Blue Owl Capital Corporation - Q3 2023

Transcript

Operator (participant)

Greetings, and welcome to the Blue Owl Capital Corporation Third Quarter 2023 Earnings 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 call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Dana Sclafani, Head of Investor Relations. Thank you. You may begin.

Dana Sclafani (Head of Investor Relations)

Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's Third Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer, and our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm. We're also joined this quarter by senior members of our team, including Alexis Maged, our Chief Credit Officer, and Logan Nicholson, who joined the firm in September and served as a portfolio manager for several of our diversified direct lending funds, including OBDC. 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 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 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. OBDC's earnings release, 10-Q and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporation.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. In the third quarter, we saw continued strong momentum, delivering excellent credit performance across the portfolio and another quarter of record earnings. Net investment income was $0.49 per share, reflecting our third consecutive quarter of record NII. This was driven by increased interest income due to higher rates, solid dividend income, and our resilient portfolio performance. These increased earnings translated into an attractive return on equity of 12.7%, in addition to growing distribution for our shareholders. Based on our earnings well in excess of the regular dividend, our board has declared a supplemental dividend for the third quarter of $0.08 per share. Coupled with our previously declared regular dividend of $0.33, this equates to total dividends paid for the third quarter of $0.41.

Reflecting our confidence in both the sustainability of NII and the continued credit performance of our portfolio, our board has also approved a $0.02 increase to our regular dividend, increasing the fourth quarter regular dividend to $0.35 per share. The business is generating record earnings, and we continue to share those earnings with our shareholders. This is the second increase in our base dividend since the second quarter of 2022, and our total dividend of $0.41 for the third quarter represents a more than 30% increase in our total quarterly dividend during this period. Net asset value per share increased to $15.40, up $0.14 from the second quarter. This marks the highest NAV per share since our inception.

Our non-accrual rate remains low at 0.9% of the fair value of the debt portfolio, with just three names on non-accrual, unchanged from last quarter. We continue to demonstrate our ability to resolve non-accruals and protect our principal. Since inception, we have deployed over $25 billion of capital and experienced a net loss ratio of only 15 basis points. Our borrowers' operating performance remains solid, continuing to reflect the strength of the U.S. economy. Consistent with last quarter, our borrowers reported modest quarterly growth in revenues and EBITDA, with many borrowers delivering margin expansion as a result of price increases and moderating inflation levels. Borrowers' performance has grown steadily over the past year. On a year-over-year basis, our borrowers reported revenue and EBITDA growth of roughly 10%-12% for each of the last two quarters.

Our largest sectors, software, insurance, food and beverage, and healthcare, continue to deliver strong results reflecting the durable nature of these industries and the less discretionary services they provide. We believe the portfolio will continue to be resilient and to perform in line with our underwriting expectations. Even still, we are closely monitoring the impact of the higher rate environment on our portfolio. Over the course of this year, we have seen interest coverage levels come down as rates have increased, with coverage moving from 2.3x to 1.8x today. While the rate outlook today is higher than it was six months ago, the impact on coverage ratios has been meaningfully mitigated by better-than-expected operating performance.

As a result, although rates are higher, we continue to believe interest coverage ratios will reach trough levels of mid-1x in the first half of 2024. We expect that the vast majority of our borrowers will maintain an adequate coverage cushion and strong operating performance through this period.... The list of borrowers we believe could see more challenged liquidity needs remains small. Our underwriting and portfolio management teams remain very focused and engaged with these borrowers, and we believe any challenges will be manageable across our portfolio as a whole. We continue to be very pleased with the performance of our companies despite the higher rates. 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 quarter with total portfolio investments of $12.9 billion, outstanding debt of $7.1 billion, and total net assets of $6 billion. Our third quarter NAV per share was $15.40, a $0.14 increase from our second quarter NAV per share of $15.26, largely attributed to the continued over-earning of our dividends from NII, as well as the net unrealized gains in the portfolio. Year-over-year, we have grown NAV by 3.7%, in addition to paying out 10.2% in distributions, which equates to a total return of 13.9%. In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio.

