Blue Owl Capital Corporation - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered solid results with GAAP NII per share of $0.42 and adjusted NII per share of $0.40; both exceeded Wall Street consensus, driven by elevated one-time repayment/prepayment income and accelerated fee amortization. Results vs consensus: EPS $0.424 vs $0.398*, Total investment income $485.8M vs $480.1M*; beat driven by $32.1M of unscheduled paydown income and higher prepayment-related fees.
• NAV per share declined to $15.03 (from $15.14 in Q1), primarily due to write-downs on a small number of watchlist names, partially offset by over-earning of dividends; non-accruals improved to 0.7% at fair value (0.8% in Q1).
• The Board declared a Q3 2025 base dividend of $0.37 and a Q2 2025 supplemental dividend of $0.02; adjusted earnings covered the base dividend with ~109% coverage, and spillover remained healthy at ~$0.33 per share, supporting payout stability in a lower-rate environment.
• Management remains confident in credit quality and earnings power; spreads have “troughed and stabilized,” the origination pipeline is led by incumbencies, and synergies/portfolio rebalancing are expected to lift ROE by another 50–75 bps over time, a key medium-term catalyst.

What Went Well and What Went Wrong

• What Went Well

  • “OBDC delivered another quarter of solid earnings and generated a 10.6% annualized return on adjusted net investment income” (CEO).
  • Adjusted NII per share increased sequentially to $0.40 (from $0.39), supported by elevated one-time repayment income ($0.05/share), with supplemental dividend raised to $0.02.
  • Portfolio performance remained resilient: non-accruals improved to 0.7% (fv), debt investments 97.6% floating, weighted average yield at fv 10.6%.

• What Went Wrong

  • NAV per share declined to $15.03 (from $15.14) due to write-downs on a handful of watchlist names; total net realized/unrealized losses of $(79.2)M in the quarter.
  • Operating expenses rose to $266.8M (from $259.6M), reflecting higher interest, management and incentive fees post-merger.
  • Spread compression persists versus last year; management reaffirmed spreads have troughed and stabilized rather than widened alongside muted M&A and a strong syndicated market.

Transcript

Speaker 8

Good morning, everyone, and welcome to Blue Owl Capital Corporation's second quarter 2025 earnings call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mosticchio, Head of BDC Investor Relations. Please go ahead.

Speaker 2

Thank you, Operator, and welcome to Blue Owl Capital Corporation's second quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the second quarter ended June 30, 2025. These should be reviewed in connection with the company's 10-Q filed yesterday with the SEC. All materials referenced during today's call, including the earnings press release, earnings presentation, and 10-Q, are available on the Investors section of the company's website at blueowlcapitalcorporation.com. Joining us on the call today are Craig William Packer, Chief Executive Officer; Logan Joseph Nicholson, President; and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of the company's control.

Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in OBDC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's 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. With that, I'll turn the call over to Craig.

Speaker 4

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered solid second quarter results driven by the continued strong performance of our portfolio. As a reminder, our second quarter results reflect the first full quarter of combined company results following the merger with OBDE that closed in January. In the second quarter, we achieved an ROE of 10.6%, our 12th consecutive quarter of double-digit ROE based on adjusted NII per share of $0.40, reflecting the ongoing strength of our earnings power. As of quarter end, our net asset value per share was $15.03, down $0.11 from the prior quarter. Our portfolio continues to perform well, which we believe is a reflection of our investment approach that emphasizes downside protection by focusing on large, highly diversified, recession-resistant businesses.

The modest write-downs in Q2 occurred on a few companies that have been on our watch list for several quarters, including some that have been impacted by tariffs. None of these are new underperforming names. In fact, given the uncertainty around tariffs, we are quite pleased with how our portfolio is performing, which is in line with our expectations given our business mix. Overall, the fundamental performance across our portfolio remains strong, and we are not seeing any broader signs of stress. As Logan will dive into later, our borrowers continue to experience healthy fundamental trends, including solid revenue and EBITDA growth. OBDC's great credit performance, as evidenced by our below industry average non-accrual and loss rates, is a result of our defensive strategy focusing on high-quality, upper middle market businesses. Next, I want to talk about the current market environment and how we are approaching it.

2024 has been a more challenging deal environment as muted M&A has weighed on overall deal activity. Despite limited new supply and a strong broadly syndicated loan market, the spread pressure we experienced last year has troughed and generally stabilized. That said, our sourcing capabilities, which are enhanced by our scale across both Blue Owl Capital and our credit platform, allow us to continue to generate attractive deal flow. As you've heard me talk about over the past year, we have expanded our broader business into other complementary strategies, including alternative credit and investment-grade credit, as well as data centers and digital infrastructures. With our expanded suite of products across the platform, we're able to access new attractive investment opportunities while also adding financing tools that are valuable to our borrowers and sponsors.

