Q4 2024 Blue Owl Capital Corp Earnings Call
Good morning, everyone and welcome to the <unk> Corporation fourth quarter and full year 2024 earnings call.
As a reminder, this call is being recorded.
Speaker Change: I'm, just trying to call over to Mike.
Speaker Change: Head of Investor.
Alicia: Alicia Thank you.
Speaker Change: Thank you operator, and welcome to Blue <unk> Capital Corporation fourth quarter, and full year 2024 earnings conference call Yes.
Speaker Change: Yesterday <unk> Capital Corporation issued its earnings release and posted an earnings presentation for the fourth quarter and full year ended December 31, 2020 for PCB.
Speaker Change: These should be reviewed in conjunction with the company's 10-K filed yesterday with the SEC.
Speaker Change: All materials referenced on today's call, including the earnings press release earnings presentation, and 10-K are available on the investors section of the company's website at Blue All Capital Corporation Dotcom Joy.
Speaker Change: Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President and Jonathan Lamb, Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described in <unk> filings with the SEC.
Speaker Change: The company assumes no obligation to update any forward looking statements.
Speaker Change: 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 has not been independently verified.
Speaker Change: The company makes no such representation and warranties with respect to this information.
Speaker Change: With that I'll turn the call over to Craig Packer, Chief Executive Officer of BDC.
Thanks, Mike Good morning, everyone and thank you all for joining us today.
Speaker Change: On behalf of the blowout team I would like to extend a special welcome to our OBE shareholders, who are joining us following the closing of the merger in January.
Speaker Change: I also wanted to take a moment to thank our BDC team members for all their hard work to successfully close this merger.
Speaker Change: Okay.
Speaker Change: We generated strong fourth quarter and full year results driven by the ongoing strength of our portfolio robust investment activity and tailwind from elevated interest rates.
Speaker Change: Consistent with our pre released preliminary results in January our fourth quarter NII was <unk> 47 per share and our full year NII totaled $1 89 per share.
Speaker Change: We achieved ROE for the quarter of 12, 4%, our eighth consecutive quarter of double digit Roe and.
Speaker Change: And our full year ROE was 12, 2%.
Speaker Change: As of quarter end, our net asset value per share was $15.26 or approximately in line with the prior quarter.
Speaker Change: Our results throughout the year reflected our attractive asset base and the resilient credit quality of our portfolio even against the evolving economic backdrop.
Speaker Change: Further it's worth mentioning that our non accrual rate remains well below the industry average.
Speaker Change: For 2024, we paid out record dividend totaling $1 72 per share, which reflects a nearly 10% increase year over year, while maintaining our stable net asset value per share.
Next I wanted to take a moment to look back on what we accomplished in 2024.
Speaker Change: Overall, the year presented some challenges M&A deal flow was disappointing elevated base rates led to a focus on credit risk.
Speaker Change: And our strong broadly syndicated loan market resulted in spread compression.
Speaker Change: Despite these pressures our performance for 2024 was very strong and.
Speaker Change: And we closed the year on solid footing.
Speaker Change: We originated a record number of investments, while maintaining excellent credit quality.
Speaker Change: We further strengthened our capital structure by upsizing, our revolving credit facility and priced our lowest spread unsecured bond offering to date.
Speaker Change: Importantly, we announced the merger with <unk> Capital Corporation, three <unk>, which we just closed in January.
Speaker Change: Although while we have continued to deliver attractive risk adjusted returns.
Speaker Change: We believe our platform our scale, our disciplined investment approach, our conservative balance sheet and our deeply experienced team, but what has differentiated <unk> throughout the year.
Speaker Change: We have a central a longtime that were built with the goal of performing well in any economic environment 2024 was a further demonstration of that point.
Speaker Change: Additionally, we meaningfully broadened blew out credit platform in 2024 by expanding into alternative and investment grade credit as well as data centers.
Speaker Change: Together these new capabilities augment your origination funnel for our Bdcs.
We have long believed the scale of our direct lending platform as one of our largest competitive advantages.
Speaker Change: Our strategic efforts that blow out over the past year only strengthen those advantages and further our differentiation.
Speaker Change: We are among the select few platforms with the size resources and flexibility to consistently deliver for shareholders borrowers alike.
Speaker Change: With over 135 billion credit assets under management, and our expanded suite of financing solutions, we have become even more important to borrowers and sponsors.
Speaker Change: This enhanced capacity allows us to better meet the ever evolving the diverse needs of our partners.
Speaker Change: With this growth trend towards larger deals has been a focus of ours.
Other than spreading capital across smaller deals that don't align with our strategic goals, we're now able to deploy meaningful capital into the opportunities that we have the highest conviction in.
Speaker Change: For example across our direct lending business, our average hold size, a new direct lending deals has grown from $200 million.
Speaker Change: In 2021 to roughly $350 million for 2024, while the total deal size has nearly doubled from 600 million to over $1 billion during that same time period.
Speaker Change: Despite the increase in capital deployment across our platform, our selectivity rates still remains low at roughly 5%.
Speaker Change: Further we continue to take a leadership role in most of our deals leading our co leading approximately 90% of transactions.
Speaker Change: Additionally, we have a deep pool of existing borrowers and sponsor relationships. We can draw upon for deal flow, providing investment opportunities even during times of modest new activity as we experienced throughout the year.
Speaker Change: To that end roughly 50% of our originations in 2024 were in existing portfolio companies.
Speaker Change: We believe the market will continue to favor the largest direct lending platforms and our efforts to grow across both the <unk> platform and our Bdcs, who will provide a distinct competitive advantage moving forward.
Speaker Change: Finally, I want to spend some time on the recently closed merger between <unk> and <unk>, which further enhances our combined company's competitive advantage.
