Blackstone Secured Lending Fund - Q2 2023

Transcript

Operator (participant)

Good day, welcome to the Blackstone Secured Lending Q2 2023 investor call. Today's conference is being recorded. During today's call, if you need any operator assistance, please press star zero. If you would like to ask a question during today's presentation, please press star one on your telephone keypads. At this time, I'd now like to turn the conference over to Miss Stacy Wang, Head of Stakeholder Relations. Please go ahead, ma'am.

Stacy Wang (Managing Director and Head of Stakeholder Relations)

Thank you. Good morning, welcome to Blackstone Secured Lending Q2 call. Earlier today, we issued a press release with a presentation of our results and filed our 10-Q, both of which are available on the Shareholders section of our website, www.bxsl.com. We will be referring to that presentation throughout today's call. I'd like to remind you that this call may include forward-looking statements which are uncertain and outside of the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the Risk Factors section of our most recent annual report on Form 10-K. This audio cast is copyright material of Blackstone and may not be duplicated without consent. With that, I'll turn the call over to BXSL's Co-CEO, Brad Marshall.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Thank you, Stacy. Good morning, everyone. Joining me today is Co-CEO, Jon Bock, and our CFO, Teddy Desloge. Turning to this morning's agenda, I'd like to start with some high-level thoughts on the market and the portfolio before turning it over to Jon and Teddy to go into more details on the portfolio and our Q2 results. Turning to slide four, BXSL reported another strong quarter, which was highlighted by our record quarterly net investment income per share, an increase in our base dividend distribution, increased net asset value, and continued strong portfolio credit performance. Looking at the details, net investment income, or NII, increased 14% quarter-over-quarter and 71% year-over-year to a BXSL record of $1.06 per share, which represents a 16.2% annualized return on equity.

In the quarter, we also announced a 10% increase to the Q3 base dividend distribution of $0.70 per share to $0.77 per share, which represents an 11.7% annualized distribution on our June 30th net asset value per share. One of the highest among our BDC peers, with as much of its portfolio invested in first lien senior secured assets, and we covered our Q2 dividend by 151%. From a portfolio perspective, we continued our focus on protecting investors' capital. During the quarter, 100% of the investments we made were first lien senior secured, with an average loan-to-value of 43.8%.

As of June 30th, BXSL's portfolio is 98% first lien senior secured, with a 46.5% average loan to value, has a minimal non-accrual rate of 0.14% at amortized cost or 0.07% at fair market value, and has only 1% of debt investments marked at fair value below 90. Our net asset value, which increased to $26.30 per share from $26.10 the previous quarter, reflects portfolio stability. Slide five provides additional highlights on our portfolio activity and strong liquidity position. Second quarter sales and repayments were $465 million, in line with what we communicated on previous calls.

Proceeds from sales and repayments were primarily used to reduce leverage to our targeted range of 1-1.25x. Other proceeds were used for new investments of $117 million. Additionally, we generated $7.2 million of realized gains in the 2Q associated with our exit of Westland. While equity positions only account for 1.2% of the portfolio, we continue to be very strategic about those commitments. For example, inception to date, BXSL cash proceeds from realizations of equity positions total $95 million on a total of $52 million invested across those positions. Westland realized in the 2Q 2023 and Datasite in the 3Q 2022. Looking forward, we expect our deal pipeline to continue to build if economic strength continues to exceed expectations.

Just as Blackstone was early to spot inflation, we are beginning to see it fall across our ecosystem of portfolio companies. For example, within the Blackstone portfolio on a year-over-year basis, input costs rose just 1.7%, shipping costs are now back to pre-COVID levels. As you've heard us say in the past, we continue to expect an economic slowdown due to the impact of sustained higher rates. What does this mean for private credit markets? With the slowdown comes caution and scarcity of capital, resulting in a reshuffling of debt capital providers. As commercial banks continue to retrench, private credit markets continue to expand. Through the first half of the year, private credit managers, including Blackstone Credit, executed 108 of the 120 leveraged buyout deals that came to market.

