Blue Owl Capital Corporation - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 came in soft versus expectations: GAAP NII/share was $0.37 and adjusted NII/share $0.36 (down from $0.40 in Q2), with total investment income of $453.1M; NAV/share declined $0.14 to $14.89 on unrealized depreciation concentrated in a few names. Against S&P Global consensus, EPS/NII missed (~$0.372 actual vs $0.394 est.) and revenue missed ($453.1M actual vs $466.6M est.) as non-recurring income fell from Q2 levels (see Estimates Context).
• Credit remained resilient but non-accruals increased to 1.3% of fair value from 0.7% in Q2; management flagged two tariff-impacted positions (Conair second lien, Beauty Industry Group) as primary drivers of markdowns.
• The Board maintained the base dividend at $0.37 for Q4 (no supplemental); a new $200M, 18-month buyback was authorized to replace the expiring $150M plan.
• Post-quarter, OBDC terminated the proposed merger with OBDC II citing market conditions; the previously announced $200M buyback remains in place.

What Went Well and What Went Wrong

• What Went Well

  • Portfolio fundamentals: management emphasized continued resilience, with borrowers’ revenue/EBITDA growth in mid-to-high single digits, interest coverage ~2.0x (up from 1.7x YoY) and senior-secured focus near record levels.
  • Origination activity and scale: Q3 new commitments were $1.3B with $963M funded, as Blue Owl’s platform accessed larger, high-quality direct lending opportunities; weighted average spreads on new deployments remained ~500 bps over base.
  • Shareholder return tools: base dividend held at $0.37 for Q4 and a fresh $200M repurchase program was launched to support value in dislocations.

• What Went Wrong

  • Earnings softness vs Q2/consensus: adjusted NII/share fell to $0.36 from $0.40 as non-recurring prepayment and fee income dropped to ~$0.02/share from ~$0.05 in Q2; total investment income also declined sequentially.
  • Credit headlines and marks: NAV/share declined to $14.89, with unrealized depreciation tied to a small number of watchlist names (including tariff-impacted Conair and Beauty Industry Group) and a modest uptick in non-accruals to 1.3%.
  • Merger uncertainty: while initially announced with expected synergies, the OBDC–OBDC II merger was later terminated post-quarter due to market conditions, removing a potential NII accretion lever near-term.

Management quotes:

• “OBDC delivered another quarter of strong performance…Our portfolio continues to demonstrate solid credit quality and underlying fundamentals” – Craig W. Packer, CEO.
• “We generated adjusted NII per share of $0.36…Our results…reflected a lower level of non-recurring income” – Craig W. Packer.
• “Our non-accrual rate…1.3% at fair value this quarter…primarily due to the addition of Beauty Industry Group” – Logan Nicholson, President.

Transcript

Kenneth Lee (VP of Equity Research)

Good morning, everyone, and welcome to Blue Owl Capital Corporation's third 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 Mastuccio, Head of BDC Investor Relations.

Mike Mosticchio (Head of BDC Investor Relations)

Thank you, Operator, and welcome to Blue Owl Capital Corporation's third quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the third quarter ended September 30, 2025. These should be reviewed in connection with the company's 10-Q filed yesterday with the SEC. Additionally, OBDC and Blue Owl Capital Corporation II, or OBDC II, issued a joint press release announcing that the companies have entered into a merger agreement pursuant to which OBDC will acquire OBDC II. The merger is subject to the satisfaction of customary closing conditions, including OBDC II shareholder approval. All materials referenced during today's call, including the earnings and merger press releases, earnings and merger presentations, and 10-Q, are available on the news and events section of the company's website at blueowlcapitalcorporation.com.

Joining us on the call today are Craig Packer, Chief Executive Officer; Logan Nicholson, President; and Jonathan Lam, 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. We would also like to remind everyone that we refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the events and presentations section of our website.

Certain information discussed in 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.

Craig Packer (CEO)

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. In addition to reporting another quarter of solid results for OBDC, we are also pleased to be announcing a merger between OBDC and OBDC II, a transaction which we believe can create meaningful value for shareholders of both funds. First, I would like to review OBDC's results for the quarter, and then I will spend a moment discussing the transaction. Our objective has always been to deliver consistent returns to shareholders, and we're pleased to have done that since our founding nearly 10 years ago. This long-term focus continues to guide our strategy and how we manage OBDC, and in the third quarter, we delivered solid results that reflect the ongoing strength and resilience of our portfolio. We generated adjusted NII per share of $0.36, which represents an ROE of 9.5%.

These results were roughly in line with our long-term average, though they have come down from peak levels due to the declining base rate and spread environment. While Jonathan will go into more detail shortly, our results in the third quarter reflected a lower level of non-recurring income as compared to our historical average. As of quarter end, our net asset value per share was $14.89. A modest decline of $0.14 from the prior quarter. We note that our NAV remains consistent with levels from a few years ago and has increased over 4% since inception, underscoring the durability of our strategy and portfolio. Our portfolio continues to benefit from our disciplined investment approach, which emphasizes larger, recession-resistant businesses.

During the quarter, we marked down a few watchlist positions, but we want to emphasize that these positions have been on our watchlist for several quarters and do not reflect new credit issues in the portfolio. Overall, the portfolio's fundamentals remain strong, and as Logan will detail later on, we are not observing any broad signs of stress or a material increase in amendment activity. With that, I want to take a moment to address the recent headlines surrounding private credit, which have generated a lot of attention and confusion for investors. It is important to clarify where we participate within the broader landscape. Our primary focus is on direct lending, which we believe is one of the most attractive areas of the market.