Speaker Change: Following the closing of the merger or BDC is now the second largest publicly traded BDC by total assets.
Speaker Change: This has already led to improved trading liquidity and we anticipate the merger will drive lower cost of financing and generate meaningful operational synergies moving forward.
Speaker Change: Subsequent to quarter end and in conjunction with the merger close we released preliminary financial results for both Ob DC Adobe D, which reflected ongoing strong performance on a standalone basis for both Bdcs.
Speaker Change: And bind portfolio represents a larger and more diversified composition with increased first lien exposure and lower non accruals that standalone BDC.
Speaker Change: All of this leaves our BDC poised for continued performance in the years to come.
Speaker Change: Looking ahead as I reflect on all that we've accomplished throughout last year I feel very positive about the platform and believe <unk> is well positioned to continue to deliver for shareholders.
Speaker Change: With that I'll turn it over to Logan for additional color on portfolio performance.
Logan: Thanks, Greg the fourth quarter capped a record origination year for blue all despite muted M&A environment.
Logan: Across our platform, we committed over $27 billion in direct originations, excluding refinancings, which was roughly double from 2023.
Logan: And Ob D C. Specifically during the fourth quarter, we deployed approximately $1 $2 billion in new investment commitments, excluding joint venture strategic equity activity.
Logan: Notably we closed several multibillion dollar financings in the quarter.
Logan: Excluding JV and strategic equity activity over 97% of this quarter's origination activity consisted of first lien investments based on our view that first lien and Unitranche loans continued to provide the most attractive relative value in the market today.
Logan: Since last year <unk> first lien investments have grown from 68% to 76% of the portfolio and when combined with <unk> portfolio first lien investments increased to 78% pro forma.
Logan: We continue to experience steady level of repayments with $1 6 billion in the fourth quarter, highlighting the quality of our portfolio, which kept leverage constant at around one two times.
Logan: Turning towards our underlying portfolio metrics, our average investment represents less than 45 basis points of the portfolio minimizing our exposure to any single company.
Logan: The median EBITDA of our portfolio of borrowers is $119 million.
Logan: And weighted average EBITDA is $201 million.
Logan: With an average LTV of 44%.
Logan: As the average size of our borrowers continues to grow we are seeing a corresponding increase in quality with many of these companies being clear market leaders within their sectors. Our quality, we continue to identify as important and our decision to left.
Logan: Our borrowers continue to show solid underlying financial performance the earnings growth of our portfolio companies as a significant driver of credit health.
Logan: And across the overall portfolio borrower revenues and EBITDA continue to increase in the mid to high single digits year over year.
Logan: Additionally, interest coverage remains steady and based on current spot rates interest coverage was approximately one eight times across the portfolio.
Logan: We'd note. This is up from our trough coverage of one six times.
Logan: We remain confident in the resilience of our portfolio even in the face of shifting economic conditions to.
Logan: To that end I'd like to briefly address the potential impact of tariffs and government efficiency reform on our portfolio.
Logan: While the situation remains fluid we believe our portfolio is defensively structured to withstand the economic pressures likely to result from tariffs we.
Logan: We have limited direct exposure to companies that engage in manufacturing import goods from abroad or our direct government contractors.
Logan: The majority of our portfolio companies are services oriented based in the United States and primarily serve domestic customers.
Logan: <unk> exposure to international trade disruptions as a reminder, our top sector exposures, our software insurance brokerage and healthcare all of which have defensive characteristics.
Logan: Therefore, we believe the effects of the current scope of tariffs and federal spending cuts on our portfolio to be limited and our 130 person direct lending investment team is monitoring these risks in real time.
Logan: Now I'd like to touch on some other credit metrics in our portfolio.
Logan: The non accrual rate remains low at 40 basis points the portfolio at fair value, reflecting no new additions this quarter and combined with <unk> portfolio, our pro forma nonaccrual rate decreases to 30 basis points of fair value.
Logan: Our internal rating system of one to five indicator of the health of the portfolio companies has also remained stable compared to our recent historical averages the.
Logan: 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.
Logan: Our pik exposure decreased slightly quarter over quarter and pro forma for the combined company our pick income declines further to 12, 5%.
Logan: Specifically the vast majority of our tech is by design and the investments in the portfolio performing as expected and converting to cash pay interest rates as scheduled.
Logan: Taking a step back as we think about the overall health of the portfolio. We remain pleased with our results and the resilient performance of our borrowers in 2024.
Logan: Credit quality has remained excellent and as we look ahead to 2025, we do not currently see any meaningful signs of stress, which gives us confidence in our ability to deliver attractive risk adjusted returns for our shareholders.
Jonathan: And now I'll turn over the call to Jonathan to provide more detail on our fourth quarter financial results.
Jonathan: Thank you Logan.
Jonathan: We achieved strong financial performance in the final quarter of the year.
Jonathan: Upon the closing of the merger with size and scale of <unk> significantly increased with total portfolio investments growing to over $17 billion total net assets increasing to nearly $8 billion.
Jonathan: And total outstanding debt increasing to over $10 billion.
Jonathan: Our fourth quarter NAV per share was $15 26 down two pennies from last quarter, reflecting the impact of credit related markdowns on certain investments.
Jonathan: We believe the stability of our NAV demonstrates the resilience and quality of our portfolio.
Jonathan: Turning to the income statement.
Jonathan: We reported net investment income was <unk> 47 per share, which was consistent with the prior quarter.
Jonathan: Despite lower interest rates and spreads we benefited from an elevated level of onetime income in the fourth quarter include.
Jonathan: Including accelerated OID and dividends.
