Finian O'Shea

Finian O'Shea followed up on the performance fee structure, asking if FSK would revisit its look-back provisions, citing Blackstone's recent write-downs and subsequent lower incentive fees as a precedent.

Answer

Dan Pietrzak, Chief Investment Officer and President, stated that the team is highly aware of fee structures and continuously benchmarks them against market practices and dividend metrics. He mentioned the current 9.2% dividend yield, which is below target but above historical averages, and confirmed that these matters are under ongoing discussion.

Finian O'Shea inquired about FSK's overall strategy given its shrinking size and trading below book value, suggesting a 'grand bargain' involving lower fees from FS and balance sheet injection from KKR to revitalize the BDC. He also asked about revisiting the performance fee's look-back provision, referencing a peer's approach to write-downs, and later sought an update on spillover income and the potential for special distributions.

Answer

Dan Pietrzak, Chief Investment Officer and President, acknowledged the complexity, highlighting the partnership's $34 billion in originations over eight years with a 9.1% unlevered IRR, despite recent bumps. He noted the focus on addressing non-income producing assets (9.5%) and evolving the operating plan for 2026/2027. Regarding fees, Mr. Pietrzak stated FSK is cognizant of fee structures and dividend numbers (9.2%). Steven Lilly, Chief Financial Officer, provided an update on spillover income, estimating $464 million, and clarified that the dividend policy now aligns with GAAP net investment income, with potential additional payments later in the year for spillover purposes.

Finian O'shea from Wells Fargo Securities, LLC asked about the lower Q3 dividend guidance for the Credit Opportunities Partners (Kop) JV, its credit situation, and the company's stance on share buybacks given the stock's price relative to book value.

Answer

Chief Financial Officer Steven Lilly explained the lower JV dividend guidance for Q3 was due to the lumpy timing of ABF dividends, not performance issues. President & CIO Daniel Pietrzak added that any potential share buybacks must be balanced against market opportunities and maintaining the company's target leverage ratio, noting they are currently within their desired range.

Finian O'Shea sought clarification on the Q2 guidance for non-JV and other fee income, and asked about the nature of new asset-based finance (ABF) investments that appear to have lower, sub-500 basis point spreads.

Answer

Chief Financial Officer Steven Lilly explained that the Q2 guidance reflects lower anticipated ABF distributions, which are lumpy, but this is offset by increased dividend income from the growing joint venture. Chief Investment Officer & Co-President Daniel Pietrzak clarified that the lower-spread investments are ABL-style receivables and inventory deals, which offer attractive overall returns when including significant upfront fees, and are distinct from higher-yielding traditional ABF or opportunistic deals.

Finian O'Shea from Wells Fargo Securities questioned whether the Q1 guidance for non-recurring fees and the joint venture dividend should be seen as a new run-rate or a one-off. He also asked about the strategy for managing spillover income and whether the policy of paying it out might extend into 2026.

Answer

Chief Investment Officer Daniel Pietrzak indicated the joint venture dividend is relatively consistent, while other fee and dividend income will fluctuate more. Chief Financial Officer Steven Lilly clarified the spillover strategy, stating the goal is to reduce the balance from 2.7 quarters of dividend coverage to around 2.3 quarters by the end of 2025, bringing it within their long-term target range of plus or minus two quarters. He explained the buildup was rate-driven and the current payout is a planned return of that capital to shareholders.

Finian O'Shea asked about the potential impact of a slowdown in the non-traded channel on Blackstone Secured Lending Fund's (BXSL) new origination strategy, specifically if it would necessitate investing in smaller companies, and followed up on the strategy for managing spillover income given the stock trading below book value.

Answer

Teddy Desloge, Senior Managing Director, and Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, explained that the U.S. leverage finance market is institutionally driven, with non-traded BDCs being a smaller segment. They highlighted Blackstone's $520 billion credit business and $40 billion of dry powder, emphasizing continued activity and performance-driven capital attraction. Brad Marshall further addressed spillover income, noting options include reinvesting in new loans, buying back discounted shares, or delevering, while acknowledging the high dividend yield and the current trading discount.

Finian O'Shea followed up on the company trading below book value, asking if it makes sense to retain spillover income or if a special dividend might be considered.

Answer

Brad Marshall, Global Head of Private Credit Strategies, Chairman, and Co-CEO, explained that spillover income has been reinvested into new loans. He outlined options for new cash proceeds, including reinvesting in new loans, buying back discounted shares, or delevering, noting the current 11.4% dividend yield is already at the high end of the market. All options for capital allocation are on the table.

Finian O'Shea from Wells Fargo & Company asked how BXSL manages its ATM issuance in relation to its dividend, questioning if the primary goal is to protect the dividend or if it's more returns-driven, potentially leading to earnings upside.

Answer

Co-CEO Brad Marshall clarified that ATM usage is driven by the need to fund attractive investment opportunities and diversify the portfolio, not to manage the dividend. He highlighted that returns are driven by multiple factors, including a focus on lowering liability costs and operating expenses, and that capital is raised when the risk environment is appropriate.

Finian O'Shea inquired about Blackstone Secured Lending Fund's dividend coverage, asking if the dividend would be adjusted if falling SOFR rates push core earnings below the current payout, and what the company's policy is on utilizing spillover income.

Answer

Co-CEO Brad Marshall acknowledged that falling rates would pressure earnings and stated that the dividend would be adjusted to reflect earnings declines, as the firm will not compensate by taking on more risk. Co-CEO Jonathan Bock added that retaining spillover income is a cheap form of capital that builds the equity base, which is a sensible strategy when shares trade at a premium to NAV, but the policy is always under review.

Finian O'Shea asked for color on the mark-down of Medallia, its underlying performance, and followed up on whether current investment spreads are consistent with Q4 levels or are trending lower due to market competition.

Answer

Co-Chief Executive Officer Brad Marshall explained that Medallia's EBITDA has tripled since investment but is growing slower than planned, which the mark reflects. Regarding spreads, he emphasized focusing on risk-adjusted returns, citing the low-LTV Dropbox deal. He argued BXSL's low-cost structure allows it to maintain quality and deliver returns even in a tighter spread environment.

