Q1 2025 Blue Owl Capital Corp Earnings Call
Good morning, everyone and welcome to Blue Capital Corporation's first quarter 2025 earnings call.
Unknown Executive: Good morning, everyone, and welcome to Blue Owl Capital Corporation's first quarter 2025 earnings call. As a reminder, this call is being recorded.
Reminder, this call is being recorded.
Mike Mosticchio: At this time, I'd like to turn the call over to Mike Mosticchio, head of BDC Investor Relations. Thank you, operator and welcome to Blue Owl Capital Corporation's first quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31, 2025. These should be reviewed in connection with the company's 10Q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation, and 10Q are available on the investor section of the company's website at blueowlcapitalcorporation.com.
Mike Shim: At this time I'd like to turn the call over to Mike Mr. Shim head of BDC Investor Relations.
Speaker Change: Thank you operator, and welcome to <unk> Capital Corporation first quarter 2025 earnings Conference call Yes.
Speaker Change: Yesterday <unk> Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31 2025.
Speaker Change: These should be reviewed in action with the company's 10-Q filed yesterday with the SEC.
Speaker Change: All materials referenced on today's call, including the earnings press release earnings presentation, and 10-Q are available on the investors section of the company's website.
Speaker Change: <unk> Capital Corporation Dotcom.
Mike Mosticchio: Joining us on the call today are Craig Packer, Chief Executive Officer, Logan Nicholson, President, and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements which are not guaranteed a future performance or results and involve a number of risks and uncertainties that are outside of the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC's filings with the SEC.
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, which 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 or Bdcs filings with the SEC.
Mike Mosticchio: The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's earnings materials, including information related to portfolio. was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information.
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 and has not been independently independently verified.
Speaker Change: The company makes no such representation or warranty is with respect to this information with that I'll turn the call over to Craig.
Craig Packer: With that, I'll turn the call over to Craig. Thanks, Mike. Good morning, everyone. And thank you all for joining us today. We delivered solid first quarter results driven by the ongoing strong performance of our portfolio. As a reminder, we completed the merger between OBDC and OBDE on January 13th. So our first quarter results now represent the combined company. In the first quarter, we generated an ROE of 10.2%, our 11th consecutive double-digit ROE, based on $0.39 per share of adjusted NII. As discussed during our last earnings call, the decline from the prior quarter was anticipated. Our results last year significantly benefited from higher interest rates and elevated income from repayment activities.
Craig: Thanks, Mike Good morning, everyone and thank you all for joining us today.
Craig: We delivered solid first quarter results driven by the ongoing strong performance of our portfolio.
Craig: As a reminder, we completed the merger between Ob D C and Ob G E on January 13th for our first quarter results now represent the combined company.
Craig: In the first quarter, we generated an ROE of 10, 2%, our aloha 11th consecutive double digit Roe.
Craig: Based on 39 per share of adjusted NII.
Craig: As discussed during our last earnings call the decline from the prior quarter was anticipated.
Craig: Our results last year significantly benefited from higher interest rates and elevated income from repayment activity.
Craig Packer: both of which have started to normalize. Jonathan will go into more detail later on, but in the first quarter, we experienced a lower level of one-time, non-recurring income. As compared to the fourth quarter, as well as the remaining impact of interest rate cuts from last year.
Craig: Both of which have started to normalize.
Craig: Jonathan will go into more detail later on but in the first quarter, we experienced a lower level of one time nonrecurring income as compared to the fourth quarter as well as the remaining impact of interest rate cuts from last year.
Craig Packer: As of quarter end, our net asset value per share was $15.14, down slightly from the prior That said, the fundamental performance of the portfolio remains strong, credit quality is solid, and our non-accrual rate continues to be well below the industry average. While we are now operating in a more normalized earnings environment, we remain confident in the credit quality of the portfolio.
Craig: As of quarter end, our net asset value per share was $15 in 14th says down slightly from the prior quarter.
Craig: That said the fundamental performance of the portfolio remains strong credit quality is solid and our nonaccrual rate continues to be well below the industry average.
Craig: While we're now operating at a more normalized earnings environment, we remain confident in the credit quality of the portfolio.
Craig: In light of events over the past month I thought it would be helpful to share our perspective on the current economic and market environment.
Craig Packer: In light of events over the past month, I thought it would be helpful to share our perspective on the current economic and market environment. With uncertainty around tariff policy, ensuing equity sell-off in April, and the possibility of an economic slowdown, we took the opportunity to re-evaluate the health of our entire portfolio by re-underwriting our investments through the lens of potential scenarios for the months ahead. Following this review, we are confident that OBDC is well positioned to navigate these uncertain times. As was the case during the COVID pandemic in 2020. and Regional Banking Crisis in 2023.
Craig: With the uncertainty around tariff policy.
Craig: Assuming equity sell off in April and the possibility of an economic slowdown we took the opportunity to reevaluate the health of our entire portfolio by re underwriting our investments through the lens of potential scenarios for the months ahead.
Craig: Following this review we are confident that all BDC is well positioned to navigate these uncertain times.
Craig: As was the case during the Covid pandemic in 2020.
Craig: And the regional banking crisis in 2023.
Craig Packer: Our portfolio is built for resilience during economic disruption. Our team has been through seismic events before, and we are actively monitoring the portfolio in real time. Maintaining positive dialogue with our portfolio companies, sponsors, and partners to proactively address any issues that may arise. While the economic outlook remains unclear, we believe we are entering this period from a position of strength. Performance across our portfolio companies remains healthy, which we believe is a result of our weighting towards defensive sector. This stands in stark contrast to the public fixed income market. are more meaningfully skewed towards cyclical industries such as building products, retail, autos, energy and chemicals.
Craig: Our portfolio is built for resilience during economic disruptions.
Craig: Our team has been through seismic events before and we're actively monitoring the portfolio in real time.
Craig: Maintaining positive dialogue with our portfolio companies sponsors and partners to proactively address any issues that may arise.
Craig: While the economic outlook remains unclear. We believe we are entering this period from a position of strength performance across our portfolio of companies remains healthy.
Craig: We believe as a result of our weighting towards defensive sectors.
Craig: This stands in Stark contrast to the public fixed income markets, which are more meaningfully skewed towards cyclical industries, such as building products retail autos energy and chemicals sectors in which obesity generally has not invested.
Craig Packer: sectors in which OBDC generally has not invested. As noted on our last earnings call, approximately 94% of our portfolio of companies are based in the United States and primarily serve domestic customers. Limiting Exposure to International Trade Disruption Our top sectors are primarily service oriented such as health care, business services, financial services or software, which reduces reliance on manufactured goods or commodities and minimizes direct tariff impact. We estimate that our exposure to companies with significant offshore manufacturing is limited to mid-single digits of the portfolio. Additionally, these businesses generally have diverse product sourcing capabilities and experience management teams that have successfully navigated previous tariff or supply chain disruptions.
Craig: As noted on our last earnings call approximately 94% of our portfolio companies are based in the United States are primarily serve domestic customers limiting exposure to international trade disruptions.
Craig: Our top sectors are primarily service oriented such as health care business services financial services or software.
Craig: Which reduces reliance on manufactured goods or commodities and minimizes direct tariff impacts.
Craig: We estimate that our exposure to companies with significant offshore manufacturing is limited to mid single digits of the portfolio.
Craig: Additionally, these businesses generally have diverse product sourcing capabilities and experienced management teams that have successfully navigated previous tariff or supply chain disruptions. This.
Craig Packer: This was by design. Since inception, we've built our portfolio to withstand turbulent economic environments and believe we will be a safe port in the storm. That said, we remain quite cautious about the impact of potential negative economic developments that our portfolio companies might face. including the possibility of broader recessionary pressure. This is why we've taken a proactive approach in response to the recent policy announcements by focusing on what we can control and quickly addressing any challenges that arise. OBDC's defensive position as a senior secured lender with low loan-to-values can mitigate risk experienced during uncertain markets and, in our view, positions us well to weather potential future volatility or a recession.
Craig: This was by design since inception, we've built our portfolio to withstand turbulent economic environments and I believe we will be a safe port in the storm.
Craig: That said, we remain quite cautious about the impact of potential negative economic developments that our portfolio companies might face, including the possibility of broader recessionary pressures.
Craig: This is why we've taken a proactive approach in response to recent policy announcements by focusing on what we can control and quickly addressing any challenges that arise.
Craig: Obi D CS defensive position as a senior secured lender with low loan to values can mitigate risk experienced during uncertain markets and in our view positions us well to weather potential future volatility or a recession.
Craig: The majority of our portfolio companies are backed by private equity sponsors where skilled operators with significant equity investments in these businesses.
Craig Packer: majority of our portfolio companies are backed by private equity sponsors, or skilled operators with significant equity investments in these This is particularly important during more volatile times, as these sponsors have substantial financial resources, including ample dry powder, to support their investments for extended periods of stress, as we saw during COVID. Additionally, we are a lead or co-lead lender on roughly 90% of deals and an administrative agent on approximately 65% of our investments across our platform. which gives us direct access to real-time information on borrower performance. To date, we have not seen any material signs of stress, such as increased revolver borrowings, requests for interest payment modifications, or late interest payments.
