Blue Owl Capital Corp Q4 FY2023 Earnings Call

Hello, and welcome to the Blue Owl Capital Corp. fourth quarter and fiscal year 2023 earnings call and webcast. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Dana Sclafani, Head of BDC Investor Relations for Blue Owl. Please go ahead, Dana.

Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's Fourth Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; and our Chief Financial Officer and Chief Operating Officer, Jonathan Lamm, as well as Alexis Maged, our Chief Credit Officer; and Logan Nicholson, Portfolio Manager for OBDC. 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 OBDC'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. OBDC's earnings release, 10-K and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporation.com. With that, I will turn the call over to Craig.

Thanks, Dana. Good morning, everyone, and thank you all for joining us today. We are very pleased to report another record quarter of earnings with continued excellent credit performance across the portfolio. Net investment income was $0.51 per share, up $0.02 from last quarter. Our NII increased in each quarter of 2023, we generated a new record NII for the fourth consecutive quarter. In total, we earned $1.93 of NII in 2023, up $0.52 or 37% year-over-year. Our strong results throughout the year are the outcome of our emphasis on great credit selection and a proactive approach to liability management. Results also benefited from the higher rate environment and continued strong economic conditions. Based on these results, our Board has approved another $0.02 increase in our base dividend to $0.37 per share. This is our third $0.02 increase since the fourth quarter of 2022. This reflects our strong results to date and incorporates our expectations for the future trajectory of earnings even in a more normalized rate environment. In addition, for the fourth quarter, our Board declared a supplemental dividend of $0.08. We instituted the supplemental dividend framework in the third quarter of 2022 to allow shareholders to participate in earnings upside in a predictable manner, and we are pleased to pay $0.36 per share of supplemental dividends over these last six quarters, also meaningfully growing net asset value. Going forward, we believe shareholders will continue to benefit from the supplemental dividend framework. Net asset value per share increased to $15.45, up $0.05 from the third quarter. This represents the highest NAV per share since our inception in the second quarter in a row of record net asset value. As a result of strong earnings and continued NAV growth, we earned a record 13.2% return on equity in the fourth quarter, resulting in an annual ROE of 12.7% for the full year. This is right in line with the expectations we set at our Investor Day in May. Looking at our borrowers results, we saw continued resilience across our portfolio companies throughout 2023. We came into the year appropriately cautious and prepared for a more challenging economic environment. Over the last 12 months, our borrowers on average delivered low to mid-single-digit growth in both revenue and EBITDA each quarter. They were proactive in cutting costs and raising prices where appropriate to combat inflationary pressure and supply chain challenges. These initiatives contributed to the solid performance we saw this year. Further, we believe our borrowers are well-positioned coming into 2024. Our largest sectors continue to be software, insurance brokerage, food and beverage, and health care, all of which serve diversified and durable end markets. The weighted average EBITDA of our portfolio companies is over $200 million, and we believe this scale provides strategic benefits and operational stability as many of our borrowers remain market leaders within their sectors. Looking forward, while markets are expecting rates to decline, short-term rates remain elevated. Now we remain focused on potential portfolio company challenges. We believe coverage levels will trough in the first half of 2024 at around 1.5x to 1.6x interest coverage. We continue to have a small list of borrowers who we believe may see challenges in the months ahead. Our underwriting and portfolio management teams are closely monitoring these situations and we believe any challenges ultimately will be manageable across our portfolio as a whole. I would note, we had a few borrowers migrate lower in our rating scale, but overall, the names on our watch list remain consistent. Based on the visibility we have today and the strong positioning of our borrowers, we expect that the vast majority of our portfolio companies will maintain solid coverage metrics and adequate liquidity throughout this period. While we added one very small position to non-accrual in the quarter for a total of four names, our non-accrual rate remains low at 1.1% of the fair value of the debt portfolio. Overall, our record year in 2023 demonstrates the resilience of our portfolio companies and the strength of our investment and portfolio management process. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Thanks, Craig. We ended the quarter with total portfolio investments of $12.7 billion, outstanding debt of $7.1 billion, and total net assets of $6 billion. Our fourth quarter NAV per share was $15.45, a $0.05 increase from our third quarter NAV per share of $15.40 attributable to the continued overall earnings of our total dividends. In terms of deployment, we continue to largely match originations with repayments to maintain a fully invested portfolio. Repayments increased this quarter to $1.1 billion, which was matched by $1 billion of new investment fundings. This was a sizable increase compared to the roughly $390 million of repayments we saw in the third quarter, consistent with our belief that we will see an increase in repayments as the market environment continues to be more favorable for refinancings. We ended the quarter with net leverage at 1.09x, down slightly from the prior quarter. This is largely reflective of the timing of repayments versus new originations in the quarter. Turning to the income statement. We earned a record $0.51 per share in the fourth quarter, up from $0.49 per share in the prior quarter. The increase in NII was driven by roughly $0.015 quarter-over-quarter increase in accelerated income, driven by a pickup in repayments as well as modest increases in our dividend and interest income. For the fourth quarter, the $0.08 per share supplemental dividend will be paid on March 15 to shareholders of record on March 1. Reflecting this supplemental and the previously declared $0.35 regular dividend, shareholders will receive total dividends of $0.43 which equates to an annualized dividend yield of over 11% based on our NAV per share for the fourth quarter. For the full year 2023, we paid a total of $1.59 per share in dividends, an increase of $0.30, roughly 25% from the prior year. The Board also declared a first quarter regular dividend of $0.37, which will be paid on April 15 to shareholders of record as of March 29. Pro forma for our new increased regular dividend, coverage remains robust at 138%. We finished the year with $0.30 of spillover income as a result of meaningful overearning of our dividends, inclusive of our supplemental dividends throughout 2023. Turning to the balance sheet. We continue to proactively manage our liability structure to maximize returns to our shareholders. In the fourth quarter, we increased our revolver capacity to $1.9 billion and continue to maintain a robust liquidity position, which increased to $2.1 billion. This is well in excess of our unfunded commitments to our portfolio companies. In January, we opportunistically raised $600 million in new 5-year unsecured notes. A portion of the proceeds will be used to repay our $400 million unsecured notes that mature in April 2024. Taken together, these actions will modestly improve our overall cost of unsecured financing and increase our total unsecured debt as a percentage of total debt to 61%. We continue to be very focused on maintaining a well-laddered liability structure and lowering our financing costs. The spread on this new issuance represents one of our tightest spreads to treasuries. Further, we were able to swap this new issuance at a rate of S-plus 212 basis points, which when taken together with the maturity of the April 2024 notes is accretive to ROE for our shareholders and attractively priced relative to our current secured financing costs. The BDC bond market continues to deepen and expand with investors. We are pleased to see investors' recognition of OBDC's high-quality portfolio and continued performance, which allowed us to drive improved pricing for this issuance, even in a higher rate environment. As we have since inception, we continue to be proactive in addressing our financing needs and continuing to deepen our investor base and improve our liability costs. With that, I'll turn it back to Craig for closing comments.