Finian O'Shea of Wells Fargo Securities inquired about the amount of spillover income BXSL has accumulated and the company's strategy for managing it amidst market headwinds like declining base rates and tightening spreads.

Answer

Co-CEO Jonathan Bock disclosed that spillover income was approximately $1.82 per share. He explained that while spillover magnifies returns, the firm's primary focus is on strong long-term underwriting and performance. Co-CEO Brad Marshall added that lower rates and spreads are expected to accelerate deal activity, boosting turnover and fee generation, leading to a positive outlook for 2025.

Finian O'Shea asked about CEO Tom McDonnell's new initiatives to improve ROE, specifically regarding accelerating existing efforts and implementing new ones. He also inquired about the potential expansion of the Jocasi joint venture and its return structure, as well as the impact of recent news on the non-traded BDC market and private retail investor sentiment.

Answer

CEO Tom McDonnell explained that initiatives include accelerating exits of non-interest-earning legacy assets, winding down the Sierra Credit Support Agreement, and consolidating other JVs to focus on expanding the successful Jocasi JV. He noted that the high hurdle rate would benefit earnings as base rates decline and mentioned exploring other private asset opportunities across Barings. Regarding Jocasi, he clarified the focus is on increasing investment and activity to boost absolute dividend dollars. For the non-traded BDC market, Mr. McDonnell acknowledged negative headlines but stated that flows remain good, and the team is proactively engaging investors to alleviate concerns about the market's viability.

Finian O'Shea inquired about CEO Tom McDonnell's new initiatives to accelerate ROE improvement, including plans for legacy assets, the Sierra CSA, and the Jocassee joint venture, as well as the company's perspective on the non-traded BDC market.

Answer

CEO Tom McDonnell detailed efforts to accelerate exits of non-interest-earning legacy assets and wind down the Sierra CSA to redeploy capital. He also discussed expanding investment in the successful Jocassee JV and leveraging Barings' broader private asset expertise. Regarding the non-traded BDC market, Mr. McDonnell acknowledged negative headlines but stated that flows remain strong, and the company is actively engaging investors to address concerns.

Finian O'Shea asked about the profile of future asset sales to the Jocassee (Jakafi) joint venture, its target leverage, the strategic fit of the new ScreenVision investment, and the degree of integration between the GPF and Capital Solutions platforms.

Answer

President Matthew Freund stated that the Jocassee (Jakafi) JV has ample capacity and that asset sales will be a diversified mix of vintages. Co-Portfolio Manager Bryan High and CEO Eric Lloyd clarified that while sourcing is centralized, distinct investment committees remain for each strategy. Mr. Freund added that ScreenVision was a familiar, sponsored first and second lien opportunity.

Inquired about the asset profile and leverage of the Jocassee joint venture, the strategic fit of a new investment (ScreenVision), and the integration of the GPF and Capital Solutions platforms.

Answer

The company stated that the Jocassee JV has ample capacity and will receive a diversified mix of assets. BBDC's leverage will be managed at the higher end of its target range. The ScreenVision investment is a familiar name that fits well. The GPF and Capital Solutions platforms collaborate closely on sourcing and underwriting but maintain separate investment committees.

Finian O'Shea asked about future asset sales to the Jocassee (Jakafi) joint venture, the profile of those assets, and the JV's target leverage. He also inquired about the new ScreenVision investment and the degree of integration between the Global Private Finance (GPF) and Capital Solutions platforms.

Answer

President Matthew Freund stated that the Jocassee JV has ample capacity for incremental investments, which will be a diversified mix of recent and older vintages. He also noted BBDC's leverage will likely run at the higher end of its range. Co-Portfolio Manager Bryan High and CEO Eric Lloyd clarified that while sourcing and underwriting are collaborative, distinct investment committees remain for each asset class. Freund added that ScreenVision was a familiar name to the firm.

Finian O'Shea inquired about the specifics of a PIK non-accrual investment and the primary drivers behind the valuation changes in the Credit Support Agreements (CSAs).

Answer

Chief Financial Officer Elizabeth Murray explained that the PIK non-accrual was a prudent measure, as the company did not expect to recover the full PIK portion, although the investment is performing as underwritten with its cash interest payments. Chief Executive Officer Eric Lloyd added that the change in the CSA mark was overwhelmingly due to the valuation mark on the Black Angus Steakhouse position.

Finian O'Shea inquired about the specifics of a PIK non-accrual investment and the primary drivers behind the valuation changes in the Credit Support Agreements (CSAs).

Answer

CFO Elizabeth Murray clarified that the PIK non-accrual investment is performing as underwritten with cash payments, but the PIK portion is not expected to be collected. CEO Eric Lloyd added that the increase in the CSA's value was overwhelmingly driven by the mark-down of the Black Angus Steakhouse position, with minor impacts from interest rates and timing.

Finian O'Shea followed up on the OBDC portfolio sale, asking if it was primarily for fine-tuning concentration, if the sold names were concentrated in the top 10 or 20, and if there were other benefits. He also sought clarification on any hidden compensation or special structures in the transaction, and if the sold portfolio was expected to repay quickly.

Answer

Craig Packer, Co-President of Blue Owl Capital Inc, explained that the OBDC sale (2% of assets) was immaterial, a 'scalpel-like precision' to trim larger positions and satisfy strong institutional demand. He emphasized the sale at 99.7% of book value validates their marks and portfolio quality across 130 positions. Mr. Packer clarified there was no hidden compensation or unusual structure, describing it as a 'plain vanilla' transaction using standard LSTA procedures, with buyers making arm's-length economic decisions.

Finian O'Shea followed up on the OBDC portfolio sale, questioning if it was primarily for fine-tuning concentration or other benefits, given OBDC's already diversified portfolio and limited liquidity needs. He also sought clarification on the transaction mechanics, specifically if there was any hidden compensation or if the sold portfolio was expected to repay quickly.

Answer

Craig Packer, Co-President of Blue Owl Capital Inc, explained that the OBDC sale was a modest trim (2% of assets) for portfolio management and to capitalize on strong buyer demand, validating their marks and portfolio quality. He emphasized that the transaction was 'plain vanilla,' with no hidden compensation, executed at 99.7% of book value using standard LSTA procedures, and was an arm's length economic decision by four institutional investors.