Given our deep expertise in these areas, we're able to better meet the diverse and ever-evolving needs of our partners, which is especially important considering the more muted deal environment we have experienced this year. Our growing solution set has generated novel origination opportunities for our BDCs. While we aren't changing our fundamental strategy at OBDC, we're currently evaluating cross-strategy opportunities, and at quarter end, we formed a cross-platform equipment leasing joint venture. This is an example of how Blue Owl's in-house expertise enables us to explore strategic equity and the creative joint venture investments that have the cash flow and credit profiles to provide consistent income, which is one of the hallmarks of our investment strategy. Following the OBDC merger close earlier this year, we have incremental capacity to execute on these opportunities.

Select strategic equity and joint venture investments enhance our diversification and expand our reach in new investment areas that are unique to the Blue Owl platform and complement our core sponsor deal flow. To close, we believe our experienced team, defensively constructed portfolio, disciplined underwriting, and highly durable funding model have positioned us to deliver strong risk-adjusted returns regardless of what lies ahead. Now I'll turn it over to Logan for additional color on portfolio performance.

Speaker 3

Thanks, Craig. Despite deal activity being relatively subdued in April after the initial tariff announcement, we continue to find attractive opportunities to commit capital in the second quarter. We deployed approximately $1.1 billion of new investment commitments, with $906 million of fundings in the second quarter. We also saw a steady flow of repayments, with $1.9 billion of paydowns this quarter, which resulted in net leverage landing at 1.17 times. As you recall, reducing leverage back down to our target range was a priority following the one-time leveraging event from the merger with OBDE earlier this year, and we now have ample capacity to navigate going forward. As Craig mentioned earlier, our scale and incumbency create a unique advantage, and in the uncertain market environment that persisted throughout the second quarter, the majority of our originations came from existing borrowers.

A recent example of this was Truecordia, an insurance brokerage firm that has been part of the Blue Owl portfolio since 2020. At inception, we provided a creative financing solution that included a cash-paid debt component, plus an intentionally structured PIC component, and a common equity co-investment. In the second quarter, the company completely recapitalized, resulting in the payoff of our term loan, the collection of all accrued PIC interest on that loan, and the realized gain on our common equity position. Additionally, an existing preferred equity investment was refinanced. Overall, the transaction resulted in an IRR in the low double digits and a MOIC of approximately 1.4 times across our entire investment. This is yet another example of how structuring deals with PIC at inception can lead to more attractive returns.

Additionally, given our deep and long-standing relationship with the borrower, Blue Owl was able to provide a new second lien term loan behind a broadly syndicated first lien as the sole lender in that tranche. The transaction highlights the strength of our incumbencies and our ability to provide customized, flexible solutions that deliver attractive risk-adjusted returns for our shareholders. Before we turn to the portfolio, as Craig noted earlier, we formed an equipment leasing joint venture at quarter end. It will allow us to efficiently invest in a diverse pool of high-quality equipment leases with a dedicated leverage facility. We expect it to generate attractive, low double-digit yields once fully ramped, which should be accretive to fund-level ROEs over time. This is yet another example of how we leverage the breadth of the Blue Owl platform to create value for shareholders. Now I'd like to touch on some portfolio metrics.

We believe our long-standing and disciplined approach of investing in a diverse pool of upper middle market businesses and non-cyclical sectors continues to drive strong portfolio results in all market environments. OBDC's average investment represents less than 45 basis points of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio borrowers is $133 million, and weighted average EBITDA is $222 million, up from $120 million and $215 million in the prior quarter, respectively. Our debt portfolio sits at a conservative LTV of 42% on average, which we believe is key to protecting our downside and supporting robust recoveries during challenging times. As Craig William Packer highlighted, the fundamental performance of our portfolio company borrowers remains strong. Revenue and EBITDA increased by mid to high single digits on a year-over-year basis, which accelerated slightly compared to prior quarter results.

Interest coverage increased to 1.9 times based on current spot rates, providing our borrowers with incremental cash flow cushion. PIC income decreased again quarter over quarter, down to 9.1% of total investment income from 10.7% last quarter, primarily driven by refinancings of several PIC investments, including Truecordia, as I mentioned earlier. As we've highlighted in the past, the vast majority of our remaining PIC names were underwritten at inception rather than resulting from credit issues, and these investments continue to perform as expected. Our internal ratings, which range from one to five as an indicator of portfolio health, remain steady, and our watch list was down modestly at cost from the prior quarter. Further, we do not see any material pickup in amendment activity or other signs of material stress. Outside of our watch list, our portfolio is performing well, and our marks remain stable quarter over quarter.

