Robert Dodd

Robert Dodd of Raymond James questioned the durability of "moats" like proprietary data and entrenched software for enterprise players, given the rapid pace of AI advancements and the potential for AI agents to scrape data. He asked about the risks of these moats evaporating and whether GBDC anticipates reducing its software deal volume due to potentially outsized risks and tight pricing.

Answer

CEO David Golub outlined three scenarios for AI's impact on software companies: slower growth (lower equity valuations, reduced new logos/customer retention), negative growth (revenue reduction), and a "meltdown" where AI rapidly replaces incumbent products. He believes the meltdown scenario is least likely for good software companies, expecting a "melting" rather than a "meltdown." Golub noted that credit market problems would follow equity market reactions. Regarding future software deal volume, he stated it's premature to set specific capital deployment goals without more data on how private markets will reprice risk, but expects Golub Capital to remain a leading software lender.

Robert Dodd of Raymond James Financial, Inc. questioned the resilience of software 'moats' against rapid AI advancements, specifically proprietary data and entrenched software, and whether these could evaporate faster than currently perceived.

Answer

David Golub, CEO of GBDC, outlined three scenarios for AI's impact on enterprise software: slower growth and lower equity valuations ('melting'), negative growth, and a rapid 'meltdown' (least likely). He emphasized that credit market problems would require moving past the slower growth scenario, focusing first on equity market reactions. Regarding future software deals, Golub expects the market to reprice risk, noting wider spreads in the broadly syndicated market. He believes it's premature to set specific capital deployment goals for software but anticipates Golub Capital will remain a leading software lender due to its expertise and sponsor relationships.

Robert Dodd asked about specific economic themes where cost inflation is outpacing pricing power, and later inquired about the risk of private credit spread premiums not being maintained, and what factors could drive broad spread increases without a credit catastrophe.

Answer

David Golub, CEO of GBDC, expressed optimism about increased capital spending due to recent legislation, but voiced concerns about the subprime consumer, citing increased delinquencies in credit card, mortgage, and auto loans, coupled with stagnant wages and rising food/rent costs. Regarding spreads, he attributed broad compression across debt categories to investor confidence rather than just supply/demand imbalance in private credit, suggesting a broad shift in investor sentiment would be needed for spreads to widen.

Robert Dodd from Raymond James asked about specific economic themes where cost inflation might be outpacing pricing power, drawing a parallel to past issues in the healthcare sector. He also questioned the risk of private credit spread premiums not being maintained and what could cause broad spreads to increase without a credit catastrophe.

Answer

David Golub, CEO of GBDC, expressed optimism regarding increased capital spending driven by tax incentives but voiced concerns about the subprime consumer, citing rising delinquencies in credit cards, mortgages, and auto loans, alongside reduced spending and persistent food/rent inflation. Regarding spreads, Mr. Golub noted that compression is widespread across various debt categories, reflecting broad investor confidence. He suggested that a significant shift in overall investor sentiment, rather than just private credit dynamics, would be necessary for broad spreads to widen.

Robert Dodd of Raymond James asked for the expected scale of cost savings on the liability side from recent debt optimizations and questioned if high M&A activity could increase portfolio churn and force a shift in investment mix.

Answer

Matthew Benton, Chief Operating Officer, quantified the potential drop in the weighted average cost of debt to around 5.5% from the reported 6.2% once all changes are effective. David B. Golub, Executive, added that while higher M&A will increase churn, it will be manageable alongside new originations, and reiterated GBDC's strategic preference for the core middle market where it sees the best opportunities.

Robert Dodd of Raymond James inquired about the current credit cycle, focusing on deal documentation and EBITDA definitions compared to past cycles. He also asked for GBDC's outlook on 2025 M&A activity and whether the company's balance sheet optimization is complete after recent debt restructuring.

Answer

Executive David B. Golub explained that documentation terms are currently borrower-friendly, especially in the large market segment, which is why GBDC is focusing on its core middle market strategy. Regarding 2025 M&A, Golub detailed both tailwinds (lower rates, sponsor pressure) and headwinds (geopolitical uncertainty), stating it's too early to call a 'super cycle.' He also confirmed that while significant work has been done on the balance sheet, the company is never 'done' and continuously seeks optimization opportunities for both secured and unsecured debt.

Robert Dodd of Raymond James inquired about the potential for recent market volatility to widen loan spreads and questioned the prevalence of Pluralsight-like loan structures, which permit asset transfers, across the broader GBDC portfolio.

Answer

David B. Golub, Executive, responded that while it's too early to tell if volatility will be sustained, it is causing some rethinking in the private credit market and may temper the recent trend of spread compression. Regarding Pluralsight, he clarified that he does not view it as a case of a sponsor misusing documentation, but rather a situation where a supportive sponsor ran out of time. He emphasized that in the private credit market, strong lender-sponsor relationships and market norms, rather than just documentation, serve as the primary deterrents against aggressive liability management transactions.

Robert Dodd from Raymond James asked about the composition of Gladstone Capital's robust pipeline, specifically distinguishing between Q4 spillover deals and new Q1 launches, and whether this activity level is expected to continue throughout the year. He also questioned the company's appetite for federal government-related businesses given recent shutdown impacts and sought an update on the workout progress for the Eegee's investment.

Answer

President Bob Marcotte explained that roughly half of the pipeline consists of Q4 spillover deals, reflecting vigilant private equity diligence and extended transaction timelines. He attributed the overall robust activity to downward rate trends, industry clarity, and a consistent build in domestic manufacturing, particularly in precision manufacturing and reshoring. Addressing government-related businesses, Mr. Marcotte clarified that the referenced shutdown impact was unique to a dredging company and not indicative of a softened appetite for their typical long-term defense contractors. For Eegee's, Mr. Marcotte detailed ongoing challenges including seasonality, elevated ICE activities in border states, and unanticipated headwinds, but noted management is evolving the business with new menu offerings expected to drive traffic in 2026.

Robert Dodd asked about the composition of the robust pipeline (Q4 spillover vs. new deals) and the outlook for activity through the year, the company's current appetite for federal government-related businesses given past shutdown impacts, and an update on the eegee's investment, including the reasons for stress in its equity piece.

Answer

President Bob Marcotte indicated that about half of the pipeline is Q4 spillover, with diligence periods extending. He attributed the robust activity to downward rate trends, industry clarity, and reshoring, expecting consistent domestic manufacturing growth. He clarified that the shutdown impact was a unique circumstance for a dredging company, not typical government contractors, and not a permanent impairment. For eegee's, President Bob Marcotte cited seasonality and elevated ICE activities in border states as headwinds, noting that while management is performing, unanticipated challenges require accelerating cost structure changes, with new menu offerings expected to drive traffic in 2026.

Robert Dodd questioned the risk of elevated repayment activity continuing into 2026, especially since 60% of the portfolio did not turn over, and inquired about any new credit cracks or concerning themes developing within the portfolio beyond existing non-accruals.

Answer

President Bob Marcotte stated that while some larger exposures could turn over, the extended hold periods by private equity and the maturity of investments suggest that repayment activity might not be as rapid. He expressed confidence in the company's ability to outpace repayments. On credit, Marcotte acknowledged that some businesses face challenges but emphasized that the company's low leverage and board-level involvement allow for proactive management, preventing situations from escalating. He confirmed no exposure on an LTV basis for any positions outside of the current non-earning assets.

Robert Dodd inquired about the risks of elevated repayment activity continuing into 2026, especially given that 60% of the portfolio did not turn over in 2025. He also asked about any developing cracks or themes of concern in the portfolio from a credit perspective, beyond existing non-accruals.

Answer

President Bob Marcotte stated that while the maturity of investments and private equity appreciation plans are key, he expects continued growth even if larger transactions in the remaining 60% of the portfolio turn over, noting extended hold periods by private equity. On credit, Mr. Marcotte acknowledged that some businesses face challenges but emphasized that low leverage and board-level oversight allow for proactive management, preventing situations from escalating. He confirmed that the company does not feel exposed on an LTV basis for any positions not already classified as non-earning assets.

Robert Dodd of Raymond James Financial followed up on the high level of recent investment activity, asking about the pipeline's potential for the December quarter and seeking more detail on the risk/return profile of the first-lien, last-out deal structures.

Answer

Bob Marcotte, President, expressed cautious optimism for a strong Q4 but noted that a sustainable quarterly origination pace is $50-$100 million due to the manpower required for their smaller deal sizes. He elaborated on the first-lien, last-out structure, explaining that Gladstone achieves attractive second-lien pricing with a superior risk profile, as its attachment point is within a conservative first-lien leverage multiple (e.g., inside 3.25x) and it controls the loan documentation.

Robert Dodd of Raymond James asked for a timeline on the EGs investment turnaround, the potential timeframe to reach target leverage, and the portfolio's exposure to tariffs and geopolitical risks.