Jonathan: Collecting the strength of our portfolio.
Jonathan: Specifically, we received accelerated OID from repayments, which was about <unk> <unk> per share higher in the fourth quarter as compared to our two year average.
Along with a one time dividend from Bel run a small equity investment.
These items, partially offset a 25 basis point decline in weighted average spreads and a 45 basis point decline in average interest rates quarter over quarter.
Jonathan: Similar to prior quarters, we mean, it's way over earned our base dividend.
Jonathan: Resulting in the board declaring a <unk> supplemental dividend based on our fourth quarter results, which will be paid on March 17 to shareholders of record as of February 28.
Jonathan: The board also declared first quarter beef dividend 37 sites.
Jonathan: Which will be paid on April 15.
Jonathan: The shareholders of record as of March 31.
Jonathan: As mentioned in prior earnings calls, we continue to believe BDC well positioned for the all been great environment.
Jonathan: Bdc's piece dividend well covered by our earnings with 127% dividend coverage, which was consistent with the prior quarter.
Jonathan: Further supporting our distributions as our spillover income, which remains healthy at approximately <unk> 39 per share on a pro forma combined basis with ABB as a result of meaningful over earnings of our dividends.
Jonathan: Moving to the balance sheet, we continue to optimize and enhance our liability structure to deliver strong performance to shareholders.
Jonathan: We finished the fourth quarter with net leverage of 119 times down slightly from one to three times.
Jonathan: In our target range of <unk> nine to one and a quarter times based on originations that were generally in line with repayments.
Jonathan: Last quarter, we increased <unk> corporate revolver of $355 million to a total size of nearly $3 billion.
Jonathan: Effective pricing by $22 five basis points, so for plus 165.
Jonathan: We also opportunistically raised $400 million.
Jonathan: Reopening of <unk> March 2029 unsecured notes.
Jonathan: Bringing total outstanding size to $1 billion.
Jonathan: The notes were priced at T plus 163.
Jonathan: Tightest spread we've ever printed on the blue our BDC unsecured bonds and represented one of the tightest five year by the BDC DTC offerings.
Jonathan: The notes were subsequently swapped to floating rate on a portion of the proceeds were used to pre fund our upcoming March 2025 maturities.
Jonathan: We remain we use the strength of our financing partnerships and liability structure.
Jonathan: Overall, we remain well capitalized with total liquidity of $3 $2 billion at quarter end, which was well in excess of our unfunded commitments.
Jonathan: Additionally, following the closing of the merger the increased scale of the combined company may enable better access to a wider array of debt funding solutions at lower borrowing costs with the opportunity to optimize our liability structure overtime.
Jonathan: Looking ahead in the coming days, we will file a $750 million the market equity issuance program.
Jonathan: Which has already been approved by our board.
This represents a cost efficient and accretive tool to raise capital, but we will use only under supportive market conditions over time.
Jonathan: Finally, I wanted to take a moment to highlight one of the steps we've taken to make operating our bdcs more efficient.
Jonathan: During the fourth quarter, we established a joint venture across all of our Bdcs and subsequently wound down or Bdcs senior loans.
Jonathan: The result is that we now have a single JV spanning all of our BDC is creating a more efficient and scaled way to invest.
All of the senior loan fund generated an attractive return of 10, 6% over the licensee investment.
Jonathan: We believe there is an opportunity to generate an EBIT higher risk adjusted return I optimizing our funding profile with lower operating expenses as we invest across a larger and more diversified portfolio.
Jonathan: Additionally, the size of the <unk> investment in this joint venture will be comparable to that of our previous JV with room to grow our allocation over time following the increase in size from the <unk> merger.
Jonathan: Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for the year.
Craig Packer: And now I'll hand, it back to Craig to provide final thoughts for today's call.
Craig Packer: Thanks, Jonathan.
Craig Packer: As we look ahead to 2025 Ob D. C is entering the year from a position of strength.
Craig Packer: With increased size scale and diversification, all while maintaining excellent credit quality and leveraging the benefits of the blue all platform.
Craig Packer: While we can't be certain we expect market conditions to be supportive this year driving a potential pickup in M&A activity.
Craig Packer: Despite spread tightening rates remain elevated after coming off of their peaks, allowing us to continue earning an attractive return.
Craig Packer: We are positioned to capitalize on these opportunities in the year ahead.
Speaker Change: Wireless whether M&A activity picks back up.
Speaker Change: As you've heard me say today, the significant size and presence of our credit platform allows us to invest even during periods of modest deal activity.
Speaker Change: Finally, with the completion of the merger with Ob D. We're excited about the opportunities to further enhance Roe or <unk>.
Speaker Change: We expect to realize a number of synergies from the merger with <unk>, including more than $5 million of <unk>.
Speaker Change: Operational savings in year one.
Speaker Change: Additionally, we expect to see reductions in financing costs over time, driven by the benefits of increased scale and cost savings from consolidation of our secured facilities.
Speaker Change: Lastly, we remain focused on optimizing our portfolio and asset mix for an improved yield which could include selectively increasing investments in strategic equity and joint ventures, leveraging blowouts adjacent credit strategies for incremental deal flow.
Speaker Change: As we think about <unk> fundamental performance, we've been pleased with how the stock has traded following the closing of the <unk> merger.
Speaker Change: Despite an increase in trading activity. The stock has performed well and is up since the close which we believe reflects the quality and institutional investor composition of the legacy OBE shareholder base.
Speaker Change: To close we are very pleased with our fourth quarter and full year results and the seamless execution of the merger.
Speaker Change: We are confident that the increased scale across both <unk> and the <unk> platform will help drive further benefits for our shareholders in the years to come.
