Paul Johnson

Paul Johnson of Keefe, Bruyette & Woods asked about general software trends, specifically the slowdown in technology sector revenue growth observed in the Golub Altman Index, separate from AI disruption risks, and the underlying drivers.

Answer

David Golub, CEO of GBDC, confirmed a slowdown in year-over-year growth in the technology/software sector, including a selective slowdown in new bookings. He attributed this to corporate clients moving more slowly to adopt new software products, possibly due to cost pressures or digesting prior tech investments, viewing it as a cyclical pattern likely to rebound. Regarding ARR (Annual Recurring Revenue) based structures, Golub explained GBDC has reduced its exposure in recent years due to tighter pricing and decreased attractiveness, with many older ARR loans converting to traditional EBITDA loans. He noted that declining bookings trends make ARR loans a more challenging space.

Paul Johnson from KBW asked about general software trends, specifically the observed slowdown in technology sector revenue growth in the Golub Altman Index, separate from AI disruption risks. He also inquired about the proportion of Annual Recurring Revenue (ARR) based structures in GBDC's software portfolio, their defensive thesis, and trends in conversion to traditional EBITDA loans.

Answer

CEO David Golub confirmed a slowdown in year-over-year growth and new bookings trends in the technology/software sector, attributing it to corporate clients dealing with cost pressure and digesting prior tech investments, rather than a generalized move away from software adoption. He clarified that GBDC, an early originator of ARR loans, has significantly reduced its exposure to them in recent years as pricing tightened and older ARR loans converted to traditional EBITDA loans. Golub noted that in the current environment with slower bookings, ARR loans are generally tougher, requiring individual merit-based judgment. He committed to checking what specific disclosure is available on ARR loan proportions.

Paul Johnson of Keefe, Bruyette & Woods questioned the rationale behind the $1 billion in originations, asking if it was a platform-wide trend and why GBDC deployed significant capital in a challenging credit environment. He also requested quantification of the non-cash interest expense from swap markdowns.

Answer

Executive David B. Golub clarified that while deployment is platform-wide, GBDC was under-levered post-merger and aimed to increase assets. He emphasized focusing on the net funds growth of $368 million, which is a more normal figure, and noted that originations were heavily skewed towards repeat sponsors and borrowers, leveraging competitive advantages. Chief Financial Officer Christopher Ericson specified that the non-cash interest expense related to the swap was approximately $0.02 per share.

Paul Johnson of KBW asked for the motivation behind the voluntary incentive fee waiver in the quarter, questioning if it was related to specific credit events like the Imperial Optical restructuring or broader market pressures.

Answer

David B. Golub, Executive, explained that Golub Capital has a long-standing tradition of periodically and voluntarily waiving fees. He stated that given the significant 'onetime noise' in the quarter's results, management felt it was appropriate to waive the incentive fee to support shareholder returns and maintain a positive investor experience, consistent with their long-term perspective as a manager.

Paul Johnson with KBW asked about the percentage of Ares Capital's software book that is currently below profitability (negative EBITDA) and whether the PIK portfolio has a tilt toward software or is as diversified as the broader portfolio.

Answer

Kort Schnabel, CEO of Ares Capital Corporation, stated that a 'very, very, very small, almost de minimis amount' of their software book has negative EBITDA, primarily limited to recurring revenue (ARR) loans, many of which are already positive EBITDA or have converted. He noted that the software book had a slightly higher percentage of PIK, but almost 100% of this PIK was structured upfront, not amended, indicating no weakness in the software book.

Paul Johnson asked about the percentage of Ares Capital's software book that is below profitability (negative EBITDA) and whether the PIK portfolio has a tilt toward software.

Answer

CEO Kort Schnabel stated that a very small, almost de minimis, amount of the software book has negative EBITDA, primarily within recurring revenue (ARR) loans, many of which were positive EBITDA at the outset or have since achieved it. He confirmed that the software book had a slightly higher percentage of PIK, but almost 100% of this PIK was structured at the investment's outset, not as an amendment, indicating no underlying weakness in the software book.

Paul Johnson asked for an updated outlook on monetizations and future realized gains, and the impact of mega financing deals on capital supply/demand in private credit.

Answer

Kort Schnabel (CEO) stated that ARCC's strategy is to capitalize on potential big gains, citing Potomac as an example but not the only one, and suggested investors review disclosures for future opportunities. He believes mega financing deals help absorb capital, but multiple large buyouts are needed to significantly widen spreads and shift deals back to private credit. Scott Lem (CFO) added that a regular cadence of large transactions is key to absorbing market capital.

Paul Johnson asked for an updated outlook on monetizations and future realized gains, specifically if the Potomac Energy Center sale represents the most significant near-term opportunity, and whether mega financing deals like the Dun & Bradstreet LBO can effectively absorb excess capital in the private credit market.

Answer

CEO Kort Schnabel stated that while Potomac was a great example of a significant gain, it's not the only one in Ares' history, and he expects more future gains from restructured investments, advising investors to review disclosures for potential clues. CFO Scott Lem added that the regular cadence of large transactions, not just single mega-deals, helps absorb capital. Mr. Schnabel also noted that such large buyouts indicate a well-functioning credit market and could potentially widen spreads and shift deals back to private credit.

Paul Johnson asked about the significant increase in the Ivy Hill distribution, the portfolio's exposure to government contracts, and whether PE sponsors were attempting to limit lender control in deals.

Answer

Then-CEO Robert DeVeer clarified the Ivy Hill dividend included a one-time $10 million special dividend on top of a higher recurring base dividend reflecting the company's growth. He stated that exposure to government contracts is not significant. On lender control, he said they haven't seen unusual attempts to limit voting rights in performing situations and that ARCC maintains strict documentation standards.

Paul Johnson asked if spread compression has also affected structuring fees, inquired about the resolution of an investment removed from non-accrual, and sought management's view on current inflation trends within the portfolio.

