Mickey Schleien

Mickey Schleien requested further details on the primary factors contributing to the realized gain and unrealized losses observed during the quarter. He also asked for a reiteration of the pro forma non-accrual figures following the January portfolio activity. Additionally, Mr. Schleien inquired about the strategic reasoning behind deploying capital from portfolio repayments into new investments rather than prioritizing share repurchases given the stock's significant discount to NAV, and sought confirmation on the current status of the supplemental dividend policy.

Answer

Henry Chung, President and Managing Director of Crescent Capital BDC, attributed the realized gain to the sale of MCS above cost, while unrealized losses stemmed mainly from new non-accruals in Generate and Transportation Insight due to business degradation and sector challenges, respectively. He confirmed that pro forma non-accruals are expected to decrease by approximately 100 basis points on cost, resulting in 1.4% of fair value and 3.2% of cost. Mr. Chung clarified that the buyback program remains active, but the firm balances new private credit investments for long-term income against share repurchases, aiming for a balanced approach to capital deployment. He also confirmed the supplemental dividend policy remains in place but noted that no supplemental dividend would be paid for Q4 earnings due to the two-quarter look-back NAV measurement test.

Mickey Schleien asked for details on the main drivers behind the realized gain and unrealized losses during the quarter. He also sought clarification on the pro forma non-accrual rates after January's activity, the rationale for prioritizing new investments over share buybacks given the discount to NAV, and the current status of the supplemental dividend policy.

Answer

Henry Chung, President and Managing Director, attributed the realized gain to the sale of MCS above cost basis. He identified unrealized losses primarily from new non-accruals: Generate (degraded outlook) and Transportation Insight (challenges in third-party logistics). Mr. Chung provided pro forma non-accrual rates of 1.4% of fair value and 3.2% of cost. He explained that while the buyback program remains active, the company balances repurchases with new investments to generate durable, long-term income from a strong pipeline. Mr. Chung confirmed the supplemental dividend policy is still in place but no payment for Q4 due to a 2-quarter NAV look-back test.

Mickey Schleien of Ladenburg Thalmann asked for an outlook on market balance and credit spreads given increased capital and risk, and inquired about the company's stance on initiating a share buyback program.

Answer

CEO Jason Breaux stated that while significant capital inflows are pressuring spreads in the upper-middle market, CCAP remains selective and focused on the less competitive core middle market. Regarding buybacks, he explained that while they are evaluated, the company's long-term strategy prioritizes a stable equity base and NAV, and any program would be constrained by the current portfolio size and leverage.

Mickey Schleien asked for management's sentiment on the overall market, considering the large capital inflows into private BDCs and increased risks, and inquired about the outlook for spreads. He also followed up by asking if the board was considering share buybacks as an investment strategy, given the stock's discount to NAV.

Answer

CEO Jason Breaux stated that while significant capital inflows are pressuring spreads in the upper-middle market, CCAP remains focused on the less competitive lower and core middle market. He noted that recent tariff uncertainty has slowed deal activity but CCAP remains selective. Regarding buybacks, Jason Breaux acknowledged that they are continuously evaluated, but emphasized the company's long-term focus on maintaining a stable equity base and high-quality portfolio, weighing these factors against the short-term benefits of repurchases.

Mickey Schleien of Ladenburg Thalmann asked for management's sentiment on the overall market balance, considering the large capital inflows to private BDCs against a backdrop of rising risks and volatility. He also inquired about the potential for the company to initiate share buybacks as an alternative use of capital, given the market uncertainty and the stock's trading discount.

Answer

CEO Jason Breaux stated that while significant capital inflows are pressuring spreads, the impact is primarily in the upper-middle market, whereas CCAP focuses on the less competitive lower and core middle market. He noted that CCAP will remain highly selective. Regarding buybacks, Breaux confirmed they are under evaluation but stressed the company's long-term focus on maintaining a stable equity base and high-quality portfolio, also noting that the current leverage profile is a consideration.

Mickey Schleien asked for a high-level breakdown of the drivers behind the realized and unrealized gains and losses during the fourth quarter.

Answer

CEO Jason Breaux attributed the unrealized losses to some individual company movements and an increase in non-accruals. CFO Gerhard Lombard clarified that there were no individually material movers, and the change was primarily driven by a $40 million migration of assets to the watchlist (3, 4, and 5 rated), rather than significant deterioration in any single credit.

Mickey Schleien asked if software exposure was 'buried elsewhere' in the portfolio beyond the stated 9.3% enterprise software allocation, the proportion of the portfolio invested in second lien investments, and if there were any non-recurring items in interest expense for the quarter.