Craig: This is particularly important during more volatile times as the sponsors have substantial financial resources, including ample dry powder to support their investments for extended periods of stress as we saw during COVID-19.
Craig: Additionally, we are lead or co lead lender and roughly 90% of deals and the administrative agent on approximately 65% of our investments across our platform.
Craig: Which gives us direct access to real time information our borrower performance.
Craig: To date, we have not seen any material signs of stress such as increased revolver borrowings requests for interest payment modifications related interest payments.
Craig: We also benefit from a strong balance sheet and significant liquidity supported by diversified and flexible funding sources to allow us to be resilient and divest across all market environments.
Craig Packer: We also benefit from a strong balance sheet and significant liquidity. Supported by diversified and flexible funding sources. to allow us to be resilient and invest across all market environments.
Craig: In summary, we believe our experienced team defensively constructed portfolio disciplined underwriting highly durable funding model have positioned us to protect our shareholders regardless of what lies ahead.
Craig Packer: In summary, we believe our experienced team, defensively constructed portfolio, disciplined underwriting, and highly durable funding model have positioned us to protect our shareholders, regardless of what lies ahead.
Logan Nicholson: With that, I'll turn it over to Logan for additional color on portfolio. Thanks, Craig. As just mentioned, the recent policy shifts subsequent to quarter end only added to the uncertainty about when a pickup and M&A activity will materialize. Accordingly, originations were lighter this quarter. We recorded $1.2 billion of new investment commitments and $800 million of fundings excluding joint venture and strategic equity activities. Over 90% of first quarter direct loan originations consisted of first lien investments, as we continue to believe that first lien and Unitron's loans provide the most attractive relative value in the current market.
Craig: With that I'll turn it over to Logan for additional color on portfolio performance.
Logan: Thanks, Greg.
Speaker Change: As just mentioned the recent policy shifts subsequent to quarter end only added to the uncertainty about when a pick up in M&A activity materials.
Speaker Change: Accordingly originations were later this quarter, we recorded $1 $2 billion of new investments and.
Speaker Change: At $800 million of fundings, excluding joint venture and strategic equity activity.
Speaker Change: Over 90% of first quarter direct loan originations consisted of first lien investments as we continue to believe that first lien and unitranche loans provide the most attractive relative value in the current market.
Speaker Change: As a result over the last year <unk> first lien investments have grown from 73% to 77% of the portfolio.
Logan Nicholson: As a result, over the last year, OBDC's first lien investments have grown from 73% to 77% of the portfolio. While activity has slowed, we continue to find large high quality opportunities during the quarter, including PCI Pharma, a $4.5 billion transaction led by Blue Owl to refinance a syndicated loan. Notably, with an average deal size of approximately $2 billion this quarter, we continue to see the market migrate towards larger, more diversified growth. With the addition of first quarter originations, the median EBITDA of our portfolio borrowers grew slightly to $120 million and weighted average EBITDA increased to $215 million.
Speaker Change: While activity has slowed we continued to find large high quality opportunities during the quarter, including PCI pharma, a $4 $5 billion transaction led by Blue all to refinance the syndicated loan.
Speaker Change: Notably with an average deal size of approximately $2 billion. This quarter, we continue to see the market migrate towards larger more diversified.
Speaker Change: With the addition of first quarter originations. The median EBITDA of our portfolio of borrowers grew slightly to $120 million and weighted average EBITDA increased to $215 million.
Logan Nicholson: Portfolio company revenues and EBITDA once again increased in the mid to high single digits year over year. We would highlight this is approximately double the U.S. GDP growth rate due to our durable, non-cyclical sector selection, which should provide our borrowers more cushion in a potential recession. The portfolio also remains highly diversified, with an average investment size of approximately 40 basis points. And our top 10 investments represent approximately 22% of the portfolio, down from 24% in the prior quarter. Additionally, as Craig noted, our average LTV is just over 40%, which provides significant support underneath our capital.
Speaker Change: Portfolio of company revenues and EBITDA once again increased in the mid to high single digits year over year.
Speaker Change: We would highlight this is approximately double the U S GDP growth rate due to our durable non cyclical sector selection, which should provide our borrowers more cushion and a potential recession.
Speaker Change: The portfolio also remains highly diversified with an average investment size of approximately 40 basis points and our top 10 investments represented approximately 22% of the portfolio down from 24% in the prior quarter.
Speaker Change: Additionally, as Greg noted our average LTV is just over 40%, which provides significant support underneath our cap.
Logan Nicholson: Now I'd like to touch on some credit metrics in our portfolio. The non-accrual rate as of quarter end was 0.8% at fair value and 1.4% at cost, compared to 0.4% and 1.9% in the prior quarter. The change reflects two additions, including National Dentex Labs and the removal of three positions that were fully executed. Stepping back, our non-accrual rate remains at the lower end of our broader sector average. Next, our internal rating system, which ranges from one to five as an indicator of portfolio health, remains steady, and the subset of names on our watch list is also stable quarter over quarter.
Speaker Change: Now I'd like to touch on some credit metrics in our portfolio.
Speaker Change: The non accrual rate as of quarter end was 8% at fair value and one 4% cost compared to <unk>, 4% and one 9% in the prior quarter.
Speaker Change: The change reflects two additions, including National Dentex labs, and the removal of three positions that were fully exited stepping.
Speaker Change: Stepping back our nonaccrual rate remains at the lower at our broader sector averages.
Speaker Change: Next our internal rating system, which ranges from one to five as an indicator of portfolio health.
Speaker Change: <unk> steady and the subset of names on our watch list is also stable quarter over quarter.
Logan Nicholson: Interest coverage remains steady at 1.8 times based on current spot rates, up from trough levels, as lower rates have benefited our borrowers, which should provide them a bit more flexibility during this period of uncertainty. Finally, PIC income declined to 10.7% of total investment income from 13.2% last quarter. driven by several investments that were awarded to All Cash Pay, as well as the merger with OBDE, which had lower levels of PIC exposure. As we've highlighted in the past, the vast majority of this pick was underwritten at inception rather than as a result of credit issues, and these investments continue to perform as expected.
Speaker Change: Interest coverage remained steady at one eight times based on current spot rates up from trough levels as lower rates have benefited our borrowers which should provide them a bit more flexibility during this period of uncertainty.
Speaker Change: Finally pick income declined to 10, 7% total investment income from 13, 2% last quarter.
Speaker Change: Driven by several investments that converted.
Speaker Change: All cash pay as well as the merger with Ob D E, which had lower levels of take exposure.
Speaker Change: As we've highlighted in the past the vast majority of this tech was underwritten at inception, rather than as a result of credit issues and these investments continue to perform as expected.
Logan Nicholson: In closing, I want to echo the sentiment Craig shared. Our first quarter results demonstrate the continued strength of our portfolio. We are closely monitoring our investments for potential tariff impacts, but we remain confident in our defensive positioning and proactive in our approach.
Speaker Change: In closing I want to echo the sentiment brake share our first quarter results demonstrate the continued strength of our portfolio.
Jonathan: We are closely monitoring our investments for potential tariff impacts, but we remain confident our defensive positioning and proactive in our approach and now I'll turn over the call to Jonathan to provide more detail on our first quarter financial results.
Jonathan Lamm: And now I'll turn over the call to Jonathan to provide more detail on our first quarter financial results. Thank you, Logan. Before discussing our financial results, I want to review the non-GAAP accounting adjustments we introduced this quarter due to the accounting treatment of our recent merger with OVD. We did this to help make our post-merger financials more comparable to pre-merger results. Under the asset acquisition method, we recognized an $83 million purchase discount on the assets acquired from OBDE, which resulted in a one-time unrealized gain to OBDC in the first quarter. This purchase discount will be reversed out of unrealized gains into total investment income each quarter as the legacy OBDE loans mature or are realized.
Jonathan: Thank you Logan.
Jonathan: Before discussing our financial results I want to review the non-GAAP.
Jonathan: We introduced this quarter due to the accounting treatment of our recent merger with <unk>.
Jonathan: We did this to help make our post merger financials more comparable pre merger results.
Jonathan: So through the asset acquisition methods, we recognized an 83 billion dollar purchase discount the assets are.
Jonathan: <unk>.
Jonathan: Which resulted in a onetime unrealized <unk> and the first quarter.
Jonathan: This purchase discount will be reversed our realized gains into total investing.
Jonathan: Each quarter as the legacy <unk> loans mature or are realized.
Jonathan Lamm: In the first quarter, this amortization income represented approximately two cents per share. Importantly, we have amended our investment advisory agreement to revise the calculation of incentive fees to ensure that any income or net realized gains arising solely from the merger accounting treatment will have no impact on the incentive fees paid by Blue Owl. This non-cash amortization will be reflected in our results going forward and we're happy to discuss this further with you in Q&A or offline to the extent you have any questions.
Jonathan: In the first quarter. This amortization income represented approximately two cents per share.
Jonathan: Importantly, we have amended our investment advisory agreement to revised calculation of incentive fees to ensure that any income for net realized gains arising from the merger accounting treatment will have no impact on the incentive fees payable.
Jonathan: Sure.
Jonathan: This noncash amortization will be reflected in our results going forward and we're happy to discuss this further with you in Q&A or offline to the extent you have any questions.
