Blue Owl Capital Corporation - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to the Owl Rock Capital Corporation first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Dana Sclafani, Head of IR. Thank you. You may begin.

Dana Sclafani (Head of Investor Relations)

Thank you, operator. Good morning, everyone. Welcome to Owl Rock Capital Corporation's first quarter earnings call. Joining me this morning are our Chief Executive Officer, Craig Packer, our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, and other members of our senior management team. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statements.

Certain information discussed on this call and in our earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. ORCC's earnings release, Form 10-Q, and supplemental earnings presentation are available on the investor relations section of our website at owlrockcapitalcorporation.com. With that, I'll turn the call over to Craig.

Craig Packer (CEO)

Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are pleased to report another quarter of very strong results driven by continued growth in earnings and strong credit performance. Our net investment income for the first quarter was $0.45 per share, a $0.04 increase from the prior quarter and a $0.14 increase compared to a year ago. This is a new record quarterly NII for the company. I want to start by putting this strong quarter in context. Going into the third quarter of last year, we were confident that rising rates and continued credit performance were going to drive significant improvement in earnings. As a result, we increased our regular dividend by $0.02 and added a formulaic supplemental dividend to our quarterly dividend structure.

We recognized that we would significantly outperform the regular dividend in a rising rate environment and wanted to create a predictable mechanism to share that upside with shareholders. Compared to the second quarter of 2022, the average base rate in the portfolio increased roughly 300 basis points, the NII has grown by over 40%, which has driven the growth in our supplemental dividend. For the first quarter, our board approved a supplemental dividend of $0.06 per share, which is an increase of $0.02 from the prior quarter. This is in addition to our previously declared $0.33 regular dividend, which results in total dividends of $0.39 for the quarter. In total, this represents an annualized dividend yield of over 12% based on the current share price, which we believe is very attractive in today's market.

We also delivered an ROE of 12.1% for the quarter. We would expect to deliver an ROE in excess of 12% over the full year based on our current outlook for rates and credit performance. Our continued earnings growth is complemented by the strength of our portfolio. Net asset value per share increased to $15.15, up $0.16, or 1% from the fourth quarter. The majority was driven by overearning our dividend by $0.08 and by roughly $0.08 of net realized and unrealized gains in the portfolio. The average mark on our debt positions this quarter increased to 97.6% from 97% last quarter. The primary driver of this change was the improved marks on certain debt investments which were restructured during the quarter.

Excluding those, the average change in the mark on the remainder of the debt portfolio was roughly 15 basis points. We also benefited from the increase of the mark in the equity investment in our senior loan fund, reflecting improved public market loan trading levels. In addition to higher rates, our results were driven by the strength of our credit quality, which is reflected in our very low non-accrual rate, which stands at just 0.3% of the fair value of the portfolio, with only two names on non-accrual as of quarter end. We are very pleased with these results and believe we are in a position to maintain this level of earnings power and credit performance in today's environment. That said, we continue to expect and are prepared for more challenging conditions in the back half of the year.

Like many in the market, we have been anticipating a shift in consumer demand on the back of the higher rate environment and a subsequent contraction in the economy. We remain vigilant and are proactively analyzing our portfolio. Similar to last quarter, we have not yet seen any early signs of challenges across our borrowers who continue to deliver stable operating performance. Revenue and EBITDA are growing at a modest, albeit slowing pace. Many of our borrowers are experiencing improved profitability as a result of receding supply chain disruptions and lower input costs. We also take comfort that our portfolio is primarily comprised of senior secured first lien investments with low loan-to-values across companies that have strong financial sponsor backing. We are closely monitoring the interest coverage levels of our borrowers.

As we expected, reported interest coverage continued to decline, finishing the quarter with a weighted average coverage ratio of 2.2x. We fully recognize that the current rate environment, as it works its way through borrowers' financials, will reduce interest coverage levels over the course of the year. We believe average interest coverage on our portfolio will trough around 1.5x in the second half of this year. This will undoubtedly pressure liquidity at some borrowers more than others. We believe we have good visibility into the small number of borrowers which could be most affected, and therefore, we think that these challenges will be manageable. As we've said before, most of our borrowers benefit from financial and operational support from sophisticated financial sponsors.