Answer

CEO Kyle Brown confirmed that 9.3% represents the total enterprise software companies. COO Gerry Harder clarified that while other companies use software, 9.3% is for pure SaaS business models. Gerry Harder stated that 15% of the portfolio is in second lien investments. CFO Michael Testa explained that a tick up in early repayments led to accelerated OID in interest income, but there were no non-recurring items on the interest expense side, noting an improvement in the cost of debt.

Mickey Schleien asked if the stated 9.3% software allocation represents the total, or if additional software exposure is embedded elsewhere in the portfolio. He also inquired about the proportion of second lien investments and any non-recurring items affecting interest expense for the quarter.

Answer

CEO Kyle Brown confirmed that 9.3% is the total for pure enterprise software companies, while COO Gerry Harder clarified that other portfolio companies might use software/AI tools, but it's not classified as pure SaaS. Gerry Harder stated that 15% of the portfolio is in second lien investments, with 85% secured by first liens. CFO Michael Testa clarified that a tick-up in early repayments led to accelerated OID included in *interest income*, not expense, and that the cost of debt improved.

Mickey Schleien from Clear Street asked about the impact of increasing captive CLO equity funds on fee structures for third-party CLOs and the ability of third parties to compete, referencing a new JV with no fees.

Answer

Thomas Majewski, Chief Executive Officer, explained that while fees are borne at the shareholder level of the JV, CLOs without internal management fees have the potential to outperform. He noted that a significant portion of new CLOs in 2025 were purchased by captive funds, distorting the market, and that this is an 'other than short-term phenomenon.' He highlighted the company's strategy of pivoting investments to areas with top-line revenue shares in CLO collateral managers and other credit assets, which now constitute 26% of the portfolio, to maximize shareholder returns.

Mickey Schleien asked about the impact of increasing captive CLO equity funds and new JV structures on third-party CLO fee structures and competition, as well as the outlook for loan default rates, LMEs, recoveries, and overall credit quality trends for the upcoming year.

Answer

CEO Thomas Majewski explained that captive funds, including new JVs, distort the market by driving spread compression, despite having different fee structures. He noted that a significant portion of new CLOs in 2025 were purchased by these funds. Majewski detailed the company's strategic pivot to increase allocation to other credit asset classes (26% of the portfolio) where better risk-adjusted returns are found, a move supported by the board. For the outlook, he anticipates continued loan spread compression, slower CLO liability tightening, and a credit environment similar to the previous year, with LMEs being a factor but not always negative for CLOs with strong managers.

Mickey Schleien from Clear Street asked about the divergence between CLO AAA spreads and underlying cash flows, questioning if the market's risk aversion is justified and what might shift this sentiment. He also inquired about the specific drivers of the quarter's realized losses.

Answer

CEO Thomas Majewski explained that CLO valuations are influenced by a mix of AAA demand, loan spread compression, and investor risk appetite, which can be out of sync temporarily. He emphasized that the portfolio's cash generation remains strong and is the primary focus. CFO Kenneth Onorio clarified that the realized losses were primarily driven by a non-cash accounting reclassification of previously written-down positions ($0.05/share) and currency hedge settlements ($0.08/share), with only a minor impact from actual trading ($0.02/share).

Mickey Schleien asked what catalyst is needed for the market to recognize the stable cash flow of Collateralized Loan Obligations (CLOs), given that CLO NAVs have been weak for several quarters despite high yields.

Answer

CEO Thomas Majewski explained that CLO equity cash flows have been historically stable and that the company's portfolio continues to generate significant cash. He characterized the recent NAV decline as a short-term market price fluctuation, not a fundamental issue, and views the volatility as an opportunity. He noted that the reinvestment optionality within their CLOs is underappreciated by the market and that the headwind from loan spread compression has largely abated, positioning the portfolio well.

Mickey Schleien asked about the impact of out-of-court restructurings and 'zombie companies' on the CLO market, and how rising CLO AAA spreads affect the opportunity to refinance portfolio deals.

Answer

Executive Thomas Majewski acknowledged that liability management exercises (LMEs) are a negative but not a 'dire' market factor, noting that Eagle Point's large collateral managers have influence in these situations. He added that despite some loan spread compression, the company has significant opportunities to lower liability costs and, more importantly, extend its portfolio's weighted average remaining reinvestment period (WARP) through resets, which serves as a key long-term risk mitigant.

Mickey Schleien inquired about the drivers behind the significant NAV appreciation for Schylling, Old World, and SFE-SFEG, specifically asking about operational or valuation changes. He also questioned how consumer-oriented companies like Schylling and Old World are growing EBITDA despite broader sector headwinds, and sought details on the underwriting process for Rowan Energy, particularly regarding cyclicality and business cycle assumptions. Additionally, Schleien asked for clarification on the portfolio's interest rate floor protection and the potential risks or benefits from AI.

