Sean-Paul Adams

Sean-Paul Adams from B. Riley Securities asked for an estimate of Gladstone Capital's remaining SOFR exposure and the basis points before the majority of its embedded loan floors become active, aiming to understand the pure base rate exposure.

Answer

President Bob Marcotte estimated the average loan floor at approximately 1.25 basis points, noting that with SOFR around 3.70, there's still a material buffer before floors are hit. He detailed that the company's net spread, excluding the base rate, is about 2.50, and that $100M-$150M in incremental net interest margin could offset the first 50 basis points of rate decline. Mr. Marcotte stated that Gladstone Capital is well-positioned to absorb 50-75 basis points of rate reduction through various levers, including fee income and commitment fee savings, and remains confident in its dividend coverage based on the recent reset.

Sean-Paul Adams asked for an estimate of the remaining SOFR exposure in basis points before the majority of the company's embedded loan floors become active, focusing on the pure base rate exposure.

Answer

President Bob Marcotte estimated the average loan floor is around 1.25%, with the average SOFR last quarter at 3.90% (currently 3.70%). He stated the company is well-positioned to absorb at least the first 50-75 basis points of rate decline through net interest margin and commitment fee savings, with additional levers available to support the dividend beyond that threshold.

Sean-Paul Adams from B. Riley Securities questioned whether Gladstone Capital is considering a shift in its portfolio mix towards more second-lien and equity co-investments to enhance overall portfolio yields.

Answer

Bob Marcotte, President, clarified there is no fundamental strategy to change the portfolio mix away from first-lien unitranche debt. He explained that higher yields are achieved selectively through two main structures: first-out, last-out arrangements where Gladstone takes the higher-yielding last-out piece, and second-lien positions behind asset-backed facilities. He noted that straight second-lien deals are generally not prevalent in the lower middle market.

Sean Paul Adams asked for more color on the non-accruals, noting a heavy skew towards healthcare and pharma segments, and inquired about specific workout strategies for these long-standing positions.

Answer

Armen Panossian, CEO and CIO of OCSL, explained that the non-accruals in healthcare and pharma primarily consist of a few chunky, long-standing positions, such as SIO2, which have been in the portfolio for several years. He clarified that these are not new problems but ongoing operational workouts, with capital structures already restructured. The focus is on working with management teams to drive performance, sell assets, fund cash burn, or facilitate repayments, without any significant or monumental changes expected in the near term.

Sean Paul Adams asked for more details regarding OCSL's non-accruals, specifically addressing the concentration in the healthcare and pharma segments, and followed up by inquiring about the specific workout strategies being employed for OCSL's long-standing non-accrual positions.

Answer

Armen Panossian, CEO and CIO, explained that the concentration stems from a few chunky, long-standing positions in the life sciences space, such as SIO2, which are undergoing operational workouts and restructurings, but are not yet ready for exit or accrual status. He noted no new problematic life sciences or healthcare names in recent quarters. Panossian clarified that these are primarily operational workouts, involving close collaboration with management teams to drive performance, sell assets, fund cash burn, or facilitate repayments/distributions, rather than significant capital structure restructurings.

Sean-Paul Adams asked whether the improved portfolio grade and declining non-accruals reflect general improvements in the economic environment or primarily the runoff of specific non-accruals, and also sought Ares Capital Corporation's perspective on a potential bottom for spread level declines in the current economic environment.

Answer

CEO Kort Schnabel attributed the improved credit quality primarily to the runoff of a couple of non-accruals, noting the economic environment is stable and the movement wasn't extreme. Regarding spreads, Mr. Schnabel observed that spreads have been stable for the last three quarters, suggesting a floor has been found, partly due to increasing transaction activity and private credit managers needing to cover dividends. He highlighted that Ares' Q3 originations actually showed modest spread widening, indicating it's not a "race to the bottom" environment for them.

Sean-Paul Adams asked if the improved portfolio grade and declining non-accruals reflect general economic improvements or specific non-accrual runoff, and about the envisioned bottom for spread level declines.

Answer

Kort Schnabel (CEO) attributed the improved credit quality primarily to the runoff of a couple of non-accruals, noting the economic environment is stable. Regarding spreads, he stated they have been stable for the last three quarters, suggesting a floor has been found due to increased transaction activity and BDC dividend needs. He also highlighted ARCC's Q3 originations showing modest spread widening, not a 'race to the bottom' environment.

