Blue Owl Capital Corp Q3 FY2022 Earnings Call

Hello, and welcome to the Owl Rock Capital Corp. Q3 2022 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Dana Sclafani, Head of Investor Relations. Please go ahead, Dana.

Thank you, operator. Good morning, everyone, and welcome to Owl Rock Capital Corporation's third 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 number of factors, including those described in ORCC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. ORCC's earnings release, 10-Q, and supplemental earnings presentation are 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 all for joining us today. We are pleased to report very strong results and are announcing today a number of shareholder-friendly initiatives that reflect this strength. Our net investment income in the third quarter was $0.37 per share, up $0.05 from last quarter and roughly 20% in excess of our previously declared $0.31 per share quarterly dividend. This is the highest quarterly NII we have earned since the first quarter of 2020. We are very pleased with the significant growth in earnings, which was largely driven by the pull-through of higher rates on our investments. We have seen a dramatic move in base interest rates with SOFR up roughly 350 basis points this year. The impact of this move drove our third quarter results and will further increase earnings in the fourth quarter. The earnings power of our portfolio is strong and growing. We are announcing today that we expect to earn at least $0.39 of net investment income per share in the fourth quarter. This estimate assumes a continuation of the very low repayment environment we have seen, and any increase in repayment activity in future quarters would provide further upside to NII. We are putting out this guidance because we have clear visibility on the impact that elected base rates will have on fourth quarter NII, and we are confident in our portfolio. The credit quality of our borrowers remains strong, which is seen in the consistency of our internal portfolio ratings and average marks of our investments as well as the 2.5% increase this quarter and NAV per share to $14.85. We are also announcing several capital actions to ensure that our shareholders benefit from this earnings momentum. First, we are increasing our regular quarterly dividend. Our Board has declared a fourth quarter dividend of $0.33 per share, up $0.02 from our third quarter dividend of $0.31 per share. We also want to ensure our shareholders benefit from the consistent earnings we expect in excess of our regular dividend going forward. And as such, we are introducing a new quarterly supplemental dividend in addition to our regular dividend. For the third quarter, our Board has declared a supplemental dividend of $0.03 per share. Jonathan will discuss the framework for this dividend in more detail later in the call. Assuming the supplemental dividend is constant in the fourth quarter, the combined $0.36 per share dividends would generate an annualized yield of 12% at ORCC's current trading levels. We believe the increase in the regular dividend and the addition of the supplemental dividend is a balanced approach to maximize distributions to shareholders. The increase in our regular dividend reflects our confidence in the earnings power of the portfolio and positions us to evaluate further increases in the future, while the supplemental dividend provides additional predictable cash flow to shareholders. While fundamentals are strong and we are increasing shareholder distributions, our stock continues to trade at a significant discount to NAV. As a result, we are also announcing that ORCC and Blue Owl employees each intend to purchase stock in the open market to take advantage of this discount. First, ORCC's Board authorized a new $150 million repurchase program, which replaces our previous program. Second, Blue Owl employees have opted to participate in an investment vehicle that intends to buy an additional $25 million of ORCC's stock. In the near term, the company and the investment vehicle intend to purchase $75 million of stock in aggregate, a portion of which will be executed under programmatic 10b5-1 plans so they are able to continue buying after the trading window closes. Our Board and the Blue Owl employees believe it is an attractive time to be buying ORCC shares, and we value this alignment between the company to allow our employees and our shareholders. I would also like to spend a minute on the economic outlook. Given the current Fed monetary policy environment, market consensus expectations indicate we will enter a recessionary environment in the near-to-medium term, and we are well prepared for that outcome. A recession in conjunction with the higher rate environment will likely cause increased pressure on borrowers in the leveraged finance market and elevated levels of credit challenges. As we have said many times, since inception, we have been an upper middle market lender. We believe this approach positions us well going into this environment that our companies will fare better than most. Our borrowers are large with an average EBITDA of approximately $160 million and benefit from strong competitive positioning. We believe larger companies can generate more stable results as they benefit from deeper customer relationships and increased pricing power with suppliers. They have greater financial flexibility, often benefiting from non-core assets they can sell to enhance liquidity or deleverage and are often strategically important in their market, making them attractive to acquirers. We