We see this as a result of the benefits that come with private credit solutions, such as flexibility, certainty, and confidentiality, as compared to uncertainty in the public market. Looking at our activity, the number of deals we considered has more than doubled in the last quarter as private equity sponsors look to deploy capital. We believe these transactions represent a healthy funnel for BXSL to deploy into and are in line with BXSL's core strategy. Predominantly, first lien senior secured exposure in historically recession-resilient sectors we know very well. We believe that we will see deal activity continue to pick up over the remainder of the year. Our weighted average yield on debt investments at fair value increased from 11.4% last quarter to 11.8% at this quarter end, primarily driven by higher base rates.

The yield on new debt investment fundings during the quarter averaged 12%, while yield on assets repaid or sold down during the quarter averaged 11.3%, boosting our weighted average yield in the portfolio. Importantly, base rates on our 99% floating rate portfolio expanded approximately 400 basis points since Q2 of last year. Turning to slide six. We ended the quarter with $9.3 billion of investments, average fund leverage of 1.26x, and ending leverage of 1.15x, down from 1.33x and 1.31x, respectively, last quarter. We also remain well-positioned with $1.8 billion in liquidity, including cash and borrowing capacity, to lean into a growing pipeline.

One of the key benefits of having a scaled platform like Blackstone Credit is our ability not just to participate in deals, but to create and lead them. In 82% of BXSL's portfolio, Blackstone Credit served as the sole or lead lender. We value the ability to drive outcomes, whether on the front end with credit documentation or later in life of the loan, should the company face challenges. Further, being part of the world's largest alternative asset manager with over $1 trillion in assets under management as of June 30, $295 billion of which comprises Blackstone Credit insurance, we have the opportunity to build an investment network which we can offer investors distinct advantages.

For example, we leverage our sector expertise and insights across the Blackstone platform with over 100 senior advisors, 50 data scientists, and 470 employees in technology and innovations, providing valuable perspectives as we make investment decisions and manage our portfolio. Having this data advantage by being part of the largest alternative platform globally is a key differentiating factor, whether it comes in the form of sourcing investment opportunities or diligencing these opportunity in the market or looking at business trends. With over 450 professionals, Blackstone Credit has the scale and bandwidth to form investment opinions in over 3,000 corporate issuers that we currently invest in globally. We also have one of the largest leveraged loan and CLO platforms, managing over $100 billion in liquid credit.

This scale in our liquids business, in addition to our private origination platform, helps drive incumbent deal flow and has led to over $12 billion in new private credit opportunities for Blackstone Credit over the last 2.5 years. Additionally, within BXSL, over 95% of deals we've committed to in the past quarter were issuers with whom Blackstone had a pre-existing relationship. Finally, Blackstone Credit provides more than just capital to our portfolio companies. BXSL borrowers are offered the full access to Blackstone Credit's value creation program. We believe this sets Blackstone Credit apart with our differentiated platform, broad network, and dedicated teams who can partner with portfolio companies to add value after we make a loan. We believe these are important points of distinction, one that complements our strong results and strengthens our ability to continue to drive attractive risk-adjusted returns for our investors.

You see some of that in the numbers today, not just in the returns, which we have previously discussed, but also underlying credit performance. Only 0.14% of amortized cost, or 0.07 of fair market value, of the portfolio is on non-accrual. Just 1% of our debt investments are currently marked below 90, and only 0.22% of our portfolio at cost has asked for performance-related amendments this quarter. The quality of our earnings remains very high, with limited one-time fee-driven income and non-PIK interest accounting for 96% of total interest income. We continue to believe that our focus on credit quality will be reflected in our numbers as you measure those against our peers. With that, I will turn it over to Jon.

Jon Bock (Senior Managing Director and Co-CEO)

Thank you, Brad. Let's turn to the portfolio. Jump to slide seven. As Brad mentioned, we heavily stress our seniority because as the economy slows and interest burdens elevate on businesses overall, we see the top of the capital structure as most defensive for investors. Importantly, 98% of BXSL investments are in first lien senior secured loans. Over 95% of loans are to companies owned by private equity firms or other financial sponsors, who generally have access to additional equity capital to support their companies. Now, the portfolio is highly equitized, with an average loan-to-value of 46.5%. As we often say, it's not just that we're senior in the capital structure. More importantly, we're focused on senior loans with companies of the right size in the right industries.