Sponsors are also preparing for a tougher environment later in the year, and we've seen sponsors positioning their companies more defensively. This includes cutting costs, putting projects on hold, and shoring up liquidity. Lastly, when these situations do get more stressed, we have the tools in place to ensure that we are in dialogue early and often with borrowers and their sponsors. This information flow and our strong documentation and covenant protections ensure that we have a seat at the table at the earliest signs of trouble. We can then work with the sponsors who are generally incentivized to put in additional capital to provide near-term support in order to protect the longer-term value of their investment. For these reasons, we believe we are well prepared for further challenges to come.

As we've said before, while we may see increased levels of stress, we believe defaults or potential losses will be manageable and will be more than offset by the continued strength of our earnings across the balance of the portfolio. We are proud of the highly diversified and well-insulated portfolio we have built. Our borrowers have the advantages of size, scale, and sponsor support as we enter a potentially more challenged environment, and we believe this will serve us well. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Jonathan Lamm (CFO and COO)

Thanks, Craig. We ended the first quarter with total portfolio investments of $13.2 billion, outstanding debt of $7.4 billion, and total net assets of $5.9 billion. Our NAV per share was $15.15, a 1% increase from our fourth quarter NAV of $14.99. This increase was driven by the continued strong performance of our borrowers and our continued over-earning of the dividend. We continued to see the impact of the broader slowdown in M&A and refinancing activity on new investment activity across the market. Funded activity for our portfolio remained modest at roughly $94 million, which reflects the low repayment activity we continue to see. Turning to the income statement, we are pleased with the continued strength of our earnings.

We believe this quarter's NII represents a sustainable level in the current rate environment. We could see further upside if repayments pick up or dividend income from our strategic equity investments and the senior loan fund increase. Conversely, we could also see a decline in NII if rates drop or non-accruals increase. Although we do not currently see evidence of either happening in the near term. As a result, we believe that we will be able to deliver ROE in excess of 12% for the year and provide attractive dividend income to our shareholders. We have also continued to work towards our previously announced repurchase target of $75 million through the combined buying power of the company's share repurchase program and the Blue Owl employee investment vehicle.

As of May 10th, 2023 an incremental $22 million of ORCC stock was purchased, bringing total stock purchase to $74 million at an average price of $12.22, of which $49 million was repurchased by the company. For the second quarter of 2023, our board has declared a $0.33 per share regular dividend, which will be paid on or before July 14th, 2023 to shareholders of record as of June 30th 2023. Our board also declared a supplemental dividend of $0.06 per share for the first quarter of 2023, which will be paid on June 15th to shareholders of record on May 31st 2023. As a reminder, we instituted the supplemental dividend on the back of our continued earnings momentum to ensure that our shareholders benefit from the higher rate environment.

We expect to continue to evaluate our dividend policy going forward to ensure we are striking the optimal balance of sharing upside while also protecting the stability of the dividend across all market environments. We have a flexible balance sheet with a well-diversified financing structure. We ended the quarter with net leverage of 1.21x, largely unchanged from where we ended the prior quarter and within our target range. We also had liquidity of $1.7 billion, well in excess of our unfunded commitments of approximately $940 million. This quarter we saw some stress in the market as the banking sector crisis played out. In response, our financing team rigorously analyzed the impact of the number of potential outcomes on our liability structure.

We found that we had no material exposure to the affected banks, and we saw no impact to our fund operations. We believe this highlights the quality of our balance sheet and the benefit of having diverse funding sources. We deliberately built our balance sheet to have a significant amount of unsecured bonds, over 50% of our liabilities today, and our revolver is made up of a large, diversified group of 19 lenders led by large global banks. This allows us to have material over-collateralization on our secured facilities, and we have structured those facilities to have limited mark-to-market exposure. We have over 60 unique finance partners across our secured facilities. In addition, our weighted average cost of debt remains low at 5.2%, and we have no near-term maturities.