have always focused on investing in stable, noncyclical annuity-like businesses in sectors like software, insurance brokerage, and healthcare. Our investments are primarily first lien loans and are supported by significant equity cushions with an average loan-to-value ratio of roughly 45%. The vast majority of our investments are supported by sophisticated financial sponsors, who provide both operational and financial resources, which is particularly valuable in evolving economic conditions. We recognize that some companies will have challenges over the life of our investment and have built a robust portfolio management process, which allows us to proactively identify areas of concern and to work directly with our borrowers to understand and mitigate issues. To date, we have not yet seen evidence of economic weakness in our borrowers' operating performance. Across our 180 portfolio companies, the vast majority saw top line revenue growth in their latest financial reporting with an average increase in revenues of 7% and EBITDA of 4% quarter-over-quarter. Of course, we are not just looking at the current performance of our borrowers; we are also looking forward and are acutely focused on the impact of a higher rate environment on cash flows. We have run various sensitivity analyses looking at implied interest coverage in a period where higher rates are sustained and reflected in a full year of cash flows. Even in these scenarios, we believe that the vast majority of our borrowers will maintain adequate interest coverage cushions. In addition, most of our borrowers are entering this period with ample available liquidity, and we believe most would benefit from additional sponsor support if needed. So while we remain vigilant, we take great comfort that our portfolio was built to endure challenging times, and we believe any defaults or ultimate losses in the portfolio will be manageable, especially in light of our materially higher earnings trajectory. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Thanks, Craig. We ended the third quarter with total portfolio investments of $12.8 billion, outstanding debt of $7.2 billion, and total net assets of $5.8 billion. Our NAV per share was $14.85 versus our second quarter NAV of $14.48, an increase of 2.5%. This increase was driven by the continued strong credit performance of our borrowers in a relatively flat spread environment. At quarter-end, our net leverage remains within our target range at 1.18x net debt to equity, a slight decrease from last quarter. Repayment activity remained low in the third quarter, which drove a modest quarter of originations, given the portfolio is fully invested. We also ended the quarter with liquidity of $2.1 billion, well in excess of our unfunded commitments of approximately $1 billion, roughly half of which are revolvers. Turning to the income statement. Our net investment income was $0.37 per share, which is six cents above our previously declared third quarter dividend of $0.31 per share. As Craig mentioned earlier, our Board declared a $0.33 per share regular dividend for the fourth quarter which will be paid on or before January 13, 2023, to shareholders of record as of December 30. This $0.02 increase in addition to the $0.03 supplemental dividend represents a 16% increase in our quarterly distribution. I'd like to spend a few minutes discussing the framework for the new supplemental dividend, which is also laid out on Page 17 of our earnings presentation. The supplemental dividend will be variable each quarter, calculated at 50% of NII in excess of our regular dividend, rounded to the nearest penny and subject to certain measurement tests. It will be approved by our Board, announced with quarterly results, and paid in the following quarter. So for the third quarter, our Board declared a supplemental dividend of $0.03 per share, which is 50% of the difference between our NII of $0.37 per share and our previously declared $0.31 per share third quarter dividend. This supplemental dividend will be paid on December 15 to shareholders of record on November 30. As a result, ORCC shareholders will receive a dividend eight times a year. We are also accelerating the dividend payment date going forward to roughly 15 days from the record date, which will allow us to deliver income to shareholders in a more timely manner. Turning to our balance sheet. We have a flexible balance sheet with a well-diversified financing structure. With only 50% of our liabilities exposed to rising rates, our weighted average total cost of debt remains low at 4.3%, and we have no maturities until April 2024. From an earnings perspective, we are experiencing a meaningful benefit from rising rates on our investments, which is driving materially higher interest income. In the third quarter, the average base rate for our portfolio was roughly 2.3%, which reflects a mix of base rate elections in effect for the quarter. We have visibility that our average base rate will increase in the fourth quarter as the elections made as of September 30 have already increased the beginning average fourth quarter base rate to approximately 3% with the likelihood that it will further increase during the quarter as more resets take effect. Looking forward, holding all else equal, we expect each additional 100 basis point increase in our effective base rate from the third quarter's rate of 2.3% to generate approximately $0.04 per share or a roughly 11% increase in quarterly NII after considering the impact of income-based fees. With that, I'll turn it back to Craig for closing comments.

