Blue Owl (OBDC) Q3 2024 Earnings Call Transcript

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DATE

Thursday, November 7, 2024 at 10 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Craig Packer
• President — Logan Nicholson
• Chief Financial Officer — Jonathan Lamm

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TAKEAWAYS

• Return on Equity (ROE) -- 12.4% for the quarter, marking seven consecutive quarters of double-digit ROE.
• Net Asset Value (NAV) per Share -- $15.28, "just off from historical highs," according to Packer.
• Net Investment Income (NII) -- $0.47 per share, down $0.01 sequentially from Q2 2024.
• Supplemental Dividend -- $0.05 per share declared for the quarter, bringing cumulative supplemental dividends to $0.47 per share since inception of the program.
• Base Dividend Coverage -- 127%, among the highest stated peer numbers, with management expressing confidence in sustaining coverage through 2025.
• Dividend Distributions -- Fourth quarter base dividend of $0.37 per share declared, payable January 15, 2025, to shareholders of record as of December 31, 2024.
• Portfolio Investments -- $13.4 billion at quarter end.
• Outstanding Debt -- $7.8 billion, yielding net leverage of 1.23x, positioned within the 0.9x-1.25x target range.
• Total Net Assets -- $6 billion as of quarter end.
• Total Liquidity -- $2.1 billion, exceeding unfunded commitments, after raising revolver capacity by $585 million to $2.6 billion.
• Spillover Income -- $0.41 per share at quarter end, described as a "strong advantage" for supporting future distributions.
• Interest Rate Sensitivity -- A 50 basis point rate decrease is expected to reduce NII by $0.02 per share over the next quarter, assuming all other factors remain steady.
• Non-Accrual Rate -- 0.7% of debt portfolio fair value, with one name removed from non-accrual and no new additions during the quarter.
• First Lien Investments -- Increased to 76% of the portfolio from 69% one year ago, with over 96% of this quarter's originations in first lien or unitranche structures.
• Investment Diversification -- Average investment is less than 0.5% of the portfolio; 11 new names added in the quarter.
• Borrower Metrics -- Median EBITDA of portfolio borrowers is $112 million; weighted average EBITDA is $197 million; average loan-to-value (LTV) is 43%.
• Interest Coverage Ratio -- Portfolio average improved to 1.7x from 1.6x in the prior quarter, with management projecting improvement to high-1x-to-low-2x within a year under the current forward curve.
• Portfolio Revenue and EBITDA Growth -- "mid-single digits" year over year, with a slight quarter over quarter uptick.
• PIK (Payment-in-Kind) Exposure -- Over 80% of PIK income structured at initial underwriting; over half in first lien investments; exposure remains stable vs. prior periods.
• Originations -- $1.2 billion in new commitments; approximately two-thirds allocated to existing borrowers for refinancing or add-ons.
• Platform Scale -- $128 billion in credit-related assets under management; Blue Owl serves as lead or co-lead lender on 90% of deals and administrative agent on about 65% of investments.
• Recent Acquisitions -- Atalaya Capital Management acquisition closed in September; IPI Partners acquisition announced in October, expanding platform capabilities in alternative credit and data centers.
• OBDE Merger Process -- Joint proxy declared effective in mid-October; shareholder meetings scheduled for January 8; anticipated closing January 2025.
• Loss Ratio -- Cumulative loss ratio since inception is approximately 0.20%, indicating low realized portfolio losses.
• Dividend Income Variability -- Q3 dividend income was $47 million, down from $51 million in Q2, with management attributing fluctuations to the underlying asset performance rather than structural changes.
• Fee Income -- Prepayment-related fee income in Q3 was lower compared to Q2, which had "exceptional repayments" due to refinancing activity.

SUMMARY

Blue Owl Capital Corporation (NYSE:OBDC) reported portfolio investments of $13.4 billion, supported by $2.1 billion in liquidity and a strong capital structure highlighted by a recent revolver upsizing. Management stressed their ability to sustain the base dividend through 2025 and characterized portfolio credit trends as stable, with first lien loans comprising a growing share of assets. The company disclosed low non-accruals, increasing spillover income, and improved portfolio interest coverage, while noting that a 50 basis point interest rate decline could modestly reduce net investment income in the near term. Strategic expansion continued with recent acquisitions in alternative credit and data centers, as well as an anticipated merger with OBDE designed to streamline the platform and enhance earnings accretion. No adverse credit migration or heightened amendment activity was identified, with portfolio company earnings and diversification metrics described as favorable for risk-adjusted performance despite muted new M&A volumes.

