Blue Owl Capital Corp Q2 FY2022 Earnings Call

Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's Second Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, and other members of our senior management team. I'd like to remind our listeners that remarks made during today's call may contain forward-looking statements which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We will also be referring to non-GAAP measures on today's call, which are reconciled to GAAP figures in our earnings press release and supplemental earnings presentation available on the Investor Relations section of our website at owlrockcapitalcorporation.com. With that, I'll turn the call over to Craig.

Thanks, Dana. Good morning, everyone, and thank you for joining us today. I'd like to start with our high-level results. We reported a net asset value per share of $14.48, down from our first quarter NAV per share of $14.88. This decline was primarily driven by unrealized portfolio markdowns due to credit spread widening experienced across the broader markets. Our net investment income was $0.32 per share, up $0.01 from last quarter. This was driven by continued stable investment income due to strong credit performance and an increase in dividend income. We were also pleased to be able to over-earn our dividend without the benefit of meaningful repayment-related income as repayment activity continues to be muted. In addition, the rapid rise in interest rates we have experienced will meaningfully benefit our NII beginning in the third quarter. All else equal, this will drive a further increase in our earnings even if we do not experience an increase in repayment activity in the second half of the year. Jonathan will touch more on this later in the call. During this quarter, we have very clearly seen a transition in the market environment, which has impacted all asset classes as investors are recalibrating expectations given a more uncertain economic environment. Continued concerns around the trajectory of Fed policy, inflation trends and the potential course of the U.S. economy have disrupted the markets. In this environment, we think it's important to make a distinction between market volatility and economic uncertainty. Market volatility creates an even greater opportunity for us as a direct lender. As banks have pulled back from providing financing, we have seen an increase in demand for our capital, and large platforms like ours have stepped in to provide attractive financing solutions for some of the largest deals getting done. In the second quarter, we evaluated over 20 opportunities for deals over $1 billion in size, which was another very active quarter for these larger deals. In this environment, the certainty of our capital is even more valuable to borrowers, and we are financing deals with better terms, structures and wider spreads. Coupled with higher base rates, we believe these loans for large, high-quality companies offer very attractive risk-adjusted returns for our portfolio. That said, we are highly focused on the current economic uncertainty and its impact on the credit quality of our portfolio. While we are prepared for a recessionary environment, we have not yet seen that materialize in our portfolio. Broadly speaking, our borrowers continue to meet or exceed our expectations for performance, and we have not seen an uptick in credit issues. We continue to have only 1 company on nonaccrual status representing 0.1% of the portfolio based on fair value, one of the lowest levels in the BDC sector, and our annualized loss ratio remains very low at roughly 15 basis points. As an upper middle market lender, we focus on larger companies, many of which are leaders in their markets. Consumer demand remains healthy, and while our companies are experiencing some margin pressure from increases in labor and input costs, they have largely been able to pass through those cost increases to maintain healthy profitability. We focus on non-cyclical service-oriented businesses with enduring revenue models and have very little exposure to classic cyclical sectors. The majority of our portfolio is comprised of companies in service-oriented sectors, such as software, insurance, and health care, which we believe are more insulated from a broad economic downturn. For example, in our largest sector, software, fundamentals remain strong as software solutions are embedded in their customers' workflows and are mission-critical to day-to-day operations. The majority of these investments are structured with conservative loan to values, typically well below the roughly 45% average of our broader portfolio. Additionally, our team has been rigorously analyzing the portfolio, given the economic uncertainty. We evaluated each of our borrowers based on a number of factors, including labor, commodity price, and supply chain exposure, and feel the portfolio is well positioned to withstand economic pressures. We believe we have built a resilient portfolio that will continue to perform well in a changing economic environment. Turning to our activity in the quarter, ORCC had a modest quarter of originations, driven by light repayment volume. We had expected repayments to modestly increase in the second quarter. However, higher rates, reduced refinancing activity, and market uncertainty led to a decline in M&A activity. Even though repayments were low this quarter, where we did receive repayments, we were able to redeploy this capital into attractive opportunities. The portfolio at quarter end was $12.6 billion, with roughly 75% first lien investments and is well diversified across borrowers and industries. We continue to seek ways to prudently improve returns by targeting specialized lending verticals. In the second quarter, we provided an additional $77 million of capital to Wingspire, an asset-based lending business in our portfolio, to support their acquisition of Liberty Commercial Finance, an equipment leasing business. This brings our total commitment to Wingspire to $400 million. Post quarter end, we also announced an increase in our commitment to our senior loan fund, which continues to generate attractive returns of roughly 10%, to $500 million. Additionally, the Owl Rock BDCs, including ORCC, recently announced an equity commitment in Amergin Asset Management. Amergin is a newly formed portfolio company created to invest in a leasing platform focused on railcar and aviation assets. Following the continued growth and success of Wingspire, this platform will also be built organically by a team of industry-leading professionals with a proven track record. Over the long term, we expect these specialized lending investments will provide further upside to our earnings and asset value. Now I'd like to turn it over to Jonathan to discuss our financial results in more detail.

