Melissa Wedel

Melissa Wedel asked about Ares Capital Corporation's strategy for using its at-the-market (ATM) program, given its leverage bandwidth, and plans for optimizing the non-qualifying asset bucket.

Answer

Kort Schnabel (CEO) stated that ARCC has been moderating ATM issuances over the last three quarters, aiming to increase leverage slightly from its conservative 1x position to capitalize on market opportunities and maintain financial flexibility. He highlighted a recent amendment to the SDLP joint venture that lowered capital costs and increased yield by 100 basis points, expecting increased utilization of SDLP and Ivy Hill to depend on overall transaction volume.

Melissa Wedel questioned Ares Capital Corporation's strategy regarding its at-the-market (ATM) program, given declining share prices and bandwidth to increase leverage, and sought insights into optimizing the non-qualifying asset basket, including future plans for Ivy Hill and SDLP.

Answer

CEO Kort Schnabel explained that the company has been moderating ATM issuances over the last three quarters, influenced by operating below the midpoint of their target leverage range (0.9x-1.25x) and a desire to increase leverage over time for financial flexibility. Regarding the non-qualifying asset basket, Mr. Schnabel highlighted a recent amendment to the SDLP joint venture documents, which lowered the cost of capital and increased its yield by 100 basis points, boosting returns. He anticipates increased utilization of SDLP and Ivy Hill with rising market transaction volume.

Melissa Wedel of JPMorgan Chase & Co. followed up on the impact of tariffs, asking for an updated estimate of portfolio exposure. She also sought to reconcile the Q2 capital injection into Ivy Hill with a sizable post-quarter-end exit from its subordinated loan.

Answer

CEO Kort Schnabel reported that the company feels better about tariff risk, with estimated exposure to high-risk names now in the low-single-digit range, down from mid-single digits, due to portfolio companies' ability to mitigate impacts. CFO & Treasurer Scott Lemm and CEO Kort Schnabel clarified that the Ivy Hill subordinated loan functions like a working capital line, allowing for capital to be recycled, which explains the inflow during the quarter and subsequent outflow.

Melissa Wedel asked for elaboration on how Ares Capital would 'respond quickly' to mitigate tariff impacts on portfolio companies and whether the current deal backlog faces a higher-than-usual risk of not closing due to market volatility.

Answer

Incoming CEO Kort Schnabel described a proactive playbook that includes collaborating with private equity sponsors for liquidity injections, offering temporary relief like PIK interest in exchange for new equity, and being prepared to take ownership if necessary. President Jim Miller added that while M&A volume may slow, private credit's certainty becomes more valuable, potentially increasing ARCC's market share of completed deals.

Melissa Wedel asked about the cadence of investment activity in Q4 and its potential impact on net interest income, as well as the company's asset allocation strategy regarding the shift towards first-lien debt.

Answer

Robert DeVeer, then-CEO, stated that Q4 activity was relatively flat compared to Q3 and that deal flow remained strong into January. He clarified there is no fundamental change in the portfolio mix strategy; the recent skew towards first-lien debt reflects market conditions favoring large unitranche deals over junior capital, where spreads have compressed and many opportunities are non-cash PIK.

Melissa Wedel sought clarification on the trend of gaining market share with existing clients, asking if it was driven by refinancing activity in Q3. She also inquired about the timing and cadence of originations during the quarter.

Answer

CEO Robert Kipp DeVeer explained the trend is about deepening relationships with key clients, not a focus on refinancing. Co-President Kort Schnabel specified that the activity was primarily add-on capital for M&A and growth, which increased ARCC's share in those deals. DeVeer noted that the timing of originations in the quarter was not unusual.

Melissa Wedel of JPMorgan Chase & Co. asked about the expected timeline to fully scale the joint venture (PSLF) and inquired about any anticipated repayment activity in the near term.

Answer

Art Penn, Founder and Managing Partner, estimated that the joint venture could be fully optimized within the next six to nine months. He also noted that as M&A activity increases, they expect a normal course of loan repayments, which often coincides with cash realizations from related equity co-investments.

Melissa Wedel asked about the timeline for fully scaling and optimizing the PSLF joint venture and inquired about any anticipated repayment activity in the near term.

Answer

Art Penn, Founder and Managing Partner, estimated that the joint venture could be fully optimized within the next six to nine months. He characterized upcoming repayment activity as 'normal routine,' noting that a pickup in M&A activity typically leads to loan repayments, which often coincides with the monetization of related equity co-investments.

Melissa Wedel of JPMorgan Chase & Co. asked about run-rate earnings in light of base rate changes and inquired about the portfolio's exposure to government reimbursement (DOGE) and healthcare sector risks.

