Blackstone Secured Lending Fund Q1 FY2022 Earnings Call

Welcome to the Blackstone Secured Lending First Quarter 2022 Investor Call. At this time, all participant lines are in listen-only mode. Please note that the call is being recorded for replay purposes. With that, I would like to hand the call over to Michael Needham, Head of Investor Relations. Please go ahead.

Thanks. Good morning and welcome to Blackstone Secured Lending's first quarter call. Joining me today are Brad Marshall, Chief Executive Officer and Stephan Kuppenheimer, Chief Financial Officer. Earlier today, we issued a press release with a presentation of our results and filed our 10-Q, both of which are available on our website. I'd like to remind you that today's call may include forward-looking statements which are uncertain outside of the firm's control and may differ materially from actual results. We do not undertake any duty to update these statements. For some of the risks that could affect results, please see the risk factors section of our 10-K and 10-Q. This audio cast is copyrighted material at Blackstone and may not be duplicated without consent. On to our results, we reported GAAP net income of $0.63 per share for the first quarter and net investment income of $0.61 per share. With that, I'll turn the call over to Brad.

Great, thanks, Michael, and good morning everyone and thanks for joining our call this morning. The BXSL, as Michael reported, had a strong first quarter highlighted by a 2.5% quarterly total return based on NAV, along with outstanding credit performance and a well-covered dividend. That brings our inception to-date annualized total return based on NAV to 10.1%. While we'd be pleased with these results in most markets, what's truly remarkable is that this happened during a quarter in which equity and credit markets declined materially. With the S&P 500 down 5% and the S&P leveraged loan index down 0.1%. As we have highlighted in the past, BXSL was built for challenging market environments like the one we find ourselves in today. By leading the market with low fees and expenses, we can take less portfolio risk and drive more defensive returns for investors over time. BXSL is not only focused at the very top of the capital structure, with 98% of the portfolio invested in first lien senior secured loans with less than 50% loan to value, but also focused on investing in larger companies with more durable business models in industries with strong secular tailwinds. As compared to other scale BDCs defined as those with more than $750 million of assets at year-end, BXSL has the lowest fee structure, the highest first lien senior secured focus and the lowest concentration of assets on non-accrual at zero. In the first quarter, we delivered a regular dividend of $0.53 per share, which increased from $0.50 starting in the fourth quarter. That higher regular dividend was well covered by net investment income, with a dividend coverage ratio of 115%, despite a market environment characterized by lower deal activity and lower prepayment fees. In addition to our regular dividend, there were two special dividends in the quarter totaling $0.25 and we have declared two more special dividends to be paid later this year for an additional $0.40 per share. Excluding the impact of special dividends, NAV would have increased 0.4% during the quarter. While BXSL's performance was steady during a volatile first quarter, we're most excited about what lies ahead. Even though there may be macroeconomic headwinds on the horizon, we believe that BXSL's defensive portfolio composition and attractive liability structure make us well positioned for an environment of rising inflation and rising interest rates. Today, I'd like to cover a few key themes before turning it over to Steve to review our financial results. First, I'll discuss robust investment platform enhancements we're making on that front; second, the defensiveness of our portfolio in the current environment; third, potential income upside over time from higher interest rates and from normalization of prepayment income over time; and fourth, our operating team's Blackstone Advantage, which is an important tool in most environments - and especially in today's environment - to help companies mitigate inflationary pressures. Starting with our BDC franchise, we have vast pools of capital as the largest BDC manager in the industry. The BXSL benefits from that because it can finance large transactions for high-quality companies when it has available capital. Year-to-date, Blackstone Credit committed to 10 mega unit tranche transactions with deal values exceeding $1 billion. In the past 12 months, Blackstone Credit was the largest lender of $17 billion-plus transaction. Blackstone has further cemented itself as the market leader for the largest private financings. In fact, our BDC platform was recognized by private debt investors earlier this year as BDC Manager of the Year, along with winning Global Fund Manager of the Year and Deal of the Year in America's for one of our large transactions. Across Blackstone Credit, there are over 400 employees, 15 regional offices around the world, deep sector teams, and over 2,300 corporate debt investments. That gives us tremendous insight, origination, and overall connectivity in the credit markets. Across the larger Blackstone platform, with over 4,000 employees and nearly $1 trillion in assets under management, that connectivity is multiplied many times over. For example, BXSL's investment team has access to over 100 Blackstone senior advisors across various areas of expertise. And it's not just the scale of Blackstone, but how we leverage it to advantage our investors. As Blackstone's Credit capital base has expanded, it has invested in more capabilities that benefit BXSL across origination, sector expertise, and other support areas. Blackstone Credit is also meaningfully expanding its headcount by targeting over 100 new hires by year-end, which will bolster our origination and sector expertise, including enhancements to our technology and healthcare verticals, where we see attractive long-term opportunities. Those verticals also happen to be BXSL's