OBDC had $500 million of new investment commitments, of which $387 million were funded, offset by the $390 million of repayments for the quarter. The weighted average total yield of the portfolio was 11.8%, up from 10% in the third quarter of the prior year. Turning to the income statement. We earned a record $0.49 per share in the third quarter, up from $0.48 per share in the prior quarter. Based on these results, our board declared a supplemental dividend of $0.08 per share for the third quarter of 2023, which will be paid on December 15th to shareholders of record on November 30th.

For the fourth quarter of 2023, our board has increased our regular dividend to $0.35 per share, which we believe is still a very comfortable level relative to our earnings power, and we expect to continue to declare and pay supplemental dividends quarterly to provide further distributions to shareholders. The fourth quarter dividend will be paid on or before January 12th to shareholders of record as of December 29th. Since we instituted the supplemental dividend in the third quarter of 2022, we have paid out $0.28 of additional dividends per share. This dividend structure provides increased income to our shareholders while also allowing us to build NAV through excess earnings. As a result, we have $0.26 of spillover income through the end of the third quarter. OBDC continues to benefit from its flexible balance sheet and well-diversified financing structure.

Overall, we continue to maintain significant liquidity of $1.9 billion, and we ended the quarter with net leverage of 1.13x, in line with the prior quarter and within our target range. With that, I'll turn it back to Craig for closing comments.

Craig Packer (CEO)

Thanks, Jonathan. I'd like to spend some time addressing one of the most frequent questions we're hearing today: How will borrowers fare in the higher for longer rate environment? Interest coverage is the metric that is most widely cited, and it is certainly a meaningful high-level statistic to assess the health of the portfolio. However, in our ongoing portfolio monitoring, we evaluate borrowers on many different metrics to give us a more comprehensive perspective. In addition to interest coverage, free cash flow, and liquidity expectations, we believe loan-to-value and potential equity owner support are also key considerations in assessing the overall health of our borrowers. Over the course of the year, private equity owners have been proactive in addressing the higher rate environment through cost-cutting initiatives and liquidity management. These include reducing operating costs, improving working capital, and reducing capital expenditures and acquisition spending.

We believe these actions and the sponsor's willingness to support the business with additional equity when needed, are critical components to the preservation of long-term value for these businesses. While we have had a limited number of comprehensive credit amendments this year, sponsors have contributed additional capital in 70% of these cases. An important part of our underwriting assessment is loan-to-value. On average, we invest at approximately 40% loan-to-value. Even in a lower valuation environment, the sponsors retain significant equity investments in their companies. While not contractually required, this means that the private equity firms have a strong economic motivation to continue to support the business. It also means that if we need to take over a business, we believe we will have the opportunity for a very high recovery.

Of course, all this doesn't minimize the amount of time and effort that it takes to work through more challenging situations. We have both the resources and the time horizon associated with our permanent capital base to work with borrowers to provide the operating runway needed to optimize value. We continue to invest in our team with over 115 investment professionals today, reflecting our commitment to ensure we have the resources necessary to work on troubled situations and protect our portfolio.... To close, I wanted to spend a minute on the current market opportunity and our outlook for the fourth quarter and into next year. Deal activity has picked up nicely since the first half of the year, driven by increased refinancings, add-on acquisitions, and new buyout activity. We have seen the reopening of the public markets, which has led to some tightening of spreads.

However, we are still able to earn 11%-12% returns on unitranche loans, which we believe is a very attractive absolute return on new opportunities. Direct lenders continue to provide a compelling financing solution for borrowers of scale. We've had notable success leading the financings on many of the largest deals announced in recent months, including the multi-billion-dollar refinancing facilities for Finastra and PetVet. In many of these larger deals and across our broader portfolio, we typically serve as the administrative agent, which is not just a technical title, but instead is an important role awarded to only one lender on each deal. As the administrative agent, we are in direct dialogue with the borrower and sponsor in shaping the transaction terms and the credit documentation.

In addition, this role allows our team to maintain a frequent dialogue with the borrower over the life of the loan, which gives us the singular best insight into its operating performance and liquidity profile on a real-time basis. Our franchise continues to win this important role across some of the most attractive deals in the market. In recent months, we have committed to seven deals with financing sizes over $1 billion, and serve as the administrative agent on five of them. We believe this reflects the confidence that the private equity sponsors have in our firm. We are also seeing the benefit from incumbency, with roughly 70% of our originations this quarter deployed into existing borrowers, reflecting both our confidence in our borrowers and the power of this growing incumbency, with 187 borrowers in the portfolio today.