Thanks, Craig. We ended the second quarter with total portfolio investments of $12.6 billion, outstanding debt of $7.1 billion, and total net assets of $5.7 billion. Our NAV per share was $14.48 versus our first quarter NAV of $14.88. This was largely driven by the decline in fair value of our portfolio due to market adjustments from the impact of wider credit spreads. The weighted average mark on the debt portfolio was down roughly 1.1%, which caused the decline in NAV of 2.7%, considering the impact of leverage. We finished the second quarter with net leverage of 1.2x debt to equity, which remains within our target range. Our portfolio and outstanding debt remained at consistent levels quarter-over-quarter, and the impact of unrealized losses on our NAV drove a modest uptick in leverage. In the second quarter, we had roughly $490 million in sales and repayments and $340 million in new funded investments. As Craig mentioned, our originations for the quarter are primarily a function of repayment volume now that we are at our target leverage. We also ended the first quarter with liquidity of $1.7 billion, well in excess of our unfunded commitments of approximately $1 billion. Turning to the income statement, our net investment income was $0.32 per share, $0.01 above our previously declared second quarter dividend. For the third quarter, our Board declared a $0.31 per share dividend payable on November 15 to stockholders of record on September 30. Our total investment income for the quarter was $273 million versus $264 million in the first quarter, reflecting a modest increase in interest income, resulting from rising rates and an increase in dividend income. This increase in dividend income was a combination of recurring dividends from our existing investments, such as Wingspire, as well as certain nonrecurring dividends from well-performing portfolio companies. Total expenses of $146 million increased roughly $5 million versus the prior quarter, primarily as a result of the increase in base rates on our floating rate liabilities. Turning to our balance sheet, we have a flexible balance sheet with a well-diversified financing structure. As we've discussed before, we believe having a significant portion of our liabilities and unsecured notes is strategically important and maximizes our financial flexibility. At quarter end, $4.2 billion, or roughly 60% of our $7.1 billion of outstanding debt, was within unsecured notes. With respect to rising rates and the impact on our liabilities, approximately 50% of our liabilities are floating rate and exposed to rising rates. Despite the meaningful increase in rates during the second quarter, our weighted average total cost of debt remains low at 3.7%, and we have no maturities until April 2024. As I discussed last quarter, we will see a meaningful benefit from rising rates starting in the third quarter. As you will recall, at the beginning of the second quarter, many of our borrowers reset their interest rate election to 3-month LIBOR, which was approximately 1% at the time and slightly above the average floor in our portfolio. So there was a limited benefit to our interest income in Q2. The second quarter ended with 3-month LIBOR at 2.3%, which meaningfully increased the base rate for those borrowers. Holding all else equal, had our base rates as of June 30 been in effect for the entirety of the second quarter, we estimate NII would have increased $0.02 per share to a total of $0.34 per share in Q2. Additionally, borrowers will continue to reset their interest rate elections throughout the third quarter, which will continue to benefit the yield on our portfolio and be accretive to NII. The asset yield on the portfolio, reflecting base rate elections as of June 30, was 8.8%, up 80 basis points from the prior quarter. Looking forward, holding all else equal, we expect each additional 100 basis points increase in our base rates from the June 30 level to generate approximately $0.04 per share or a 12.5% increase in quarterly NII after considering the impact of income-based fees. Before I turn it back to Craig, I want to underscore the importance of our valuation process to accurately mark each investment in our portfolio every quarter. As I mentioned, our NAV declined due to unrealized losses driven by a widening credit spread environment and is not a reflection of deteriorating credit quality in our portfolio. Evidencing this, our internal portfolio ratings at the end of the second quarter were consistent with prior quarters, with roughly 90% of the portfolio rated 1 or 2, our highest rating categories. Our best-in-class valuation process includes engaging a third-party valuation firm to mark 100% of the investments in our portfolio every quarter. We think this is particularly important for shareholders in a volatile market environment. With that, I'll turn it back to Craig for closing comments.