Finian O'Shea asked for thoughts on the recent decline in gross inflows for non-traded BDCs and whether this trend could lead to a cooling of the market and wider credit spreads.

Answer

CEO Craig Packer described the non-traded BDC fundraising environment as 'really good' and resilient, with inflows down only modestly and recovering. He believes the channel remains underpenetrated. He reiterated that a potential widening of spreads is more likely to be driven by a rebound in M&A activity or a cooling of the public markets rather than a lack of capital in the private space.

Finian O'Shea questioned whether the growth of wealth management products and a move upmarket are creating a long-term secular decline in spreads. He also asked how the company would utilize its spillover income if falling base rates push earnings below the dividend.

Answer

CEO Craig Packer contended that the current spread compression is cyclical, not secular, driven by competition from the syndicated loan market, and that OBDC's strategy remains sound. CFO Jonathan Lamm explained that spillover income is a tool to maintain dividend stability during periods of volatility but would not be used to sustain a dividend that is un-earnable over the long term in a lower rate environment.

Finian O'Shea asked about the potential for a comeback in the platform's tech strategy, the significance of the incumbency advantage for deal flow, and the company's intended approach for its newly announced at-the-market (ATM) equity issuance program.

Answer

CEO Craig Packer affirmed the strength of their premier software lending business, which is well-positioned for when M&A activity picks up. President Logan Nicholson highlighted that incumbency is a key advantage, with about half of Q4 originations coming from existing borrowers. CFO Jonathan Lamm described the ATM program as a cost-efficient, 'just-in-time' tool for raising capital accretively above net asset value to fund the investment pipeline when market conditions are supportive.

Finian O'Shea inquired about the recent restructuring of the Senior Loan Fund (SLF) and the expected composition of unsecured debt for the combined company following the merger and 2025 maturities.

Answer

CFO Jonathan Lamm explained that the SLF changes are about creating a more efficient multi-BDC joint venture with better financing, not a change in strategy. Regarding liabilities, he stated the post-merger unsecured mix will be around 50%, and they intend to refinance upcoming maturities to maintain that level, not expecting a material shift in the secured/unsecured percentages.

Finian O'Shea inquired about the structure of the newly formed Structured Credit Partners (SCP) joint venture, specifically whether it would invest in broadly syndicated loan (BSL) CLOs or direct lending, and how the high spillover income would be managed given the nature of BSL CLO equity.

Answer

Bo Stanley, CEO, outlined the criteria for the JV investment, emphasizing accretion to shareholders and alignment with core competencies. Ross Bruck, Managing Director and Head of Investment Strategy, clarified that the SCP JV would invest in broadly syndicated loan CLOs, not private credit, and would be financed like traditional BSL CLOs but without management or incentive fees at either the CLO or JV level. Ian Simmonds, CFO, explained that spillover income is closely monitored, and the JV's ramp-up will be gradual, not immediately impacting spillover in the near term, allowing for careful management within the existing dividend framework.

Finian O'Shea of Wells Fargo Securities sought clarification on management's comments that credit issues were both "idiosyncratic" and "likely behind us." He also asked about the impact of the latest co-investment order on the BDC's priority for originations.

Answer

CEO Joshua Easterly explained that the "behind us" comment relates to the lag effect from the 2022 rate hike shock, with most issues having now surfaced. He specified the Lithium issue was a company-specific miss on post-COVID industry structure, not a general credit problem. Easterly also confirmed the new co-investment order simplifies the process but does not change the BDC's priority on direct lending deals.

Finian O'Shea of Wells Fargo Securities, LLC questioned the characterization of credit issues as both "idiosyncratic" and "likely behind us," and asked about the impact of the latest co-investment order on the BDC's origination priority.

Answer

CEO Joshua Easterly clarified that the lag effect from the 2022 rate hikes means most credit issues have now likely surfaced. He specified the Lithium non-accrual was an idiosyncratic issue related to a post-COVID business model shift, not broad economic factors. He also confirmed that under the new co-investment order, the BDC retains priority for direct lending originations, with the changes merely streamlining the process.

Finian O'Shea of Wells Fargo Securities inquired about the impact of private credit capital on TSLX's investment funnel, sought clarification on the firm's negative M&A outlook, and asked how the new ATM program would be utilized compared to historical capital raises.

Answer

CEO Joshua Easterly and President Bo Stanley explained that while the M&A environment is weak due to valuation disconnects, TSLX's broad origination platform allows it to find attractive, often complex, opportunities. Easterly added that volatility has historically led to outperformance. Regarding the ATM, Easterly and CFO Ian Simmonds clarified it's a more efficient tool, but the core philosophy of raising capital only when accretive to NAV and ROE is unchanged. It allows for 'just-in-time' capital but doesn't preclude traditional offerings for larger opportunities.

Finian O'Shea of Wells Fargo Securities inquired about the origination outlook for 2025, specifically asking if the TRP Energy deal was a capital solutions transaction and what returns such opportunities yield. He also requested an update on the IRG investment.

Answer

CEO Joshua Easterly clarified that the TRP Energy deal was a first-lien financing, not a capital solutions deal, though such opportunities are in the Q1 pipeline with spreads of SOFR+600 to SOFR+850. Regarding IRG, he stated they are actively working to sell the underlying assets and anticipate a resolution within the next one to two quarters.

Finian O'Shea inquired about the origination outlook, specifically asking if the TRP Energy deal was a capital solutions transaction and what returns such deals generate. He also requested an update on the IRG investment.

Answer

CEO Joshua Easterly clarified that TRP Energy was a first-lien financing in the energy sector, not a capital solutions deal. He noted that true capital solutions opportunities, which are in the pipeline, offer spreads from SOFR+600 to SOFR+850. Regarding IRG, he stated they are working to sell the underlying assets and expect a resolution in the next one to two quarters.

Finian O'Shea pressed for specific developments that could threaten foundational enterprise SaaS plays from AI and asked about the sustainability of dividend tailwinds given current volume and structuring fees.