In direct lending, we make primarily senior-secured loans directly to companies, typically as the lead lender, which affords us the ability to be in direct dialogue with our borrowers and sponsors to shape transaction terms and credit documentation. This direct engagement also gives us access to comprehensive financial reporting and an ongoing dialogue with our portfolio companies. The transparency and control this provides allows us to build a complete picture of each credit during underwriting, gives us greater confidence compared to deals in the public fixed income markets. Our portfolio is continuing to perform well, and as Logan will describe later, our borrowers are demonstrating solid revenue and EBITDA growth. OBDC's healthy credit performance, as evidenced by our below-industry-average non-accrual and loss rates, is a direct result of our disciplined approach and focus on high-quality, upper-middle market businesses.

Public market sentiment with respect to BDCs seems to be disconnected from the realities on the ground, and we encourage investors to look beyond the headlines and focus on the fundamentals that drive our strong, risk-adjusted results over time. Next, I'd like to briefly highlight the transaction we announced yesterday to merge OBDC and OBDC II, with OBDC as the surviving entity. The merger strengthens OBDC's position as the second-largest publicly traded BDC. Adds nearly $1 billion in net assets, and creates a larger, predominantly senior-secured portfolio with potential for earnings accretion over time. This merger marks an important step in streamlining our BDC platform while enhancing long-term value for shareholders. Now, I will turn it over to Logan to provide more detail on OBDC's portfolio and the proposed merger.

Logan Nicholson (President)

Thanks, Craig. We saw a pickup in deal activity during the third quarter with originations of $1.3 billion and fundings of $1.1 billion. That outpaced $797 million of repayments and resulted in net leverage of 1.22 times at the end of the quarter. In addition to a higher number of new deal originations this quarter, approximately 40% of the originations were add-ons, consistent with the past three quarters. This sustained level of add-on activity underscores the benefits of being an incumbent lender as it allows us to support the continued growth of our borrowers. As we've increased in scale, we've been able to commit capital in greater size to larger borrowers while maintaining a highly diversified portfolio.

For example, our average hold size across our platform on new direct lending deals has grown from $200 million in 2021 to roughly $350 million this year, while the total deal size doubled to nearly $1.5 billion over the same period. This enhanced capacity allows us to participate in some of the largest and most attractive transactions in the market and shows the secular trend of larger borrowers preferring direct solutions. Next, I'd like to reiterate that the fundamental performance of our portfolio remains strong. We believe our borrowers are among the highest quality we've seen since inception. This is supported by the scale and diversity of our $17 billion portfolio, the increasing size of the companies we lend to, and our continued focus on senior-secured investments, which represent 89% of the portfolio near record levels excluding our specialty finance and JV investments. Our credit metrics continue to reflect strength.

The cumulative fair value of our threes to fives-rated names is approximately 8%, which declined nearly 2% since year-end 2024. Our non-accrual rate remains at the low end of the range across the BDC sector and in line with our historical average at 1.3% at fair value this quarter, which is modestly up primarily due to the addition of Beauty Industry Group, which had been on our watchlist for over two years. Credit-related amendment activity is stable, with no signs of increased pace or intensity of amendments over the last two years. We also monitor portfolio company revolver drawing activity closely as it's an indicator of stress, and our average revolver draws are below 20%, a conservative level that has actually been decreasing throughout the year.

Further, on the theme of larger, more resilient borrowers in the market, the average revenue and EBITDA of portfolio companies has grown to over $1 billion and $229 million, respectively, nearly double the level of four years ago. We continue to focus on upper-middle market borrowers that are scaled players with access to more resources to manage various headwinds. These companies have market-leading positions with diversified revenue streams, strong recurring cash flow profiles, healthy liquidity, and generally operate in non-cyclical defensive sectors of the economy that are expanding, including healthcare, technology, business services, and insurance brokerage. As a reminder, we intentionally avoid more cyclical sectors such as energy, chemicals, and retail, which are featured more prominently in the public markets and tend to be more volatile.

These larger businesses have continued to perform well, with year-over-year revenue and EBITDA growth again in the mid to high single digits and average LTVs of 42%. Our interest coverage ratio increased to approximately two times based on current spot rates, up from 1.7 times one year ago, reflecting ongoing portfolio company EBITDA growth as well as base rate reductions, and we expect that will continue to improve as base rates decline further. Also, I wanted to highlight that PIC income at 9.5% of total investment income is down from 13.5% a year ago, primarily driven by refinancings of several PIC investments. As we've highlighted in previous earnings calls, the vast majority of our PIC names were underwritten at inception, and we have not had any non-accrual, bankruptcy, or principal loss on any of these structured PIC loans since inception.

In summary, Q3 credit performance metrics, including below-market loss rates, steady amendment activity, and strong borrower fundamentals underscore the quality of our portfolio, and we believe our credit business remains well-positioned. Turning back to the proposed merger between OBDC and OBDC II, OBDC II was launched in 2017 to give individual investors access to the same strategy and platform we originally offered institutions through OBDC. Both portfolios are highly aligned and comparable exposures to senior-secured loans, and nearly all of OBDC II's investments, about 98%, overlap with OBDC. These portfolios are managed by the same investment team and reflect a consistent investment composition and credit quality. As Craig mentioned, this transaction adds scale to OBDC's portfolio, bringing in $1.7 billion of investments, which will increase the portfolio to $18.9 billion across 239 companies.