Focusing on size, our portfolio companies have a weighted average EBITDA of $183 million, relative to $149 million as of 2Q 2022, as we continue to orient the portfolio to larger, more durable businesses. Slide eight focuses on our industry exposure, where we believe investing in better companies, in better neighborhoods, drives strong returns over time. This means focusing on key sectors with low default rates and lower CapEx requirements, such as software, healthcare providers and services, and professional services, which account for over 35% of the investment portfolio. Diving into portfolio quality further, jump to slide nine. We remain steadfast in our approach to invest in larger companies based on the simple belief that larger scaled businesses handle the adversity of economic cycles better than smaller ones. Here's what supports that view.

As this slide shows, the relative risk-adjusted returns of spread per turn of leverage for large deals, as well as middle-market deals, as measured by the Lincoln Senior Debt Index, is effectively the same at 158 basis points. Notice some key differences. Larger companies with over $100 million of EBITDA have grown at over 5x the rate of smaller companies with less than $50 million in EBITDA. Larger companies also default much less often, with a default rate that is less than one-fifth that of middle-market companies, which is why we remain steadfast in our belief that larger-scale businesses handle the adversity of economic cycles better. On slide 10, we can see BXSL's company fundamentals compared to the private credit market, as measured by the Lincoln Senior Debt Index.

As you can see, BXSL's portfolio has a weighted average EBITDA of $183 million, compared to the private credit market average of $87 million. This larger focus has yielded companies with stronger EBITDA growth year-over-year, and also companies that are 30% more profitable. Now, this dovetails into a discussion on interest coverage. Remember, interest coverage is a stat that gets widely shared on other listed BDC earnings calls. As we've mentioned previously, the way it's calculated by BDC managers varies widely. In some cases, certain sectors or types of loans are excluded. In other cases, managers exclude negative EBITDA companies. When we calculate interest coverage, we include all private companies' EBITDA, including those that have borrowed on a recurring revenue loan. Next, we compare our portfolio to the industry database to give a sense of relative portfolio quality.

Let's dive into it. For BXSL, the last 12 months' average interest coverage ratio was 2x, which is slightly higher than the market average of 1.5x. This shows that BXSL's portfolio companies generate greater earnings with which to pay their interest when compared to the broader market average. Now, this difference remains resilient when we run interest rates forward at 5%, which brings our average interest coverage to 1.7x versus the private credit markets at 1.4. We attribute this stability to our focus, again, on larger, more profitable, higher growth businesses. We also hear from investors and other market participants that it's less about the averages and more about the tails. On an LTM basis, BXSL had approximately 2% of its portfolio with an ICR below one.

It's more relevant for investors to evaluate the percentage of one's portfolio below an ICR of 1 on a forward basis using higher base rates. If we flow through base rates of 5%, we can see that we would have roughly 8% of our portfolio with an ICR below 1, compared to the Lincoln database, which tracks the broader market, which is at roughly 17%, more than double BXSL's exposure. To be clear, of that 8% with a 1x ICR at 5% base rates, over 3% would be tied to a single transaction that was structured with a low ICR, given it was a high-growth company with significant level of equity cushion embedded in the deal, and it's exhibited growth year-over-year.

Let's dive into that 17% uncertain, stat once more because I believe it further outlines why our focus on larger transactions is the right one for investors. Note that of the 17% of companies in the private credit market with an ICR below 1, over 70% are companies with EBITDA less than $50 million. We believe discerning investors will be right. Averages won't tell the story of direct lending performance. The tails will. We seek to limit tail risk through our focus on better, larger businesses in historically resilient sectors, and we continue to see favorable results. As Brad mentioned, Blackstone has built a conservative credit culture on a foundation of structural protections for investor capital.