Sean-Paul Adams of B. Riley Securities asked about Ivy Hill, questioning if a recent shift in gross commitments for first-lien loans signaled a long-term change in its target asset classes or investment strategy.

Answer

CEO Kort Schnabel provided a direct response, stating that Ivy Hill's strategy remains focused on first-lien investments and that the company does not anticipate any strategic changes for the vehicle.

Sean-Paul Adams asked if the company was seeing any thematic patterns in portfolio stress or in specific sectors or industries, based on feedback from companies and analysis of non-accruals and tariff exposure.

Answer

Incoming CEO Kort Schnabel responded that despite continuous monitoring and analysis, the company is not currently seeing any discernible trends or thematic patterns in portfolio stress that they could comment on.

Sean-Paul Adams inquired about the Diligent Delivery Systems investment, noting its upcoming maturity and recent fair value markup, and requested additional color on the company's plans for this position.

Answer

President David Dullum clarified that Diligent Delivery Systems is a legacy debt investment from a prior sale. He stated the company plans to roll over the debt as necessary while management restructuring occurs at the portfolio company, with the ultimate goal of being paid out over time.

Sean-Paul Adams from B. Riley Securities asked if 2026 is expected to be a turnaround point for portfolio growth, given recent net portfolio contraction and anticipated repayments.

Answer

CIO Greg Greifeld and CFO & COO Thomas Raterman confirmed a brighter outlook for 2026 but stressed the current priority is portfolio optimization and diversification, not reckless growth. They explained that as very large loans are repaid, they will be replaced with multiple smaller loans to improve diversification, which may cause a temporary lag in net growth but is part of their long-term strategy.

Sean-Paul Adams of B. Riley Securities asked if portfolio companies impacted by tariffs are successfully passing the increased costs through to the end consumer.

Answer

CEO Stuart Aronson confirmed that companies are attempting to pass through any tariff costs not absorbed by suppliers by raising prices. However, he noted that the ultimate consumer reaction to these higher prices remains uncertain and will become clearer during the upcoming holiday season.

Sean Paul Adams from B. Riley Securities asked whether the tariff impacts on portfolio companies are being passed through to the end consumer.

Answer

CEO Stuart Aronson confirmed that to the extent tariffs are not absorbed by suppliers, portfolio companies are raising prices. He noted that competitors are doing the same, but the ultimate consumer reaction to these higher prices, particularly for seasonal businesses, remains to be seen.

Sean-Paul Adams from Raymond James inquired about the strategy to mitigate downward pressure on credit quality, considering the uptick in non-accruals, potential tariff impacts, and a higher-for-longer rate environment.

Answer

Executive Stuart Aronson detailed a strategy focused on first-lien debt, remediating existing non-accruals like Telestream, and maintaining caution on new deals. He emphasized their extensive analysis of tariff risks and a focus on strong debt service coverage, leading them to avoid cyclical businesses or deals structured with excessive leverage.

Sean-Paul Adams of B. Riley Securities, Inc. asked for more color on the new non-accruals, noting they appeared to be previously restructured assets, and inquired how many other such assets are being monitored.

Answer

Daniel Pietrzak, President & Chief Investment Officer, clarified that only one of the four, PRG, was a legacy (pre-KKR advisor) asset. He explained that the workout team is deeply engaged with each unique situation, with PRG facing another restructuring, KBS being a valuation issue post-stabilization, and 4840 still paying interest but trending towards non-accrual.

Sean-Paul Adams of B. Riley Securities inquired about the reasons for the quarter-over-quarter decrease in non-accruals and the migration of some investments from the highest risk rating (1) to the second-highest (2).

Answer

CEO Michael Sarner explained that the net decrease in non-accruals was primarily due to a large position of approximately $25 million returning to accrual status, which offset a smaller new non-accrual. Regarding the risk rating migration, he suggested it was not due to credit degradation but likely involved a performing company that was upgraded to a '1' in anticipation of a sale that did not proceed, causing it to revert to a '2'.

Sean-Paul Adams requested more detail on the status of two specific portfolio companies, NexCAR and Space Perspective, and inquired about any near-term plans for them given their upcoming maturity dates.