Looking forward, we expect deal activity will continue to rebound as valuations and the rate environment stabilize, driving increased interest in M&A by both companies and sponsors. We believe this more robust market environment will lead to a continued increase in repayment activity, which could drive further income for OBDC and allow us to redeploy capital into the new opportunities. Finally, I just want to reflect on OBDC's continued success and what a strong quarter this was. This is our third quarter of record NII. We achieved the highest NAV since our inception, and we delivered an attractive ROE of 12.7%. Credit performance remains strong and is driving consistent earnings and increased distributions to shareholders. We expect that our portfolio will continue to perform well, and we will be able to deliver strong operating results and returns to our shareholders.

With that, thank you for your time today, and we'll now open the line for questions.

Operator (participant)

Thank you. We will now 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 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 poll for your questions. Our first questions come from the line of Brian McKenna with JMP Securities. Please proceed with your questions.

Brian McKenna (Director)

Thanks. Good morning, everyone. So just a question on the dividend to start. You know, coverage of both the regular and supplemental dividends has been running around 100% year to date. So I guess, is this a reasonable expectation for the next few quarters, assuming no material shift in the rate backdrop, and then, you know, also continued healthy underlying credit trends across the portfolio?

Craig Packer (CEO)

Sure, Brian. Good morning. We, you know, we felt really comfortable increasing the base dividend. Obviously, supplemental dividend has worked really well and delivered additional dividends to shareholders. We certainly feel extremely comfortable with this new base, and, you know, I think folks should expect us to continue to pay this going forward with the conditions that you suggested. If the portfolio continues to perform well and rates continue to stay high, you know, we currently have, you know, a little additional room as well. So we feel really comfortable where we are, and if conditions warrant, you know, we will always evaluate whether we should increase it. But I think it's a good representation of where we sit right now.

Brian McKenna (Director)

Got it. Helpful. And then switching gears a little bit. So if I look at the average investment size of your portfolio companies, it's been holding steady around $70 million the last several quarters. You know, that said, I know the broader Blue Owl platform is more focused on the large end of the market, and deal sizes in this part of the industry continue to trend upwards. So how should we think about the size of new investments and then kind of the overall average size of the portfolio at OBDC over time?

Craig Packer (CEO)

Sure. We've been really pleased with the number of large, high-quality, new investment opportunities. I talked a minute ago about $7 billion deals, five of which we're leading. We continue to see this trend in this quarter and in our pipeline with large companies tapping direct lending more and more. So I think that's very exciting, particularly because the quality of the companies are very high. As for our position size, as a platform, when we sign up these new deals, our aggregate investment is quite large, could be $400 million-$700 million in total investment across our platform. When it comes to sizing, OBDC specifically, it's really a function of our capital available at the fund at that moment in time.

The fund is in, you know, squarely in our target leverage level, and so we are sizing new investments, essentially, to replace repayments. And so in this quarter, we got it. I think as perfectly, accurate as you can get it, but it, it can be a little bit, a little bit lumpy. So if we get more repayments and those repayments are of greater size, then we would look to put, you know, marginally larger investments in, in this, in OBDC. Having said all that, you know, I really like the increased diversification we've, we've been able to achieve over the last couple of years, and so, you know, that's also a goal.

So, it, you know, any one, two, or three quarters is not going to change the average size of the portfolio, given the number of names in it. At 187 names, it would take a lot of, a lot of turnover. But I, I think the average size probably won't drift much higher over time, which I think is a good thing, you know, because the diversification is, is very attractive.

Brian McKenna (Director)

Great. Thanks, Craig.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Robert Dodd with Raymond James. Please proceed with your questions.

Robert Dodd (Director)

Hi, guys, and congrats on the quarter. I mean, two questions. I mean, one, your comments on liquidity and interest coverage, et cetera, Craig, are very helpful. I mean, have you seen any change in revolver draws at the portfolio companies? I mean, you disclose all the unfunded commitments, but it's sometimes hard to see when they move from one quarter to the next or whatever, whether those are getting drawn or the commitments are expiring or whatever. So have you seen any change in pattern there, or is it just, you know, regular course of business?