Thanks, Jonathan. To close, I wanted to spend a minute on what we are seeing in the market today and what we expect for 2024. We continue to see deal activity pick up in the fourth quarter. As Jonathan noted, we had over $1 billion in both originations and repayments in OBDC. This nearly equates to the total activity we saw in the first 3 quarters combined. Across our broader Blue Owl direct lending platform, we deployed over $8 billion in the quarter, the highest quarterly level since 2021. We continue to believe the scale of our platform is an advantage for OBDC as our large origination effort allows us to efficiently match our repayment and deployment activity each quarter in order to maintain a fully invested portfolio and to scale up deployments in quarters where repayment activity is higher. We closed on several attractive new deals in the fourth quarter, including the $1 billion-plus financings for several firms, all of which Blue Owl serves as lead arranger and administrative agent. We believe our role as administrative agent on these large deals demonstrates the private equity firms' confidence in our platform and as importantly, positions us to maintain frequent dialogue and have the greatest influence on credit documentation and terms. Further, we continue to benefit from incumbency across our portfolio, with significant add-on activity for our current borrowers in the quarter. As noted earlier, repayments stepped up materially in the fourth quarter as we saw a more active market for refinancings and company exits. We expect repayment activity to continue to revert to these higher, more normalized levels which could generate meaningful repayment income for OBDC. Looking forward, we expect to see increased market activity throughout 2024. We believe there is substantial pent-up desire for private equity firms to return capital to LPs by exiting companies and increased clarity on the rate environment could drive more activity. That said, to date, activity in the first quarter has been lighter, which is consistent with the typical seasonality we see after many issuers seek to transact before year-end. Reflecting this dynamic, and with strengthening public and private markets, we are seeing some pressure on spreads across new investment opportunities. However, we continue to see larger and larger companies doing direct deals, the credit quality is some of the highest we've seen in our history and the structures and terms on new deals remain attractive. Finally, on behalf of the entire OBDC management team, I want to reiterate how pleased we are to have delivered another quarter of impressive results. We are grateful to the investment and portfolio management teams who continue to assess new opportunities, carefully monitor our portfolio companies, the financing team who continues to optimize our liability structure and the entire Corporate Solutions group who support the company's complex operations. As a result of these efforts, we delivered a total return of more than 40% to shareholders in 2023. We once again delivered record NII and a record high NAV per share ultimately providing a 12.7% ROE for the year to our shareholders. We are also pleased to be able to raise our regular dividend, which we believe reflects our continued confidence in the portfolio. We are entering 2024 on strong footing and believe we are well-positioned for the year to come. With that, thank you for your time today, and we will now open the line for questions.