Thanks, Jonathan. To close, I would like to provide some commentary on current market conditions and address the economic outlook that we know is top of mind for investors. As I mentioned before, the market volatility has been beneficial to the direct lending market opportunity. When the Fed started to raise interest rates in mid-March, it prompted heightened volatility and a sell-off across asset classes that has persisted since then. As a result, there has been a noticeable shift in the supply-demand dynamics for private credit solutions. Many direct lenders entered this period fully invested and with lighter repayment volumes; capital available for new deals is more constrained. As a result, demand from borrowers for private credit solutions now exceeds available capital. Our platform remains one of the largest providers of direct lending capital. The continued growth of the broader Owl Rock platform, which today has over $55 billion of assets under management, and our ability to write large checks keeps us front of mind with sponsors and borrowers. We continue to see robust deal flow. The second quarter was our third most active quarter since inception, with over $7 billion in originations across the platform. As ORCC repayments increase, we will be able to redeploy those proceeds into an even more attractive opportunity set. With the public leverage finance markets effectively shut, more borrowers are turning to private credit solutions. Although the volume of M&A activity is down, we continue to see attractive opportunities at better terms and better structures, with spreads on new deals widening out 100 basis points or more. This is demonstrated by the weighted average interest rate of new commitments in the second quarter of 9.5%, up more than 200 basis points versus the first quarter. We continue to see this momentum in the third quarter and across our platform have a robust pipeline of committed deals that we expect to close on in the second half of this year. We believe we have demonstrated our ability to source attractive deals through the various market environments. But as I have said before, the credit quality and performance of our portfolio will remain our highest priority in this new phase of the economic cycle. As a lender, we are focused on the downside, so we are preparing for a potential recession. While we can't forecast what the timing or impact of the recession will look like, we are assessing all new opportunities through the lens of a possible economic downturn. We are also well prepared to work with our borrowers to protect our investments in the event of economic challenges. We have a rigorous portfolio management process and maintain active dialogue with our borrowers, which we believe enables us to identify any early signs of challenges. While our borrowers have reported building inflationary pressures, many of them have been able to pass on these costs to maintain stable profitability. We are appropriately cautious on the economic outlook, but take comfort that we have purposefully built the portfolio to withstand macroeconomic pressures by focusing on upper middle market businesses in noncyclical sectors. We believe the portfolio is also structurally insulated due to our primarily senior secured first lien investments, which benefit from a conservative loan to value on average of roughly 45%. The portfolio further benefits from diversification with an average position size of 60 basis points today, down from 110 basis points three years ago. Despite the uncertainty of this economic environment, we believe ORCC remains well positioned. As I outlined before, the market supply-demand dynamics are favoring direct lenders. We expect net investment income to grow in the third quarter based on interest rate elections already made to date. Further, we may see additional increases in net investment income in the fourth quarter if rates continue to rise or repayment activity increases. In addition to those positive trends, we are also increasing our commitments in our specialized lending verticals. These vehicles are delivering high returns, which we believe should further enhance ORCC's earnings power. We believe these tailwinds will ultimately benefit our shareholders in the quarters to come. I wanted to close by highlighting that based on where ORCC is currently trading and based on our stated dividends, ORCC stock is yielding 9.6% on a portfolio of well-performing, primarily first lien term loans, which we think is a compelling relative value in the current environment. And with that, thank you all for joining us today. Operator, please open the line for questions.

Our first question is from Ryan Lynch at KBW.

First question I had was, Jonathan, in your prepared comments, you mentioned that dividend income was up pretty meaningfully this quarter. You mentioned that was a combination of just higher recurring dividend income via like Wingspire, but then there was also some nonrecurring income dividend income in the quarter. Could you maybe quantify, help us understand how much nonrecurring income that occurred this quarter just so we can kind of model out a better run rate for that going forward?