Note that when Blackstone leads or co-leads, the vast majority of our deals have structural protections against asset stripping transactions, and almost none allow for uncapped cost savings or synergies or add backs to EBITDA. That is all materially better than the syndicated loan market. Turning to amendments, we work with our portfolio companies constructively in the regular course to provide an idea scope of what we saw this quarter. We had 85 amendments, of which 78% were related to transitioning to SOFR or other technical adjustments, and 20% were related to M&A or other add-on activity. We saw only two amendments related to performance, which represent 0.22% of our portfolio at cost, or 0.21% at fair market value.

We believe those two amendment discussions were constructive and will ultimately support full recovery on our invested capital. Turn to slide 11. As Brad mentioned, we recently increased our Q3 dividend distribution to $0.77 a share, with the current dividend yield at NAV of approximately 11.7%, well covered by our earnings. This distribution is up 10% from our Q2 and over 50% up since the first quarter of 2019, when we made our first distribution. We believe that speaks to the fund's ability to deliver for our shareholders. With that, I'll turn it over to Teddy.

Teddy Desloge (Senior Managing Director and CFO)

Thanks, Jon. I'll start with our operating results on slide 12. In the Q2, BXSL's net investment income was a record $171 million, or $1.06 per share, which was up 71% year-over-year. Our revenues were up $103 million, or 55% year-over-year, driven by increased interest income, primarily due to higher rates. Payment in kind, or PIK income, represented less than 4% of total investment income. In the Q2, we also realized $13 million of nonrecurring income in the form of accelerated income from repayments and another $5 million in fees, which added $0.09 per share benefit to NII in the quarter, net of the impact of incentive fees.

GAAP net income in the quarter was $145 million, or $0.90 per share, up from $0.47 per share a year ago, despite $37 million of net unrealized losses in the quarter. Turning to the balance sheet on slide 13, we ended the first quarter with $9.3 billion of total portfolio investments, of which approximately 99% are floating rate loans with a weighted average yield at fair value of 11.8%. This compares to $5 billion of outstanding debt with a weighted average cost of just 4.8%. The spread between our floating rate assets and low cost, mostly fixed rate liabilities, provides the company with the potential for additional earnings growth if rates continue to rise.

As a result of strong earnings in excess of the dividend in the Q2, NAV per share increased to $26.30, up from $26.10 last quarter. Next, slide 14 outlines our attractive and diverse liability profile, which includes 64% of drawn debt in unsecured bonds at a weighted average fixed coupon of less than 3%, which we view as a key advantage in this rising rate environment. We maintained our three investment grade corporate credit ratings and ended the quarter with $1.8 billion of liquidity in cash and undrawn debt available to borrow. We believe this provides us with significant flexibility and cushion. While the average fund leverage was 1.26x over the quarter, ending leverage was 1.15x, both down from last quarter.

Based on our pipeline activity, we would expect to remain within our target of 1x to 1.25x through the balance of the year. Additionally, we have low level of debt maturities in the next few years, with only 12% of debt maturing within the next two years and an overall weighted average maturity of 3.6 years. Lastly, near the end of the quarter, we issued $125 million of equity under our ATM, or at the market program, to both large, institutional, and individual investors. This is backed by our pipeline activity in Blackstone's scale and capabilities, which we believe allow us to deploy capital at moments where it's most valuable to drive strong investor returns.

In closing, we believe BXSL is very well positioned to generate earnings in excess of our dividend, as rates on our 99% floating rate investment have continued to reset higher. We remain positive about the outlook, given our defensive portfolio position, built to overemphasize parts of the economy where we see resilience while avoiding areas of risk, balance sheet capacity to deploy into a strong market environment, continued healthy core underlying company fundamentals we see in the portfolio, and elevated earnings power tied to higher base rates. All of this is backed by Blackstone's platform advantage, providing for premier sourcing, resources, and an infrastructure built to protect investors' capital. With that, I'll ask the operator to open it up for questions. Thank you.

Jon Bock (Senior Managing Director and Co-CEO)

Thank you. As a reminder, if you'd like to ask a question, please signal by pressing star 1 on your telephone keypads. If you're using a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment. We'll now go to our first question from Casey Alexander from Compass Point.

Casey Alexander (Managing Director, Senior Equity Research Analyst)

I have two.