With the addition of complementary portfolios from OBDC last year and now OBDC II, the overall portfolio will have grown by 40%, affording us more scale and diversity. The merger strengthens our balance sheet given OBDC II's lower leverage at 0.78 times, and we expect the transaction to be accretive to NII over time. We anticipate approximately $5 million of cost savings in the first year, largely from eliminating duplicative expenses. Over time, there is potential for lower cost sources of capital and greater flexibility to pursue new investment opportunities. Finally, while this merger would provide liquidity for OBDC II shareholders, it is worth noting that these shareholders have had access to liquidity through a quarterly repurchase program, which met 100% of shares tendered for nearly seven years.

We believe this transaction positions the combined company well to continue to deliver attractive risk-adjusted returns as a market leader in the space. I will now turn over the call to Jonathan to provide more detail on our third-quarter financial results and the mechanics of the proposed merger.

Jonathan Lamm (CFO)

Thank you, Logan. To summarize OBDC's quarterly performance, we ended the quarter with total portfolio investments of over $17 billion, total net assets of nearly $8 billion, and total outstanding debt of approximately $9.5 billion. Our second-quarter NAV per share was $14.89, down from $15.03 last quarter, following write-downs of existing watchlist positions. Starting with the income statement, as Craig mentioned, we earned adjusted net investment income of $0.36 per share, down from $0.40 as compared to the prior quarter, driven primarily by lower non-recurring income, which was $0.02, well below the $0.05 we generated in the second quarter and our historical run rate average of approximately $0.03. The board also declared a fourth-quarter base dividend of $0.37, which will be paid on January 15, 2026, to shareholders of record as of December 31, 2025. In prior quarters, we over-earned our base dividend, allowing the board to declare supplemental distributions.

This quarter, given the lower rate environment over the past year, we did not generate excess earnings to distribute under our dividend policy. Craig will provide additional color on our dividend outlook later in the call. As we have previously reported, our spillover income remains healthy at approximately $0.31 per share and supported our base dividend this quarter. Moving to the balance sheet, we finished the quarter with net leverage of 1.22 times, up modestly from 1.17 times and within our target range of 0.9-1.25 times as we had net fundings of $273 million. In terms of liquidity, we remain well-capitalized with significant capacity to invest as new opportunities come in. We ended the quarter with over $3 billion in total cash and capacity on our facilities, which was well in excess of our unfunded commitments.

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. Lastly, I'd like to spend a minute describing the proposed merger consideration. The transaction is structured as a stock-for-stock merger, with each OBDC II shareholder receiving a certain number of OBDC shares to be determined just prior to closing. The exchange ratio will be determined by a formula, which will be struck on a NAV-for-NAV basis if OBDC is trading at or below NAV per share, or a premium that will benefit OBDC shareholders if OBDC is trading above NAV per share.

As a sign of support from Blue Owl, OBDC and OBDC II will be reimbursed for 50% of the fees and expenses associated with the proposed merger up to $3 million in total, which will be paid for by OBDC's advisor if the proposed merger is consummated. OBDC's board of directors has also authorized a new share repurchase program of up to $200 million in open market purchases from time to time to account for the increased size of the combined company. This will replace our current $150 million share repurchase plan. Finally, we are expecting to close the transaction in the first quarter of 2026, subject to customary closing conditions. Now I will turn it over to Craig for some closing remarks.

Craig Packer (CEO)

Thanks, Jonathan. To close, I want to talk about our earnings outlook in the current environment and the quality of our portfolio. As expected, rising rates over the past few years increased our earnings given the floating-rate nature of our portfolio. We have passed those gains through to our shareholders via regular and supplemental dividends. As a reminder, we implemented the supplemental dividend policy in part because we expected that elevated base rates would likely eventually subside, and this mechanism would provide for a naturally adjusting tool to allow for these rate movements to flow through to dividends. Naturally, if base rates decline further, as the market currently expects, our earnings and dividends will adjust as well. That said, we think it's important for investors to separate out the impact of potentially lower rates on the portfolio from the risk of significant credit concerns.

While rates may decline, we continue to feel confident in the strength of our portfolio, supported by solid fundamentals, disciplined underwriting, and a defensively constructed asset mix. Our loss rates remain well below market averages, a reflection of our consistent focus on downside protection and credit selectivity. Even in a lower-rate environment, we believe OBDC will continue to have strong credit performance that will provide investors with a steady stream of dividends that will be attractive relative to other investment opportunities. Thank you for your time today, and we will 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 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press Star 2 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 Citizens. Please proceed with your questions.

Brian McKenna (Director of Equity Research)

Thanks. Good morning, everyone. Starting on the OBDC II merger, non-accruals in this portfolio are 60 basis points above OBDC. What is driving this, and what part of that portfolio has underperformed relative to OBDC? Leverage is clearly lower, but what kind of ROEs has OBDC II generated since inception? Is there a way just to think about the incremental ROE post the merger?

Craig Packer (CEO)

I'll start. Hey, Brian. It's Craig. I'll start, and then Jonathan can chime in. For those that aren't familiar, OBDC II was raised about a year after we initiated OBDC. The portfolios have almost complete overlap, almost 100%. It's the same names invested in the same period of time with the same economics, with the same strategy, and the same team. OBDC II will comprise about 10% of OBDC. The impact of merging it in is really quite modest given the overlap in names. The higher non-accrual rates are a function of the names on non-accrual being a little bit bigger at OBDC II because OBDC II is still operating under a lower leverage constraint than OBDC. It has the old leverage rules, so it's capped at one turn of leverage. We've been running at 0.75 times of leverage.