If you were to exclude the handful of names on our watch list where we saw markdowns, the rest of our portfolio marks were flat quarter over quarter at $99.06 a par. Our non-accrual rate as of quarter end was 0.7% at fair value and 1.6% at cost, compared to 0.8% and 1.4% in the prior quarter, reflecting the addition of one small position that has been on the watch list for several quarters. At the time of our first quarter call, we estimated that our tariff exposure was roughly mid-single digits of the portfolio. We're pleased to report that today, with the benefit of more time engaging our portfolio companies, we believe our exposure is narrower than we had previously estimated.

Our borrowers continue to manage these headwinds well, and for the small subset of names impacted by anticipated tariffs, our sponsors continue to provide support and resources to diversify supply chains. In closing, I want to echo the sentiment Craig shared. Our second quarter results demonstrate the continued strength of our portfolio, which is bolstered by our differentiated origination funnel and conservative approach to underwriting. Now I'll turn over the call to Jonathan to provide more detail on our second quarter financial results.

Speaker 1

Thank you, Logan. OBDC delivered another quarter of solid financial performance. We ended the quarter with total portfolio investments of nearly $17 billion, total net assets of nearly $8 billion, and total outstanding debt of approximately $9 billion. Our second quarter NAV per share was $15.03, down from $15.14 last quarter. Turning to the income statement, we earned adjusted net investment income of $0.40 per share, up $0.01 as compared to the prior quarter, driven primarily by an elevated level of one-time repayment income in the second quarter, totaling $0.05 per share, which was about $0.03 per share higher as compared to our three-year average. This was partially offset by lower leverage.

Similar to prior quarters, we over-earned our base dividend, resulting in the board declaring a $0.02 supplemental dividend based on our second quarter results, which will be paid on September 15th to shareholders of record as of August 29th. The board also declared a third quarter base dividend of $0.37, which will be paid on October 15th to shareholders of record as of September 30th. We continue to believe OBDC is well-positioned for the evolving rate environment. Our adjusted earnings covered our base dividend with 109% dividend coverage. Further, our spillover income remains healthy at approximately $0.33 per share and equates to nearly a full quarter's worth of base dividends. We believe having a meaningful undistributed spillover supports our goal of maintaining a steady dividend through volatile and varying market conditions.

Moving to the balance sheet, we finished the quarter with net leverage of 1.17 times, down from 1.26 times, and within our target range of 0.9 to 1.25 times, as we made a concerted effort to lower leverage following our merger with OBDE, as Logan mentioned. Turning to liquidity, we ended the quarter with over $4 billion in total cash and capacity on our facilities, which was over two times in excess of our unfunded commitments. We believe we have positioned our balance sheet with significant capacity to invest as new opportunities come in. During the quarter, we further bolstered our liquidity by raising $500 million in new five-year notes, and we continue to optimize our capital structure post-merger with several refinancings and amendments of our secured facilities.

As a result, we have no material short-term maturities, and our robust liquidity position provides us with more than ample unfunded capacity to meet any near-term funding needs. Overall, we remain very pleased with our results and believe that our balance sheet is well-positioned for the environment ahead. I'll now hand it back to Craig to provide final thoughts for today's call.

Speaker 4

Thanks, Jonathan. To close, I want to reflect on where OBDC and the broader BDC market are today. Over the past year, we saw two trends that have impacted both OBDC and the broader leverage finance markets. First, interest rates declined 100 basis points from their peak as market expectations evolved. As a predominantly floating-rate asset class, this has had a direct impact on our portfolio's earning power. Second, while direct lending spreads have been tighter, spreads have narrowed in all markets. Direct lending still commands a healthy premium to the broadly syndicated loan market, yielding a 150 to 200 basis point premium, which is generally in line with historical averages. Despite these two headwinds, we believe our portfolio is positioned for strong, consistent performance. Absolute returns with direct lending continue to be compelling.

OBDC continues to deliver attractive relative returns, which we were once again able to demonstrate in the second quarter, generating a 10.6% ROE and a 10.4% dividend yield on net asset value. Looking ahead, spreads have generally stabilized. While the rate outlook remains uncertain, the market is expecting modest additional rate cuts later this year. However, even with that assumption, we are confident that we will maintain our dividend level throughout the rest of the year. On the deal environment, we are cautiously optimistic about a potential rebound in activity in the second half of this year. Recent conversations with private equity sponsors have been encouraging, and if these discussions translate into new transactions, they could significantly boost deal flow. Regardless of whether these deals materialize, we are confident that our sourcing capabilities, enhanced by the scale of our platform, will continue to drive attractive deal flow going forward.