Our first question is from Brian McKenna from Citizen JMP. Your line is now live.

Okay, great. Good morning, everyone. So maybe just a question on credit quality to start. The portfolio is clearly in a very strong position today. But could you just provide any details on the one company you added to non-accrual during the quarter? And then is there any update on the other three companies just in terms of resolving these? And then more broadly, can you talk about the size of your portfolio management team today? How much has related headcount grown over the last couple of years? And then where is the team spending a lot of their time today just given the low level of non-accruals today?

Good morning, Brian. You asked like four questions in there. You're going to have to remind me before the first couple. Look, overall, the team is really pleased with the credit quality of the portfolio. I think it's pretty striking. I think back a year ago, rates as high as they were across the space. I think there was a lot of concern about how direct funding, credit quality would hold up. And here we are more than a year into this higher rate environment and we are really seeing credit quality across the board. And I would say the space overall has also been really strong. I think it really is a testimony to the quality of the companies that are coming into the direct lending space, which is the highest it's ever been. We had a really de minimis position in a company with less than $15 million of exposure in OBDC. We had similarly small exposures in several other funds. And it was a business backed by a couple of private equity firms that we do a lot of business with and had some operational challenges, and it just is in a position where we felt it was appropriate to put it on non-accrual, and we are working through it with the borrower and the sponsors a plan going forward. So it's a credit-specific issue to that business and not reflective of any greater credit issues. Beyond that, the other three names, nothing to report. In the case of two of them, we've taken over the business. The other two we will continue to work with the existing sponsors. I'll just call out one of the names, CIBT, because I think it's interesting. This is a business that has been on non-accrual for us for several years now, was significantly impacted by COVID as a travel-oriented business. Its sponsors have worked really diligently over the last four years to try to rebuild the company in light of changing travel patterns and the like, and continue to own and support the business. We, along with the other vendors and the capital market firms are working with them. We continue to have that particular position marked at a very low price. But we'll see, we are hoping to do better. We'll just have to see. But it really is a testimony to how hard the private equity firms work to rebuild the companies, and that's very much central to our model. I think you asked about our resources; we have added significantly to our portfolio management and workout resources. Our investment team overall is 115 people, and there are probably about 15 of those 115 that are doing full-time portfolio management and work out. Our approach to work out here varies; some have single growth, some are different. We have our existing underwriting teams involved in the credits even if they go into workout; they know the company best, and we think that connectivity and consistency is very valuable to maximizing recovery. So beyond our workout team, which is sizeable, we really use our whole team. Other firms have a more structured approach, a cushion to workout group, if you will. So I feel very comfortable that we have the capacity; we had a business PLI we took over during COVID, and it's been restructured. We own that business today. It's not on non-accrual anymore. But if you walk through the marks of that acquisition, what you will see is the combined value of our debt and equity in that company today is pretty much on par with where our original basis was when we first made the loan. We haven't realized on that yet, so I'm not declaring victory, but I think it ended in a direction where we'll be able to report at some point that we are moving forward. And I think it's, again, a testimony to our ability to have a very long time horizon to take over a business, work with an existing management team, or supplement that with new management and aim for long-term value creation. I believe that PLI will be hopefully a great case study when we realize it on our ability to do that. So Brian, I think I got most of it. I don't know if I missed any, I'll give you one more shot.

