Blue Owl Capital Corp Q3 FY2025 Earnings Call

Thank you, operator, and welcome to Blue Owl Capital Corporation's Third Quarter 2025 Earnings Conference Call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the third quarter ended September 30, 2025. These should be reviewed in connection with the company's 10-Q filed yesterday with the SEC. Additionally, OBDC and Blue Owl Capital Corporation II, or OBDC II, issued a joint press release announcing that the companies have entered into a merger agreement pursuant to which OBDC will acquire OBDC II. The merger is subject to the satisfaction of customary closing conditions, including OBDC II shareholder approval. All materials referenced during today's call, including the earnings and merger press releases, earnings and merger presentations and 10-Q are available on the News and Events section of the company's website at blueowlcapitalcorporation.com. 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 OBDC's filings with the SEC. The company assumes no obligation to update any forward-looking statements. We would also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Events and Presentations section of our website. 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. In addition to reporting another quarter of solid results for OBDC, we are also pleased to be announcing a merger between OBDC and OBDC II, a transaction which we believe can create meaningful value for shareholders of both funds. First, I would like to review OBDC's results for the quarter, and then I will spend a moment discussing the transaction. Our objective has always been to deliver consistent returns to shareholders, and we are pleased to have done that since our founding nearly 10 years ago. This long-term focus continues to guide our strategy and how we manage OBDC and in the third quarter, we delivered solid results that reflect the ongoing strength and resilience of our portfolio. We generated adjusted NII per share of $0.36, which represents an ROE of 9.5%. These results were roughly in line with our long-term average, though they have come down from peak levels due to the declining base rate and spread environment. While Jonathan will go into more detail shortly, our results in the third quarter reflected a lower level of nonrecurring income as compared to our historical average. As of quarter end, our net asset value per share was $14.89, a modest decline of $0.14 from the prior quarter. We note that our NAV remains consistent with levels from a few years ago and has increased over 4% since inception, underscoring the durability of our strategy and portfolio. Our portfolio continues to benefit from our disciplined investment approach which emphasizes larger recession-resistant businesses. During the quarter, we marked down a few watchlist positions, but we want to emphasize that these positions have been on our watch list for several quarters and don't reflect new credit issues in the portfolio. Overall, the portfolio's fundamentals remain strong. And as Logan will detail later on, we are not observing any broad signs of stress or a material increase in amendment activity. With that, I want to take a moment to address the recent headlines surrounding private credit, which have generated a lot of attention and confusion for investors. It's important to clarify where we participate within the broader landscape. Our primary focus is on direct lending, which we believe is one of the most attractive areas of the market. In direct lending, we primarily make senior secured loans directly to companies, typically as the lead lender which affords us the ability to have direct dialogue with our borrowers and sponsors to shape transaction terms and credit documentation. This direct engagement also gives us access to comprehensive financial reporting and an ongoing dialogue with our portfolio companies. The transparency and control this provides allows us to build a complete picture of each credit during underwriting, giving us greater confidence compared to deals in the public fixed income markets. Our portfolio is continuing to perform well. And as Logan will describe later, our borrowers are demonstrating solid revenue and EBITDA growth. OBDC's healthy credit performance, as evidenced by our below-industry average nonaccrual and loss rates, is a direct result of our disciplined approach and focus on high-quality, upper-middle market businesses. Public market sentiment with respect to BDCs seems to be disconnected from the realities on the ground and we encourage investors to look beyond the headlines and focus on the fundamentals that drive our strong risk-adjusted results over time. Next, I'd like to briefly highlight the transaction we announced yesterday to merge OBDC and OBDC II, with OBDC as the surviving entity. The merger strengthens OBDC's position as the second largest publicly traded BDC, adds nearly $1 billion in net assets, and creates a larger, predominantly senior secured portfolio with potential for earnings accretion over time. This merger marks an important step in streamlining our BDC platform while enhancing long-term value for shareholders. Now I will turn it over to Logan to provide more detail on OBDC's portfolio and the proposed merger.