In closing, we feel very comfortable with our ability to deploy capital opportunistically and manage leverage appropriately. Our strong track record, combined with the scale of our platform and consistent investment philosophy, positions OBDC to deliver attractive risk-adjusted returns to our shareholders across any economic environment. Thank you for your time today, and we will now open the line for questions.

Speaker 8

Thank you. The floor is now open for questions. If you would like to ask a question, please press star one on your telephone keypad at this time. 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 the handset before pressing the star keys. Again, that's star one to register a question at this time. Our first question today is coming from Brian J. Mckenna of Citizens JMP Securities. Please go ahead.

Thanks. Good morning, everyone. We're a couple of quarters removed now from the merger with OBDE. Where are we in terms of realizing the vast majority of those synergies? On the expense side, those are pretty straightforward. In terms of remixing some of the assets and also optimizing the funding side, I'm just trying to think through if there's any more upside to the 10.5% ROE from here, assuming all else equal.

Speaker 4

Sure. Morning, Brian. Jonathan, why don't you handle the expense and financing side?

Sure. Brian, on the OpEx side, as we mentioned last quarter, the vast majority, really all of that has come through, came through immediately, and we've seen that. We've seen those synergies take effect. On the financing side, it's a little bit of a slower burn just because we have certain financings, in particular on the secured side, that have call dates or reinvestment periods that still need to come. That will occur really over the course, the vast majority of it over the course of the next year or so, but it's happening piecemeal. I would say that the vast majority there has not occurred, and then I'll hand it back.

What do you imply?

About 20%, 25%.

How much ROE from benefit from additional financing synergies?

Another 50 bps.

On the portfolio rotation, that's going to take a little bit of time as well. Part of what we have been planning for as OBDE was not invested to the same extent as Blue Owl Capital Corporation in some of the joint ventures that we have that generate nice return. As we deploy capital into those strategies, we'll be able to essentially true up Blue Owl Capital Corporation on a pro forma basis, which probably is another 25+ basis points of ROE. Between the financing and the portfolio rebalancing, I think there's a potential for another 50 to 75 basis points of ROE improvement over time as those things take effect.

OK, that's really helpful. Thank you both. I appreciate all the detail on just kind of the broader capabilities across your credit platform. You called these out, but in areas like alternative credit, digital infrastructure, et cetera. It's great to hear the positive impact those businesses are having on just creating differentiated deal flow and really additional origination opportunities for OBDC. Is there any way to quantify how much of year-to-date originations or commitments have come from these types of opportunities? Is there a way to think about this mix longer term?

Sure. I think that there's a couple of pieces to this, and I want to sort of separate them out. The first is, you know, Blue Owl as a platform has gotten into new lines of business that just we weren't in previously. As folks, I think, know, but just to highlight, we acquired Ottawa Capital last year, which is in the business of what we call alternative credit, but some will call it asset-based lending. We also got into the business of managing data centers with our acquisition of IPI. Our real estate business has seen tremendous activity in the data center space. The firm as a whole has a much broader opportunity set than ever before. We are going to be selective, but many of those opportunities offer similar cash flow characteristics and return characteristics as what we've been doing in our direct lending business.

We are going to be deliberate about what we would put in OBDC, but we have just a broader deal funnel, and we think that that's valuable in and of itself, especially in an environment where there's just less new sponsor deals. That's very attractive to us. It's early, and I wouldn't, looking backwards for this quarter and the previous quarters, I would say it's very modest because we're just getting that deal flow in place and just now in a position where we can commit to new deals and put them in the portfolios. We've talked a couple of times in the script, we set up an equipment finance JV across our BDCs. Historically, it's had limited impact, but I will tell you the reason why we've mentioned it a couple of times today is we're seeing very consequential inbounds in this area.

I do think going forward, it's something that we will really benefit from. I kind of hesitate to quantify it on the fly, but if I would just sort of cuff it, in the next couple of years, could you see, you know, 10% of the portfolio, 15% of the portfolio in some of these new strategies? Don't hold me to that, but I want folks to know it can be meaningful, but I also want them to know it's not going to dominate our investing. These are really, I think, attractive investments that will fit really well in our BDC and offer attractive risk-adjusted return. Just directionally meaningful, but not change the overall complexion of the portfolio. We'll obviously keep everyone updated quarter by quarter as we start to make these types of investments.

Speaker 3

Brian, to that end, 10% of Q1 originations were into these types of equity and JV investments.

OK, that's great. Thank you, guys. Appreciate all the color.