• The company completed $1.2 billion of new investment commitments, with most originations allocated to refinancing and add-on deals for existing borrowers rather than new buyout activity.
• Over 96% of new originations were in first lien or unitranche loans, elevating first lien exposure to 76% of the total portfolio.
• Administrative agency and lead/co-lead lending roles were maintained in most platform investments, supporting selective portfolio construction.
• Recent acquisitions and joint ventures expanded addressable markets in credit, infrastructure, and data centers, but management reaffirmed commitment to upper middle-market, sponsor-backed lending as the BDC's primary strategy.
• Dividend and prepayment-related income remain variable quarter-to-quarter, depending on underlying asset performance and refinancing trends.
• Following the merger, the combined company is expected to see a decline in common equity investments, but will have room to strategically grow these positions over time.
• Interest rate sensitivity analysis reveals moderate downside risk to income if base rates fall, though management expects any earnings reduction to occur gradually.
• Total platform assets under management now exceed $128 billion, providing competitive origination advantages and a deep pool of sponsor and borrower relationships.

INDUSTRY GLOSSARY

• Unitranche: A type of single-debt facility that combines senior and subordinated loan tranches into one structure, typically used in direct lending to provide borrowers with streamlined financing.
• PIK (Payment-in-Kind) Income: Interest paid in the form of additional securities or accrued principal rather than cash, often used for portfolio companies with limited current cash flow.
• Spillover Income: Undistributed taxable income, usually retained to support future dividend payments in a BDC structure.
• Administrative Agent: The lender or institution responsible for managing and administering the terms and ongoing activities of a syndicated loan agreement.

Full Conference Call Transcript

Craig Packer: Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered strong third quarter results driven by continued portfolio performance and robust investment activity. We achieved ROE for the quarter of 12.4%, our seventh consecutive quarter of double-digit ROE and dividend yield, reflecting our attractive asset base and the resilient credit quality of our portfolio. As of quarter end, our net asset value per share was $15.28 just off from historical highs. The fundamental performance of the portfolio remains strong and our non-accrual rate remains well below the industry average.

OBDC continues to over earn the base dividend, enabling us to pay $0.05 per share supplemental dividend, and Jonathan will share more on our financial performance in a moment. We are very pleased with our results this quarter, and we think it's important to put them in the context of what we are seeing in the broader markets. Since we spoke to you last quarter, the interest rate outlook has shifted considerably. The market is now recalibrating based on an expectation of additional rate cuts over the remainder of the year as inflation has eased.

When rates increased over two years ago, we took decisive action to ensure our shareholders would benefit from expected earnings momentum while maintaining ample cushion on our base dividend. We introduced a variable, supplemental dividend framework and modestly increased the base dividend. Both of these initiatives were designed to deliver predictable cash flow to our shareholders. As floating rate investors, we recognize that the elevated rate environment would not last forever and by implementing a programmatic supplemental dividend that allowed OBDC shareholders to benefit from the higher returns associated with the increased rate environment while providing the predictability of our base dividend. This move has proven beneficial since launching the supplemental dividend structure two years ago.

OBDC shareholders have received a total of $0.47 of supplemental dividends per share, reflecting our commitment to ensuring our shareholders benefit from our earnings momentum. In the third quarter, OBDC's base dividend coverage was 127%, one of the highest among BDC peers, providing us with ample confidence in our ability to navigate the rate environment ahead. To put this in context, given current market rate expectations, we believe our base dividend will be covered throughout 2025. Depending upon how fast rates decrease, we may continue to generate excess income and pay modest additional supplemental dividends. Turning to the market environment.

While M&A activity remains subdued, we continue to find attractive risk-adjusted opportunities to deploy capital and stay at our optimal portfolio leverage for enhanced returns. Even during times of muted industry deal activity, we leverage our differentiated scale and broad origination platform to maintain strong deal flow and selectivity. Our growth as a platform has resulted in a large number of incumbent lending positions. With our $128 billion of assets under management and credit, we have a deep pool of existing borrowers and sponsor relationships we can draw upon for deal flow even in a period of modest new buyout activity.

Across our platform, we are a lead or co-lead lender on roughly 90% of deals, administrative agent on approximately 65% of our investments and have the ability to commit over $1 billion to any single investment. This significant presence typically makes us the first call when a new financing for one of our portfolio companies is in the works, driving significant deal flow. To that end, roughly two-thirds of our originations this quarter were deployed into our 435 existing borrowers in refinancings or add-on acquisitions. We believe this reflects not only the confidence we have in our portfolio companies, but also the trust that private equity sponsors place in us as a preferred financing provider.