Answer

David Dullum, President of Gladstone Investment, explained that the appreciation was primarily driven by EBITDA increases rather than multiple changes. He attributed the strong performance of consumer companies to unique products (like NeeDoh for Schylling), strong management, and effective navigation of tariff impacts. Regarding Rowan Energy, Dullum noted that existing energy-related portfolio companies (E3, Smart Chemical) provide internal expertise for evaluating such investments, allowing for attractive valuations and identified upside. Dullum clarified that significant SOFR decreases would be needed for more companies to hit their interest rate floors, indicating substantial protection. He also stated that most portfolio companies are beneficiaries of AI, using it for efficiency and product design, rather than being direct competitors in the AI tech space.

Mickey Schleien asked about the drivers behind the significant NAV appreciation for Schylling, Old World, and SFEG, how consumer-oriented companies are growing EBITDA despite sector headwinds, the underwriting process for Rowan Energy in the cyclical energy equipment sector, the implications of interest rate floors on portfolio yield, and the portfolio's exposure and utilization of AI.

Answer

David Dullum, President of Gladstone Investment, explained that the appreciation was primarily due to EBITDA increases, not multiple changes. He highlighted Schylling's unique product demand and Old World Christmas's strong management for outperforming consumer trends despite tariffs. For Rowan Energy, Dullum noted their internal expertise from existing energy investments helps in evaluation. Taylor Ritchie, CFO, clarified that significant SOFR declines (over 200 basis points) would be needed for all debt investments to hit their 12.1% floors, mitigating yield compression. Dullum added that most portfolio companies utilize AI for efficiency, positioning GAIN as a beneficiary rather than having direct AI tech competition.

Mickey Schleien asked about the drivers behind Gladstone's healthy M&A pace despite market weakness, whether there are signs of an economic slowdown in the portfolio, and the Board's comfort level with the current amount of undistributed taxable income (UTI).

Answer

President David Dullum explained that while the market is competitive with tricky valuations, the company is seeing good quality deal flow in its target range and works hard to source opportunities. He noted that while portfolio activity remains stable, some margins are being squeezed by tariffs, leading to modest EBITDA declines in certain companies but not threatening debt service. CFO Taylor Ritchie added that the Board is comfortable with the current spillover level and evaluates it on a quarter-to-quarter basis.

Mickey Schleien inquired about the portfolio's quantitative exposure to tariff risk, its connection to lower-income consumers, the recovery outlook for non-accrual investments like Hobbs, and the performance of Horizon.

Answer

President Dave Dullum explained that while most portfolio companies have some tariff exposure, only a few with direct China production are significantly affected, and mitigation strategies are in place. He noted that consumer-facing companies are not specifically targeted at lower-income groups. Dullum expressed optimism for the non-accrual companies, stating three of the four, including Hobbs, are now profitable on an EBITDA basis and he hopes to return Hobbs to accrual status by year-end. He clarified that Horizon is also profitable but was marked down due to leverage from a prior recap and a relative decline in EBITDA.

Mickey Schleien asked about the decline in fee credits from the external manager, the recovery status of non-accrual asset Hobbs, its potential to return to accrual, and the calculation of the income-based incentive fee.

Answer

CFO Rachael Easton stated that lower fee credits are tied to quieter deal activity. President Dave Dullum provided a detailed update on Hobbs, noting a new management team has returned it to profitability, and it could be back on accrual status within 6-9 months without needing more cash. Rachael Easton also confirmed the incentive fee calculation was standard and not impacted by unusual factors.

Mickey Schleien inquired about the current breakdown of the portfolio between sponsored and non-sponsored deals, the behavior of private equity sponsors in the current market, the impact of LP pressure, the expected deal flow and repayment risk for net portfolio growth, the structure of the new joint venture, and the underwriting approach to cyclical consumer segments.

Answer

Michael Sarner, CEO, and Josh Weinstein, CIO, clarified that the portfolio is approximately 93% sponsored. Mr. Weinstein noted that lower middle market private equity funds still have capital and are actively seeking deals, though deployment was weaker last year. Mr. Sarner added that the lower middle market experiences a steady drumbeat of deals due to founder transitions. Mr. Weinstein acknowledged LP pressure exists but is less pronounced than in the middle or upper markets, and the company considers a fund's lifecycle in its investment committee process. Mr. Sarner expressed bullishness for deal flow, citing expanded sponsor relationships, new MD hires, and the JV's ability to win more high-quality deals. Mr. Weinstein explained the JV's first-out position structure and its expected leverage. Regarding consumer segments, Mr. Weinstein stated that while leverage is slightly elevated at 4.2x, it's still conservatively structured, and underwriting accounts for potential consumer pullbacks.