Answer

Chairman and CEO Arthur Penn clarified that while base rates are a factor, credit spreads have recently widened, which is beneficial. He emphasized that the primary driver for future earnings growth is the planned rotation out of equity investments, which has been delayed by market conditions. Regarding sector risk, Penn stated the portfolio is well-aligned with increased defense spending priorities and avoids areas subject to cuts. In healthcare, he noted that PNNT's strategy of using lower leverage than peers has mitigated risk and resulted in strong performance.

Melissa Wedel asked for clarification on the cadence of dividend growth from the JV, the portfolio's exposure to government reimbursement and tariff risks, the use of treasury balances, and the meaning of 'cleanup work' before a potential PNNT/PFLT merger.

Answer

CEO Arthur Penn and CFO Richard Allorto explained that JV dividend growth can be uneven due to reserves and funding structure. Penn detailed their risk mitigation strategy in government-exposed sectors, focusing on cost-containment and low leverage. He clarified that treasury balances are a temporary quarter-end tool for managing the 30% bucket. Finally, he defined the 'cleanup work' as achieving significant equity rotation to de-risk the portfolio before considering a merger.

Melissa Wedel followed up on the joint venture, asking about the target position size of the JV investment within PNNT's overall portfolio and whether there is a maximum exposure level.

Answer

CEO Arthur Penn explained that while the JV itself is highly diversified with average positions around $25 million, PNNT's own investment in the JV is getting 'pretty full' within its 30% non-qualifying asset bucket. He highlighted that PNNT managed this exposure by taking a smaller percentage of the most recent capital upsize, bringing PNNT's ownership down to about 55%.

Melissa Wedel inquired about repayment expectations for the broader portfolio beyond Merx, especially in a more active M&A environment. She also asked if the projected $0.06 per share NII accretion from Merx redeployment provides confidence in covering the dividend amid potential base rate cuts.

Answer

President Ted McNulty stated that he does not expect a significant increase in repayments, as most portfolio companies are below the size where they would be refinanced by the broadly syndicated market. CEO Tanner Powell confirmed the Merx redeployment is a positive driver for earnings and that, given the current outlook, the company feels good about its dividend coverage.

Melissa Wedel from JPMorgan Chase & Co. asked if the slow M&A environment would lead to continued low prepayment income and inquired about the portfolio's exposure to government contracts or spending cuts.

Answer

Executive Chairman Howard Widra confirmed that, consistent with peer commentary, the lack of M&A is expected to result in fewer prepayments and lower fee income. On government exposure, Mr. Widra stated that limiting exposure to government payments is a long-standing underwriting principle due to 'stroke of the pen risk.' He clarified that the portfolio has minimal to no direct government contractors and their healthcare investments are not directly reimbursed by the government.

Melissa Wedel asked about the volume of repayment activity in Q4, the outlook for net deployments to reach target leverage, and sought confirmation that realized losses were on assets exited near their previously marked values.

Answer

President Ted McNulty explained that repayment activity was on target and that the company is nearly finished recycling capital from the CEF mergers, expressing confidence in reaching target leverage in the coming quarters. CFO Gregory Hunt confirmed her analysis, stating that the realized losses were primarily a reclassification from unrealized to realized as assets were exited.

Melissa Wedel from JPMorgan Chase & Co. asked about one-time costs from recent refinancing, the potential drawdown of unfunded commitments, and the outlook for prepayment activity in Q3.

Answer

CIO Greg Greifeld detailed that refinancing led to a ~$0.04 per share impact from higher interest expense, with $0.015 of that being a one-time cost. He and CFO & COO Thomas Raterman noted that historically, over 50% of unused commitments expire without being drawn. Mr. Greifeld also anticipates slightly elevated repayments in Q3, which should benefit NII for the quarter.

Melissa Wedel of JPMorgan Chase & Co. questioned the rationale behind the Q2 supplemental dividend reduction despite strong Q1 Net Investment Income (NII), seeking clarity on the portfolio's sustainable earnings power.

Answer

Chief Financial Officer Tom Raterman explained the dividend policy includes a $0.33 base with a supplemental of up to 50% of excess NII. He stated the current focus is on building Net Asset Value (NAV) per share rather than maximizing the dividend payout. Raterman affirmed confidence in the portfolio's core earnings power to cover the base dividend, noting that quarterly NII will fluctuate with prepayments and portfolio growth.

Melissa Wedel of JPMorgan Chase & Co. sought to understand the scale of the new origination pipeline following the BC Partners acquisition and inquired about gains from the Q1 sale of an equity position in Gynesonics.