We have had the non-accruals for just a little bit bigger part of that portfolio. It is the same names that OBDC already has exposure to. When you add them in, it has an immaterial impact on overall credit statistics at OBDC. Their names were already in. Slightly higher immaterial impact. I do not know, Jonathan, maybe you want to hit the ROE question.

Jonathan Lamm (CFO)

Yeah. On the ROEs, obviously, just given we've been running OBDC leverage toward the middle over time, middle to the upper end of our target leverage ratio, whereas OBDC II has been running, as Craig alluded to, at 0.6, call it to 0.75. Historically, the ROEs, just based on the returns associated with that leverage, have been lower. As the companies come together, Brian, we think that there's about 15-20 basis points of ROE accretion that we can create across the portfolio. That's really driven by OpEx synergies that we can see, some liability management associated with some of the financings, in particular in OBDC II, that we can refinance into single facilities. OBDC II just has a little bit of a higher weighted average asset yield.

Brian McKenna (Director of Equity Research)

Okay. Great. That's helpful. And then just as it relates to the stock, it's now trading at 82%, give or take, of book value. A few years ago, you did an investor day. You laid out some steps you were going to take to improve the valuation. As we sit here today, we're clearly in a different part of the cycle. I mean, what are you doing as a management team to improve the valuation? You're fresh and upsized the buyback to $200 million. Should we expect you to be a little bit more active there? Should we expect to see maybe some insider buying and even some repurchases from OWL?

Craig Packer (CEO)

We laid out some goals on investor day that I think were very effective. In fact, the stock within a year or so actually got to book value. We were very pleased with that at the time. One of the goals, just to say it at the time, was also to simplify our BDC portfolio, which at the time was seven names. We had a stated goal of getting it down to four names. With the merger we are announcing today, if that is approved and closes, we will have accomplished that goal. We are quite mindful where the stock is. It is something we take quite seriously and discuss as a management team and with our board. I think just running some math, the stock is yielding more than 11%. It is hard for us to reconcile that with the performance, which has been very consistent.

We think that what's happening with the company and high-quality BDCs is simply a rate cycle that we're going through. As you acknowledge, we're in a different part of the rate cycle now. Credit performance in the portfolio remains very strong, even with the impact of the one non-accrual. I won't try to go point by point through all the tools, but I just would say all the tools are on the table. Buyback. I think part of what we did in the earnings day was just provide a lot of transparency around the quality of the portfolio. I think with a lot of the headlines now, investors are oftentimes taking just a knee-jerk reaction to a headline. I think part of our job is to make sure that people hear our confidence in the portfolio, and that remains the case today.

Whether it be buybacks, I think certainly with the merger, that's something that we'll be attuned to. We have the buyback that's out there. Insiders. We don't direct insiders to buy the stock, but obviously, a lot of employees find it attractive from time to time. We did do a special program around, at the time you mentioned, for employees. We'll certainly look at that tool as well. It is all available. We have been very focused on creating value for shareholders and getting the stock back to where we think it should be, and candidly, where the analyst community has it projected out as well.

Brian McKenna (Director of Equity Research)

Great. I'll leave it there. Thanks so much, Craig.

Craig Packer (CEO)

Thanks, Brian.

Operator (participant)

Thank you. Our next question has come from the line of Aaron Saganovich with Truist. Please proceed with your questions.

Arren Cyganovich (Senior Analyst)

Thanks. With respect to what you were discussing in your prepared remarks about base rates declining further as the market expects and earnings and dividends having to be adjusted. I guess, is there a certain level that you would have to be below the current NII, or is it just once you kind of see the future there, you'll make that adjustment? I guess, lastly, what are your expectations for rate cuts over the next four or five quarters?

Craig Packer (CEO)

On our expectation, look, we do not consider ourselves macroeconomists with a macro view. We tend to look at the forward curve as the best sense of market sentiment. We focus on SOFR. By the end of next year, that is expected to get to be about 3%. I think that is our expectation, but we are really just mimicking the market. We will have to see there. In terms of dividend policy, it is robust. We look at it every quarter. We discuss it with the board every quarter. That is not new to this environment. We had those same discussions as rates were going up and throughout this period of time. Obviously, we are in a different rate environment. We.

Want to have a base dividend that is sustainable with a rate environment that if we expect a rate environment to stay in a stable place, but rates could move up and down. You are constantly evaluating this. We put the supplemental dividend in place when rates went up because we thought that might not be sustainable. The supplemental, I think, worked extremely well. We are going to strive to find the right balance between being very thoughtful on rate moves, excuse me, dividend moves. The portfolio is performing well. This quarter, our NII was a penny; our dividend was a penny above our NII. We have significant spillover. We have said we are comfortable through the end of the year. We remain comfortable through the end of the year. As we look to 2026, given how much rates have come down or are expected to come down.

It's logical for investors to think that we'll evaluate reducing the dividend appropriate with the earnings power in a lower rate environment. We will look at it. We have a strong-performing portfolio. Our dividend levels for investors who are newer to the stock were lower in a lower rate environment. If you went back to when rates were at 3%, our dividend was about $0.33. There are good data points that investors can look to to try to calibrate where dividends will go. We enjoy the benefit of higher rates, but we think this company is designed to generate a premium return in all rate environments. It is not designed to generate a high level of return when rates are low. Because of the quality we are investing in and the market we invest in, the rate, the investment opportunities fluctuate.