Mickey Schleien asked about the portfolio's sponsored vs. non-sponsored breakdown, private equity sponsor behavior, LP liquidity pressure, the company's deal flow expectations, the structure and leverage of the new joint venture, and the underwriting approach for cyclical consumer segments.

Answer

Michael Sarner, CEO, stated the portfolio is approximately 93% sponsored and 7% non-sponsored. Josh Weinstein, Chief Investment Officer, noted that lower middle market private equity funds still have significant capital and are actively seeking deals, though 2025 was a weaker deployment year. He clarified that LP pressure for liquidity is less pronounced in the lower middle market, and Capital Southwest prioritizes deals in the early to middle stages of a fund's life. Weinstein expressed bullishness for future deal flow, attributing it to expanded sponsor relationships, new MDs, and the JV's ability to compete on lower-spread, high-quality deals while maintaining granularity. He clarified the JV primarily holds first-out positions with asset-level leverage between 1x-1.5x and fund-level leverage around ±2.5x. Regarding consumer segments, Weinstein explained that while leverage is slightly elevated at 4.2x, it's still conservative, and deals are structured to account for potential consumer pullbacks.

Mickey Schleien from Clear Street asked about the drivers of management's M&A optimism, expectations for prepayment activity, the trajectory of operating leverage, and the rationale for issuing equity versus increasing balance sheet leverage.

Answer

CEO Michael Sarner cited a robust deal pipeline, with $110 million already closed in the current quarter, as the basis for optimism. Regarding leverage, Sarner and CFO Chris Rehberger explained that while the LTM operating leverage was 1.7%, the run-rate is trending toward 1.4%-1.5%. They prefer a conservative balance sheet leverage target of 0.85x-0.9x and will continue consistent ATM equity issuance to fund growth rather than push leverage higher.

Mickey Schleien of Ladenburg Thalmann inquired about the attractiveness of the current investment vintage, the primary drivers of recent net realized losses, and the timeline for capitalizing the newly approved second SBIC license.

Answer

CEO Michael Sarner and Executive Josh Weinstein characterized the current deal environment as binary, with high-quality deals in service-oriented industries proceeding while cyclical or policy-impacted deals are delayed. Executive Chris Rehberger and CEO Michael Sarner clarified that realized losses were concentrated in two specific, restructured non-accrual companies, not indicative of broad portfolio weakness. Sarner projected that the new SBIC subsidiary would begin to be capitalized over the next three months, with the first debenture draws expected around the same time.

Mickey Schleien of Ladenburg Thalmann asked about M&A activity trends, the drivers of low repayment activity, and the potential impact of tariffs on the portfolio. In follow-up questions, he inquired about the sources of increased fee income, the drivers of realized losses, the reasons for portfolio performance divergence, and the company's target for economic leverage.

Answer

CEO Bowen Diehl and other executives noted early signs of increased M&A activity. CFO Michael Sarner projected that 10-15% of the portfolio would rotate in 2025, largely driven by M&A. Executive Chris Rehberger stated that about 10% of the portfolio could see some impact from tariffs, but the first-lien position mitigates risk. Sarner attributed higher fee income to a prepayment penalty, interest on cash from a bond issuance, and amendment fees. The realized loss was from a single restructured deal. Diehl described portfolio upgrades and downgrades as idiosyncratic. Sarner confirmed the economic leverage target is around 1.0x to 1.1x.

Mickey Schleien with Ladenburg Thalmann inquired about the market share of captive CLO funds in the primary market and their potential impact on CLO equity returns for third-party investors like Oxford Lane. He also asked about the outlook for loan market supply and demand.

Answer

Managing Director Joe Kupka estimated that captive funds would likely dominate CLO issuance in 2026 due though 2025 was more balanced. CEO Jonathan Cohen stated it's difficult to predict the long-term impact of captive funds on CLO equity returns, noting other significant factors. He also expressed hope for a restoration of balance in the loan market supply and demand based on historical norms.

Mickey Schleien from Clear Street sought to reconcile strong H1 deal flow with a cautious outlook, asked if AI deals were skewing market data, and inquired about the risk mitigation strategy for its consumer sector investments.

Answer

CFO & COO Thomas Raterman responded that while deal flow exists, the focus is on quality and diversification. He agreed that AI is skewing market data and explained that RWAY's consumer investments are focused on larger, more established businesses with over $100M in revenue and a clear path to profitability, a sector they are not actively expanding in the current environment.

Mickey Schleien of Ladenburg Thalmann asked about trends in deal terms, the company's investment appetite for AI companies, the impact of regulatory changes on healthcare deal flow, and the drivers of Q1's realized gains and unrealized depreciation.