largest sector exposure today. Second, BXSL's portfolio was designed to protect investors' capital in challenging market environments. As of quarter-end, none of our portfolio companies are on non-accrual and in aggregate our companies are experiencing healthy revenue and EBITDA growth as well as expanding margins. However, the overall business environment has undoubtedly become more challenging. Inflation is at a 40-year high in the U.S. Supply chains are disrupted in certain areas, and interest rates are rising along with financing costs. We expect those challenges to be felt unevenly across the economy, with some areas more protected, especially where revenue growth can offset inflation pressure. We believe other areas, such as certain industrial businesses, will bear more of the brunt given capital expenditure requirements and rising input costs. We believe these risks generally are amplified as you move into smaller companies and as you move further down the capital structure into second lien unsecured debt and equity. The advantage we gain from being part of the Blackstone platform is that we get an early read on economic trends and inflection points from many thousands of investments managed across the firm. In this case, we saw inflationary pressures developing and built our portfolio around that theme. We've largely avoided secular disruptive businesses, which protect us as debt holders. Most of our portfolios comprise of non-cyclical sectors, and our privately originated loans have an average loan to value of 44% with significant equity and subordinated debt below us. We built a largely senior secured portfolio and focus on lending to larger companies that have more pricing power, more experienced management teams, and are backed by sophisticated sponsors with financial and operational support. Looking ahead, we feel very good about the quality and the resiliency of our portfolio. Third, we see income growth potential over time from rates and prepayment fees. Our asset liability profile enables BXSL to benefit from rising interest rates. Nearly 100% of our debt investments are floating rate, and nearly 60% of our liabilities are fixed rate at an average interest rate of 2.97%. We decided not to swap those liabilities back to floating, giving us powerful upside earnings potential, while still protecting us to the downside with interest rate floors on our assets. Since our earnings call last quarter, short-term interest rates have increased significantly, with three-month LIBOR increasing from 21 basis points to 96 basis points as of quarter-end and 140 basis points today. Short-term interest rates are now above BXSL's interest rate floors which have averaged 84 basis points on all our investments. Given the significant quarter-to-date move in LIBOR and the timing of rate resets, we expect most of the benefit from recent moves to begin in the third quarter of this year given the timing of three-month LIBOR contract rolling over. Based on quarter-end LIBOR, we estimate that a 100 basis point increase in LIBOR would result in incremental earnings per share of $0.09 per year, $0.18 from a 200 basis point increase, and 28 basis points from a 300 basis point increase. Since quarter-end, rates have already increased by 44 basis points. While spreads may compress in a higher rate environment, which could partially offset the benefit from rising from higher rates for BXSL, this will come as the portfolio turns over which will drive incremental income from prepayment fees. In the quarter-end investment activity was fairly light, driven primarily by our desire to maintain leverage at 1.25 times. On the positive side, we were able to optimize BXSL's investment activity around its capital availability, which was limited due to lower prepayment activity. The flip side to that is that prepayment income was at a historically low level for BXSL due to this lower portfolio turnover. Prepayment fees accounted for only one penny of our $0.61 of net investment income. Even if those fees were zero, we would have meaningfully covered our dividends. Our prepayment fees could remain subdued over the near term; we expected that coverage will grow over time with rising rates. Fourth, and lastly, our Blackstone advantage program is helping our companies combat inflation. Last quarter, we talked about how we believe in delivering a superior value proposition to our boards. One of those services is expense reduction through procurement, which has been in high demand given rising costs and supply chain bottlenecks. We believe we can help mitigate those pressures on our borrowers by taking an active role. For example, one of our portfolio companies was experiencing challenges obtaining raw materials and controlling its overall cost inflation. We've been working closely with that company to leverage our group purchasing offering, as well as building out RFPs and supplier auctions on their behalf. So far, we've helped them identify more than $3 million of cost savings. We're also helping to map their carbon emissions footprint, procure energy resources, and identify renewable energy projects, all of which should lead to reduced costs and lower emissions. Across the Blackstone credit platform, we've identified total annual savings of nearly $200 million for companies through this program, which has created billions of dollars of enterprise value for our sponsors. I'll close by saying that I'm extremely excited about what lies ahead for BXSL. We built a high-quality portfolio that is designed to withstand challenging environments and deliver an attractive, durable yield. Our platform is unmatched in scale sourcing and providing operational support to our companies. And Blackstone is investing even more into that platform. We think that the BXSL represents the best version of a public business development company with a stable, high-quality, defensive portfolio that is well positioned for this environment. Pairing that with a low-cost structure and attractive upside from higher interest rates creates a powerful economic engine that we believe will drive strong results for our investors going forward. So with that, I will turn it over to Steve.