Speaker Change: With that thank you for your time today, and we will now open the line for questions.
Speaker Change: Great. Thank you.
Speaker Change: Time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press star two to remove yourself from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing this darkies.
Speaker Change: One moment, please pull for questions.
Speaker Change: First question here is from Brian Mckenna from JMP Securities. Please go ahead.
Speaker Change: Thanks, Good morning, everyone. So you delivered a pretty impressive results throughout all of 2024 anyhow. It's some of the macro headwinds into year end and delivered an NII ROE of 12, 4% in the fourth quarter I know, there's a lot of moving pieces in the outlook and the backdrop can shift here, but given the benefits of the OBE merge.
Speaker Change: <unk> as well as the strength in the underlying portfolio I mean, what do you think there'll be obedient can deliver in terms of Roe.
Speaker Change: In 2025 and beyond.
Speaker Change: Yes.
Speaker Change: Hey, Bryan Thanks.
Speaker Change: Very generous question. We appreciate it and look we're really pleased with our results all year long.
Speaker Change: In the fourth quarter I mean, there were.
Speaker Change: Headwinds in the fourth quarter on rates and spreads and despite that we.
Speaker Change: Had some really nice additional income from some repayments from a dividend from a portfolio company and so we really offset all of that.
Speaker Change: In the fourth quarter I think looking ahead to this year.
Speaker Change: Those headwinds will persist rates are lower the forward curve has them staying lower.
Speaker Change: And the lower spreads I think are here.
Speaker Change: Near term foreseeable future so that will impact.
Speaker Change: Results, we've shared some sensitivity analysis.
Speaker Change: In our 10-K on a light but directionally.
Speaker Change: For us I think that takes a <unk> 12 ish low <unk> Roe.
Speaker Change: That puts it somewhere on the tax.
Speaker Change: If everything stayed exactly the way it was right now for the rest of the year for all this year now history tells us it doesn't always stayed outlay. So you've got to have your own view on rates and spreads and activity levels.
Speaker Change: We talked a lot at the time of the merger about the benefits of the merger not only some cost savings, but some ability to optimize the combined portfolio.
Speaker Change: Yes, it was.
Speaker Change: Really a strong portfolio, but on the margin a little bit more returning a little bit more first lien in nature.
Speaker Change: A bit more conservatively structured so we we expect to migrate the combined portfolio to work essentially <unk> BDC looked <unk>.
Speaker Change: <unk> and we've outlined this at the time of the merger.
Speaker Change: As we do that as we benefit from our scale lower financing costs. We think that we can generate another 50 to 75 basis points of Roe.
Speaker Change: As we implement on that plan and that should offset some of the reduction in returns from simply lower rates and lower spreads.
Speaker Change: So those are those are those are the parts.
Speaker Change: Again, I always caution investors you have to look at this all relative.
Speaker Change: Rates are lower so our returns at 10%, 11% are equally attractive as they were 12 relative to other asset classes.
Speaker Change: The lower rates lower spreads are affecting all all income generating activities. So I think that will continue to be strong performance relative to our peer group.
Speaker Change: Okay. That's helpful.
Craig Packer: Then Craig that's a blue all Investor day, two weeks ago. When you talked at length about the evolution of the direct lending platform and the journey to a $100 billion.
Craig Packer: Of AUM over the past decade, it's clearly been a great success story, but as you frame that theres still a lot of growth opportunities ahead.
Speaker Change: Within that how does the evolution of your public Bdcs from here play into growth of the broader direct lending platform longer term.
Speaker Change: So Oh BDC was our very first vehicle in many ways.
Speaker Change: It's a flagship and that is the most visible.
Speaker Change: We're really quite proud of the performance we've delivered now coming up to close to 10 years.
Speaker Change: And demonstrating our track record in investment performance and returns.
Speaker Change: So we're going to continue to execute on that plan for <unk>.
Speaker Change: In states stick to the strategy that's worked so well.
Speaker Change: I do think.
At the <unk> level.
Speaker Change: While not directly related to the BDC, we have significantly expanded our capabilities in credit historically all al was a it was really a direct lending credit shop that was almost all of our assets.
Speaker Change: We built it.
Speaker Change: Really terrific business in a market leader indirect lending and we intend to continue to to be that market leader in terms of investment team resources relationships. The scale that we can offer very few in the industry can match and that is a significant competitive advantage working with private equity firms that want to work with scale.
Speaker Change: All providers, we're also benefiting from greater Incumbencies.
Speaker Change: Keep doing what we've been doing well direct lending.
Speaker Change: The environment is going to continue to favor really small handful of the largest platforms which were won.
Speaker Change: However, we are also now significantly expanded our credit capabilities.
Speaker Change: Getting into alternative credit or some we'll call it asset based credit.
Speaker Change: As well as <unk>.
Speaker Change: <unk> grade credit data centers, there are a number of other offerings. We have the blood level that we can offer to companies of all sizes and not only private equity owned companies, but also just privately held technology businesses.
Speaker Change: And so all of these investment capabilities we.
Speaker Change: We will expand our funnel.
Speaker Change: To make us more relevant to borrowers are more to counterparties and we're already seeing this and getting some really interesting.
Speaker Change: <unk> imbalance for folks that want to access our capital, which will which will provide opportunities for our direct lending business.
Speaker Change: Just more velocity more flow and we can offer a nicer menu of solutions. If you think about our investment in the data center space. This is the space, where there are literally tens of billions of dollars worth of capital needs really hundreds of billions of dollars worth of capital needs.
Speaker Change: We're not going to stray from our investment strategy to <unk>, but we do think there may be opportunities to have loans that have some more credit characteristics and return profile.