Answer

Chief Investment Officer Greg Greifeld noted improving deal structures with better covenants and lower leverage. He explained that Runway targets mature AI companies but avoids chasing 'hot' deals with compressed terms. On healthcare, Greifeld stated their focus on post-approval companies mitigates some regulatory risk. Chief Financial Officer Tom Raterman attributed the realized gain to the Gynesonics equity sale and unrealized depreciation to a mix of company performance and market multiples.

Mickey Schleien asked for an update on the Snagajob investment, questioning whether its improved valuation meant it could be expected to return to accrual status in the near future.

Answer

Thomas Raterman, CFO and COO, responded that the primary strategy for Snagajob is to preserve and restore NAV. He stated that while there is a plan in place to protect the asset's value and a long-term expectation for it to return to accrual status, it is not expected to do so in the short term.

Mickey Schleien asked for a high-level view on the current position in the credit cycle and whether the trough in credit spreads is sustainable given the capital flowing into private credit.

Answer

CEO Craig Packer explained that while OBDC's portfolio companies are performing well, the BDC is not a proxy for the U.S. economy due to its defensive positioning in non-cyclical sectors. He believes credit spreads have troughed, attributing the tightness to both private capital inflows and a 'white hot' syndicated loan market. He is hopeful the next move in spreads will be wider but noted that current absolute returns remain highly attractive.

Mickey Schleien asked why Blue Owl did not utilize its share repurchase program more actively during recent market volatility, suggesting it would have been a great use of capital given the stock price.

Answer

CEO Craig Packer agreed that the stock is attractively priced below its net asset value but noted the need to balance buybacks with deploying valuable capital into new investments. He explained that share repurchase authorizations have specific open windows, which are measured in weeks. CFO Jonathan Lamm then confirmed that the recent period of market volatility and stock selloff did not coincide with an open window for repurchases.

Mickey Schleien noted an anecdotal trend of credit deterioration across the BDC sector and asked if, given Blue Owl's scale, management is seeing any signs that the economy is beginning to slow down at the margin.

Answer

CEO Craig Packer responded that he does not see signs of a broader economic slowdown within their portfolio of over 400 companies, which continue to exhibit modest revenue and EBITDA growth. He emphasized that OBDC's portfolio is concentrated in defensive sectors like software and healthcare and is not a direct proxy for the U.S. economy. He believes any credit issues seen elsewhere are likely idiosyncratic to weaker credits impacted by higher rates, rather than a systemic economic weakness.

Mickey Schleien asked for details on Blue Owl's non-sponsored lending segment, its economics compared to sponsored deals, and sought clarification on the math behind the change in weighted average interest rates on new commitments.

Answer

CEO Craig Packer explained that while they selectively engage in non-sponsored deals, they strongly prefer the sponsored market for its scale and governance, and he does not see meaningfully wider spreads in the non-sponsored space. Regarding new commitment rates, he attributed the change to the combined effect of lower market spreads and lower base rates, confirming no strategic shift away from unitranche loans.

Mickey Schleien of Clear Street asked about the impact of growing private credit competition on spreads in the lower middle market and inquired about the overall health of Gladstone's portfolio amid mixed economic signals.

Answer

Bob Marcotte, President, stated that Gladstone Capital is not seeing significant spread compression from larger funds in its niche, maintaining spreads over 100 basis points above the broader middle market. He affirmed the portfolio's health, citing that investments are in growth-oriented companies with conservative leverage (under three turns of EBITDA) and strong private equity sponsor support, providing a cushion against economic headwinds.

Mickey Schleien inquired about the potential impact of widening credit spreads on the portfolio and NAV, the performance of specific portfolio companies like SeaLink and RPM Freight amid tariff changes, and the financial implications of the Eegee's restructuring.

Answer

Robert Marcotte (Executive) stated that Gladstone's portfolio is well-positioned, with spreads already wide of the market and low leverage, mitigating degradation risk. He explained that tariff-related supply chain shifts are actually benefiting domestic-focused companies like RPM and SeaLink. Marcotte also noted that the Eegee's restructuring would result in only a very small realized loss and that the associated debt is returning to accrual status.

Mickey Schleien of Alliance Global Partners inquired about Gladstone's investment strategy in the restaurant sector, the potential for investing in liquid credits to deploy capital, and the outlook for the portfolio company Engineering Manufacturing Tech.

Answer

President Bob Marcotte explained that for restaurant deals, the firm maintains a high bar, focusing on compelling business models, strong margins, and disciplined leverage structures, adding that they are not looking to significantly increase exposure to the sector. He dismissed the idea of investing in liquid credits, citing low marginal returns on equity due to their cost of capital and a lack of control and diligence possible in those markets. Regarding Engineering Manufacturing Tech, Marcotte noted that despite losing a major customer, the company is backfilling revenue, adding new management, and has a strong outlook for 2025, driven by data center and reshoring trends.