Answer

An executive explained the BC Partners combination expands the pipeline by providing more market access and expertise for different structures like revolvers, which will be additive to the existing strategy without materially changing return targets. CFO Tom Raterman confirmed the Gynesonics transaction resulted in a gain that was largely reflected in the fair value mark as of December 31, 2024.

Melissa Wedel asked how the BC Partners acquisition and diversification into new products would impact the portfolio's asset yield. She also questioned the outlook for M&A and portfolio churn given potential rate cuts, and requested context for the $30 million in repayments that occurred after the quarter ended.

Answer

Greg Greifeld, Managing Director and Deputy CIO, stated that asset-level return targets are not expected to change. David Spreng, CEO, expressed optimism about the M&A environment, while Greg Greifeld noted their portfolio companies are both targets and acquirers. Thomas Raterman, CFO, explained that the post-quarter-end prepayments were anticipated and consistent with their H2 2024 forecast.

Melissa Wedel of JPMorgan Chase & Co. asked for details on how portfolio companies are mitigating tariff pressures, whether the higher mandate pipeline implies elevated repayments, and if there are plans to expand the JV given its limited capacity.

Answer

CEO Stuart Aronson explained that companies are managing tariffs by negotiating with suppliers, moving sourcing from China to Vietnam, and being nimble. He noted the BDC's balance sheet is expected to be fully deployed, with the JV having ~$20 million in capacity, and confirmed there are no current plans to upsize the JV.

Melissa Wedel from JPMorgan Chase & Co. asked for more details on tariff pressures impacting portfolio companies and inquired about plans to upsize the STRS JV given its limited capacity.

Answer

CEO Stuart Aronson explained that companies are mitigating tariffs by negotiating with suppliers and moving sourcing, such as from China to Vietnam. He also stated that the BDC's balance sheet is expected to be fully deployed and there are no current plans to increase the size of the JV.

Melissa Wedel of JPMorgan Chase & Co. inquired about the timeline for the Telestream investment returning to accrual status, its potential impact on NII, and whether expectations for elevated repayment activity in 2025 have moderated.

Answer

Executive Stuart Aronson confirmed hopes to complete the Telestream restructuring by the end of May 2025, which would return a large portion of the debt to accrual status. He clarified that while the move will be accretive, the impact will be at a new market rate, not the original higher rate. Regarding repayments, Aronson noted that while market volatility temporarily slowed activity, the visible repayment pipeline is currently light, and they are not seeing heightened repayment activity at the moment.

Melissa Wedel of JPMorgan Chase & Co. asked about the impact of declining base rates on Q4 NII, the potential for company deleveraging in 2025, and whether the large spillover income makes the board reluctant to adjust the dividend.

Answer

CFO Joyson Thomas attributed the Q4 yield decline primarily to lower base rates and later clarified that the portfolio resets roughly 50% monthly and 50% quarterly. Executive Stuart Aronson stated the goal is not to deleverage and that origination efforts, especially in the non-sponsor market, should offset repayments. Regarding the dividend, he confirmed the Board actively evaluates earning power but has maintained the current rate for now, supported by the spillover income.

Melissa Wedel asked about the deal environment, questioning if the portfolio might deleverage given expectations for a modest Q4 and elevated repayments. She also inquired about the rising percentage of PIK (Payment-In-Kind) income and how the company manages it for both new and existing investments.

Answer

Stuart Aronson, an executive, responded that he does not anticipate portfolio shrinkage, as new mandates are expected to balance repayments, and highlighted significant undeployed capacity in both the BDC and the JV. Regarding PIK income, Aronson clarified that new deals prioritize cash income, and most existing PIK is tied to troubled accounts like Telestream, which are being restructured with the goal of returning them to cash-pay status.

Melissa Wedel of JPMorgan Chase & Co. requested an update on the company's spillover income level and a recap of its investment allocation and current opportunities within the Asset-Based Finance (ABF) portfolio.

Answer

CFO Steven Lilly stated that spillover income is now in the mid-$400 million range and is expected to reach the target of approximately two quarters' worth of dividends by year-end. President & CIO Daniel Pietrzak described the ABF strategy as multi-asset class, with a small (2-2.5%) consumer allocation focused on high-FICO borrowers and secured deals, alongside investments in residential mortgage and hard assets like aviation.

Melissa Wedel from JPMorgan Chase & Co. inquired about the low fee income in Q4, repayment activity in Q1, and the level of urgency FSK feels to relever its portfolio in the current market.