Answer

Chief Credit Officer Ron Cundich stated that discussions with NexCAR regarding a loan modification are ongoing and the company continues to receive investor backing. For Space Perspective, which was added to non-accrual status, he indicated that a transaction is expected to be finalized during Q3 with more details to follow.

Sean-Paul Adams asked about the narrow NII coverage of the dividend, the company's commitment to the dividend, plans for spillover income, and how they would balance the dividend versus NAV in a potential earnings crunch.

Answer

CEO Kyle Brown affirmed a strong commitment to maintaining and growing the dividend, calling it 'BDC 101.' He explained the lower coverage in Q1 was due to a temporary lack of early loan payoffs, which typically adds $0.03-$0.04 to EPS. He stated that building NAV is a current focus given the stock's high yield, which may lead to future special dividends. He concluded by expressing strong confidence in covering the dividend going forward.

Sean-Paul Adams of B. Riley Securities questioned the continued write-downs on the Edmentum position, asking whether this was part of a forecasted unwinding or indicative of negative secular trends in the education technology space.

Answer

COO Laura Holson responded that the write-downs on Edmentum are not related to the company's underlying performance or negative secular trends. She stated that the business itself is stable and well-positioned in a strong K-12 market. The valuation pressure is a result of the capital structure, where securities senior to NMFC's common equity position are accreting value, which modestly impacts the mark on their holding.

Sean-Paul Adams of B. Riley Securities questioned the continued write-downs of the Edmentum position, asking whether this was due to a forecasted unwinding or broader secular trends in the education technology space.

Answer

COO Laura Holson responded that the EdTech market remains strong and Edmentum's underlying business performance has stabilized. She clarified that the write-downs are not due to operational issues but are a result of the capital structure, where senior securities are accreting in value ahead of NMFC's common equity position, which pressures its valuation.

Sean Paul Adams asked for expectations on the growth and earnings run-rate from the MSC adviser (asset management business) and inquired about the implied exit multiples in the lower middle market equity portfolio compared to current market transactions.

Answer

Executive Dwayne Hyzak stated that future growth in the asset management business's base fees will be driven by capital deployment at MSC Income Fund. He suggested Q2 earnings from the adviser would be similar to Q1, with the variable incentive fee being the largest determinant going forward. On valuations, Hyzak explained that the goal of their quarterly process is to reflect fair market transaction multiples, as detailed in the 10-Q. He noted that a competitive sale process, like those for recent exits, can lead to significant multiple expansion above the carrying value.

Sean-Paul Adams requested an update on the non-accrual investment in Quantum IR and inquired about the continued write-downs in Vertex and another portfolio company.

Answer

Executive Edward Ross stated there was no material update on Quantum IR, confirming the team is actively managing the situation and that the investment's valuation reflects its risk profile. For the other two companies mentioned, Ross indicated the valuation changes reflect normal quarter-to-quarter performance fluctuations rather than a significant change in their outlook, describing the businesses as stable.

Sean-Paul Adams asked for an update on portfolio softness, particularly concerning potential impacts from tariffs on manufacturing and industrial companies, and questioned if Fidus has altered its investment selection methodology or target sectors.

Answer

Executive Edward Ross acknowledged ongoing softness in consumer and industrial markets but emphasized the portfolio's overall health, noting that more companies grew EBITDA than declined in Q4. He stated that while some portfolio companies could see margin impacts from potential tariffs, the exposure is not significant, and most have the pricing power to offset cost increases. Ross confirmed there has been no change to their investment strategy, which remains focused on high free cash flow businesses, maintaining reasonable leverage, and ensuring a strong enterprise value cushion.

Sean-Paul Adams asked about the target yield and structure for new deals given the recent repayment activity and whether the current deal flow pipeline is consistent with previous quarters.

Answer

Chief Investment Officer Michael Grisius explained that the pipeline is up slightly despite a challenging market. He emphasized that new deals are priced to be accretive relative to the all-in cost of capital, aided by favorable financing from their SBIC license. Executive Henri Steenkamp clarified that net asset growth occurred in Q4, with the significant net repayments happening in Q3, which generated the large cash balance.

Sean-Paul Adams asked about the significant uptick in repayments versus deployments, the target yield and structure for new deals given the cash on hand, and whether the current deal flow pipeline is aligned with previous quarters.