Answer

President Bob Marcotte estimated a six-month timeline for the EGs resolution but hoped for a quicker outcome. On leverage, he stated the immediate goal is to manage high portfolio turnover, and increasing leverage toward the 1:1 target in the second half of the year depends on finding deals with appropriate yields and managing capital costs, including a potential bond refinancing. Regarding external risks, Marcotte noted that while most of the portfolio is in relatively insensitive sectors like aerospace, the firm is closely monitoring two smaller auto market investments due to potential tariff and supply chain turmoil.

Robert Dodd of Raymond James asked about the scale of Q4 funding activity versus large cash collections and its impact on portfolio size, sought clarification on partnering with commercial banks for blended financing solutions, and inquired about the potential for portfolio concentration by vintage or sector given the high deal volume.

Answer

President Robert Marcotte stated that the current deal pipeline is expected to exceed the cash proceeds from recent exits, with a target of keeping the portfolio size roughly flat, and noted that the high turnover should drive significant fee income. He confirmed they would consider various structures with banks, including first-in/last-out, and may increase subordinated financings as rates compress. Regarding concentration, Marcotte said vintage is not a concern, but they actively monitor sector concentration, using their selective process to avoid overexposure to any single area.

Robert Dodd asked if potential spread widening in the software market would make it more attractive from a risk-return perspective for Ares Capital, leading to an increased allocation to software over the next 12-24 months.

Answer

CEO Kort Schnabel stated that ARCC would need to observe how the market develops, including spread movements and transaction activity, before speculating on increased allocation. He reiterated ARCC's commitment to diversification, noting that software is already its largest industry category, and while comfortable with it, they value portfolio diversification.

Robert Dodd with Raymond James asked if the potential widening of spreads in the software market, combined with Ares Capital's comfortable underwriting process, would make software even more attractive from a risk-return perspective, leading to a potential increase in allocation over the next 12-24 months.

Answer

Kort Schnabel, CEO of Ares Capital Corporation, stated that it's too early to speculate on increasing software allocation, as it depends on how spreads widen and the types of companies seeking capital. He reiterated Ares' commitment to diversification, noting that software is already their largest industry category, and they will 'see what the market gives us.'

Robert Dodd inquired about the drivers behind the high 'other income' this quarter and its sustainability, and how in-house AI expertise has changed software underwriting.

Answer

Jim Miller (President) clarified that 'other income' primarily consists of one-time transaction or amendment fees, not typically replicable quarterly, unlike capital structuring fees tied to origination volume. Kort Schnabel (CEO) explained that while their core strategy for foundational software remains, AI expertise now helps them avoid software companies that merely provide content or analyze third-party data, ensuring resistance to AI disruption.

Robert Dodd inquired about the drivers behind the unusually high "other income" this quarter, asking if it's sustainable or indicative of a new strategy to support earnings, and how Ares Capital Corporation's in-house AI expertise has specifically influenced its software underwriting process over the past few years.

Answer

President Jim Miller clarified that the high "other income" was mainly due to transaction or amendment-type fees, which are typically one-time in nature and not necessarily replicable each quarter, distinguishing them from capital structuring fees tied to origination volume. CEO Kort Schnabel explained that while the core strategy for software investing (foundational, infrastructure-like businesses) hasn't changed, the rise of AI has intensified focus on ensuring the portfolio is defensively positioned. The in-house AI expertise helps in identifying software companies resistant to disruption by AI's content creation and data synthesis capabilities, emphasizing those deeply embedded in customer operations rather than those providing easily disrupted content or third-party data analysis.

Robert Dodd of Raymond James Financial, Inc. asked about the recent increase in non-accrual assets, noting that some were previously restructured, and questioned if it's becoming harder to restructure club deals. He also asked if the Q2 capital injection into Ivy Hill was opportunistic or part of a long-term plan.

Answer

CEO Kort Schnabel clarified that the new non-accruals were due to idiosyncratic, company-specific factors rather than a broader economic trend or issues with club deal restructurings. He stated that the capital injection into Ivy Hill was part of its normal-course, long-term growth plan and not a specifically opportunistic move based on Q2 market volatility.

Robert Dodd inquired about the portfolio's exposure to potential retaliatory tariffs on exports. He also asked if the recent non-accrual of a veterinary roll-up company signals a broader cyclical issue in that sector.

Answer

Incoming CEO Kort Schnabel stated that exposure to retaliatory tariffs is minimal, and the company relies on its conservative underwriting, which always models recession scenarios. Regarding veterinary roll-ups, he noted that the company's exposure to the entire physician practice management sector, including veterinary, is less than 2% of the portfolio, limiting specific industry risk.

Robert Dodd sought clarification on whether management's comment about 'no direct impact from government policy changes' included potential future tariffs and asked about the portfolio's preparedness.

Answer

Then-CEO Robert DeVeer noted it's early but they are vigilant. CEO Kort Schnabel added that specific analysis on tariff exposure from China, Canada, and Mexico showed a 'very small impact' on the portfolio. He also highlighted that ARCC is generally under-weighted in product-based businesses that heavily import and export, further mitigating risk.

Robert Dodd asked for clarification on the drivers of the decline in the portfolio's weighted average yield, particularly the impact of base rates. He also questioned if spreads on new first-lien loans were now sub-500 basis points and if compression was worsening.

Answer

Co-President Kort Schnabel explained there is a lag in the impact of base rate declines, with most of the effect to be seen in subsequent quarters. CEO Robert Kipp DeVeer stated that while spreads have compressed, the typical range is 450-550 basis points, which remains attractive. Schnabel added that spreads stabilized in Q3.

Robert Dodd asked if there is any intent to expand the size or type of assets within the new joint venture once it scales, and how Capital Southwest evaluates AI disruption risk in both its existing portfolio and new originations.

Answer

Josh Weinstein, Chief Investment Officer, clarified that the JV is primarily focused on the same asset types—clean deals in the $5 million to $10 million EBITDA range with spreads between 5% and 5.75%. He noted that it might allow for slightly larger hold sizes on the margin but will mostly target the core space. Regarding AI risk, Mr. Weinstein explained that the company formed an AI committee about a year ago and incorporates an AI risk rating into its investment committee process for new deals, considering both the potential benefits and long-term disruptive impacts. He also mentioned internal efforts to utilize AI for organizational efficiency.

Robert Dodd inquired whether the new joint venture would expand the types or sizes of businesses targeted, or if it would primarily focus on the same assets with lower spreads. He also asked about how AI disruption risk is evaluated for both existing portfolio companies and new originations.

Answer

Josh Weinstein, Chief Investment Officer, clarified that the JV would primarily target the same clean assets in their core space (e.g., $5M-$10M EBITDA, 5-5.75% spreads). He added that it marginally allows for slightly larger deals (e.g., $35M-$40M checks) by enabling a portion to be held in the JV, thus maintaining portfolio granularity. Regarding AI risk, Weinstein explained that the company formed an AI committee about a year ago and integrated an AI risk rating segment into their investment committee process. He noted that AI can be both beneficial (e.g., for efficiency) and a potential long-term risk (e.g., impacting future valuations), making it a significant part of their investment committee discussions. He also mentioned internal efforts to utilize AI for organizational efficiency.

Robert Dodd of Raymond James Financial, Inc. questioned the level of competitive pressure from banks, sought updates on plans to launch an asset manager, and asked if strong deployment would lead to higher usage of the ATM program.

Answer

CIO Josh Weinstein confirmed that banks are currently in a 'risk-on' phase, increasing competition and contributing to spread compression. CEO Michael Sarner indicated the company is pursuing strategic initiatives to enhance earnings on larger deals, possibly through partnerships. CFO Chris Rehberger affirmed that due to the strong origination pipeline, ATM usage would likely be at the higher end of the typical range, around $50 million for the quarter.

Robert Dodd of Raymond James asked about the potential scale of spread compression on non-tariff impacted deals and the company's strategy for managing its growing Undistributed Taxable Income (UTI) balance, including its philosophy on special versus supplemental dividends.

Answer

CEO Michael Sarner stated he does not expect material spread compression, though the environment does not support widening either, with new deal spreads averaging 5-7%. Regarding the high UTI balance, which is expected to grow past $1.00 per share, Sarner explained the strategy is to use it to support the regular and supplemental dividends rather than issue large, one-time special dividends. He emphasized a preference for programmatic shareholder returns through the supplemental dividend, which could increase if the UTI balance continues to grow significantly.

Robert Dodd of Raymond James questioned the adequacy of staffing levels given the high deal activity, the portfolio's exposure to federal contractors, and the company's strategy for its growing undistributed taxable income (UTI) balance, particularly in light of the new convertible notes.