Answer

Chief Financial Officer Steven Lilly clarified that Q4 fee income of $7 million would have been closer to $10-11 million if not for a couple of delayed deals. Chief Investment Officer Daniel Pietrzak noted that while repayments may continue due to the open syndicated market, the balance of new deals versus repayments should be better in Q1. He stated that 'urgency' is not the right word for relevering, emphasizing that discipline is key. However, he confirmed the plan is to trend leverage back up from 104% net debt-to-equity toward the midpoint target of 115% over the coming quarters.

Melissa Wedel followed up on the PIK income theme, asking how persistent PIK status impacts fair value marks over time. She also questioned whether a potentially slower pace of Fed rate cuts would alter the firm's outlook on broader industry credit trends.

Answer

Daniel Pietrzak, CIO, and Brian Gerson, Co-President, explained that fair value marks are determined on a case-by-case basis, driven by a company's overall financial performance and capital decisions, not just its PIK status. Regarding rate cuts, Pietrzak stated that a slightly slower pace of decline is not expected to have a material impact on credit quality, though Gerson noted higher rates for longer could extend private equity hold periods.

Melissa Wedel of JPMorgan Chase & Co. sought confirmation that deployment optimism was stronger for Q4 than Q3 and asked if a pickup in repayments should also be expected. She also inquired about how the company balances growth plans against potential earnings pressure from lower rates, particularly concerning the sustainability of the $0.40 dividend, and asked about the valuation of the Maverick restructuring.

Answer

CEO Justin Plouffe confirmed that Q4 is expected to be stronger for originations than the seasonally slow Q3 and that he does not anticipate a significant change in prepayment activity. CFO Tom Hennigan detailed several factors supporting the dividend, including upside from leverage, non-accrual resolutions, and JV growth, which should offset rate headwinds. He also confirmed the Q2 mark on Maverick was reflective of its July restructuring economics.

Melissa Wedel from JPMorgan Chase & Co. asked about post-merger portfolio strategy, including plans for asset rotation, the yield profile of the newly acquired CSL III assets, and the timeline for returning to target leverage levels.

Answer

CFO Thomas Hennigan explained that the CSL III portfolio, being newer vintage and nearly all first-lien, has a slightly lower yield, which will reduce the combined portfolio yield by approximately 15 basis points. He noted the near-100% asset overlap and said the primary rotation strategy will be to move lower-spread assets into the joint venture to improve returns. Hennigan projected that CGBD would reach its target leverage of 1.0x over the next two quarters, citing a strong Q2 pipeline and a slowdown in repayments.

Melissa Wedel from JPMorgan Chase & Co. asked if there was any outsized fee or prepayment income in the fourth quarter and sought clarification on the wider-than-usual spread between the weighted average yield on debt investments and the yield on all income-producing investments.

Answer

CFO Thomas Hennigan stated that fee income and OID acceleration were actually about $0.01 per share lower than the historical average. He did note an incremental dividend from a JV being wound down. CEO Justin Plouffe explained the yield spread was due to this extra JV dividend, noting the normalized yield is closer to 11.3-11.4% and that the two yield metrics should converge next quarter.

Melissa Wedel asked about the fundamental health of Carlyle's portfolio companies, specifically focusing on current trends in revenue and EBITDA growth.

Answer

CEO Justin Plouffe described the credit environment as 'benign' and 'constructive,' stating that portfolio companies have generally managed the rise in interest rates well. He elaborated that while past growth was in the low-double-digits, it has since stabilized to a healthy mid-single-digit rate for both revenue and EBITDA as inflationary pressures have subsided.

Melissa Wedel of JPMorgan Chase & Co. inquired about the likelihood of regional banks re-entering the ABL market, whether net investment income would have covered the dividend with a full quarter's impact from new originations, future earnings power given leverage levels and potential rate cuts, and the reason for the declining fair value of the SLR Equipment Finance portfolio.

Answer

Co-CEO Bruce Spohler addressed the questions, stating that high barriers to entry make it unlikely for banks to quickly re-enter the ABL market. CFO Shiraz Kajee confirmed that NII would have covered the dividend with a full quarter's benefit from the new deployments. Bruce Spohler also explained that the portfolio's shift to higher-yielding specialty finance assets, which are less correlated to base rates, provides a cushion for earnings. He clarified that the equipment finance portfolio's fair value declined due to a strategic decision to shrink it, a trend that is now beginning to reverse.

Melissa Wedel asked for an estimate of the portfolio's exposure to tariffs and questioned if the recent increase in the equipment finance portfolio's yield was driven by lease extensions in the post-tariff environment.

Answer

Co-CEO Bruce Spohler stated that less than 1% of the portfolio has direct tariff exposure, as it is heavily focused on domestic service-based businesses. He emphasized that the firm is more focused on healthcare policy risk. For the equipment finance portfolio, Spohler confirmed that lease extensions contributed to the higher yield but clarified that onetime gains from asset sales were also a significant factor, making it too early to determine a new run rate.