Thank you, Brad. And thank you all for your time today. BXSL produced very strong results for the first quarter of 2022 and is well positioned for the current market environment. Today I'll focus on a few topics highlighting these themes, including our financial performance, our investment activity, the evolution of our portfolio, and our liability structure. In terms of yields, the returns we generated a dividend yield of 8.8% over the last 12 months, based on quarter-end NAV, which included a regular dividend of $0.53 per share and two special dividends totaling $0.25 per share in the current quarter. Going into our balance sheet and dividend performance, BXSL ended the first quarter with total portfolio investments of $10 billion, outstanding debt of $5.6 billion, and total net assets of $4.4 billion. That asset value per share decreased from $26.27 to $26.13, primarily due to our $0.25 of special dividends, which were paid entirely from accumulated undistributed net investment income from prior quarters. Excluding the impact of special dividends, NAV per share was up $0.11 or 0.4% for a quarter ago and up 3.2% from a year ago. We continue to out-earn our regular dividend with net investment income. In the current quarter, our NII of $103 million exceeded our regular dividend by $30 million, or a dividend coverage ratio of 115% for the quarter. In addition, we had $5 million of net realized and unrealized gains driven by realization on our equity investment and forfeits. $103 million of NII represents $0.61 per share, which was down from $0.67 per share in the prior quarter, mainly driven by a lower level of prepayment fees, but also still well in excess of our regular dividend level. Focusing on our assets, our total investment portfolio at fair value at the end of the quarter was $10 billion, and we had total assets of $10.3 billion. As of March 31, 2022, the weighted average yield on our debt investments and other income-producing securities at amortized cost was 7.3%. The excess sales gross investment activity during the quarter was slower given this was our first quarter of being fully drawn and invested. During the quarter, the company made $278 million of funded investments offset by only $33 million of sales and $100 million of repayments for net investment activity of $145 million. Although our quarter-over-quarter portfolio statistics are relatively similar, I would like to summarize the evolution of the portfolio on a year-over-year basis, as it helps to frame the picture around how well BXSL is situated for current and expected market conditions. Compared to the first quarter of 2021, the number of portfolio companies is up 71% from 89 to 152. The average EBITDA of our borrowers is up 91% from $67 million to $128 million, while the average LTV of our borrowers has remained constant at 44%. In addition, the first 9% of the portfolio in floating rate exposure for both the first quarter of 2022 and the first quarter of 2021 was 98% and 99.9% respectively. Altogether, this means we have added material diversity and quality to the portfolio through more individual credits and larger borrowers while not compromising risk based on loan to value or first in concentration. We continue to be diversified across industries as we ended the quarter invested across 35 different industries, which is consistent quarter-over-quarter. As of quarter end, our largest exposures are in healthcare, software, and professional services. Each of these are industries where we continue to see strong tailwinds, economic growth, and well-positioned companies backed by strong sponsors aligned to. Now moving on to our capitalization and liquidity, our balance sheet is comprised of efficient, diversified sources of capital, including a significant amount of fixed-rate unsecured debt. As of quarter end, 56% of our debt outstanding was in the form of unsecured bonds, which provides the company with significant flexibility and cushion as well for potential additional earnings upside as rates continue to rise, as Brad mentioned. Of our $6.3 billion of committed debt, $5.7 billion of principal was drawn. Of that $5.7 billion, $3.2 billion represented unsecured bonds, which, again, as Brad mentioned, have an average coupon of just under 3% and maybe just as importantly, have a remaining weighted average life above 4.4 years. And we – as Brad mentioned, we did not swap these bonds. This means that we have a very low unsecured cost structure for the next several years of forecasts. At the end of the quarter, our average debt to equity ratio was 1.28 times and – I'm sorry, we ended at 1.28 times, on an average of 1.25 times, which is consistent with our near-term goal to operate with leverage at the high end of the range of one-to-one on a quarterly basis. This active balance sheet management allowed us to continue to keep our costs of leverage down with an average cost of debt over the quarter of 2.9%. Additionally, we have a low level of debt maturities over the next few years with our nearest maturity in 2023 and the weighted average maturity of our liabilities at four years as of quarter end. We ended the quarter with $569 million of undrawn debt capacity. As part of the IPO, a share repurchase program equal to $262 million, or the size of the IPO, was put into place. The program is formulaic, and is triggered to BXSL shares trading below net asset value. The program was put in place because we believe that if our common shares trade below NAV, it is in the best interest of our shareholders to reinvest in the portfolio. Though there were no repurchases in the first quarter of 2022, since the stock price never traded below NAV, the repurchase program has been activated on a few trading days subsequent to quarter end. However, the vast majority of the $262 million program remains available to the company. The first quarter of 2022 saw continued strong investment and financial performance for the company. And we believe BXSL is well positioned in the current rising rate environment with floating rate assets and largely fixed low-cost liabilities that should allow for enhanced earnings power going forward. And with that, I'll ask the operator to open the call for questions.

