case.
Speaker Change: and 100% of these were Ursuline, allowing us to maintain some of the portfolio tenets we have been discussing. Leadership and control.
Speaker Change: As the market remains competitive with both public market alternatives and the rising number of new credit funds, we have found that BXCI's platform is even more sought after by companies and sponsors alike.
Speaker Change: In fact, 2024 is on track to be BXSL's busiest year of deployment since 2021, despite a muted M&A environment. The core drivers of this expansion have been
Speaker Change: First, our ability to transact across the middle market and the expanding large-cap market with speed and certainty.
Speaker Change: From a capital standpoint, we believe middle market companies desire partnering with Blackstone because our deep pockets of capital can help them grow.
I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: Second, we continue to expand our focus on some of our favorite thematic neighborhoods.
Speaker Change: Blackstone has established leading platforms in what we view as compelling high-growth areas coupled with several experts in these fields, helping to add value to the diligence process alongside our partners.
Speaker Change: Third, once we make an investment, we try to be more than capital providers. BXCI's value creation program today is used by 90% of the BXCI portfolio companies where the service is offered.
Speaker Change: and can help create equity value, either by plugging borrowers into the Blackstone ecosystem and reducing costs, or by simply saving them capital through our group procurement system.
Speaker Change: middle market companies that may not have the scale of large caps particularly enjoy having access to these resources.
truly unique in a private credit space.
Speaker Change: We believe passionately in these advantages, and we believe our investors will benefit as a result, whether it be BXSL's increased deployment,
Speaker Change: BXSL's lowest non-accrual rate across our traded BDC peers or third-party validation of the BXCI platform as demonstrated by Moody's recent upgrade of Blackstone's two BDCs to BAA2.
Speaker Change: We believe these are all a result of our deep focus on driving differentiated results for our investors. And with that, I will turn it over to Teddy.
Thanks, Carlos.
I'll start with our operating results on slide 10.
Speaker Change: In the third quarter, BXSL's net investment income was $186 million, or $0.91 per share, up 16% year-over-year, and the highest dollar amount since inception.
Speaker Change: Total investment income for the quarter, also a dollar-based record for the fund, was up 59 million, or 21% year-over-year, driven by increased interest income.
Speaker Change: As a reminder, we amortize 100% of OID earned over the life of each loan versus taking fees up front, which we believe leads to greater stability over the long term. Interest income excluding PIC, fees, and dividends represented nearly 94% of our total investment income in the quarter.
Speaker Change: Turning to the balance sheet on slide 11, we ended the quarter with nearly 12 billion of total portfolio investments at fair value, 6.4 billion of outstanding debt, and 5.7 billion of total net assets.
Speaker Change: NAV per share increased to $27.27, or 0.3%, up from $27.19 last quarter, driven primarily by stable fundamentals across the majority of our portfolio, excess earnings, and share issuance above NAV.
Speaker Change: This represents the eighth consecutive quarter of NAV per share growth.
Speaker Change: Moving to slide 12. In addition, we saw the most active quarter since 2021 on a deployment basis, as Brad outlined, with BXSL funding approximately $956 million in the quarter.
Speaker Change: committing to over $1.1 billion, and an estimated additional $113 million committed by BXCI and earmarked for BXSL as of September 30th.
Speaker Change: Net funded investment activity in the quarter was approximately $660 million, up over 250% year-over-year.
Speaker Change: We saw $292 million of repayments in the quarter, bringing year-to-date repayment rate to 6%, which compares to 10% for all of 2023.
Speaker Change: And as we look forward, we would expect portfolio turnover to increase with M&A volumes in a declining rate environment.
Speaker Change: Next, slide 13 outlines our attractive and diverse liability profile, which includes 44% of drawn debt in unsecured bonds that are not swapped.
Speaker Change: These unsecured bonds have a weighted average fixed coupon of less than 3%, which we view as a key advantage in an elevated rate environment and contributed to an overall weighted average interest rate on our borrowings of 5.45%.
Speaker Change: That compares to a weighted average yield at fair value on our performing debt investments of 11.2 percent.
Speaker Change: This quarter, we maintained our three investment grade corporate credit ratings, and as Brad mentioned, we earned a full notch upgrade from Moody's to BAA II from BAA III.