We also have one of the largest direct lending teams in the industry with over 120 investment professionals coupled with several complementary credit strategies at Blue Owl. The scale across both Blue Owl Capital and our credit platform is one of our most significant competitive advantages that provides us the ability to generate significant deal flow through our sourcing capabilities. This has allowed us to remain highly selective even as we deployed over $9.5 billion across the platform this quarter.

In addition, our growing footprint has made Blue Owl an attractive home for leading asset managers, which has helped drive the recent acquisitions of Atalaya Capital Management, which closed in September, and the announcement of IPI Partners in October, the global investment manager focused exclusively on data centers. These acquisitions expand our platform into alternative credit, broaden our capabilities and enhance our overall deal flow across the platform, ultimately strengthening our ability to drive originations at the fund level in the coming quarters. Looking ahead, as we think about our investment approach, we remain focused on direct lending to senior secured investments in the upper middle market.

We are seeing strong results from our portfolio companies and a number of challenged positions within the portfolio was small. These achievements reflect the durability of our strategy and our continued focus on credit selection and proactive portfolio management, which remains unwavering even as economic conditions shift. Finally, I want to provide an update on our previously announced merger with OBDE. As we've discussed on our last earnings call, we expect this merger will streamline our direct lending platform, enhance our scale with a high-quality diversified portfolio that offers significant investment overlap, improve our trading liquidity profile for current and prospective shareholders, increase our access to lower-cost sources of debt and finally, drive operational efficiencies and cost savings.

We also anticipate that it will drive NII accretion over both the near and long-term with an opportunity for NAV per share accretion. We achieved an important milestone in the merger process in mid-October when the joint proxy statement of OBDC and OBDE was declared effective by the SEC. The proxy solicitation process has begun and will conclude at each of our shareholder meetings scheduled for January 8. Our current expectation is that the transaction will close in January 2025. We encourage all shareholders to review the proxy materials and vote your shares accordingly. As a reminder, the OBDC Board of Director, myself included, has unanimously recommended shareholders vote in favor of the proposals on the ballot.

With that, I'll turn it over to Logan for additional color on portfolio performance.

Logan Nicholson: Thanks, Craig. We continue to find attractive opportunities to commit capital in the third quarter, driving strong origination activity and solid earnings despite the persistently low M&A deal flow. During the quarter, we deployed approximately $1.2 billion in new investment commitments, which was roughly in line with repayments. As Craig mentioned, our scale and incumbency creates an advantage, resulting in the majority of our originations this quarter coming from existing borrowers. We were able to achieve larger allocations in some of the largest, highest quality new borrowers in the market. And for our refinancing flows, we were actually able to grow our share in many deals across the platform.

I would contrast this to the first quarter where we saw elevated second lien repayments that did not present us with a reinvestment opportunity. We added 11 new names into the portfolio and funded Audiotonix, an LBO that Blue Owl committed approximately $1.5 billion to across our platform. Over 96% of this quarter's origination activity consisted of first lien investments as we continue to believe that first lien and unitranche loans provide the most attractive relative value in the market today. As a result, our first lien investments have grown to 76% of the portfolio from 69% in the prior year.

We believe our long-standing and disciplined approach to investing in upper middle market businesses with significant operating histories in non-cyclical sectors has resulted in an attractive, highly diversified portfolio. Our average investment represents less than 0.5% of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio of borrowers is $112 million, and weighted average EBITDA is $197 million with an average LTV of 43%. We believe this scale can provide strategic benefits and operational stability as many of our borrowers are market leaders within their sectors. As Craig mentioned, our borrowers are performing well, having navigated the higher rate environment.

Across the portfolio, our average interest coverage improved to around 1.7x, up from 1.6x last quarter. This is in line with how we thought about our trough coverage in the prior quarter, and we expect to see the benefits of lower base rates flowing through the portfolio of companies over the next quarter. Based on the declining forward rate curve, we should expect to see continued gradual improvement in interest coverage. One year from now, we project our average interest coverage ratios will be in the high 1x to low 2x assuming these forward rate conditions remain as forecasted and portfolio company performance remains stable.