Melissa Wedel of JPMorgan Chase & Co. asked for clarification on the high volume of repayments in the asset-based lending (ABL) portfolio during Q4, especially given the attractive market opportunity.

Answer

Co-CEO Bruce Spohler characterized the Q4 repayments as idiosyncratic, noting the repaid loans had a long average duration of four years. He highlighted that a significant portion ($60 million) were temporary paydowns on revolving facilities, not a permanent loss of borrowing relationships, and emphasized the overall stability of ABL yields.

Melissa Wedel of JPMorgan Chase & Co. asked for more details on the assets acquired in the Webster factoring portfolio, specifically regarding diversification and whether they are fixed or floating rate. She also questioned if SLRC is constrained by the 30% regulatory cap for similar future acquisitions.

Answer

Co-CEO Bruce Spohler explained that the acquired assets are all floating rate and consistent with their existing platform. He noted the portfolio adds diversity with 94 borrowers and an average investment of $1.3 million. Spohler emphasized the attractive risk profile, long-tenured relationships, and expansion into new industries. He also confirmed that SLRC is not constrained by the 30% cap due to structural flexibility and the ability to utilize the broader platform's capital.

Melissa Wedel of JPMorgan Chase & Co. questioned if the low Q2 repayment activity was expected to rebound with the strengthening deal pipeline and asked about the strategy for the large spillover income balance.

Answer

CFO Teddy Desloge stated that Q2's 5% annualized repayment rate was abnormally low and he expects it to normalize higher as M&A activity increases. Co-CEO Brad Marshall reiterated that spillover income is for managing short-term earnings volatility and that long-term dividend policy is driven by the broader market outlook, not temporary fluctuations.

Melissa Wedel from JPMorgan Chase & Co. asked about the fund's leverage and capital deployment strategy, noting that net leverage appears low, suggesting dry powder, and questioned the team's eagerness to deploy capital amidst market uncertainty.

Answer

CFO Teddy Desloge confirmed that net leverage is at the lower end of their target range and that the fund is well-capitalized to take advantage of market volatility, which has shifted some deal flow to private markets. Co-CEO Brad Marshall added that while they were cautious in Q1 with a high 'pass rate' on deals, the current pipeline is strong, and they are seeing some spread widening in lower-quality assets.

Melissa Wedel expressed surprise at the minimal level of repayments and exits in Q4 given the strong origination activity and asked if an increase is expected in 2025.

Answer

Chief Financial Officer Teddy Desloge acknowledged that repayments were relatively light for the quarter and full year, at approximately 6%. He explained that since much of the Q4 activity involved incumbent portfolio companies, it did not drive repayments. He positioned a potential pickup in M&A and repayments as an upside driver for future returns.

Melissa Wedel from JPMorgan Chase & Co. followed up on the at-the-market (ATM) stock issuance program, asking if the recent pace of capital raising would continue given the bullish outlook for deployment.

Answer

Co-CEO Jonathan Bock responded that the ATM program's usage is not based on a fixed run rate but is managed dynamically to maintain an optimal leverage level. He emphasized that while they anticipate a 'super cycle' of deal activity, the timing is uncertain. Therefore, the program will be used to ensure they have the capacity to invest when those opportunities arise, balancing leverage and the need for deployable capital.

Melissa Wedel from JPMorgan Chase & Co. questioned the confidence in the $0.40 base dividend level, given that core earnings power appears tight and the forward curve implies future rate cuts. She also requested more detail on the types of asset-backed and infrastructure opportunities OCSL finds attractive.

Answer

President Matt Pendo stated that while he would not project future dividends, the board's confidence in the current $0.40 base dividend is supported by the robust deployment pipeline, visibility on prepayments, and progress in converting non-earning assets into cash. Co-CIO Raghav Khanna and CEO Armen Panossian elaborated on asset-backed opportunities, citing a diversified pipeline in areas like rental car leases and HVAC financing, while explicitly avoiding consumer unsecured debt. They focus on assets with corporate underlying borrowers in familiar industries like telecom.

Melissa Wedel from JPMorgan Chase & Co. questioned the confidence in the $0.40 base dividend level, considering the impact of one-time items and the potential for future interest rate cuts. She also requested more details on the attractive opportunities mentioned in asset-backed financing and infrastructure.

Answer

President Matt Pendo stated that while he couldn't project future dividends, the board was comfortable with the $0.40 base for the current quarter based on the deployment pipeline, prepayment visibility, and the conversion of non-earning assets to cash. Co-CIO Raghav Khanna and CEO Armen Panossian added that the asset-backed pipeline is diversified, focusing on corporate-related assets like equipment receivables and telecom, while avoiding consumer unsecured debt.