Mickey Schleien of Ladenburg Thalmann & Co. Inc. questioned the rationale for issuing equity while under-levered, inquired about the firm's leverage targets, asked about success fees from the ARA exit, sought an outlook on portfolio companies DKI and EGs, and asked about the accounting for preferred dividends.

Answer

President Robert Marcotte explained the equity issuance was a modest, precautionary move to ensure flexibility for the significant ARA exit and noted that equity's marginal funding cost was at times below debt. He confirmed leverage targets are unchanged but they are not rushing to increase leverage. He also stated the ARA exit was a straight equity gain with no success fees. Regarding portfolio companies, he expressed diminished optimism for DKI and said the firm is increasing its engagement to exit EGs. CFO Nicole Schaltenbrand clarified that reporting preferred dividends below the line is dictated by accounting rules.

Mickey Schleien of Clear Street LLC asked for a high-level view on sector-wide spread compression driven by non-traded BDCs, its potential impact on ROEs, the reason for a migration in internal risk ratings, and the nature of an increase in prepaid assets.

Answer

CEO Joshua Easterly warned of sector complacency, stating that backward-looking metrics hide a future of lower ROEs due to spread compression and a declining SOFR curve. Vice President Robert Stanley clarified the risk rating change was due to two specific, underperforming assets, not a portfolio-wide trend. CFO Ian Simmonds explained the increase in prepaid assets was a receivable for an investment that paid off at quarter-end, with cash received subsequently.

Mickey Schleien of Ladenburg Thalmann asked for a high-level view on the secular trend of spread compression from non-traded BDC growth and its impact on future ROEs. He also questioned the drivers behind the migration in internal risk ratings and the increase in prepaid expenses on the balance sheet.

Answer

CEO Joshua Easterly expressed concern about sector complacency, noting that backward-looking metrics hide the impact of lower forward rates and tighter spreads, and believes a sub-9% ROE is unsustainable. President Robert Stanley explained the risk rating migration was due to two specific, idiosyncratic names, not a portfolio-wide trend. CFO Ian Simmonds clarified the increase in prepaid assets was a receivable for an investment that paid off on June 30, with cash received post-quarter-end.

Mickey Schleien of Ladenburg Thalmann & Co. Inc. posed a modeling question regarding Q1 interest and dividend income, which appeared light relative to the portfolio's size and rate movements, asking if a reversal or other factor was at play.

Answer

CEO Joshua Easterly and CFO Ian Simmonds clarified that the quarter-over-quarter comparison was skewed by a large, non-recurring dividend payment of $5.1 million in Q4 2024. They explained that after adjusting for this one-time item, the Q1 interest and dividend income was consistent with the portfolio's size, reflecting only slight yield compression.

Mickey Schleien of Ladenburg Thalmann & Co. Inc. questioned the outlook for spread stability in the sponsored finance market and asked about Sixth Street's interest in growing the TSLX BDC relative to its broader platform.

Answer

CEO Joshua Easterly explained that he hopes market forces will create a floor for spreads as the poor ROE from mispriced assets becomes more evident. Regarding growth, he emphasized an "investor-first" philosophy, stating that the BDC will grow only when opportunities provide acceptable risk-adjusted returns for shareholders, rather than pursuing growth for its own sake.

Mickey Schleien questioned the outlook for spread stability in the sponsored finance market and asked about Sixth Street's interest in growing the TSLX BDC relative to its larger platform.

Answer

CEO Joshua Easterly explained that he hopes market forces, specifically the realization of low ROEs from tight spreads, will create a floor for asset-level returns. He reiterated Sixth Street's "investor first" philosophy, stating that the direct lending business will grow as long as they can find opportunities that provide acceptable returns for their investors, which is crucial for their long-term platform success.

Mickey Schleien asked for the outlook on CLO equity for the remainder of the year, given the recent NAV decline, and what it would take to see stronger bids. He also questioned how loan modification events (LMEs) are handled in CLO tests, their eventual default rate, and the rationale for calling a relatively new 2021 vintage CLO.

Answer

Nishil Mehta, Principal Executive Officer and President, explained that the April NAV decline was market-driven and has since rebounded. He views recent volatility as a net positive for CLO equity, as it halts loan repricings and creates opportunities to buy discounted assets. Regarding the called CLO, he stated it was an idiosyncratic situation involving an underperforming manager. Lauren Basmadjian, Chair and Global Head of Liquid Credit, added that while there is limited data on LMEs leading to subsequent bankruptcies, their lower haircuts are factored into default assumptions, resulting in a blended loss rate that is not dramatically different from historical models.