Answer

CEO Bowen Diehl and CFO Michael Sarner affirmed they are constantly evaluating staffing and typically add 3 junior deal professionals and 1-2 back-office staff annually to support growth. On federal contractor exposure, they estimated it was minimal and not a primary concern. Sarner explained the plan for the UTI is to continue increasing the supplemental dividend slowly, with the potential for a larger increase if anticipated realized gains materialize later in the year, a strategy unaffected by the convertible notes.

Robert Dodd of Raymond James asked if the strong projected net deployments for the December quarter would cause unusual bonus accruals. He also inquired about any emerging themes of credit weakness beyond the specific non-accruals mentioned, given the modest portfolio-wide EBITDA growth.

Answer

CFO Michael Sarner clarified that compensation is not based on origination volume, so he does not expect dramatic changes to bonus accruals, as shareholder returns and dividend stability are prioritized. CEO Bowen Diehl identified two general themes of pressure: businesses serving the low-end consumer and slower B2B purchase decisions due to economic caution. However, he balanced this by highlighting positive overall portfolio health, including strong rating migration, solid interest coverage, and a lower percentage of PIK interest income.

Robert Dodd questioned the company's comfort level in achieving and maintaining its target leverage ratio, given the current dividend plan, spillover distribution, and other initiatives.

Answer

Art Penn, Chairman and CEO, acknowledged the constraints of reducing spillover income, executing equity rotation, and managing PNNT's leverage ratio. He stated that the company is constantly evaluating its dividend policy while working within these constraints.

Robert Dodd asked about the types of businesses most likely to transact for equity rotation, distinguishing between control positions like FLOC and non-control co-investments. He also questioned the evaluation process for selling assets to the PSLF JV and the regulatory implications, and the company's comfort level with achieving target leverage given dividend plans and spillover distribution.

Answer

Chairman and CEO Art Penn clarified that both control positions (e.g., FLOC, JF Acquisitions, AKW) and non-control equity co-investments are potential candidates for exit, with control positions offering more flexibility in timing. He corrected a misunderstanding, stating the evaluation is for selling assets from PNNT to the PSLF JV, not between two 40 Act companies, to manage PNNT's leverage. Penn further elaborated on balancing spillover reduction, equity rotation, and maintaining the target leverage ratio of 1.25-1.3 times, acknowledging the multiple constraints.

Robert Dodd of Raymond James Financial asked about the company's significant spillover income, questioning at what point it might be low enough to trigger a dividend re-evaluation. He also inquired about current market terms for new originations and the likelihood of realizing large equity positions soon.

Answer

Art Penn, Founder and Managing Partner, explained that any dividend evaluation would occur after the 12 to 18-month portfolio normalization and equity rotation is complete. He noted that new loans are underwritten at conservative leverage (e.g., 3.8x Debt/EBITDA), and while smaller equity positions are being realized, significant chunky positions are not expected to be sold in the immediate term.

Robert Dodd asked about the threshold for the spillover income balance that would trigger a dividend re-evaluation, the current market terms for new originations versus the portfolio average, and the potential for realizing gains from larger equity positions in the near term.

Answer

Art Penn, Founder and Managing Partner, stated that any dividend evaluation would occur after the 12-18 month portfolio normalization is complete. He noted new loans typically have lower leverage (e.g., 3.8x) than the portfolio average (4.7x) but can grow into it. He also mentioned that while smaller equity positions are beginning to be realized, no sales of the larger, chunkier positions are imminent.

Robert Dodd inquired about the target level for the company's substantial spillover income, the restructuring prospects for the non-accrual investment Pragmatic Institute, and which sectors present the most attractive investment opportunities.

Answer

CEO Arthur Penn explained there is no specific target for reducing the $0.99 per share of spillover income, stating the plan for 2025 is 'steady as she goes' while aiming to rotate equity. He anticipates a restructuring for Pragmatic during the current quarter. Regarding investment areas, Penn noted they respond to market opportunities presented by private equity, with a continued focus on recession-resilient sectors like healthcare and government services, emphasizing low leverage and strong covenants.

Robert Dodd asked about the most appealing investment sectors for 2025 and whether the recent spread compression in the market has bottomed out.

Answer

CEO Arthur Penn identified healthcare and government services/defense as key attractive sectors, emphasizing a strategy of selectivity and low leverage. Regarding spreads, he stated a belief that they have plateaued for senior loans in the 5.00-5.50 range over the risk-free rate, noting they remain attractive on a relative value basis compared to the broadly syndicated loan market.

Robert Dodd inquired about the recent portfolio acquisition, specifically its origin, potential for similar future opportunities, and the strategic value of a large acquisition versus individual investment deployment. He also asked about market bifurcation, post-COVID hangovers in sectors like logistics, and the impact of the government shutdown on portfolio companies.

Answer

Art Penn, Founder and Managing Partner at PennantPark Investment Advisers, LLC, explained that the portfolio acquisition involved assets from a known joint venture, which were originated by PennantPark and offered high spreads. He noted that logistics is still dealing with post-COVID effects, the average consumer is soft due to inflation and tariffs, but government services, defense, and healthcare remain strong. Penn confirmed minimal exposure to civilian government activities, thus no impact from the shutdown.

Robert Dodd inquired about the recent portfolio acquisition, specifically how it originated, the potential for similar opportunities, and its value compared to deploying capital into individual investments. He also asked about market bifurcation, potential COVID-19 hangovers in certain sectors like logistics, and the impact of the government shutdown on portfolio companies.

Answer

Chairman and CEO Art Penn clarified that the portfolio acquisition involved assets from another joint venture, which PennantPark had originated years ago, making them familiar with the portfolio. Regarding market conditions, Art Penn noted ongoing post-COVID challenges in logistics and a general softness in the consumer sector due to inflation and tariffs. However, he highlighted the continued strength in government services, defense, and healthcare sectors. Art Penn also confirmed that the company's defense and intelligence-focused government exposure meant the shutdown had no significant impact.

Robert Dodd from Raymond James inquired about the motivation behind the recent equity raise via the ATM program, asking if it was for a long-term capital build or in anticipation of an increased deal pipeline. He also asked what conditions are necessary to unlock new M&A activity and about the expected income recovery from the non-accrual investments that were restructured post-quarter end.

Answer

Arthur Penn, Chairman and CEO, explained that the capital raises were to prepare for a robust 2025, but market activity slowed, leaving the company with a substantial 'war chest' raised at an accretive price. He stated that general market certainty, more than specific tariff resolutions, is needed to restart M&A. Penn also detailed that the non-accrual restructurings are expected to recover about 60% of the lost income, contributing approximately $0.01 per share on a run-rate basis, which helps position NII to comfortably cover the dividend.

Robert Dodd asked about the control and process for shadow ratings within securitizations, the ideal mix of securitization in the debt stack, the potential for monetizing equity positions in 2025, and the expected timeline for the PSSL joint venture to reach its new $1.5 billion capacity.

Answer

Arthur Penn, Chairman and CEO, explained that shadow ratings are updated annually by S&P, or more frequently if a material event occurs. He emphasized the value of a diversified funding mix, using revolvers for flexibility and securitizations as a term-out facility. Penn anticipates 2025 will be an active year for M&A and exits, and projected that the PSSL joint venture could reach its $1.5 billion capacity within the next 9 to 12 months.

Robert Dodd questioned the sustainability of the collections overperformance, noting that the majority was 'cash overs' rather than changes in expected future recoveries, and asked about the company's strategic M&A opportunities and whether they might move up the capital allocation priority ladder.

Answer

Ashish Masih, President and CEO, confirmed the overperformance is heavily driven by MCM's exceptional collections, particularly from new initiatives impacting early-stage portfolio lifecycles. He noted that forecasts will gradually adjust as more data is incorporated. Regarding M&A, he stated it remains a priority but the bar is high, and while they continuously evaluate opportunities, current portfolio buying in the US offers a reliable way to generate value.

Robert Dodd inquired about the sustainability of the collections overperformance, particularly the high proportion of 'cash overs' versus changes in expected future recoveries, and how this might eventually be reflected in collection forecasts. He also asked about the potential for strategic M&A opportunities to move up Encore's capital allocation hierarchy.

Answer

Ashish Masih, President and CEO, confirmed that the overperformance is heavily driven by the MCM business, with initiatives impacting early stages of portfolio lifecycles and recent vintages. He explained that while 97% of the $63.6 million in changes and recoveries were cash overs, forecasts will gradually adjust as more data is incorporated. Masih expressed confidence in the collections performance and its contribution to earnings. Regarding M&A, he stated it remains in their capital allocation hierarchy, with a high bar for opportunities that create sustained shareholder value, emphasizing their comfort with portfolio buying as a reliable value generator.

Robert Dodd of Raymond James questioned if there was an unusual mix between new payment plans and large one-time payments during Q1. He also asked for a hypothetical timeline on when a major, previously non-selling bank might begin selling portfolios in volume following a large merger.