Thanks, Jonathan. The current market opportunity for direct lending is probably the best we have seen since we started Owl Rock in 2016. Public markets are effectively shut and sponsors are primarily turning to direct lenders. On new loans, we're typically earning more than 11% with extended call protection, attractive leverage profiles, and credit protections for high-quality, strategically important companies. Given our scale and resources, we are continuing to see solid deal flow and having excellent competitive success in leading highly attractive investment opportunities. The opportunity set has further swung our way, and we expect that to continue. However, in our discussions with shareholders, we know the topic on their minds is not the market opportunity but rather the dynamics driving ORCC's share price, which currently trades at a significant discount to net asset value. Often, this gets framed to us when shareholders ask if there is something we are missing? We believe the answer is no, and that there's a disconnect between where ORCC is trading relative to the fundamental credit quality of the portfolio and the future earnings power available for distribution to shareholders. To put this into context, the current ORCC valuation is implying a default rate of more than 20% on the entire portfolio and a 60% recovery rate. This default rate would be a far worse default rate than the 10% default rate that the leveraged loan market experienced in the great financial crisis. In a downturn, any credit challenges would typically first show up in the form of amendment requests and additional capital needs from our borrowers. To date, we have not seen any increase in activity that would indicate heightened stress at our portfolio companies. We are not seeing any increase in amendment requests, any increase in requests for extra funding or revolver draws, or any request to pick loans for performance reasons. Our watch list remains around 10% or about 15 companies, where they have been for the last two years. Although we had one small additional non-accrual this quarter, our non-accruals remain much lower than the industry average. We are extremely careful in our evaluation of accrual status, and I would highlight that 90% of our loans are marked at 95% or higher. 100% of our borrowers are current on their interest expense, and we have no loans that are in uncured covenant violation. Another key data point for the health of our portfolio is our quarterly valuation process and corresponding marks. We have previously highlighted our consistent practices since inception, but feel it bears repeating now. Every quarter, we use a third-party valuation firm to mark every name in our portfolio. They provide a valuation point, not a range. The marks on our investments largely increased this quarter, reflecting the continued strong credit performance of our borrowers and relatively flat market spreads. In addition to the stability of our investments, there is also clear evidence of the improving earnings power of our portfolio. Our portfolio-level asset yield has increased to 10.2%, up over 200 basis points from the beginning of the year, and will further increase with higher rates. Our earnings this quarter well exceeded expectations, and we have put out guidance for a further increase in the fourth quarter. Of course, a weakening economy will create some portfolio issues. We do not expect to nor will we be perfect. We will see some challenges and could see defaults tick up from the current levels, which are at historical lows. However, we believe these issues will be manageable and the significant increase in earnings we are experiencing will more than offset any modest pickup in losses. We are also very proud to have paid the same regular dividend since our IPO, even through COVID, and are excited to take this step today to raise our dividend, which we believe we can comfortably cover going forward. And in light of ORCC's earnings trajectory, we think the addition of the supplemental dividend enhances our distribution profile while leaving us flexibility to evaluate further increases in the regular dividend if performance warrants it. Further, we are pleased to demonstrate the commitment and alignment between the company, Blue Owl employees, and ORCC shareholders through the new share repurchase initiatives. Since inception, we have successfully delivered on the objectives we laid out for the company. Our returns continue to improve, generating an ROE of over 10% in the third quarter, up 100 basis points from last year, and our credit performance has been one of the best in the space with a loss rate of less than 15 basis points per year since inception. In aggregate, we hope these comments and the actions we are taking convey the high level of confidence we have in the outlook for ORCC and underscore our continued commitment to deliver value to our shareholders. With that, I will thank you for listening, and we will open the line for questions.