Melissa Wedel from JPMorgan Chase & Co. questioned the company's confidence in its $0.40 base dividend, especially given that core earnings power is close to that level and considering potential future rate cuts. She also requested more detail on the specific types of asset-backed and infrastructure opportunities OCSL finds attractive.

Answer

President Matt Pendo stated that while he couldn't project future dividends, the company was comfortable with the $0.40 base for the quarter after considering the deployment pipeline and progress in converting non-earning assets to cash. Co-CIO Raghav Khanna and CEO Armen Panossian added that the asset-backed pipeline is diverse, including areas like rental car leases and HVAC financing, but they are avoiding consumer unsecured debt and focusing on corporate-related assets in familiar industries.

Melissa Wedel from JPMorgan Chase & Co. questioned the confidence in the $0.40 base dividend, noting that adjusted earnings barely cover it and that potential future rate cuts could add pressure. She also requested more detail on the specific types of asset-backed and infrastructure opportunities OCSL finds attractive.

Answer

President Matt Pendo stated that while he couldn't project future dividends, the board's confidence in the current $0.40 level is supported by plans to increase leverage, visibility into prepayments, and the conversion of non-earning assets to cash. Co-CIO Raghav Khanna and CEO Armen Panossian added that asset-backed opportunities are diverse, including rental car leases and HVAC financing, but exclude consumer unsecured debt. They are focusing on deals with corporate underlying assets in familiar industries like telecom.

Melissa Wedel inquired about the run-rate Net Investment Income (NII) following recent markdowns and non-accruals, and asked whether repayment activity would slow amidst market volatility.

Answer

CFO Christopher McKown noted that leverage is at the low end of their target range, providing room for growth. President Mathew Pendo added that they are focused on increasing deployment into the JVs. CEO Armen Panossian acknowledged that while repayments should generally slow in a volatile market, OCSL has had some idiosyncratic exits and sees opportunities to deploy capital into the JVs at attractive prices.

Melissa Wedel sought clarification on the supplemental dividend policy, asking what portion of excess earnings would be paid out. She also inquired about the deployment timeline for the new equity capital and the potential for cash drag. In a follow-up, she asked if the new incentive fee look-back calculation includes foreign currency gains and losses.

Answer

President Mathew Pendo confirmed that investors should assume roughly 50% of the income above the base dividend would be paid out as a supplemental dividend. Co-Chief Investment Officer Raghav Khanna stated that a strong pipeline should allow for the new equity and associated leverage to be deployed 'fairly quickly' over a couple of quarters, net of repayments. CFO and Treasurer Christopher McKown confirmed the incentive fee calculation will include all capital gains and losses, including foreign currency movements.

Melissa Wedel of JPMorgan Chase & Co. asked for clarification on the expected timing of an investment activity pickup, questioning if a typical Q4 surge was expected or if it would be delayed until early 2025. She also inquired about the potential to optimize the joint ventures (JVs) for better returns, including the possibility of increasing leverage.

Answer

CEO Armen Panossian responded that while it's difficult to predict activity for a single quarter, the velocity of conversations with sponsors has picked up, suggesting a stronger environment over the next 12-24 months. Regarding the JVs, Panossian confirmed they are always looking to optimize them and see an opportunity to gradually increase leverage from the current 1.4x level, particularly by rotating the portfolio more towards broadly syndicated loans.

Melissa Wedel of JPMorgan Chase & Co. inquired whether the elevated repayment activity seen in recent quarters is expected to continue in the second half of 2025 and asked for an update on the portfolio's exposure to tariffs.

Answer

CEO Joshua Easterly stated he expects repayments to remain elevated in the near term, which he views as a positive because TSLX's exposure to post-2022 vintage assets means early repayments generate excess income from call protection and accelerated fees. President Robert Stanley confirmed that tariff exposure remains very low and has decreased since the prior quarter, as one of the three previously identified companies has been paid off.

Melissa Wedel of JPMorgan Chase & Co. asked whether elevated repayment activity is expected to continue in the second half of the year and requested an update on the portfolio's exposure to tariffs.

Answer

CEO Joshua Easterly stated he expects repayments to remain elevated in the near term, which is beneficial as it generates activity-based fees from call protections on newer vintage assets. Vice President Robert Stanley confirmed that tariff exposure remains very low and has decreased since last quarter, as one of the three previously identified companies with direct exposure was paid off.

Melissa Wedel of JPMorgan Chase & Co. sought to clarify comments about allowing for net repayments in Q2 and asked if the recent market volatility has started to create attractive private credit opportunities yet.