Answer

President and CEO Ashish Masih responded that there was nothing unusual in the Q1 payment mix, with all collection channels and payment types remaining consistent with historical trends. Regarding the potential new seller, Masih noted it would likely take a long time for the merged entity to align strategies and that any new market entrant would probably start selling slowly, though the eventual supply could be meaningful.

Robert Dodd sought details on the Cabot ERC change, asking if it was tied to specific products or new modeling, the nature of the IT impairment, confidence in the pricing of the large Q4 purchase, and trends in U.S. legal collection costs.

Answer

President and CEO Ashish Masih explained the ERC change was a broad-based, holistic review of older vintages, not product-specific. The IT impairment related to U.K. servicing business projects. He expressed high confidence in the recent large purchase, noting recent vintages are performing well. He also highlighted that the legal channel's share of U.S. collections is at a record low of 36%, demonstrating increased efficiency in call center and digital channels.

Robert Dodd asked about the significant year-over-year and sequential increase in legal expenses, questioning if this represents the start of a continued ramp-up as the large portfolio purchases from recent years flow through the legal collections process.

Answer

President and CEO Ashish Masih acknowledged that as the volume of portfolio purchasing rises, legal expenses are expected to steadily rise as well. However, he emphasized that the company remains focused on resolving accounts prior to the legal process and expects to continue seeing improved overall operating leverage, as reflected in the cash efficiency margin.

Robert Dodd of Raymond James Financial inquired about the outlook for M&A and large portfolio acquisitions similar to the Conn's deal, and asked about the potential for further improvements in the company's best-in-class cash efficiency ratio.

Answer

CEO David Burton distinguished between traditional M&A and large portfolio purchases like Conn's, noting that the success of the latter has attracted more similar opportunities. Regarding cash efficiency, Burton affirmed that while large gains are harder to achieve, continuous improvement remains a core tenet of their strategy due to its powerful operating leverage, and he expects ongoing enhancements rather than a plateau.

Robert Dodd from Raymond James Financial asked about the M&A environment, specifically if opportunities for large performing portfolio acquisitions like the Conn's deal were becoming more likely. He also questioned how much more improvement could be achieved in the company's already high cash efficiency ratio on a like-for-like basis.

Answer

CEO David Burton clarified that M&A typically refers to acquiring companies, not portfolios. He noted that the success and visibility of the Conn's transaction have led to more performing portfolio opportunities being presented to the company. On efficiency, Burton acknowledged that large nominal gains become more difficult but affirmed that continuous improvement is a core focus with a powerful operating leverage impact, and he expects to continue driving costs down.

Robert Dodd from Raymond James Financial inquired if M&A opportunities similar to the Conn's portfolio purchase were becoming more likely and asked what levers remain to improve the already high cost efficiency ratio.

Answer

CEO David Burton clarified that the Conn's deal was a unique portfolio purchase, not traditional M&A, and that its success has attracted more similar opportunities. Regarding efficiency, he acknowledged that gains become harder but affirmed that continuous improvement is a core focus due to its powerful operating leverage, and he expects to continue finding opportunities to reduce costs.

Robert Dodd asked about the outlook for portfolio spread compression, given that new deployments have lower spreads than the portfolio average. He also inquired if sponsor leverage demands are expected to increase from the current quarter's low level and sought clarification on whether the Merx proceeds were already redeployed.

Answer

CEO Tanner Powell acknowledged that portfolio spreads would likely trend down but noted that improved liability costs and a potential M&A pickup could mitigate the impact on net interest margin. He agreed it would not be surprising to see sponsor leverage requests tick up. Management confirmed the company deployed capital ahead of the Merx repayment, bringing pro forma leverage to their target of around 1.37x.

Robert Dodd of Raymond James Financial inquired about the recent shrinkage in the private loan portfolio, the nature of underperformance in consumer-facing businesses, and the outlook for continued large realized gains from the lower middle market portfolio.

Answer

CEO Dwayne Hyzak and Nick Meserve, MD of the Private Credit Investment Team, attributed the private loan portfolio's decline to slower private equity industry activity and higher repayments, with Meserve noting they may have missed some deals on pricing. Hyzak explained that underperformance is concentrated in legacy, lower-end consumer investments and that the firm has been 'risk off' on new consumer exposure for about two years. Regarding gains, Hyzak stated that the mature lower middle market portfolio has several companies receiving exit interest, potentially leading to more significant realizations in the near term, especially for premium assets.

Robert Dodd inquired about the specific tariff exposure within the portfolio, such as reliance on offshore manufacturing or imported materials, and asked for the rationale behind characterizing the private loan pipeline as 'average' amidst a muted M&A market.

Answer

Executive Dwayne Hyzak detailed the tariff exposure, noting it's limited and manageable. He explained that in the lower middle market, a high single-digit percentage of companies have meaningful exposure, with another 10-20% having some indirect risk, but management teams are experienced in mitigation. For private loans, the risk is similar and further mitigated by first-lien positions and existing fair value write-downs on some exposed companies. Regarding the pipeline, Hyzak and an executive from the private credit team explained that 'average' reflects strong add-on investment opportunities within the existing portfolio and a steady flow of attractive new deals, though the muted M&A environment does create uncertainty around deal closures.

Robert Dodd of Raymond James inquired about the portfolio's exposure to potential tariffs and government efficiency initiatives, and whether anticipated changes in capital gains taxes are slowing M&A activity.

Answer

Dwayne Hyzak (Executive) acknowledged that while some portfolio companies would be impacted by tariffs, the portfolio's diversity and focus on U.S. domestic businesses should mitigate the overall effect. He noted that management teams are experienced in navigating such issues and that exposure to government efficiency initiatives is limited. Regarding capital gains taxes, Hyzak stated he has not seen this factor slow down M&A activity, attributing the current slowness more to general economic uncertainty.

Robert Dodd of Raymond James followed up on ATM usage, asking if it would decrease in Q4 since Q3's equity raise effectively pre-funded deals that closed in Q4. He also questioned the cause for lower-than-average non-recurring dividend income and asked for details on a $26 million realized gain in the private loan portfolio, specifically its timing and any impact on asset manager incentive fees.

Answer

Executive Dwayne Hyzak confirmed that ATM usage is expected to be lower in Q4, as the company had pre-funded the deals that slipped from Q3. Regarding dividend income, Hyzak and Executive David Magdol clarified there was no concerning thematic reason for the dip; it was normal variability caused by portfolio companies reinvesting for growth and by lower incentive fees from the asset management business. Hyzak stated the $26 million realized gain occurred within Q3 and did not impact incentive fees.

Robert Dodd of Raymond James Financial inquired about the outlook for M&A activity in the second half of 2025, its potential impact on repayments and equity realizations, the current competitive landscape, and whether the significant prepayment fees from Q2 should be considered non-recurring.

Answer

CEO & Investment Committee Chair Edward Ross noted that M&A deal flow began improving in late Q2 and continues into Q3, though it is not yet at robust levels. He anticipates lower repayment activity in Q3 compared to Q2, creating an opportunity for portfolio growth. Regarding competition, Ross acknowledged it has increased but stated Fidus rarely competes directly with large asset managers. CFO Shelby Sherard confirmed that the Q2 prepayment fees and accelerated amortization, totaling approximately $1.9 million, were episodic and are not expected to repeat at similar levels in Q3.

Robert Dodd inquired about the portfolio's specific exposure to tariffs beyond general statements, the necessary conditions for a rebound in the lackluster M&A market, and whether recent financing adjustments are sufficient to handle upcoming debt maturities.

Answer

Executive Edward Ross clarified that direct tariff exposure is minimal, at just over 5% of the portfolio, and that portfolio companies have manageable, prudent mitigation plans. He stated that market stability and certainty, rather than the complete removal of tariffs, are needed for an M&A rebound. Regarding financing, both Edward Ross and Executive Shelby Sherard explained that recent capital raises provide near-term flexibility, though a long-term refinancing of unsecured notes is still planned. Sherard added they have multiple options to handle maturities if market conditions are unfavorable.

Robert Dodd of Raymond James inquired about the outlook for the early-stage deal pipeline in 2025, the current state of spread compression, and the drivers behind the quarterly increase in amendment fees.

Answer

Executive Edward Ross stated that while Q4 2024 is expected to be active, it is too early to confirm a more robust M&A environment for 2025. He noted that spread compression is not accelerating, with new originations yielding 13.2%. Ross attributed the higher amendment fees to a high level of general activity within the large portfolio, such as acquisitions and refinancings, rather than specific credit deterioration, though he acknowledged pockets of economic softness.