Thanks, Craig. We saw a pickup in deal activity during the third quarter with originations of $1.3 billion and fundings of $1.1 billion, that outpaced $797 million of repayments and resulted in net leverage of 1.22x at the end of the quarter. In addition to a higher number of new deal originations this quarter, approximately 40% of the originations were add-ons, consistent with the past three quarters. This sustained level of add-on activity underscores the benefits of being an incumbent lender as it allows us to support the continued growth of our borrowers. As we've increased in scale, we've been able to commit capital in greater size to larger borrowers while maintaining a highly diversified portfolio. For example, our average hold size across our platform on new direct lending deals has grown from $200 million in 2021 to roughly $350 million this year, while the total deal size doubled to nearly $1.5 billion over the same period. This enhanced capacity allows us to participate in some of the largest and most attractive transactions in the market and shows the secular trend of larger borrowers preferring direct solutions. Next, I'd like to reiterate that the fundamental performance of our portfolio remains strong. We believe our borrowers are among the highest quality we've seen since inception. This is supported by the scale and diversity of our $17 billion portfolio, the increasing size of the companies we lend to and our continued focus on senior secured investments, which represent 89% of the portfolio at near record levels, excluding our specialty finance and JV investments. Our credit metrics continue to reflect strength. The cumulative fair value of our 3s to 5s rated names is approximately 8%, which declined nearly 2% since year-end 2024. Our nonaccrual rate remains at the low end of the range across the BDC sector and in line with our historical average at 1.3% at fair value this quarter which is modestly up, primarily due to the addition of Beauty Industry Group, which had been on our watch list for over two years. Credit-related amendment activity is stable with no signs of increased pace or intensity of amendments over the last two years. We also monitor portfolio company revolver drawing activity closely as it's an indicator of stress and our average revolver draws are below 20%, a conservative level that has actually been decreasing throughout the year. Further, on the theme of larger, more resilient borrowers in the market, the average revenue and EBITDA of portfolio companies has grown to over $1 billion and $229 million, respectively, nearly double the level of four years ago. We continue to focus on upper-middle market borrowers that are scaled players with access to more resources to manage various headwinds. These companies have market-leading positions with diversified revenue streams, strong recurring cash flow profiles, healthy liquidity and generally operate in noncyclical defensive sectors of the economy that are expanding, including health care, technology, business services and insurance brokerage. As a reminder, we intentionally avoid more cyclical sectors such as energy, chemicals, and retail, which are featured more prominently in the public markets and tend to be more volatile. These larger businesses have continued to perform well with year-over-year revenue and EBITDA growth again in the mid- to high single digits, and average LTVs of 42%. Our interest coverage ratio increased to approximately 2x based on current spot rates, up from 1.7x one year ago, reflecting ongoing portfolio company EBITDA growth as well as base rate reductions, and we expect that will continue to improve as base rates decline further. Also, I wanted to highlight that PIK income at 9.5% of total investment income is down from 13.5% a year ago, primarily driven by refinancings of several PIK investments. As we've highlighted in previous earnings calls, the vast majority of our PIK names were underwritten at inception, and we have not had any nonaccrual bankruptcy or principal loss on any of these structured investments since inception. In summary, Q3 credit performance metrics, including below-market loss rates, steady amendment activity and strong borrower fundamentals underscore the quality of our portfolio and we believe our credit business remains well positioned. Turning back to the proposed merger between OBDC and OBDC II. OBDC II was launched in 2017 to give individual investors access to the same strategy and platform we originally offered institutions through OBDC. Both portfolios are highly aligned and comparable exposures to senior secured loans and nearly all of OBDC II's investments, about 98% overlap with OBDC. These portfolios are managed by the same investment team and reflect a consistent investment composition and credit quality. As Craig mentioned, this transaction adds scale to OBDC's portfolio, bringing in $1.7 billion of investments which will increase the portfolio to $18.9 billion across 239 companies. With the addition of complementary portfolios from OBDE last year and now OBDC II, the overall portfolio will have grown by 40%, affording us more scale and diversity. The merger strengthens our balance sheet given OBDC II's lower leverage at 0.78x, and we expect the transaction to be accretive to NII over time. We anticipate approximately $5 million of cost savings in the first year, largely from eliminating duplicative expenses. Over time, there is potential for lower cost sources of capital and greater flexibility to pursue new investment opportunities. Finally, while this merger would provide liquidity for OBDC II shareholders, it is worth noting that these shareholders have had access to liquidity through a quarterly repurchase program, which met 100% of shares tendered for nearly seven years. We believe this transaction positions the combined company well to continue to deliver attractive risk-adjusted returns as a market leader in the space. And now I'll turn it over to Jonathan to provide more detail on our third quarter financial results and the mechanics of the proposed merger.