Craig Packer (CEO)

Thanks, Robert. No change in behavior on revolvers, you know, business as usual. You know, companies use revolvers, you know, to fund the short-term liquidity needs of their business and, no change, you know, along in those regards. Our companies are performing really well. You know, I highlighted some of the statistics, but we've been really pleased with the strong operating performance, revenue growth, EBITDA growth, both quarter-over-quarter, year-over-year. And so, nothing of note to comment on revolvers. I think it reflects just the overall strength of the portfolio company performance.

Robert Dodd (Director)

Got it. Thank you. On the second one, I mean, on the outlook, I mean, as you said, I mean, you've you're winning some very large deals. And, you know, are you—do you expect 2024 to kind of... Obviously, it's very hard predicting the future, but do you expect that kind of, you know, to continue that theme, you know, more deals, bigger deals and a rebound in the market? Or do you think, you know, the near term is maybe a spurt of activity by the industry and could it level off again? Any thoughts there?

Craig Packer (CEO)

I'm pretty optimistic that 2024, we'll see a significant pickup in activity. We're, you know, we're seeing that already as we look to the fourth quarter of this year. I noted all that in my comments. You know, our pipeline of deal activity for the fourth quarter looks good, both in terms of repayments and new activity. There's a lot of pent-up appetite from the private equity firms to exit portfolio companies. For those of you that follow the private equity industry, you'll be aware that private equity fundraising is more challenged because private equity firms have not had the opportunity to return capital to their LPs, as much as they would like, given some of the volatility over the last 12 months.

They would like to exit their companies, and that is the single biggest driver of deal activity. And so we're seeing that, you know, beginning to happen. And I think if we get stability in the rate environment, and in the markets, and the economy stays in a reasonable place, I think you'll see a meaningful pickup in M&A activity that will drive new deals for us. You will also see a pickup in refinancings in our portfolio. What we've been really pleased with is there have been some really sizable companies of very high quality that had been previously financed in the public markets, that are increasingly choosing to refinance in the private markets. Finastra, you know, PetVet would be two great examples. Hyland.

This is a, I think, extremely strong trend for direct lenders such as OBDC. These are large companies, and they offer us really attractive risk-adjusted returns, and we're seeing some. I think we're going to continue to see meaningfully more in 2024. So I'm optimistic about deal activity, both in terms of repayments, income generation off of those repayments, as well as deploying capital in high-quality situations.

Robert Dodd (Director)

Thank you.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Ryan Lynch with KBW. Please proceed with your questions.

Ryan Lynch (Managing Director)

Hey, good morning and nice quarter, guys. One of the questions I had was, you know, you've talked a lot about, you know, some large deals that you guys are leading, as well as potentially the pickup in 2024. There's a lot of loans coming from the broadly syndicated loan market that are now going to the private credit route. I think you mentioned some from PetVet, Finastra, Hyland, just an example of a few that you guys are either leading or participating in....

Can you maybe just speak to the notion that some of these large borrowers that were maybe in the broadly syndicated loan market before are choosing the private credit solution versus not being able to access the broadly syndicated loan market, that this is more of a choice versus them not being able to access that, and that's why they're coming to the private credit side?

Craig Packer (CEO)

Sure. Look, you know, it's obviously there's a multitude of factors, but I think that this phenomenon is extremely attractive for private credit. The public loan market, by far the dominant purchaser of those loans are CLOs. In strong market environments, when CLO creation is high, CLOs, CLOs have lots of cash, and can deploy, and they do so, you know, at reasonable spreads. But when those factors are not in place, then the largest buyer base is missing. CLO creation has been spotty this year. There have been times when it's been light, there's been times when it's rebounding, it's bumping around. CLOs need a certain ratings profile, and the rating agencies have a certain rubric that they use to evaluate credits.

And so if you get a certain rating, you can go to the public markets. If you can't, you don't get it for whatever reason, you can't. The other factor is the private equity firms have become sensitized that even when they have a deal that is issued in the public markets, and you get a rating, that over time, they are vulnerable to that rating changing, leaving them with lack of access to the public markets. And that risk is one that they have had to live with, but they no longer have to live with, because the private credit markets, we can do our own independent work, our own credit analysis, and make our own judgments about the creditworthiness. And we don't have that short-term time horizon if there's a downgrade.