The absolute return fluctuates based on where rates are. I think you can look at where rates were at a 3% environment, at $0.33, and get a sense of the order of magnitude of what we might consider. We're not doing that now. We're not going to do that for the fourth quarter. We'll have discussions with our board as 2026 gets underway based on rate expectations at the time to consider what we do with the dividend. We have a quarter's worth of spillover income, and that gives us a little bit of cushion. We're not stubborn about it either. We think that the base dividend level should reflect the earnings power of the portfolio in the expected rate environment for a reasonable period of time. Hopefully, that gives you a little bit of context of how we think about it.

Arren Cyganovich (Senior Analyst)

Yeah. That's helpful. 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 (Managing Director and Senior Equity Analyst)

Hi, guys. Moving on to the outlook for originations activity, etc., I mean, I think you've well covered the dividend discussion at this point. I mean, you are basically towards the high end of your target leverage. Obviously, when OBDC comes in, then that would adjust. I mean, is there any opportunity to—or do you expect there to be an opportunity to rotate any assets or anything like that in terms of—to be if M&A activity does continue to ramp that we're hearing about. You're a little—not tapped out, but I mean, you're towards the—you might not be able to participate in that as fully given where the leverage is unless you can—obviously, repayments happen too. I mean, what are your thoughts on what the opportunities are if there is a real M&A cycle given where your leverage is to start with?

Craig Packer (CEO)

I'll make a couple of comments. Logan, maybe you can comment on what activity level we're seeing right now. You're right. We are at sort of the higher end of the range that we've had. Look, we have a very prolific ability to originate assets at Blue Owl. It's one of our great strengths as a platform. Even in moderate M&A environments, this past quarter, as a platform, originated $10 billion worth of deals. What we've been doing at OBDC is really trying to match originations to repayments to stay at sort of the mid to higher end of our range to generate good returns. It's not easy to do that perfectly because deal closings and repayments aren't perfectly precise. We're at the higher end. The merger will take leverage down a little bit by itself. That will create some cushion.

Guys, what is it? 1.15 or something pro forma? So 1.15 pro forma. That alone will get us down a little bit. We can modulate this pretty easily in any given quarter because we're constantly getting repayments. I think that we can participate in an attractive deal flow cycle. If we see an unusually attractive cycle just by allowing some repayments to come in and deploying to get back to 1.2-1.25. Logan, maybe just comment on what the deal environment's been.

Logan Nicholson (President)

Yeah. Sure. In the fall, we've seen a meaningful pickup in our activity levels. We've seen in the last couple of months, particularly in September, a pickup of our activity and pipeline by about a third from prior quarter levels. The mix is significantly weighted now towards sell-side M&A opportunities, which usually and typically result in greater upfront fees when doing a brand new deal. There's more new capital, obviously, in those new deals as well in the supply versus what you've seen over the last two years is dollar-for-dollar refinancings of deals that come with very little upfront fees. The mix is better, and the pipeline is higher. We're trying to be cautiously optimistic given we need to get to signings of those deals. We would note that the teams are very busy, and the outlook, we're quite optimistic.

I'd also point out something that we pointed out last quarter. After the OBDC merger, that also rings true after OBDC II, we continue to have less pro forma JV and strategic equity investments as we would have had prior to the merger. It gives us an opportunity to deploy into those accretive and non-correlated opportunities. If you look at this quarter as an example, the differences are modest, but that dividend income offset some of the base rate decline and was stable and non-correlated to the rest of the portfolio. It was really more one-time income-related items that had the impact this quarter versus last quarter. I think those JVs and strategic investments will be a place post the OBDC II merger where we're able to take advantage of it.

Robert Dodd (Managing Director and Senior Equity Analyst)

Thank you for that. The follow-on is exactly that. I mean, you created a new bit called Cross Strategies Opportunities, or whatever it was called, I think, this quarter to take advantage of that. I mean, it's obviously very, very small right now. I think it's like a $5 million position. I mean, how big could that vehicle be as a piece of the portfolio? What kind of return on capital do you expect from those versus the on that type of opportunity versus the on-balance sheet direct lending?

Craig Packer (CEO)

Sure. No, I think it's a great example of the benefits of the platform. Last quarter, we talked about the equipment leasing JV we set up with CalSTRS, and this quarter, we set up another entity really for asset-based and alternative credit across the platform. It's meant to be a diversified box of secured investments across a diversified pool of, call it, conviction calls or best-in-class opportunities from the Blue Owl platform. We're going to go slowly. Keep it quite diversified. I would expect that there will be some meaningful opportunities there. Just like every other one of our strategic equity and JV investments, it's going to be a small individual part of the portfolio. It could be a percent or two over a number of years.

I wouldn't expect it to move the needle a lot in the next quarter or two, but over the next few years, we would look to grow it. Returns-wise, just like all of the other JVs we've set up, we're targeting a low double-digit type of return profile that should hopefully be with an asset-backed asset base non-correlated to the corporate credit in the other direct lending names. Similar return profiles, and we're going to move slowly and deliberately in the deployment of that new entity.

Robert Dodd (Managing Director and Senior Equity Analyst)

Got it. Thank you.

Craig Packer (CEO)

Thanks, Robert.

Operator (participant)

Thank you. Our next question has come from the line of Finian Patrick O'Shea with Wells Fargo. Please proceed with your questions.