Within our portfolio, the sustained earnings growth of our borrowers continues to be the most significant driver of credit health. Overall, our borrowers are growing revenues and EBITDA in the mid-single digits year-over-year. We'd note that earnings growth of our borrowers ticked up modestly quarter-over-quarter as well. Our portfolio companies have the advantages of size, scale and sponsor support, which we believe will continue to serve us well. We remain confident in the resilience of our portfolio across varying economic environments and the changing rate landscape. Our non-accrual rate in our debt portfolio remains low at 70 basis points of fair value, reflecting the removal of one name from non-accrual and no new additions this quarter.

One of the primary indicators of health of our portfolio is our internal rating system. In the third quarter, our investments internally rated 3 to 5 actually declined modestly, which is another encouraging sign of the underlying health and stability of our investments. And finally, the subset of names on our watch list remains steady quarter-over-quarter, and we do not see any material pickup in amendment activity or other signs of stress. I also want to spend a moment on our PIK exposure, an area of heightened focus in the market.

As we have said before, over 80% of our PIK income was structured as such at initial underwriting, and more than half of our PIK exposure is in the form of first lien investments. In addition, PIK exposure remains stable year-over-year and quarter-over-quarter in the portfolio. In fact, these PIK names represent some of our best investments. A recent example in the quarter was our preferred equity investment in Citrix, which was originally underwritten with PIK in 2022 and carried PIK interest at inception of S plus 12% and recently had flipped to cash pay.

Due to the company's strong performance, Citrix refinanced the preferred equity with senior debt and we generated an IRR north of 20% and a MoIC of 1.5x. Our portfolio continues to be stable and resilient, giving us confidence in our ability to deliver attractive risk-adjusted returns for our shareholders. And now I'll turn over the call to Jonathan to provide more detail on our third quarter financial results.

Jonathan Lamm: Thank you, Logan. Our financial performance for the third quarter demonstrated the consistency of our earnings despite the changing market environment. We ended the third quarter with total portfolio investments of $13.4 billion, outstanding debt of $7.8 billion and total net assets of $6 billion. Our third quarter NAV per share was $15.28, reflecting the impact of credit-related markdowns on a select few investments. We believe our NAV demonstrates the resilience of our portfolio as it remains near our historical highs. Turning to the income statement. We earned net investment income of $0.47 per share, down $0.01 from the prior quarter, driven by maintaining leverage towards the higher end of our target range and stable repayment-related income.

Similar to prior quarters, we meaningfully over earned our base dividend, resulting in the Board declaring a $0.05 supplemental dividend for the third quarter, which will be paid on December 13 to shareholders of record on November 29. The Board also declared a fourth quarter base dividend of $0.37, which will be paid on January 15 to shareholders of record as of December 31. As Craig mentioned earlier, we believe OBDC is well positioned for a lower rate environment. OBDC's base dividend is well covered by our earnings with 127% dividend coverage. Further supporting our distributions is our spillover income.

We finished the quarter with approximately $0.41 per share of spillover as a result of meaningful overearning of our dividends, which is a strong advantage that provides stability going forward. In terms of our asset sensitivity to lower rates, if rates are cut by an additional 50 basis points and assuming no other changes to our portfolio, we would expect NII to decrease $0.02 per share over the next quarter. Despite these potential headwinds, we feel very comfortable with our base dividend level amid the evolving rate environment, and any reductions in rates will take time to impact our earnings.

We encourage investors to refer to the interest rate risk section of our 10-Q for additional information on OBDC's asset sensitivity. Moving to the balance sheet. We continue to optimize and enhance our liability structure to deliver strong performance to shareholders. We finished the third quarter with net leverage of 1.23x within our target range of 0.9x to 1.25x based on originations that were generally in line with repayments. During the quarter, we enhanced our liquidity position by increasing our revolver capacity by approximately 30% or $585 million across six lenders, bringing OBDC's total revolving facility to $2.6 billion. This reflects the strong relationships we have built with our bank partners and represents the importance of the Blue Owl platform.

As of quarter end, total liquidity stood at $2.1 billion, well in excess of our unfunded commitments. Additionally, we believe we can further reduce costs through the synergies and liability optimization, [resulting] from our anticipated merger with OBDE. We remain very pleased with our results and with what we have accomplished with our liability structure. And now I'll hand it back to Craig to provide final thoughts for today's call.