Chandra, before we move to Q&A, I would just like to clarify that the earnings per share upside from LIBOR that we discuss on a quarterly basis is not annual. With that, Chandra, can you please open the call to questions?

Certainly. And the first question is coming from Citi. Please go ahead.

With rising concerns about potential recession, what's the Blackstone view of recession? And what are the types of things you're looking for that would make you a little bit more conservative in terms of your portfolio construction?

Sure, thanks, Aaron. While I give you the top of the house view from our Chief Strategist Joe Zidle, I think if he was here, he would express a little bit more of an optimistic perspective on the runway for the U.S. economy and expanding over the next 12 months. I think his view is that there are certain tailwinds in the household and corporate sector. And that kind of momentum, those tailwinds should sustain growth despite higher inflation and rising rates. Generally, I think he would say there are preconditions that need to be in place before any recession: one, leading economic indicators have to roll over. They typically lead the business cycle by an average of seven months, and as of the most recent print, they're still rising. Secondly, corporate profit growth on a year-over-year basis needs to turn negative. We've never had a recession in the modern era without profit growth turning negative, and that business cycle contracts before an economic cycle. Lastly, just the unemployment rate needs to move higher, and we haven't seen that just yet. My overlay on top of that, Aaron, while I believe all that to be true, is that I think there is going to be a quality breakdown; better companies will have pricing power, they'll be able to pass through inflation or growth through it. I think it's really the smaller, more commoditized businesses that will begin to be stressed either because of input costs, supply chain issues, or rising rates and what that does to the interest burden. So while we generally have good tailwinds, we're going to see some things break down. That doesn’t change our portfolio construction and our view on how to mitigate risk, which is focused on bigger companies in sectors we think have more growth in them: more technology and healthcare, less industrial or commoditized type of businesses, and continue to be in the most senior part of the capital structure to help mitigate any risk in the event that something does trip one of these companies up.

Thanks, that's helpful. The other thing I wanted to talk about was credit spreads; credit spreads in the liquid markets are starting to widen out a bit. I know it tends to take a while to kind of get into the private credit market. But I'm just curious to see if you're seeing any notable spread widening or if you're kind of repricing some of your new loans that you're putting into the pipeline?

Yes, so you're right. Just to put some numbers to that, since the start of the year, first lien loans in the market are down about 2.5 points, second lien loans are down 4.7 points, and the high-yield market is down 11 points. The further down the capital structure you go, the more spread widening you're seeing. In the private markets, we've seen spreads stay about the same, maybe a little bit wider. But as you point out, there's typically a little bit of a lag in terms of the public markets impacting the private markets because there needs to be a little bit more duration to that spread widening versus just pockets of technical volatility. But I would expect over time that if the public markets stay wide, the private markets will follow. So we're definitely keeping an eye on that.

Thank you.

The only thing I would add, Aaron, is just if I can just add to that, you know, typically when base rates widen, your spreads compress. So the fact that base rates are up 120 some odd basis points since the start of the year, without really any material spread compression in the private markets is quite unusual. So the effective yields have widened quite a bit in both the public and private markets.

