Blue Owl Capital Corp Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to Blue Owl Capital Corporation Second Quarter 2025 Earnings Call. As a reminder, this call is being recorded. At this time, I'd like to turn the call over to Mike Mosticchio, Head of BDC Investor Relations. Please go ahead.

Thank you, operator, and welcome to Blue Owl Capital Corporation's Second Quarter 2025 Earnings Conference Call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the second quarter ended June 30, 2025. These should be reviewed in connection with the company's 10-Q filed yesterday with the SEC. All materials referenced during today's call, including the earnings press release, earnings presentation and 10-Q are available on the Investors section of the company's website. Joining us on the call today are Craig Packer, Chief Executive Officer; Logan Nicholson, President; and Jonathan Lamm, Chief Financial Officer. I'd like to remind listeners that remarks made during today's call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties that are outside of 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 filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in the company's 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. With that, I'll turn the call over to Craig.

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered solid second quarter results, driven by the continued strong performance of our portfolio. As a reminder, our second quarter results reflect the first full quarter of combined company results following the merger with OBDE that closed in January. In the second quarter, we achieved an ROE of 10.6%, our 12th consecutive quarter of double-digit ROE based on adjusted NII per share of $0.40, reflecting the ongoing strength of our earnings power. As of quarter end, our net asset value per share was $15.03, down $0.11 from the prior quarter. Our portfolio continues to perform well, which we believe is a reflection of our investment approach that emphasizes downside protection by focusing on large, highly diversified recession-resistant businesses. The modest write-downs in Q2 occurred on a few companies that have been on our watch list for several quarters, including some that have been impacted by tariffs. None of these are new underperforming names. In fact, given the uncertainty around tariffs, we are quite pleased with how our portfolio is performing, which is in line with our expectations given our business mix. Overall, the fundamental performance across our portfolio remains strong, and we are not seeing any broader signs of stress. As Logan will dive into later, our borrowers continue to experience healthy fundamental trends including solid revenue and EBITDA growth. OBDC's great credit performance, as evidenced by our below industry average non-accrual and loss rates, is a result of our defensive strategy focusing on high-quality, upper middle market businesses. Next, I want to talk about the current market environment and how we are approaching it. 2025 has been a more challenging deal environment as muted M&A has weighed on overall deal activity. Despite limited new supply and a strong broadly syndicated loan market, the spread pressure we experienced last year has troughed and generally stabilized. That said, our sourcing capabilities, which are enhanced by our scale across both Blue Owl Capital and our credit platform, allow us to continue to generate attractive deal flow. As you've heard me talk about over the past year, we have expanded our broader business into other complementary strategies, including alternative credit and investment-grade credit, as well as data centers and digital infrastructures. With our expanded suite of products across the platform, we're able to access new attractive investment opportunities, while also adding financing tools that are valuable to our borrowers and sponsors. Given our deep expertise in these areas, we are able to better meet the diverse and ever-evolving needs of our partners, which is especially important considering the more muted deal environment we have experienced this year. Our growing solution set has generated novel origination opportunities for our BDCs. While we aren't changing our fundamental strategy at OBDC, we are currently evaluating cross-strategy opportunities. At quarter end, we formed a cross-platform equipment leasing joint venture. This is an example of how Blue Owl's in-house expertise enables us to explore strategic equity and accretive joint venture investments to have the cash flow and credit profiles to provide consistent income, which is one of the hallmarks of our investment strategy. Following the OBDE merger, closed earlier this year, we have incremental capacity to execute on these opportunities. Select's strategic equity and joint venture investments enhance our diversification and expand our reach in new investment areas that are unique to the Blue Owl platform and complement our core sponsor deal flow. To close, we believe our experienced team, defensively constructed portfolio, disciplined underwriting, and highly durable funding model have positioned us to deliver strong risk-adjusted returns regardless of what lies ahead. Now I'll turn it over to Logan for additional color on portfolio performance.