Answer

CEO Kort Schnabel reiterated strong confidence in core enterprise software and regulated industries, finding it challenging to foresee dramatic risks there. He identified single-function software apps, content creation software, and data analysis/visualization companies as more vulnerable. Regarding dividends, Schnabel clarified that structuring fees were consistent quarter-over-quarter on a constant basis and noted that high volume is crucial in a tight spread environment, but if volume falls, other factors like wider spreads and fees could offset the impact, as seen in 2022-2023.

Finian O'Shea with Wells Fargo Securities pressed Ares Capital on the long-term risks of AI to foundational enterprise SaaS, asking what developments could threaten these businesses and why management is confident in a very long disruption timeline. He also inquired if the strong deployment volume is necessary for the dividend outlook or if it might moderate with other offsets.

Answer

Kort Schnabel, CEO of Ares Capital Corporation, reiterated that he sees minimal dramatic risk to core enterprise software or regulated industries, focusing instead on single-function apps, content creation software, and data analysis/visualization companies as more vulnerable. Regarding the dividend, Schnabel explained that many variables affect it, but if the spread environment remains tight and rates fall, high volume is desired. He noted that structuring fees were consistent quarter-over-quarter on a constant basis.

Finian O'Shea inquired about Ares Capital Corporation's (ARCC) allocation framework for junior or alpha-laden opportunities, specifically how it differs from ASIF, and the role of spillover income in supporting the base dividend.

Answer

Kort Schnabel (CEO) clarified that both ARCC and ASIF receive deal allocations based on available capital and fund mandates, with ARCC's flexible mandate ensuring it participates broadly. Scott Lem (CFO) added that ARCC's specific profile also influences allocation. Regarding spillover income, Mr. Schnabel expressed confidence in dividend coverage, noting spillover provides stability if core earnings temporarily fall below the dividend level, but declined to speculate on specific usage scenarios.

Finian O'Shea of Wells Fargo Securities asked about the potential for improved investment terms, such as spreads and fees, given the pickup in market activity, and also inquired about the likelihood of expanding off-balance sheet vehicles like SDLP and Ivy Hill.

Answer

CEO Kort Schnabel responded that while market volatility can create opportunities for better terms, the overall theme for spreads and yields has been stability over the past few quarters. Regarding the off-balance sheet vehicles, he affirmed that both SDLP and Ivy Hill are strategically important and that he would not be surprised to see them grow further.

Finian O'Shea asked about private credit pricing versus banks given the capital in non-traded BDCs and its impact on Ares Capital's competitive position. He also requested more detail on how the company defines portfolio 'exposure' to tariffs.

Answer

Incoming CEO Kort Schnabel explained that spreads have already started to widen and that ARCC's diversified sourcing strategy across various market segments mitigates competitive pressure. CFO Scott Lem clarified that the tariff analysis identified a 'mid-single-digit' share of the portfolio with direct import exposure from high-tariff countries, noting this is a pre-mitigation figure and not a final 'impact' assessment.

Finian O'Shea inquired about the rationale for the equity investment in the Miami Dolphins franchise and its suitability for ARCC. He also asked about the outlook for structuring fees given the focus on incumbent borrowers.

Answer

Then-CEO Robert DeVeer explained the Dolphins investment leverages the broader Ares platform's expertise in sports, media, and entertainment. He described it as a unique, high-quality asset that is not overly large for the portfolio. Regarding fees, he noted they are lower due to both the focus on incumbent borrowers, which command lower fees, and general fee pressure across the direct lending market.

Finian O'Shea questioned whether the direct lending premium is in a secular decline due to spread compression and significant capital raising in the sector. He also asked if the Riverside acquisition signals a broader trend of consolidation among large managers.

Answer

CEO Robert Kipp DeVeer stated he does not believe the premium is in a secular decline, explaining that spread compression reflects a stronger economic outlook rather than a structural shift. He positioned the Riverside acquisition as consistent with ARCC's long-term strategy of adding high-quality origination talent.

Finian O'Shea inquired about the post-transaction structure of the Merx investment, asking for details on the remaining assets and whether the servicing business is a strategic, growing component. He also asked for a 'plain English' explanation of recent co-investment order changes and their impact on Apollo funds' access to MidCap origination.

Answer

CEO Tanner Powell clarified that the Merx servicing business is not a strategic, growing investment but rather a run-off portfolio of existing contracts tied to the Navigator fund. He explained that recent co-investment rule changes have provided greater flexibility for Apollo-affiliated funds to participate in transactions but have not fundamentally changed the availability of MidCap's origination.

Finian O'Shea asked about the financial impact of the post-quarter insurance recovery for Merx, questioning if it represented a full recovery and if it implied a more expedited wind-down of the aircraft leasing business.

Answer

CEO Tanner Powell stated that the insurance recoveries were approximately at their marked value, and the company is very happy with the results. CFO Gregory Hunt added that they expect a resolution on the remaining claims within the year and have good line of sight for the sale of a significant portion of the Merx portfolio.

Finian O'Shea of Wells Fargo Securities asked for clarification on the mid-teens ROE target for the credit fund (MMCF JV) and its implied dividend level. He also questioned if the hiring of Alex Chi signaled a potential strategic shift toward more aggressive growth, similar to larger market peers, which might necessitate a change in the fee structure.

Answer

CFO Tom Hennigan explained that the mid-teens ROE target could support a quarterly dividend from the JV in the range of $4.5 to $5.5 million once fully capitalized, and mentioned the company is exploring other JV opportunities. CEO Justin Plouffe stated there will be no change to the BDC's core middle-market U.S. lending strategy and that Alex Chi's hiring is intended to add 'strength to strength' rather than alter the company's investment focus.

Finian O'Shea from Wells Fargo Securities inquired about the financial impact of the credit fund optimization, specifically on ROE and future dividends. He also questioned the strategy for the newly freed-up non-qualifying asset capacity and the extent to which the company would use its spillover income to support the dividend amid potential base rate headwinds.