Jonathan: Now turning to our results we built upon the momentum established in 2024 and delivered another quarter of solid financial performance to begin the year.
Jonathan Lamm: Now turning to our results. We built upon the momentum established in 2024 and delivered another quarter of solid financial performance to begin the year. Following completion of the merger with OBDE, we ended the quarter with total portfolio investments of nearly $18 billion, total net assets of nearly $8 billion, and total outstanding debt of approximately $10 billion. Our first quarter now per share is $15.14, down 12 cents from the last quarter. The decline was primarily driven by changes in credit spreads and write-downs on a small number of high-focus events.
Jonathan: Completion of the merger with IBD, we ended the quarter with total portfolio investments of nearly $18 billion total net assets of nearly $8 billion and total outstanding debt of approximately $10 billion.
Jonathan: Our first quarter NAV per share $16.14 down 12 cents from the last quarter.
Jonathan: The decline was primarily driven by changes in credit spreads and breakdowns from a small number of high focus investments.
Jonathan: Turning to the income statement.
Jonathan Lamm: Trying to be ignorant today. We reported adjusted net investment income of 39 cents per share, down 8 cents from the prior quarter, which was in line with our expectations. As discussed on our last earnings call, the decline primarily reflects a meaningful reduction in one-time income. including early repayment activity and a dividend we received in the fourth quarter, which together contributed approximately five cents to last quarter's NIL. In addition, the remaining one third of the 100 basis point interest rate cuts that were implemented last year flowed through earnings, as well as a small amount of spread compression of approximately 10 basis points.
Jonathan: We reported adjusted net investment income <unk> 39 per share down <unk> <unk> from the prior quarter, which was in line with our expectations.
Jonathan: As discussed on our last earnings call.
Jonathan: Primarily reflects a meaningful reduction one timing.
Jonathan: Including early repayment activity and a dividend we received in the fourth quarter, which together contributed approximately five last quarters.
Jonathan: In addition, the remaining one third of the 100 basis point interest rate cuts implemented last year.
Jonathan: As well as a small amount of spread compression of approximately 10 basis.
Jonathan: Similar to prior quarters, we over earned our base.
Jonathan Lamm: Similar to prior quarters, we over-earned our base dividend, resulting in the board declaring a $0.01 supplemental dividend based on our first quarter results. which will be paid on June 13 to shareholders of record as of May 30. As a reminder, we implemented a programmatic supplemental dividend framework to allow shareholders to benefit from the higher returns associated with the increased rate environment, which has worked as designed. The board also declared a second quarter base dividend of 37 cents, which will be paid on July 15th to shareholders of record as of June 30th. We believe OVDC is well positioned for the evolving great environment, and that the base evening continues to be supported by our adjusted earnings.
Jonathan: Resulting in the board declared a Q1 supplemental dividend based on the first quarter was which will be paid on June 13 to shareholders of Brookfield asset.
Jonathan: Sure.
Jonathan: As a reminder, we implemented a programmatic supplemental the midstream to last shareholders benefit from higher returns associated with with the increased rate environment.
Jonathan: Just worked as designed.
Jonathan: The board also declared a second quarter base dividend <unk> 37, which will be paid on July 15 to shareholders of record as of June <unk>.
Jonathan: We believe our BDC is well positioned for the evolving.
Jonathan: Rate environment and the base dividend continues to be supported by our adjusted earnings with 106%.
Jonathan Lamm: 106% Dividend Income. Further, our spillover income remains healthy at approximately $0.34 and equates to nearly a full quarter's worth of base dividend. We believe having a meaningful undistributed spillover supports our goal of maintaining a steady dividend through volatile and varying market conditions.
Jonathan: Further our spillover income remains healthy proximately 34 sites.
Jonathan: <unk> to nearly a full quarter's worth.
Jonathan: Yes.
Jonathan: We believe having a meaningful undistributed spillover supports our goal of steady dividend through volatile in varying market conditions.
Jonathan Lamm: Moving to the balance sheet, we are entering the year on a solid footing as our diversified capital structure positions us to expand the current environment. We finished the quarter with net leverage of 1.26. up from 1.19 times and just outside of our target range of 0.9 to 1.25 times. which is partly attributable to the one time leveraging event of the merger with OBGYN. We also had visibility into a couple of large repayments that slipped into April, and as a result, we expect net leverage in Q2 will be within our target.
Jonathan: Moving to the balance sheet.
Jonathan: We are entering the year on solid footing.
Speaker Change: <unk> capital structure positions us to withstand the current environment.
Speaker Change: We finished the quarter with net leverage was two six times up from $1 1 million times and just outside of our target range of nine to one.
Speaker Change: One in a quarter.
Speaker Change: Which is partly attributable to the onetime leverage event with merger.
Speaker Change: We also have visibility into a couple of large repayments that slipped into April as a result, we expect net leverage in Q2 will be within our target range.
Jonathan Lamm: Since the merger closing in January, we have taken several steps to optimize our capital structure and reduce funding costs at OBDC. During the first quarter and post-quarter end, we reset two sale loads and amended two of our bilateral SPVs, reducing interest expense for each and extending maturities for most of the facility. In April, we repaid OBD's $142 million July 2025 notes, which was modestly accretive to net investment income, as the notes had a higher interest rate as compared to OBDC's cost of Lastly, as a reminder, we pre-funded the 425 million unsecured notes that matured in March by opportunistically raising $400 million through a reopening of OBDC's March 2029 unsecured notes last quarter, which priced a swap spread of SOFR plus 192 basis.
Speaker Change: Since the merger closing in January we have taken several steps to optimize our capital structure and reduce funding costs at <unk>.
Speaker Change: During the first quarter and post quarter end, we've reset to sell those and amended two of our bilateral spv's, reducing interest expense for each and extending maturities for most of the facilities.
Speaker Change: In April we repaid <unk> $142 million or July 2025 notes, which was modestly accretive to net investment income as the notes at a higher interest rate as compared to <unk> cost.
Speaker Change: Lastly, as a reminder, we pre funded the $425 million secured notes that matured in March by Opportunistically raising $400 million.
Speaker Change: The opening of Ob Dcs March 2029.
Speaker Change: Last quarter, which priced the swap spread so for plus 192 basis.
Jonathan Lamm: Near Secured Credit Facility Price These changes represent our continuing efforts to actively improve our liability structure and optimize ROE post-merger.
Speaker Change: Near secured credit facility pricing.
Speaker Change: These changes represents our continuing efforts to actively improve our liability structure and optimize our ROE post merger.
Speaker Change: Turning to liquidity.
Jonathan Lamm: Turning to liquidity, we ended the quarter with over $3 billion of total cash and capacity on our facilities, which was over two times in excess of our unfunded commitment. that can be immediately dropped. Importantly, we have no material short term maturities, and our robust liquidity position provides us with more than ample unfunded capacity to meet any near term fund Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for a more uncertain environment ahead.
Speaker Change: We ended the quarter with over $3 billion of total cash and capacity on our facilities, which is which was over two times in excess of our funding commitments that can be immediately draw.
Speaker Change: Importantly, we have no material short term maturities and a robust liquidity position provides us more than ample.
Speaker Change: Simple unfunded capacity to meet any near term.
Speaker Change: Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for a more uncertain environment.
Craig Packer: And now I'll hand it back to Craig to provide final thoughts for today's call. Thanks, Jonathan. The recent volatility across stocks and public fixed income markets has signaled a potential shift in the investment land While leverage at OBDC is towards the high end of our target range, we remain agile and able to deploy capital strategically as repayments come in, which allows us to be patient and pick our spots as we find opportunities. Last year, we experienced a significant number of refinancings, which impacted the overall spread of our portfolio. However, at this point, we believe most of this refinancing activity has played out, which means we have the ability to operate with a high quality portfolio that benefits from stable spread.
Craig: And now I will hand, it back to Craig to provide final thoughts for today's call.
Craig: Thanks, Jonathan the.
Craig: The recent volatility across stocks in public fixed income markets has signaled a potential shift in the investment landscape.
Craig: And parents like this we believe private credit is poised to capitalize on market volatility by providing support to borrowers and sponsors facing challenges in accessing financing.
Craig: While leverage at O B D. C is towards the high end of our target range, we remain agile and able to deploy capital strategically as repayments come in which allows us to be patient and pick our spots as we find opportunities.
Craig: Last year, we experienced a significant number of refinancings, which impacted the overall spread of our portfolio.
Craig: However at this point, we believe most of this refinancing activity has played out.
Craig: Means we have the ability to operate with a high quality portfolio that benefits from stable spreads.
Craig Packer: This positions us well to be patient and selective, knowing that as public markets continue to experience volatility, the value of the certainty we offer to borrowers only increases. While it is too early to say how long this environment will last, we are confident in our ability to take advantage of opportunities given our capital, resources, and long-term investing time horizon to navigate what lies ahead. Looking forward, while macroeconomic uncertainty persists, the market is anticipating a significant reduction in interest will impact our earnings. That said, we believe our stable earnings profile and compelling risk adjustment. continue to make us an attractive option for investors, even in a lower rate environment.
Craig: This positions us well to be patient and selective knowing that as public markets continue to experience volatility the value of the certainty we offered to borrowers only increases.