Answer

CEO Robert Kipp DeVeer acknowledged some pressure on fees alongside spreads but noted it was too early to call a definitive trend. An unnamed executive confirmed the specific non-accrual investment was fully exited. DeVeer also stated that inflation has moderated significantly over the past year to more normalized levels.

Paul Johnson questioned the top-line growth and EBITDA trends in the software sector, asking if there have been changes in growth rates, new deal activity, and the market impact beyond secondary loan price weakness.

Answer

Armen Panossian, Co-CEO, Oaktree, stated it's too early to see widespread performance degradation in software due to AI, with concerns focused on long-run refinanceability and potential binary outcomes. He discussed covenants in software deals (EBITDA-based or ARR-based) and OCSL's limited exposure to non-cash-flowing ARR deals. Chris McKown, CFO and Treasurer, Oaktree, added that software portfolio EBITDA growth since funding is up 20%, with a 40% EBITDA margin, and 18-20% of software loans repaid in the last 12 months.

Paul Johnson asked about top-line growth and EBITDA trends in the software sector, the impact of AI concerns on the market, the current weighted average LTV ratio for software investments, and the extent of equity multiple degradation the software space can absorb before widespread restructurings.

Answer

Armen Panossian (Co-CEO, Oaktree) stated it's too early for widespread AI-driven performance degradation but noted long-run concerns affect refinanceability, discussing covenant types and OCSL's limited ARR deal exposure. Chris McKown (CFO and Treasurer, Oaktree) highlighted 20% EBITDA growth and 18% software loan repayments. Matt Pendo (President of OCSL) clarified the 47% LTV is a current estimate as of 12/31. Armen Panossian added that LTVs exceeding 55%-60% could jeopardize refinancing, with sponsor support depending on fund stage and future risk factors.

Paul Johnson questioned the significant quarter-over-quarter decline in the portfolio yield, asking if the current level is a good run-rate. He also asked for clarification on the JV's 10.6% ROE and its potential for growth.

Answer

CFO Christopher McKown attributed the yield decline to reference rate resets, the impact of new non-accruals (approx. 30 bps), and some spread compression, confirming the current yield is a 'decent run rate.' He clarified the JV's ROE is based on NII and subordinated note interest, and stated that an 11-12% ROE is achievable depending on the opportunity set.

Paul Johnson inquired about the recurring nature of the incentive fee waiver, the status of non-accrual credits like nThrive and Thrasio, details of the Pluralsight restructuring, and the outlook for credit terms and covenants in 2025.

Answer

President Mathew Pendo clarified that the $1.2 million incentive fee waiver is discretionary and decided quarter-to-quarter, unlike the permanent base management fee reduction. CEO Armen Panossian addressed the credit questions, noting a recent positive development for nThrive, a longer execution timeline for Thrasio, and that the Pluralsight revolver is intended for business support, not paying coupons. Panossian also stated that while he expects strong covenants to hold in the middle market, the large-cap space has seen erosion, though increased deal flow could help restore some lender protections.

Paul Johnson asked for details regarding the investment in Bylight, specifically what transpired quarter-over-quarter, noting a potential payoff or realization.

Answer

Art Penn, Founder and Managing Partner at PennantPark Investment Advisers, LLC, explained that Bylight underwent a dividend recapitalization, resulting in a realized gain of $0.04 per share, which was an NAV element rather than income. He also mentioned other realized losses during the quarter, including Walker Edison ($0.12 per share) and LAV Gear ($0.05 per share), which involved restructurings.

Paul Johnson asked for details regarding the investment in Bylight, specifically what happened quarter over quarter, noting a potential payoff or realization.

Answer

Chairman and CEO Art Penn explained that Bylight underwent a dividend recapitalization, resulting in a realized gain of approximately $0.04 per share, which was an NAV element rather than income. He also mentioned other realized losses during the quarter, including Walker Edison ($0.12 per share) and LAV Gear ($0.05 per share), which involved restructurings.

Paul Johnson of Keefe, Bruyette & Woods (KBW) asked about the ATM issuance during the quarter, noting it likely occurred when the stock was at a larger discount to NAV. He questioned the strategy behind this and whether the company plans to continue this practice for capital management going forward.

Answer

Art Penn, Founder and Managing Partner, confirmed the $32 million in ATM issuance occurred at an average price of $11.31 per share before "Liberation Day" as part of a strategy to build a "war chest" for anticipated deal flow. He acknowledged the deal flow was subsequently delayed but stated the company is now well-capitalized with its under-levered balance sheet and two JVs. He indicated that PFLT is now focused on deploying this capital, suggesting further ATM issuance is not an immediate priority.

Paul Johnson asked if the successful exit from Marketplace Events could trigger a special dividend and inquired about recent credit trends, specifically any notable amendment activity or credit migrations within the portfolio.

Answer

Arthur Penn, Chairman and CEO, explained that gains like the one from Marketplace Events increase spillover income, which is used to cushion the regular dividend rather than fund a special dividend, reinforcing their goal of a steady, stable payout. Regarding credit, he described current amendment activity as normal for a diversified portfolio of 159 companies and reported no abnormal credit migrations, highlighting the portfolio's conservative structure as a key risk mitigant.

Paul Johnson inquired about the attractive aspects of the current investment vintage, the outlook for 2025 amid potential administration changes and rate declines, and the specifics of any deterioration in deal terms. He also asked for the drivers behind the recent decline in non-accruals and the NAV impact from ATM share issuance.

Answer

Chairman and CEO Arthur Penn explained that the current vintage is attractive due to strong credit quality in the core middle market, including average debt-to-EBITDA of 3.4x and loan-to-value of 38%. He noted that while spreads have tightened, covenant protections remain meaningful. Penn clarified the non-accrual decrease was due to the restructuring of one company, Dynata. CFO Richard Allorto added that the impact of ATM issuance on NAV was immaterial as shares were issued at or above NAV.