Finian O'Shea (Director of WFS Research)

Hey, everyone. Good morning. Logan, sticking with you. I found one of your opening comments interesting on the average or hold sizes and facility sizes approaching $1.5 billion. Correct me if I'm wrong there. I think you were talking about the tranche size total of an average name. Is that indicative of more refi, repricing risk as the leveraged finance market continues to hold up strong? How much, I suppose, higher do you think that will go over time, or do you think it's more—do you think you'll be more so broadening as opposed to growing in size of companies? Thanks.

Logan Nicholson (President)

Yeah. No, thanks for the question, Finn. It is related to tranche size, not our specific Blue Owl hold size. And it's been increasing meaningfully. If you look at the first quarter, we noted a comment that in one of the quarters this year, the average deal size exceeded $2 billion total tranche size. We are seeing sizable businesses, some of them even north of $10 billion enterprise value, choosing direct. I think if the average deal size were even half of that, we would have the same dynamic of competition with syndicated markets or public markets. I do not think that that's new. I think a point of validation that we continue to monitor are the new M&A and new borrower choices. There are third parties like S&P, for example, that put out market share statistics quarterly. Despite the public markets being wide open.

North of three quarters of all of those new M&A deals and LBO deals are still choosing direct. We do not see, even in this low-spread public market environment, material share loss. In fact, we see it the other direction. I think the experience our borrowers are having is a good one with direct lending. I think you are seeing that adoption continuing. The number of companies in the private markets, the scale of those companies, how long they can stay private for longer is a secular shift. I think the secular shift to direct is something we are experiencing every single quarter. I think we have a reasonably long runway for that to continue. We are not concerned that the dynamic right now is any different with the public markets.

Finian O'Shea (Director of WFS Research)

All for me. Thanks so much.

Logan Nicholson (President)

Thanks, Finn.

Operator (participant)

Thank you. Our next question has come from the line of Casey Alexander with Compass Point. Please proceed with your questions.

Casey Alexander (Managing Director and Senior Equity Analyst)

Yeah. Good morning. Thank you for taking my questions. I'm kind of curious. In relation to the $200 million share repurchase program. I noticed that the merger doesn't have any lockups or gates for the OBDC II shareholders. Is it kind of your plan or your strategy to hold that for after the merger and use that to absorb any potential selling pressure that might come from the merger?

Craig Packer (CEO)

I don't think that we've made that determination. I think that we think about the buyback as something that can be used anytime. Obviously, the current share price environment is one that you have to be looking hard at it. Just because you're raising it, and again, investors may not be familiar with OBDC2. OBDC2, throughout its entire life, for seven years, has had quarterly tender offers. We have fulfilled every penny of every tender offer for every quarter for seven years. Unlike other BDC mergers in the space, where a merger with a public BDC would be the first opportunity for investors to get liquidity, these investors have not only had access, but anybody who's wanted out has gotten out on schedule.

I think there's a lot of fact pattern to suggest that investors in OBDC II wouldn't necessarily be sellers because if they wanted to sell, they could have just sold in the last tender offer we did. Therefore, we're not thinking about our buyback as necessarily needed for the closing of that merger because that fact pattern wouldn't suggest that the merger would create more sellers. We just view it as a tool to be used in any environment. Certainly, again, the stock price is at a level that we'll look at it.

Casey Alexander (Managing Director and Senior Equity Analyst)

All right. Thank you for taking my question.

Craig Packer (CEO)

Thanks, Casey.

Operator (participant)

Thank you. Our next question has come from the line of Mickey Schlein with Clear Street. Please proceed with your questions.

Mickey Schleien (Managing Director of Equity Research)

Yes. Good morning, everyone. Craig, thanks. Logan, thank you for all the discussion of the market backdrop. I wanted to follow up on that issue by noting that we've heard generally that activity has picked up in the third quarter, which is obviously a good thing. That could help balance the direct lending loan market. With that in mind, I'm curious what your sense is of the market's current balance or disequilibrium and your outlook for spreads, particularly going into next year.

Craig Packer (CEO)

Sure. I'll start with Logan. You're welcome to chime in. Okay. I'm glad you're asking the question because I think when you look at earnings, certainly our earnings and maybe other BDCs, there are a few different pieces that are at play here. I think it's worth spending a second on this. We're really confident in the quality of our portfolio. Our portfolio continues to perform well. We did have the one-to-one accrual. Overall, we expect credit performance to continue to perform well. What's happened is there's been a meaningful move on rates over the last year, 100 basis points move on rate. That's been the primary driver of earnings. That shouldn't be a surprise given the floating rate nature of the assets. It certainly will produce headlines that earnings are down in a given quarter or down over a year.

It's just a function of rates. To your point, there's another piece, which is spread. Spreads have tightened in the direct lending market. Directionally, if you look at our OBDC, a year ago, we published this. Spreads in the portfolio were 50 basis points wider than they are today. You have two things going on: a 100 basis point drop in rates and a 50 basis point drop in spreads. Two different cycles. The spread cycle, which is what you're asking about, I think, is a function of two things. One, we do compete with the syndicated market. Syndicated spreads are at all-time tights. We're seeing single B credits getting priced at 275-300 over. Any student of the public loan markets would say that's exceptionally tight. In my experience in the leverage finance space in all these years, that market tends to be cyclical.