Answer

CFO Thomas Hennigan stated that the credit fund optimization is expected to be roughly neutral to NII in the near term, with higher ROE on a smaller capital base offsetting the change. He described the new financing as a bank-like facility with CLO-like features. Hennigan also noted that while they are actively working on plans for the non-qualifying asset capacity, the strategy won't be dramatically different. Regarding the dividend, Hennigan and CEO Justin Plouffe confirmed their intention to maintain consistency, acknowledging SOFR headwinds but pointing to various levers and the $0.85 per share in spillover income as support, which they will assess on a quarterly basis.

Finian O'Shea of Wells Fargo Securities inquired about Carlyle's plans for its joint ventures (JVs), particularly regarding the freed-up non-qualifying asset capacity. He also asked about the reason for the lower tax expense in Q4 and the company's broader growth plans post-merger.

Answer

CFO Thomas Hennigan explained that the MMCF 2 JV was consolidated onto the balance sheet, creating capacity. The MMCF 1 JV is being extended and will be ramped up in the future, though it will see a near-term return of capital. He noted the Q4 tax line drop was a year-end true-up. CEO Justin Plouffe added that the immediate focus is on completing the merger before considering future growth initiatives.

Finian O'Shea of Wells Fargo Securities inquired about performance in the healthcare portfolio, specifically asking about the drivers behind a dental business downgrade, potential industry-wide headwinds, and the performance of Alliance Animal Health. He also asked for details on the dividend protection program, including the rationale for the incremental fee waiver in Q2 and the long-term strategy for supporting the dividend.

Answer

COO Laura Holson explained that the dental business downgrade was idiosyncratic due to operational intensity and management sensitivity, not broad sector headwinds. She contrasted this with the veterinary space, noting Alliance Animal Health is performing well with better fundamentals like cash-pay models. CEO John Kline addressed the dividend, stating the protection program provides shareholder stability through 2026. He noted the incremental waiver was a discretionary move to ensure consistency, and outlined several initiatives to boost core NII, including leverage optimization, refinancing high-cost debt, and an expected increase in deal velocity.

Finian O'Shea of Wells Fargo Securities inquired about potential systemic headwinds in the healthcare sector following a downgrade in a dental portfolio company, the performance of Alliance Animal Health, and the strategy behind the dividend protection program, including the incremental fee waiver in the quarter.

Answer

COO Laura Holson explained that while the dental and physician practice space has tailwinds, it is operationally intensive, making the specific downgrade idiosyncratic rather than a broad trend. She noted the veterinary space remains strong. CEO John Kline described the dividend protection program as a shareholder support mechanism through 2026, highlighting levers like optimizing leverage, refinancing debt, and share buybacks to bolster core earnings and support the dividend.

Finian O'Shea inquired about the complex capital structure changes at UniTek, questioning the accounting for warrant appreciation, paydowns, and write-downs. He also asked about the stability of future income from UniTek and how income is derived from other control investments.

Answer

John Kline, an executive at New Mountain Finance Corporation, detailed the UniTek transaction, explaining that the value of exercised warrants exceeded the par value of the second lien, leading to a gross-up in value across the capital structure. He confirmed that income is still being accrued on the super senior preferred tranche. Kline clarified that income from control investments is based on contractual rates deemed collectible at current fair market value, not on long-term exit projections.

Finian O'shea of Wells Fargo Securities inquired about how OCSL achieved new investment spreads in the mid-to-upper 5% range, outperforming peers, and asked if increasing leverage was the primary strategy to boost earnings to cover the dividend, questioning the rating agencies' comfort with this approach.

Answer

Co-CIO Raghav Khanna attributed the strong spreads to a mix of higher-yielding life science and non-US deals, such as one at SONYA + 5.5%, and a premium on refinancing transactions. President Matt Pendo confirmed the plan to increase leverage from 0.93x to the midpoint of their 0.9x-1.25x target range to support earnings. Pendo noted that other levers include optimizing the JV and redeploying capital from resolved non-accruals, and that the company is comfortable with its rating agency dialogues regarding this strategy.

Finian O'shea of Wells Fargo Securities inquired about how OCSL achieved new investment spreads in the mid-to-upper 5% range, which tracked better than peers. He also asked if increasing leverage was the primary method to boost earnings to cover the dividend and about the rating agencies' comfort with this strategy given recent loss rates.

Answer

Co-CIO Raghav Khanna explained that the strong spreads resulted from a mix of deals, including higher-yielding life science and non-US transactions, and a premium for refinancing deals. President Matt Pendo clarified that the plan is to increase leverage to the midpoint of their target range (0.9x-1.25x), not the maximum. He added that other levers to support the dividend include increasing leverage in the JV and redeploying capital from resolved non-accruals into interest-earning assets.

Finian O'shea of Wells Fargo Securities inquired about the factors driving OCSL's strong investment spreads this quarter, which tracked better than peers. He also asked if increasing leverage was the primary strategy to boost earnings to cover the dividend, and about the company's discussions with rating agencies regarding this plan.

Answer

Co-CIO Raghav Khanna explained that the favorable spreads resulted from a mix of deals, including higher-yielding life science and European transactions, alongside a premium for refinancing deals. President Matt Pendo clarified that the plan is to increase leverage toward the midpoint of their target range (0.9x-1.25x), not the maximum. He noted other levers for earnings growth include a robust deployment pipeline, optimizing the JV, and redeploying cash from resolved non-accruals, adding that the company is comfortable with its rating agency dialogues.

Finian O'Shea of Wells Fargo Securities inquired about the drivers behind OCSL's strong new investment spreads, questioning if non-sponsor deals or higher leverage were factors. He also asked if increasing leverage was the primary strategy to support the dividend, given that adjusted earnings appeared to be below the dividend level, and whether rating agencies were comfortable with this approach.

Answer

Co-CIO Raghav Khanna explained that the favorable spreads resulted from a mix of higher-yielding life science and European deals, a premium on refinancing transactions, and some standard large-cap sponsor loans. President Matt Pendo confirmed that the plan is to increase leverage to the midpoint of their target range (0.9x-1.25x) to boost earnings. He added that other levers include optimizing the JV and redeploying cash from resolved non-accruals, and that the company has active, positive dialogues with rating agencies about this strategy.

Finian O'Shea asked about OCSL's strategy of focusing on larger, more diversified businesses, questioning its success and whether recent portfolio losses were concentrated in smaller companies.