Paul Johnson inquired whether the recent liability amendments and efforts to prepare for upcoming bond maturities would alter the company's interest in potentially repurchasing shares.

Answer

Tanner Powell, CEO, acknowledged that share repurchases are a compelling tool for shareholder value, especially given recent BDC trading, and the company has been an active repurchaser historically. He noted that repurchases are weighed against liquidity, leverage, and new loan deployment opportunities. Tanner Powell also mentioned the preference for utilizing repurchase windows when open to leverage the latest information, confirming ample room under current authorization.

Paul Johnson of Keefe, Bruyette & Woods asked about the size of the portfolio's exposure to tariffs, trends in loan amendment activity, and the company's approach to share repurchases given current leverage levels.

Answer

CEO Tanner Powell stated that direct tariff exposure is in the 'single digits' and that the firm is more focused on second-order economic effects. Executive Chairman Howard Widra noted that amendment activity was flat quarter-over-quarter. Regarding buybacks, Mr. Widra explained that they are always weighed against other capital uses and become a higher hurdle at target leverage. He also mentioned that practical constraints like trading windows and volume limits impact the execution of repurchases.

Paul Johnson requested more detail on the 'stability in certain credit metrics,' asked about the drivers of the quarter's net depreciation, and inquired how the new CLO financing might change the company's unsecured funding mix.

Answer

President Ted McNulty pointed to stable revolver utilization and an improved interest coverage ratio as signs of stability. CFO Gregory Hunt noted that over 60% of the net depreciation was from positions already on non-accrual. He also stated that CLOs are expected to be an important and favorable source of capital going forward, given their attractive pricing relative to unsecured debt.

Paul Johnson from KBW questioned the company's strategy regarding share buybacks, particularly given the stock's weakness post-merger and the competitive market. He asked why buybacks weren't considered more strongly and how the breakeven price for repurchases might change with market returns.

Answer

Executive Chairman Howard Widra stated that the company's policy remains to buy back stock when it is accretive compared to other capital uses, referencing a previous breakeven guideline of around 0.8x price-to-NAV. He suggested the stock's recent underperformance could be temporary as legacy fund shareholders ineligible to hold the stock exit their positions. He also noted that the company's trading window was closed for much of the quarter. Widra emphasized that the buyback decision is based on a long-term view of spreads and returns, not just daily market fluctuations.

Paul Johnson from Keefe, Bruyette & Woods (KBW) requested an update on the performance and ownership structure of a specific control investment, JF Intermediate, given its stable valuation mark.

Answer

Art Penn, Founder and Managing Partner, reported that JF Intermediate is performing well, with EBITDA well north of $50 million, and recently completed a successful debt refinancing. He clarified that PennantPark's debt position was refinanced out and that they are partnered with an independent sponsor on the remaining equity position.

Paul Johnson requested an update on the performance of a specific control investment, JF Intermediate, and asked about the ownership structure, specifically if PennantPark is partnered with a sponsor.

Answer

Art Penn, Founder and Managing Partner, reported that JF Intermediate is performing well, with EBITDA well north of $50 million, and recently completed a debt refinancing where PNNT's debt position was paid off. He confirmed that PNNT retains its equity position and is partnered with an independent sponsor.

Paul Johnson questioned if the markup in the By Light investment indicated M&A interest and asked for the rationale behind PNNT's participation in the new Marketplace Events loan.

Answer

CEO Arthur Penn commented that while he couldn't discuss M&A, the By Light markup reflects strong company performance. CFO Richard Allorto and CEO Arthur Penn clarified that PNNT participated in the new Marketplace Events loan post-sale because it was an attractive opportunity in a company they knew well, and the loan is intended to ultimately reside in the joint venture.

Paul Johnson asked a series of questions covering the sustainability of the JV's 19% distribution rate, its target leverage, a recent JV agreement amendment, the rationale for partial non-accruals, and the potential for equity co-investment realizations.

Answer

CEO Arthur Penn addressed the JV, stating that while 19% returns are hard to guarantee, upper-teens returns should be achievable, with target leverage around 2.0x-2.25x. He explained the amendment clarifies partner exit mechanics. CFO Richard Allorto clarified that partial non-accruals occur when enterprise value covers only a portion of a loan. Finally, Mr. Penn noted that a pickup in M&A should provide opportunities for equity realizations, particularly in positions with high fair value marks relative to cost.

Paul Johnson from Keefe, Bruyette & Woods (KBW) asked for details on the positive write-up of the Quest Software credit and questioned the general priorities of sponsors regarding capital structure optimization versus returning capital through dividends.

Answer

CEO & Investment Committee Chair Edward Ross explained that Quest Software, a cybersecurity provider, underwent an LME transaction that improved the risk profile of Fidus's second lien security without any principal reduction, leading to the write-up. On the topic of sponsor priorities, Ross stated that while returning capital is a market theme, the significant dividend income Fidus received in Q1 and Q2 was episodic, driven by specific company refinancings and distributions, and should not be considered a recurring event.

Paul Johnson of Keefe, Bruyette & Woods asked about the timing for utilizing the newly approved SBIC license, the general migration of credit quality in the portfolio, and whether secondary transactions could provide an exit path for equity investments.

Answer

Executive Shelby Sherard explained that the new SBIC license provides flexibility and buys time, with plans to begin drawing on it in the first half of the next year. Executive Edward Ross described portfolio company performance as generally healthy but flattish, with some credit migration due to the high-interest-rate environment, though the overall portfolio remains sound. Regarding exits, Ross clarified that the company is not planning a large-scale sale of its equity portfolio but is well-positioned for episodic realizations as individual companies mature.

Paul Johnson inquired about the impact of the BlackRock/HPS integration on TCPC's investment process, particularly with new investment committee members. He also asked how TCPC would maintain its strategic priority and access to resources within the larger platform, and sought clarification on the markdown of the AutoAlert investment.