Thanks, Craig. Despite deal activity being relatively subdued in April after the initial tariff announcement, we continue to find attractive opportunities to commit capital in the second quarter. We deployed approximately $1.1 billion of new investment commitments with $906 million of fundings in the second quarter. We also saw a steady flow of repayments with $1.9 billion of paydowns this quarter, which resulted in net leverage landing at 1.17x. As you recall, reducing leverage back down to our target range was a priority following the one-time leveraging event from the merger with OBDE earlier this year, and we now have ample capacity to navigate going forward. As Craig mentioned earlier, our scale and incumbency create a unique advantage. In the uncertain market environment that persisted throughout the second quarter, the majority of our originations came from existing borrowers. A recent example of this was Trucordia, an insurance brokerage firm that has been part of the Blue Owl portfolio since 2020. At inception, we provided a creative financing solution that included a cash pay debt component plus an intentionally structured PIK component and a common equity co-investment. In the second quarter, the company completely recapitalized resulting in the payoff of our term loan, the collection of all accrued PIK interest on that loan, and the realized gain on our common equity position. Additionally, an existing preferred equity investment was refinanced. Overall, the transaction resulted in an IRR in the low double digits and a MOIC of approximately 1.4x across our entire investment. This is yet another example of how structuring deals with PIK at inception can lead to more attractive returns. Additionally, given our deep and long-standing relationship with the borrower, Blue Owl was able to provide a new second lien term loan behind the broadly syndicated first lien as the sole lender in that tranche. The transaction highlights the strength of our incumbencies and our ability to provide customized flexible solutions to deliver attractive risk-adjusted returns for our shareholders. Before we turn to the portfolio, as Craig noted earlier, we formed an equipment leasing joint venture at quarter end. It will allow us to efficiently invest in a diverse pool of high-quality equipment leases with a dedicated leverage facility. We expect it to generate attractive low double-digit yields once fully ramped, which should be accretive to fund level ROEs over time. This is yet another example of how we leverage the breadth of the Blue Owl platform to create value for shareholders. Now I'd like to touch on some portfolio metrics. We believe our long-standing and disciplined approach of investing in a diverse pool of upper middle market businesses and non-cyclical sectors continues to drive strong portfolio results in all market environments. OBDC's average investment represents less than 45 basis points of the portfolio, minimizing our exposure to any single company. The median EBITDA of our portfolio borrowers is $133 million, and the weighted average EBITDA is $222 million, up from $120 million and $215 million in the prior quarter, respectively. Our debt portfolio sits at a conservative LTV of 42% on average, which we believe is key to protecting our downside and supporting robust recoveries during challenging times. As Craig highlighted, the fundamental performance of our portfolio company borrowers remains strong. Revenue and EBITDA increased by mid- to high single digits on a year-over-year basis, which accelerated slightly compared to prior quarter results. Interest coverage increased to 1.9x based on current spot rates, providing our borrowers with incremental cash flow cushion. And PIK income decreased again quarter-over-quarter, down to 9.1% of total investment income from 10.7% last quarter, primarily driven by refinancings of several PIK investments, including Trucordia, as I mentioned earlier. As we've highlighted in the past, the vast majority of our remaining PIK names were underwritten at inception rather than resulting from credit issues, and these investments continue to perform as expected. Our internal ratings, which range from 1 to 5 as indicators of portfolio health, remain steady, and our watch list was down modestly at cost from the prior quarter. Further, we do not see any material pickup in amendment activity or other signs of material stress. Outside of our watch list, our portfolio is performing well, and our marks remained stable quarter-over-quarter. If you were to exclude the handful of names on our watch list, where we saw markdowns, the rest of our portfolio marks were flat quarter-over-quarter at $0.996 a par. Our non-accrual rate as of quarter end was 0.7% at fair value and 1.6% at cost compared to 0.8% and 1.4% in the prior quarter, reflecting the addition of one small position that has been on the watch list for several quarters. And finally, at the time of our first quarter call, we estimated that our tariff exposure was roughly mid-single digits of the portfolio. We're pleased to report that today, with the benefit of more time engaging with our portfolio companies, we believe our exposure is narrower than we had previously estimated. Our borrowers continue to manage these headwinds well, and for the small substantive names impacted by anticipated tariffs, our sponsors continue to provide support and resources to diversify supply chains. In closing, I want to echo the sentiment Craig shared. Our second quarter results demonstrate the continued strength of our portfolio, which is bolstered by our differentiated origination funnel and conservative approach to underwriting. And now I'll turn over the call to Jonathan to provide more detail on our second quarter financial results.