Answer

CEO and Co-CIO Armen Panossian explained that while the market for large-cap direct lending has been volatile, recent conditions are becoming more favorable. He clarified that recent markdowns were not related to their large-cap strategy but were idiosyncratic issues in specific, long-standing problem assets, distinct from the core portfolio's focus.

Finian O'Shea inquired about the details of the $100 million equity investment from Oaktree, including its origin and future plans, and also asked about the strategic rationale for OCSL's increasing focus on senior, direct lending to larger companies.

Answer

President Mathew Pendo explained that the equity purchase included a standard one-year lockup and was intended to provide significant dry powder for deployment in an attractive market. CEO and Co-CIO Armen Panossian clarified that the shift to first lien lending is a response to the current rate environment, where senior debt offers the best risk-adjusted returns, as junior debt would be too costly for most borrowers. He noted this focus could evolve as market conditions and M&A volume change.

Finian O'Shea of Wells Fargo inquired about the concentration of new nonaccruals in the software sector and asked about any additional headwinds to top-line revenue beyond the disclosed onetime items.

Answer

President Henry Chung explained the software nonaccruals were due to company-specific issues and not a broader sector trend. He and CEO Jason Breaux clarified that top-line headwinds were not from spread compression, as new investment spreads actually widened in Q1, and net portfolio growth should provide a tailwind.

Finian O'Shea followed up on the nonaccruals, noting a concentration in the software sector and asking if there was a broader negative trend or a reckoning for smaller software companies. He also inquired about other potential top-line headwinds beyond onetime items, such as funding timing or spread compression.

Answer

President Henry Chung addressed the software nonaccruals, stating they were driven by company-specific issues rather than a broad sector trend. He specified one was related to a niche end-market challenge, while another (Nuvera) is more of a managed services provider. Regarding top-line performance, Henry Chung noted that the portfolio size was net up, which should benefit Q2, and that spreads on new investments were actually wider at 565 basis points. CEO Jason Breaux confirmed that Q1 deployment spreads were wider than in Q4.

Finian O'Shea of Wells Fargo followed up on the nonaccrual topic, asking about a perceived concentration in the software sector and whether it signaled a broader trend of sponsors withdrawing support. He also inquired about other potential top-line revenue headwinds beyond the disclosed onetime items, such as the timing of fundings or spread compression on the portfolio.

Answer

President Henry Chung clarified that the nonaccruals were in different industries, with only two being software-related, and attributed their issues to company-specific drivers rather than a broad sector trend. Regarding revenue, Chung noted that new investment spreads were actually wider in Q1 at 565 bps, and the portfolio grew, suggesting a positive setup for Q2. CEO Jason Breaux confirmed that Q1 deployment spreads were wider than in Q4.

Finian O'Shea of Wells Fargo followed up on the debt maturity discussion, asking if laddering the debt would increase costs, and also questioned the level of competition from larger players in the lower middle market.

Answer

CFO Gerhard Lombard explained that while there will be a price-to-market effect, they do not expect costs to increase due to smaller issuance sizes. CEO Jason Breaux added that they would also consider interest rate swaps. Regarding competition, Jason Breaux stated that it is not meaningful in the lower-middle market but is sometimes seen from larger players in the core-middle market.

Finian O'Shea inquired about the significant drop in 'other income' from National Property REIT Corp. (NPRC), the strategy for maintaining dividend coverage beyond August given the SOFR curve, and the recent financing mix, particularly the slowdown in program notes versus an increase in preferred stock issuance.

Answer

Executive Michael Eliasek addressed the questions, explaining that the lower NPRC income was due to a temporary slowdown in asset sales caused by interest rate volatility, but the company plans an orderly, value-maximizing reduction of the portfolio. To support dividend coverage, he highlighted several levers: rotating capital from lower-yielding real estate and CLO equity into higher-yielding middle-market loans, focusing on loans with higher SOFR floors, and utilizing Prospect's low leverage. He also noted that while market volatility slowed program note issuance, the company maintains a diversified financing strategy across multiple channels, including preferreds and its large credit facility, to ensure consistent access to capital.

Finian O'Shea of Wells Fargo Securities asked about the significant drop in 'other income' from the National Property REIT Corp. (NPRC), the strategy for maintaining dividend coverage as SOFR declines, and the recent shift in financing from program notes to preferred stock.

Answer

Executive Michael Eliasek addressed the questions, explaining that the lower NPRC income resulted from a temporary slowdown in property sales due to interest rate hikes. To support future dividend coverage, he outlined several strategies: rotating capital from lower-yielding real estate and structured notes into higher-yielding middle-market loans, focusing on loans with higher SOFR floors, and utilizing the company's low leverage. Regarding financing, Eliasek attributed the slowdown in program notes to market volatility and affirmed that Prospect will continue to use a diverse mix of financing, including both unsecured debt and preferreds.

Finian O'Shea of Wells Fargo Securities inquired about Prospect Capital's future unsecured debt strategy following recent rating changes and asked about the participation and pricing of a recent preferred stock exchange offer.

Answer

Executive Michael Eliasek stated that Prospect Capital does not anticipate significant changes to its financing strategy, planning to continue using a diversified mix of its revolver, bonds, and program notes. Eliasek noted that credit spreads have tightened since July 2024. Regarding the preferreds, he confirmed strong historical participation in exchange offers and explained the new 7.5% coupon reflects a balance of current market conditions for medium-term fixed-rate debt.

Finian O'Shea from Wells Fargo Securities questioned the company's strategy to improve its return on book value, noting the dividend yield remains comparatively low, and asked for more detail on the rotation out of CLOs and other assets.

Answer

Executive Michael Eliasek detailed a three-part strategy to boost returns. The plan involves rotating capital from the low GAAP-yielding CLO portfolio (now 6% of assets) into core middle-market lending. Secondly, the company will monetize appreciated real estate assets, which are less competitive in the current rate environment. Finally, Prospect will exit successful middle-market deals with appreciated equity to redeploy capital into new, higher-yielding opportunities.