Answer

Chairman, CEO & Co-CIO Phil Tseng explained that the new Private Financing Solutions (PFS) platform centralizes origination, enhancing deal flow. He noted that while the core investment process remains, it is now supplemented by HPS professionals, including on the investment committee and in restructuring efforts. Tseng assured that TCPC is a key strategic priority as the only publicly traded BDC on the PFS platform. He clarified the AutoAlert markdown was driven by lower market comps for similar companies, not a decline in its operational performance, which has improved since restructuring.

Paul Johnson requested details on the significant markup of the Job and Talent investment, asking what drove the valuation change. He also inquired about the company's plans and timeline for pursuing a new SBIC license.

Answer

Chairman, Co-CIO & CEO Philip Tseng explained the Job and Talent markup resulted from both the company's strong performance and the enhanced economics from a new preferred debt investment TCPC provided. CFO Erik Cuellar confirmed that TCPC is in the process of obtaining a second SBIC license, the maximum allowed, and stated that the process and timing have not been materially affected by recent administrative changes.

Paul Johnson of KBW asked for the portfolio's total exposure to Amazon aggregator companies following the markdown of Razor Group. He also questioned the basis for optimism in the sector's future. Additionally, he inquired about the reasons for the higher-than-expected cost of debt during the quarter and asked about the remaining capacity under the company's SBA license.

Answer

President Philip Tseng reported that Amazon aggregators comprise 5.9% of the portfolio's fair value and expressed confidence in a path to successful outcomes through consolidation and improved capital structures. CFO Erik Cuellar explained the higher cost of debt was due to refinancing notes at higher rates and temporarily carrying extra cash, which should normalize. He also confirmed TCPC has $10 million in remaining SBA capacity and the ability to apply for a second license.

Paul Johnson asked if further spread compression is expected as the portfolio rotates and whether there is a significant opportunity to invest in junior capital as loans refinance into the BSL market.

Answer

CEO Craig Packer stated that he believes the vast majority of spread compression has already worked through the portfolio and expects spreads to be stable. President Logan Nicholson characterized the junior capital opportunity, like the Trucordia deal, as closer to a 'one-off' due to tight pricing in public markets. He emphasized that deal flow between the direct lending and BSL markets is balanced, with many names also moving from BSL to direct.

Paul Johnson sought clarification on whether the ATM program would ever be used in a dilutive manner, asked about the nature of the large multi-billion dollar deals done during the quarter, and inquired about trends in amendment activity.

Answer

CEO Craig Packer stated unequivocally that the ATM program will only be used to issue shares on a net basis above book value, ensuring it is always accretive to shareholders. President Logan Nicholson clarified that the large deals were new money transactions, including public-to-private LBOs like Catalent and Squarespace, not refinancings. Nicholson also reported that amendment activity was flat quarter-over-quarter with no material uptick in significant amendments.

Paul Johnson from Keefe, Bruyette & Woods asked about competition between private credit and the BSL market, the reason for the JV's fair value write-down, and what options are being considered for the 2026 dividend policy.

Answer

President & CIO Daniel Pietrzak explained their focus on the $50-$150M EBITDA range is strategic and that the JV's mark-to-market write-down was correlated with the same assets that impacted the parent BDC. He reiterated that the 2026 dividend will be NII-led, with concepts like a base and supplemental payout being considered in light of the current rate and spread environment.

Paul Johnson asked about the current deployment status of funds within the RIA, the desired long-term contribution of the RIA to Trinity's business, and the likelihood of loans at their interest rate floors being refinanced as rates decline.

Answer

CFO Michael Testa noted that RIA deployment is ramping up, representing about 12% of new fundings. CEO Kyle Brown added that the RIA is a critical tool for managing leverage and driving accretive EPS growth, with the ultimate goal being accretive growth for investors. COO Gerry Harder addressed refinancing, explaining that while some rate-driven refinancing may occur, most prepayments happen when companies 'graduate' to lower-cost bank debt, an outcome Trinity views positively.

Paul Johnson questioned the drivers behind lower portfolio yields in recent quarters, requested the percentage of the portfolio in a first-lien position without other senior debt, and asked about any recent increase in liquidity demands from borrowers.

Answer

CEO Kyle Brown attributed slight yield compression to rate changes and a strategic push into more mature, lower-risk sponsor finance deals, which improves portfolio diversification. Chief Credit Officer Ron Kundich confirmed that 78% of the portfolio is first lien. Kyle Brown also stated there has been no unusual uptick in revolver draws or liquidity requests from portfolio companies.

Paul Johnson of Keefe, Bruyette & Woods asked for quantification of the expense from the upcoming bond conversion, inquired about the fintech portfolio's dependence on bank partnerships, and sought details on the Space Perspective non-accrual.

Answer

CFO Michael Testa quantified the Q1 NAV impact from the convertible debt retirement at an estimated $0.27 per share. COO Gerry Harder and CEO Kyle Brown explained that their underwriting requires fintechs to have multiple bank partners and noted their ABL group often replaces banks, providing senior financing against receivables. Chief Credit Officer Ron Kundich clarified the Space Perspective non-accrual is a company-specific issue related to a small venture loan, not an industry-wide trend.

Paul Johnson inquired about the AUM growth in off-balance sheet vehicles, the drivers behind the improved portfolio credit rating, and the operational and financial strategy for the European expansion.

Answer

CFO Michael Testa reported ~$41M was syndicated to off-balance sheet vehicles in Q3 and they are working on adding leverage. COO Gerry Harder attributed the improved credit rating to a mix of strong new originations and upgrades to existing portfolio companies. Multiple executives explained the European expansion uses the same underwriting rigor and will be supported by dedicated capital raised through the RIA.

Paul Johnson of Keefe, Bruyette & Woods (KBW) inquired about the rationale for refinancing the 2019 middle market securitization, the drivers behind strong Q2 origination activity amid a slower M&A market, and the flexibility to move new originations into the company's joint ventures.