At some point, you should expect the public loan market spreads to widen out, and that could be material. The other activity that's going on is the M&A cycle remains modest. We're seeing signs of pickup. The private equity firms are eager to resume M&A activity, and we're starting to see signs that that's happening. I don't want to predict this is the beginning of a new cycle, but we're seeing signs in the last month or two that are encouraging. I know other managers have observed that as well. If you get an environment where M&A continues to pick up and you get some, I won't even say dislocation, just normalization of the public loan market, then spreads in the direct lending market will follow suit and spreads will widen out.

I think there's just going to, at some point, be a normal spread widening cycle in the direct lending market. As to when that happens. My prediction skills haven't been good. I would have thought it would happen this year, and it hasn't. At some point, it will. When it does, that will offset some of the rate tightening that we've experienced and generate better returns. Again, I don't want to say I expect it to happen next year because I think that it would be just impossible to predict. If folks are observing the loan market and observing the M&A cycle, I think it's pretty reasonable to think over the next 12-18 months that one or both of those things will happen and we will benefit from it.

Logan Nicholson (President)

Maybe just add on.

Mickey Schleien (Managing Director of Equity Research)

Appreciate that.

Logan Nicholson (President)

One additional.

Mickey Schleien (Managing Director of Equity Research)

Yeah. I'm sorry.

Logan Nicholson (President)

One additional point.

Mickey Schleien (Managing Director of Equity Research)

Go ahead.

Logan Nicholson (President)

One additional point to add on is Craig's mention of where syndicated market spreads are today. We've seen spread deployment stability over the last few quarters in private markets. If you look at the average spread on our new deployments, excluding a couple of one-off second liens or refinancings, we've been deploying right around that 500 over spread level basically for the last year, plus or minus. Our deployments have been consistent while public markets continue to tighten. The relative spread environment still feels reasonably good.

Mickey Schleien (Managing Director of Equity Research)

Appreciate that. That's really helpful and sort of in line with my thesis. Moving on, there were several portfolio companies which contributed to this quarter's unrealized portfolio depreciation. Conair and Beauty Industry Group were most of it on a net basis. Could you just help us understand what the issues are there? Do you see those sort of factors affecting other portfolio companies?

Logan Nicholson (President)

Sure.

Sure. Absolutely. Thanks. I think there are two different issues on the two names. On Conair, to address the first one, it is a second lien position predominantly behind a syndicated market first lien. That first lien has been downgraded to CCC ratings, so it has a technical pressure to it. The marks reflect a relative value to the trading price of the first lien, so there is an element of both technical and fundamental. It also has tariff-related weakness and tariff-related issues affecting the business. They import the vast majority of their goods from China and are working through redeveloping their supply chains to work around or to fix that issue. It is going to take time with Conair. It is a name where, on the Conair side, they have well over a year's worth of liquidity.

There is no imminent event or imminent catalyst that we can see. The company is on solid footing and should have a long period of time to try to work through the tariff-related issues. It is a tariff-related name in our list, but it is one that is depressed in trading price by a public market name and public market rating dynamic. On the beauty industry side, there are some similarities in the fact that tariffs have impacted the fundamentals. Beauty industry is a name that we have had in our portfolio for over five years. Through two ownership periods. It has been on our watch list for two years. There have been a number of issues. Tariffs is just the latest. Importantly, they had some competition-related issues a number of years ago and then an operational issue.

Most recently, tariffs, given they import most of their beauty-related products from China as well. The sponsor there over time has put in capital. At this period of time, we're unsure that they'll put in additional capital to support the business. We had further markdowns that we took. That one does not have the same trading dynamics and is a much tighter liquidity situation than Conair. It was marked down accordingly this quarter. Hopefully, that provides some help.

Craig Packer (CEO)

Yeah. I would just add. We have said when tariffs kicked in that there were a few names that we thought were names. Although disappointing, it's not surprising to us, but I want to reassure investors, this is not indicative of a long list of other names that could migrate.

Logan Nicholson (President)

Why don't we move to the next question?

Operator (participant)

Thank you. Our next questions come from the line of Kenneth Lee with RBC Capital Markets. Please proceed with your questions.

Kenneth Lee (VP of Equity Research)

Hey, good morning. Thanks for taking my question. Just one on the merger here. Wondering if you could talk a little bit more about expected timeframes for achieving the expected ROE accretion that you mentioned. Thanks.

Jonathan Lamm (CFO)

Sure. I mean, timing-wise, similar. Timing in terms of our expectation to close. The merger, which should be at some point, hopefully, in the first quarter, maybe later in the first quarter. The OpEx synergies tend to come in relatively quickly, just given they're mostly related to duplicative expenses and things along those lines. The capital structure-related synergies do sometimes take a little bit longer, but we expect we can achieve most of those in 2026. The effect of just leveraging out the portfolio, just given the relative small size of OBDC II to OBDC, also is a relatively near-term event. We do not think that it's going to take very long.

Kenneth Lee (VP of Equity Research)

Gotcha. Very helpful there. Just a follow-up, if I may, another one on the new share repurchase program. How would you evaluate potential share repurchases in the context of OBDC's leverage? As well, how would you approach balancing between repurchases and a potential pickup in investment opportunities over the near time there? Thanks.

Craig Packer (CEO)

Look, I think you're doing a good job of identifying all the variables. We're going to balance all of those variables. I think that, look, our capital is permanent and very valuable. And we are always trying to preserve that capital for new investment opportunities. Certainly, in a world where the stock is where it is, and where we've already talked about how spreads are tight and rates are lower, it's going to make the attractiveness of buying shares that much better. Leverage obviously plays in. I've already commented on leverage. We can manage leverage just as we get repayments, which we continue to get. I can't, it's not scientific. I think this is well understood. We also operate with various windows based on our public disclosure periods of time. In any given quarter, our.