Speaker Change: Bdcs. So I think we can leverage leverage that wider funnel, but it's.
Speaker Change: Sticking to our core our core strategy Adobe.
Speaker Change: Adobe DC.
Okay, Great I'll leave it there I appreciate the time.
Speaker Change: Thanks, Brian.
Speaker Change: Great. Our next question is from Casey Alexander from Compass point. Please go ahead.
Casey Alexander: Yeah, Good morning, and first of all congratulations on the merger.
Casey Alexander: As an observer of many of these transactions I would call that probably the most seamless transition from a direct listing to merged into a greater scale vehicle that we've seen so congratulations to your team for achieving that with a minimum of disruption I think that was that was very impressive.
My first question is we're seeing that the fed rate cuts flow through the portfolio and we know that theres a little bit of a delay in how they come through as of the end of the fourth quarter.
Casey Alexander: Where would you say the portfolio is in terms of of fully recognizing those resets is at 50%, 75% I mean, how far along.
Casey Alexander: The path of recognizing those that 100 basis points of portfolio resets in the portfolio.
Casey Alexander: At the end of the fourth quarter.
Casey Alexander: Yes, it's a little more than two thirds.
Casey Alexander: About 70%.
Casey Alexander: Okay, Alright, alright secondly.
Casey Alexander: You know kind of where where our onboarding yields are we are we had spreads that are that are really below average and how much does M&A and deal flow half to increase for spreads to move back to a more normalized level.
Casey Alexander:
Casey Alexander: So I think that.
Casey Alexander: There's a couple of reasons widespread are tight today.
Casey Alexander: One is as you are suggesting.
M&A remains really moderate.
Casey Alexander: So we most of the activity there is some new app new deal activity Theres also add on acquisition activity, but there is not enough and it's long overdue that there is a recovery and I think at some point, we will see that.
Casey Alexander: But the other factor is that is the strength of the broadly syndicated loan market.
Casey Alexander: Folks that follow that market no there has been a record.
Casey Alexander: Hello creation record activity in the public loan market.
Casey Alexander: That does we do compete with that market in terms of the solutions. We offer borrowers. So I think that that strengthen that market has also played into the spread tightening.
Casey Alexander: That we've seen.
Casey Alexander: I think if you looked on a historical basis spreads today for new tranche are coming in at 475, maybe 500.
Casey Alexander: On the low end of what you would see historically however.
Casey Alexander: If you compared it to spreads in the broadly syndicated market.
Casey Alexander: They are still 150 175 basis point premium to the broadly syndicated market. So I.
Casey Alexander: I think you have to keep that perspective, as well our spreads tight offshore but spreads everywhere are tight and so I think direct lending and bdcs continue to offer really attractive risk adjusted return.
Casey Alexander: Personally I think that's one of the reasons why the stock is performing as well as they have they are generating really attractive returns even at those tighter spreads base rates remain high.
Speaker Change: So for firstly unit tranche.
Speaker Change: Lending for our upper middle market companies are earning 10% and I think that that's really attractive.
So I think that my hope and expectation will be.
Speaker Change: Either an increased M&A environment or a loosening of the syndicated loan market will allow spreads to sort of come off the bottom.
Speaker Change: Both of those things happening at once and I think spreads could widen meaningfully and get back to something that we would find more attractive.
Speaker Change: Alright, Thank you for taking my questions.
Casey Alexander: Alright, Thanks Casey.
Speaker Change: Next question is from Robert Dodd from Raymond James. Please go ahead.
Speaker Change: Hi, it's almost a phone.
Speaker Change: And congrats on the quarter.
Speaker Change: The execution of the merger.
Speaker Change: In terms of the portfolio as it stands today I mean do you feel I mean, there's been a lot of turnover in the portfolio over the last year I mean, congrats on all the origination swaps that.
Speaker Change: We'll lap.
Proportion view.
Speaker Change: Your portfolio would you say, you're still kind of above.
Speaker Change: Legacy assets that are above market spreads today, I mean, there's market spreads are pretty tight and we'll look for something.
Speaker Change: How much.
Speaker Change: The portfolio is left that could theoretically be price in this environment.
Speaker Change: Versus.
Speaker Change: Some of those higher spread assets something together.
Speaker Change: There can be certain of our assets, but any color there.
Robert Logan: Yes, Thanks, Robert Logan.
But we've looked at the portfolio. If you look at our refinancing volumes over the last four quarters, we've been averaging.
Robert Logan: Double low double digit percentages of the portfolio.
Robert Logan: Volumes.
Robert Logan: When you look at our book and we think about the names that could still be at risk.
Robert Logan: A an opportunistic refinancing at a lower spread we think that that number is somewhere in the 10% to 15% range of the book. So we've actually worked our way through what we think is most of the low hanging fruit on a refinancing wave and we're already seeing the refinancing.
Robert Logan: Volumes slow here, a little bit in the early parts of the year. So there are still some names, but we think we've worked our way through the vast majority of.
Robert Logan: The higher spread names and there is still some left but.
Robert Logan: It's a small percentage of about call it 10% 15%.
Robert Logan: Got it thank you for that.
Robert Logan: One more if I can one on.
Robert Logan: In your prepared remarks, you talked about.
Robert Logan: <unk> increased strategic equity investments.
Robert Logan: And obviously you've commented on other things the platform as a whole has expanded I mean can you.
Robert Logan: In that is it is that contemplating obviously, increasing equity commitment to the JV potentially but all of the.
Robert Logan: So we're looking in 2025, but you're going to be making significant new portfolio company creations to take opportunities take.
Robert Logan: Advantage of ours.
Robert Logan: You now have on the platform that maybe you didn't in the past.
Sure.