Yes. No, that's great. I appreciate all that color. And I'll hop back into the queue, and congrats on another great quarter.

Thank you. The next question is coming from Casey Alexander from Compass Point. Your line is now live.

Yes. Hi. Good morning and thank you for taking my questions. Again, everything I understand that Brian's question sounded like four questions because everything is sort of connected. Your discussion about some tighter spreads, private equity refinancing is up private equity want to return money back and you guys work in the upper middle market. Does that all combine to, it seems like a little bit of rejuvenation of the broadly syndicated loan market? And is that contributing to some of the tighter spreads that you see in the upper middle market?

Good morning, Casey. I think that's a very great word for rejuvenation. The banks' willingness to commit to leveraged finance deals is completely a function of there being a bid from buyers' loans, primarily CLOs, and CLO creation rebounded towards the end of last year and has been quite healthy this year. The strengthening of the syndicated markets is giving the banks confidence to commit to deals. The market is quite good. And so the banks are willing to commit, distribute, and the pricing in that market can be attractive for certain companies. So you're seeing a more normalization of the mix of flows; the normal market environment is a fully functioning public market and a fully functioning private market. The trend has been decidedly towards private market execution and direct lending execution. That trend has been going on for certainly since the history of our business and our growth has tracked that trend. In most normal market environments and most of our existence, the public markets have been open and the banks have been able to finance deals, while sponsors have been increasingly picking direct. But in this environment, they've got choices, and they're making those choices. I think that’s indicative of the market environment, and it does contribute to some of the spread compression. In the first half of last year, the public markets were shut, and natural direct lenders such as ourselves could charge more. Today, as the markets are open, a public decision is being made on pricing and that can contribute to spread compression. I think spread compression is also a function of a really good economy and expectation that rates are going to come down, which reflects the general health of the markets. But the private credit has raised capital; we have capital, other direct owners have capital, and so there's competition. So we are on the tight end of the range of spreads that we've seen in direct lending. I think it has troughed probably where it is now, but it's on the tighter end of where things are. I think there will be swings back and forth. I'd like to talk about the secular and the cyclical. The secular trend is going to continue to be direct lending. There'll be cyclical periods of time where there's a little more into the public markets, a little more into the private markets. Right now, I think it's a pretty healthy balance, and so you're seeing some spread tightening.

Okay. Thank you. That's very helpful. My follow-on question is, in the last two quarters, you've raised the base dividend a couple of times. In the face of what is generally a consensus that, as you mentioned, rates are normalized some. So you got rates going one way and your base dividend going the other way. What gives you the confidence that you're going to be able to maintain and cover that adequately as rates come down? Is it potential growth of the joint ventures or the specialty finance verticals? Or is it expanding the leverage ratio somewhat kind of a modest ratio right now? But I'm curious and holistically, how to mix all of those things together to make sure that the Board has confidence to raise the base dividend again.