Finian O'Shea inquired about BCSF's strategy for its At-The-Market (ATM) stock offering, its posture on share buybacks, and the resilience of its dividend coverage if the SOFR curve were to decline.

Answer

CEO Michael Ewald described the ATM program as opportunistic and noted it hadn't been used recently due to stock performance, while confirming the share buyback program remains an available option. CFO Amit Joshi addressed dividend coverage, stating that given projections for rates to remain higher and a significant spillover income buffer, the company foresees no near-term need to revisit its dividend policy.

Finian O'Shea of Wells Fargo Securities asked about real-time spread dynamics, inquiring if spread tightening has stabilized and what premium the core middle market commands over the large-cap market. He also questioned the difference in spreads between new LBOs and follow-on investments.

Answer

President Michael Boyle explained that Q4 originations were at a spread of approximately 560 basis points, noting that spread tightening has largely stabilized. He estimated the premium over the large-cap market to be 50-75 basis points. CEO Michael Ewald added that current spreads are comparable to historical levels from 2017-2019, with new LBOs typically at the lower end of the range and add-on deals at the higher end.

Finian O'Shea asked for more detail on the Q1 shift towards technology investments and the potential impact of global trade and tariff developments on the life sciences portfolio, particularly regarding competition and supply chains involving China. He also questioned if a recent large sponsor buyout deal signaled a strategic pivot towards more large-market unitranche transactions.

Answer

CEO Scott Bluestein clarified that the slight Q1 weighting toward technology (53% of commitments) was driven by volatility in the public biotech markets, not a major strategic shift. He stated there is no direct competitive impact from China on their life sciences borrowers, though they are monitoring potential API supply chain issues related to tariffs, which they assess as a minor cost risk. Regarding the large buyout, he confirmed it was not a pivot but a selective, opportunistic investment where Hercules had a strategic angle, consistent with its diversified approach.

Finian O'Shea from Wells Fargo Securities asked about the Q1 shift towards tech investments, the impact of trade tariffs on the life sciences portfolio, and if a large recent buyout signals a strategic pivot.

Answer

CEO & CIO Scott Bluestein attributed the slight tech-ward shift to volatility in public biotech markets and FDA uncertainty. He sees minimal direct impact from tariffs on the life sciences portfolio, though they are monitoring API supply chains from China. Bluestein clarified the large buyout was a selective opportunity handled by their dedicated sponsor finance team and not a broader strategic pivot.

Finian O'Shea inquired about the Q1 core yield guidance, the yield on new money deployments, the secular trend of lower end-of-term fees, and the company's future debt mix between secured and unsecured instruments.

Answer

CFO Seth Meyer confirmed the Q1 core yield guidance of 12.25% to 12.75%. CEO Scott Bluestein added that new originations are in the 11.5% to 13% range and that lower fees are a result of a strategic shift to higher-quality, first-lien deals and market competition, though the effective yield remains strong. Regarding the debt stack, Seth Meyer stated the mix will continue to be heavily weighted towards unsecured debt, though they remain opportunistic on the secured side.

Finian O'Shea sought to clarify if the light Q3 origination volume was driven by poor deal quality or competition. He also asked CFO Seth Meyer for the rationale behind the increased guidance for the RIA dividend and inquired about the potential for future performance fees from the RIA.

Answer

CEO Scott Bluestein clarified that the Q3 slowdown was a deliberate choice due to a market that was both slow and soft in terms of credit quality, prompting them to conserve capital for better opportunities. CFO Seth Meyer explained the RIA dividend guidance was raised due to the strong performance and maturation of the RIA's portfolio, which is now generating prepayments. Meyer confirmed that while there is structural potential for performance fees, they are viewed as opportunistic upside rather than a core component of expected returns.

Finian O'Shea from Wells Fargo Securities sought clarification on the reason for the increased guidance for the RIA dividend from the private funds. He also asked for management's observations on the competitive landscape regarding the re-emergence of Silicon Valley Bank.

Answer

CFO Seth Meyer explained that the guidance range for the RIA dividend was narrowed and slightly increased because actual results had consistently been at the top end of the previous range. CEO Scott Bluestein described SVB (now part of First Citizens) as an active and viable competitor that Hercules both competes and partners with, noting their presence is not as extensive as it was pre-acquisition.

Finian O'Shea of Wells Fargo asked about the impact of interest rates on portfolio yield, the interest-bearing status of the Snagajob preferred stock, the rationale for the new dividend policy, and the expected portfolio impact from the BC Partners integration.

Answer

CFO Tom Raterman attributed the Q4 yield decline to lower rates and fewer prepayment fee accelerations. CIO Greg Greifeld confirmed the Snagajob preferred stock is non-interest-bearing. Raterman explained the new dividend policy aims for a sustainable base dividend resilient to rate fluctuations, with leverage targets unchanged. An executive clarified the BC Partners integration is additive, expanding the pipeline and product set to win deals, not a wholesale strategy change. Raterman also noted the spillover income will likely build naturally under the new policy.

Finian O'Shea inquired about the specifics of the adviser merger with BC Partners, asking if the entire adviser was being acquired and about the strategic implications of the buyer being a fund. He also asked a follow-up question about who would bear any deal-related expenses.

Answer

David Spreng, Chairman, President and CEO, confirmed that BC Partners is acquiring 100% of the adviser in a long-term strategic move to expand origination capabilities and fortify its market position. Thomas Raterman, CFO and COO, clarified that under the '40 Act, all transaction-related costs are borne by the adviser, not the BDC.

Finian O'Shea of Wells Fargo Securities inquired about the specific reasons for the Q4 add-on investment in David's Bridal and the operational breakthrough at Homer City that led to its return to accrual status.

Answer

President and CIO Gregg Bresner explained the David's Bridal investment was a larger, non-recurring event to fund the first full post-bankruptcy merchandising season and a new digital marketplace. Regarding Homer City, he noted its redevelopment into a gas plant, aligning with data center trends, but could not provide further detail on the private company.

Finian O'Shea asked for clarification on the share repurchase program, specifically whether it is programmatic or discretionary. He also questioned why CION doesn't consider an economically commensurate fee structure change to address the stock's discount to NAV, suggesting it could be a more lasting solution than buybacks.