Robert Dodd asked for clarification on the 'lender of influence' strategy, questioning if TCPC would take smaller positions while the broader PFS platform holds the influence. He also posed a broader question about the trend of previously restructured assets experiencing a second round of issues, asking if initial restructurings across the industry have been aggressive enough.

Answer

Chairman, CEO & Co-CIO Phil Tseng responded that TCPC will continue to benefit from the larger platform's influence by receiving allocations of larger deals where the platform is a lead or co-lead lender, noting this has already been the case for about 90% of deals in the last two quarters. Regarding restructured assets, Tseng stated that outcomes are case-by-case and can be impacted by the macro environment, such as prolonged high interest rates. He emphasized that recoveries are not linear and the team is working diligently with these companies to improve performance.

Robert Dodd asked for a timeline on resolving the Amazon aggregator investments, which form a significant part of non-accruals. He also questioned if TCPC's investment strategy will shift towards deals with more direct influence and fewer co-lenders to avoid future restructuring complexities.

Answer

Chairman, Co-CIO & CEO Philip Tseng projected that the aggregator restructurings should be completed within the next few quarters, noting positive signs of improvement at companies like SellerX. He confirmed that TCPC is definitively shifting its strategy to focus on investments where it can exercise significant influence, avoiding the 'errors of the past' associated with broadly syndicated loans where their influence was limited.

Robert Dodd asked for assurance on whether the current NAV represents a floor after significant write-downs, questioned the specific risks for new non-accrual Renovo, and probed if the timing of the management fee waiver was connected to the HPS acquisition timeline.

Answer

CEO Philip Tseng stated that while the large Razor markdown was an unexpected surprise, most credit issues have been concentrated in the previously discussed cohort of assets. President Jason Mehring clarified that Renovo's issues are both operational and macro-related, but its focus on smaller projects and domestic supply chains provides some insulation from tariff risks. Tseng asserted that the timing of the fee waiver was not related to the HPS deal and was part of a broader set of shareholder-aligned actions.

Robert Dodd of Raymond James asked if the new global direct lending structure at BlackRock would lead to more international deals in TCPC's portfolio. He also inquired about the company's spillover income position, the rationale for the $0.10 special dividend, the sustainability of elevated prepayment-related income, and whether a pickup in M&A activity could accelerate the resolution of restructured assets.

Answer

President Philip Tseng stated that the portfolio mix is not expected to change, as TCPC already benefits from global sourcing. Chairman and CEO Rajneesh Vig and CFO Erik Cuellar described the special dividend as a capital allocation decision to balance distribution requirements and excise tax management. Regarding prepayments, Mr. Vig noted that while hard to predict, current market conditions are conducive to more activity. He also explained that while a better M&A market could help, resolving restructurings often requires time and patience to optimize outcomes.

Robert Dodd asked about the confidence level in achieving the forecasted $12 million in equity realization proceeds in the second half of the year. He also inquired about the risk profile of the 15% of the portfolio rated 'three' or lower, and the certainty of growing the portfolio by year-end given the current timing of deal flow.

Answer

CEO Robert Ladd expressed high confidence in the equity realizations, as the underlying businesses are performing well and are already being actively marketed. For loans rated 'three', he clarified that by definition, the company expects to receive all principal and income. Ladd also reiterated that the pipeline is robust enough to support portfolio growth by year-end, despite the inherent uncertainty in the timing of closings and repayments.

Robert Dodd followed up on the deal pipeline, asking for characterization of the slowdown and whether it represented a temporary delay or a permanent loss of opportunities. He also questioned if the recent $75 million bond issuance was sufficient to handle upcoming maturities or if more unsecured debt would be needed.

Answer

CEO Robert Ladd characterized the M&A slowdown as a 'temporary disruption' caused by tariff uncertainty and expressed confidence that the deal activity would return. On the topic of debt, Ladd clarified that the company will need to issue more unsecured debt before the end of the year to address the 2026 bond maturity, but noted the new issuance would likely be less than $100 million.

Robert Dodd asked for the timing of the potential transaction tied to the portfolio's appreciation and whether Q4's expected realized gains were included in the reported spillover income. He also inquired about credit spread compression trends and management's confidence in achieving its Q4 portfolio size guidance.

Answer

Executive Robert Ladd confirmed the transaction is expected to close in Q4 and clarified that the $42 million in spillover income was as of Q3 end, with Q4 gains being distributable separately. He acknowledged that new loan spreads have compressed from the 6% range to the 5% range but have recently stabilized. Ladd expressed high confidence in meeting the Q4 portfolio guidance of $930-$950 million, citing a significant pickup in deal activity.

Robert Dodd asked about the hypothetical timeframe for integrating a new platform acquisition into the BDC and for commentary on the market share dynamics between private credit and the broadly syndicated loan (BSL) market.

Answer

CEO Craig Packer stated that for any new acquisition, integration would be rapid, measured in a month or two post-close, but emphasized that current new strategies are already live. On market dynamics, Packer described the environment as a 'healthy traditional market' where both private and public markets are viable options for sponsors, noting the secular shift to direct lending continues and the flow between markets is currently balanced.

Robert Dodd asked about the company's underwriting process, specifically if the perceived probability of a near-term recession has changed. He also questioned if there are plans to increase allocations to diversified, non-traditional lending strategies now that the company has a larger, combined balance sheet.

Answer

CEO Craig Packer emphasized that their underwriting is always downside-focused but acknowledged that recent economic uncertainty has led them to factor a potential slowdown into their base case, increasing caution. He confirmed they plan to grow exposure to diversified strategies like asset-based lending from the current low-double-digits to potentially 15% of the portfolio over time, aligning the combined entity with OBDC's historical strategy.

Robert Dodd inquired about the proportion of the portfolio that still holds above-market spreads and is at risk of refinancing. He also asked about the company's plans for increasing strategic equity investments and potentially creating new portfolio company verticals.

Answer

President Logan Nicholson estimated that about 10-15% of the portfolio could still be at risk for opportunistic refinancing, noting that the company has already worked through the majority of these higher-spread names. CEO Craig Packer added that strategic equity investments are in specialized, low-risk lending businesses that are accretive and non-correlated. He confirmed plans to increase the allocation to these investments in the larger post-merger portfolio and is open to adding new verticals over time, though no immediate plans are in place.

Robert Dodd asked for color on the improvement in portfolio interest coverage, specifically noting the significant reduction in the percentage of the portfolio that is excluded from that calculation.

Answer

CEO Craig Packer described this trend as a positive indicator of their investment strategy working as intended. He explained that companies are typically excluded early in their life cycle while investing for growth; the reduction in exclusions shows these companies have matured and improved their credit quality, allowing them to be included in the metric without skewing the results.

Robert Dodd from Raymond James Financial, Inc. questioned if there was a common theme behind assets re-defaulting after restructuring and asked about the timeline for the recently reviewed deal flow to convert into closed transactions.

Answer

President & CIO Daniel Pietrzak stated there is no single theme for re-defaults, as each situation is idiosyncratic, and only PRG is expected to undergo another restructuring. He agreed that the current deal pipeline would likely convert later in the year or in 2026, and noted that while fee income should see an upside from Q2's low level, upfront fees on new loans are tighter than a year ago.

Robert Dodd asked about the likelihood of the JW Aluminum preferred equity returning to accrual status given positive trends, and questioned the apparent divergence between improving interest coverage, falling portfolio leverage, and declining portfolio yields.

Answer

Chief Investment Officer & Co-President Daniel Pietrzak expressed satisfaction with the recent partial paydown on JW Aluminum and acknowledged the business tailwinds, but stated the team will remain conservative about returning the asset to accrual status. Regarding interest coverage, both Pietrzak and Chief Financial Officer Steven Lilly attributed the perceived divergence to a lag effect in how coverage metrics are calculated and reported as underlying interest rates change.

Robert Dodd of Raymond James asked for FSK's outlook on its asset-backed finance business, separate from sponsor finance, and inquired if there were any specific areas of weakness in the portfolio despite strong overall EBITDA growth.

Answer

Chief Investment Officer Daniel Pietrzak highlighted that asset-backed finance is a significant business for FSK with a large team and AUM, noting its growth feels like the direct lending market did 5-10 years ago. He explained that portfolio issues have been more idiosyncratic to specific issuers rather than broad-based. While constructive on the economy, he mentioned that risks like tariffs and wage inflation are being closely monitored at the portfolio company level.

Robert Dodd of Raymond James Financial asked about the feasible timeline to fully utilize the equity in the current credit fund. He also inquired about the potential structure of a second JV, asking if it would be a 'carbon copy' of the first, and questioned if there has been any shift in the quality mix of deals entering the pipeline.

Answer

CFO Tom Hennigan stated the goal is to fully deploy the current JV's equity in the next two to three quarters, noting a second JV would likely be a 2026 event. CEO Justin Plouffe explained that the structure of a future JV is not yet decided but will leverage the broader strengths of the Carlyle Global Credit platform. Plouffe also affirmed that they have not seen a material change in the quality of companies in their pipeline, which remains strong.