It was about $6.8 million. It was one dividend from one portfolio company.

Okay. Perfect. And...

I want to emphasize that the dividend we received was from PLI, which has been one of the few credit issues we've faced historically. Although it's early in the process, we now fully own PLI and are managing the company. It is showing good recovery from its previous challenges. While it's still early, we saw very positive results and strong liquidity, allowing us to take out the dividend. This indicates the positive direction PLI is headed. It's important to note that this is one of the few companies we've encountered difficulties with, and it is now making significant progress.

Okay. That's good context as well. And that's good to see that performing much better and starting to pay you back as kind of testing strategy. How you guys decided to go into that space. Did you guys hire a team to do that? Or did you kind of peel people away from other places in the firm? And then just kind of longer-term kind of talk about like 2 years out, obviously, incredibly hard to predict, but like what are your hopes like 2 years out for what sort of size that this strategy can grow to and the potential returns they can generate just ballpark, obviously?

We frequently receive inquiries about opportunities in specialized lending sectors, but most do not align with our criteria. However, we have engaged in conversations with a team that previously collaborated in another alternative asset platform and possesses extensive experience in this field. They sought financial support and believed that our capital base would be the perfect partner. After lengthy discussions, we felt they presented an excellent opportunity due to their conservative investment approach in a challenging space. This team has a proven track record and is very risk averse, intending to adopt a highly diversified strategy focused on rail and aircraft investments, emphasizing selective opportunities rather than merely capital accumulation. We anticipate attractive returns and growth potential from this collaboration. In contrast to Wingspire, where our investment was entirely through ORCC, this investment utilizes resources from multiple funds. While we see significant scaling potential, the growth might not reach the levels of Wingspire since ORCC's ownership stake is only a fraction. Currently, there are no commitments in place, so this remains a speculative scenario. I would not expect it to reach the same size as Wingspire in the long run. However, if we manage to deploy around $200 million in the next few years, that would be an excellent outcome, albeit it will take time to realize. I don't want to exaggerate expectations.

Yes, that's good information. I have one more question. Your core earnings have increased significantly recently, and I appreciate Jonathan's insights regarding the impact of rising base rates on Q2 earnings. As we look ahead, with interest rates expected to rise further, it seems that operating earnings should remain well above the dividend for the foreseeable future, potentially even accelerating. Could you remind us of the Board or company's policy on dividend payouts? I believe you will be over-earning by a considerable margin, so how are you thinking about core dividends in relation to supplemental dividends alongside core net investment income?

Sure. I think it would be helpful to go through the numbers briefly to ensure everyone is on the same page, as there are a few factors involved. We reported earnings of $0.32, of which approximately $0.015 is due to the PLI dividend. I would exclude that from core earnings since it's a one-time event. Based on the elections made to date, that contributes about $0.02, and we anticipate additional benefits from rates as borrowers continue to make new elections in the third quarter. While we’re uncertain about the exact amount, for the sake of discussion, let's say it adds at least $0.01, bringing us to about $0.34. The actual figure could vary. This is just to give you a foundation for understanding. We expect further benefits in the fourth quarter if rates remain stable, and assuming we receive the full benefit then, there could be additional gains. Jonathan mentioned a hundred basis points and $0.04, so you can calculate from there. This is all based on modest repayment assumptions, which I thought would increase by now but haven't. Therefore, we're not factoring in an uptick in repayments anymore as we're unsure of the timeline. This serves as a good framework. We have ongoing conversations with our Board every quarter. If we become confident, as they are suggesting, that the rate environment will be stable and credit remains robust, we would discuss options for increasing our dividend since we're significantly over-earning it. Everything is on the table regarding increasing the base dividend or considering special dividends based on increases. The situation will be specific at the time, making it difficult to predict with certainty. Currently, everyone is rightly focused on the existing rate environment, which may change by year-end. I assure you that the Board is very engaged, and we are committed to delivering strong returns for our shareholders. If we maintain healthy earnings, we will seriously explore ways to share those returns with our shareholders. I'm not certain if that fully addresses your question, but that's the gist of it.

No, no, it's a very helpful framework for how you guys are thinking about it.

Next question today is coming from Robert Dodd from Raymond James.