For these reasons, we remain pleased with the strength of our liability structure and believe it will serve as a competitive advantage, providing the portfolio with flexibility and durability across market environments. With that, I will turn it back to Craig for closing comments.

Craig Packer (CEO)

Thanks, Jonathan. To close, I'd like to touch on the current market environment, which remains a very attractive one for direct lending. With the public market mostly unfavorable for new issuance, we continue to see direct lenders financing nearly all the deals that are coming to market. These opportunities are attractive because they are for high-quality borrowers with enhanced spreads, documentation, and leverage levels. As we've noted before, given continued low repayments, ORCC is currently benefiting from this environment largely through amendments and other repricing events, which continue to help increase the overall spread on our portfolio. Our growing incumbency positions are also helping to drive additional deal flow in a slower M&A environment. More broadly, recent volatility in the credit markets and general capital constraints have underscored the benefit of scale for direct lending platforms.

Given the potential challenges to come over the near to medium term, we believe that the market environment over the next couple of years will favor larger platforms like ours. Size and scale are increasingly important when it comes to fundraising, deal flow, and access to financing, as well as hiring and retaining top talent. We believe that the strength of our platform will be even more apparent during this time. When conditions are more challenging, people naturally gravitate to the stability and security that larger platforms provide, and we expect to be a beneficiary of this dynamic. Our competitive positioning today is as strong as it's ever been because of our scale and deep relationships with sponsors. We believe that sponsors and borrowers value our capital and look to us as a preferred partner for financing solutions.

Before we open it up for questions, I wanna spend a few minutes on our upcoming Investor Day on May 24th. This is our first Investor Day, and we're excited to have the opportunity to discuss ORCC, as well as our other BDCs in more detail to highlight what differentiates our direct lending platform. We have a full day planned, including sessions with senior members of our investment team, discussing our approach to origination, underwriting, and portfolio management to provide further insight into our disciplined approach and how we have built our exceptional track record. We will also cover why we believe ORCC is well positioned to deliver attractive returns through various market cycles and how the stock offers a compelling total return opportunity. For those of you that are newer to our story, ORCC trades around 85% of net asset value.

Some of our most comparable peers trade around 100% of net asset value. As a result, ORCC offers not only the opportunity for an attractive dividend yield, but also the potential for capital appreciation to net asset value if the stock is able to trade in line with those peers over time. We believe the current environment is one where our portfolio will not just fare well but will outperform. As we've noted before, we are prepared for conditions to get tougher from here but remain firm in our belief that any challenges will be manageable. This is because we've been extremely disciplined on credit selection and believe our portfolio will continue to perform very well and generate strong returns. We have also been proactive in fortifying ORCC's balance sheet with diversified financing sources.

We seek to maximize flexibility and have locked in low-cost debt with no meaningful near-term maturities. I look forward to seeing many of you at the upcoming investor day and hope that you'll come away from the event as confident as we are in our process, our people, and our strong credit performance. On behalf of our entire team, we look forward to sharing more on why we are so excited about the future of ORCC. With that, as always, thank you for your time today. We will now open the line for questions.

Operator (participant)

Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we pull for questions. Our first question comes from Casey Alexander with Compass Point. Please state your question.

Casey Alexander (Managing Director and Senior Equity Analyst)

Hi. Good afternoon. Or good morning. I have two questions. One, I heard your comment about expecting the interest coverage ratio to decline to 1.5x the second half of the year. I didn't hear what it is currently.

The second part of my question is, what are the inputs that went into that in terms of your assumptions? How much of that is expected company performance versus how much of that is expected rate development?

Craig Packer (CEO)

Sure, Casey. Good mornixng. It's 2.2x reported, if you will, through the first quarter. We think it's gonna trough at 1.5x in the back half of this year. We did do some analysis around performance, and it does bake in the impact of a moderating economy. We expect the economy to weaken, and so we baked that into that number. The most significant impact is higher rates. I don't have a precise number for you, but if I had to guess, it's 75% rate.

Casey Alexander (Managing Director and Senior Equity Analyst)

Okay. Thank you. My second question is, Walker Edison was restructured during the quarter, and yet you chose to keep it on non-accrual. Now, I recognize that at least based upon the way I read the schedule of investments, that it's 100% PIK right now. Still, most of the time when something is restructured, you know, usually it comes off of non-accrual. I'm curious at what your thinking was there.