Robert Dodd of Raymond James inquired about the sustainability of BXSL's dividend, given the forward curve for SOFR suggests declining rates, and asked about the potential for spread expansion as deal activity increases.

Answer

Co-CEO Brad Marshall explained that dividend decisions are based on long-term signals, not short-term rate fluctuations, and noted the company has significant surplus income. Regarding spreads, he stated they are influenced by capital supply/demand and public market tightness, and emphasized that BXSL will maintain its focus on high-quality assets rather than reaching for riskier, higher-spread deals.

Robert Dodd of Raymond James questioned the source of management's heightened optimism for a 2025 M&A 'super cycle' and asked for their outlook on credit spreads over the next year.

Answer

Co-CEO Brad Marshall attributed the optimism to a confluence of factors: a lower cost of capital, a clearer economic outlook, significant private equity dry powder, and anecdotal confirmation from bankers and sponsors. On spreads, he argued they are not 'extraordinarily tight' but rather in line with 2021 levels, and that spreads per unit of risk are actually more attractive now due to lower leverage in deals.

Robert Dodd of Raymond James Financial asked for more color on the consumer products company downgraded to 'Red' status, questioning if the impact from tariffs was worse than anticipated and if similar risks exist elsewhere in the portfolio. He also questioned whether the company's strategic initiatives, such as liability optimization and equity monetization, could be completed by the end of the dividend protection program in 2026, potentially making the program unnecessary thereafter.

Answer

CEO John Kline clarified that the downgraded company was the one previously flagged for material tariff exposure and was already underperforming. While he expressed long-term optimism for a full recovery, the current situation necessitated the downgrade. COO Laura Holson added that analysis shows tariff risk across the rest of the portfolio remains minimal. Regarding the post-2026 outlook, Kline expressed strong optimism that the company will make significant progress on its strategic initiatives over the next six quarters, focusing on controllable factors like asset quality, liability mix, and PIK monetization to improve core earnings, though he noted the broader yield environment is harder to predict.

Robert Dodd from Raymond James asked for more color on the 'Red' rated consumer products company, questioning if performance was worse than expected beyond the known tariff risk. He also asked about the timeline for normalizing earnings to a level that could sustain the dividend by the end of the dividend protection program in 2026.

Answer

CEO John Kline clarified that the consumer products company was already an underperformer before the tariffs, which exacerbated the issues, but he remains optimistic about a full recovery long-term. COO Laura Holson added that tariff risk is minimal across the rest of the portfolio. Regarding the dividend, John Kline expressed confidence in making significant progress on improving asset quality, liability mix, and monetizing assets by 2026, while noting the broader yield environment is harder to predict.

Robert Dodd asked for an outlook on market spreads amid current volatility and questioned the sustainability of the dividend given the declining forward SOFR curve. He also asked why the junior preferred stock in UniTek, valued at zero, was not realized as a loss.

Answer

COO Laura Holson stated that spreads are currently stable due to a lack of deal supply despite significant dry powder. Executive John Kline addressed dividend sustainability, highlighting levers like optimizing SLP financing, monetizing non-yielding equity like Office Ally, strong Q2 deal flow, and the dividend protection program. He added that upcoming debt maturities offer an opportunity to refinance at lower rates, providing a hedge. Regarding UniTek, Kline explained that co-investors prevent a unilateral write-off of the junior preferred tranches, which had minimal cash investment.

Robert Dodd of Raymond James asked about the UniTek transaction valuation relative to its Q4 mark, the outlook for reducing PIK income in 2025, the expected mix within senior assets, and trends in market spreads and portfolio repricing.

Answer

Executive John Kline confirmed the UniTek valuation was modestly higher than the Q4 mark and expressed confidence in reducing PIK exposure despite a slow market start. He also stated the senior asset mix would remain consistent. Executive Laura Holson added that credit spreads have stabilized and believes most potential portfolio repricings have already occurred.

Robert Dodd of Raymond James inquired about the recent decline in portfolio leverage, the strategy for reducing PIK income in 2025, and a discrepancy in the Senior Loan Program's (SLP) income versus its dividend payout.

Answer

Laura Holson, COO, explained that lower portfolio leverage is due to interest coverage constraints on new deals but emphasized their focus on the stable loan-to-value metric. John Kline, CEO, stated that PIK reduction will come from exiting legacy 100% PIK assets, aiming for a long-term PIK ratio under 10-12%. Laura Holson also clarified that the SLP dividend variance was merely a matter of timing and not indicative of any performance issues.

Robert Dodd of Raymond James Financial questioned if the focus on higher purchase price multiples implies that peak purchasing volume is now in the past. He also asked about the potential magnitude of cost savings from the five new strategic priorities and their long-term impact on the cash efficiency ratio.

Answer

President and CEO Martin Sjolund responded that the company is striking a balance between returns, volume, and leverage, and is not simply chasing volume, emphasizing a disciplined approach. Regarding cost savings, Sjolund clarified that the initiatives are not all cost-focused; for example, the U.S. restructuring is about execution speed. He noted that the overhead cost review is a smaller part of the total cost base and that while important, its financial impact will take time to materialize and expectations should be tempered.

Representing Robert Dodd of Raymond James, an associate asked if any macro trends beyond seasonality were impacting consumer behavior and inquired about the potential long-term supply impact from the Capital One and Discover merger.

Answer

President and CEO Vik Atal stated the company is not seeing any new adverse macro trends impacting consumer behavior, a view echoed for the European market by Martin Sjolund, President of PRA Group Europe, who noted cash collections there were slightly ahead of expectations. Regarding the merger, Vik Atal declined to speculate on the actions of specific lenders or the potential impact on future portfolio supply.

Robert Dodd asked about the expected churn rate for offshore collectors compared to U.S. counterparts, any emerging trends in U.S. consumer health related to tax season, and whether the company is launching new efforts in digitization or AI to drive further efficiency.

Answer

Vik Atal, President and CEO, responded that attrition rates for offshore collectors are currently lower than for their onshore counterparts. Rakesh Sehgal, EVP and CFO, noted that it is still too early in the tax season to identify definitive trends but they are closely monitoring key dates. Regarding technology, Atal confirmed the company is aggressively pursuing efficiencies across the board but is not launching a single new 'whizbang' initiative, instead focusing on continuous improvement of existing processes.

Robert Dodd questioned why the preliminary 2025 portfolio purchase guidance of over $1 billion seems conservative compared to the 2024 run-rate, asked about the future trajectory of legal collection costs, and inquired about capital use plans as the company expects to de-lever.

Answer

CEO Vik Atal clarified that the '$1 billion plus' guidance is a cautious starting point as they are still in their planning cycle and the spot-driven European market is variable. He also noted legal costs will likely rise as recent large portfolio purchases move through the legal channel. EVP and CFO Rakesh Sehgal added that the primary use for future capital capacity will be reinvesting in portfolio purchases, stating that dividends or buybacks are not a current priority.

Robert Dodd of Raymond James Financial, Inc. sought to reconcile comments on elevated repayments and fee potential with a key metric, and questioned the viability of a >9% ROE industry threshold given the rise of retail capital in private credit.

Answer

CEO Joshua Easterly clarified that his repayment outlook was for Q3, while the ROE guidance was for the full year. Regarding the ROE threshold, he expressed a strong belief in long-term market efficiency, arguing that fiduciaries will eventually favor the superior risk-adjusted returns and liquidity of public BDCs over less liquid evergreen funds if a performance gap persists.

Robert Dodd of Raymond James Financial asked management to reconcile expectations for elevated repayments with a rising fair value-to-call-protection ratio. He also questioned if the traditional 9% ROE floor for financials will hold given the influx of retail capital via evergreen funds.

Answer

CEO Joshua Easterly clarified that his comment on elevated repayments was a near-term Q3 view, while the ROE guidance was for the full year. On the ROE question, Easterly expressed a firm belief in long-term market efficiency, arguing that fiduciaries will eventually steer clients toward better risk-adjusted returns, such as publicly traded BDCs with daily liquidity and potential discounts to NAV, over gated, at-NAV non-traded funds if a performance gap exists.

Robert Dodd of Raymond James asked about the impact of retail fund flows on market competition, the rationale for holding significant spillover income instead of returning capital, and how a potential peak in globalization might shift long-term investment strategy.

Answer

CEO Joshua Easterly stated that while retail flows may have slowed, TSLX's resilience stems from its large, diverse origination funnel and disciplined capital allocation. He explained that retaining spillover income is preferable to returning capital, as holding capital during volatility is strategically valuable despite the 4% excise tax cost. Easterly noted that deglobalization is inflationary and will slow growth, impacting asset valuations and requiring a more rigorous underwriting approach, though TSLX's services-focused portfolio is well-positioned.