Yeah, hi. I have two fairly simple questions. One, Brad, you discussed the gains that you've made on the equity investments, Equity investments are also a very small percentage of the portfolio, which, you know, and investors have taken a lot of comfort in, you know, the very high first lien exposure, particularly in this cycle. Really, what's kind of the sweet spot for equity investments? How much would you grow that sleeve that could lead to, you know, additional incremental NAV accretion in the future, assuming those investments are relatively successful?

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Yeah, sure. Thanks, Casey. You should not expect us to grow that sleeve materially from where we are today. Where we've made equity investments, it's where we strongly believe we are adding some value across Blackstone. If you look at Westland, we provided them with debt capital, growth capital, and we invested in the equity with the view that we could expand them from being a regional player into a national player. Over that short time period, we, we more than doubled the value of our equity. In Datasite, similarly, we took a position in that company on the debt and equity side because we thought we could roll their products out across the broader Blackstone group and drive equity value. It's going to be very, very precisioned on where we invest in equity.

I highlight that on the call because if you look at our platform, we're trying to deliver more than just capital to these companies. We're trying to add value, whether it's through our debt investments and, and helping them, you know, grow the, their equity thesis, or taking a little bit of equity to, you know, get our investors some, some participation in that upside. It's really important as you think about, not just the equity positions, but also as we go through a softer economic period, we are going to be leaning on our value creation team, a lot more than we have, historically.

Casey Alexander (Managing Director, Senior Equity Research Analyst)

All right, great. Thank you. My, my second question is, you know, you have, you had net repayments for the quarter, and at the same point in time, you raised capital, bringing the leverage ratio down to a very manageable level and, and giving you some capacity. What's the real sweet spot for the leverage ratio? Would you like to hold it up, you know, around 1.2 or, or, or somewhere between 1.2 and 1.25 to maximize the, the earnings power of the portfolio, or are you okay where you're at now?

Teddy Desloge (Senior Managing Director and CFO)

Yeah. Thanks, Casey. You know what I would say, so historically, what we've said, target range, 1 to 1.25 times. Per Brad's comments, we are seeing an increase in the pipeline. Pipeline's deals we're looking at is, is up about 2 times over over the first quarter. For the deals we deployed in the, in the, in the last quarter, the, the return on those unlevered is about 12%. We, we also want some capacity to deploy. We think ending at 1.15 does provide provide some of that capacity.

Arren Cyganovich (VP)

All right. Thank you for taking my questions.

Operator (participant)

Thank you. We'll next go to Arren Cyganovich from Citi.

Arren Cyganovich (VP)

Thanks. The increase in investment activity you're seeing in your pipeline, what are, what are the conversations with sponsors that are, you know, seeing, seeing the opportunity for those to start to get a little bit more, I guess, back to normal to some extent?

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Yeah, I would say the driver there, Arren, is around valuation. Taking a bigger step back, if you look at the amount of... We spend a lot of time with advisors, so if you think about our platform, we, we obviously cover sponsors, but we spend a lot of time with advisors, and they're kind of the tip of the spear from a deal activity standpoint, I think, which is why we're seeing probably more, you know, of a pipeline growth than, than others. What they would say is that the, the amount of deals on the shelf that are ready to come to market is the highest that they've seen in, in over a decade. They've been paused a little bit because of uncertainty around financing. They've been paused a little bit around valuation.

With the passage of time, valuations have, the gap between the buyers and sellers has come closer together. Sponsors are starting to be a little bit more active, acknowledging the fact that the cost of capital is quite high. That's why they're adjusting their valuations, they're adjusting their leverage levels. As we think about the pipeline, we'll continue to see add-ons like others. We'll continue to see take privates. The sponsor-to-sponsor activity is where we're seeing the greatest uptick in deal activity.

Arren Cyganovich (VP)

Thanks. That's helpful. Then on the at-the-market issuance, is that something you expect to be, you know, fairly regular when you're trading above book value, or is this just, you know, relative to what you're seeing in the opportunities in the market?