Craig Packer: Thanks, Jonathan. Since inception, we have delivered strong ROEs and constructed a resilient portfolio with a very low loss ratio of approximately 20 basis points. We believe this performance reflects our commitment to credit quality and a long-term approach in managing our credit business and OBDC. We've built our direct lending platform with this long-term mindset, ensuring our portfolio and dividend framework will perform well across all interest rate and economic environments. Looking ahead, we are confident that our strong origination capabilities will allow us to maintain a fully invested high-quality portfolio. While lower rates will impact OBDC's earnings, they will also reduce interest expense for our portfolio companies, enhancing their performance and potentially leading to increased M&A activity.

New activity has been light in recent quarters with historically tight spreads driven by strong capital inflows into both public debt and private credit funds. This has put pressure on pipelines across the BDC sector, resulting in new joint ventures between direct lenders and established banks as they seek to expand origination efforts. At Blue Owl, we have not needed to pursue these strategies. As you've heard me say today, our investment in our team, our scale, our sponsor relationships and our long-term investment thesis have carried us through both outsized market activity and more challenged economic cycles. We believe the current market trends will not persist indefinitely. Eventually, the supply-demand imbalance will improve.

Lower rates could result in increased deal activity as companies invest more in growth initiatives, potentially spurring a wave of M&A and improving pricing as deal activity increases. In the meantime, while we wait for the market to recalibrate, our portfolio remains healthy, credit quality is strong, and we are confident in our ability to continue to deliver attractive returns to our shareholders. We are pleased to be entering this changing macroeconomic environment from a position of strength. With that, thank you for your time today, and we will now open the line for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Brian McKenna with Citizens JMP. Please proceed.

Brian McKenna: Okay, great. Good morning, everyone. So just a question to start on yields and spreads for new deals today. The average yield on new commitments totaled sub-10% in the quarter. I know there's a few different drivers kind of within that, and it's also more challenging to predict in the near-term. But where do these go from here? Do you think we're close to the bottom in terms of spreads? And then what makes you confident that private credit yields will continue to be in excess of public credit markets.

Craig Packer: Sure. Good morning, Brian. Thanks for the question. Spreads on new deals, today are as low as 4.75%, some are 5.00%, probably one or two that are 4.50%, but I would say 4.75% is probably the center of gravity for the tight spreads for attractive deals. We're certainly doing deals that are wider than that. My sense is spreads are troughed there. Based on just activity in the last three months or so, I think that's about where it's troughed, and you're not seeing things come tighter than that.

I don't think there's a meaningful risk that it will come tighter than that, still given where SOFR is, that's still, as you noted, still generates a 10-plus percent absolute return, which we think is very attractive. But I do think we're at a cyclical trough and my hope is in the next year or so if M&A picks up and the public markets cool a bit that spreads will widen to a more normalized level. As to your question relative to the public markets, and I think you know this, but maybe some of the listeners don't, public market spreads are significantly tighter than 4.75% over. Public market spreads are 3.00%, 3.25% over.

And so the private markets continue to offer 100-plus basis point premiums ignoring the fact that we also get underwriting fees is that are not available to the public market investor. So the private markets continue to generate substantially higher returns, differentiated returns versus the public markets. And I'm hopeful that spread at some point will normalize.

Brian McKenna: Okay. That's super helpful. And then just for my follow-up, the Blue Owl platform more broadly continues to expand capabilities, including within alternative credit and then in other higher-growth areas like infrastructure and data centers. There's clearly going to be quite a bit of capital needs within both of these markets. So what does this ultimately mean for lending opportunities across all your BDCs, do you think you'll look to lean in here over time? And then is there any way to frame the yield opportunity here relative to regular way direct lending?

Craig Packer: Sure. as folks know Blue Owl has done a small number of strategic acquisitions or mergers in the last year or so, as you noted, including a significant expansion into the alternative credit space with our acquisition of Atalaya, our recently announced transaction of a large hyperscale data center business, IPI, our insurance – our expansion into the insurance space, I think these are all really terrific opportunities for our direct lending platform and our BDCs. We are not changing the strategy of our BDCs. We're going to continue to be focused on upper middle market, sponsor-backed lending from recession-resistant sectors as we have since inception.

But we are going to now have just a meaningfully larger ecosystem in both the sponsor and non-sponsor world in really high-quality assets, working with teams that have generated very significant returns to investors in their respective asset classes. Having that all under one roof and one credit platform and one asset manager platform, it's going to significantly expand our deal flow. And I think there will be opportunities, select opportunities where we can invest in scale across the Blue Owl platform that will create select opportunities to put high-quality, predictable income generating-assets into our BDCs. That's the strength we haven't had before and now we're going to have it.