So the private equity firms have become more and more comfortable just choosing a private credit solution with the certainty, the privacy, the customization, and the private equity firms are willing to pay a premium for that. So I think this is a great trend for our investors to get access to these extremely high-quality companies. And so it's part choice. In some cases, there may be companies that just don't have the ratings profile, or they're trying to finance in a market where CLO creation is light. You know, generally, private credit, we can also offer customization that the public markets can't offer. We can offer maybe a bit more leverage for a high-quality company. Again, we're financing at 40% loan value.

So I think it's a combination of these things, but I would very much look at it as an opportunity for our portfolio to invest in high-quality businesses. You know, and that opportunity set is growing, and we have more to choose from. And our capital base, as an industry, is allowing much bigger financings to get done in private credit markets. So I think it's very much a sign of strength, and something the sponsors tell us regularly that they like and would like to see more ways to finance in the private markets.

Ryan Lynch (Managing Director)

Okay, that's, that's really helpful background and color on that. The other question I had was, your guys' credit quality has fared really well, you know, as shown by the low non-accruals and really nice NII performance. But you mentioned something on the call that I was curious on, and I want to make sure I got the number correct, but I believe you said with some of the performance-related amendments that you guys have made in your portfolio, private equity sponsors have contributed 70%, of capital in 70% of those cases, I should say. I'm just curious, on the remaining 30% that the private equity sponsor didn't contribute additional capital into, was that because that was not a request that you guys had made?

Was that something that the private equity sponsor was unwilling to do, or was that something that the private equity sponsor maybe just didn't have any capital remaining in that, that fund to do so? Just love to get a little color on that remaining 30%, where private equity capital wasn't contributed.

Craig Packer (CEO)

Sure. You know, every situation is unique. You know, we and I think that's, again, one of the great attributes of private credit. If you have a broadly syndicated loan and there's a credit problem, there's nobody to talk to. Your loan's held by 200 CLOs that you don't know, you have no ability to have a negotiation. You know, we have a bilateral loan. We are. We typically own more than half of it, and the sponsors like being able to call us and discuss what's going on with the company. One of the main things on our list to ask for is equity. If the company, in our opinion, needs some deleveraging, you know, that is always very high on our list.

But there are situations where a company might be bumping into a covenant, where it can comfortably cover its interest, and maybe we priced a high-quality loan at a spread where leverage is mildly elevated, and it doesn't require new equity, it requires some type of economic solution. And so in those cases, you know, we will work out a different type of solution with the private equity firm. Maybe we'll ask for additional call protection or some repayments. There's a lot of ways for us to solve problems with the private equity firms. Equity is certainly one that we really like for obvious reasons, but, you know, it's not the solution in every case.

The general answer to your question is, in our material amendments, we have very, amicably reached, good solutions for us and the private equity firms. It's. You shouldn't read it as a sign that we just had to amend the deal and couldn't get what we wanted and had to suffer through it. That's not representative of the other 30%.

Ryan Lynch (Managing Director)

... Okay, that makes sense. Thanks for the color on that. That's all for me today. I appreciate the time.

Craig Packer (CEO)

Thanks, Ryan.

Operator (participant)

Thank you. Our next question has come from the line of Mark Hughes with Truist Securities. Please proceed with your questions.

Mark Hughes (Analyst)

Yeah, thanks. Good morning. Following on that, the amendment activity, I don't know if you suggested whether you'd seen any trend there, whether it ticked up, steady. Obviously, you're getting a lot of private equity support, but how has the trend been lately?

Craig Packer (CEO)

I would say it's been very light. You know, it's really, you know, like, in a good way. I mean, at the beginning of the year, you know, I was quite cautious, given rates were higher. You know, I had expected by now we would have more stress in the portfolio. We really haven't seen it. You know, it's low single digit amount of amendment activity, garden variety. Amendment activity, we haven't seen any pickup. And I would say it's lighter than anybody, you know, would have expected. I'm quite pleased with it. You know, the stats we gave on sponsor support, you know, really, it's over the course of the last 12 months, really. You know, the last quarter, this quarter was a really light amendment quarter.

You know, sitting here into the fourth quarter, you know, it remains light, and we'll see how the rest of the quarter plays.

Mark Hughes (Analyst)

Yeah. Yeah. The 10%-12% EBITDA growth, I think you suggested for the last couple of quarters, seems pretty impressive. Do you have a sense of whether there's an expectation for that to slow as the Fed does its work? Any nuance on the economy here?