Speaker Change: Paul It was too early to say how long this environment will last we are confident in our ability to take advantage of opportunities given our capital resources and long term investing time horizon to navigate what lies ahead.
Speaker Change: Looking forward, while macro economic uncertainty persists the market is anticipating a significant reduction in interest rates, which will impact our earnings.
Speaker Change: That said, we believe our stable earnings profile and compelling risk adjusted returns, we'll continue to make us an attractive option for investors, even at a lower rate environment.
Speaker Change: As we've mentioned throughout today's call our portfolio is performing well, reflecting the continued strength and resilience of our borrowers.
Craig Packer: As we've mentioned throughout today's call, our portfolio is performing well, reflecting the continued strength and resilience of our borrowers. The stability of our portfolio gives us confidence in maintaining our dividend level for the remainder of 2025.
Speaker Change: Stability of our portfolio gives us confidence in maintaining our dividend level for the remainder of 2025.
Craig Packer: We are very pleased with our first quarter results and the seamless execution of the merger. We're confident in our ability to navigate a more challenging environment ahead, all while delivering attractive returns to our shareholders.
Speaker Change: To close we are very pleased with our first quarter results and the seamless execution of the merger we're confident in our ability to navigate a more challenging environment ahead, all while delivering attractive returns to our shareholders.
Unknown Executive: Thank you for your time today and we will now open the line for questions. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question at this time, please press star one from your telephone keypad and a confirmation tone indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Speaker Change: Thank you for your time today, and we'll now open the line for questions.
Speaker Change: Thank you.
Speaker Change: At this time, we'll be conducting a question and answer session.
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Speaker Change: One moment, please when we poll for questions.
Speaker Change: Our first question is from the line of Brian Mckenna with citizens. Please proceed with your question.
Brian McKenna: Our first question is from the line of Brian McKenna with Citizens. Please receive your question. Thanks.
Speaker Change: Thanks, Good morning, everyone.
Brian McKenna: Good morning, everyone. Craig, it would be great to get your perspective on how the macro unfolded over the past several months. I know you gave a little bit of color, but for some time now, we've talked about just how tight spreads were as banks were really active, and then there's just this lack of new M&A transactions. We finally got some volatility. Banks did pull back. So I'm just curious from your see how spreads trended from February to March and then from March into April and May. And then at the OWL Investor Day back in February, you stated, quote, unquote, I don't know.
Speaker Change: It will be good.
Speaker Change: To get your perspective on how the macro unfolded over the past several months I know you gave a little bit of color, but you know for some time now we've talked about you know just how tight spreads were as banks were really active in that and there was just this lack of new M&A transactions. We finally got some volatility banks did pull back. So I'm just curious from your seat helps spur.
Speaker Change: <unk> trended from February to March and then from March into April and May and then it would not be well Investor day back in February you stated quote unquote I don't know I haven't seen it yet when speaking about the forthcoming recovery in M&A. So here or there has been no change in the broader M&A backdrop do you have any updated thoughts on.
Brian McKenna: I haven't seen it yet. When speaking about the forthcoming recovery in M&A. So here we are. There's been no change in the broader M&A backdrop. Do you have any updated thoughts on where we go from here? And then, you know, if activity remains remuted on the M&A side, you know, how does that have any implications on OB?
Speaker Change: Where do we go from here and then you know if activity remains our muted on the M&A side, you know how to you know does that have any implications on Ob D C.
Speaker Change: Okay.
Craig Packer: Okay, thanks, Brian. There are a few pieces in there, so if I don't get to all of them, you know, remind me.
Speaker Change: Okay. Thanks, Brian.
Speaker Change: A few pieces in there so if I don't catch all of them remind me.
Craig Packer: My quote-unquote, I don't know, I haven't seen it yet. I think that's held up well over time. So I think I was probably spot on there.
Speaker Change: My quote unquote, I don't know I havent seen it yet I think that's held up well over time.
Speaker Change: No.
Speaker Change: Alright.
Speaker Change: Oh, you're spot on there.
Craig Packer: Look, to try to hit some of the themes that you're asking about. I'm just to pull the lens back. Last year was a moderate M&A environment. a really strong, broadly syndicated loan market. And rates, you know, spreads tight. And so there's a lot of refinancing last year, or a lot of public and private market dollars chasing a moderate amount of deal flow and that resulted in spread compression. hope this year was that there'd be a resumption in M&A. I think there was a lot of optimism within the new administration that that would be deregulated, deregulatory, that would result in M&A with private equity firms needing to return capital.
Speaker Change: Try to hit some of the themes that you're asking about.
Speaker Change: Just to pull the lens back last year.
Speaker Change: It's a moderate M&A environment.
Speaker Change: Really strong broadly syndicated loan market.
Speaker Change: And rates.
Speaker Change: Spreads are tight and so theres a lot of refinancing last year or a lot of public and private market dollars chasing a moderate amount of deal flow and that resulted in spread compression.
Speaker Change: I hope this year was that there'd be a resumption in M&A I think there was a lot of optimism with a new administration that there wouldn't be too regularly regulatory that would result in M&A with private equity firms needing to return capital.
Craig Packer: So there was a hope that that would result in more deal flow, more opportunities to deploy, and potentially improve spread environment.
Speaker Change: So there was a hope that that would result in more deal flow more opportunities to deploy and potentially improved spread environment.
Craig Packer: What's happened so far this year is given there's just been After the initial, I think, optimism around new administration, there's been a lot of uncertainty created by tariffs in particular, and that's had a chilling effect on M&A, both private equity, but just in general. The uncertainty around tariffs has created a muted M&A environment, and I think most people expect that to continue for a while. Until there's clarity, it's hard for companies to want to buy and sell and for there to be an active M&A environment. And so I think that will continue to be the case.
Speaker Change: What's happened so far this year has given theres just been.
Speaker Change: After the initial I think optimism around new administration, the theres been a lot of uncertainty created by tariffs in particular.
Speaker Change: That's had a chilling effect on M&A both.
Speaker Change: Private equity, but just in general the uncertainty around tariffs is created.
Speaker Change: A muted M&A environment and I think most people expect that to continue.
Speaker Change: Four.
Speaker Change: For a while until there's greater clarity is hard for companies to want to buy and sell in for there to be an active M&A environment.
Speaker Change: So I think that will continue to be the case.
Craig Packer: On the spread front, the public loan market, you know, really closed out, it's opened up a little bit now, but the extreme volatility of a month or so ago, really impacted the public loan market. So that bit went away. And so spreads, I think, have stabilized. Um, Our hope would have been in an environment with a lot of public market volatility, that spreads would widen, you know, typically, that's what you would see that that we haven't seen that private credit spreads are stable. I think different market participants might call it 25 basis points wider, 50 basis points wider.
Speaker Change: On the spread front.
Speaker Change: Hum.
Speaker Change: Public loan market.
Speaker Change: Really.
Speaker Change: Closed out its opened up a little bit now, but the extreme volatility of a month or so ago really impacted the public bond market. So that bid went away.
Speaker Change: And so spreads I think has stabilized.
Speaker Change: Our hope would have been in an environment with a lot of public market volatility.
Speaker Change: That spreads would widen typically thats, what you would see.
Speaker Change: That that we haven't seen that yet.
Speaker Change: Private credit spreads are stable I think different market participants might call it 25 basis points wider.
Speaker Change: Basis points wider but I think theres also deals that are getting done at really the same spread that you would've gotten done couple of months ago. So I think it's it's not coming entire our hope is to have it go wider we are certainly.
Craig Packer: But I think there's also deals that are getting done and really the same spread they would have gotten done a couple months ago. So I think it's not going any tighter. Our hope is to have it go wider. We are certainly pushing for that in the instances where we think it's appropriate. but there remains pretty modest deal flow. And so, you know, the deals we're seeing are good quality. You saw we had an active quarter. I think we'll continue to have an active year. Our portfolio companies, we have a significant number of incumbencies and they are constantly doing add-on acquisitions that are smaller, but allow us to deploy capital.
Speaker Change: Pushing for that in the instances, where we think it's appropriate.
Speaker Change: But there remains pretty modest deal flow.
Speaker Change: So.
Speaker Change: The deals we're seeing are good quality you saw we had an active quarter I think we'll continue to have an active year.
Speaker Change: Our portfolio of companies, we have a significant number of incumbencies and they are constantly doing that all acquisitions that are smaller.
Speaker Change: Us to deploy capital.
Craig Packer: You know, I think spreads, my hope is at some point, there'll be a pickup in activity and spreads will go wider a bit, but we're not seeing that just yet. You know, it's a fine environment for investing. I'd like to see more deal flow. I'd like to see a little bit better, you know, economic terms, but the quality is very good and the portfolio companies are holding up very well.
Speaker Change: I think spreads my hope is at some point there'll be a pickup in activity and spreads will go wider a bit we're not we're.
Speaker Change: We're not seeing that just yet.
Speaker Change: It's a fine environment for investing.
Speaker Change: I can see more deal flow I would like to see a little bit better.
Speaker Change: Economic terms, but the quality is very good and the.
Speaker Change: And the portfolio of companies are holding up very well, so hopefully that captures I think that just what youre asking about if I missed this.