Mickey Schleien of Ladenburg Thalmann inquired about the catalysts needed for CLO equity market strength, the reasons for lower July versus April payments, and the prospective impact of the 1-month vs. 3-month SOFR spread in a rate-cutting environment.

Answer

Portfolio Manager Nishil Mehta explained that the CLO equity market remains strong, with recent weakness attributable to loan repricing waves. He noted that lower July payments were caused by this spread compression and the semi-annual payment cycle of bonds within CLOs, with an expected uptick in October. Mehta also projected that while the SOFR basis could create a mismatch during rate cuts, the impact should be manageable.

Mickey Schleien from Ladenburg Thalmann asked for a high-level view on the equilibrium in PFLT's target private credit market, specifically questioning the stickiness of current spreads given the large capital buildup by private BDCs. He also inquired about the expected timeline for injecting the remaining unfunded equity commitment into the senior loan fund.

Answer

Arthur Penn, Chairman and CEO, opined that large-scale competitors are moving upmarket, which creates more opportunity for PFLT in the core middle market ($10M-$50M EBITDA) where competition remains rational. He believes this trend leaves more room for PFLT. Regarding the joint venture, Penn stated that a 6-to-12-month timeframe is a reasonable general range for deploying the platform's excess capital, though it is contingent on the pace of M&A activity.

Mickey Schleien asked about the drivers behind the stabilization of market spreads, the reasons for the markdowns on the PSSL equity investment despite its strong ROE, the discretion over unfunded commitments, and the company's policy on subsidizing ATM issuance below NAV.

Answer

Arthur Penn, Chairman and CEO, attributed spread stabilization to lenders seeking double-digit returns and relative value. He clarified that the PSSL JV participates in debt markdowns but not in the upside from equity co-investments, which are held on PFLT's balance sheet. On liquidity, he noted that delayed draws are more discretionary than revolvers. Regarding ATM issuance, Penn stated that subsidizing it is a case-by-case decision based on the attractiveness of the investment vintage.

Mickey Schleien asked whether investment spreads can remain stable given the large amount of capital in private credit, questioned the prepayment risk associated with the growing number of top-rated portfolio companies, and sought details on the challenges facing the distressed investment in Quest Software.

Answer

Executive Edward Ross responded that spreads for A+ credits are likely to remain stable due to a flight to quality, while there may be opportunities for spread widening in more complex situations. He acknowledged that prepayment risk is an ongoing part of the business, citing a few recent and expected prepayments and refinancings. Regarding Quest Software, Ross explained that while the company is over-levered, its long-term outlook is solid, and the investment's current valuation reflects market concerns about a potential liability management event.

Mickey Schleien inquired about the outlook for lower middle-market loan spreads in 2025, the specifics behind the Quantum IR Technologies non-accrual, the accounting treatment for the Health Use and Medsurant distributions, and the company's target balance sheet leverage.

Answer

Executive Edward Ross stated that he expects loan yields to remain stable due to significant market capital, though opportunities for higher rates may arise with perceived risk. Regarding Quantum, he described the situation as resulting from specific negative events and confirmed Fidus is actively involved to improve the outlook. He also affirmed the company's target leverage is around 1:1, with debt expected to be the primary source of growth capital. Executive Shelby Sherard clarified that the Health Use and Medsurant proceeds will be booked as a return of capital and realized gains, and that this was anticipated in the Q4 fair value marks.

Mickey Schleien inquired about the stability of the portfolio yield despite falling SOFR rates, interest income reversals, manager subsidies for share issuance, and the long-term strategy for the company's high balance sheet leverage.

Answer

Executive Henri Steenkamp clarified that the core portfolio yield did decrease by 30 basis points, primarily due to lower SOFR, and confirmed there were no interest reversals and that the manager did subsidize ATM issuances. CEO Christian Oberbeck addressed the leverage, stating that the company's confidence is based on its long-term, covenant-free debt structure and the high quality of its current portfolio, which he believes mitigates mark-to-market risks seen in other financing structures.

Mickey Schleien asked for clarification on portfolio yield stability given the drop in SOFR, whether there were any interest income reversals, and if the external manager subsidized share issuances. He also questioned the long-term goal for the high balance sheet leverage, especially given increasing economic risk.

Answer

CFO Henri Steenkamp clarified that the core portfolio yield did decrease by 30 basis points, primarily due to lower SOFR, and confirmed there were no interest reversals. He also affirmed that the manager subsidized ATM issuances. CEO Christian Oberbeck defended the leverage level, emphasizing the stability of their long-term, covenant-free debt structure, which he believes carries less mark-to-market risk than typical asset-based lending, giving them confidence in the current portfolio's quality.