Craig Packer (CEO)

Yeah. No, it's a good observation. I think it speaks to, you know, we try to be very thoughtful about every decision in investment when we put it on non-accrual and evaluate its prospects. You're right, we restructured this position. Typically, we will restructure a position such that the remaining debt will be, you know, a par instrument, if you will, and on accrual. In the case of Walker, as a reminder, this is a business that makes ready-to-assemble home furnishing coffee tables. It was significantly benefited from COVID and stay at home and has seen that reverse, post-COVID. In addition, there have been some supply chain issues.

The business, although we did restructure the debt, and took a significant loss, the business continues to face challenges. We felt at this point, given the challenges that it's facing, that it was prudent to keep it on non-accrual. You know, this will be a longer road back than some of our... You know, we haven't had a lot of troubled investments, but the ones we've had have been quite quick to respond. This one's gonna be longer, and we felt that the right based on, our judgment of where the company sits right now, it's best to keep it on non-accrual. We hope to see improved performance and we'll evaluate it quarter by quarter.

Casey Alexander (Managing Director and Senior Equity Analyst)

All right. Thank you for taking my questions.

Craig Packer (CEO)

All right. Thanks, Casey.

Operator (participant)

Our next question comes from Robert Dodd with Raymond James. Please state your question.

Robert Dodd (Director)

Hi, guys. Congrats on the quarter. Jonathan mentioned the bank disruption and the fact that the liability side slide. On the asset side, I mean, something like Wingspire Capital, where you've been putting in more capital. Obviously, they do working capital lines, they do equipment financing, all areas where regional banks are typically big players and maybe less so going forward. Should we expect arguably better performance from Wingspire and maybe an acceleration in capital invested in that vehicle, given its target market seems to be moving in a favorable direction for them?

Craig Packer (CEO)

As you know, we've been really pleased with the performance in Wingspire. You know, as a reminder, we built that business organically working with a very experienced management team. You know, it took a few years for them to sort of hit the momentum that they're at now. It's performing quite well and delivering very attractive dividends and ROE for ORCC. You know, they're, you know, we talk to them regularly, and I think they're seeing good market conditions already, just given the environment. We do expect to continue to provide additional capital to Wingspire Capital as they find opportunities. It stands to reason that if regional banks pull back from credit support, that will provide additional opportunities for Wingspire Capital.

I don't think we've seen that effect yet, but it stands to reason we will. In addition, generally in a weaker economy, you know, companies will turn to asset-based financing more frequently. I think that I agree with the supposition of your question. There'll be more opportunities for Wingspire Capital, and we can put more capital in it and earn really attractive returns.

Robert Dodd (Director)

Okay. I appreciate that. Thank you.

Craig Packer (CEO)

All right. Thanks, Robert.

Operator (participant)

Your next question comes from Ryan Lynch, KBW. Please state your question.

Ryan Lynch (Managing Director)

Hey, good morning. First question I just had, have you seen any sort of pullback in funding in the CLO markets or any sort of slowdown in funding in the CLO markets with the sort of disruption that we've seen in the banking sector? Or is that market, you know, been functioning kind of the same kind of pre-banking crisis versus post-banking crisis?

Craig Packer (CEO)

I'm not sure if you're asking about how we are using CLOs to finance our portfolios or you're just talking about the general BSL CLO market.

Ryan Lynch (Managing Director)

Yeah. Yeah, I'm talking about the general BSL market. Obviously, you know, there's been a big shift in loans to the direct lending marketplace. you know, that's just probably gonna continue. I'm just wondering if there's further disruption in the CLO, you know, funding market-

Craig Packer (CEO)

No, I think.

Ryan Lynch (Managing Director)

Is that sort of settled?