Robert Dodd of Raymond James questioned if tight spreads could persist even with a rebound in M&A activity and asked if the company's guidance implies this market imbalance is a long-term phenomenon.

Answer

CEO Joshua Easterly reiterated his supply-demand framework, suggesting market signals from poor ROEs should eventually correct the imbalance. He clarified that TSLX's guidance is intentionally conservative, assuming current conditions persist, and highlighted the company's track record of over-delivering on its forecasts as important context.

Robert Dodd questioned the likelihood of spreads remaining tight if M&A activity rebounds and asked if the market's self-correction on spreads is a longer-term process, given TSLX's guidance assumes current levels.

Answer

CEO Joshua Easterly detailed the supply-and-demand framework for spreads, suggesting a combination of reduced capital supply (due to poor ROE signals) and increased M&A demand should eventually push spreads wider. He cautioned against interpreting their guidance as a market forecast, emphasizing that their guidance is intentionally conservative and reflects a history of aiming to over-deliver on expectations.

Robert Dodd asked for the specific portfolio percentage to which the interest coverage metric applies, sought a breakdown of the nonsponsored deal mix, and questioned the risk of more credit 'surprises' if rates remain high.

Answer

CEO Joshua Easterly explained that the interest coverage metric applies to most of the portfolio, with adjustments mainly for growth-stage software companies. He clarified that Q3 nonsponsored deals were all 'off the run' asset-based transactions, not traditional cash-flow loans. Regarding credit risk, he stated that fundamentally challenged companies in the portfolio already have a near-100% overlap with existing non-accruals, suggesting the risk of new surprises is low.

Robert Dodd of Raymond James questioned the sharp sequential drop in the Logan JV dividend and the sudden increase in nonaccrual loans, asking about the underlying drivers and forward visibility.

Answer

President Henry Chung explained the Logan JV dividend decline was due to timing mismatches and overcollateralization tests affecting the volatile equity tranche, but noted potential near-term upside. Regarding nonaccruals, he clarified they were previously on the watch list and were reclassified due to specific, deteriorating events at each borrower.

Robert Dodd questioned the significant sequential drop in the Logan JV dividend, asking for the specific drivers behind the decline. He also pointed out the discrepancy between the low internal risk ratings last quarter and the sudden increase in nonaccruals, asking if there were any warning signs and if the newly nonaccruing assets were still paying cash interest.

Answer

President Henry Chung explained the Logan JV dividend decline was driven by the lumpy nature of the equity tranche distributions, which are based on residual cash flows and subject to timing mismatches and overcollateralization tests. He noted that some cash was retained this quarter due to these tests but suggested potential near-term upside from recent opportunistic reinvestments. Regarding the nonaccruals, Henry Chung clarified they were all previously on the watch list and were reclassified due to specific, idiosyncratic negative developments at each borrower, not a sudden surprise. The question on cash interest payments was deferred.

Robert Dodd of Raymond James questioned the significant sequential decline in the Logan JV dividend, asking for the driver behind the drop given the position's fair value was written up. He also probed the increase in nonaccruals, noting they were not previously reflected in the higher-risk internal rating categories (4 and 5), and asked if these assets were still paying cash interest before being placed on nonaccrual.

Answer

President Henry Chung explained the Logan JV dividend decline was due to the lumpy nature of its equity tranche distributions, which are affected by the timing of payment determination dates and overcollateralization tests that retained cash this quarter. He added that the new nonaccruals were previously on the watch list and were reclassified due to specific, independent negative developments at the borrower level. The question regarding cash interest payments was deferred.

Robert Dodd inquired about the common themes driving the increase in '3 rated' assets, the portfolio's potential exposure to tariffs and government spending cuts, and the repricing risk on the existing loan book.

Answer

CEO Jason Breaux noted that the new watchlist additions had company-specific issues. President Henry Chung elaborated on challenges in subsectors like third-party logistics, packaging, and early-stage med-tech. Regarding external risks, Chung stated that exposure is limited, with about 12% of the portfolio having material foreign sourcing and less than 5% having direct government revenue. On repricing, Chung linked the risk to LBO volume, suggesting it would subside if deal flow increases, while Breaux noted pressure is concentrated in the upper-middle market.

Robert Dodd asked for clarification on the amount of nonrecurring income, the expected pace of rotating the remaining First Eagle BDC assets, and the outlook for deal activity in 2025 compared to historical levels.

Answer

CFO Gerhard Lombard confirmed the components of nonrecurring income, including prepayment fees and back PIK from two names returning to accrual status. President Henry Chung stated that the rotation of First Eagle assets should accelerate with an expected M&A market recovery. CEO Jason Breaux and President Henry Chung both expressed optimism for a significant pickup in 2025 deal flow, driven by pent-up demand, but noted it would differ from 2021 due to higher base rates and a more muted PE fundraising environment.

Robert Dodd of Raymond James asked about the company's strategy for managing its concentrated debt maturities in 2026 and inquired about any marginal shifts in portfolio company liquidity or sponsor support.

Answer

CFO Gerhard Lombard confirmed that while the current low-coupon debt is attractive, they are actively managing the capital structure and plan to ladder the 2026 maturities to diversify refinancing risk. President Henry Chung added that liquidity needs are concentrated in a small subset of the watchlist, not a broad portfolio issue. CEO Jason Breaux affirmed that sponsors in their market segment continue to provide capital for short-term needs.

Robert Dodd of Raymond James questioned the sustainability of the dividend given the NII shortfall, asking for an update on spillover income. He also inquired about the bid-ask spread in the M&A market and its impact on deal flow.

Answer

CFO Joyson Thomas reported year-end spillover income of $28.4 million against a Q1 dividend shortfall of approximately $2.1 million. Executive Stuart Aronson added that the Board is weighing potential earnings upside against persistent non-accruals before deciding on the dividend. Regarding the M&A market, Aronson noted that high-quality companies are trading at high multiples, but deals with tariff or recession risk face wider bid-ask spreads, and he expects overall M&A activity to remain muted for the next 60-90 days.

Robert Dodd requested clarification on the spillover income figure and questioned the sustainability of the aggressive lending market, particularly deals with fixed charge coverage ratios below 1.0x. He also asked about the strategic shift for the American Crafts workout, from a turnaround to a potential sale.

Answer

CFO Joyson Thomas confirmed the pro forma spillover income was $26.8 million. Executive Stuart Aronson addressed the market, stating competitors are underwriting based on aggressive growth and rate-cut expectations, a view he is skeptical of. Regarding American Crafts, Aronson explained that the loss of a major customer made a standalone recovery unviable, forcing a shift in strategy towards a sale, which he acknowledged was a disappointing outcome and a departure from their typical successful turnarounds.

Robert Dodd asked if the high spillover income balance creates a disconnect between required distributions and earnings, and questioned when it would make sense to use the large cash balance to call higher-cost baby bonds.

Answer

CEO Christian Oberbeck acknowledged that outsized redemptions have impacted earnings but stated the spillover provides flexibility, with a decision on a potential special dividend to be made by year-end. Regarding the baby bonds, he explained that the current spread to reissuance costs doesn't justify a call, given the favorable terms of the existing debt (covenant-free, long-term). Executive Henri Steenkamp added that cash is earning over 4.25%, mitigating the negative carry.

Robert Dodd asked if the high spillover income balance, at over four quarters of the current dividend, creates a disconnect between required distributions and potential earnings. He also inquired about the point at which it would make sense to call higher-cost baby bonds to utilize the large cash balance.

Answer

CEO Christian Oberbeck acknowledged the high spillover but stated any decision on a special dividend would depend on performance for the rest of the year, noting the 4% excise tax can be viewed as low-cost financing. He explained that calling the baby bonds is not currently attractive due to call costs, reissuance costs, and the bonds' favorable terms. CFO Henri Steenkamp added that cash earns ~4.25%, reducing the negative carry, and the current bond market doesn't offer favorable refinancing rates.

Robert Dodd from Raymond James questioned the high spillover income level (over $3/share), its potential to force future dividends disconnected from earnings, and why the company is not using its large cash balance to call and retire higher-cost baby bonds.

Answer

CEO Christian Oberbeck explained that the company has until year-end to manage the spillover, potentially through a special dividend, and views the 4% excise tax as a form of low-cost financing. Regarding the baby bonds, he stated that the current market for reissuance and the costs of calling the debt do not present a compelling enough opportunity, valuing the flexibility of the existing long-term, covenant-free debt. Executive Henri Steenkamp added that cash earns ~4.25%, mitigating the negative carry.

Robert Dodd of Raymond James asked for clarification on the significant drop in issued term sheets, questioning if it was due to early-stage issues like leverage demands or later-stage diligence findings. He also inquired about the level of optimism and potential timeline for recovering value from the restructured Zollege and Pepper Palace investments, and asked for the current amount of undistributed spillover income per share.