Brian McKenna: So hopefully that captures, I think, the gist of what you're asking about, but if I missed any piece of it, you know, just remind. Yeah, no, I think you got most of it, if not all of it. So that that super helpful. Appreciate that.
Speaker Change: Yeah, No I think you got most of it if not all of it so that that super helpful. I appreciate that.
Brian McKenna: There were clearly a few questions in that.
Speaker Change: There were clearly a few questions in that so I just have one quick follow up is there any updated timeline around the public listing of ots now that that merger is complete.
Brian McKenna: So I just have one quick follow up. Is there any updated timeline around the public listing of OTF now that that merger is complete? Um, there's no, there's nothing, nothing for us to disclose here, you know, as we have with, you know, we've obviously completed a number of strategic transactions, you know, merger, merger of OPDC&E, merger of our two private tech funds, you know, we're, we take a very front foot, front footed approach with trying to find ways to overvalue for our shareholders, talk to our board regularly about about all those activities. And so our tech fund, I may report on it, but you know, the, the, our tech fund now combined the private tech funds would be one of the largest, most consequential OPDCs if it were a public company.
Speaker Change: Yes.
There's no there's nothing nothing for us to disclose here as we have with.
Speaker Change: Obviously, we completed a number of strategic transactions merger merger, how do you see any merger of our two private tech funds.
Speaker Change: We take a very front for <unk>.
Speaker Change: Front footed approach with trying to find ways to do it.
Speaker Change: Value for our shareholders our board regularly about about all those activities.
Speaker Change: And so our Tech fund dominating report on it but the.
Speaker Change: Our Tech fund now combined.
Speaker Change: Protect bonds would be one of the largest most consequential bdcs are core public companies will be found the window, where we think that makes sense.
Craig Packer: So we found a window where we think that makes sense, you know, that we would explore that as we have some of these other strategic transactions. So, you know, we're, you know, we actively look at each of our funds regularly to see what makes sense, but nothing more specific to report.
Speaker Change: That we would explore that as we have some of these other strategic transactions.
Speaker Change: So where we are.
Speaker Change: We look at it.
Speaker Change: At each of our funds regularly to see what makes sense, but nothing more specific to report.
Brian McKenna: Okay, I'll leave it there. Thanks, Craig. Thanks, Brian.
Craig: I'll leave it there thanks Craig.
Speaker Change: Thanks, Brian.
Speaker Change: The next questions are from the line of Mickey Schlein with Ladenburg Thalmann. Please proceed with your question.
Mickey Schleien: The next questions are from the line of Mickey Schleien with Leidenberg-Thalmann.
Mickey Schleien: Pleased to see you. It's your question. Good morning. I wanted to record it. This call is no longer being recorded. Craig? We're here, Mickey. I'm not sure what that was. Yeah, I'm not sure. Sorry.
Speaker Change: Good morning, I wanted to ask will be recorded.
Speaker Change: Okay.
Speaker Change: This call is no longer being recorded.
Speaker Change: Greg.
Speaker Change: We're here makes you I am not sure what that was.
Speaker Change: I'm not sure sorry.
Mickey Schleien: I wanted to ask a spread question as well, but you explained it very...
Speaker Change: I wanted to ask the spread question as well, but but you you explained it very.
Speaker Change: Okay.
Speaker Change: A thoroughly.
Mickey Schleien: So my other question is related to share repurchases. I realize there are windows which open and close for share repurchases, but why not rotate some of the repayments you received into buying shares during the recent periods of volatility, which would seem to be a great use of capital? So we have a share repurchase program. We've also instituted an ATM program. We look at both tools regularly, weekly, daily.
Speaker Change: My other question is related to share repurchases.
Speaker Change: I realize there are windows, which opened and closed for share repurchases, but why not rotate some of the repayments you received.
Speaker Change: Buying shares during the recent periods of volatility, which would seem to be a great use of capital.
Speaker Change: Yes.
Speaker Change: So we have we have a share repurchase program. We've also instituted an ATM program.
Speaker Change: We look at both tools.
Speaker Change: Rarely weekly daily.
Craig Packer: As you know, there are windows for share repurchases, and they're meaningful windows, which I won't get into precisely here, but they're measured in weeks, not in days. And so if there are environments that line up with our windows to buy shares, that's a conversation that we'll have with our board. It was not that long ago that we've been above both values, so these things move quickly and they have to line up. We've used the share repurchase in the past, and we can look at using it again. I mean, I agree with your instinct, which is we think that our stock, trading where it is, is not reflective of the fundamentals of the portfolio performance, which continues to be excellent.
Speaker Change: As you know there are windows for share repurchases, so and they are in there and they're meaningful windows.
Speaker Change: I won't get into precisely here, but they're measured in weeks not in days.
Speaker Change: And so.
Speaker Change: If there are environments that wind up with our windows.
Speaker Change: Buy shares that's a conversation that we'll have with our board meeting.
Speaker Change: Not that long ago that we have.
Speaker Change: Been above book value. So these things move quickly and they have to lineup we'd use the share repurchase in the past.
Speaker Change: We can look at using it again.
Speaker Change: I agree with your instinct, which is we think that our stock trading where it is not reflective of the fundamentals of the portfolio performance continues to be excellent.
Craig Packer: The yield on our stock today on our base dividend is close to 11%, and we haven't had any credit issues in our peers that have comparable credit quality or trading book value. We traded 90 cents of book value. So we agree with the sentiment that our stock is attractively priced. Obviously, the capital is very valuable to deploy, so we always weigh that, but it's something that we will continue to look at.
Speaker Change: Yield on our stock today on our base dividend is close to 11%.
Speaker Change: And we haven't had any credit issues in our peers that have comparable credit quality, a trading book value we trade it.
Speaker Change: The book value so.
Speaker Change: We agree with the sentiment that our stock is attractively priced.
Speaker Change: Obviously, the capital is very valuable to the voice so we always weigh that.
Speaker Change: It's something that we will continue to look at.
Speaker Change: So.
Mickey Schleien: So, if I understand correctly, that recent period of volatility where we saw a sharp sell-off over a few days, it just didn't coincide with one of the windows being open, is that correct? It is correct. Okay, thank you for that.
Speaker Change: If I understand correctly.
Speaker Change: Recent period of volatility we saw sharp selloff over a few days it just it didn't coincide with one of the windows.
Speaker Change: Open is that correct.
Speaker Change: That is correct.
Speaker Change: Okay. Thank you for that that's it.
Mickey Schleien: That's it.
Thank you.
Casey Alexander: Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question.
Speaker Change: Our next question comes from the line of Casey Alexander with Compass point. Please proceed with your questions.
Speaker Change: Yeah. This is for Jonathan Chadwick.
Jonathan Lamm: Yeah, this is for Jonathan. Jonathan, not being as familiar with the liability structure that you inherited from Blue Owl 3, I'm curious if there's anything in Blue Owl 3's liabilities that you inherited that are going to offer some opportunities to rationalize some of those liabilities at lower cost. Yeah, no, that it's a great it's a great question. Something that we we definitely talked about at the time of the merger that we thought that there were that there were going to be opportunities. We've already started to take advantage of some of those on the secured side by repricing certain certain drop down facilities that we have in place as well as repricing the CLO.
Jonathan not being as familiar with the liability structure that you inherited from blew out three I'm curious if there's anything in blue L. Three's liabilities that you inherited that are going to offer some opportunities to rationalize some of those liabilities at lower cost.
Speaker Change: Yes.
Speaker Change: It's a great. It's a great question and something that we just.
Speaker Change: We talked about at the time of the merger that we felt that there were there were going to be opportunities. We've already started to take advantage of some of those on the secured side by repricing certain.
Speaker Change: Certain drop down facilities that we have in place as well as repricing the CLO.
Jonathan Lamm: And we've, you know, subsequent to quarter end, we took out notes that we had issued at OVC three that were high coupon as well at the first possible chance to to take those notes out. So there's, there's, there's more there to do. And as the call dates and are, you know, sort of come up, we'll certainly be able to take advantage of that. Thank you.
Speaker Change: And subsequent.
Speaker Change: Subsequent to quarter end, we took out.
Speaker Change: We have issued.
Speaker Change: <unk> three.
Speaker Change: We're a high coupon as well at the first possible chance to take those notes out.
Speaker Change: So there's more there to do.
Speaker Change: As the call dates.
Speaker Change: Sure.
Speaker Change: Come up we'll certainly be able to take.
Speaker Change: Okay.
Speaker Change: Thank you.
Robert Dodd: The next question is from the line of Robert Dodd with Raymond James. Please proceed with your question. Hi guys, you've answered the spread in M&A 1 really clearly in case you got the liability one. So, going back to kind of your opening remarks here, I mean...
Speaker Change: The next question is from the line of Robert Dodd with Raymond James. Please proceed with your questions.
Speaker Change: Hi, guys.
Speaker Change: So the spread in M&A, one allele clearly in case, you've got a liability one so.
Speaker Change: The board will go back to.
Speaker Change: Kind of your opening remarks here I mean.