Answer

CFO Amit Joshi stated the securitization was refinanced due to more attractive market pricing and the fact that the 2019 CLO was exiting its investment period. CEO Michael Ewald attributed robust originations to sustained activity in the core middle market and expanded sponsor outreach, noting a near 50/50 split between new and existing company deals. President Michael Boyle confirmed that new first-lien loans are eligible to be transferred to the JVs in the future.

Paul Johnson from Keefe, Bruyette & Woods (KBW) questioned the rationale for refinancing the 2019 middle-market securitization and inquired about the drivers of strong origination activity during a period of reduced market-wide M&A.

Answer

Amit Joshi, Treasurer and CFO, explained that the CLO refinancing was driven by accessing the market at a more attractive rate and the fact that the 2019 CLO was nearing the end of its investment period. CEO Michael Ewald attributed the robust origination to the resilience of the core middle market and a successful expansion of sponsor outreach. President Michael Boyle confirmed that these new first-lien loans are eligible to be moved into the company's joint ventures.

Paul Johnson of Keefe, Bruyette & Woods (KBW) inquired about the rationale for refinancing an attractively priced 2019 securitization, the drivers behind strong Q2 origination activity, and whether these new investments could be moved to joint ventures.

Answer

Amit Joshi, Treasurer and SVP - Finance & CFO, explained the CLO was refinanced because its investment period was ending and the company secured even more attractive pricing. CEO Michael Ewald attributed strong originations to sustained activity in the core middle market and a successful expansion of sponsor outreach. President Michael Boyle confirmed that the new first lien loans are eligible to be moved into the company's joint ventures in the future.

Paul Johnson of Keefe, Bruyette & Woods (KBW) inquired about the rationale for refinancing the attractively priced 2019 middle market securitization, the drivers behind strong Q2 origination activity despite a broader market slowdown, and whether new originations could be moved to the company's joint ventures.

Answer

Amit Joshi, Treasurer and SVP - Finance & CFO, clarified that the CLO refinancing was opportunistic, driven by even more attractive market pricing and the end of the 2019 CLO's investment period. CEO Michael Ewald attributed the high origination volume to the resilience of the core middle market and a successful expansion of sponsor outreach, resulting in a roughly 50/50 split between new and add-on deals. President Michael Boyle confirmed that the new first-lien loans are suitable for and could be moved into the joint ventures in the future.

Paul Johnson of Keefe, Bruyette & Woods inquired about the rationale for refinancing the 2019 middle market securitization, the drivers behind the strong Q2 origination activity despite a market slowdown, and whether new originations could be moved to the joint ventures.

Answer

CFO Amit Joshi explained that the securitization was refinanced because they secured more attractive pricing on the new AAA tranche and the investment period for the 2019 CLO was ending. CEO Michael Ewald attributed strong originations to the resilience of the core middle market and a successful expansion of sponsor outreach, noting a roughly 50/50 split between new and existing company deals. President Michael Boyle confirmed that the new first-lien loans are eligible to be moved into the joint ventures in the future.

Paul Johnson asked for quantification of the impact from back-weighted fundings on Q1 interest income and inquired about the resolution and recovery details for realized losses, specifically Forming Machine Industries.

Answer

President Michael Boyle acknowledged the back-weighted fundings but highlighted the stable 11.5% portfolio yield and new origination spreads of 540 basis points. Boyle also explained that two non-accrual investments, Atlas (Forming Machine) and Ambridge, were exited during the quarter through restructuring efforts, with recoveries north of $0.50 on the dollar, which was in line with prior marks. CEO Michael Ewald added that the new origination spread was down only about 10 basis points from the prior quarter.

Paul Johnson inquired about the drivers of the Q3 portfolio yield decline, the outlook for spread compression, the relative value of U.S. versus international private credit, the reasons for a minor increase in underperforming investments, and the source of a realized gain.

Answer

President Michael Boyle attributed the yield decline primarily to lower base rates and reduced dividend income from the aviation portfolio and joint ventures, not significant spread degradation. CEO Michael Ewald noted that spread compression has largely played out, with current spreads bifurcating by credit quality. He also explained that the U.S. private credit market offers better structural terms than Europe currently. Boyle added that the uptick in lower-rated investments was idiosyncratic and the realized gain came from the successful exit of a legacy investment, BlackBrush.

Paul Johnson of Keefe, Bruyette & Woods asked about the drivers of higher "other income," the specific amount of prepayment income per share, whether sponsor optimization deals generate structuring fees, and details on the Lithium earn-out security.

Answer

CFO Ian Simmonds and CEO Joshua Easterly explained that "other income" and prepayment fees, which are close cousins, totaled 11-13 cents per share, driven by miscellaneous exit fees. Easterly detailed their accounting policy of deferring all upfront fees into OID, which boosts NII upon repayment. President Robert Stanley described the Lithium earn-out as an equity participation in cash flows with an expected three-year duration to realize its value.

Paul Johnson of Keefe, Bruyette & Woods asked about the drivers of higher "other income," the amount of prepayment income, the potential for structuring fees, and the specifics of the Lithium earn-out security.

Answer

CFO Ian Simmonds attributed the higher "other income" to miscellaneous exit fees and quantified prepayment fees at about 6 cents per share. CEO Joshua Easterly noted total exit-related fees were 11-13 cents per share and explained their accounting policy defers all upfront fees into OID, boosting NII upon repayment. Vice President Robert Stanley described the Lithium earn-out as an equity participation with an expected three-year realization timeline based on future cash flows.

Paul Johnson of KBW asked about the status of the maturing IRG Sports and Entertainment loan, the drivers behind the significant decline in the cost of debt, and the firm's view on structured risk transfers (SRTs) in the BDC space.