Sure. So I think that we've tried to be really thoughtful about our dividends. I would pull the lens back to more than about 1.5 years ago, when it was clear rates were going up, and we felt really confident that the portfolio would not only perform but generate a much higher set function, higher level of income. And we thought about how do we – what's the right way to share that with shareholders? We introduced this notion of a supplemental dividend to give shareholders a very predictable understanding of how our earnings and higher rates flowed through to them. We got a lot of great feedback on it. I think that mechanism has worked really well. We had our base dividend at that time, we raised to $0.33, and then we had the supplemental. What happened since then is that rates stayed higher for longer, the portfolio has been doing extremely well, and we've generated terrific record earnings for four quarters in a row. What our shareholders enjoy is a growing supplemental in a base that was more than adequately covered. We wanted to think hard. We are not just complacent with that success. We looked at our peers and their payout ratios and did extensive work around our portfolio. As you would expect us to, as rates drop, we're making thoughtful assumptions about credit performance, and we wanted to know if we had the cushion to raise the dividend further, and we felt really comfortable that even in a lower rate environment with appropriate assumptions around credit quality, we have more than enough cushion to raise the dividend an additional $0.02 a share. So we did that. This isn't complicated. We invest in floating-rate assets. If rates come down, earnings are going to go down. Rates went up, earnings went up. Shareholders should understand that; it's just fundamentals. What we would expect over time is if rates come down, we tend to look at the forward curve. We feel very comfortable continuing to earn our base dividend while putting more of our dividend in the base and that the supplemental will be lower if rates come down. So to fundamentally answer your question, we looked at it holistically. We're going to keep doing exactly what we're doing. We feel really confident in our portfolio. We don't need to change any levers; we will continue to stay in our target leverage range. We may tweak that higher, continue to invest in some of our specialty finance verticals, those are accretive, especially in a lower rate environment. But fundamentally, we're just delivering great credit performance, and we're comfortable with the new dividend model.

Thank you.

Thank you. Our next question today is coming from Erik Zwick from Hovde Group. Your line is now live.

Thanks. Good morning, everyone. I wanted to start first with a question on the pipeline, and I know in the prepared comments, you mentioned that activity has been kind of seasonally slow to start, but not out of the range of normal. I'm just curious, as you look at the pipeline today, what it looks like in terms of the mix of new versus add-on opportunities and whether you're seeing any commonalities in the kind of themes in terms of industries or types of companies that are looking attractive today.

Sure. It's a mix of new opportunities, add-ons, refinancings—it's a mix. I would tell you that it's my hope and expectation that at some point this year, we'll see a significant pickup in new buyouts. New buyout activity remains moderate, and I think that should pick up in a more stable rate environment. For the economy, sponsors have capital to deploy, and they're really in an imperative to return capital to their LPs, so that should reflect itself by selling companies that will result in new financings. I was hopeful we might see that starting in the first quarter; we're seeing some, but I wouldn't call it robust. I'd say it's a reasonable environment that I would expect to increase over time.

Thanks. And next is looking at your common equity portfolio continues to grow in both dollar terms and as a percentage of total assets. How are you thinking about these investments in terms of the overall concentration and what is your inclination to realize some of the embedded gains in over what potential timeframe?

Sure. So look, I think that for shareholders that are less familiar with our company, while technically all those investments you're referring to are common equity investments, the vast majority of them are equity investments in specialty finance verticals. Essentially, they are portfolio companies for OBDC where the underlying assets are pools of typically first lien secured loans. The credit characteristics of the vast majority of our common equity, more than half of it, is an income stream; it's a dividend stream of a diversified portfolio, credit loans underwritten by management teams and companies with deep expertise in the domain that they're investing in. For those of you who are newer, examples include various asset-based lending businesses, our life insurance settlements business, and our rail and aircraft leasing business. These are essentially portfolio companies that have very diverse pools of assets that generate income. We are equity owners, but we are getting a very consistent, predictable, and growing income stream that we think will generate generally double-digit returns on equity. We have been building each of these in a very methodical way. In addition to that income stream, if our teams do a good job, we also have an asset and equity investment that is valuable to us, as well as valuable to others, and we are creating enterprise value through our ownership stake in these businesses. We've grown that part of our portfolio, and we are going to continue to do so, but it would be sort of off key to think of that as a common equity investment. From an accounting standpoint, it certainly is, but from our standpoint, it's really a pool of assets that generate income to us, and as we invest more, we will earn more. No plans to realize on any of that. We do have a much smaller number of equity co-investments, and we have a couple of positions, I mentioned PLI, where we took over a business, but the combination of equity investments is just 2% or 3%. It's really de minimis. This has been a powerful return generator, and could be a long-term income long-term gain for OBDC, and we'll continue to do so. When we did our Investor Day last year, we did a whole section on this. I think all of that is still available on our website. So again, if you're newer, please take a listen. We have e-mail us if you're unsure how to get a hold of it. Our perception of this is, you can come away quite excited about what we're building in some of these specialty verticals.