Craig Packer: At this point in your, your underwriting case, when you're looking at new deals, what are you ranking, you know, maybe qualitatively, not quantitatively necessarily, as the, as the probability of a near term recession? I mean, you always put one into kind of your underwriting case. And for a lot of your businesses, they're not that economically sensitive because of the services side, but how, you know, is that kind of near-term view like, you know, the second half of 25, is that... view changed on the probability of a meaningful or moderate economic slowdown. Uh, sure.
Speaker Change: At this point in your underwriting case, when you're looking at new deals what are you ranking maybe qualitatively or quantitatively necessarily as the as the probability of a near term recession. I mean, you always put one into kind of your underwriting case and for a lot.
Speaker Change: Businesses that don't.
Speaker Change: That economically sensitive because of the services side, but how are.
Speaker Change: Yeah, It does that kind of near to be like the second half of 'twenty five is that.
Speaker Change: Have you changed on the probability of a meaningful or moderate economic slowdown.
Speaker Change: Sure.
Craig Packer: Um, so look, I, um, I'll try to answer your question, but I'm going to, I'm going to Let's try to give a broader lens to it. we're, we're, the economy can be gangbusters, and we're running downside. We're, you know, every deal, every investment we've made in our history has a recession. Every deal in our history has a liquidation So we're extremely downside focused, and it's a hallmark of our honoring process. In addition to that, as you know, we're buying businesses, we're investing in businesses, excuse me, that are not that difficult. You know, that's, you know, that is also a hallmark of our investment process, software, insurance, brokerage, healthcare, food and beverage, you know, mostly US businesses, mostly stable, mostly annuity like revenue streams. That's what we like to invest in.
Speaker Change: So look I I.
Speaker Change: I'll try to answer your question, but I'm going to I'm going to.
Speaker Change: Just try to give a broader lens to it.
Speaker Change: We're the economy can be gangbusters, and we're running downside cases.
Speaker Change: We're every deal every investment we made in our history as a recession case.
Speaker Change: Every deal in our history as a liquidation case.
Speaker Change: So we're extremely downside focused and is a hallmark of our underwriting process. In addition to that as you know we're buying businesses, we're investing business excuse me that are.
Speaker Change: Not that simple.
Speaker Change: That is also a hallmark of our investment process software insurance brokerage healthcare food and beverage.
Speaker Change: No most of the U S businesses, mostly stable, mostly annuity like revenue streams, that's what we'd like to invest in.
Craig Packer: I'll also repeat what we said in our prepared remarks, we're not seeing any economic weakness in our portfolio. Now, we are not a forward indicator of the U.S. economy because we're selecting into the most stable parts of the U.S. economy, so we wouldn't see it, but we're not. If what you're asking me is, are we especially concerned about an economic slowdown in our underwriting process? I think the answer is yes, we are. I mean, we follow economic developments as closely as I think most investors would. And there have been seismic changes to U.S. trade regulations that many feel are going to potentially impact the economy later this year.
Speaker Change: I'll also repeat what we said on the <unk>.
Speaker Change: Prepared remarks, we're not seeing any economic weakness our portfolio companies.
Speaker Change: Now we are not a forward indicator of the U S economy, because we're selecting into more stable parts of the U S economy. So we wouldn't see it but we're not.
Speaker Change: If you are right.
Speaker Change: If what you are asking me is are we are especially concerned about an economic slowdown in our underwriting process I think the answer is yes, we are.
Speaker Change: We follow economic developments as closely as I think most investors would and there have been seismic changes too.
Speaker Change: U S trade regulations that that many feel are going to potentially impact.
Speaker Change: The economy later this year and so of course, we're taking.
Craig Packer: And so, of course, we're taking, you know, a serious look at that and factoring that into our base case rather than our downside case. So I think that that's just sort of responsible lending in this kind of environment, and we are a downside in our orientation. So we're taking that into account, and that's probably our expectation. It's not going to change the kinds of investments we're making because we were already selected out of the type of investment that would be most impacted by that type of a downturn. But it's certainly on the margin makes you that much more cautious about how much leverage you put on a business that even though it's not cyclical, like every business is impacted if there's a recession and even very stable ones.
Speaker Change: A serious look at that and factoring that into our base case downside case.
Speaker Change: So I think that that's just sort of responsible one.
Speaker Change: Lending in this kind of environment.
Speaker Change: We are downsizing orientation, so we're taking that into account and that's probably our expectation.
Speaker Change: It's not going to change the kinds of investments, we're making because we were early.
Speaker Change: Selected out of the type of investments that would be most impacted by that type of a downturn, but it's certainly on the margin makes us that much more cautious about how much leverage you put on a business that even though it's not cyclical like every business is impacted if there was a recession you have been very stable. One so we're certainly factoring that in.
Craig Packer: So we're certainly factoring that in, and it's, you know, you know, we insist that that introduces a level of caution as we look to deploy additional capital.
Speaker Change: We insisted that introduces a level of caution as we look to deploy additional capital.
Speaker Change: Got it got it. Thank you for that now well one more if I can I mean one.
Speaker Change: Now the.
Speaker Change: The business has been combined with the asset base is bigger you've.
Speaker Change: You've got a little bit more room I'll be now under your nonqualified bucket or any any of these other.
Speaker Change: Our diversified lending strategies, followed between wing spar etcetera, I mean, any any incremental and I think I asked you about this last quarter, but any incremental thoughts on like.
Craig Packer: diversified lending strategies that you follow between Wingspire etc. I mean any any incremental, and I think I asked you about this last quarter, but any incremental thoughts on like Now that they're combined, bigger balance sheet, how much of that non pure traditional firstly, and I'm not saying it's high risk or anything like but, but, you know, those differentiated strategies you want within this vehicle. So, as you're alluding to, at OBDC, previously, we had fairly meaningful investments in a number of essentially portfolios of assets. We have an asset-based funding business, we have a syndicated loan joint venture, our aircraft and railcar equipment finance.
Speaker Change: Now that that combined bigger balance sheet, how much of that non pure traditional firstly I'm, not saying, it's high risk or anything like that but you know theres differentiated strategies you want within this vehicle.
Speaker Change: So.
Speaker Change: As you are alluding to at <unk> previously we had.
Speaker Change: Meaningful investments and number of essentially portfolios of assets.
Speaker Change: Asset based lending business.
Speaker Change: Syndicated loan joint venture.
Speaker Change: Our aircraft and railcar equipment finance give or take those are measured in the low double digits.
Craig Packer: Give or take, those are low double digits of the asset pool. OBDE had much less. And so, we would certainly look to true up the combined portfolio and essentially get a portion of incremental exposure by just getting the combined asset base to where OBDC was previously. These have been really good Again, the underlying pools of assets within each of these investments are diversified pools, diversified pools of loans. Typically, we have a life insurance settlements business, a drug royalty business. They're diversified underlying pools that have delivered, depending upon the structure, low to mid-teens, ROEs. So, they're accretive to OBDC.
Speaker Change: Paul O P. D E had had much less so.
Speaker Change: We would we would certainly look to true up.
Speaker Change: Buying portfolio and essentially get a portion of <unk>.
Speaker Change: <unk> exposure by just getting the combined asset base, where <unk> was previously.
Speaker Change: <unk> been really good investments again, there the underlying pools.
Speaker Change: Assets within each of these investments are diversified pools diversified pools of loans typically.
Speaker Change: We had a life insurance settlements business of drug royalty business through diversified underlying pools that are delivered.
Speaker Change: Depending upon the structure of low to middle low to mid teens ROE accretive Toby D. C. We think they are.
Craig Packer: We think they're risk appropriate. And over time, we'd like to continue to grow our exposure to the existing ones. And if we could find one or two additional strategies to invest in, we would do that as well. Again, today, it's combined low double digits. We're going to be patient as we grow this. But over the next couple of years, if we could take that number up to 15% versus 12%, I think that would be very valuable for shareholders. And we're working with experienced teams that have good deal flow, chunky opportunities, and we'll look to support them and find good investments through that venue.
Speaker Change: <unk>.
Speaker Change: The risks risk appropriate and over time, we'd like to continue to grow our exposure to the existing ones and if we could find one or two additional strap.
Speaker Change: Strategies to invest in.
Speaker Change: We'll do that as well again today as combined low double digits.
Speaker Change: Could it be patient as we grow this but.
Speaker Change: Over the next couple of years that we can take that number up to.
Speaker Change: 15% versus 12% I think that would be very valuable for shareholders.
Speaker Change: We're working with experienced teams that have.
Speaker Change: Good deal flow chunky opportunities.
Speaker Change: And we will look to support them and find good investments through that venue.
Casey Alexander: Thank you. Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Casey Alexander with Compass point. Please proceed with your questions.
Speaker Change: Sure. It's Andrew Please go ahead with your questions.
Casey Alexander: Mr. Alexander, please go ahead with your question. Yeah, I just wanted to follow up real quick. I just want to make sure that the variable dividend structure is going to be toggling off of adjusted earnings and not the gap number. Casey, that is correct. It's all for the justice. Okay, great. Thank you.
Speaker Change: Okay.
Speaker Change: Yeah, I just wanted to follow up real quick.
Speaker Change: I just wanted to make sure that the variable dividend structure is gonna be toggling off of adjusted earnings and not the GAAP number.
Speaker Change: That is correct.