Craig Packer (CEO)

I think that, I think that market is functioning fine. I don't think it's the strongest CLO market we've seen, but it's a, it's a functioning market. We have been utilizing it. I think it's a little more expensive, but it's, it's open. It's not seeing any significant disruption. If anything, in the last couple months, you've seen a nice rally in BSL and strengthening conditions overall in that part of the market. I don't think it's an area of weakness or an area of concern. If anything, you know, functioning, you know, fine with upside from here, I think would be my characterization of it. I don't see it as a particular stress point if that's what you're asking.

Ryan Lynch (Managing Director)

Okay. My other question was, obviously we're in kind of a difficult marketplace as far as just the economic impacts are hitting some industries greater versus others, and some industries actually have tailwinds. I would just love to hear, as you kind of look at your portfolio, and I know each individual business has probably idiosyncratic things that affect each portfolio company you invest in, but from a higher level, is there maybe one industry in your portfolio that's maybe outperforming the rest of the group and performing really well in this current economic environment? Is there any industry that's maybe underperforming or has potential headwinds given some of the crosscurrents in the current economic environment?

Craig Packer (CEO)

Sure. Look, I would say overall, most of our sectors are doing quite well. We're continuing to see revenue growth. We're continuing to see EBITDA growth. It's a little bit slower growth, but still growth. We're seeing generally strong performance across all of our industry groups. We continue to feel software is the best sector and performs the best and is continuing to see really strong results, you know, across the board from our software companies. We do a lot in the insurance space as well, insurance brokerage, if you will. That's an area that we like and is not particularly sensitive to the economic cycle, and that performs well as another example of a sector that's performing.

There are individual companies that maybe got impacted to the negative during COVID that are, you know, kind of experiencing a ramp, but I wouldn't call it any particular theme on the positive. In terms of a couple sectors that are maybe, I wouldn't say underperforming, but where there's, you know, a little some pockets of weakness. Certainly in the consumer area, there are businesses that we have that were big COVID beneficiaries that are now seeing, you know, slower demand because, you know, that demand during COVID has moved away. People have ordered, you know, ordered the products or whatnot and aren't ordering as much.

At the same time, you know, there's some buildup of cost pressure in some consumer businesses, that's resulting in some pockets of underperformance in consumer. Walker would be an example, although Walker's got, I think, bigger issues. That would be an example of what I'm describing. Similarly in the healthcare space, a small portion of our healthcare, not all of it, but a small portion, we're seeing pressures on labor costs, either just rising labor costs or inability to get labor that's resulting in more overtime or lower capacity utilization. At the same time, some of those providers are not able to pass through price increases immediately. They've got contracts and the like. Again, this is just a small portion of our healthcare business. I don't want you to draw that observation to all of it.

Those are a couple of examples of parts of our portfolio where, you know, there's some underperformance, but relatively limited in the context of our book.

Ryan Lynch (Managing Director)

Okay. That's helpful. I appreciate the time today.

Craig Packer (CEO)

Thanks, Ryan.

Operator (participant)

The next question comes from Mark Hughes with Truist. Please state your question. Mark Hughes, your line is open. Please unmute yourself. All right, we will move on to the next question. The next question comes from Kevin Fultz with JMP Securities. Please state your question.

Kevin Fultz (Analyst)

Hi, good morning, and thank you for taking my questions. You know, with leverage at your stated target, I know that the level of investment activity was largely driven by matching deployments to repayment activity. I'm curious how you would categorize the investment landscape right now. You know, how attractive are the deals you're reviewing relative to other vintages? Also, if recent turmoil in the banking sector has created even more compelling investment opportunities for Owl Rock.

Craig Packer (CEO)

Sure. You know, we said this last quarter, I'd say again, I think it's probably the best environment we've seen since we were a public company for new investments. Spreads remain elevated. Base rates are obviously high. In addition, we're getting very attractive OID upfront and higher than typical call premiums. You know, what does that mean? We're getting 12%-13% on unitranche versus 7%, 7.5% a year ago. You know, I don't wanna throw this word around lightly, but I think that's pretty extraordinary to be able to earn 12%-13% on first lien unitranche debt at 45% loan to value, I think is extremely good value. The deals we're doing are of high quality as well.