Speaker 8

Thank you. Our next question is coming from Arren Saul Cyganovich of Truist Securities. Please go ahead.

Thanks. You mentioned you're kind of cautiously optimistic about a rebound in activity in the second half. Maybe you could talk a little bit about what types of deals you're seeing. Are they predominantly M&A activity? Are they refinancing? How open are sponsors to getting deals done rather quickly?

Speaker 4

Sure, I'll start. Logan, you can chime in. Look, I always debate how much to lean in on this comment because we've been hopeful before and been disappointed before, and we don't want to be, you know, we're not trying to lean in too much here. There's been a noticeable pickup in engagement with sponsors in the last 60 days or so that feels a little bit different. If it were to really result in transactions, I think it could move the needle. In terms of the flavors, it's a mix. We've seen inbounds on potential public-to-private activity, so public companies getting taken private, which would be brand new names to the market. Those are really exciting. There is still activity where we're refinancing loans in the public market into the private markets. There's an ebb and flow there.

There are certainly names going the other direction from private to public, but there are syndicated loans that are getting refinanced in our market. There's just, you know, good old-fashioned sponsors looking to potentially sell companies to other sponsors. We continue to see a steady drumbeat of add-on acquisition financing for our portfolio that's been carrying us throughout. I would say those first three buckets or so, there's been enough in each area that gives us some hope that this will translate into increased deal activity in the second half of the year. I'm always a believer, you know, like to see it actually happen versus predicting it'll happen. These deals are moving along in a nice clip, and hopefully things will unstick here a bit.

Got it. Thanks. Your leverage came back down within your target. Can you talk a little bit about where you see leverage heading? Are you going to keep it around this level, or might you lever it up, particularly if deal activity is starting to pick up?

Speaker 3

Yeah, sure. That was intentional. As we noted, we were comfortable at the higher end of our range last quarter, but we've delevered to just under 1.2 times. I think in this range, which is near the top end of our range, is where you'll see us hover in terms of leverage. Very comfortable at this level. The one-time OBDE merger impact is now fully worked through. High 1.15 to 1.20, the high end of our range, I think is a good place to estimate.

Thank you.

Speaker 8

Thank you. The next question is coming from Robert James Dodd of Raymond James. Please go ahead.

Hi, guys. If I can go back to your comment about these other strategies, Craig, I mean, I'll ask you a hypothetical, and you can dodge it if you want. If the platform were to make a new acquisition of a new strategy, you know, tomorrow, what kind of time frame, you know, to onboard it, review it, maybe let it mature a little bit, then look, is it BDC appropriate and then build a structure? I mean, if you made an acquisition tomorrow, it's like you might be onboarding those assets two years from now if they're BDC appropriate? You know, what's the time frame for review of whether something, review and structuring, et cetera, et cetera, whether something's appropriate to add in terms of a new type of strategy to the BDC portfolio?

Speaker 4

The acquisitions we've made are completely integrated and fully ramped. The deal flow is active, and our teams are integrated with those opportunities. We've already done all the work necessary to make sure investments can be appropriate, structured properly, pass muster in terms of allocation policies, set up appropriate coordination. All the opportunities I mentioned earlier, that's all live now. The delay is not from work internally, but just finding deals that work and it takes time for deals to come in, and we commit and they close. It's just the life cycle of the deals at this point, not any holdups. We're live on this now, and we look weekly at opportunities that can fit across the platform.

That's why we're saying we're talking about this, because you're going to see as soon as the third quarter investments show up that are a benefit of what we're talking about here. In terms of your hypothetical, if you see us announce an acquisition at the Blue Owl level, once the deal closes, we're able to integrate and get things up and running really quickly, measured in a month or two. We're a nimble organization. We're ultimately a fairly focused and focused organization. We're in three major credit lines, credit, real assets, and GP stakes. By the time we announce a deal, you should assume we've diligenced it extraordinarily well and understand exactly how it's going to fit and whether it's appropriate, and we can be investing in those strategies, measured in months. Deals just have a cycle to themselves.

I would focus on the deals we've already announced rather than some hypothetical and just say, I think it's a huge positive for OBDC shareholders, that's why I'm highlighting it. These are really attractive risk-adjusted returns, originated and structured by teams with deep, deep, deep domain expertise, and offer low double digit plus ROEs. Robert, you know well, like we've done this before, not at the acquisition level, but we've built joint ventures in aircraft and rail car finance and drug royalties and asset-based lending. These have been very, the creative strategies were very deliberate about how we do them, but they offer additional diversification, additional consistent income, the benefits of scale. I think it's a nice way to allow us to continue to be very disciplined in our core sponsor lending business.