Looking back at the specialized lending, Wingspire, Liberty Commercial, and Amergin are all individually significant, even if not large. With the addition of Amergin, it's clear you haven't stopped exploring opportunities to incorporate more asset-backed verticals. Could you provide some insights on what percentage you'd like these to represent in the portfolio? Currently, first lien stands at 75%, while Wingspire makes up only about 3.5% of the assets. Can you share more on how much you'd like that kind of high return, high security through asset-backed and cash flow-based loans to constitute in the mix?

Yes, that's a good question. I won't provide a precise answer, but directionally, Wingspire and the senior loan fund are around 3% to 4%, possibly 3.5% to 4%, when fully invested. I believe we can continue to grow each of those in the mid-single digits. Could they reach 6% or 7% each? That will depend on the market opportunities we identify. If we continue to find investment opportunities in asset classes through Wingspire and the senior loan fund, we are confident that we can achieve over 10% return on equity for our shareholders, and we believe that is sustainable. This is great for ORCC, and we will keep adding capital. Our approach will be guided by the opportunities available, rather than a top-down portfolio construction. Regarding Amergin, it will likely not reach the same size as we are distributing it among other funds. I have noticed that some of our peers have over 20% of their portfolio in these types of assets and perform quite well. Therefore, I believe there's plenty of room for us to grow in this area, especially if the opportunities are present, and potentially add more verticals, which can be quite beneficial. If the combination of all these factors brought us closer to 10% or 12% in the next couple of years, it would be significantly advantageous, though still less than some peers. We have not set specific targets, as our focus is on opportunities rather than strict portfolio guidelines. The last thing we want to do is set a target and have people pursue it without ensuring the right returns. We will maintain discipline. I am very proud of what the Wingspire team has accomplished. We built that from the ground up, which took years, and we have been patient. I remember in the early calls when you pressed me about future expectations, and I emphasized that it would take time. We are committed to long-term growth, and we are beginning to see the results of that effort. We will keep working on it, and hopefully, Amergin will also find success.

It took Wingspire about two years to make a significant capital commitment before its first distribution. Is that the kind of timeline we're looking at? It won't be just six months before Amergin.

I believe Amergin could move a bit faster than that. The team is prepared and has previously worked well together, so there's no need for hiring. They are ready to go, and I expect we’ll enter the market sooner than Wingspire. However, I can’t provide a precise timeline until their website is launched and operations are fully underway. Stay tuned, but I would wager it will be quicker for them as they are starting now and won't take 6 months to get going.

Next question is coming from Casey Alexander from Compass Point.

I just kind of want to make sure that I understand the dynamics of what I'm looking at and have relatively worthwhile expectations for the future. When I look at the unrealized losses that you took in this quarter and the previous quarter, they totaled about $240 million. But understanding your comments, I would guess that most of those are recoverable over time as these positions work their way back to 0, absent any credit issues that could pop up. But if they don't, we should expect to see most of those unrealized losses reversed in future periods as these positions work their way back to par and kind of eliminate some of the marks that you've taken for spread widening. Am I thinking about that correctly?

You are.

Absolutely. I want to emphasize what Jonathan mentioned. Since we started, we've adopted the practice of marking every name each quarter by using an external third party, which I believe is a top-notch process. In quarters like this one, where the market is down and there's significant spread widening, the offsets get marked down, resulting in unrealized losses. However, our credit performance remains exceptionally strong. If those loans are eventually repaid at par, we will recover all of the unrealized losses. While it's true that losses could arise, overall credit quality is still robust, and we are confident that we will recover the majority of that when the loans are repaid or when spreads tighten. It’s worth noting that we’ve seen this happen before; after COVID, for example, spreads widened out significantly, but they recovered within two quarters.

I believe the market should value the way you manage your portfolio with a high level of integrity. I want to ensure that investors understand there is approximately $0.60 per share in embedded net asset value due to how you've handled your portfolio. This should definitely be taken into account in my future valuation.

The next question is coming from Kevin Fultz from JMP Securities.

Portfolio of credit quality is in great shape with only 1 investment on nonaccrual. Are there certain verticals you have exposure to that you view as more at risk in the current environment, whether that's due to inflation, labor challenges, geopolitical risk or recession fears, which you are monitoring more closely as the macro environment continues to evolve?