Thank you, Logan. OBDC delivered another quarter of solid financial performance. We ended the quarter with total portfolio investments of nearly $17 billion, total net assets of nearly $8 billion, and total outstanding debt of approximately $9 billion. Our second quarter NAV per share was $15.03, down from $15.14 last quarter. Turning to the income statement, we earned adjusted net investment income of $0.40 per share, up $0.01 as compared to the prior quarter, driven primarily by an elevated level of one-time repayment income in the second quarter totaling $0.05 per share, which was about $0.03 per share higher as compared to our 3-year average. This was partially offset by lower leverage. Similar to prior quarters, we over-earned our base dividend resulting in the Board declaring a $0.02 supplemental dividend based on our second quarter results, which will be paid on September 15 to shareholders of record as of August 29. The Board also declared a third quarter base dividend of $0.37, which will be paid on October 15 to shareholders of record as of September 30. We continue to believe OBDC is well-positioned for the evolving rate environment. Our adjusted earnings covered our base dividend with 109% dividend coverage. Further, our spillover income remains healthy at approximately $0.33 per share and equates to nearly a full quarter's worth of base dividends. We believe having a meaningful undistributed spillover supports our goal of maintaining a steady dividend through volatile and varying market conditions. Moving to the balance sheet, we finished the quarter with net leverage of 1.17x, down from 1.26x and within our target range of 0.9x to 1.25x. As we made a concerted effort to lower leverage following our merger with OBDE, as Logan mentioned. Turning to liquidity, we ended the quarter with over $4 billion in total cash and capacity on our facilities, which was over 2x in excess of our unfunded commitments. We believe we have positioned our balance sheet with significant capacity to invest as new opportunities come in. During the quarter, we further bolstered our liquidity by raising $500 million in new 5-year notes, and we continue to optimize our capital structure post-merger with several refinancings and amendments of our secured facilities. As a result, we have no material short-term maturities, and our robust liquidity position provides us with more than ample unfunded capacity to meet any near-term funding needs. Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for the environment ahead. I'll now hand it back to Craig to provide final thoughts for today's call.

Thanks, Jonathan. To close, I want to reflect on where OBDC and the broader BDC market are today. Over the past year, we saw two trends that have impacted both OBDC and the broader leveraged finance markets. First, interest rates declined 100 basis points from their peak as market expectations evolve. As a predominantly floating rate asset class, this has had a direct impact on our portfolio's earning power. Second, while direct lending spreads have been tighter, spreads have narrowed in all markets. Direct lending still commands a healthy premium to the broadly syndicated loan market, yielding a 150 to 200 basis point premium, which is generally in line with historical averages. Despite these two headwinds, we believe our portfolio is positioned for strong, consistent performance. Absolute returns within direct lending continue to be compelling, and OBDC continues to deliver attractive relative returns, which we were once again able to demonstrate in the second quarter, generating a 10.6% ROE and a 10.4% dividend yield on net asset value. Looking ahead, spreads have generally stabilized. And while the rate outlook remains uncertain, the market is expecting modest additional rate cuts later this year. However, even with that assumption, we are confident that we will maintain our dividend level throughout the rest of the year. On the deal environment, we are cautiously optimistic about a potential rebound in activity in the second half of this year. We've seen conversations with private equity sponsors have been encouraging. If these discussions translate into new transactions, they could significantly boost deal flow. Regardless of whether these deals materialize, we are confident that our sourcing capabilities enhanced by the scale of our platform will continue to drive attractive deal flow going forward. In closing, we feel very comfortable with our ability to deploy capital opportunistically and manage leverage appropriately. Our strong track record, combined with the scale of our platform, consistent investment philosophy positions OBDC to deliver attractive risk-adjusted returns to our shareholders across any economic environment. Thank you for your time today, and we will now open the line for questions.

Our first question today is coming from Brian McKenna of Citizens.