Speaker Change: This was on the heels of being the first listed BDC to receive an improved outlook from stable to positive by Moody's Last year and a full notch upgrade in Q1 by Fitch to triple B flat
Speaker Change: VXSL is one of three BDCs with a BAA2 rating, two of which are managed by Blackstone, a testament to our disciplined approach to portfolio construction, defensive positioning, and conservative liability structure.
Speaker Change: We have no maturities on our funded liabilities until 2026, and our debt and funding facilities have an overall weighted average maturity of 3.1 years.
Speaker Change: We upsized our corporate revolver by $300 million this quarter while tightening the lowest tier-drawn spread by 22.5 basis points to SOFR plus 152.5 basis points.
Speaker Change: Another testament to our platform and our focus on driving down financing costs to further improve our balance sheet.
Speaker Change: Post-quarter end, we have continued to seek to optimize our cost of capital. We issued a $400 million, three-and-a-half-year bond, which priced at a 5.35% coupon, or 163 basis points over the relevant benchmark Treasury rate.
Speaker Change: Year-to-date BXSL claims the top two spots for tightest spread BDC bond issuances.
Speaker Change: Additionally, post-quarter end, BXSL's first 750 million dollar CLO priced at SOFR plus 154 through 61% loan-to-value.
Speaker Change: including the senior notes portion pricing at SOFR plus 151, the tightest spread on the senior most notes of any middle market private credit CLO among the 200 plus issued CLOs since 2021.
Speaker Change: So just to pull all that together, BXSL has one of the lowest costs of financing in the BDC space.
Speaker Change: Our revolver at SOFR Plus 152.5, our bonds issued this year, and our first CLO at SOFR Plus 154 have all priced tighter than those of our traded BDC peers to the benefit of our investors.
Speaker Change: Total liquidity at quarter end is $1.1 billion in cash and undrawn debt available to borrow. And ending leverage as of September 30th was $1.12 turns, about flat from the second quarter, and near the midpoint of our target range of $1 to $1.25.
Speaker Change: We have positioned our balance sheet with significant excess capacity to support continued pipeline momentum we see through year-end as rates may fall further.
Speaker Change: With that, I'll ask the operator to open it up for questions. Thank you.
Thank you.
Speaker Change: Thank you. As a reminder, please press star 1 to ask a question. We ask you limit yourself to one question and one follow-up question to allow as many callers to participate as possible.
We'll go first to Finian O'Shea with Wells Fargo Securities.
Thank you for watching. Bye. Bye.
Hey, everyone. Good morning. Just one for me.
So with facing market headwinds to earnings, namely base rates,
Speaker Change: to the extent that's meaningful, what your approach to managing that might be. Thank you.
Thank you. Thank you.
Speaker Change: I think the important item to take away as you start to spill over is...
Speaker Change: How the Long-Term Earnings Trend and How the Long-Term Return Trend Looks in Your Book. Because what spillover does...
Speaker Change: is it magnifies. It magnifies on the way up, right, to the extent that you're retaining capital, reinvesting, and growing your earnings. That's great if you have great and strong long-term performance.
Speaker Change: But what it does is it also magnifies on the way down.
Speaker Change: So to the extent that you have increasing non-accruals, losses, et cetera, you start to find that clearly that you can run into some dividend issues and returns of capital that may be suboptimal for investors in the longer-term outlook. For us,
Speaker Change: That long-term return profile has been very strong in part because of strong underwriting as well as
attractive, maintaining leverage, and well actively growing.
Speaker Change: Spillover, that's the number. Our focus is always on ensuring that you keep adequate spillover so long as you generate attractive return. And then I'll pass it to my colleague Brad on forward market look.
Brad Marshall: Yeah, hey, Fen. So I agree with some of your sentiment that yields are coming down because spreads have tightened from last year's highs.
and rates have come down.
over the past couple sessions.
But I don't think that necessarily paints the full picture.
Brad Marshall: Obviously, with high rates and high spreads, there was a very low deal volume, deal activity. I think 2023, there was a Morgan Stanley.
on the GDP Adjust Basis.
Brad Marshall: So what lower spreads and lower rates will do is accelerate the deal environment. That's good for turnover. That's good for fee generation. So we're actually quite positive on the outlook and positioning ourselves.
Brad Marshall: accordingly. So just something to kind of there's there's obviously two sides to it. Lower rates will obviously help the portfolio companies as well. I do think 2025 will be a super cycle for deal volume and I think investors will benefit from that.