Again, I don't want to give – I don't want to create a concern about strategy drift. But I do think that the scale of having $120 billion credit platform now is going to create just new avenues for deal flow. Sponsors that might not have thought we've had a relevant source of capital, we'll now call us for new deals. Companies that may not have thought of us as a financing source will now be able to call us, founder owned businesses will call us. And those folks don't always necessarily know where their capital needs can best be met on our platform.

And so could just also generate regular way direct lending opportunities as before, but now people are calling us and we can direct it in the right place, not to mention all the additional underwriting resources we'll have under one roof. So I'm quite excited about this opportunity. In terms of the return profile, each of those businesses I mentioned, the insurance business is a little bit different because it's investment-grade orientation but the investment – the alternative credit business generates returns really in excess of the direct lending model. In the data center business, returns have been very attractive and more importantly, the credit quality the counterparts they have in that business are extremely high.

So this is a huge positive to OBDC shareholders to have this all under one roof and no negatives as far as I can see.

Brian McKenna: Okay. I will leave it there. Congrats on another strong quarter.

Craig Packer: Thank you.

Operator: Our next question is from Casey Alexander with Compass Point. Please proceed.

Casey Alexander: Hi. Good morning, Craig. And thanks for taking my questions. I kind of lift on the combination of dividend income and fee income this quarter, and that's on me. But I'm kind of wondering where you feel sort of the correct cadence is in sort of the run rate of the second quarter or the run rate of the third quarter, at least for the next couple of quarters until you're able to consummate the merger, then the answer to that question might be different?

Craig Packer: Sure. I'll start and Jonathan will say, well, Casey, we would never say that you whiff. You might have hit one off of that and so the stance. But I wouldn't call it a whiff. But we do recognize that your numbers might have been a bit different than ours. Jon, if you can add some additional color. I think there were a couple of components maybe in your model that might have been a bit off and other investors may have the same questions.

One is that we do have a really a significant amount of dividend income from some of our investments, either in businesses like Wingspire or senior loan fund as well as investments in some preferred stocks and the like. In the second quarter, approximately that generated about $51 million of income. On this quarter, it was down a few million dollars. There's nothing particular there. Most – really, all of these, I think, or most of them – most of it, it's not contractually defined income, it's based on the underlying performance of the individual hold assets or it might be a variable dividend that a particular company declares.

And so it will – it can move around quarter-to-quarter based on what's going on in those underlying assets, a few million dollars positive or negative. Historically, the first half of this year is about $50 million; this quarter is $47 million. Next quarter, we'll just have to see, it could be up a bit. The other piece, I think, in your numbers, was some fee income really primarily related to repayments. As folks know, second quarter, we had significant really exceptional repayments, given the low rate environment, there is a lot of refinancings on. And so this quarter, we had some nice income generated by repayments but it wasn't this off of that accelerated number in the second quarter.

And so looking ahead to the fourth quarter, the fee income – excuse me, the dividend income, probably be in the zip code, hope a bit higher. The prepayment income, we'll just have to see how the quarter ends. It could be in the same zip code, maybe a bit higher, a bit lower. So I don't know, Jonathan, if....

Jonathan Lamm: I think you hit on everything right there, Casey, that helps you. I think you had really effectively projected an up number relative to the prior quarter. So I think hopefully that straightens it out.

Casey Alexander: All right. Well, listen, thank you for taking my question. I appreciate the clarity and the only people who don't whiff are people who don't swing. So I'll still take it as a whiff. Thank you.

Craig Packer: All right.

Operator: Our next question is from Mickey Schleien with Ladenburg Thalmann. Please proceed.

Mickey Schleien: Yes. Good morning, everyone. Craig, I just wanted to touch on the non-sponsored market. Everybody is talking about how spreads are so tight in the sponsored market, et cetera. But you do have a non-sponsored segment. I was wondering if you could just review how large that is within your organization, what proportion of your portfolio is non-sponsored? And how do the economics compare there?

Craig Packer: Sure. We've done non-sponsored deals since inception. That's part of our business plan, associates one of our single largest investments. It's not a sponsored-owned company. And so we do that regularly, although we generally strongly prefer sponsored-backed companies for the reasons that are obvious, they bring significant capital, governance, resources and they can – particularly if the business is struggling, they can add all those features that's typically not the case in the non-sponsored deal. We're going to continue to prefer sponsor but we will do non-sponsor selectively or really attractive companies where we get to know the ownership group and the management team extremely well.