Robert Logan: So.
Robert Logan: For folks that don't don't.
Robert Logan: Necessarily portion of our 10-K really really closely when we talk about joint ventures and strategic equity investments.
Robert Logan: The strategic equity investments are investments, we've made at the BDC level.
Robert Logan: Our specialized.
Robert Logan: Specialized investing strategies, where technically our investment as an equity investment, but we're we're owning.
Robert Logan: We're owning businesses that are fundamentally doing lending and doing and very diversified.
Robert Logan: We think attractive low risk way their pools of loans. So this is weng spire, our asset based lending business. This is <unk>, which is our railcar aircrafts finance business fifth season, which buys life insurance settlements.
Robert Logan: We have a relatively new one called LSI that does.
Robert Logan: Essentially does drug royalty investing so the underlying activity for each of these we think has the same high quality predictable characteristics as our loans.
Robert Logan: We are investing in.
Robert Logan: On a portfolio because we are.
Robert Logan: We're investing.
Robert Logan: To support really experienced management teams that are experts in the space that are essentially portfolio companies of the BDC.
Robert Logan: As we've grown we have created the flexibility to invest across multiple bdcs, which allows us to achieve even greater scale. So that's the strategic investments are very accretive and they are not correlated to the rest of the book because they each each of the asset classes has their own.
Robert Logan: Ex that are not completely correlated to our unit tranche direct lending. So we think that they are attractive and should deliver low double digit returns and also create the ability to generate net asset value over time and you've seen that.
Robert Logan: With wings fire, which has performed extremely well.
Robert Logan: So the easiest thing for us to do is to just take the essentially <unk> was not in those investments and now that merged in with <unk>. We can essentially just true up the overall percentage of the portfolio now Thats bigger that's easy Youre question is will we also have additional ones and the answer is no immediate plan.
Robert Logan: But I think that we would welcome the opportunity to have additional verticals that are benefiting from some of the some of the capabilities that we now have as part of the <unk> platform.
Robert Logan: And set up potential additional.
Robert Logan: Equity investments, so again, no immediate plans, but over time, if we can find the hard to find once we have very high bar, we're very picky. So we want to work with great teams and want to work with.
Robert Logan: Asset classes that you can generate very predictable income streams, we generally prefer a corporate business type risk versus consumer type risks. So these are these are narrow.
Robert Logan: The universe, we get calls all the time from teams that wont be part of our platform and we're really selective on where we engage.
Robert Logan: So hopefully that gives you gives you a bit of a flavor I just wanted to come back to just.
Robert Logan: I could come back on that.
Speaker Change: I appreciate that congratulations on the merger.
Robert Logan: And.
Robert Logan: You also mentioned this I just wanted to come back to this.
Robert Logan: Teamwork really hard a merger of listening in the merger.
Robert Logan: Which we appreciate and we appreciate we thought it went extremely smoothly, but even more to the point, we're really pleased with how well that that has been received in the public markets.
Robert Logan: <unk> stock is trading higher now than the top of the merger or BDC stock is trading above book value.
Robert Logan: The history of mergers in the BDC space has not typically lead to that outcome is typically led to disruption in stock and so those looking at the merger I think may have taken a bit of a skeptical view about how the stocks that trade BDC would trade as a result of the merger we felt it would be different.
Robert Logan: We know that our investor base at <unk>.
Robert Logan: High quality institutional in nature and long term orientation.
Robert Logan: No that'll BDC is trading trading below the peers. So we felt that that Investor group would look at SMB patient and.
Robert Logan: And not be a seller and I think it's early but I think that's exactly what has proved out.
Robert Logan: Average trading volume in Ob ADC is twice what it was pre the merger and the stock is up post the merger.
Robert Logan: And so I just think for those that are not following this wondering and seeing news around merger what does it mean again early days, but I think we felt not only great about the technical execution, but the fundamental value that is created for <unk> shareholders and we're hopeful that that will sustain and grow on that.
Robert Logan: Yeah.
Robert Logan: I appreciate his comments, Greg even though.
Uh huh.
Robert Logan: The gentlemen.
Robert Logan: Thank you.
Robert Logan: Sure.
Robert Logan: Alright, Robert Thank you.
Robert Logan: Thanks Robert.
Speaker Change: Our next question is from Mickey <unk> from Ladenburg Thalmann. Please go ahead.
Mickey: Yes, good morning, everyone.
Speaker Change: Good questions already I, just have one left Craig.
Mickey: Obviously BDC earnings season is not over.
Mickey: But anecdotally it looks like there may be a little bit of a trend of some credit deterioration across the sector, perhaps not.
Mickey: Obi do you see.
Mickey: Given the scope of Blue Wow.
Mickey: And taking into consideration that some of this may be due to vintage do you get any sense that the economy is starting to slow down at the margin.
Mickey: I don't get that sense across.
Mickey: Or 100 plus portfolio companies.
Mickey: For what we see we continue to see modest growth in revenues and EBITDA.
Mickey: Hi.
Mickey: I hasten to add that we and most of our high quality peers are not really a reflection of the U S economy.
Mickey: Harped on this software and healthcare and food and beverage and insurance brokerage.
Mickey: We don't have in most of our peers don't have the cyclicals.
Mickey: Or like the true like really consumer facing businesses, where you would see.
Mickey: Maybe the first signs of weakness so I'm, we're not seeing it.
Mickey: I still feel feel good about it but I think.
Mickey: There's a lot there's a lot that's happening at the macro economic level.
Is creating some uncertainty for businesses out there and we're certainly waiting to see hopefully getting a little more clarity about about some of the some of the.
Mickey: Changes afoot out of Washington, but no. We're we're continuing to see good performance.