Answer

President Bo Stanley stated they are working to sell the assets of IRG Sports and Entertainment to resolve the loan. CEO Joshua Easterly and CFO Ian Simmonds explained the lower cost of debt was driven by a favorable funding mix, including rolling off a matured unsecured note onto the revolver and issuing a new lower-spread bond. Regarding SRTs, Ian Simmonds suggested they are done for capital relief for banks, which could expand bank lending capacity on the margin but is unlikely to reduce pricing.

Paul Johnson from KBW asked if new partnerships, like with First Citizens, would generate deal flow for TSLX, inquired about the nature of non-sponsored opportunities, and questioned the company's stance on raising new equity capital.

Answer

CEO Joshua Easterly stated the First Citizens partnership is for equipment leasing and won't feed into TSLX's portfolio. He described non-sponsored deals as a mix of long-term relationships and transitory opportunities. On capital, he was firm that they will not raise permanent equity if they cannot deploy it at accretive ROEs, prioritizing shareholder returns over growth.

Paul Johnson asked if new partnerships like the one with First Citizens would generate deal flow for TSLX, inquired about the nature of non-sponsor financing opportunities, and questioned their stance on raising new equity capital.

Answer

CEO Joshua Easterly explained that the First Citizens equipment leasing partnership is not expected to feed into TSLX's corporate lending portfolio, but other platform opportunities could. He described non-sponsor deals as a mix of long-term relationships and more transitory, opportunistic financings. Critically, he affirmed they would not raise new equity unless they were confident they could deploy it at accretive, long-term ROEs, underscoring their disciplined, investor-first approach.

Paul Johnson asked about the new nonaccrual investment, Nuvera technology, questioning its valuation in light of a potential restructuring and its size relative to CCAP's typical deals. He also inquired about Crescent's general approach to workout situations and the percentage of the portfolio that is Crescent-originated.

Answer

President Henry Chung clarified that the valuation mark for Nuvera is in line with the expected restructuring outcome. CEO Jason Breaux added that a restructuring has not yet occurred on their books and offered to discuss specifics offline. Regarding workout strategies, Jason Breaux explained that the primary goal is capital preservation, utilizing various options from sponsor partnerships to sales or taking ownership. Henry Chung added that they take a longer-term view to maximize value rather than pursuing quick secondary sales. Finally, Henry Chung stated that 92% of the portfolio's fair value consists of Crescent-originated assets.

Paul Johnson asked about the origin of new non-accrual investments, whether Crescent leads deals on the watchlist, the driver of the quarter's realized loss, current market spreads, and if tariff discussions change the opportunity for manufacturing-focused investments.

Answer

CEO Jason Breaux stated one of the three new non-accruals was Crescent-originated. President Henry Chung confirmed Crescent leads the majority of watchlist deals and that about 20% of the watchlist by fair value are acquired assets. CFO Gerhard Lombard identified the restructuring of portfolio company CECO as the primary driver of the realized loss. Regarding spreads, Chung and Breaux explained that while the market sees deals below 500 bps, particularly for larger borrowers, they maintain pricing discipline. Chung also affirmed they will stick to their strategy of avoiding capital-intensive businesses despite tariff dynamics.

Paul Johnson inquired about the company's appetite for future BDC acquisitions, the specific drivers of unrealized portfolio depreciation, and the mechanism that capped the Q3 supplemental dividend at $0.07.

Answer

CEO Jason Breaux explained that while CCAP is open to M&A, it prioritizes measured growth and benefits from the scale of the broader Crescent platform. CFO Gerhard Lombard attributed the unrealized losses primarily to four names, including the Logan JV and two nonaccrual assets. Lombard also clarified that the supplemental dividend was capped by a formula limiting the combined impact of the supplemental dividend and unrealized NAV changes over a two-quarter period.

Paul Johnson from KBW inquired why CCAP's PIK income is significantly lower than the BDC average, asked for a breakdown of new investment activity, and requested an update on the Logan JV's performance.

Answer

CEO Jason Breaux attributed the low PIK income to a disciplined focus on cash-yielding assets and avoidance of PIK-heavy structures like ARR loans. CFO Gerhard Lombard noted strong portfolio company fundamentals have also reduced the need for PIK amendments. President Henry Chung detailed the quarter's investment mix, and CEO Jason Breaux stated the Logan JV's performance is in line with expectations, with its CLO's reinvestment period ending in April 2025.

Paul Johnson from KBW asked for a breakdown of the $0.17 per share NAV decline, seeking to understand the split between credit-specific issues and general mark-to-market movements. He also inquired about the frequency of securing equity co-investments.

Answer

CFO Teddy Desloge detailed that the NAV decline was driven primarily by the reversal of unrealized gains on repayments and a mark-down on a single company, Medallia, due to competitive pressures. Co-CEO Brad Marshall explained that the value BXSL adds through the Blackstone network provides more opportunities for selective equity co-investments, which serve as a strategic tool to offset potential credit losses but will remain a small part of the portfolio.

Paul Johnson of KBW inquired about the target borrower size for the anticipated increase in deal activity, asking if the focus would be on the upper middle market or more traditional middle market companies.

Answer

Co-CEO Brad Marshall explained that while the platform sees deals of all sizes, they have a bias towards larger companies, which they view as better businesses. He noted that while they were more active in the middle market this year, they might skew further upmarket in 2025 if the expected deal volume materializes with appropriate structures, as they passed on some larger deals this year due to leverage or documentation concerns.

Paul Johnson inquired about the equity cushions in the later-stage deals Hercules is pursuing and whether sponsors are typically investing new equity concurrently. He also asked if the current challenges in the venture capital market might create an opportunity for Hercules to invest in earlier-stage companies.

Answer

CEO Scott Bluestein reiterated that Hercules' debt is designed to supplement, not replace, equity capital. He emphasized that a key underwriting focus is ensuring a company's ability to continue raising equity, even if it's not simultaneous with their loan. Regarding company stage, he stated that it is still too early to consider shifting back into earlier-stage investments, a segment they have intentionally avoided in recent years, preferring to wait for more market stability before re-evaluating that part of the market.