Our first question today is from Mickey Schleien from Ladenburg Thalmann.

Craig, thanks for your in-depth prepared remarks. It's very helpful. I want to ask a high-level question in terms of the volatility in this market environment and how that may be impacting the amount of demand and the sort of demand for your capital. Clearly, you've been very successful in intermediating other channels. And my sense is that if anything, that's acceptable pressure has been very helpful.

Sure, Mickey, I think I understood your question despite the cut-off at the end. You're correct that we believe this is possibly the best environment we've encountered since our inception. The public markets are essentially closed, and it's well known that banks are holding onto $50 billion of leveraged finance inventory that they can't sell. Consequently, they are likely to be hesitant to underwrite new deals, and if they do, the terms will be challenging to accept. As a result, most of the opportunities for the private equity firms we're collaborating with are directed towards direct lenders, and fortunately, we feel we're at the forefront of that list. We're being approached for almost every available opportunity, allowing us to select the ones we find most appealing. We have capital across our platform, and while it has decreased compared to our peak, it's still more than what most other vendors are offering. Therefore, we are using our capital selectively for attractive credits. Currently, we're securing wider spreads, routinely 700 over SOFR, and earning over 11% on unitranche investments. We're also obtaining more fees, better call protection, and generally improved structures. Although the level of deal flow isn't what it used to be before the market volatility, all deals are funneled to direct lending, which creates sufficient demand for our capital. Furthermore, our discussions with private equity firms indicate they wish we had more capital, as they are encouraging us to commit more to their deals. Overall, it's a positive environment. ORCC is fully invested at this point, and we'll maintain our target leverage range. Our deployment from ORCC will largely depend on repayments, which have remained modest. However, across the Owl Rock platform, we're currently very active in some of our growing funds and are deploying a significant amount of capital.

I appreciate that, Craig. That's really helpful. And in your prepared remarks, you said that by and large, the portfolio is not really showing signs of consistent credit problems, but you did have this one new non-accrual. And I was wondering if that was idiosyncratic or is there something that that company is facing that the other portfolio companies that you've invested in may start to see as we go into next year?

Sure. So Walker Edison, we put on non-accrual; it's about an $85 million position. I think the issues there are specific to that company. I don't think there's any read-through to other portfolio companies. They are a supplier of affordable ready-to-assemble home furnishings. So think TV stands, consoles. They were impacted by two things: one, supply chain issues; and two, they've really benefited from COVID and stay-at-home. And while we had underwritten that return to work would impact them, I think it impacted them to a greater extent than we had expected. So no particular read-through to the rest of our portfolio, and we're going to continue to work with the company and the sponsors there. But we felt at this point, it was appropriate to put it on non-accrual.

I understand. That's helpful. And congrats on a very good quarter.

Our next question today is coming from Robert Dodd from Raymond James.

Congratulations on the quarter and the new dividend program. Regarding the theme of credit, as you mentioned, 10% of the portfolio is on your internal watch list, and Walker Edison has been one of your most marked down assets. It's remained relatively flat leading up to this call. Could you provide more insight into any trends, particularly considering inflation and other factors affecting the tail of the portfolio? You indicated that the vast majority is fine, but that leaves room for some incremental issues. Could you elaborate on what those themes might be? Also, you mentioned not seeing amendment requests. When do you anticipate those might start occurring?