We're a couple of quarters removed now from the merger with OBDE. Where are we in terms of realizing the vast majority of those synergies? On the expense side, those are pretty straightforward. But just in terms of remixing some of the assets and also optimizing the funding side, I’m just trying to think through if there's any more upside to the 10.5% ROE from here, assuming all else equal?

Sure. Jonathan, why don't you handle the expense and financing side?

Sure. Regarding the operating expenses, as we mentioned last quarter, we have already seen the majority of the synergies take effect. In terms of financing, it’s progressing at a slower pace because certain secured financings still have upcoming call dates or reinvestment periods. This will unfold over the next year, but it is happening gradually. I would say most of that has not yet taken place, and I will pass it back to you now.

How much ROE firm benefit from additional financing synergies?

Another 50 basis points.

On the portfolio rotation, that's going to take a little bit of time as well. Part of what we have been planning for as OBDE was not invested to the same extent as OBDC in some of the joint ventures that generate a nice return. So as we deploy capital into those strategies, we'll be able to essentially true up OBDC on a pro forma basis, which probably is another 25-plus basis points of ROE. So between the financing and the portfolio rebalancing, I think there's a potential for another 50, 75 basis points of ROE improvement over time as those things take effect.

Okay. That's really helpful. And then I appreciate all the detail on just kind of the broader capabilities across your credit platform, and you called these output in areas like alternative credit, digital infrastructure, etc. And it's great to hear the positive impact those businesses are having on just creating differentiated deal flow and really additional origination opportunities for OBC. I mean is there any way to quantify how much of year-to-date originations or commitments have come from these types of opportunities? And then is there a way to think about this mix longer-term?

Sure. I believe there are several elements to consider, so I'll break them down. First, Blue Owl has expanded into new areas of business that we weren't involved in before. As you may be aware, we acquired Atalaya Capital last year, which is focused on what we refer to as alternative credit, or asset-based lending. We also ventured into managing data centers with our acquisition of IPI. Our real estate division has experienced significant activity in the data center sector. Overall, the firm has a much wider range of opportunities than ever before, and while we will be selective, many of these opportunities present similar cash flow and return profiles as our direct lending business. We will carefully decide what to include in OBDC, but the deal flow has expanded, and we see that as valuable, particularly in a market with fewer new sponsor deals. This situation is appealing to us, although it's still early. In terms of the current and previous quarters, I've seen only modest results as we are just starting to establish this deal flow and are beginning to commit to new deals for our portfolios. We have set up an equipment finance joint venture across our BDCs, which historically hasn’t had much of an impact, but we've highlighted it today because we are noticing significant opportunities in this area. Looking ahead, I believe we will benefit from this considerably. While I hesitate to provide exact figures on the spot, it’s reasonable to consider that 10% to 15% of the portfolio could be allocated to these new strategies. I want to emphasize that while this could be substantial, it will not overshadow our primary investment strategy. These investments are attractive and fit well within our BDC, providing appealing risk-adjusted returns. Overall, they will have a meaningful impact without altering the fundamental makeup of the portfolio. We will continue to provide updates each quarter as we begin pursuing these types of investments.

Brian, to that end, 10% of Q1 originations were into these types of equity and JV investments.

Our next question is coming from Arren Cyganovich of Truist Securities.

You mentioned you're kind of cautiously optimistic about a rebound in activity in the second half. Maybe you could talk a little bit about what types of deals you're seeing? Are they predominantly M&A? Are they refinancing in how open our sponsors to getting deals done rather quickly?

Sure. I'll start and you can chime in. I always debate how much to emphasize this comment because we've been hopeful before and faced disappointments. However, there has been a noticeable increase in engagement with sponsors in the last 60 days or so, which feels a bit different. If this leads to actual transactions, it could significantly impact us. Regarding the types of deals, it's a mix. We've seen interest in potential public-to-private transactions, where public companies are acquired and taken private, introducing new names to the market, which is very exciting. There is also activity involving refinancing loans from the public market to the private market. There's a back-and-forth dynamic here. Some companies are moving from private to public, but there are syndicated loans being refinanced in our market, and there are sponsors looking to sell their companies to other sponsors. We continue to see consistent demand for add-on acquisition financing for our portfolio, which has supported us. I believe that these first three categories have shown enough activity to give us hope for increased deal-making in the second half of the year. I prefer seeing actual developments rather than just predicting them, but these deals are progressing well, and hopefully, we will see more movement.