Mickey: My observation would be where you are seeing just a modest modest increase in issues.
Mickey: For others I think it just tends to be credit idiosyncratic.
Mickey: Should have higher rates.
Mickey: Have impacted weaker performing credits that just after two years of higher rates. Some of the weaker performing credits I think have had struggles not some broader read through of economic weakness or at least from where we sit.
Mickey: That's really helpful. Thank you for that clarification.
Mike: Sure. Thanks, Mike.
Mickey: Yes.
Operator: Next question is from Finian O'shea from Wells Fargo. Please go ahead.
Finian O'shea: Hey, everyone. Good morning.
Finian O'shea: A question on the platform Tech strategy.
That felt like a pretty good origination advantage in the past and understandably, perhaps less so in the past couple of years.
Finian O'shea: But can you talk about the potential for for a comeback there to the extent youre seeing.
Finian O'shea: The market volumes.
Finian O'shea: Looking forward and what that might mean for the strategy. Thanks.
Finian O'shea: Okay.
So.
Finian O'shea: We have we think the premier.
Finian O'shea: Software lending business, we've invested heavily in our team and our resources.
Finian O'shea: As folks I think now we have three bdcs that just essentially software investing.
Announced two of those are merging.
Finian O'shea: That's very much on track we've talked about that.
Finian O'shea: Across the direct lending platform is by far our largest sector, but we do it we do it.
Finian O'shea: Not only in our tech funds, but we do it.
Finian O'shea: <unk> our diversified funds.
It's been a great performer the fundamentals of those businesses has been very strong.
Finian O'shea: We continue to find it to be attractive risk adjusted return and we continue to find find it to be an area, where differentiated underwriting expertise matters the company's generally.
Finian O'shea: We're scaling our investing you need teams to really understand and be able to pull apart all of them at a very granular level the different business models.
Finian O'shea: Once you think will be successful and our team has a great track record in doing that.
Finian O'shea: And they continue to do it.
Finian O'shea: Our portfolio of companies have been doing really really well.
So we feel really good about our software portfolio look M&A is down every sector and software is no exception.
Finian O'shea: At some point the companies in this space continue to grow by doing acquisitions, Theyre smaller, but obviously those incumbencies are quite valuable to us.
Finian O'shea: And the companies also have performed well and so there is refinancing opportunities that we've been pursuing we'd all I can see more de novo M&A or it really to sell portfolio companies that generates opportunities to do up to a brand new financing set modest levels to go will pick up when it picks up I think it will be extremely well positioned in the meantime.
Finian O'shea: We've got a portfolio, we feel really good about performing well and.
Finian O'shea: In funds that are finding ways to deploy capital.
Finian O'shea: Okay. Thanks, that's helpful.
Finian O'shea: Follow up on the I think in your remarks you.
<unk> highlighted that.
Finian O'shea: Incumbency.
Finian O'shea: The advantage and seeing if that suggests that.
Finian O'shea: <unk>.
Finian O'shea: Or what if you could say what the picture is like for your commitments to existing borrowers.
Finian O'shea: Maybe perhaps large cap peers it feels like half.
Finian O'shea: Where you are in.
Finian O'shea: And that evolution, and where you think youre going thanks.
Logan: Yes, Thanks Logan.
Logan: We did experience about half of our volumes on the origination side.
Logan: Last quarter from a competency and I think youre continuing to see that.
Logan: Why will affect.
Logan: Add on issuance and existing borrowers driving results.
Logan: Certainly we like to be as an agent in the lead and lead or co lead on 90% or so of what we do and so we have that first call relationship with the borrowers and I think that number of incumbency transactions is going up and we will continue to go up for us.
Logan: It certainly creates a funnel of activity for us and origination advantage and I think this year in particular with M&A low we really show some differentiation on our platform in terms of originations and a lot of that came from those competencies.
Speaker Change: That's helpful. Thanks, guys.
Speaker Change: Have to sneak one more in.
Speaker Change: The post quarter.
Speaker Change: The ATM program can you talk about your.
Speaker Change: Sure.
Speaker Change: Posture.
Speaker Change: And how you would operate data if it's one of the sort of.
Speaker Change: Tools and the and the capital racing kit for just in time funding or maybe a sort of ongoing all in kind of approach as.
Speaker Change: As seen with some of your large cap peers. Thank you.
Speaker Change: Yes.
Speaker Change: Thanks.
Speaker Change: You should have as a.
Speaker Change: Our finance company you should have all tools available to you in the context of capital both on the debt and the equity side and with some equity we definitely think that the ATM program is the most efficient form in terms of issuing as you described just the time cap.
Speaker Change: If at all.
Speaker Change: We definitely.
Speaker Change: Planned to use the ATM program in a way that is going to be beneficial for shareholders.
Speaker Change: Create accretion to the net asset value when youre issuing above book value Youre not youre not teekay discounts in terms of the way that you sell the stock that's being sold into the market in a much more efficient way you can utilize it.
When you can when you can see that you've got a pipeline of investments buildings or towards the higher end of your target leverage ratio and you can raise capital so that <unk> can participate in investments that the platform is originating.
Speaker Change: As opposed to taking a place holder investment can actually take an investment.
Speaker Change: Of a decent size. So we see it exactly that way and we think that this tool is.
Speaker Change: It's something that will be beneficial for us over the years to come now that we've got the merger out of the way and we've seen how.
Speaker Change: How well the stock has performed we said this was the right time to announce it and make sure that it's there for when we need it.
Speaker Change: You can see that we do manage our we've managed.
Our targets.
Speaker Change: Our leverage towards the top end of our target range and so this just gives us that tool to the extent that there are opportunities.