Next, we have Ken Lee with RBC. Please go ahead.

Hi, good morning. Thanks for taking my question. You highlighted some activity with transactions greater than $1 billion. I'm wondering if you could just further expand upon your comment and talk about what you're seeing in potential transactions pipeline at the upper end of the market, especially given recent market volatility? Thanks.

Yes, so in the larger end of the market, it's actually fairly active. Just to put some numbers to it. In 2019, we talked about this before, there were maybe two deals above $1 billion that got done. Last year, it was 26. In the first kind of four months of this year, we've seen about 15. The secular shifts from the public markets to the private markets have continued, and I think the volatility in the public markets has accelerated that a little bit for the start of the year. So what I would say, Ken, the pipeline is very active. It's one of the most active pipelines we've seen in a long time. Just to give you a number, we're currently reviewing over 150 different transactions, both large and small. We will gravitate to the bigger deals based on my comments earlier. But the market is definitely becoming much more active.

Okay, very helpful there. And one follow-up, if I may, in terms of the leverage, you're currently at your top being at the upper end of your leverage range. Wondering, do you see any change over the near term just given current market backdrop? Thanks.

Ken, how you doing? I think we like our target range. In this environment, being around one and a quarter is a comfortable position. We feel good about where the company is with the current portfolio and our pipeline. So, I would not expect changes to our current stock exchange.

Got it. Very helpful. Thanks again.

And next, we have Finian O'Shea with Wells Fargo. Please go ahead.

Guys, it's Jordan on for Finian today. We were looking through some of your new originations this quarter and maybe only see or maybe a handful of new names. Obviously, you're right on the mark for target leverage so there wasn’t much need to put some new assets on. But I'm just curious if you could describe the quarter and whether origination was maybe slower across the platform?

Yes, so you hit the nail on the head. We were targeting our investments around our target leverage of 1.25 times. In direct lending, we invested over $5 billion. So we were actually fairly active in the first quarter and will be again in the second quarter. If BXSL had $3 billion of capital, we would have invested that amount. But we do not plan on taking leverage up much higher, so we're waiting for more turnover in the portfolio to reinvest those proceeds into our pipeline.

Okay. Great. And so, it looks like a lot of these bigger deals are maybe in healthcare and software, concentrated in those industries? Are you guys thinking about maybe position sizing and how high you can take those industries as a percentage of the portfolio? Any high-level thoughts on that?

Yes, listen, we think about risk in a lot of different ways. As you know, we're focused on the top of the capital structure; we want to be diversified geographically and across different sectors. Our belief is that healthcare and technology have become such big parts of the U.S. economy, and our growth sectors align with our view of the world that those will be on the higher end of our universe. We'll maintain a very diversified view on how we build up the portfolio across individual assets, individual sectors, and across areas in the U.S.

All right. Thank you. That's all for me.

Melissa Wedel with JPMorgan is next in the queue. Please go ahead.

Good morning. Thanks for taking my questions today. I wanted to follow up on something you just said, that normally you'd observe that when base rates increase, spreads will compress a bit, but we haven't quite seen that yet. I was hoping you could elaborate on that. What is the normal time horizon that you'd expect to see spreads compress after base rates rise, and is there any reason to think this environment might be different?

Sure. So, I missed the first part of that question, but it was just around rates and how base rates interchange with spreads. One of the things that we benefit from, not just us but others, is in order for spreads to compress, there needs to be turnover in the portfolio. We don't voluntarily take our spreads down on our assets. In an environment – and I'll get to your broader question, but I wanted to highlight this one point. In an environment where there is low turnover, there is no spread compression. In an environment where there's high turnover, there's higher prepayment fees, generating more income offset by your spreads coming down a little bit. So, we feel like we have a lot of positive uplift in either scenario with rising rates or portfolio turnover. In terms of your question around whether base rates and spreads will play out differently this time around, I think there’s a hard-to-say. I definitely think there's a lag in order for spreads to compress. One of the things covered at the start of the call was what’s happening in the public markets. In fact, you're seeing the opposite play out right now; spreads are widening in that market. That should have the same impact in the private markets. So in the near term, you may actually see spread widening as opposed to spread tightening, but that will level out over time as spreads and base rates continue to increase.

Okay. Thank you.

The next question is coming from Ryan Lynch with KBW. Please go ahead.