Thank you, Logan. To summarize OBDC's quarterly performance, we ended the quarter with total portfolio investments of over $17 billion, total net assets of nearly $8 billion and total outstanding debt of approximately $9.5 billion. Our second quarter NAV per share was $14.89 down from $15.03 last quarter following write-downs of existing watch list positions. Starting with the income statement. As Craig mentioned, we earned adjusted net investment income of $0.36 per share, down from $0.40 as compared to the prior quarter driven primarily by lower nonrecurring income, which was $0.02, well below the $0.05 we generated in the second quarter and our historical run rate average of approximately $0.03. The Board also declared a fourth quarter base dividend of $0.37, which will be paid on January 15, 2026, to shareholders of record as of December 31, 2025. In prior quarters, we over-earned our base dividend, allowing the Board to declare supplemental distributions. This quarter, given the lower rate environment over the past year, we did not generate excess earnings to distribute under our dividend policy. Craig will provide additional color on our dividend outlook later in the call. As we have previously reported, our spillover income remains healthy at approximately $0.31 per share and supported our base dividend this quarter. Moving to the balance sheet. We finished the quarter with net leverage of 1.22x, up modestly from 1.17x and within our target range of 0.9 to 1.25x as we had net fundings of $273 million. In terms of liquidity, we remain well capitalized with significant capacity to invest as new opportunities come in. We ended the quarter with over $3 billion in total cash and capacity on our facilities, which was well in excess of our unfunded commitments. 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. Lastly, I'd like to spend a minute describing the proposed merger consideration. The transaction is structured as a stock-for-stock merger with each OBDC II shareholder receiving a certain number of OBDC shares to be determined just prior to closing. The exchange ratio will be determined by a formula, which will be struck on a NAV-for-NAV basis if OBDC is trading at or below NAV per share, or a premium that will benefit OBDC's shareholders if OBDC is trading above NAV per share. As a sign of support from Blue Owl, OBDC and OBDC II will be reimbursed for 50% of the fees and expenses associated with the proposed merger up to $3 million in total, which will be paid for by OBDC's adviser if the proposed merger is consummated. OBDC's Board of Directors has also authorized a new share repurchase program of up to $200 million in open market purchases from time to time to account for the increased size of the combined company. This will replace our current $150 million share repurchase plan. Finally, we are expecting to close the transaction in the first quarter of 2026, subject to customary closing conditions. Now I will turn it over to Craig for some closing remarks.