Speaker Change: It's off of adjusted.
Speaker Change: Okay, great. Thank you.
Speaker Change: The next question comes from the line of Sean Sean Paul Adams with B Riley Securities. Please proceed with your questions.
Sean Paul Adams: The next question comes from the line of Sean Paul Adams with B Reilly Securities. Please receive your question. Good morning.
Speaker Change: Good morning, I think you already touched on part of this question earlier in the call, but you know now that the <unk> merger has closed what kind of specific operational efficiencies. Besides just the refis are you guys tracking I believe earlier in the quarter you had mentioned expecting maybe.
Craig Packer: I think you already touched on part of this question earlier in the call, but, you know, now that the OBD merger has closed, you know, what kind of specific operational efficiencies besides just the refis are you guys tracking? I believe earlier in the quarter you had mentioned expecting maybe 50 to 75 bps of ROE uplift from portfolio optimization. How far along are you in realizing those gains and when would we see the full benefit to OBDC?
Speaker Change: 50 to 75 bps of ROE uplift from portfolio optimization.
Speaker Change: How far along are you in realizing those gains and when would we see the full benefit to <unk>.
Speaker Change: Sure, maybe I'll start and pass to Jonathan Theres, two fronts that we highlighted at the time of the merger.
Craig Packer: Sure, maybe I'll start and pass to Jonathan because there's there's two fronts that we highlighted at the time of the merger. first was I call it market dependence and investment related. ROE optimization efforts. Some of those are exactly what Craig was just talking about is continuing to deploy to accretive JVs and strategic equity opportunities like our platforms Wingspire as one example. And OBDE was underweight some of those opportunities. And so getting that back up as part of the combined portfolio would be top of that list. And that certainly takes time to deploy into the assets at that level, but it's something that we're already working on.
Speaker Change: First was.
Speaker Change: I think they call it market dependence and investment related.
Speaker Change: ROE optimization efforts.
Speaker Change: So some of those are exactly what Greg was just talking about is continuing to deploy to accretive <unk> strategic equity opportunities like our platform's wings fire as one example, and OBE was underway some of those opportunities and so getting that back up as part of the combined.
Speaker Change: Portfolio would be top of that list and that certainly takes time to deploy into the assets at that level, but it's something that we're already working on.
Jonathan Lamm: Additionally, there are others where OBDE was a slightly different portfolio mix and part of that market opportunity set dependent. Today, we see the best relative value as mentioned during the call in first lanes and Unitron. But we are open if the return opportunity and the relative value opportunity improves to looking at second lanes or junior capital where OBDE was also underweight. So some of them are more market dependent. JVs is more time dependent, and we're working on those now.
Speaker Change: Additionally, there are others, where <unk> was a slightly different portfolio mix and part of that market opportunity set dependent today, we see the best relative value as mentioned during the call and first lien unit tranche, but we are open.
Speaker Change: The return opportunity and the relative value opportunity improves so looking at second lien or junior capital where OLED. He was also underway. So some of them are more market dependent GBS as more time dependent and we're working on those now and then there are cost structure size, which I'll, let Jonathan touched on.
Jonathan Lamm: And then there are cost structure sides, which I'll let Jonathan touch on. Yeah, so look, on the operating expenses, you get to see those sort of pull through rather quickly. And so in Q1, we were able to already see approximately 10 basis points of what I'll call synergies on a relative basis to where OPEX was across a number of categories in 2020.
Speaker Change: Yes.
Speaker Change: On the operating expenses you get to see Booz.
Speaker Change: Pull through rather quickly. So in Q1, we were able to already see approximately 10 basis points of what I'll call synergies on a relative basis to where opex was across a number of categories in 2020.
Speaker Change: Got it I appreciate the color. Thank you.
Jonathan Lamm: I appreciate the color. Thank you.
Speaker Change: Thank you. Our next questions are from the line of Finian O'shea with Wells Fargo. Please proceed with your questions.
Phinney O'Shea: Our next questions are from the line of Phinney and O'Shea with Wells Fargo. Please proceed with your questions. Hey, everyone, good morning. So I might be piggybacking on on Robert's question here, but I want to go back to spread as well. Appreciating the contemporary puts and takes, you know, longer term, you and your large market peers have these burgeoning wealth products, and you're going more and more upmarket in deployment. So do you think there's more of a firmly secular trend downward on spread? And if so, will the public BDC continue to stay on that bus or pivot more meaningfully toward higher spread, you know, I think you mentioned ABF or just other sort of old school private credit strategies.
Hey, everyone. Good morning.
Speaker Change: Sorry, I might be piggybacking on on Robert's question here, but I wanted to go back to spread as well.
Speaker Change: <unk> the contemporary puts and takes.
Speaker Change: Longer term you and your large market peers have these burgeoning wealth products and you are going more and more.
Speaker Change: Upmarket and deployment. So so do you think there's more of a a firmly.
Speaker Change: Secular trend downward on spread.
Speaker Change: And if so will the public BDC.
Speaker Change: Continue to stay on that bus or pivot more meaningfully toward.
Speaker Change: Higher spread I think you mentioned ABF or just other.
Speaker Change: Sort of old school private credit strategies. Thank you.
Craig Packer: Thank you.
Craig Packer: Sure, let me try to take a stab at that. But just as just for just a level set, the spread in our portfolio today is at the end of this quarter was 590 over. I think it's an excellent spread, even with base rates where they are, that's a that's an absolute all in return of north of 10% for portfolio, primarily first lien assets to good companies. So, spreads have come in. I don't think it's a secular shift. I think it's a cyclical shift. The Strength in the Broadly Syndicated Loan Market, which is a market that we do compete with, drove spreads down last year in an environment with light M&A.
Speaker Change: Sure.
Speaker Change: Let me try to take a stab at that.
Speaker Change: But just as just for just to level set the spread in our portfolio. Today is the end of this quarter was $5 90 over.
Speaker Change: I think it's an excellent spread even with base rates, where they are.
Speaker Change: That's an absolute all in return.
Speaker Change: North of 10% for.
Speaker Change: Portfolio, primarily first lien assets two good companies so.
Speaker Change: Spreads have come in I don't think it's a secular shift I think it is a cyclical shift.
Speaker Change: The strength in the broadly syndicated loan market, which is a market that we do compete with drove spreads down last year in an environment with light M&A give.
Craig Packer: give us a window where either there's more M&A or a closed public loan market, and I think spreads will widen. So I view it as just a typical cycle, not a secular shift. You're right that there's been a growth in the non-traded BDCs in the Wealth Channel. That's a channel that we participate in. But at the same time, the addressable market for those deals have expanded in pace. The growth in that channel is what's allowing us to finance deals that are $3, $4, $5 billion at a clip. And so the market is growing as the capital is growing to support that market.
Speaker Change: Give us a window, where either there is more M&A or a closed public loan market I think spreads will widen.
Speaker Change: So I view it as just a typical cycle not a secular shifts.
Speaker Change: Youre right that.
Speaker Change: There has been a growth in the.
Speaker Change: Non traded Bdcs in the wealth channel that's a channel that we participate in.
Speaker Change: At the same time, the addressable market for those deals have expanded and pace.
Speaker Change: The growth in that channel is what's allowing us to finance deals that are 345 billion.
Speaker Change: Cliff.
Cliff: And so the market is growing as the capital is growing to support that market.
Craig Packer: And the private equity firms are choosing to use direct lending solutions to finance bigger deals in a way they never have before because they like the solution, and we get a premium to the public markets. So that all feels good to me. I also think that the larger deals are just really good credits, and I think that this is an area that observers just don't fully give us credit for. When we're financing deals that are $3 or $4 or $5 billion, these are $8, $10 billion companies with $4 billion equity checks from private equity firms. The industry is just much higher quality than it was 10 years ago.
Cliff: Private equity firms are choosing to use direct lending solutions to finance bigger deals the way they never had before because they like the solution.
Cliff: We get a premium to the public markets. So that all feels good to me I also think that the larger deals are just really good credits and I think that this is an area that.
Cliff: Observers don't fully give us credit for when we're financing deals that are three or four or $5 billion 10.
Cliff: $10 billion company.
Cliff: Billion dollars equity checks from private equity firms industry, just much higher quality than it was 10 years ago and I think that's one of the reasons why I expect it will continue to perform from a credit standpoint.
Craig Packer: One of the reasons why I expect it will continue to perform from a credit standpoint.
Cliff: In terms of our strategy for <unk>, our strategies remain the same we have been from the beginning focus on credit quality.
Craig Packer: In terms of our strategy for OBDC, our strategy is going to remain the same. We have been, from the beginning, focused on credit quality versus all else, and we continue to think that the quality of the upper middle market company is attractive, and that's where we seek to play. And I would also offer that I think that spreads in smaller deals are the same as the upper middle market. And I know there will be others out there that will argue otherwise, but that's not what we're seeing. We look at everything that's out there, and we think it's pretty comparable, so we think we're getting better quality for a comparable spread.
Cliff: Sowell. So we continue to think that that the quality of the upper middle market company.
Cliff: As attractive and Thats, where we seek to play.