Answer

Co-Chief Executive Officer Mark Gatto responded that the share repurchase program is programmatic and will be used prudently as long as the stock remains undervalued. He stated that management believes this is the most effective current approach. While they will take the fee structure suggestion into consideration, their primary focus is on managing the portfolio and delivering solid performance, which they expect will ultimately be reflected in the share price.

Finian O'Shea asked for clarification on whether the share buyback plan is programmatic or discretionary and questioned why the company doesn't consider a more permanent fee structure change to address the stock's discount to NAV instead of repurchases.

Answer

Co-CEO Mark Gatto confirmed the share repurchase program is programmatic and will be used prudently while the stock is undervalued. Regarding the fee structure, Gatto stated that while they will take the suggestion into consideration, their current focus is on managing the portfolio and delivering strong performance, which they believe is the most effective way to address the share price discount.

Finian O'Shea inquired about Goldman Sachs BDC's leverage targets, questioning if the company plans to run with lower leverage following the adjustment of its dividend policy, and asked for details on the portion of the portfolio slated for rotation.

Answer

CEO Alex Chi clarified that the company's target leverage remains 1.25x and they do not anticipate meaningful increases. He explained that the new dividend structure, with a $0.32 base per share, is designed to be stable in the current environment without requiring higher leverage, and will be supplemented by spillover income and existing capacity.

Finian O'Shea inquired about TCPC's current spillover income, the rationale for the new dividend level, and the potential strategic changes resulting from the pending BlackRock acquisition of HPS, particularly regarding co-investment orders.

Answer

CFO Erik Cuellar stated there is approximately $0.10 per share of spillover income carried over. CEO Philip Tseng explained the new $0.25 regular dividend is set at a sustainable level considering lower base rates, spread compression, and non-accruals, with special dividends intended to enhance total shareholder returns. Regarding the HPS acquisition, Tseng noted he doesn't expect meaningful strategic changes but could not comment on specifics like co-investment orders until the transaction closes, emphasizing the deal highlights BlackRock's commitment to private credit.

Finian O'Shea of Wells Fargo Securities inquired about the factors contributing to the net investment income (NII) return being at the high end of historical levels. He also asked about the recent management and organizational changes at BlackRock's private credit division, questioning if this signals a strategic shift for TCPC, possibly towards the upper middle market.

Answer

CFO Erik Cuellar explained that while higher base rates have benefited NII, this trend is expected to reverse slightly, which is a factor in maintaining the current dividend level. President Philip Tseng clarified that the consolidation of BlackRock's direct lending groups into a global unit is a natural evolution to enhance collaboration and synergies, not an indication of a strategy shift away from their focus on the core middle market.

Finian O'Shea from Wells Fargo inquired about the direct lending loss environment given increased competition and looser terms, and also asked how the influx of new competitors is influencing Golub's growth strategy.

Answer

David B. Golub, Executive, contrasted the private credit market with the broadly syndicated loan market, noting that stress in private credit is concentrated in a 'tail' of companies. He emphasized that GBDC's core middle-market focus allows for earlier intervention. He also asserted that Golub's strategy is not driven by competitors but by a disciplined focus on its core competencies, deliberately avoiding the trend of chasing growth in the large-cap market.

Finian O'Shea of Wells Fargo asked about the commonality of sponsor support being required for portfolio companies to meet interest payments. He also inquired about the company's strategy for increasing leverage in the current tight spread environment, including the target level and timeline.

Answer

David B. Golub, Executive, stated that the need for sponsor support for interest payments is 'quite uncommon' as most portfolio companies remain cash flow positive. He explained that while the target leverage is approximately 1.15x debt-to-equity, GBDC will not rush to reach this level. The company will be patient and prioritize committing to high-quality loan opportunities rather than growing the balance sheet at the expense of credit quality.

Finian O'Shea inquired about KBDC's strategy in the lower middle market, asking if the enhanced returns are a result of investing in very small or complex companies, citing a discounted syndicated purchase as an example. He also asked about the prevalence and terms of call protection in their deals.

Answer

Co-CEO Kenneth Leonard explained that KBDC focuses on financing platform companies with buy-and-build strategies, emphasizing selectivity and their role as agent in 75% of deals to control pricing. Co-CEO Douglas Goodwillie added that their 'value lending' approach targets stable, lower-growth industries and may embrace complexity, but not distressed assets. Executive Frank Karl described a 'bell curve' pricing strategy. Regarding call protection, Leonard stated that a '2 and 1' structure is standard and considered on-market.

Finian O'Shea inquired about the expected pace of rotating the Broadly Syndicated Loan (BSL) portfolio into private credit and how current new money spreads compare to expectations at the time of the IPO. He also asked about the portfolio's composition, noting the difference between the median and weighted average EBITDA, and what that implies about the presence of larger credits.

Answer

Co-CEO Douglas Goodwillie stated the goal is to rotate out of the BSL portfolio by year-end 2024 or Q1 2025, which is achievable given the strong origination pipeline. He acknowledged spread compression of 25-75 basis points but noted it was less severe than in the broader market. Co-CEO Kenneth Leonard added that KBDC strategically invests in larger, 'upmarket' companies when they can secure lender-friendly terms like financial covenants, good pricing, and avoid large bank groups, which explains the higher weighted average EBITDA.

Finian O'Shea asked if the company would consider switching to an external management structure, given its stock valuation does not seem to fully reflect the benefits of being internally managed.

Answer

CEO Kyle Brown unequivocally rejected the idea, passionately defending the internal management structure as ideal for delivering superior shareholder returns, efficiently raising capital, and growing earnings per share through its asset management platform, stating they will "not ever" make such a change.

Inquired about the rapid value decline in the Office Fund, whether it's an isolated event, and how the value-add strategy in the core multifamily business is being affected by market liquidity and cash constraints.

Answer

The Office Fund I issue was attributed to a unique market seizure during its harvest period, compounded by unresponsive lenders, and is considered largely isolated from the rest of the portfolio which has strong liquidity. The value-add strategy in multifamily remains robust, is funded by equity, and is outperforming NOI projections, which helps offset cap rate expansion.