Answer

Chief Investment Officer Michael Grisius noted the pipeline is up slightly in a tough market and that new deals are priced to be accretive over the all-in cost of capital, leveraging favorable SBIC financing. CFO Henri Steenkamp clarified that the significant net repayments occurred in Q3, whereas Q4 saw net asset growth. Michael Grisius added that access to low-cost SBIC capital allows them to deploy capital accretively even in a tight pricing environment.

Sean-Paul Adams from B. Riley Securities inquired about the recent uptick in repayments, the target yield and structure for new capital deployment, and the current state of the deal flow pipeline compared to previous quarters.

Answer

CIO Michael Grisius stated the deal pipeline is up slightly in a challenging market and that new investments are priced to be accretive over the firm's all-in cost of capital, aided by their SBIC license. Executive Henri Steenkamp clarified that AUM grew in Q4, with the large cash balance stemming from record repayments in Q3, not Q4.

An analyst from B. Riley Securities asked about the specific operational efficiencies being realized from the OBDE merger and the progress toward achieving the previously guided 50-75 basis points of ROE uplift.

Answer

CEO Craig Packer detailed two sources for the ROE uplift: investment-related optimization, such as increasing exposure to accretive strategic equity platforms where OBDE was underweight, and cost structure synergies. CFO Jonathan Lamm added that on the cost side, the company has already realized approximately 10 basis points of operating expense synergies in Q1 2025.

Sean Paul Adams of Value Securities asked if there have been any material negative migrations in internal risk ratings, noting that the ability to capitalize on volatility depends on not having credit issues within the existing portfolio.

Answer

CEO Joshua Easterly confirmed there have been no material negative migrations. He elaborated on the firm's tariff exposure analysis, stating direct risk is limited to about 2% of the portfolio by fair value, with minimal expected impact. Easterly emphasized that the ability to 'play offense' requires capital, liquidity, and bandwidth, and confirmed TSLX has all three because its existing portfolio is healthy.

Sean-Paul Adams inquired about Stellus Capital's leverage strategy for 2025-2026, considering potential tariff impacts and the risk of magnifying credit quality issues.

Answer

Executive Robert Ladd stated that while the company targets 1:1 regulatory leverage, they are currently operating below that level and are cautious due to economic uncertainty. Ladd noted they are in a 'wait-and-see' mode regarding tariff impacts, emphasizing that while most portfolio companies are U.S.-based, they remain cognizant of cross-border risks.

Sean-Paul Adams asked about Morgan Stanley Direct Lending Fund's portfolio concentration in the auto sector, the potential impact of tariffs, and the outlook for M&A activity in 2025.

Answer

CEO Jeffrey Levin clarified that the company's auto exposure is indirect, primarily through service and software offerings to the industry, not direct manufacturing. He stated that while a full analysis of tariff impacts is ongoing, the portfolio's largest sectors, enterprise software and insurance brokerage, are relatively insulated. Regarding M&A, Levin expects a gradual, back-half-weighted recovery in 2025, noting that despite a slow 2024 market, MSDL successfully deployed capital into many new platforms due to its strong sourcing capabilities.

Sean-Paul Adams asked if BXSL has conducted a portfolio review to assess its exposure to potential upcoming tariff impacts, given the defensive but broad nature of the portfolio.

Answer

Chief Financial Officer Teddy Desloge confirmed that extensive work has been done on the topic. He stated that exposure to risks from higher tariffs on imported goods is estimated to be in the "mid-single digits" of the portfolio. He also noted that the firm is now even more cautious on new investments in potentially affected industries like consumer goods.

Sean-Paul Adams asked for an update on the non-accrual assets, specifically confirming the number of remaining non-accruals from the legacy CEF portfolio and the status of their potential resolution.

Answer

President Ted McNulty confirmed that several non-accrual positions underwent restructuring transactions, placing them in a more stable position. He directed the analyst to the earnings supplement, which details the four remaining non-accrual names from the mergers.

Sean-Paul Adams of Raymond James asked for an update on the Rug Doctor investment, which has been on nonaccrual, inquiring about any changes or potential pathways to resolution.

Answer

Co-CEO Bruce Spohler clarified that the Rug Doctor investment is a joint venture with BISSELL, which operates the business. He stated the nonaccrual status is because cash flow is being reinvested into the business rather than being paid out as interest. Spohler suggested a long-term resolution could involve their JV partner, BISSELL, acquiring the remaining interest from SLRC and other BDC holders.