The businesses are of high quality, they're large, and they're leaders in their field. And we're getting good documentation. It's just across the board. The deals that we're doing, I think, are really, really attractive for the portfolio and the funds that we manage that have more capital, you know, we're doing as much as we can in those funds. Great environment for direct lending. The trends, you know, public to private is one driver of deal flow. Add-ons for existing portfolios companies is another. When we see things that we like, we like them a lot. In terms of opportunities from the banking sector, you know, I'm pretty balanced about this. I've been asked it a lot. I think that, you know, we do upper middle market private equity-backed deals.

That's generally not where we're competing with regional banks. You know, we're generally competing with other direct lenders, and we're competing with the syndicated markets and the large banks that are arranging but not holding loans. That's what we compete with. When the regional banks are pulling back, that's not really in our bread and butter. It stands to reason that as regional banks, if they're pulling back, that there may be companies or non-sponsor companies that just have a harder time getting financing. If there's any of them out there that are listening, you should give us a call, and we'd love to talk to you. I would say I don't expect a tremendous amount of that because regional banks are generally not doing non-investment grade loans for the most part. There's pockets.

You know, and the reason I say I'm balanced about it and cautious about it is because as regional banks pull back, it does impact the economy overall, and it impacts conditions for our portfolio companies on who their customers are getting financing from regional banks. There may be opportunities. I've seen others say this could be good for direct lenders. I'm gonna take more of a wait and see approach on that, and just see what is it gonna do to the economy. There may be, there may be select opportunities as well. We'll just have to see how it plays. Overall, I prefer a functioning banking system and a strong economy, and I, you know, I hope we get to that.

Kevin Fultz (Analyst)

Okay. That's really great insight. Just one more. Can you provide an update on portfolio company leverage?

Craig Packer (CEO)

Portfolio company leverage. We talked about interest coverage. Portfolio company leverage is, you know, probably in mid sixes-ish.

Kevin Fultz (Analyst)

Okay, no real change quarter-over-quarter.

Craig Packer (CEO)

No. No, EBITDA, as I mentioned, EBITDA has been, you know, slightly up. Leverage is up. I mean, it's really the interest, obviously, that the interest is actual interest paid is what has moved, and that's why the coverage ratios have moved. The debt to EBITDA is pretty much flat.

Kevin Fultz (Analyst)

Sure. That makes sense. You know, I'll leave it there. Congratulations on a nice quarter.

Craig Packer (CEO)

Great. Thank you.

Operator (participant)

Your next question comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee (Managing Director)

Hi. Good morning. Thanks for taking my question. Obviously, very attractive direct lending markets right now. Wondering if you could share your thoughts on how would you characterize the overall competitive environment, especially if you look back last, like, half year or a year or so. Thanks.

Craig Packer (CEO)

I think it's a good competitive environment. You know, it has been for a while. There are, you know, we consider ourselves, and there's a small handful of lenders in this category, the large platforms that have a lot of capital, resources, relationships, the intellectual capital, the financing to be relevant to do the large, upper middle market deals that we like. There's just a small handful of us that can do those. We, you know, we are finding that we're seeing all the opportunities that are out there, and we're having the opportunity to participate in, you know, the ones that we like. You know, in any one deal, there's gonna be a little back and forth on terms, but I think the market is, it's really a lender's market.

There's not enough capital to do the larger deals. Lenders' bite sizes are down, so it's taking that extra effort to arrange the financing. You know, the marginal lender has the ability to get to sort of price the deal. So I think it's a good competitive environment. I think it's been a good competitive environment for the last year or so. There's always, you know, little ups and downs. There's also been reduced inflows generally in the non-traded space, which has been a, you know, the source of incremental capital into the direct lending space. As that has contracted a bit, it's created more purchasing power for those that have capital like ourselves. Generally good, but deal flow is light as well.

That's the counterbalancing factor. I think, as I said a minute ago, great environment for new investments. That's a reflective of a good competitive environment for us, you know. Obviously, the syndicated market continues to be. It's opening back up, but it continues to be weaker. I think you'll see the banks start to commit to deals. We're hearing that and seeing that, but they're being very cautious on terms. Even as the banks start to come back to the market, I think direct lenders are still gonna have ample opportunities to commit to deals, you know, given cautious commitment levels from banks.