The answer is really no. There are no specific sectors. We have been consistent from the start; we prefer companies that can withstand a recession and maintain stable cash flows regardless of the economic situation. If you examine our top sectors over the years, you would notice they are consistently in software, insurance, health care, and food and beverage. Given the current economic concerns and inflation, our team conducted a thorough analysis of various factors such as European exposure, commodity prices, and labor costs to ensure we understood the risks in our portfolio. We emerged from this analysis feeling optimistic about what we found. There are no sectors that particularly alarm us. While some companies do have minor exposure to raw materials or labor costs, these percentages are relatively low. Our watchlist remains consistent with what it has been for the last couple of years. We do pay close attention to companies that have consumer exposure, particularly those that sell through large retailers or supermarkets, especially in light of concerns about weak consumer demand and potential cost pressures. The large companies we work with have been proactive in implementing price increases and appear to be managing these challenges successfully. Therefore, while we are cautiously optimistic, we acknowledge the uncertainty of the current environment. I don't have specific sectors that worry me; rather, we have certain credits on our watch list.

Okay. That all makes sense. And then one more, just looking at new investment equipment on Slide 5 of the presentation. The weighted average interest rate on new investment equipment was 9.5% this quarter, which is up about 210 basis points from prior quarters. Can you just quantify how much of that increase was due to spread widening on new transactions as it appears that asset mix didn't materially change?

Sure, it's clearly a light quarter, but the split rate is about 50-50 between the underlying rate and wider spread. I'm glad you brought up that number because it's quite appealing. The average rate we're achieving on our new investments is 200 basis points higher than last quarter. I'm pleased to share that this is the area we're investing in during the third quarter, along with signing new deals. This is where unitranche is approaching 10%. As we pursue new investments, the environment is very attractive. Unitranche is nearly at 10% compared to 7% not too long ago, representing a significant shift in the direct lending landscape. That's why we are excited about the opportunities we see right now.

Next question is coming from Mickey Schleien from Ladenburg.

Craig, I wanted to briefly follow up on Wingspire. Maybe this is a quarter to remind us who are its customers. And as an ABL lender, to what extent does the economic volatility we're experiencing actually create a tailwind for Wingspire?

Wingspire's borrowers are companies from various industries, including both sponsor- and nonsponsor-backed firms, typically smaller than the companies they are allocated to. They primarily serve the classic middle market or even the lower middle market, featuring a diversified customer base. As an asset-based lender, Wingspire excels in underwriting by ensuring there are sufficient assets to back the loan and also assessing other relevant credit metrics that reflect the borrower's health. This focus on asset-based lending is one of the reasons we are optimistic about this sector. In the current economic climate, I anticipate increased demand from customers facing challenges who may shift to an asset-based lending solution instead of a traditional cash flow option that they might have preferred, especially as banks tighten lending standards. Although I haven't received any recent reports from the Wingspire team, I see early signs of opportunity, which I expect to grow over time. They have a strong pipeline, and we are pleased with the acquisition of Liberty, which enhances their equipment finance capabilities. I remain hopeful that over the next six to nine months, if the economic challenges many predict materialize, this will positively impact Wingspire's ability to secure good deals and widen their margins.

That's helpful commentary, Craig. One other question for me this morning. There's been a lot of discussion today in this call about the directionality of interest rates. We can all look at the forward curve; it actually has rates coming down towards the end of next year. But I've been around long enough to know that I don't think the market knows what rates will be a year from now or 2 years from now. But my question is, in terms of risk management, given that rates, certainly in the near term, are climbing or have already climbed meaningfully, what is the portfolio sort of average cash interest coverage ratio? And where would LIBOR or so for Fed funds or whatever you want to talk about, have to go before you get concerned about interest coverage?

Sure. Currently, EBITDA and interest coverage are in the high 2s. If rates were to move up by 300 basis points, it would drop to around 2x. This indicates we have sufficient room. Some of our borrowers have taken steps to hedge against these rate increases, although I don't have complete data on that. So, there may be some protective measures in place. Generally, I believe that given the anticipated rate hikes, our borrowers will have less flexibility, but they should still be capable of servicing their debt despite the expected increases.

The next question is coming from Kenneth Lee from RBC.