Great, thanks so much.
Thank you. We'll go next to Casey Alexander with CompassPoint.
with your permission.
Casey Alexander: I'd love to know, just in a normalized M&A environment where you're getting an appropriate level of churn in the portfolio.
Casey Alexander: Relative to today's earnings, what could that add in a range of cents per share to today's earnings in a more normalized M&A volume? How much leverage is there to those fees and accelerated income?
So, permission granted. So, good luck with that.
A couple of things that...
Casey Alexander: A couple things that will drive earnings from a more active M&A market, you know, clearly right now we're in the mid-range of our kind of leverage.
Casey Alexander: So we have the ability to take leverage up a little bit higher in a more active deal environment.
If you think about deals, at least with Blackstone,
Casey Alexander: We amortize the fees over the life of the loan, so if those loans turn over a little bit quicker, you have an acceleration of those fees in addition to the fact that you may have some call protection that materializes. So, I'm not sure we'll put an exact figure on it.
Speaker Change: Casey, but I think as you think about doing your own math and 20-25 percent turnover in the portfolio And the average fee being about two points. You can probably start to back into some numbers
from there.
Speaker Change: All right thank you for that and since you said good luck with that I think what I'll do is I'll quote you on it as opposed to stealing it.
Secondly, in the spirit of partnership, I appreciate it, Cable.
Speaker Change: Okay, given the obvious high quality nature of the portfolio, and you did just mention something relative to that.
Speaker Change: Why, and I understand your desire to have a great credit rating, but why does this platform naturally operate at a leverage ratio that's actually a little higher than 1 to 1.25 times?
[inaudible]
John: Well, we do care about our rating quite a bit and you're seeing the benefits of that. If you look at the bonds, you know, Teddy mentioned those were the tightest.
The bonds issued, year to date, the CLO, the Titus.
John: of the year, our revolver is tighter than everyone else in the market. So all of those things are material return drivers that no one gives enough credit to, and it's because of the quality assets.
John: It's because of upgrades that we get like the one we just got from Moody's. So it is a return driver, Casey, and it goes into our calculus on how to manage our portfolio towards a lower risk profile in order to maximize long term returns.
John: for our investors, which, listen, in credit, it's not about the extra 25 or 50 basis points of spread. I think that's lost on people. It's really about minimizing losses.
John: and that is priority number one for us. You see it in the results, so I'm glad that's the case, but we're very focused on all these different drivers and our rating and our liability is a big part of that.
Thank you for taking my questions.
and John.
Speaker Change: Thank you. We'll go next to Robert Dodd with Raymond James.
Robert Dodd: Hi guys and congrats on the quarter. I've got to say, probably for anybody but for Brad, this seems to be the most optimistic
Robert Dodd: We've heard you on the Outlook for Activity since maybe the fourth quarter of 2020, heading into 2021. The first time I think you've ever been on the Outlook for Activity. Thank you.
compared the Outlook to
Robert Dodd: of confidence. I mean, we've heard it for the last several years. Hey, next year is going to be great. There's a lot of dry powder. All of those things were true at the beginning of last year. They're true now, but you seem much more confident that's going to happen now. So, what's the real tipping point that pushes you into that level of optimism?
[inaudible]
Great. Well, if you look at what's changed.
Robert Dodd: So, the primary change over the course of this year has been both rates and spreads, which has lowered the cost of capital, and the outlook on the economy is much better than it was at the start of the year. So, both those things are maybe what's different from the start of this year.
Robert Dodd: In addition to that, you have the same drivers that we might have highlighted before, which is there's a lot of dry powder.
Robert Dodd: with private equity sponsors. They need to return capital to their LPs. There has to be kind of turnover in their own portfolios.
Robert Dodd: Well, that is true today. It was also true at the start of the year. So really what's changed is you have a more clear outlook on the economy.
You have an administration now that will be quite supportive.
Robert Dodd: deal activity, and then you have cost of capital that's come down to make valuations more transactable for both buyers and sellers. So all of that put together are the reasons why we think.
Robert Dodd: 2025 will be a super cycle and maybe just one overlay on top of that's more anecdotal but we're out on the road, myself in particular, talking to bankers, talking to sponsors.