Kenneth Lee (Managing Director)

Gotcha. Very helpful there. Then one follow-up, if I may. Just in terms of the amendment activity you're seeing in the portfolio, were there any out of the ordinary amendment activity that you've been seeing more recently? Thanks.

Craig Packer (CEO)

Nothing out of the ordinary. As we mentioned, there has not been a pickup in amendment activity in terms of volume. There hasn't been a pickup in the nature of the amendment activity. We had, you know, two or three amendments this quarter. That's about what we typically average. You know, and it's the typical kinds of discussions around, you know, with borrowers situation specific. It remains a benign environment from an amendment standpoint.

Kenneth Lee (Managing Director)

Great. Very helpful. Thank you very much.

Craig Packer (CEO)

Thanks, Kenneth.

Operator (participant)

Our next question comes from Mickey Schleien with Ladenburg. Please state your question.

Mickey Schleien (Senior Equity Research Analyst)

Yes. Good morning, everyone. Craig, don't wanna beat a dead horse here. There's been a lot of discussion about the lender friendly environment. I just wanted to follow that up and ask you about whether that's opening up some new industries for you to look at. You know, there's obviously the saying there's no bad deals, there's just bad prices for deals. At the margin, are there sectors that look more interesting to you now, where, you know, pricing is more interesting and sort of gets above your bar and, you know, is providing incremental investment opportunity for the Owl Rock platform?

Craig Packer (CEO)

Thanks, Mickey. I'm not ready to sign off on there. There are no bad deals, supposition. There's definitely bad deals that we would say no to at any price. I think I understand the nature of your question. Look, we have been really consistent, to the point maybe of boredom on the sectors that we like. You've been on our calls and you've heard us say this. We like recession resistant sectors. We like businesses that have annuity-like cash flows. We like businesses backed by private equity in a significant way. Our biggest sectors, you know, software insurance, healthcare, food and beverage have been our biggest sectors every quarter since we started, and it served us well.

It's put us in a great spot in a potentially weakening economy to outperform. We're not gonna deviate from that now. You know, I don't think we'll ever deviate from that. We don't try to zig into sectors that don't fit that credit profile because they're cheap or, you know, we can get, you know, above average returns. You know, we just don't do it. Every so often there'll be a business within a sector that we don't love that has unique characteristics that are not reflective of that sector, and we'll do it. We're not, you know, seeking to change that risk profile in terms of on the investments that we do. You know, that matches up quite well with the private equity firms that we work with.

That's those are the sectors they're most active with. It serves us well. Some of those other sectors, in addition to having just more cyclicality to them, they're also they're sectors that tend to be financed with much higher loan to value because they're more value-oriented sectors for the, for the private equity firms. The loan to value tends to be high, just not where we like to play. Nothing really new to report on that.

Mickey Schleien (Senior Equity Research Analyst)

That's really helpful. I appreciate your comments. That's it for me this morning.

Craig Packer (CEO)

Thank you.

Operator (participant)

Our next question comes from Erik Zwick with Hovde Group. Please state your question.

Erik Zwick (Managing Director)

Good morning. just one question for me today. Curious about your thoughts on the trajectory of the portfolio yield going forward. If we take the Fed, you know, its word at face value, that it's just about done hiking and gonna hold for higher for longer. I realize that the LIBOR and SOFR curves don't necessarily agree with that. If we were to hold in that scenario, I think it would be safe to assume that the majority of the improvement in the portfolio yield is in. Would you still expect maybe kind of a gradual opportunity for improvement as older vintages roll off and you're able to put on, you know, newer fundings and commitments at higher spreads?

Is that a safe assumption or are there other things we should be thinking about as well? Thanks.

Craig Packer (CEO)

Yeah. No, it's a good question. Look, I think, there's still a little bit more benefit from the higher rates, you know, in the next quarter or so. We experienced about a 4.5% base rate in the first quarter. Base rates are obviously at 5% now. I think we've got a little more to go there in terms of benefiting from the higher rates that have already happened on the lag effect. You know, we look at the forward curve and take that to be as reasonable a guess as to what's gonna happen as anything. We would expect, by the end of this year, rates to be lower and certainly by the end of next year, rates to be further lower. That's gonna roll through.