Just one quick one about the comments about robust deal flow. If M&A and refinancings are slowing down, what's driving the deal flow there?

The high-yield market and the public leveraged loan market are essentially inactive. Although overall M&A activity is decreasing, there is a significant increase in the portion of that activity directed towards direct lenders. Banks are largely not issuing new leverage finance commitments and are hesitant to enter new agreements because they are dealing with commitments they have made in the past that they cannot sell. As a result, sponsors are approaching direct lenders, especially us, for their financing needs. There is still M&A activity; for instance, Thoma Bravo recently announced its acquisition of a company called Ping Identity, which we are leading the financing for. Additionally, New Mountain has announced an acquisition of assets from the public company PerkinElmer, for which we are also leading the financing. We are receiving first opportunities, resulting in attractive spreads, better structures, and more favorable terms. We are also advocating for more call protection to ensure we benefit from the capital we deploy now, recognizing that market conditions may change. It's worth noting that there has been significant concern over the past couple of years regarding whether there is too much capital in the direct lending space. Many people have raised this question, but we have always believed that concern was unfounded given the vast capital available in private equity. The current demand from private equity firms demonstrates that there is not enough capital in private credit to meet their needs. This shift in the direct lending market is significant and should be acknowledged, as there continues to be a greater demand from private equity firms for substantial platforms like Owl Rock to address their financing requirements.

Great. That's very helpful color there. Just one quick follow-up for me. In terms of the specialized lending platforms, sounds like a potential benefit on the return side there. I wonder if you could just talk a little bit more about how it changes potentially the risk profile for ORCC.

I don't believe it alters the risk profile for ORCC. The positions in the individual platforms are moderate in size, and within a $12.5 billion fund, each position is part of a portfolio with many other subpositions, so we’re not assuming any significant single name risk. The leverage we place on the senior loan fund and Wingspire, ultimately on Amergin, is modest. Additionally, others have significantly more exposure, which the market appears to find attractive. Therefore, I don't think it really makes a difference for us at all.

Our next question is a follow-up from Casey Alexander from Compass Point.

Yes. Just a minor point. I noticed that there were about 750,000 or so shares repurchased during the quarter. Was there a special circumstance surrounding that repurchase? Because it seems like kind of a one-off.

Our Board has approved the repurchase of shares, and we are considering it. We will assess the stock's trading position and if we find it to be an attractive use of our capital, we will proceed with share repurchases. However, we need to balance this with our investment opportunities. I want to mention that we are constrained by specific windows related to our reporting, which limits when we can purchase shares. Therefore, we don't always have the flexibility to act based on market conditions. Currently, we are investing in unitranche at 10% and in specialty verticals at the same rate, so we must weigh that against the potential for share repurchases. There are indeed times when we find shares to be very attractive, and the Board has been open to pursuing that. We will keep exploring this option, but I anticipate the scale to remain modest as we value our capital highly, and right now, we are achieving excellent returns from our investments.

Our next question is coming from Derek Hewett from Bank of America.

Could you provide some details on the Pik revenue since it's approximately 12% and it seems to have doubled on a year-over-year basis? At what point would this become a concern for you?

Sure. So the vast majority of our Pik interest is from deals that we structured as Pik at the time of underwriting because in particular, in the tech and software space, companies were growing rapidly, and the sponsors would like the flexibility to plow all their cash flow, if you will, into growth. So they ask for that flexibility, and we for the right situations are willing to do that. A much more modest portion of it is from credit issues. And so this is something that we are willing to do for extremely good credits with really low loan to value and good pricing in the software space in particular, where most of them check all those boxes. And so it's not a function of poor credit quality. And obviously, when the loans get repaid, we collect all the cash from the Pik that has been growing. There are we haven't set a bound to it. If it's grounded a little bit higher, it wouldn't bother me too much. We obviously have a massive amount of liquidity at the ORCC. So no liquidity issue, not a credit issue; we can get great returns by offering that flexibility is something that we're willing to consider on a case-by-case basis.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Craig for any further closing comments.

Great. I appreciate the questions. I appreciate the interest. We're really pleased with the quarter, but even more, we're pleased about the outlook. Hopefully, we made that clear today. Happy to have any follow-up questions from folks if you have them. Thanks for your time, and enjoy your day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.