Speaker Change: For us to deploy to be able to utilize a program with us.
Speaker Change: Thanks, so much.
Speaker Change: Our next question is from Paul Johnson from <unk>. Please go ahead.
Speaker Change: Yeah. Good morning, Thanks for taking my questions.
Just one more on the ATM I imagine.
Speaker Change: We'll be issuing above book value, but just to clarify.
Speaker Change: In terms of how you issue on a net basis would you be.
Speaker Change: Issuing in any way, where it would be dilutive just.
Speaker Change: Spread that you are paying on issuance, whereas the plant would be issuing well above NAV.
Speaker Change: <unk>.
Speaker Change: Fundamental fundamental principle of this program for US is that we're going to be on a net basis issuing above book value it will be it.
Speaker Change: It will be accretive it will not be dilutive.
Speaker Change: Okay. Thank you for that and then.
Speaker Change: On the the several multibillion dollar deals that were done on the platform during the quarter on the on the Blue our platform.
Speaker Change: Were any of these where these new acquisitions or were these.
Speaker Change: Refinancing deals essentially out of the syndicated market what was kind of the nature of those larger multibillion dollar deals.
Speaker Change: Yes.
Speaker Change: Examples where public to private transactions.
Speaker Change: You have seen publicly announced catalog transaction, so public take private by Novo.
Speaker Change: As well as square space, which closed in the quarter uptake private by Premier So public and private new borrowers new transactions not refinancings.
Speaker Change: There was a third one that was a private insurance brokerage transaction, but also a new Monte deal for us. So all new borrowers I believe we added seven or eight new borrowers to the portfolio. This year. So.
Speaker Change: Certainly diversified the portfolio.
Speaker Change: And found new names.
Craig Packer: Certainly gained share in terms of how we've seen new companies choosing to go direct relative to the syndicated market. Despite those syndicated markets be wide open as Craig mentioned, we've seen.
Craig Packer: Certainly the majority of choices go direct and in those examples of those deals where were some of those new Lps.
Craig Packer: Thank you for that and then.
Craig Packer: Higher level.
Speaker Change: I'm, just wondering kind of just how amendment activity trended for the quarter. If there was any significant difference from the trend throughout the year or anything that would be worth highlighting there and that's all for me. Thanks.
Speaker Change: Sure that's an activity was flat quarter over quarter for us, we really arent seeing any uptick in what we would.
Speaker Change: Characterize as material amendments.
So we've seen.
Speaker Change: A couple of those a quarter for really the last year and we haven't seen any changes in activity levels.
Speaker Change: So nothing nothing to look at API perspective, where we would be concerned.
Speaker Change: Great. Thank you Vanessa reminder, if you'd like to ask a question. It is star one.
Speaker Change: Next question here is from Mark Hughes from <unk> Securities. Please go ahead.
Mark Hughes: Yes, Thank you and good morning.
Speaker Change: We're friends at least as you disclosed in the presentation, we're up 10 basis points sequentially in the fourth quarter and as we are.
Mark Hughes: Just talking about the <unk>.
Mark Hughes: You did a number of bigger deals.
Mark Hughes: It's spread the stabilized gone in the other direction that a mix issue how would you describe that.
Mark Hughes: Yeah.
Mark Hughes: I think they are stabilized to be how I would characterize it we find ourselves in that $4 75 to 500 spread environment for new deals for the really the last three quarters of the year.
Mark Hughes: Well, we've refinanced transactions.
Mark Hughes: They are at a higher spreads oftentimes, we're able to refinance with incumbencies slightly higher.
Mark Hughes: Or for credit specific reasons, there is a slightly higher spread so it's really.
Mark Hughes: The small changes in spread in terms of our deployment are really I think just a mix.
Mark Hughes: Our deal mix specific but not a trend.
Mark Hughes: Spreads have been stable in our view for basically the last three quarters.
Speaker Change: Got a question with a lot of the refi that's been going on how.
Speaker Change: How much have you seen sponsors taking equity out of the company maybe.
Speaker Change: Limiting some of that pressure on.
Speaker Change: On the <unk>.
Speaker Change: New deals or overall M&A activity.
Speaker Change: With the refi withdrawing equity using that to to.
Speaker Change: Maybe in the short term at least satisfy the LP is there anything to note.
Speaker Change: In the broader market.
Speaker Change: I don't know I don't think thats going on in any large scale way that would be if you give you give you some sense right.
Speaker Change: There are for the most part the Refis are.
Speaker Change: Like for like.
Speaker Change: Our company is trying to take advantage of lower spreads maybe create a little extra liquidity.
Speaker Change: For acquisitions to a small acquisition I'm sure of it yet.
Speaker Change: There are some where there is a modest dividend, but no we're not seeing any significant wave.
Speaker Change: Refinancings were so.
Speaker Change: So sponsors can say.
Capital return LTE is look the sponsors will likely turn capital to Lps.
Speaker Change: So very very front of mind issue for them and for the Lps.
Speaker Change: They are eager to do it but I think that there is there is a concern for many sponsors about valuation that they will get if they exit and so they're just holding off our companies are performing well and they either.
Speaker Change: They're waiting until they get more confidence on the exit.
Speaker Change: So there may be a few a few select instances, where theyre, taking some money out meantime, but.
But that's that's not a big a big waves from our perspective.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. This concludes the question and answer session I would like to turn the floor back to management for closing comments.
Speaker Change: Okay. Thanks, all for joining this morning, we really feel great about our quarter I appreciate the chance to have some time. This morning, if you have any follow up questions.
Speaker Change: <unk> easily accessible.
Speaker Change: Look forward to talking to more in the future.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.
Speaker Change: [music].