Legal judgment is there's periods of time in a quarter where we can buy shares and we can't based on when we're going to report results and the like and when we get information from our portfolio companies. So we're not open. There's meaningful parts of a quarter where essentially we're not able to buy shares. In the periods of time where we can buy, we'll look at where the share price is. We'll look at where other investment opportunities are. We'll look at the leverage, and we'll make appropriate judgments as we have in the past. I wish I could give you a more precise analytical answer, but I think it's a function of all those things.

Kenneth Lee (VP of Equity Research)

Gotcha. Very helpful there. Thanks again.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. Our next questions come from the line. I'm Sean Paul Adams with B. Riley Securities. Please proceed with your questions.

Sean-Paul Adams (Research Analyst)

Hey, guys. Good morning. Given the impact of the uptick in the scale on earnings, are there any potential evaluations for changes on the management fee cost structure on a go-forward basis?

Craig Packer (CEO)

I'm not sure I totally understand the question, but no, we're not looking at the management fee structure if that's your question. We've had the same structure for almost 10 years, and OBDC II had the same fee structure. Our tech fund has the same. This is the fee structure.

Sean-Paul Adams (Research Analyst)

Appreciate it.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. Our next questions come from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your questions.

Christopher Nolan (Senior VP of Equity Research)

Just to follow up on that previous question on the management fee structure, given your comments in terms of narrower spreads, lower rates, you're in a different environment. Any consideration to improving expenses relative to revenues to improve the total return of OBDC?

Craig Packer (CEO)

I appreciate why you're asking the question. I just would urge you to look over the life of the fund. It's had the same fee structure. It had that same fee structure when rates were at zero for multiple years. We had the same fee structure. The fee structure has been set. It's very visible. We're consistent with it. It's not something that we're evaluating. I think it's designed in a thoughtful way, consistent with other industry peers, and commensurate with the quality and the resources that we apply to it. I don't think the intention of the fee structure is to move around based on where rates are in any three, six-month, nine-month period, in either direction. I don't think that's an expectation that people should have.

Christopher Nolan (Senior VP of Equity Research)

Okay. The only reason I ask is your investment yields on debt is roughly 10.5%. And your stock is yielding dividend yield roughly 12% or so, a little less. And the total returns, part of the reason possibly why the stock is trading below book is total returns. And I'm just trying to look at the you mentioned earlier that all levers are available and just following up on that.

Craig Packer (CEO)

I have lots of opinions about why our stock's trading where it's trading, but I'd say there are peer stocks that are comparable quality that have much lower yields. I don't think it's—I hear your question. We're hoping that this is a short-term technical situation. Investors have been very jumpy about some of the headlines in private credit generally. In the short term, investors seem to be reacting to a headline or two that's happening in the marketplace. I appreciate your pointing out that our stock is yielding 12% for a really high-quality performing portfolio. Our hope is that investors will find that attractive and will certainly buy back. It is a factor. Look, there have been periods of time where the stock has been dislocated. Again, over the last 10 years, we haven't changed the fee structure.

I do not think that is something that is really a meaningful consideration. I want to keep saying it, but I think everything else is. I am hoping that investors will see the quality of the portfolio and the opportunity to earn that type of yield. By the way, even if dividends go down a little bit, you are still going to talk about a 10-11% yield. Hopefully folks will find that attractive and the stock will get moving in a more constructive direction.

Christopher Nolan (Senior VP of Equity Research)

Great. Thank you. I appreciate the considered answer.

Craig Packer (CEO)

Thank you.

Operator (participant)

Thank you. Our next questions come from the line of Brian McKenna with Citizens. Please proceed with your questions.

Brian McKenna (Director of Equity Research)

Great. Thanks. Just a quick follow-up on repayment activity. Clearly a little bit lighter in the quarter. They can bounce around from quarter to quarter. Any visibility into fourth quarter repayments? I'm just trying to think through. Is that $0.02 per share of non-recurring income a good starting point for the fourth quarter?

Craig Packer (CEO)

Yeah. I think so far it's consistent with the prior quarter. No change.

Brian McKenna (Director of Equity Research)

Got it. Thank you.

Craig Packer (CEO)

Two cents seem about right. Seems about right. Correct.

Operator (participant)

Thank you. Our next questions come from the line of Mickey Schlein with Clear Street. Please proceed with your questions.

Mickey Schleien (Managing Director of Equity Research)

Apologies. The phone cut out. A couple of questions. In terms of the merger closing, are you assuming the government is going to reopen quickly and get the SEC fully up and running in your assessment?

Jonathan Lamm (CFO)

That would be part of the assessment that they would be able to review that. Ultimately, we think the projection that we've got in place accounts for that.

Mickey Schleien (Managing Director of Equity Research)

Okay. I do not want to beat a dead horse here, but I just want to confirm. There were no repurchases made under the 2024 stock repurchase program. Is that correct?

Jonathan Lamm (CFO)

That's correct.

Mickey Schleien (Managing Director of Equity Research)

Okay. That's it. Thank you.

Operator (participant)

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to management for closing remarks.

Craig Packer (CEO)

Okay. Look, we appreciate the engagement. We're available. If folks have questions, please reach out. Thanks for your time. We will speak with everyone soon.

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.