Got it. Thank you for that color. If I get one more on kind of related to the, when we talk about public-private markets, there's always swings at mad about. There's a big sponsor who's talking publicly, or at least talking to Bloomberg, about shifting a fair number of their deals in private credit to the syndicated loan market, which happens to be open right now with pretty tight spreads. Are you seeing anything in terms of overall shifts in terms of share or anything like that? Or is that just another artifact of the noise that we currently see of swinging backwards and forwards between the two, depending on points in the cycle?

I think it's a very healthy traditional market environment. I would say sponsors continue to shift more of their decisions and financing decisions to the private markets, especially for new deals. In terms of the trade balance in one direction or the other, it's pretty balanced. Deals coming from public to private or from private to public. It's a healthy market where sponsors have two good choices, and they're picking. I mean, we've talked about this many times on these calls. There are going to be periods of time, you know, the typical order of affairs is both markets are open and sponsors pick. That's the environment we're in now. There are going to be other periods of time where the public markets are challenged and deal flow will swing to the private markets. This is the way it should be.

Both markets, there's plenty of deal flow to feed both markets. We continue to find that the secular shift is towards direct lending. Importantly, we continue to get a significant premium, better documentation, better diligence. We continue to cherry-pick, we think, the best assets for the private markets. I think it's a healthy, functioning environment that suits us just fine.

Got it. Thank you.

Thanks, Robert.

Speaker 8

Thank you. The next question is coming from Mickey Max Schleien of Clear Street. Please go ahead.

Yes, good morning, everyone. Craig, this question may sound a little basic, but we're getting such mixed signals on the economy, whether we're looking at labor numbers or inflation or GDP growth. I just want to ask at a high level, where do you think we are in the credit cycle?

Speaker 4

Our companies continue to perform well. We talked about in the script, they continue to grow modestly, quarter over quarter, low single digits, more like double digits year over year. I would say generally we continue to see a modestly, sort of expanding economy. I know at one level we have 300 plus portfolio companies at OBDC, and investors will look to us as a barometer. I quickly rush to remind everyone, we are not a microcosm of the U.S. economy. We are heavily concentrated in companies that we think are resistant to a recession, particularly things like software and insurance brokerage, and parts of health care, food and beverage. We are not expecting to be an early warning sign of the U.S. economy and weakness. We have very few cyclicals. When you're reading about tariffs affecting auto, it's just not something that impacts our portfolio.

We have like no auto exposure. I read and consume economic information the same way I'm sure most investors do, and there's concern about the labor numbers and just general impact of tariffs and potential economic weakness. I think the consensus is that growth is slowing in the U.S. I'd say that's not what we're seeing. I hope that if we got in a modest recession, that would have even less impact on OBDC.

If we do get into a recession or things slow down meaningfully, normally we would see spreads widen in that sort of environment. You mentioned, I think, in your prepared remarks that they may have troughed. Do you think that trough is sustainable given the amount of capital flowing into private credit? Are you seeing any signs of more pricing discipline in the market?

My sense is spreads have troughed. I think that they've troughed, and I'm hopeful at some point they'll move, they'll widen off the trough. I think the reason spreads have gotten as tight as they are is only partly related to capital inflows into the private markets. It's also a white-hot syndicated loan market, and that market is at all-time tights. We just talked about it a minute ago, we compete with that market. If that market widens, that will benefit private markets. That market tends to be fickle and cyclical. If you go through a period of time where the syndicated market has some volatility, spreads will widen there, spreads will widen in the private markets, and the deal flow environment continues to be modest.

I would say I'm not predicting it in the micro short term, but I would be hopeful that the next move in spreads is wider, not tighter, as any one of those factors comes into play, more deal flow, cooling public market, or just some capital consumption in the private markets where there's not quite as much capital out there for new deals.

That's very helpful. Thank you for that, Craig. Those are all my questions this morning. Thank you for taking the time.

All right. Thanks, Mickey.

Speaker 8

Thank you. Our next question is coming from Casey Jay Alexander of Compass Point Research & Trading. Please go ahead.

Hi, good morning. Craig, I'm just a little curious on the equipment leasing side. You know, that market is often characterized by lower balance, fixed rate, short duration type loans, which can be difficult to scale, particularly to the scale that OBDC is going to need for it to make a meaningful contribution to NII. It also often takes a large team of people in place to track collateral and things like that. I'm curious how you guys plan to scale that business to something that's meaningful for OBDC.