Paul Johnson from KBW inquired about the equity cushions in later-stage deals and whether the current VC market creates an opportunity to invest in earlier-stage companies.

Answer

CEO & CIO Scott Bluestein reiterated that Hercules' debt supplements, not replaces, equity and that they focus on a company's ability to continue raising capital. He stated that while a medium-to-long-term opportunity may exist in earlier-stage companies, it is currently too early to re-enter that market segment, and they are waiting for more stability, validating their recent focus on later-stage deals.

Paul Johnson sought clarification on which 'syndicates' were struggling with high valuations, asked for an update on unfunded commitment trends, and inquired about the specific contribution of the Palantir investment exit to quarterly gains.

Answer

CEO Scott Bluestein explained his comment referred to a broad market trend where new investors are pushing back on high valuations from 2021-2022, putting pressure on existing investor syndicates to fund those companies. He noted unfunded commitments are trending down as companies let older, higher-rate commitments expire. He also confirmed the Palantir exit was the largest driver of realized equity gains in Q4, contributing approximately $15 million.

Paul Johnson of Keefe, Bruyette & Woods, Inc. asked about the drivers behind the recent increase in PIK income. He also inquired about the compression in core yields and whether this trend is expected to continue as Hercules focuses on higher-quality, later-stage assets.

Answer

CEO Scott Bluestein attributed the slight PIK increase to the competitive environment for later-stage deals, some borrowers opting for PIK, and selective use in certain transactions. Regarding yields, Bluestein explained the main driver of core yield compression is the mix shift from older, higher-yielding loans being prepaid and replaced by new, slightly lower-yielding loans. He expects minor continued degradation but no material decrease.

Paul Johnson of KBW questioned if the 13% onboarding yield is sufficient given the cost of equity, asked about changes to the warrant strategy in a frozen exit market, sought details on the Soli Organics blockage notice, and inquired about consumer and tariff exposure in the portfolio.

Answer

President Gerald Michaud and CEO Robert Pomeroy explained that the overall portfolio yield is higher than the onboarding yield due to fees from prepayments, and the strategy has shifted to focus more on contractual yield rather than warrant upside. COO/CIO Daniel Devorsetz clarified the Soli Organics notice is part of an ongoing process and that consumer exposure is minimal. Pomeroy noted the main tariff impact was market uncertainty stalling M&A.

Paul Johnson inquired about the drivers of portfolio markdowns, the status of specific credits like Evelo Biosciences and Swift Health Systems, the potential impact of government spending cuts on life sciences, and trends in portfolio yields and end-of-term fees.

Answer

COO & CIO Daniel Devorsetz attributed markdowns primarily to debt investments in companies facing fundraising challenges. President Jerry Michaud clarified Evelo Biosciences is now a recovery asset, while Devorsetz noted Swift Health Systems is still in an extended fundraise. Michaud discussed the life sciences outlook, balancing regulatory uncertainty with positive M&A and development trends. CFO Daniel Trolio and Devorsetz confirmed that onboarding yields remain in a normal range and end-of-term fees are stable, with interest rate floors mitigating some impact from falling rates.

Paul Johnson sought clarification on whether NII forecasts for dividend coverage include a full incentive fee accrual. He also asked about targets for spillover income, the impact of realized losses on it, and current yields on new investments.

Answer

CFO Daniel Trolio confirmed that forecasts do account for earning back the incentive fee, projecting a gradual return to a full accrual by the end of 2025. He noted there is no specific target for spillover income. COO & CIO Daniel Devorsetz added that while index rate cuts have an effect, they have not seen significant spread compression on new deals and expect portfolio yields to remain a strength.

Paul Johnson of KBW asked about the primary drivers behind the challenges faced by portfolio companies, the performance differences between early and late-stage companies, the outlook for earnings given the absence of an incentive fee, and what percentage of the portfolio Horizon serves as the sole lender.

Answer

Robert Pomeroy, Chairman and CEO, identified the lack of exit markets (M&A, IPOs) as the main challenge, which impacts VC funding willingness. He noted earlier-stage companies face more difficulty than later-stage ones. He also stated that Horizon is the sole lender in approximately 75% of its deals. Chief Financial Officer Daniel Trolio addressed earnings, stating that the run-rate is dependent on prepayment activity, which can fluctuate quarterly.

Paul Johnson asked about any changes to the internal investment watch list, the current percentage of the portfolio in non-sponsored deals, and the level of active involvement the firm has in resolving issues with underperforming investments.

Answer

Executive Edward Goldthorpe stated there have been few negative credit surprises recently, with most challenged assets being legacy positions from prior acquisitions. CIO Patrick Schafer estimated the BDC portfolio is weighted towards sponsored deals (approx. 60-40) for more consistent deal flow but that the firm is 'very actively engaged' in nearly all its investments, including workouts, as it holds very few broadly syndicated positions where its influence would be limited.

Paul Johnson of Keefe, Bruyette & Woods asked for clarification on the 'prudent cash and portfolio management initiatives' mentioned in the earnings release and how they affected the third quarter's results.

Answer

Chief Financial Officer Brandon Satoren explained that leading up to the refinancing of its 2018-2 secured notes, the company deliberately held back on new investments and maintained higher cash levels and incremental capacity on its JPMorgan Chase & Co. credit facility. This was a prudent measure to ensure a smooth refinancing process, which temporarily suppressed investment activity and related income for the quarter.

Paul Johnson asked for clarification on the 'prudent cash and portfolio management initiatives' mentioned in the earnings release and how those actions affected the third quarter's results.

Answer

Chief Financial Officer Brandon Satoren explained that ahead of refinancing its secured notes, the company deliberately held back on new investments and maintained additional cash and borrowing capacity on its JPMorgan Chase & Co. credit facility. This was done to ensure a smooth refinancing process, which temporarily suppressed investment activity and related income for the quarter.