Good morning. I wanted to follow up on something you said in your prepared comments. You kind of talked about the two tailwinds being rising rates in your portfolio, which obviously has a lot of interest rate sensitivity, and also the potential for increasing prepayments. It seems like those are kind of counterbalances to each other and probably are not going to occur in the same environment. Obviously, rates have been rising, and that has already happened. But it feels like if rates are rising, it seems like in that environment, you're going to have a continual slowdown in prepayment fees as people are not going to want to try to refinance into a higher rate environment. I would just love some clarity on that. Obviously, I know your prepayments and repayments were extremely low in Q1. So I'm just not sure if maybe you're just saying coming off that extremely low base, you expect it to rise or if there was something else, but it just seems like the right environment would also create lower prepayments, so I want some clarification on that.

Yes, what I would say thanks, Ryan. What I would say about that is turnover and prepayment are not driven by opportunistic refinancing; that is a very low percentage of what causes prepayments. What causes prepayments is an active M&A environment, meaning companies being sold. We went through a period at the end towards the end of last year into this year, where a lot of M&A proceeds were put on hold because of Omicron and then the war in Ukraine, creating a lot of volatility. Volatility creates a very large bid-ask between buyers and sellers. We're seeing that change, and BXSL in particular has a vintage that results in more companies starting to look for exit opportunities to get capital back to their investors. I think what you will see, just given our vintage, is that you'll expect to see prepayments pick up towards the end of the year as that M&A environment begins to pick up, which we are indeed seeing right now.

And maybe just to add to that, Ryan. You know, base rates are floating rate products, so it’s different than mortgages, where rising rates mean you have to refinance at a higher rate. Mortgages are riskier and more spread-sensitive. In contrast, we benefit from higher yields as rates rise. So it tends to be the dynamic spreads laying out, rather than being sensitive to base rates.

And maybe just one other point. Even if we had no prepayment - like zero prepayment income, we'd still cover our dividend by 105%. Our model doesn’t revolve around you needing that prepayment income to drive origination fees or prepayment fees in order to cover a dividend. We generate sufficient coverage just through our core net income, and that core net income is going to increase because of how levered BXSL is to rising rates, given its asset-liability matching or mismatching in this.

Yes, totally makes sense. Those rising rates are definitely the clear beneficiary or clear benefit to you all, new earnings. I appreciate the commentary and the clarification on kind of what can drive portfolio activity and repayments. The other question I had, you guys have clearly focused on building this BDC with a very high-quality portfolio of strong secular businesses? My question is, if we run into a more choppy economic environment or even a recession scenario, you know, I think your businesses are probably a whole lot better than the average BDC. But one of my questions is right now what we're seeing is a significant rerating and revaluation of public market businesses; even the strongest businesses are rerated significantly. I'm sure that probably hasn’t trickled through to the private markets fully? Maybe it has started to get in there yet. But my question for you is, do you expect any significant pullback in private market valuations similar to the levels we've seen in the public markets, which is well over 20%, 30%, 40% in certain businesses, again, strong, stable, secular businesses in the public markets? If there would be a valuation pullback, what do you think that would mean for credit quality in your book?

Yes, so you're absolutely right. In the sense that growth businesses have been rerated, and businesses that maybe were trading around 35 times cash flow are now trading around 25 times or even 20 times. That definitely will impact valuations in the private markets, as well for these high-quality high-growth businesses. It plays into duration risk in the risk-free rate, which is driving some of that, as well as capital moving more towards risk-off. If we were at 43% loan to value on our investments, and there's a pullback in a rerating, we might now be around 55% loan to value. This is why we highlight and talk about our capital structure on all these calls, not just being first lien but from an LTV standpoint. They’ll definitely as you rerate, that cushion will be impacted a little but because we have so much cushion underneath us, we feel fairly well covered. So we do not worry about that in this environment. What I worry about more generally is that lower quality businesses are feeling more impacts in their portfolios. They are feeling it from a rerating standpoint. They were 13 times, but they probably should have always been an eight-time business, and they were levered five or six times. Those businesses are going to feel the impacts from what you just described because they're also going to see margin compression given the inflationary impacts on their business models.

Okay, that's helpful. I appreciate the time today and dialogue. Thanks.