I appreciate the answers, Craig. Thanks for taking my questions.

Great. Thank you.

Our next question is coming from Paul Johnson of KBW. Your line is now live.

Yes, good morning. Thanks for taking my questions. Kind of looking just on fee income going forward. Obviously, it was a very active quarter for you guys, but a slower year overall. I mean, $16 million or so of fee income on a $13 billion portfolio. I mean, do you think in the relatively near-term, maybe over this year, there's potential to generate some fairly meaningful fee income there to offset some of the potential decline from rates?

Yes, this quarter, we had $1 billion of sales and repayments and we have some fair amount of prepayment-related income, as we said. That was some of the driver of the earnings, and I think that you can certainly expect relative to last year, where there was very muted activity, an increase in that fee income to represent an offset to the rates. Depending on those rate moves, will it be dollar for dollar? Certainly, we couldn't say depending on the magnitude of those rate moves. But certainly, a pickup in activity will dampen the decline in income from rates.

And I hope at some point, I talked about a role where there's a real pickup in M&A activity, which would mean that we could see a meaningful pickup in fees as well as accretion. So I expect it to happen since the number—it's a little bit better this quarter, but it's been sort of frustratingly low. I expect it to happen at some point.

Thanks. And I guess as the leveraged loan market starts to come back, there's more syndicated activity? I mean, did you see potentially some of the deals that are in the pipeline today flipping over to the public markets?

We expect to see—and again, the public markets are wider than they are today. It's not something we have to wait to see. It's already happening. Our pipeline of deals we are looking at, the sponsors are actively making choices about how they want to finance them. Currently, despite a wide-open public market, they continue to choose private money for certain deals. As it has been and as it will be, that’s part of ordinary course decision-making. I expect to continue to see some repayment activity from companies that choose to refinance in the public markets. We've seen a little of that, and I expect we'll continue to see some of that, particularly, those comprehensive portfolio companies that have performed well and can get good execution. Generally, I would view that as a normal cycle. I expect us to continue to have good success remaining deals and securing new payments and keeping our portfolio invested.

Thanks. I appreciate that. And then public valuations have been surprisingly strong last year and into this year in the growth market, tech sector, I mean, really the broader market—the public markets as a whole. I feel like that's been a little bit contrary to what's going on in the private markets last year with the adjustment to higher peak rates. I'm just curious how that affects the companies in the upper middle market that you're looking at today. I mean, have you seen this multiple expansion that we've had in the public markets? Or I'm just curious how that affects the market that you guys play in?

We continue to see private equity firms have a tremendous amount of capital, a tremendous amount of expertise, and really a tremendous track record finding opportunities to deploy that capital and generate great returns for their equity. Private equity is a very risky market that institutional LPs like quite a bit, have significant exposures to, and have generated really terrific returns in excess of the public markets often over many, many years. That's the market we choose to go back to. We work really closely with the private equity firms. They were active last year; it wasn't a robust year, but they are active. At some point, I think we will see a pickup and resume. One point that I would like to make, which is an obvious one, but I'll highlight it anyway. On average, we're lending at 40% loan to value. We're lenders. We want to have a lot of equity cushion. We have the commitment from the private equity firms relevant to their investments. Their role is to drive our deals and get a great return. As private equity firms see valuation going high, they are not rushing to sell companies; they are confident they can get the valuation that they deserve. If they need to wait six months or a year, they will. That's part of why M&A has slowed down. I don't want to sound overly promotional, but our focus is always to make sure we're backing good companies with significant equity beneath us. Even if valuations fluctuate, we believe we will be covered. Being cautious in our underwriting thesis means we never get distracted by public market valuations.

Got it. Thanks for that, Craig. Those are all my questions today.

Thank you. Next question is coming from Mickey Schleien from Ladenburg Thalmann. Your line is now live.

Yes, good morning. I apologize if my question has already been asked, but I'm juggling multiple calls. Craig, you mentioned that the BSL market is normalizing, and I'm interested in understanding how you see that impacting the spreads that you may be able to capture as the year progresses and going into next year?