Answer

President Bo Stanley estimated the portfolio might be flat to slightly down in Q2, but noted the change would be marginal and is reflected in guidance. CEO Joshua Easterly addressed the opportunity set, explaining that while there is a lag in private credit pricing, TSLX's broad platform allows it to capture volatility in other areas, such as more liquid markets, without having to wait for the private market to adjust.

Melissa Wedel of JPMorgan Chase & Co. inquired about the typical structure of call protections on new investments and asked about the extent of reimbursement risk within TSLX's healthcare portfolio.

Answer

CEO Joshua Easterly noted that call protection has been a stable feature, particularly in non-sponsored and off-the-run deals, and that the portfolio's embedded economics from this protection are at a high level. He clarified that their healthcare exposure is focused on tech and specialty pharma, not services, which mitigates direct reimbursement and wage inflation risks.

Melissa Wedel inquired about the current structure and prevalence of call protections on new investments and asked about the portfolio's exposure to reimbursement risk in the healthcare sector.

Answer

CEO Joshua Easterly noted that while call protections remain a stable feature, especially in off-the-run deals, the portfolio currently has significant embedded economic value as the fair value is low relative to the call price. He also clarified that their healthcare strategy focuses on tech and pharma, not services, which largely insulates them from the reimbursement and wage inflation risks affecting the services sub-sector.

Melissa Wedel of JPMorgan Chase & Co. inquired about the run-rate earnings power of the portfolio and the company's strategy for its share repurchase plan.

Answer

CFO David Pessah clarified that Q1 results largely reflect prior base rate changes, with a $0.04 per share impact from expired IPO-related fee waivers and a minor residual impact expected in Q2. President Michael Occi described the share repurchase plan as a formulaic, accretive tool to support the stock, noting approximately $10 million was repurchased in Q1 via a 10b5-1 plan.

Inquired about the impact of recent rate cuts on Net Investment Income (NII) in Q4 and the expected trend for Q1, and also asked about the company's ideal mix of secured versus unsecured debt.

Answer

The executive explained that about two-thirds of the rate cut impact was felt in Q4, with the remainder to come. The NII decline was entirely due to rates, with no non-recurring income in Q4. The company aims for a roughly 50/50 split between secured and unsecured debt and will look to refinance a note coming due in September 2025.

Melissa Wedel of JPMorgan Chase & Co. inquired about the drivers of the sequential decline in Net Investment Income (NII) and whether similar trends should be expected in Q1, and also asked about the company's ideal mix of secured versus unsecured debt.

Answer

CFO David Pessah explained that the Q4 NII decline from $0.62 to $0.57 (core) was entirely driven by base rate changes, as about two-thirds of the portfolio's rates reset during the quarter. He noted a third of the portfolio still has a lag. Pessah also stated that the company aims to maintain a liability mix of approximately 50% unsecured debt and is opportunistically looking to refinance its upcoming September 2025 note.

Melissa Wedel asked about the portfolio's forward earnings power, the potential for increased stock repurchases given the discount to NAV, and the reasons for the significant NAV decline in the first quarter.

Answer

President Matt Bloomfield explained that while Q1 earnings were impacted by portfolio shrinkage, the current environment of wider spreads and lower refinancing activity bodes well for future earnings. He confirmed that the formulaic stock buyback program will continue as long as the discount to NAV persists. Bloomfield attributed the NAV decline primarily to unrealized mark-to-market losses on syndicated loans in late March, which the firm expects to recapture over time.

Melissa Wedel of JPMorgan Chase & Co. asked about the portfolio's earnings power, the potential for increased stock repurchases given the discount to NAV, and the reasons for the significant NAV decline in Q1 despite the portfolio's flexibility.

Answer

President Matthew Bloomfield explained that with refinancing activity slowing, the earnings outlook is favorable. He confirmed the formulaic stock buyback program will continue as long as the discount to NAV persists. Bloomfield attributed the NAV decline to unrealized mark-to-market losses from broad market volatility in late March, stating the company expects to recapture this value over time rather than crystallizing losses by selling assets.

Asked about the future proportion of the supplemental dividend relative to the base dividend and inquired about the portfolio's exposure to potential tariffs, comparing it between broadly syndicated and private credit markets.

Answer

The company expects the supplemental dividend to continue in a similar range relative to the total dividend but is being prudent given the market. The portfolio has minimal (low single-digit) exposure to tariffs, and management believes any impact can be managed. Tariff exposure is seen as relatively balanced between the broadly syndicated and private credit markets. The commentary on tariffs was more about maintaining patience for better market entry points rather than a specific portfolio concern.