Got it. And then your leverage came back down within your target. Can you talk a little bit about where you see leverage heading? Are you going to keep it around this level? Or might you lever it up, particularly if deal activity is starting to pick up?

Yes, sure. That was intentional. As we noted, we were comfortable at the higher end of our range last quarter, but we've delevered to just under 1.2x. I think in this range, which is near the top end of our range, is where you'll see us cover in terms of leverage. So very comfortable at this level, and the one-time OBDE merger impact is now fully worked through. So high 115 to 120, the high end of our range, I think, is a good place to estimate.

The next question is coming from Robert Dodd of Raymond James.

If I can go back to your comment about these other strategies, Craig. I mean, I'll ask you a hypothetical and you can dodge it if you want. If the platform were to make a new acquisition of a new strategy tomorrow, what kind of time frame to onboard it, review it, maybe let it mature a little bit, then look, is it BDC appropriate and then build a structure? I mean, if you made an acquisition tomorrow, it might be onboarding those assets two years from now, if they're BDC appropriate? Or what's the time frame for review and structuring, et cetera, whether something is appropriate to add in terms of a new type of strategy to the BDC portfolio?

The acquisitions we have completed are fully integrated, and our active deal flow is ongoing with our teams engaged in these opportunities. We have completed all necessary preparations to ensure that investments are structured correctly, comply with allocation policies, and have the necessary coordination in place. All the opportunities I mentioned earlier are currently active. The delays we experience are not due to internal processes, but rather the time it takes to find suitable deals and close them. This is simply part of the deal cycle; there are no hold-ups. We are actively looking at potential opportunities weekly that can align with our platform. As we discuss this, you will notice the benefits in the third quarter investments, which reflect our ongoing efforts. If we were to announce a new acquisition similar to those at the Blue Owl level, once the deal is finalized, we can quickly integrate and initiate operations within a month or two. We operate as a nimble and focused organization across three main credit lines: credit, real assets, and GP stakes. By the time we announce a new deal, you can expect that we have conducted thorough due diligence and clearly understand how it will fit within our strategies. We can begin investing in these opportunities within a matter of months. However, I suggest focusing on the deals we have already announced rather than on hypothetical scenarios, as these offer great benefits for OBDC shareholders. They represent attractive risk-adjusted returns, created and structured by teams with significant expertise, with the potential for low double-digit plus ROEs.

Got it. I got one more on kind of related to when we talk about public-private markets. I mean, there's always swings that we're mad about. I mean, there's a big sponsor who’s talking publicly or at least talking to Bloomberg about shifting a fair number of their deals in private credit to the syndicated loan market, which happens to be open right now with pretty tight spreads. Are you seeing anything in terms of overall shifts in terms of share or anything like that? Or is that just another artifact of the noise that we currently see swinging backwards and forwards between the two depending on points in the cycle?

I think it's a very healthy traditional market environment. I would say that sponsors continue to shift more of their decisions and financing to the private markets, especially for new deals. In terms of the trade balance in one direction or the other, it's pretty balanced, deals coming from public to private or from private to public. It's a healthy market where sponsors have two good choices, and they're picking. I mean, we've talked about this many times on these calls. There are going to be periods of time where both markets are open and sponsors pick, and that's the environment we're in now. There are going to be other periods of time where the public markets are challenged and deal flow will swing to the private markets, but this is the way it should be. There is plenty of deal flow to feed both markets and we continue to find that the sector shift is towards direct lending. Importantly, we continue to get a significant premium, better documentation, better diligence, and we continue to cherry-pick what we think are the best assets for the private markets. So I think it's a healthy functioning environment that suits us just fine.

The next question is coming from Mickey Schleien of Clear Street.

Craig, this question may sound a little basic, but we're getting such mixed signals on the economy, whether we're looking at labor numbers or inflation or GDP growth. I just want to ask at a high level, where do you think we are in the credit cycle?