It probably goes without saying, but all BDCs are focused on sponsor business because the velocity of capital and the investment opportunity in the sponsored world is much higher than the non-sponsored world. Sponsors have significant pools of capital and spend everyday thinking about ways to deploy that capital, generating lending opportunities for us. Non-sponsored companies can go years without generating any activity. So it's much more idiosyncratic, it's very difficult to invest capital and scale in the non-sponsored space. So we seek those opportunities. We make investments, but I think our bar for non-sponsor is just higher given both the lack of some of the sponsor oversight.

And I think that's true today, and it was true as we started the business. In terms of the terms that you can get for non-sponsor, it varies based on the credit opportunity. I don't think it's currently meaningfully wider. I think that on the margin, the sponsors are clearly have a deep expertise and work with law firms that have deep expertise in negotiating. And so they'll push maybe in a way that a non-sponsor might not always have the same goals. A non-sponsored company cares an awful lot about who their lender is because it's typically a founder-owned business and that relationship is critical for a number of reasons.

And so there will be other goals that may not be the last basis point for the last credit protection. But I don't think you're going to – I don't think you're going to see a dramatically wider spread for non-sponsor opportunities. It's not a really different market. And so I think we'll continue to focus on sponsor.

Mickey Schleien: Okay. I think I understand. Thanks for that explanation. My follow-up question relates to Page 16 of the presentation. Just trying to triangulate some math in the middle of that – the sort of the two middle rows where we look at the weighted average interest rate on the new commitments and the weighted average spread. The weighted average interest rate on new commitments dropped by 1.2%. Spreads dropped 30 basis points and SOFR dropped 50 basis points. So I'm trying to understand the math there. And it may have something to do with my last question, which is, I think if I'm reading it correctly, your allocation to unitranche has declined pretty dramatically in the last few quarters.

And maybe that's the answer to the question, but I want to understand if there was something else going on there.

Craig Packer: We're happy to follow-up offline and get really detailed. Obviously, this is just focused on new commitments. So it's a relatively small part of the portfolio, [indiscernible] 10% of the portfolio. As we've been talking about, spreads have come down over the last couple of quarters. And so you can see that, I just said that a minute ago, question was where new deals coming on a spread basis. And this 5.1% is not far off from what I said a minute ago, 4.75%.

So that's just market where the market migrated to in the third quarter and the lower base rate or lower weighted average interest on new investment commitments is obviously a combination of the lower spread and lower base rates. To your question on unitranche, no change there. We continue to focus on unitranche, spreads on unitranche are lower than they were. And so as you know, the term unitranche, it's a bit of a term of art, meant to describe a first-lien term loan through a leverage level higher than its typical first lien term loan. And so that's where we continue to play and that's where the – I think most BDCs continue to play.

The spreads on that product are just come in a bit. That's certainly where our focus continues to be. And we will also – we evaluate – there is some reporting we put in our filings of exactly how much unitranche we have. We go through a pretty robust process every quarter to look at every loan and determine whether it's still a unitranche as they improve in credit quality. They often graduate to be a first-lien term loan. And so quarter-to-quarter, if you look at that disclosure, that will be not only a function of new deals, but also just how we're freshening of the analysis quarter-to-quarter.

So again, back to your question, it will happen in the quarter, new deals coming in, modestly lower spread, base rates coming down, generates lower weighted average rate on new investment commitments of about 10%.

Mickey Schleien: All right and thanks for that. Craig, appreciate your time.

Craig Packer: All right. Thank you.

Operator: Our next question is from Maxwell Fisher with Truist Securities. Please proceed.

Unidentified Analyst: Hi. Good morning. I'm on for Mark Hughes. The average commitment in new portfolio companies was lower than it's been the past several quarters as well as the maturity on those. Any purposeful or strategic shift there or just the specific investments made?

Logan Nicholson: Sure. Thanks for the question. It's Logan. Specific to this quarter, it was mostly relative to us being at our target leverage. And so our available capital to invest is simply lower. And so our average investment size was lower accordingly, where in the prior quarter, given what had happened in the first quarter with the second lien repayments that we mentioned, we have more available capital to reinvest and so our bite size was a little bit bigger.

Unidentified Analyst: Okay. Thank you. And it looks like OBDE has less of a priority on common equity investments than OBDC. Now I was just wondering how that – how the combined company will prioritize these common equity investments?

Jonathan Lamm: It's primarily a function of the strategic equity investments that we have, like investments in our senior loan fund as well as in Wingspire that don't exist in OBDE. So as a combined company, obviously, both companies will have – obviously, all shareholders will have access to that, but you'll see an immediate decline, but it gives you the room to grow those strategic investments over time.