Certainly. I want to emphasize that most of our companies are performing well, with 7% revenue growth and 4% EBITDA growth. However, we do have some companies facing challenges, primarily the same ones we've seen over the last year or 18 months. The issues at these companies are specific to their individual circumstances. I recognize that there is margin pressure present. Demand remains strong overall, and the economy is resilient, but this margin pressure is influenced by factors like rising labor costs, supply chain challenges, and increasing commodity prices, leading to slower EBITDA growth compared to revenue growth. As for when we might see a slowdown, ideally, I hope it never happens. While we're not facing declining results at this moment, we are aware that the Federal Reserve is committed to tackling inflation, which means they will likely continue raising interest rates until inflation aligns with their targets. Ultimately, we expect this could contribute to an economic contraction, which would inevitably put pressure on some of our companies. They are currently dealing with higher interest rates and have less financial cushion than before, which could lead to emerging pressures. In response to your question about timing, I can't predict when exactly the economy will slow down, and consequently when we may start to see more amendment requests. It's difficult to speculate; it could be in the second or third quarter, but that remains uncertain. This uncertainty is not exclusive to us, as other lenders and vendors are in the same situation. Nevertheless, I want to highlight that our portfolio and the companies within it are performing significantly better than the current trading value of our stock suggests. The stock market seems to reflect many issues that we are not experiencing in our portfolio.

Understood. Yes, I think the current sentiment is that credit is performing much better than the stock market suggests. So, one more follow-up regarding when this might change: prepayment activity and repayments are obviously low again, which I expected. Your guidance assumes that will continue into Q4. How long do you think this can last? Do you believe we will see a rebound next year, or will it persist as long as there is uncertainty in the economic outlook? Any thoughts on this?

We closely monitor the maturities of all our borrowers, and we do not anticipate a significant increase in maturities next year or even the following year. There is no contractual reason to expect higher repayments. Instead, a resurgence in M&A activity is expected, which will likely occur when there is greater clarity regarding interest rates and the economy. Currently, while private equity firms have ample capital, they are considering the same uncertainties and prefer to pay less for companies. Sellers are hesitant to sell for less, leading to a challenging environment for sales. This situation reflects the typical fluctuations of an M&A cycle. Eventually, as economic conditions and interest rates become clearer, M&A activity should increase. While it’s difficult to predict, it’s possible we might see increased activity by the second or third quarter of next year, and perhaps repayments could rise in the latter part of the year. However, for ORCC's earnings, we are currently expecting low repayment levels, and any improvement would positively impact net investment income and overall results.

Next question today is coming from Ryan Lynch from KBW.

Nice quarter, everyone, and I really appreciate the detailed comments about your business. I have a question regarding your prepared remarks about the interest rate environment. You mentioned that spreads are increasing and becoming wider, which creates a more attractive investment opportunity. However, during the quarter, your overall portfolio was written up, primarily due to the rising fair values of your debt portfolio. This suggests that the valuation process might be assuming tighter spreads. I'm trying to reconcile these two points. Why was the portfolio significantly written up this quarter?

Sure. So just as a reminder, Ryan, I know you know this, but for the broader group. We use the same process this quarter as we have every single quarter since our IPO. And frankly, since the inception of Owl Rock even when we were a private BDC, we use a third-party evaluation firm. They mark every name every quarter since inception, same methodology, same practices, same discussion. As you know, when we make a new investment, it goes in at our cost basis. It's typically, call it, 98%, 98.5%, depending. If there's no change to the credit performance or market spreads, that loan will accrete to par over the life of the loan. So there's a general upward trajectory on the marks of all our names, all else equal, because they're marching towards their maturity. The valuation firm that we work with looks at a number of market indices to make the judgments about the market spread in addition to the credit performance. And they look at the same metrics that they've looked at since inception. In the second quarter, you'll recall, public spreads, which are the most visible, were meaningfully wider about 150 basis points wider and public loan prices were off about 5 points, so a meaningful move in the second quarter. In the third quarter, and I know this may surprise some they don't stare at these market indices every day, spreads were basically flat in the public markets in the third quarter. Depending upon what index you look at, instead of a 150 basis point move, there was a less than 15 basis point move wider. And public loan prices were basically flat quarter-over-quarter. Our book continues to have really strong credit performance. And so given that strong credit performance, most of our loans, not only march to par, but some of them were improving credit performance and had a bump a bit more than that. So basically, the march to par in a relatively flat spread environment resulted in a move on asset prices of about 1 point, which is not a dramatic move, but I recognize that others out there had modest NAV decreases. So our asset prices are up about 1 point. When you add in leverage, you get a 2.5% increase in NAV. The average mark in our portfolio is about 97% to have some frame of reference. So it was in a relatively flat environment for market indices, good credit performance, you saw a modest increase in NAV of 2.5%.