Hey Ryan, I just wanted to give you one other stat, which isn't directly tied to your question but I think it's helpful. No one’s asked this yet, but we think about risk - our primary focus versus any other drivers that people often focus on. If you consider rising rates, it clearly has an impact on the cash flow of our businesses; it's good for investors as they get more yield, but that yield doesn't come from thin air. The portfolio companies have to pay that. Looking at our portfolio today, 5% of our issuers have interest coverage below one times. All of those are recurring revenue loans. We have three recurring revenue loans: Medallia, Relativity, and Dreambox. Our overall interest coverage is closer to three times, but if interest rates move to 4%, that 5% number remains relatively unchanged. Once you reach 5%, the base rates uptick to about 13% of our portfolio companies having interest coverage below one times. I hope that helps answer your question, in the sense of how our loan to value and the capital structure protect us; the types of businesses we're focused on also generate more cash flow in a rising rate environment, so we don't think even if rates reach 5%, our portfolio would face much distress.

Yes, that's helpful. Those are good statistics for low loan to values. You know, fairly high interest coverage as long as the businesses continue to execute fairly well, since those starting points are high. You guys should overall be relatively fine. I appreciate the additional details.

Next, we have Robert Dodd with Raymond James. Please go ahead.

Hi guys, one housekeeping one if I can real quick. First on the dividend income, is that sustainable? Is it one-time; was it due to Mermaid or Datasite or anything like that, or is it just a structural change and we should expect to see that going forward?

Hey Robert, the dividend income was really from one investment, one equity investment we have in Mode. So I wouldn't say it's something that we expect to be regular; it was a very high percentage dividend given the size of our equity investment in that company. But I wouldn't say it's something we expect to be routine or that would predict on a more regular basis.

Got it, understood, thank you. On the other one, since I'm getting incrementally more pessimistic about the economy, not doom and gloom yet, but on – obviously your balance sheet looks in great shape for the assets on the portfolio, on the books right now, like 60% unsecured. The only - if I step back, when we look at COVID, there were a lot of liquidity drawers for a lot of BDCs. You've got 700 in available cash and borrowing capacity, but undrawn commitments of north of $1 billion? Can you give us any color on all the undrawn commitment? How much is actually drawable a lot of its delayed your terms hence, obviously, so probably not to have bought? And even the revolvers, how much of that - how much all the unfunded commitments are actually drawable like today, at will by a borrowing company?

The vast majority are DDTLs, as you mentioned, Robert. Over our experience with DDTLs, over their life, maybe 30% to 40% of them get drawn throughout their overall life. So the revolvers represent a small portion of that unfunded commitment. Our view is between prepayment activity and moderate deployment or drawing on those unfunded commitments that we’re well covered. But that is a topic we keep in front of mind and look to balance out this quarter as well.

And, Robert the other thing is to add, we have 60% of our liabilities in unsecured debt. So we have $10 billion of assets, only around $2.3 billion of that is in secured facilities. Our ability to take on additional liquidity, if we need to, is we’re very well positioned for that. But Steve is right our experience with these DDTLs are attached to M&A. We do get a lot of visibility into when that M&A is going to happen. It's really the revolvers you worry more about because revolvers get drawn when bad things are happening versus delayed drawers, which are drawn when good things are happening. So from a positioning standpoint, we feel better about it.

Understood and partly over to. You have a lot of unpledged assets effectively, you could upsize the revolver. I mean has that been considered? I guess that's the bottom line?

Yes, so it's actively considered.

And our final question comes from Casey Alexander with Compass Point. Please go ahead.

Yes, good morning. I'm just wondering from a functional operating standpoint, now that the share repurchase program has been activated, should we be thinking about as the share repurchase program executes that the total portfolio balance would actually run down a little bit in order to fund the share repurchase program, or should we be thinking about as allowing the share repurchase program to lift the leverage ratio somewhat?

I think it's a little bit of a balance of both, Casey. I think it also is a little bit path-dependent on how active the repurchase program continues to be. It is formulaic and buys shares. It's allowed to buy shares a percentage of our previous trading day's total volume, which isn't an enormous amount. So it's fairly slow-moving and constant when we're trading below NAV. I would say it could result in a little bit of an increase in leverage, as you heard me say we like where we are. So if we have some prepayments and the repurchase program continues, we would probably try to maintain leverage. At the same time, if we don’t have prepayments and the repurchase program is operating modestly, we would probably stay where we are as well.

Does the repurchase program have a termination date?

Yes, it is set for November of this year.

Great, thank you, Chandra, and thank you everyone for joining our call today. Our IR team is available for any follow-up questions. Have a great day.