Unidentified Analyst: Okay. Thank you.

Operator: Our next question is from Robert Dodd with Raymond James. Please proceed.

Robert Dodd: Hi, guys. I also slightly whiffed. But I haven't stuck out yet. So I'm in the same now with Casey there. On the interest coverage, obviously, so up to 1.7%, it was 1.6% last quarter. But the – I think the bigger part is – in the beginning of the year, there were 17% of the portfolio excluded from that calculation. That's now down to 10%. So it's almost been cut in half. So the share of the portfolio EBITDA is maybe not applicable, is much lower today than it was at the beginning of the year. So can you give us any color on – was that a deliberate rotation? Was that performance at the companies?

Or should we expect that to shift further and focus more on cash flow, EBITDA is relevant businesses rather than where the portfolio is maybe positioned a year ago?

Craig Packer: Thanks. Okay. I don't think there's too much to draw, but I do think it's a positive to draw. I mean we – when there's – there are companies getting excluded from the calculation, it's typically because we might have invested in the company a point in its life cycle where it's investing in this business and the cash flow is depressed. And so it would skew the calculation. We see this particularly in the software space or there's some other structural reason why from our underwriting standpoint, we don't think it's comparable and would skew the analysis. But our investment approach is pretty clear and simple.

We do that in the expectation that those companies will eventually normalize and get to a very normal range of interest coverage. And so I think you're just highlighting model works, it's is working. We invested in companies, they improve their credit quality over time, and they became included in the calculation because their statistics are now not going to skew the results. We're going to continue to make those kinds of investments out. So I don't want to signal it's going to continue to get better because we're going to continue to do deals that where we can get an attractive risk-adjusted return, but they may have artificially skewed reported results for a few quarters.

I think that's something we do well, it's worked well. We continue to do it. Right now, we're probably at a bit of low point, and it's also probably reflecting the portfolio skewing a little bit more to refinancing and repricings and not enough new deals. When we get in an environment with new deals, some of those may have those same non-comparable measures and the statistic might go up a bit.

Robert Dodd: Got it. Thank you.

Operator: [Operator Instructions] Our next question is from Finian O'Shea with Wells Fargo. Please proceed.

Finian O'Shea: Hey, everyone. Good morning. Craig, I think if you guys can talk about the post-quarter rehash in the SLF, if that will sort of change and strategy or composition or anything else to think about?

Jonathan Lamm: Hey, Fin, it's Jonathan. No real change in the strategy at all. What we're doing is really effectively taking our historical JV, which had long ago been a direct first lien portfolio that's evolved to mix of some directs and then also some broadly syndicated loans as well, and we're effectively creating – we've created a multi BDC joint venture where effectively we can allocate out of all of our different BDCs in a much more efficient manner, with much more efficient financing from an advance rate and from an interest cost perspective. And so what's happening over here is we're effectively moving the assets from the original JV into that multi-BDC JV.

And there should be very, very little friction in terms of really any friction in terms of the returns to OBDC as they're effectively taking back a pro rata portion of that multi-BDC JV with the transfer of those assets over.

Finian O'Shea: Okay. It's helpful. Thank you. And I guess a follow-up. Have you on unsecured mix, I know things change and everyone is opportunistic, but I guess, let's say, today, as we look through the merger and the 2025 maturities, how should we think about the unsecured composition if that will go up or down in a substantial way?

Jonathan Lamm: Well, there are a few variables that go into that. We've got the merger closing. So right now, we're about 55% on a funded basis in unsecured, it'll come down a little bit as we bring the two companies to about 50%. We've got around $1 billion that's coming due next year. And so what you should expect from us is that we'll definitively refinance. We don't want to bring that unsecured percentage down too much. That being said, we definitely see the secured financing market is extremely attractive from a pricing perspective as we see the unsecured markets as well, but there is a gap there.

So I don't think you should see too much of a material movement in terms of the percentages, but we definitely have the opportunity on the secured side to reprice some of our higher-cost CLOs and other finance secured financing structures to lower cost over time.

Finian O'Shea: Thanks so much.

Operator: With no further questions in the queue. I would like to hand the conference back over to management for closing remarks.

Craig Packer: Okay. Well, look, thanks, everyone, for joining. We're really pleased with the quarter. As always, we're here to answer any of your questions. So please reach out separately if there's any follow-ups. And I hope everybody has a great day.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

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