We, even with those lower rates, we're gonna have terrific earnings at ORCC because they're still much higher than they were a year ago. Our spreads are elevated as well. Even in a environment, if you take the forward curve and take it as gospel, we should have very strong earnings this year and next year. I feel really well positioned on that. To your question, can we grind the spread even higher? This is something we've been really focused on. If you've watched us quarterly, we have for the last six quarters really been able to grind spread higher in the portfolio as we rotated out of some lower spread investments.

It's been a very active and deliberate strategy, patient, thoughtful, and we've been able to achieve that. Our average spread today is about 6.70 over. I think that's probably one of the highest in the space. There are some lower spread investments in the book that we did 12, 18 months ago. As you suggest, as they get refinanced, we'll have a chance to replace those with more market spreads. Possibly we could do a bit better. You know, it really depends where market spread, you know, spreads go as the markets strengthen. I don't wanna promise we'll do better. I promise we'll try. But I think our spread is very high already relative to the peers. Again, unitranche today is coming about 650-725 over.

You know, to the extent, I'll just do this math quickly. If we had 10% of the book at 575 over, and we could replace 10% of the book at 675 over, you know, that's 100 basis points. You know, you're talking 10 basis points across the book. You know, we'll I hope so, but we'll have to, we'll have to see how that aligns with where new deals are coming at the time that's happening.

Erik Zwick (Managing Director)

I appreciate your thoughts. Thank you.

Craig Packer (CEO)

Thank you.

Operator (participant)

Our next question comes from Mark Hughes with Truist. Please state your question.

Mark Hughes (Managing Director)

Yeah, thank you. Good morning.

Craig Packer (CEO)

Mark, how you doing?

Mark Hughes (Managing Director)

Based on the trajectory. I'm good. I'm good. Hope you're well. Just a question on the trajectory of new fundings or new commitments versus what gets repaid or sold. As the market opens up a little bit, do those move in parallel, or does one kind of move ahead of the other as the, you know, the cycle progresses, so to speak?

Craig Packer (CEO)

Sorry, Mark. I heard you, but I'm not sure I followed it. Does what move in parallel?

Mark Hughes (Managing Director)

The, just the trend in new commitments versus, pay down.

Craig Packer (CEO)

Yeah. Got it.

Mark Hughes (Managing Director)

As the-

Craig Packer (CEO)

Yeah.

Mark Hughes (Managing Director)

Does one precede the other as we emerge here?

Craig Packer (CEO)

Look, you know, we've got a 0.9-1.25 target leverage. We're towards the higher end of that. I think that's the ideal place to be. We've really would like to stick there. We don't want to exceed it, and sort of, you know, get beyond our leverage target, but we'd like to be at the higher end. Essentially, we're matching new investments to repayments. As we get visibility on repayments, we will try to match up as best we can new investments to take their place. I mean, you can't be totally precise about it because the deals don't happen every day. We're pretty good at matching them up.

Certainly within a quarter, you know, we can match them up pretty well. If we got an environment, where there's significantly elevated repayments, you know, perhaps there'd be a bit of a lag, but, you know, We're a long way from that. A more just modestly increasing repayment environment we would, you know, layer in new deals. I mean, we are doing new investments on our platform weekly, there are opportunities sitting here today for us to put more in ORCC. You know, we're just sizing them to keep leverage, you know, pretty flat, so we can be nimble as the repayment opportunities present themselves.

Mark Hughes (Managing Director)

Understood. Thank you.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. I'll hand the floor back to Craig Packer for closing remarks.

Craig Packer (CEO)

All right. Terrific. Thank you all for listening. I really encourage everyone to tune into our investor day. We're quite excited about it. You're gonna get, I think, a much deeper understanding of our team, our process, a lot of the topics we touched on today. you know, please, tune into it. If you need any help on how to get access to it, you know, just reach out to our team, and we will help you there. Thank you, and have a great afternoon.

Operator (participant)

Thank you. This concludes today's call.