Craig Packer (CEO)

Sure. So just to be clear, the 10%-12% that I referenced was a year-over-year statistic for revenues to EBITDA. And I also referenced in my comments, quarter-over-quarter growth, that growth is in the low single digits. So quarter-over-quarter, continued growth, but at a lower level, year-over-year, more significant growth. I think what we've been most pleased with is just the breadth of the performance. It's really in all of our sectors and most of our companies. And so we're pleased with it. You know, I just want to remind everyone, I don't think of our portfolio as a perfect representation of the U.S. economy.

We are very purposefully focused on recession-resistant businesses that we expect to be stable in most economic environments, sectors like software, healthcare, food and beverage, insurance, et cetera. We are not trying to be an early warning sign for economic weakness. We have almost little to no exposure in commodity sectors like energy and chemicals and home building, and retail and restaurants. These are the sectors that, you know, you would look to as early warning signs. As an example, you know, we had a very significant strike in the auto industry, which has now been settled. I mean, we have literally almost zero exposure to the auto industry in our entire portfolio. So I'm pleased with the performance.

If the economy stays the way it is, I expect that performance to continue. We do have some businesses that are exposed to just general industrial conditions or general consumer demand. And so, you know, we'll watch that closely. If the economy stays strong, the portfolio will do well. If the economy goes and has a downturn, which I think at this point, most economic observers that I follow think we will avoid a recession. But if we had a mild recession, we still think our portfolio will do really well. So, cautiously optimistic, but, you know, we'll feel better, you know, as the next 12 months unfold.

Mark Hughes (Analyst)

Thank you. Appreciate it.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question has come from the line of Erik Zwick with Hovde Group. Please proceed with your questions.

Erik Zwick (Director)

Good morning, everyone. First, just wanted to start with a question. One, I appreciate all of the detail that you put in the slide deck and just looking through a bunch of that. And noticed as I look at the new investments, both the average interest rate and average spread has come down over the past two quarters. But you know, given the increase in base rates, you've still been able to exhibit some increase in the weighted average yield in the portfolio. So just curious, kind of given those you know, the two trends of the declining rates on and spreads on new opportunities, you know, so far is obviously up a little bit from 6.30 to 9.30.

So I would think there's maybe a little bit more opportunity to expand the overall yield. But would you think, kind of, given those trends, if interest rates hold in a cycle, you've kind of neared the, the peak of the yield for the portfolio for this cycle, or are there other opportunities to kind of hold the line there?

Craig Packer (CEO)

Sure. So I'll make a couple comments. The last couple of quarters have been... You know, this quarter was a little more active, but these are light quarters from a volume standpoint. So they're not going to have a meaningful impact in the overall return in the portfolio because, you know, they're, they're a small sliver of the portfolio. If you look at the average spread that we have in the book, it, you know, it has been rock solid for five quarters in a row, pinned to 6.7%. And so I wouldn't read too much into any one or two quarters worth of activity. I did note in my comments this quarter, as the public markets have, have reopened, we have seen a bit of tightening of spread, and so-...

You know, spreads had been really wide in the first half of this year. Public markets shut, other private credit providers pulling back. That was a great opportunity for us to get lots of spread, and that is waning a bit. We're seeing some tightening of spread. Absolute returns, still extremely high, 11%-12%. I made the comment in the script. So, you know, I do think that these market conditions will move up and down on a given quarter based on what's happening in the broader syndicated markets, based on what our peers are doing with their capital. The base rate environment, extremely attractive. Overall returns for new deals, extremely attractive. Are we at the, you know, I think that you're asking forward-looking, are we at the peak? You know, it's hard to say.

It's just so market dependent. I think that, you know, that our expectation, investor expectation on rates right now is a growing sentiment that maybe rates are at a peak and will come down. Certainly, the forward curve would suggest that. As to where spreads will go, that is, you know, a function of, as I just said, market appetite and where additional capital will deploy. We're always trying to get the best of both worlds. We want to have great credits and great credit protections and get as much spread as we can. You know, but we certainly have competitive environment that we live with. So I, I'd be very pleased if it stayed like this for a while. So, you know, if we can do a little bit better, we can.