Speaker 4

The reason we highlighted the equipment finance JV is not because we think it's going to be a massive investment, but to highlight the type of opportunities that we now have, particularly by our acquisition and alternative credit space for equipment financing, joint ventures, or other types of more asset-oriented joint ventures that can benefit OBDC. I think you're right, it'll take time. It'll take time for it to be meaningful. As you know, we've done this before. Wingspire, which is one of the largest investments in OBDC, has a very successful equipment financing business, has a team, and it's a meaningful contributor, an important contributor to Wingspire's results, which OBDC benefits from every quarter.

I would say in the equipment finance business, one thing, and we'll share more detail on this when it's really impactful, so I don't want to spend too much time speculating, but particularly what's going on in data centers is creating the need for massive amounts of capital where you're building out scale data centers and have lots of financing needs for the data center itself and GPUs and the like. You have some of the, you know, literally the most valuable companies in the world that are building these facilities and don't want to have assets on their books, and it's creating very chunky opportunities for attractive, relatively short duration returns from potentially investment-grade counterparties. These are the kinds of things that can be a bit chunkier than the really micro-ticket equipment leasing that you're referring to. It'll be a mix.

I don't want to overemphasize the equipment leasing as being a needle mover for OBDC. What I do want shareholders to understand is that we're taking active steps to leverage our broader capability to come up with ever more ways to diversify our portfolio and create consistent returns, and this will just be one of many tools.

All right, thank you.

Thanks, Casey.

Speaker 8

Thank you. The next question is coming from Finian Patrick O'Shea of Wells Fargo Securities. Please go ahead.

Hey everyone, good morning. Just a sort of market-level question on the non-tradeds. We wanted to ask, given your position in that domain, and of course its importance to direct lending, seeing if you had thoughts on this sort of tail-off of gross inflows. To be clear, industry-wide, post-April Liberation Day, they've continued to tail in May and June. As it relates to direct lending and BSL, if this continues, do you think things can really cool down and spreads can widen not only BSL, but the direct lending premium to BSL, even in a stable market? Could we be hopeful for that, say, in the event that non-tradeds have kind of run their course or there's some kind of fatigue there? Thank you.

Speaker 4

Sure. Look, the picture in the non-traded is really good. I mean, we're continuing to have significant inflows that are really meaningful at Blue Owl in particular. We're a major player in the space, but other platforms as well. You're right, they're not as strong as they were pre-tariffs. You know, order of magnitude, they're off maybe 20%, but I think they're on the direction of recovering that. I think most people at the time of tariffs would have predicted a much more significant drop in the inflows in the non-tradeds. It's been quite resilient. It's all new capital, and so it may not be, you know, maybe not the capital base may not be coming in as fast a clip, but it's net meaningful inflows daily. I mean, we get the numbers daily. We report them monthly.

I think it's proving to be a very durable market that's, you know, frankly, still underpenetrated. I think there's a lot of room to run in terms of additional penetration in the high net worth space in the non-traded funds. I think for OBDC and Blue Owl and OCIC, which is our large non-traded fund, or OTIC, we have a really good balance between our non-traded funds, which are a meaningful part, but it's only a meaningful part. It doesn't dominate our platform. We've got a good balance. It's valuable to have that capital come in. You know, OBDC right now is towards the higher end of its target leverage range. We like having this additional capital in the non-traded funds. It's what allows us to continue to sign up large transactions. I think that picture is a very good one.

I think it really is showing the resilience of that channel, despite what some might have predicted would be more negative. In terms of your question on spreads and the like, I covered this a minute ago. I think that there's three factors that are driving spreads to where they are now: really strong public market, capital formation on the private side, modest M&A. I think if any one of those three were to reverse course, spreads will widen. If two of the three reverse course, spreads will widen meaningfully. I'd say of the three, I'd bet on M&A and the public markets and being towards the higher end of the list, not lack of capital in the private space because we continue to see a lot of interest from clients.

You know, spreads, I'd like spreads to be tighter, I mean, wider, excuse me, but I just always remind investors, we're earning 10% on new investments, on first, primarily first lien, 40+%, $200+ million EBITDA recession-resistant businesses. I continue to think that's one of the most attractive risk-adjusted returns in the market, especially if you think that there's going to be a recession. I'd like spreads to be wider, but the absolute returns and the asset class continue to be strong. OBDC just put up a 10+% ROE. I think that offers really good value to investors.

Awesome. Thank you so much.

Thanks, Finn.

Speaker 8

Thank you. The next question is coming from Christopher Nolan of Ladenburg Thalmann & Co. Please go ahead.

Hi. Following up on Casey's questions on the equipment finance, is this really going to focus on technology, data centers, and so forth? Will the industry mix for this SLF be different than for the BDC?