Sure, Mickey. We did talk about this a bit. In my remarks, I mentioned we do not see stress; the market has been tight and public markets have reopened. They're normalized, so that's a pricing range private equity firms look at. Spreads are tight, and I'm not sure they will go much higher than they are right now. They're on the tight end of historical ranges. Absolute returns on our lending remain very high because current short-term rates remain very high. So even if we do a unitranche at 5 over the current base rates, we're still earning 11%. But we all recognize that there's a good likelihood that, over the next two years, that base rate will be lower. By the way, this is a consideration; we do check the forward curve. The spreads are tighter, and those spreads can get interesting at times. Our lending remains attractive because current conditions help us maintain credit quality. The premium we garner for transactions remains sound and protective.

It does. I appreciate it. Thank you very much.

Thank you.

Next question is coming from Kenneth Lee from RBC Capital Markets. Your line is now live.

Hey, good morning. Thanks for taking my question. Just to piggyback on the syndicated loan questions. Do you anticipate any kind of shift in either of the sectors you're focusing on or underwriting or perhaps the types of investments you could be making either within the capital structure or the size just given the normalization of the leveraged loan markets?

We're staying the course here. It's not a matter of changing strategy; we really like recession-resilient sectors with predictable earnings in non-cyclical markets. We're not trying to time a cycle. We track private equity activity consistently where we find the best opportunities: software, insurance brokerage, some parts of healthcare, food and beverage, a lot of services businesses, and distribution businesses. That's been our sweet spot; those have been our most significant sectors for years, and we continue to see a lot of activity. Our software continues to be our best market-proven factor. We're not going to deviate from what has worked well thus far. I think that should be reassuring to investors. We make 7-year loans; if we thought the economy might oscillate between positive and negative over a couple years, we wouldn't be willing to underwrite those conditions for 7 years. So we think that's the right growth path. So no change on our side.

Got you. Very helpful there. And one follow-up if I may. In terms of the new investments, I wonder if you could just give a little bit more color in terms of what you've been seeing in terms of documentation on new investments? And then whether there's been any change just given the current landscape. Thanks.

Overall, terms and protections remain very strong for direct lending. I can underscore this: the protections we have are significantly better than those in the public markets, and that’s fundamental to what we do. We care about not just the business and returns, but the credit protections, given our significant exposure to the companies in our portfolios. We need to be in a position to protect ourselves, and the CLOs that buy public loans don't have nearly the same credit protections. We are ensuring those requirements for every deal, which echoes our philosophy. There may be a few things that creep in when markets strengthen, which we will choose selectively if other negotiations work out. In general, our credit agreements are consistent with our past approach; you'll continue to see that over time.

Got you. Very helpful there. Thanks again.

Thank you. Next question is coming from an unidentified analyst from Truist Securities. Your line is now live.

Good morning. I’m calling in for Mark Hughes. In the prepared remarks, you mentioned that the net leverage ratio ticked down, which we've seen for the last several quarters. Is there a specific range you had in mind for '24, '25 as investment activity presumably starts ramping up?

The target range remains the same; we've been at approximately 1.09x. This quarter, we had $1 billion of origination facing $1 billion repayments. Managing that leverage ratio is a bit easier when the loan volume is consistent. Overall, I prefer the leverage at the higher end, but there's nothing deliberate about tweaking it lower. It's just a function of the volume in that quarter. Our returns are genuine; we're putting up record returns, record NAV, record NII, and record levels, so I think it should reassure that we can achieve that without reaching a peak leverage point. We're not stretching beyond our normal level; we work with what we can accommodate within our conservative structure.

Yes, that's helpful. And so you mentioned the industry that you find attractive, but are there any particular industries in your portfolio that are having more credit issues than others?

We have very few credit issues across our board. So there are no particular factors having more issues overall. I would say we observe consistent low single-digit revenue and EBITDA growth across the portfolio. There are a couple of consumer-facing businesses struggling, as well as some industrial companies facing minor pressures. Still, generally, all companies are performing relatively well. We do have a loss list present, but there are no thematic concerns I would extend broader credit issues to the respondent's question regarding aggregate portfolio performance.

Okay, got it. Thank you.

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

Thank you so much, everyone, for joining. We are really pleased with the quarter. If you have any other questions, please, I love to engage with you, and we look forward to seeing and speaking with you again soon.

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