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

I think you can expect it to be a general part of how we raise equity capital on a go-forward basis. There's two major points that sustain a BDC premium above book, you know, one is a steady, stable, and attractive dividend yield, and then two, slowly growing NAV over time. To meet those two goals, you'll want to deploy equity capital or deploy capital in moments-

Jon Bock (Senior Managing Director and Co-CEO)

... we have extremely attractive risk-adjusted return. I know you've heard, several of our colleagues outline the golden moment that occurs in private credit. You can see that we have the opportunity to grow accretively, and so I'd expect it to be a part of what we do on a go-forward basis, while also remaining disciplined with regard to our investment pipeline.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Thank you.

Operator (participant)

Our next question comes from Robert Dodd from Raymond James.

Robert Dodd (Managing Director and Senior Equity Research Analyst)

Okay. Hi, hi, everybody. First, I've, I've got a question on interest coverage. If, if I can, Jon, your color on this has been really helpful in the last couple of quarters. I, I'm just wondering if, if, if all BDCs are from Lake Wobegon or something like that, because the, the number you get from Lincoln, obviously, the 17%, and yours is, is half that. Every BDC that I can recall that has actually disclosed the number has been better than average. You know, I've got my theories on why that is, but any color you can give us on, on what you would attribute that to in terms of the numbers that have been disclosed have generally been the tails in, in the single-digit range.

The industry, and I've seen the Lincoln report, and the industry, numbers appear meaningfully higher than that when they come from a third party.

Jon Bock (Senior Managing Director and Co-CEO)

Yeah. Robert, we appreciate that. The questions that you ask, you know, it's a very consistent question that you want to get to for your investors, but you get a level of inconsistency in your answers because folks try to define it differently. Our major approach was to start by looking at absolutely everything across our portfolio. No exclusions of industries, no exclusions of certain types of loans, you can recall the stats that I, that I outlined previously. Just looking at our stats isn't enough. There has to be a level of market proxy that you can compare it to. So we work closely with the, with the leading index provider in the middle market or in the private credit space, Lincoln, to generate kind of those results.

I, I believe it's really just asking the questions and trying to understand what folks effectively exclude. At Blackstone, you can see complete transparency. We want to provide you all the data so the market can make its inferences on our results.

Robert Dodd (Managing Director and Senior Equity Research Analyst)

I, I appreciate that, color. Thank you. Second question, on, on the pipeline, and, and Brad, you mentioned, you know, likely to be more sponsor-to-sponsor activity, versus, versus maybe follow-ons. So is, is the mix... Do you think the, the, the portfolio gonna shift to m- more growth in new names? And is there anything we can read into the, the, the economics there, right? Because sometimes a, a, a new agreement might have more upfront fees than an add-on, which has some, Most Favored Nation, status in terms of how, how things are structured in terms of fees and, and, and maybe even spreads. So can you give us any color on, on, you know, if, if that is gonna be a shift in the overall mix of the portfolio, and does it have slightly different economics, currently? Things change.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Yeah. Robert. What I would say is, as we work through the end of the year, you will see more names added to the portfolio. Just to give you some statistics around the pipeline, which we highlighted as growing nicely. The average yield of the deal, new deals in our pipeline is, if you take the, the fee and amortize it, is about 12.4%. 12.4%. The average loan-to-value is about 37%. You know, Jon hit on this. When we talk about the golden moment or age in private credit, this is what we're talking about. We're talking about yields that are exceptionally high because of base rates, because of spreads.

We're talking about leverage that is lower because yields are higher, whether you measure that in, in leverage multiples or loan-to-value. Better companies are the only ones that can access capital. You have higher quality assets with less leverage, earning, yields that are almost twice as high as what they were a couple of years ago. This is the moment in private credit where you can drive, you know, equity-like returns, by being senior, first lien in the capital structure. You will see more names, and you will see some add-ons, and we're excited for investors, for BXSL to continue to benefit from an earnings standpoint.

Robert Dodd (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, it is star one for a question. We'll next go to Ryan Lynch with KBW.

Ryan Lynch (Managing Director)

Hey, good morning. Thanks for taking my questions. Nice quarter. First question I had was kind of a follow-up on, on kind of the, the deal environment. You mentioned, you know, the deal activity likely picking up, advisors seeing more, more conversations going on. I'm just curious, in the past, you know, six months or so, deal activity has been down, but the quality of deals have been very high. It feels like there's been, you know, a lot of, a lot of add-ons, but really only it feels like that the highest quality companies are the ones they're able to transact. I'm just curious if going forward, if deal volume or an M&A is gonna pick up, does that mean that there are also...