Paul Johnson sought clarification on the strategic shift towards portfolio growth and higher leverage after a period of deleveraging. He also asked about the dependency of TPVG's FinTech investments on bank partnerships.

Answer

Executive Sajal Srivastava explained the shift is driven by improving venture capital market conditions and the availability of high-quality companies, a significant change from the past seven quarters. He clarified that TPVG can fund substantial growth with cash on hand before leverage materially increases. Regarding FinTech, Srivastava noted that their portfolio companies are mature, venture growth-stage businesses that typically have multiple banking partners and credit facilities, mitigating dependency risk on any single institution.

Paul Johnson requested more detail on TPVG's cautious investment stance and asked for an assessment of the current venture valuation environment, including whether the trend of down rounds is largely over.

Answer

Executive Sajal Srivastava explained that TPVG's cautious approach mirrors that of its venture capital partners, focusing on quality companies that have recently raised capital rather than deploying capital for growth's sake. He noted that while the broader market is still recalibrating valuations, TPVG's portfolio is seeing a mix of flat, down, and up rounds, with signs of improving valuations and round sizes.

Paul Johnson asked for an assessment of the portfolio's exposure to tariff risk and whether there was an additional markup on investments that were exited during the quarter.

Answer

Executive Robert Ladd estimated that up to 10% of the portfolio could be impacted by tariffs, depending on their final form, but stated it does not appear to be a material risk at this point. He also confirmed there was an additional markup of a 'few million dollars' on an equity position that was partially realized, noting its value continues to increase.

Paul Johnson inquired about the reasons for Net Investment Income (NII) being slightly below the dividend, asking about temporary drivers, the forward run-rate for NII, and the specific factors behind the unrealized gains in the investment portfolio during the quarter.

Answer

Executive Robert Ladd explained that the lighter NII was not due to unusual factors but rather a lower SOFR rate, a minor increase in non-accruals, and lighter-than-expected investment activity. He noted that the declining SOFR curve was the primary driver impacting the earnings run rate. Ladd also clarified that the quarter's unrealized portfolio appreciation was predominantly driven by a single equity co-investment with a potential upcoming transaction.

Paul Johnson inquired about the terms of new investment activity, specifically asking how leverage multiples, covenants, and covenant bands have held up compared to the more refinancing-heavy market of the previous year.

Answer

Co-CEO Douglas Goodwillie responded that leverage has remained consistent, with new investments averaging around 4x leverage. He explained that the primary change has been in pricing, not structure. Spreads on new deals have seen modest compression, moving from an average of 575 basis points in 2024 to around 550 basis points in Q1 2025, with closing fees also slightly lower. Mr. Goodwillie characterized this price movement as relatively muted compared to the upper middle and broadly syndicated markets.

Paul Johnson asked for high-level statistics on the BSL portfolio, such as the number of borrowers, average duration, and whether the investments were new issues or secondary purchases. He also inquired about credit amendment trends in the broader portfolio beyond the new non-accrual.

Answer

Executive Frank Karl provided details on the BSL portfolio, stating it consists of 22 names, has a duration north of three years, and that all but one investment were secondary market purchases. Co-CEO Douglas Goodwillie addressed credit trends, noting the portfolio is performing well with only a handful of names on the watch list and normal course amendment activity. He mentioned that the primary negative trend observed has been challenges to the consumer, which has impacted one or two portfolio companies.

Paul Johnson from Keefe, Bruyette & Woods asked about the reasons for the low repayment volume in the fourth quarter and questioned if there were any notable trends in credit-related amendments within the portfolio.

Answer

CEO Jeffrey Levin responded that repayment activity can be lumpy and advised looking at trends over a full year rather than a single quarter, stating there was no specific driver for the low Q4 number. On credit quality, Levin emphasized the portfolio's health, citing best-in-class non-accrual and PIK income statistics. He confirmed there were no significant negative trends in credit amendments and that the list of underperforming names remains 'quite narrow'.

Paul Johnson from KBW inquired about the platform's ongoing commitment to sponsor-backed lending, the sustainability of the high Q4 dividend income, and the specifics of new hires in the ABL segment.

Answer

Chairman & Co-CEO Michael Gross stated that the entire platform participates in cash flow lending, maintaining relevance with sponsors in targeted industries like healthcare. He attributed the higher dividend income to the ABL and leasing portfolios, particularly the Webster acquisition, and considers it a sustainable run rate. He also clarified that new ABL hires are on the origination side and are employed at the specialty finance company level.

Paul Johnson asked for the company's outlook on the upcoming year's loan and CLO market, and later inquired about the potential for NAV upside in CLO equity given the current spread environment.

Answer

Executive Thomas Majewski expressed optimism for the upcoming year, anticipating a 'risk on' market that will create more opportunities for cost-saving resets and refinancings. He stated that NAV upside can be driven by discounted loans paying off at par and, most significantly, by crystallizing value through proactive management actions like resets, which improve the portfolio's value even if the market partially anticipates these actions.

Paul Johnson of Keefe, Bruyette & Woods asked about the increase in watch list investments this quarter, questioning if the new additions were due to idiosyncratic issues and what level of maintenance these companies require.

Answer

Executive Kenneth Kencel responded that the portfolio remains in very good shape with no new non-accruals. He characterized the moves on the watch list as a reflection of the company's proactive portfolio management approach, stating there were no broad trends or themes. He confirmed the issues with the downgraded names were company-specific and that the situations are being worked on to maximize shareholder value.

Paul Johnson from Keefe, Bruyette & Woods sought clarification on the strategy to increase cash-paying assets, asking if it involves underwriting new assets without PIK options or simply expecting borrowers not to elect the PIK option.

Answer

John Kline, CEO, clarified that the primary strategy for reducing PIK exposure is to exit certain large, 100% PIK positions from prior vintages. He added that the company remains comfortable offering minor PIK options on new unitranche loans that are predominantly cash-pay, as the main goal is to reduce the concentration from older, fully PIK assets.