Cliff: And I would also offer that I think the spreads in smaller deals are the same as the upper middle market I know there'll be others out there that will argue otherwise, but that's not what we're seeing as we look at everything that's out there. We think it's pretty comparable so we think we're getting better quality for comparable spreads.
Craig Packer: I also think that, you know, a portfolio of high quality upper middle market loans that's diversified and it's yielding 11% holds up really well in this environment. I don't think we have to change our strategy. I think our strategy is delivering great returns for investors. And so I think that's all working.
Cliff: I also think that our portfolio of high quality upper middle market loans, it's diversified and it's yielding 11% holds up really well in this environment I don't think we'd have to change our strategy I think our strategy is delivering great returns for investors.
Cliff: And so I think thats all working.
Craig Packer: We, as you know, and as many know, at Blue Owl, we have expanded our credit platform. We have gotten into alternate credit or asset based lending that, you know. which some will use that term. That's a capability that we didn't have in scale before. That may produce opportunities for us to occasionally put some of those assets into the BDC if we think that they're of proper credit quality, can deliver kind of the consistent income that we're known for. But that's really on the margin. We're not looking to change our strategy. And I think that this will continue to be attractive, risk-adjusted return for investors.
Cliff: Yes.
Cliff: You know and as many know that while we have expanded our credit platform, we have got into.
Cliff: Alternative credit our asset based lending.
Cliff: Some will use that term.
Cliff: That's a capability that we didn't have scale before that may produce opportunities for us to occasionally but some of those assets into the BDC. If we think that there are.
Cliff: Copper credit quality can deliver.
Cliff: <unk> income that we're known for but that's really on the margin.
Cliff: Our strategy and I think that that.
Cliff: This will continue to be attractive risk adjusted return for investors.
Phinney O'Shea: Very good. Thanks.
Cliff: Very good things.
Jonathan Lamm: And just a follow-up, John, you mentioned spillover as support in the evolving base rate environment. Does that mean you'll, you know, say if base rates go more firmly against us here, that you'll run that down and earn below the dividend until that's through? Or what will your posture be, I guess, if and when SOFR pushes earnings below the dividend? Yeah, look, we use spillover income as good for helping to sustain the dividend during periods of volatility. That was what I indicated on, you know, in my prepared remarks, we're not, I'm not, we're not, I'm not at all saying that we would use the spillover and run it down if we were permanently impaired in terms of our income relative to the relative to the dividend.
John: Just a follow up John you mentioned.
Cliff: Spillover of support.
John: In the evolving base rate environment.
John: Does that mean, you'll say if base rates go more firmly against us here that you'll you'll run that down.
John: And earn.
John: Below the dividend until that's through or what were your yield.
John: What will your posture, but I guess, when if and when so for pushes earnings below the dividend.
John: Yes.
John: Your spillover income.
John: Good for helping to sustain the dividend during periods of volatility.
John: Indicated.
Speaker Change: In my prepared remarks, we're not.
Speaker Change: We're not I'm not at all saying that we would use the spillover and broken it down if we were permanently.
Speaker Change: Impaired in terms of our income relative to the relative to the dividend.
Jonathan Lamm: we're just not at that point now. And so we what we say is, what we're saying is, is that having the cushion of spillover income to sustain a dividend for a quarter or so during a period of volatility is what is what you use it for. But we like that and in no way are we indicating that we would run it down and utilize it in order to sustain a dividend that's not burnable for the long term. So in a much, much lower rate environment, we're having a different cut. It's helpful. Thanks so much.
Speaker Change: We're just not at that point now so we what we say is what we're saying is that having a a cushion of spillover income to sustain a dividend for a quarter or so during a period of volatility is what is what.
Speaker Change: You use it for but we liked that cushion.
Speaker Change: No no way every indicating that we would run it down.
Speaker Change: We utilize this in order to sustain a dividend that's not for the long term.
Speaker Change: Much much lower rate environment, we are having a different conversation.
Speaker Change: That's helpful. Thanks, so much.
Speaker Change: Yeah.
Speaker Change: Our next question is from the line of Maxwell Fritcher with true Securities. Please proceed with your questions.
Maxwell Fritscher: Our next question is from the line of Maxwell Fritscher with Truist Securities. Please receive your question. Yeah, good morning. I'm on for Mark Hughes.
Speaker Change: Yes, good morning, I'm on for Mark Hughes.
Maxwell Fritscher: Can you provide any color on what you're seeing in the pipeline in terms of mix of new versus incumbent borrowers and maybe even types of deals you're seeing terms, covenants, anything in particular to call out? Sure, it's been remarkably consistent with prior quarters. And so to Craig's point, we didn't necessarily see the pickup in M&A in the late fourth or early first quarter. And so it's been a consistent first quarter, more than half of our DealFlow in the first quarter came from existing borrowers, add-ons, and refinancings. And with the majority of the cases, when there was a refinancing, we were able to do additional size.
Speaker Change: Can you provide any color on what you're seeing in the pipeline in terms of mix.
Speaker Change: The mix of new versus incumbent borrowers and then maybe even types of deals youre seeing terms covenants and anything in particular to call out.
Speaker Change: Sure it's been remarkably consistent with prior quarters, and so to Greg's point, we didn't necessarily see the pickup in M&A in the late fourth or early first quarter and so it's been a consistent.
Speaker Change: FERC first quarter more than half of our.
Speaker Change: Deal flow in the first quarter came from existing borrowers add ons and refinancings.
Speaker Change: The majority of the cases, when there was a refinancing we were able to do additional size and so <unk>.
Maxwell Fritscher: And so incumbencies have been a majority source of our deal flow. Looking forward, our pipeline for the second quarter is trending in the same direction. quite a bit of existing borrower transactions, more than half. And sporadic M&A, there's been quite a few attractive deals already announced. One deal north of $4 billion that was publicly announced just a few weeks ago. And there are a few more that we're looking at in the pipeline that are quite attractive and sizable. So no change to the landscape relative to Q1 from a pipeline perspective and still fairly attractive and up in scale.
Speaker Change: Incumbencies have been.
Speaker Change: Majority source of our deal flow looking forward our pipeline for the second quarter is trending in the same direction.
Speaker Change: Quite a bit of existing borrower transactions more than half.
Speaker Change: And sporadic M&A theres been quite a few attractive deals already announced one deal of north of $4 billion that was publicly announced just a few weeks ago and there are a few more.
Speaker Change: Looking at the pipeline that are quite attractive and sizable so no change to the landscape relative to Q1 from a pipeline perspective, and still fairly attractive in up in scale.
Speaker Change: Understood. Thank you and then you had mentioned the decrease in Pik.
Maxwell Fritscher: Understood. Thank you.
Logan Nicholson: And then you'd mentioned the decrease in PIC from borrowers transitioning to cash pay. Do you have any visibility in the near, maybe medium term for other borrowers to do the same? Sure. Exactly right. So in the first quarter, we had five names that went from partial pick to fully cash pay. And so we do have visibility to others likely going off their pick options. Again, some of these windows, it is at the borrowers option. And so sometimes it's voluntary, and sometimes it's time based, but we do have visibility. And we expect our pick to be consistent.
Speaker Change: From borrowers transitioning to cash pay do you have any visibility in the near maybe medium term for other borrowers to be the same.
Speaker Change: Sure.
Speaker Change: Exactly right. So in the first quarter, we had five names that.
Speaker Change: Went from partial pik to fully cash pay.
Speaker Change: And so we do have visibility to others likely going off there.
Speaker Change: Pick options again some of these windows. It is at the borrower's option and so sometimes it's voluntary and sometimes it's time base, but we do have visibility.
Speaker Change: We expect our pick to be consistent we.
Logan Nicholson: We at this point, have had a number of quarters in a row back through the full year 2024, where we've been range bound on pick, and we've had now a couple of quarters of decline. So we, we would expect our pick to be consistent based on our visibility so far. And also last year, we had the benefit of a number of refinancing. So opportunistic refinancings of junior capital into de-levered capital structures into first liens, or simply takeouts with cash flow. And to the extent that the markets are open, and active in terms of refinancings, we will continue to see that.
Speaker Change: At this point have had a number of quarters in a row back through to the full year 2024, where we've been range bound on tech and we've had now a couple of quarters of declines. So we would expect our pick to be consistent based on our visibility. So far and also last year, we had the benefit of a number of refinancings.
Speaker Change: Opportunistic refinancings of junior capital.
Speaker Change: Into de Levered capital structures.
Speaker Change: In the first liens or simply take outs with cash flow.
Speaker Change: Yeah to the extent that the markets are open and active in terms of refinancings, we will continue to see that.
Speaker Change: Very good thank you.
Maxwell Fritscher: Very good. Thank you.
Speaker Change: Thank you at.
Craig Packer: At this time, I will turn the floor back to management for further remarks. Right. Thanks, everyone, for joining. We're always available. If you have any follow up questions, just reach out. Feel really good about the quarter and appreciate everyone joining. Have a great day.
Speaker Change: At this time I will turn the floor back to management for further remarks.
Speaker Change: Alright, thanks, everyone for joining.
Speaker Change: Rhodes available do you have any follow up questions just reach out feel really good about the quarter and.
Speaker Change: I appreciate everyone joining the call have a great day.
Speaker Change: This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a wonderful day.
Unknown Executive: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.