You expect, you know, kind of, you know, subpar or not as high of quality deals to start to slip in to those M&A processes? So it might actually mean that overall originations-

... may and fundings may actually not pick up because you have to be more selective in the environment? Or do you expect the, the quality of deals to, to sort of remain as high as they have been the last, you know, six to nine months?

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Thanks, Ryan. I would say it's the latter. I think what you're, what you're seeing in some of these deals that have not come to market, the seller was expecting to get, you know, for example, a 22x multiple because it's been growing, it generates a lot of free cash flow, and they were holding on to kind of that valuation. Whereas the, the, the buying community, you know, is factoring in a higher cost of capital, and so is willing to pay 18x. That's a gap. That's 4 terms of, of enterprise value, but obviously, 18x EBITDA would indicate a very high-quality business.

It's, it's that quality and that type of business that we're seeing come back into the market, where the, the seller is willing to accept something lower than their expectation, which was driven by often valuations in 2021 and the first part of 2022. It's-- Ryan, it's really hard for a marginal business to afford 12.4% cost of capital unless they take on de minimis amount of debt. That's what's driving the quality of assets coming into market. It's a higher cash flow business. It's ones that can grow through an economic, you know, period of slowness. We expect that the quality of asset in this rate environment will remain very good.

Ryan Lynch (Managing Director)

Okay. That, that's helpful color. The other one I had was, you know, credit quality is, is, is, is really good in the portfolio. And, and, and Jon, I also really appreciate the, the, the details you gave on, on interest coverage, both from, from your portfolio as well as the, the, the broader industry. I'm just curious, you said you had, you know, 85 amendments this quarter, only two were related to performance. I'm just curious, were those, those amendments that you made this quarter, was it just... Were, were they both related to switching from, from, from cash to, to some level or, or total PIC in those amendments?

Was there any sort of, any sort of, I guess, comfort or, or any sort of giveback provided by the, the private equity sponsor in those deals in order to make those amendments?

Teddy Desloge (Senior Managing Director and CFO)

Yeah. Thanks, Ryan. This is Teddy. I'm happy to take that. Just to reiterate the stats, you are right, 85 amendments. Most of those, 98%, due to SOFR, add-ons, M&A, or other benign activity. Two were, two were, you know, quote, unquote, "performance-related." You know, one was a covenant amendment that came with a material prepayment, and we're actually seeing some improvement in that business. The other was a one-quarter interest deferral. Can't get into too much details on this call, but we've since received some pretty positive news that that will be a full recovery of, of our, of our principal. Both of those marked, you know, above 90, at the end of the quarter. You know, nothing material to point to there.

Ryan Lynch (Managing Director)

Okay. Understood. I appreciate the time today.

Operator (participant)

Thank you. Our next question comes from Kenneth Lee, from RBC Capital Markets.

Kenneth Lee (Managing Director and Senior Equity Research Analyst)

Hi, good morning. Thanks for taking my question. Just given the relatively attractive spread in, in terms on, on your originations you're, you're seeing, wonder if you could just talk a little bit about what you're seeing in terms of competitive activity? Has there been any recent changes? Thanks.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Thanks, Ken. I'll, I'll take that. It's Brad. On the competitive side, you've seen, on the larger end of the market, the competitive dynamic remains very favorable, largely because the public markets have a harder time taking on these new LBOs. Banks are a little bit more reluctant to underwrite, to distribute risk into that market. The large end of the market, where we spend, as you know, a lot of time and energy and focus, to use our scale to our advantage, you know, that part of the market is, remains quite attractive, from a competitive standpoint. Small, mid-sized market, you know, there's more capital that's come into that market, maybe a little bit more competitive.

You know, at the same time, spreads and, and, all-in structure and, and, and documentation, remain fairly disciplined from despite kind of more capital coming into that part of the market.