Answer

Chief Investment Officer Michael Grisius stated that Saratoga conducts more front-end diligence than competitors before issuing term sheets, leading to fewer being issued but a higher certainty of closing. He expressed cautious optimism for the Zollege and Pepper Palace turnarounds, highlighting the new management teams and capital but noting it will take time. Executive Henri Steenkamp confirmed that the company currently has over $3.00 per share in built-up spillover income that will need to be paid out at some point, which is a factor in dividend considerations.

Robert Dodd of Raymond James sought clarification on the Zollege restructuring, the nature of the 16 follow-on investments, and the market dynamics causing private equity sponsors to favor add-on acquisitions over new platform deals.

Answer

Chief Investment Officer Michael Grisius confirmed the Zollege restructuring was a continuation of previously disclosed issues and that the company remains on non-accrual. He explained that most of the 16 follow-on investments funded tuck-in acquisitions for existing portfolio companies. Both Grisius and CEO Christian Oberbeck attributed the PE focus on add-ons to the ability to acquire smaller companies at lower, accretive multiples, while platform sellers await better market valuations. They also noted that sellers of smaller add-on companies often have different, non-market-driven motivations, such as retirement.

Robert Dodd asked for clarification on whether the manager would continue its past practice of waiving fees to support the dividend, inquired about the future of the Senior Loan Fund (SLF) which appears to be in rundown, and questioned if the BDC's strategy would evolve following the Monroe Capital partnership with Wendel Group.

Answer

Executive Theodore Koenig affirmed the manager's commitment to supporting MRCC, stating that fee waivers remain an option despite the decision to use spillover income this quarter. CFO Lewis Solimene confirmed the SLF portfolio has been allowed to decline as they are not constructive on that end of the market but are evaluating its future. Koenig also noted that the company is constantly exploring strategic ways to create shareholder value, suggesting an evolution of strategy is possible under the new partnership.

Robert Dodd of Raymond James asked for clarification on the manager's commitment to future fee waivers, the strategic plan for the declining Senior Loan Fund (SLF), and whether the new partnership with Wendel Group might lead to a strategic evolution for the BDC.

Answer

Executive Theodore Koenig reaffirmed the manager's commitment to supporting MRCC, stating that future fee waivers remain an option and the use of spillover income was a specific quarterly decision. CFO and CIO Lewis Solimene explained the SLF is being allowed to delever as they are not constructive on its upper-middle market assets. Koenig also indicated that the company is continuously exploring strategic ways to create shareholder value, suggesting a potential evolution for the BDC following the Wendel Group partnership.

Robert Dodd of Raymond James asked about the strategic implications of the Wendel Group partnership for the MRCC BDC and questioned the manager's commitment to future support, such as fee waivers.

Answer

Executive Theodore Koenig explained that MRCC will benefit from new, synergistic investment strategies from the broader Monroe platform post-partnership. He also affirmed the manager's history of being shareholder-friendly and expressed his belief that support for MRCC, if necessary, would continue.

Robert Dodd asked for an update on the workout process for the 4.5% of the portfolio (at cost) on non-accrual, questioning whether the strategy is to return assets to accrual status or to work them out for capital recovery and reinvestment, and inquired about the expected timeline for these resolutions.

Answer

CFO and CIO Lewis Solimene stated that the goal for non-accrual assets is to maximize long-term recovery value, not necessarily achieve a short-term fix, by leveraging their internal workout team. Deputy Portfolio Manager Alex M. Parmacek added that the non-accrual assets are in various stages of the turnaround process, with some in early stages and others closer to a resolution, but expressed confidence in achieving successful outcomes.

Robert Dodd asked about the portfolio's potential exposure to U.S. policy changes beyond tariffs, such as government contracting, and questioned the drivers behind the increase in PIK interest, suggesting it may stem from loan modifications.

Answer

An executive stated that a detailed analysis revealed only low to mid-single-digit percentage exposure to policy impacts, as the portfolio is mainly U.S.-focused software and services companies. Regarding PIK interest, the executive noted that overall portfolio credit health is stable to improving, with metrics like leverage and interest coverage showing slight improvements, and that PIK can be a feature of restructurings.

Robert Dodd from Raymond James asked about the timing of the expected 2025 M&A rebound and questioned the potential for adverse selection risk as the company recycles its older vintage investments.

Answer

Co-Chief Executive Officer Alex Chi projected that while M&A assessment would be busy in Q1 2025, significant deployment would likely begin in Q2 or later due to deal cycle timelines. On recycling, Co-Chief Executive Officer David Miller expressed low concern for adverse selection, stating that portfolio companies are showing growth that should support their valuations and facilitate future exits or refinancings.

Robert Dodd asked about the strategy for continued portfolio rotation in 2025 and sought color on the portfolio's exposure to the regulatory and tariff uncertainties mentioned by management.

Answer

Portfolio Manager Bryan High stated the focus remains on rotating out of non-Barings originated assets to acquire income-producing ones, thereby improving ROE. CEO Eric Lloyd addressed the economic uncertainty, noting a preliminary analysis suggests 60-75% of the portfolio is unimpacted. He added that the firm is closely monitoring the most exposed issuers and has observed a slowdown in private equity sales activity due to the uncertain environment.

Robert Dodd asked for an outlook on the pace of portfolio rotation in 2025 and requested color on the portfolio's exposure to regulatory and tariff uncertainties mentioned by management.

Answer

Portfolio Manager Bryan High stated the focus remains on rotating out of non-Barings originated assets to acquire income-producing ones, noting the market pace will influence timing. CEO Eric Lloyd addressed uncertainty, estimating that 60-75% of the portfolio is likely unimpacted by regulatory shifts, but acknowledged that uncertainty has caused private equity firms to pause on new deal activity, slowing net deployment opportunities.

Robert Dodd from Raymond James asked for a longer-term view on the M&A landscape, questioning management's optimism for finding suitable deals over the next 12 months. He also asked for more specific plans regarding Lugano's store openings for the upcoming year, including the potential for further international expansion.

Answer

Executive Elias Sabo expressed strong optimism for the M&A market over the next year, believing that pent-up seller demand and a more stable interest rate environment will lead to a bounce-back in activity. Executive Patrick Maciariello estimated that Lugano might open approximately two new stores next year, confirming that the company is actively evaluating several locations, including at least one international opportunity, though the official 2025 plan has not been finalized.

Robert Dodd asked for a longer-term view on the M&A landscape, questioning management's optimism for finding suitable deals over the next 12 months. He also requested more specific plans for Lugano's store openings in the coming year, including potential international expansion.

Answer

Executive Elias Sabo expressed strong optimism for the M&A market in 2025, believing that pent-up demand and improving financing conditions will lead to a rebound in deal flow. Executive Patrick Maciariello indicated that while the 2025 strategic plan for Lugano is not finalized, they are evaluating several locations, including internationally, and guessed they might open 'maybe two' new stores next year.

Robert Dodd highlighted Lugano's growing concentration, now one-third of EBITDA, and asked how the company plans to manage its significant capital needs without it dominating the portfolio. He also questioned if pursuing smaller healthcare deals would accelerate the need for a creative solution for Lugano.

Answer

Executive Elias Sabo acknowledged the 'high-class problem' of Lugano's concentration, driven by its exceptional return on invested capital. He stated that its share of CODI will likely grow unless they pursue creative solutions, mentioning historical examples like divestitures or partial public offerings. Sabo also noted that another path to diversification is through further acquisitions in any of their verticals, which they are actively pursuing while balancing leverage. He clarified that they are looking at both large and small deals in healthcare.

Robert Dodd raised concerns about Lugano's growing concentration, noting it reached one-third of total EBITDA and is a significant consumer of cash. He asked how the company plans to manage this concentration and whether pursuing smaller acquisitions in other verticals might accelerate the need for a creative solution for Lugano.

Answer

Executive Elias Sabo acknowledged the situation as a 'high-class problem' driven by Lugano's exceptional return on invested capital, making it difficult not to fund its growth. He stated that the concentration will likely increase unless CODI pursues creative options like a divestiture or a special financing structure, similar to past strategies. Sabo also clarified that another way to manage concentration is through further acquisitions in any of their verticals, not just smaller healthcare deals, which would help diversify the portfolio.

Asked for details on the sources of the business turnaround at PrimaLoft and BOA, and inquired about future international expansion plans for Lugano.

Answer

The turnaround at PrimaLoft is driven by a mix of new products and customers in the performance segment, as well as a general supply chain improvement. BOA's rebound is roughly half from new SKUs and half from existing SKUs taking more market share. The company is not willing to name specific future international locations for Lugano but confirmed that other cities have been scouted.