Melissa Wedel of JPMorgan Chase & Co. sought clarity on the expected size of the supplemental dividend relative to the new base dividend to better understand the portfolio's earnings power. She also asked about the portfolio's exposure to potential tariffs.

Answer

President Matt Bloomfield stated that while they aim for consistency, the company is being prudent and not stretching for risk in the current market. Chief Investment Officer Angie Long clarified that her comments on tariffs were meant to explain the rationale for patience in a market not pricing in macro risks, rather than a concern about specific portfolio holdings. Matt Bloomfield added that the portfolio's direct tariff exposure is 'de minimis' and that they see no major difference in exposure between the broadly syndicated and private credit markets.

Melissa Wedel from JPMorgan Chase & Co. asked about the drivers behind the portfolio yield's recent fluctuations, whether accelerated OID income was a material factor, and if Q4 investment activity would follow typical seasonal patterns given PSBD's liquid focus.

Answer

President Matt Bloomfield attributed the yield movement to a combination of refinancing activity, a strategic rotation into higher-spread private credit, and fair value adjustments. He clarified that accelerated OID income was not 'overly material' in Q3. Regarding Q4 seasonality, Bloomfield expects a more 'muted' quarter than is typical, noting that the election had slowed recent activity and some deals were likely pulled forward into the summer.

Melissa Wedel from JPMorgan Chase & Co. questioned the recent fluctuations in the portfolio yield, the impact of accelerated OID on income, and whether to expect typical fourth-quarter seasonality in portfolio activity given PSBD's liquid focus.

Answer

Matthew Bloomfield, President, attributed yield fluctuations to refinancing activity, a rotation into higher-spread private credit, and fair value movements. He stated that accelerated OID was not 'overly material' in Q3. Regarding seasonality, he expects a more 'muted' Q4 than is typical, citing a pull-forward of deals into the summer and a pre-election slowdown.

Asked about the implications of private credit deals moving to the broadly syndicated loan (BSL) market, the company's capital deployment strategy, portfolio leverage targets, and the company's view on interest rates.

Answer

The shift to the BSL market provides more primary investment opportunities. Spread compression can be beneficial by increasing the value of their existing discounted loans. Portfolio leverage is dynamic, currently targeted at 1.4x to 1.5x, and their fee structure supports prudent leverage management. The company's strategy is designed to be adaptable and perform well in any interest rate environment.

Melissa Wedel asked about the sustainability of the Home segment's strong margins and whether the company has observed any recent changes in consumer search behavior on its platform.

Answer

CFO Jason Bengel stated that the Home segment's strong margins, driven by high-converting home equity products, are generally expected to be sustainable. COO Scott Peyree noted that consumer demand has remained 'pleasantly strong' across most products, with the exception of some caution in mortgage purchase and refi searches. CEO Douglas Lebda added that marketing and content strategies are performing well.

Melissa Wedel inquired about the future margin profile for the Consumer segment, suggesting a potential contraction in 2025 due to investments for growth. She also asked about the hypothetical impact on Insurance segment revenue if external factors, like tariffs, were to dampen auto sales and related insurance shopping.

Answer

Jason Bengel, CFO, confirmed that the Consumer segment margin is expected to normalize to the mid-to-high 40s in 2025 from Q4's peak, while still delivering double-digit revenue growth. Scott Peyree, COO, and Douglas Lebda, CEO, clarified that new car shoppers are a minority of insurance traffic. They emphasized that the primary driver of shopping behavior is the semi-annual policy renewal cycle, which is not directly tied to new auto sales.

Melissa Wedel asked for more context on promising talks with lenders about expanding loan offerings, questioning if this meant a general credit box reopening or a different, new effort.

Answer

COO Scott Peyree explained that while lenders have been opening credit boxes 'around the edges,' the more significant recent change has been their willingness to increase spend for the same high-quality consumer demographics. He noted that personal loan traffic was up 50% YoY while revenue was up only 7% due to tight credit. He expressed optimism that as rates fall, lenders will open their credit boxes more broadly in the next 6-12 months to accept a wider swath of the consumers LendingTree is already generating.

Melissa Wedel of JPMorgan Chase & Co. asked if Essent had quantified the risk-in-force exposed to Hurricanes Helene and Milton and requested more detail on the timing and impact of the COVID forbearance process ending.

Answer

Mark Casale, Chairman and CEO, stated that the company has not quantified the risk as they haven't seen defaults from those storms yet, expecting to provide an update in February. Chris Curran, President of Essent Guaranty, clarified that the COVID forbearance program ended in November of the previous year, so its favorable impact on cure rates has concluded. Casale added that the process for new forbearances is now more stringent, leading to a normalization of default and cure activity.