Our companies continue to perform well, with modest quarter-over-quarter growth in the low single digits and double-digit growth year-over-year. Generally, we see a slightly expanding economy. However, with over 300 portfolio companies at OBDC, investors may view us as a reflection of the market. I want to remind everyone that we do not represent the entire U.S. economy. Our investments are concentrated in sectors that are more resilient to recession, such as software, insurance brokerage, parts of health care, and food and beverage. Therefore, we are not expecting to signal weakness in the U.S. economy. We have minimal exposure to cyclical industries, so tariff impacts on auto manufacturing do not affect our portfolio. I stay informed about economic trends, just like most investors, and I understand there are concerns regarding labor statistics and potential economic slowdown due to tariffs. While there seems to be a consensus that U.S. growth is slowing, we are not experiencing that trend. If a modest recession were to occur, I believe it would have even less impact on OBDC.

And if we do get into a recession or if things slow down meaningfully, normally, we would see spreads widen in that sort of environment. You mentioned, I think, in your prepared remarks that they may have troughed. Do you think that trough is sustainable given the amount of capital flowing into private credit? And are you seeing any signs of more pricing discipline in the market?

I believe that spreads have reached their lowest point. I'm hopeful that at some point, they will widen from this low. The current tightness in spreads is only partially due to capital inflows into private markets; it’s also influenced by a very strong syndicated loan market, which is currently at historic tight levels. As we discussed earlier, we are in competition with that market. If it starts to widen, it will positively impact private markets. However, that market tends to be unpredictable and cyclical. If we experience some volatility in the syndicated market, it could lead to wider spreads in the private markets, while the deal flow environment remains modest. I’m not making a short-term prediction, but I remain hopeful that the next shift in spreads will be towards widening rather than tightening, influenced by factors like a decrease in public market deal flow or less capital available in private markets for new deals.

Our next question is coming from Casey Alexander of Compass Point.

Craig, I have a question about the equipment leasing side. This market is typically associated with lower balance fixed rate, short duration loans that can be challenging to scale, especially to the level that OBDC would require for it to significantly impact net investment income. Additionally, it usually necessitates having a considerable team to manage collateral and related tasks. I'm interested in how you plan to expand that business to a level that is meaningful for OBDC.

Well, the reason we highlighted the equipment finance JV is not because we think it's going to be a massive investment. But to highlight the type of opportunities that we now have, particularly by our acquisition alternative credit space for equipment financing, joint ventures or other types of more asset-oriented joint ventures that can benefit OBDC. I think you're right; it will take time. It will take time for it to be meaningful. But as you know, we've done this before. Wingspire, which is one of the largest investments of OBDC, has a very successful equipment financing business. It has a team, and it's a meaningful contributor, an important contributor to Wingspire results, which OBDC benefits from every quarter. In the Equipment Finance business, I would say one thing, and we'll share more detail on this when it's really impactful. I don't want to spend too much time speculating. But particularly what's going on in data centers is creating the need for massive amounts of capital, where you're building out scale data centers and they have lots of financing needs for the data center itself and GPUs and the like. You have some of the most valuable companies in the world building these facilities and don't want to have assets on their books, and it's creating very chunky opportunities for attractive, relatively short duration returns from potentially investment-grade counter-parties. These are the kinds of things that could be a bit chunkier than the really micro-ticket equipment leasing that you're referring to. It will be a mix. But I don't want to overemphasize the equipment leasing as being a needle mover for OBDC, but I do want shareholders to understand that we're taking active steps to leverage our product capability to come up with ever more ways to diversify our portfolio and create consistent returns, and this will just be one of many tools.

The next question is coming from Finian O'Shea of Wells Fargo Securities.

I have a market-level question regarding non-tradeds, considering your role in that area and its significance to direct lending. I wanted to know your thoughts on the decline in gross inflows. To clarify, across the industry, we've seen a decline continuing from April into May and June. Regarding direct lending and DSL, if this trend persists, do you believe it could lead to a slowdown and affect spreads?