Thank you for the information. I have a question regarding the share repurchase. I would like to understand your approach to allocating capital for share repurchases at the current valuation levels. In the past, your share repurchase program was not as structured as the new one, which allows for greater flexibility. However, I assume you have to establish certain levels for repurchasing shares based on current market conditions, which seem to have improved over the past six months. How do you weigh share repurchases against other capital deployment opportunities? Additionally, how would your perspective change if valuations were to increase or decrease from current levels?

We have replaced our previous stock repurchase program of $100 million with a new program of $150 million, which includes a programmatic element. Many people ask why we haven't been buying back stock. Like all public companies, there are certain periods when we can and cannot buy stock. In the past year, the periods when we were allowed to buy coincided with the stock trading at higher multiples of NAV, while lower valuation periods aligned with when we couldn’t buy, which has been quite frustrating. Therefore, with the new program, we aim to overcome that limitation. By incorporating a programmatic aspect, we will be able to buy stock even during closed windows, where we plan to set metrics around volume and price. We want to maintain the flexibility to take advantage of weaknesses in the stock price. Historically, when we've had open buying windows, the stock trades at around $0.9 NAV or higher, while currently, it is around $0.8 NAV or lower. Though I won't draw specific conclusions, the current pricing is more attractive than when the windows have been open before. At $0.8 NAV, this represents about a 12% yield, which is comparable to the first lien term loans we can extend at the same yield. There are arguments for both keeping permanent capital to make new investments at 12% versus buying back stock at 11%. In this environment, shareholders may prefer that we focus on creating assets at 12% over buying back stock at 11%. Should the stock price drop below $0.8, the yield could quickly rise to 13% or 14%. We are very frustrated with the current stock price, and we believe our actions reflect this frustration. We have provided transparency regarding earnings performance and recognize the importance of addressing our stock price, with stock buybacks being one strategy to do that. Furthermore, employees of Blue Owl are also participating in buying shares, showing confidence in our portfolio and strategies.

Our next question today is coming from Kevin Fultz from JMP Securities.

I just want to dig into the investment landscape a bit more. Given the evolution of market conditions over the past 3 to 4 quarters, I'm curious if you could talk about how that has translated to deal price leverage or improved documentation deals that you're originating right now compared to 6 to 12 months ago?

Sure. As I mentioned earlier, I’m glad to elaborate further. We are in a fantastic environment right now, presenting some of the best investment opportunities we've encountered in the last six years. Regarding spreads, approximately nine months ago, spreads on unitranche term loans were around 550 basis points over. Today, that spread is closer to 700 basis points over, with some variation depending on credit quality—some are wider, while others might be at 675 basis points over. Thus, we’ll use 700 basis points for reference. The base rate nine months ago was at 1%, and it has now risen to 4%. This indicates an increase of 11%, nearly doubling when combining the spread and the base rate. Additionally, we were previously receiving about 2 to 2.25 points in fees; however, we are now frequently getting as much as 3 points. In the past, our call protection was around 101 for the first year, then it would decrease to par. Naturally, we aim to avoid extending capital only to have it repaid quickly. We are now consistently receiving call schedules of 103, 102, 101, meaning if a loan is repaid in the second year, we gain an additional 2 points of return, contributing to another 1% annualized. While the financial aspects are quite appealing, it's also vital to note that we can secure excellent leverage profiles and document structures, which aids us in making sound investment decisions. It’s important to recognize that this varies based on the credit, but there is generally less capital allocated per deal. We are all underwriters considering recession scenarios, ensuring that our activities remain viable in this high-interest rate landscape regarding leverage, cash flow, covenants, structures, and all our daily considerations. Therefore, I find this vintage very appealing, both from an economic standpoint and in terms of structure.