Speaker 4

Sure. It'll be a diversified pool of leases. I think Craig just highlighted one potential channel where the opportunity set is growing and could be chunky relative to very singular small micro equipment leases. We also see the continued trend of bank balance sheet pullback in the space. Our existing team that came along with our alternative credit team has been in the leasing business for years and has been active in the space. If you look at regional bank pullback, things like healthcare equipment would be another great example. Firms that have large capital spend equipment don't have the benefit of regional bank balance sheets anymore. We think some of these environments for equipment leasing on the higher-end capital equipment side are in a similar place that maybe direct lending was 10, 15 years ago. As banks pull back, institutional capital has to step in.

I would anticipate it to be a diversified pool. There are some areas like data centers or healthcare equipment that we see that could be chunkier, but it should be a diversified pool similar to how OBDC's portfolio is diversified.

As a follow-up question, the recent big beautiful bill, I believe, had accelerated depreciation. You can depreciate 100% in year one. Was that a factor in deciding to go down the equipment financing route?

No, it was not. It was something that we were thinking about well in advance of that.

Great. That's it for me. Thank you.

Thank you.

Speaker 8

Thank you. Our next question is coming from Paul Conrad Johnson of Keefe, Bruyette & Woods. Please go ahead.

Good morning. Thanks for taking my questions. I guess I'd ask, you guys have had pretty meaningful turnover over the last 18 months or so, and potentially a little bit higher than some of your peers. As you're looking at your backbook of loans in the portfolio and then spreads where they're at today, I think your average portfolio spread is about 5.8%. How do you think about the spread differential of today's spreads, which seems like they've troughed at this level? What's left in the backbook? Should we expect to continue to see a little bit of incremental pressure on just general spread compression as things rotate out of the book, or do you think at this point they're close enough that the spread compression is sort of behind us?

Speaker 4

Look, I think the vast majority of it has worked its way through. The sponsors are very, you know, they're very efficient at identifying opportunities to refinance and reduce spread. Look, just to remind everyone, our loans, when we put a new loan in the book, typically it'll have one, maybe two years of call protection where we get a premium. After that, our loans are typically repayable at par. One of the value propositions of direct lending is it's efficient for a sponsor in a loan that we're providing that is performing well and through its call protection for us to be able to have a conversation about, you know, a cost-effective refinancing. That happens. It's a lot easier, frankly, than the public markets. That's one of the reasons why the sponsors like working with us. I think the vast majority of that has worked its way through.

There's probably some modest amount that sponsors are holding off either for call protection or they think they're going to exit a company. I think a lot of it's worked its way through at this point. You've seen that reflected, as you said, in the last 18 months. There's probably a few names, but most of them, I think, are pretty stable at this point.

Got it. Appreciate that. Thank you. As loans potentially refi into the BSL market, your junior capital exposure has declined quite a bit over the last few years. Is there an opportunity there with the Truecordia deal to participate, similar to the Truecordia deal, to participate in a junior capital position as these investments move into the BSL market? Is that a real investable opportunity that you see in the market, or is that more a one-off situation that presented itself?

Speaker 3

Look, I think it is an opportunity. I would characterize the opportunity, though, as closer to the one-off end of the spectrum, given where junior capital is pricing in the public markets as well. If you look at high-yield spreads and the second lien spread environment for syndicated deals, they're at very tight levels. When a deal goes BSL, more often than not, it fully transitions that way. I think our relationship and incumbency and longstanding history with Truecordia was a differentiator for us. I think that mattered quite a bit in this instance. If you look at the amount of discussion around names going back and forth, as Craig mentioned, it's actually pretty balanced, though. I don't want to overplay names going to BSL, not leaving us with a substantial junior capital opportunity.

We're seeing an equal number of names come out of the BSL market and choose the direct markets. We saw substantial volume in the last quarter from names transitioning out of the BSL market. There is a balance between the two. New names, whether it be a new LBO, a take private, new names continue to have that secular shift to choosing direct, which we continue to see, and there hasn't been any shift there. I think the opportunity set remains a very good one. I think the junior capital side, if the public markets stay where they are, I think it'll be more sporadic.

Appreciate it. That's all for me. Thank you very much.

Speaker 8

Thank you. Once again, ladies and gentlemen, if you do have a question, please press star one on your telephone keypad at this time. We'll pause a moment for any additional questions. We're showing no additional questions in queue at this time. I'd like to turn the floor over to Mr. Packer for closing comments.

Speaker 4

All right. We appreciate everyone's interest. We were really pleased with our quarter. I think it was one of the strongest in the industry and continued particularly terrific performance on the adjusted net investment income front, the dividend coverage front, and the return on equity front. I appreciate everyone's interest and look forward to speaking with you again soon.

Speaker 8

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.