Robert Dodd: and every conversation I have had would confirm our view that that next year will be quite busy. So all signs seem to point quite positive.
Got it. Thank you. And then just looking to forward.
Speaker Change: And to your point, I mean, pre-activity, avoiding losses are more important, et cetera, right? It's not just about spreads, but spreads are pretty tight right now. I mean, are you seeing them stabilize? And what's your over-under on whether they're higher or lower?
this time next year, and presuming a more active market.
Speaker Change: Yeah, so I'll take the other side of that argument Robert. I don't necessarily think spreads are
in line with where they were in 2021.
I think people think about the spread movement.
which spreads were very, very wide in 2023.
Speaker Change: In the loan market, high yield market, and in the private credit market, you've seen spreads come down off their peaks, which were arguably too high in 2023 for a variety of reasons. So I think spreads are more in line with historical levels. I would say, however...
Speaker Change: that spreads per unit of risk are actually better than they were in 2021. Leverage is lower just because capital is a little bit more expensive.
Speaker Change: And so we view this environment as actually quite healthy. And again, our job for investors is to deliver a premium over what they can get in the public markets.
Speaker Change: and I would say private credit continues to have a very attractive return premium relative to the public markets, which have tightened more than the private markets.
Thank you.
Speaker Change: As a reminder, star 1 for questions. We'll go next to Kenneth Lee with RBC Capital Markets.
Kenneth Lee: Hey, good morning. Thanks for taking my question. Just in terms of some of the recent originations and commitments you've been seeing, any color on the terms, documentation, trends that you've been seeing, any loosening of such items? Thanks.
Yeah, I'm happy to take that.
Speaker Change: Despite what's been a little bit of a sluggish M&A environment, we've seen a fairly strong deployment opportunity. We had our most active quarter from a fundings perspective.
Speaker Change: You know a few key stats I would call out about 75% of our activity
We were sole or lead.
Speaker Change: about 35 to 40% was where we had in common to you. So we've been really leaning into not only our public exposure, but also our private exporter to generate activity. In terms of specifically your question, economics average spread on new deals committed was in that sort of 500 to 515 context.
Speaker Change: with about a point and a half up front OID, average LTV of right around 40%.
Speaker Change: And that activity is relatively split across the market. We had half of our deals closed below 100 million of you, but half above 100.
Speaker Change: What we're seeing from a documentation perspective is that we've been successful at really leaning into the key parts of the document where we see dispersion in recoveries in the public market. So that's collateral coverage, that's EBITDA add-backs.
Speaker Change: or collateral protections and EBITDA add-backs. And so as we look at our portfolio, you know, nearly a hundred percent of our documents have protections around those items. That's where you're really seeing the weakness play through the public market leading to lower recoveries.
Speaker Change: I think the fourth quarter spreads will get a little bit wider than what we saw in the third quarter, because the third quarter was reflecting deals that we saw through the summer.
Speaker Change: The summer is when you saw spreads at their tightest, so it does feel like, you know, they've winded down a little bit from here.
Speaker Change: I just wanted to see if there's any update in terms of the outlook and how much contribution.
Speaker Change: You can see from that, in addition to obviously a more favorable deal outlook going forward. Thanks.
[inaudible]
Speaker Change: Yeah, so I think, Kenneth, what you're speaking to is sort of our reverse opportunities where we've been reversing into a pipeline of opportunities where we've had exposure on the public side. That effort has continued. It's led to...
Speaker Change: pretty meaningful deployment this year. Again, that's baked into sort of the 35 to 40% of activity where we have incumbent Z. So that's an ongoing effort of ours, a benefit of the platform, given as a firm we are invested in or cover over 4,000 companies.
Thank you.
Very helpful there. Thanks again.
Speaker Change: Thank you. We'll take our next question from Paul Johnson with KBW.
Paul Johnson: Yeah, good morning. Thanks for taking my questions in terms of the optimism for for activity next year. I mean, where do you kind of see the target for in terms of.
company, borrower, size, are you...
Are you still kind of looking?
Paul Johnson: further upmarket, you know, closer to that, you know, average EBITDA, $194 million within the portfolio, skewing more towards kind of that upper-middle market investment-grade borrower, or are you, you know, looking at potentially funding more of the middle market kind of deals?
Yeah
Speaker Change: Thanks, Paul. So what's great about our platform is we do see the full range of deals, small deals, mid-sized deals, large deals.