That's all really helpful, Craig. And then a follow-up: I appreciate the detail you provide on a typical borrower profile around how revenue, EBITDA, and interest coverage are trending. Can you provide an update on where portfolio company leverages currently and how that has trended over the past few quarters?

Sure. We can provide more precise numbers separately. Generally, leverage is in the low to mid-6s, give or take, and the interest coverage is approximately 2.5 times.

Next question today is coming from Kenneth Lee from RBC Capital Markets.

Just a follow-up question on an earlier one around the deal flow. You talked about seeing a solid deal flow. Just wondering how that squares with the potential slowdown in M&A activity? What's driving the deal flow there?

Sure. The most active area for deal flow is in technology and software, which we really like and it's our largest sector on our platform as well as within ORCC. We also have several other funds that focus exclusively on technology. What we're observing is that private equity firms are targeting attractive publicly traded businesses with predictable revenue streams and significant growth potential, especially those that have become appealing take-private candidates due to stock depreciation. There have been several such cases, which I won't detail during this call, but many are aware of these opportunities. We're a leading provider of financing for these take-privates, and we believe these represent some of the best credits available. The loan-to-value ratios for these deals tend to be lower than our average, often around 30% or 35%, with some as low as 20% or 25%. This allows us to secure wider spreads and good covenant packages. We believe that domain expertise is essential for underwriting these deals, and we possess that expertise. These transactions are substantial, often ranging from $1 billion to $3 billion. In a climate where many direct lenders have reduced capital, we have the capacity to write significant checks, which we've been doing successfully. Another area of activity involves sponsors' existing portfolio companies pursuing add-on acquisitions, for which they seek moderate amounts of capital from us to support their growth. These smaller deals, typically around $100 million to $150 million, often go unnoticed. Benefiting from our incumbency, we lend to approximately 300 companies, who turn to us for this capital. A noteworthy aspect of this dynamic is that when we offer additional capital, most of our loans have some form of MFN structure, allowing us to reprice existing loans in conjunction with new financing for acquisitions. Consequently, we've seen our portfolio spreads widen for the fourth consecutive quarter, thanks to our willingness to extend further capital under the MFN provisions. There are plenty of opportunities available. While ORCC itself has limited capital to deploy, we are finding substantial deal flow across our platform and maintain a leadership position in most of the transactions occurring.

Got you. Got you. Very, very helpful there. Just one follow-up, if I may, and this is also another follow-up on an earlier question about the unrealized gains. And you mentioned during the valuation process, a lot of it is driven by much stronger credit performance. I assume that the credit performance is being driven by the revenue and EBITDA growth that these portfolio companies have been seeing? Or are there any other factors to note there?

The primary factor contributing to the unrealized gain is simply the passage of time for credit. Even if the performance remains stable, we are gradually adjusting the loans that are valued below par or average loans at 97% up to par. If the overall credit performance and market conditions remain unchanged, our net asset value will increase. That is the key factor. However, we do have companies within that group that are performing well and may see slight increases above the average. The key takeaway is that we have a significant portfolio of performing loans, and we are confident that they will be repaid at par by maturity, and we will continue to adjust them to par. Additionally, some of our stronger performers may appreciate more than that.

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

Thank you so much, everyone, for joining. This was a really important quarter for us. We put a lot out there in terms of rising dividends, forward guidance, buybacks, and the like. We welcome calls and follow-ups. If folks want to talk more about it, our portfolio is doing really well. And we want to make sure we're accessible. And if you have any questions or concerns, please do reach out. We'd love to have a chance to chat. And with that, I hope you all have a great 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.