Kenneth Lee (Managing Director and Senior Equity Research Analyst)

Gotcha. Very helpful there. Then one follow-up, if, if I may. In terms of expectations around investment paydowns over the near term, would you expect that to pick up somewhat in tandem as the pipeline builds up for originations? Thanks.

Teddy Desloge (Senior Managing Director and CFO)

Thanks. You know, in the quarter, we had $465 million of repayments. 2/3 of that was really from two transactions. I would say one quarter is not a trend. We, we view that as fairly high versus previous quarters and the current activity we see on the ground. I think generally, if Brad's comments come to fruition and we do see pipeline convert more through the remainder of the year, we do think that would also lead to, to higher potential re-financings as a result.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Gotcha. Very helpful there. Thanks again.

Operator (participant)

Thank you. Again, ladies and gentlemen, that is star one for a question. We'll next go to Melissa Wedel from JPMorgan.

Melissa Wedel (Executive Director and Senior Equity Research Analyst)

Good morning. Thanks for taking my questions. Actually, a lot of them have already been addressed, but I was hoping you could remind us of how you're thinking about dividends into the later part of this year, particularly with the earnings power of the portfolio so far exceeding even your increased dividend rate in 3Q. Thank you.

Jon Bock (Senior Managing Director and Co-CEO)

Thanks, Melissa. This is Bock. When we think of the dividend distribution, but these are pass-through vehicles, right? The goal is to always ensure that you're distributing and in compliance with RIC tests. I'd start to look at it from a over earnings perspective. We have a very healthy level of earnings relative to the strong dividend that we pay out. Looking into the future, it's that level of conservatism that we feel quite strongly about. It currently is $0.77 dividend and $1.06 in terms of earnings. Both as Teddy and Brad had outlined in terms of portfolio activity, we feel very confident in the level of earnings profile and dividend support that we offer, given this high level of earnings, even to the extent that base rates come down.

The recall is, let's say, cost of capital come down, and as Brad outlined, that's a bit of a limitation to deal activity. As portfolio velocity or repayments increase, so too, you can see the level of earnings power on our book increase as well. We're confident about you. You always want to start with an attractive level, ensure it's well covered from earnings, because you get that benefit that I stated at the beginning. Steady, stable dividend and attractive payout with growing NAV is what equals an attractive premium for the stock over time.

Melissa Wedel (Executive Director and Senior Equity Research Analyst)

Just to follow on there, we did see an increase in excise tax from 1Q into 2Q. Just going forward, should we expect that to be sort of a regular course line item that we should be modeling, or, or would you look to limit that, you know, as you've built up a cushion?

Jon Bock (Senior Managing Director and Co-CEO)

I think it, it would come in the form of cost to capital and really what you're seeing as it relates to the investment environment. Four percent excise tax that you paid a rate-retained capital, effectively, that was undistributed, you find that's an extremely cheap cost of equity. The key is when you retain equity, you need to make sure that you're retaining it in a book that's stable, right? You've seen situations to the other, the other extreme, where capital is retained, but then effectively lost through poor credit performance. If you kind of look at in a forward basis, that's attractive cost capital. It can be redeployed into a book that's earning attractive ROE, and we continue to see ROEs remain strong given where we are. You could likely expect that to stay.

Brad Marshall (Global Head of Private Credit Strategies and Co-CEO)

Melissa, just to maybe add to that, we talk about this a lot. We're in a fortunate position where our earnings are very, very high. If you look at six of the last eight quarters, we've either increased the dividend or paid a special. In each of those, on average, in those quarters, we've had 31% coverage over our dividends. We, we want the investor experience to be at the top of our mind. That's why we talk about it every quarter. That's why you've seen us make changes in 75% of the quarters, and we'll continue to assess that with the board.

Melissa Wedel (Executive Director and Senior Equity Research Analyst)

Thank you, guys.

Operator (participant)

Thank you. There are no further questions. I'd now like to turn the call over to Stacy Wang for closing remarks.

Stacy Wang (Managing Director and Head of Stakeholder Relations)

Thank you. That wraps up our call for today. Thank you all for joining us this morning, and we look forward to speaking to you next quarter.