Mickey Schleien of Ladenburg Thalmann asked for clarification on portfolio yield stability given the drop in SOFR, inquired about any interest income reversals, confirmed manager subsidies for share issuance, and questioned the long-term strategy for the company's high balance sheet leverage amid increasing economic risk.

Answer

Executive Henri Steenkamp clarified that the core portfolio yield did decline by 30 basis points, primarily due to lower SOFR, and confirmed there were no interest income reversals. CEO Christian Oberbeck defended the leverage, highlighting the stability of their long-term, covenant-free financing structure and the high quality of the underlying portfolio, which he believes mitigates mark-to-market risks and justifies the current leverage levels.

Mickey Schleien asked about the remaining refinancing risk in the portfolio, the current status of spillover taxable income after the recent special dividend, and the Board's perspective on managing excise tax.

Answer

CIO Michael Grisius addressed refinancing risk, stating that while some aggressive pricing exists, he does not see the portfolio as highly vulnerable and expects repayments to normalize as M&A activity picks up. Executive Henri Steenkamp clarified that the recent special dividend cleared out the fiscal 2024 spillover income. CEO Christian Oberbeck added that the 4% excise tax is currently a cheaper source of financing than issuing new debt, viewing it as a good source of capital for the company.

Mickey Schleien of Ladenburg Thalmann explored several topics, including the anticipated impact of lower base rates on M&A volume, the rationale for not resetting the CLO, the decision to forgo stock repurchases despite the NAV discount, the timing and potential for a deemed distribution of UTI, and the specific tactics to protect NII from a 200 basis point rate decline.

Answer

Chief Investment Officer Michael Grisius noted that while lower rates should spur deal activity, the lower middle market currently lags the broader market recovery. CEO Christian Oberbeck explained the CLO was not reset due to a mismatch between liability demand and asset supply, though a partial refinancing was done. He cited the need to preserve liquidity for future asset growth and manage leverage as reasons for not repurchasing shares. Regarding the over $3 per share in UTI, Oberbeck indicated a decision would be made in the coming quarter and a deemed distribution is not currently seen as appropriate. He and Henri Steenkamp outlined tactics to mitigate rate declines, including deploying cash, refinancing callable debt at lower rates, and the natural lag in asset repricing.

Mickey Schleien inquired about Great Elm's CLO joint venture, specifically why it exclusively invests in Apex CLOs, how loan market spread compression might affect cash flows and ROE targets, and the outlook for the distressed Maverick Gaming position.

Answer

CEO Matt Kaplan explained that the CLO JV's current focus on Apex is due to strategic partnerships that allow for majority positions, but they may diversify over time. He noted that while asset spreads compressed, liability costs also decreased, and they still target high-teens to 20% IRRs. Regarding Maverick Gaming, Kaplan stated that as a private company, he could only say it is monitored and fair-valued quarterly by third-party specialists.

Mickey Schleien of Raymond James asked about the potential for credit spreads to widen, noting their stability in Q4, and questioned if rising risk perception in the market could drive them higher.

Answer

Stuart Aronson, an executive, responded that spreads have remained stable into early 2025 due to a supply/demand imbalance, with too much capital chasing too few M&A deals. He believes a significant economic disruption or a major resumption of M&A activity would be required to create upward pressure on spreads.

Mickey Schleien asked about the future trend of CLO debt liability spreads, the rationale and risk profile of increasing allocations to CLO equity and CFOs, and the developing relationship between the high cash yields and lower effective yields on the company's CLO equity investments.

Answer

Executive Thomas Majewski and Portfolio Manager Daniel Ko addressed the questions. Majewski stated that while CLO debt spreads are wide relative to credit risk and should tighten over time, reinvestment risk from calls is a key variable. He noted that the CLO equity allocation could rise towards 30% but that the CFO allocation would remain small, highlighting the CFOs' higher subordination as a key risk mitigant. Ko explained that the difference between cash and effective yields in CLO equity is due to modeling a partial principal return at maturity. Majewski added that their models assume further loan spread tightening without factoring in the benefit of future liability refinancings, which can temporarily widen this yield delta.

Mickey Schleien asked about the key assumptions, such as balance sheet leverage and equity rotation, embedded in the core NII guidance, and also inquired about the main drivers of the quarter's realized losses and unrealized gains.

Answer

CEO Arthur Penn clarified that the forward NII guidance assumes continued growth in the joint venture and that balance sheet leverage would eventually decrease to the 1.3x range. CFO Richard Allorto detailed that the main drivers for unrealized gains were write-ups in JF Intermediate and Federal Advisory Partners, while write-downs on Cascade Environmental and Pragmatic were offsets. The primary driver for the realized loss was the restructuring of STG.