Speaker Change: I would say this year, we actually passed on a lot of the larger deals.
Speaker Change: You know, typically when spreads tighten, people start reaching for risk a bit more. And some of the larger deals, we just let go because we didn't like the leverage levels or the documentation. So we were less active in that part of the market and we're more active in the middle market.
Speaker Change: I will say we do have a bias towards the larger companies. We think they're better businesses, better sponsors, better management teams, more diversified. They're larger because they're better. So to the extent that that market presents itself as being more attractive,
Speaker Change: We will continue to evaluate the rest of the market as we compare it to those larger deals.
Speaker Change: My sense is, if this year we skewed more middle market, next year we may skew a little bit further up market if the DLF volume picks up and the deals are structured appropriately.
[inaudible]
Thanks, that's very helpful. That's all for me.
Speaker Change: We'll take our next question from Mark Hughes with Truist Securities.
Thank you.
Speaker Change: Yeah, thanks. Good morning. On PICC income, it's pretty small, but it had been kind of moving up in earlier quarters, so it was down a little bit sequentially in the third quarter. Any thoughts on the future trajectory there?
Speaker Change: Yeah, thanks Mark. You're right, so TICC represented about 6% of income that was lower versus the last quarter. We had one issuer roll off and was was actually paying full cash in September, so that's really the impact you see.
Speaker Change: You know over 70% of our pick is is really from the top five assets all of those are performing Marked above 90 and then less than 1% of our gross income is pick associated with assets
Marked below 90
Speaker Change: You know, I think, generally speaking, PICC has been a good tool to differentiate versus the public markets, but our view is, you know, quality really needs to line up with that. It's where you're seeing better earnings growth. Generally speaking, we're structuring it in a way where that optionality is limited to less than 24 months, and you're earning a little bit of premium for allowing that option.
Speaker Change: Very good. And then your opportunity to generate fee income if we do get more repayments. You talked about that.
These are on call protection accelerated amortization
Speaker Change: Given the composition of the portfolio now, just the age, the time it's been on your books, how would you compare that potential if we do get in a supercycle for fee income relative to levels we might have seen in the past? Is there any material difference?
Speaker Change: Yeah, our, just to put some numbers to it, our amortized cost in the portfolio is just above $98.50.
Speaker Change: So, you know, with that, and you can apply sort of a normalized repayment rate that we would expect and
Speaker Change: Sort of anywhere from 15 to 25 percent range right year-to-date our repayments are six percent So I think that gives a little bit of detail on on how that how that income generation piece could Could could trend next year
Appreciate that. Thank you.
The End.
Speaker Change: We'll take our next question from Melissa. Oh, I'm sorry. We'll take our final question from Melissa Waddell with J.P. Morgan.
[inaudible]
Speaker Change: Good morning. Thanks for taking my question. Most were actually already asked and answered. I thought I'd follow up on the at-the-market program. This seemed to be a particularly productive quarter for capital raising there.
Given your bullishness on the market, the deployment.
Speaker Change: potential of the upcoming environment. Do you anticipate sort of a similar run rate going forward in the at-the-market program or should we think about that as being coming in just a little bit if you expect higher turnover in the portfolio?
Thanks.
Speaker Change: Thanks Melissa, this is John. I'd say it's less trying to book what you think a run rate will be.
Speaker Change: and more recognizing that while we see a heavy deal of optimism coming around the deal environment.
Speaker Change: It's really hard to time, right? So what we do is always first check based on our leverage. We want to deliver an attractive leverage return. We always do so right in the middle of that range.
Speaker Change: and are on the higher side as best as possible. And then once you look at that levered return, you can recognize that there's the ability to issue some, but then also recognize that we find that having that ability to invest
Speaker Change: when the deals come, as we expect, is important. So I'd say that it's less trying to say last year's or last quarter's the same as this quarter and much more kind of recognizing we build it based on what we know is going to come and we're anticipating, as Brad outlined, a super cycle that will be important for us all to put capital to work.
[inaudible]
Thank you.
Speaker Change: And with no additional questions in queue, I'd like to turn the call back over to Ms. Wang for any additional or closing remarks.
Speaker Change: Thank you everybody for joining our call this quarter. Have a great rest of your day.
That will conclude today's call. We appreciate your participation.