What allows us to continue signing up large transactions? I think the situation looks positive. It truly demonstrates the resilience of that channel, contrary to some predictions of negativity. Regarding your question on spreads, I previously mentioned that three factors are currently influencing spreads: a robust public market, capital formation in the private sector, and modest M&A activity. If any of these factors change, core spreads would likely widen. Among these, I believe M&A and public markets are most likely to be affected, rather than a lack of capital in the private sector, as we are still seeing strong interest from clients. I would prefer tighter spreads. Our alternative credit team has been active in leasing for years. For instance, with regional banks pulling back, sectors like health care equipment are affected; companies requiring significant capital expenditure no longer benefit from regional bank support. We think that the current environment for equipment leasing, particularly in higher-end capital equipment, resembles where direct lending stood 10 to 15 years ago as banks withdraw. Institutional capital will need to fill the gap. I expect this to be a diversified pool, with certain sectors like data centers and health care equipment having the potential for larger opportunities. Overall, it should be a diversified pool, much like how OBDC's portfolio is structured.

And then as a follow-up question, the recent Big Beautiful Bill, I believe, had accelerated depreciation. You can depreciate 100% in year 1. Was that a factor in deciding to go down the equipment financing group?

No, it was not. It was something that we were thinking about well in advance of that.

Our next question is coming from Paul Johnson of KBW.

I guess I'd ask, you guys have had pretty meaningful turnover over the last 18 months or so, potentially a little bit higher than some of your peers. But as you're kind of looking at your back book of loans in the portfolio and then kind of spreads where they're at today, I think your average portfolio spread is about 5.8%. I mean, how do you kind of think about the spread differential of today's spreads, which seem like they've kind of troughed at this level? What's left in the back book? I mean, should we expect to kind of continue to see a little bit of incremental pressure on just general spread compression as things rotate out of the book? Or do you think at this point they're close enough that the spread compression is sort of behind us?

Look, I think the vast majority of it has worked its way through. The sponsors are very efficient at identifying opportunities to refinance and reduce spread. Just to remind everyone, our loans, when we put a new loan in the book, typically have one, maybe two years of call protection, where we get a premium after that, our loans are typically repayable at par. One of the value propositions of direct lending is it's efficient for a sponsor in a performing loan that we're providing, through its call protection for us to have a conversation about a cost-effective refinancing. That happens. It's a lot easier, frankly, than the public markets. It's one of the reasons why the spot works with us. I think the vast majority of that has worked its way through. There's probably some modest amount that sponsors are holding off either for call protection or they think they're going to exit a company, but I think a lot of it is pretty stable at this point.

Got it. Appreciate that. And then on that, as loans potentially refi into the BSL market, as that happens, your junior capital exposure has declined quite a bit over the last few years. I mean, is there an opportunity there, kind of with the Truecordia deal, to participate similar to the Truecordia deal to participate in a junior capital position as these investments move into the BSL market? I mean, is that a real investable opportunity that you see in the market? Or is that more kind of a one-off situation that presented itself?

Look, I think it is an opportunity. I would characterize the opportunity though as closer to the one-off end of the spectrum, given where junior capital is pricing in the public markets as well. If you look at high-yield spreads, and the second lien spread environment for syndicated deals, they are very tight levels. When a deal goes BSL, more often than not, it fully transitions that way. Our relationship and incumbency and long-standing history with Truecordia was a differentiator for us. I think that mattered quite a bit in this instance. If you look at the amount of discussion around names going back and forth, as Craig mentioned, it's actually pretty balanced. I don't want to overplay names going to BSL not leaving us with a substantial junior capital opportunity. We're seeing an equal number of names come out of the BSL market and choose the direct markets, and we saw substantial volume in the last quarter from names transitioning out of the BSL market. There is a balance between the two. New names, whether it be a new LBO or take-private, continue to have that secular shift to choosing direct, which we continue to see, and there hasn't been any shift there. I think the opportunity set remains a very good one. The junior capital side, if the public markets stay where they are, I think will be more sporadic.

We're showing no additional questions in queue at this time. I'd like to turn the floor over to Mr. Packer for closing comments.

Right. Well, we appreciate everyone's interest. We were really pleased with our quarter. I think it was one of the strongest in the industry, particularly terrific performance on the NII front and the dividend coverage front and the ROE front. So I appreciate everyone's interest and look forward to speaking with you again soon.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.