I do think deal flow activity will pick up, and that will generate some prepayment income that we haven't had for a while. But, you know, we're. These are really attractive returns and really attractive spreads, the likes of which, you know, 18 months ago, 12 months ago, around these calls, I don't think anyone expected. And so we're certainly very pleased with what we're seeing. But it'll move up and down. But spreads operate in a general band, you know, with 550-700 over, depending, and we've moved in and up in that band, down in that band over the last, you know, since our existence, every quarter, we've operated somewhere in that band. Right now, it's on the tighter end. It could widen out.

All it takes is some dislocation in the broader syndicated markets for a quarter or two, and spreads will widen out again.

Erik Zwick (Director)

That's very helpful. I appreciate the, the detailed comments there. And second one for me, just on leverage. The, you know, leverage has come down over the past two quarters, you know, closer to the lower end of your, your target range. Curious to wonder if, if that was, you know, purposeful or more just reflective of the fact that there's been more exits and repayments relative to, to new commitments over the past couple of quarters?

Jonathan Lamm (CFO and COO)

Yeah, it was basically flat this quarter versus last quarter, but it has come down from earlier in the year. Again, it's mostly a timing issue. We're matching repayments and new investments, and so, you know, we're sort of squarely in, like, call it that 115 area. We could take it up a little bit, but we're certainly happy where we are and certainly operating a little bit higher, which is where we were operating earlier in the year. I wouldn't read anything into it.

Craig Packer (CEO)

I mean, it's, well, you know, what I'm really pleased at is even with a tick lower of, of leverage, our ROE is extremely high. So, I think it's a great combination of great returns with some dry powder. And so, you know, we can invest. We, you know, see great opportunities. We take the leverage up a bit. I really like where we sit in our, in our target leverage range.

Erik Zwick (Director)

Thanks for taking my questions today.

Jonathan Lamm (CFO and COO)

Thank you.

Operator (participant)

Thank you. Our next question has come from the line of Mickey Schleien with Ladenburg. Please proceed with your questions.

Mickey Schleien (Managing Director)

Yes, good afternoon. I just have one question at this point. Wanted to ask, when do the reinvestment periods in your CLO financings begin to end? And how significant could that unwinding be on your interest expense over the next couple of years when you consider the current terms available in the market?

Jonathan Lamm (CFO and COO)

Thanks, Mickey. So yeah, our CLO reinvestment periods are typically two to four years, generally more four years, and so they're on a regular basis. You know, sort of coming close to when they're coming close to or within a year of effectively that reset period, we will go out and do a reset. So that has already occurred, you know, in some of our CLOs, and will continue to be the case. We're not that concerned in terms of what that will look like from a financing cost perspective, from a repricing, you know, repricing of those transactions. On the unsecured side, you know, obviously, we do have lower-cost financing there. Again, nothing really material in 2024.

In future years, we do have some refinancings there that will come up, and we'll be doing those in, you know, accordingly in those future years.

Mickey Schleien (Managing Director)

Jonathan, if I can just follow up. I mean, AAA spreads in the CLO world are still pretty wide. That's the reason that the machine is not working very well. So are you indicating that those spreads available in the market today are sort of similar to where you're already at, or because of your platform?

Jonathan Lamm (CFO and COO)

A little bit wider. A little bit wider, but not, not meaningfully much wider from where we printed all of these CLOs. Again, we have a fair number of CLOs in this, OBDC, and some of them were printed at wider levels. The later ones, a little bit tighter, but the earlier ones, a little bit wider, and I think we're-

Mickey Schleien (Managing Director)

Okay.

Jonathan Lamm (CFO and COO)

Yeah.

Mickey Schleien (Managing Director)

I understand. Those are all my questions. Appreciate your time. Thank you.

Jonathan Lamm (CFO and COO)

Thank you.

Operator (participant)

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Craig Packer for any closing comments.

Craig Packer (CEO)

Great. Thanks, all, for joining. We're extremely pleased with the quarter. Hopefully, the results speak for themselves. But we're really excited to deliver the dividend increase in particular, and the supplemental dividend continues to work well, and just, I'm very happy. So thanks, all, for joining. If you have any questions as a follow-up, you know, we're easily reachable and we'd be pleased to take them. And with that, hope you all have a great rest of your day.

Operator (participant)

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.