Thanks, Jonathan. To close, I want to talk about our earnings outlook in the current environment and the quality of our portfolio. As expected, rising rates over the past few years increased our earnings given the floating rate nature of our portfolio. We have passed those gains through to our shareholders via regular and supplemental dividends. As a reminder, we implemented the supplemental dividend policy, in part because we expected that elevated base rates would likely eventually subside, and this mechanism would provide for a naturally adjusting tool to allow for these rate movements to flow through to dividends. Naturally, if base rates decline further as the market currently expects, our earnings and dividends will adjust as well. That said, we think it's important for investors to separate out the impact of potentially lower rates on the portfolio from the risk of significant credit concerns. While rates may decline, we continue to feel confident in the strength of our portfolio, supported by solid fundamentals, disciplined underwriting and a defensively constructed asset mix. Our loss rates remain well below market averages, a reflection of our consistent focus on downside protection and credit selectivity. Even in a lower rate environment, we believe OBDC will continue to have strong credit performance, that will provide investors with a steady stream of dividends that will be attractive relative to other investment opportunities. Thank you for your time today, and we will now open the line for questions.

Our first question comes from Brian McKenna with Citizens.

So starting on the OBDC II merger, nonaccruals in this portfolio are 60 basis points above OBDC. So what's driving this? And then what part of that portfolio has underperformed relative to OBDC? And then leverage is clearly lower, but what kind of ROEs has OBDC II generated since inception? And then is there a way just to think about the incremental ROE post the merger?

I'll start. Brian, it's Craig. I'll start and then Jonathan can chime in. Look, for those that aren't familiar, OBDC II was raised about a year after we initiated OBDC. The portfolios have almost complete overlap, almost 100%. It's the same names invested in the same period of time with the same economics, the same strategy, and the same team. The OBDC II will comprise about 10% of OBDC, so the impact of merging it in is really quite modest given the overlap in names. The higher nonaccrual rates are a function of the names on nonaccrual being a little bit bigger at OBDC II because OBDC II is still operating under a lower leverage constraint than OBDC. It has the old leverage rules. So it's capped at one turn of leverage. We'd be running at 0.75x of leverage. And so we've had the nonaccruals or just a little bit bigger part of that portfolio. But it's the same names that OBDC already has exposure to. When you add them in, it has an immaterial impact on overall credit statistics at OBDC. So their names were already in, which creates a slightly higher immaterial impact. I don't know, Jonathan, maybe you want to hit the ROE question.

Yes. So on the ROEs, obviously, just given we've been running OBDC leverage towards the middle to the upper end of our target leverage ratio, whereas OBDC II has been running, as Craig alluded to, at 0.6x to 0.75x. Historically, the ROEs just based on the returns associated with that leverage have been lower. But as the companies come together, Brian, we think that there's about 15 to 20 basis points of ROE accretion that we can create across the portfolio, and that's really driven by OpEx synergies that we can see, and some liability management associated with some of the financings in particular in OBDC II that we can refinance into single facilities, and OBDC II just has a little bit of a higher weighted average asset yield.

Okay. Great. That's helpful. And then just as it relates to the stock, it's now trading at 82%, give or take, of book value. A few years ago, you did an Investor Day, you laid out some steps you were going to take to improve the valuation. As we sit here today, we're clearly in a different part of the cycle. But I mean, what are you doing as a management team to improve the valuation? You refreshed and upsized the buyback to $200 million. Should we expect you to be a little bit more active there? And then should we expect to see maybe some insider buying and even some repurchases from OWL?

So we laid out some goals at Investor Day that I think were very effective. And in fact, the stock within a year or so actually got to book value. So we were very pleased with that at the time. One of the goals, just to say it at the time was also to simplify our BDC portfolio, which at the time was seven names, and we had a stated goal of getting it down to four names. And with the merger we're announcing today, if that's approved and closes, we'll accomplish that goal. We're quite mindful of where the stock is, and it's something we take quite seriously and discuss as a management team and with our Board. I think just running some math, the stock is yielding more than 11%, so it's hard for us to reconcile that with the performance, which has been very consistent. We think that what's happening with the company and high-quality BDCs is simply a rate cycle that we're going through. And as you acknowledge, we're in a different part of the rate cycle now. But credit performance in the portfolio remains very strong, even with the impact of the one nonaccrual. I won't try to go point by point through all the tools, but I just would say all the tools are on the table. Buyback, I think part of what we did in the earnings day was just provide a lot of transparency around the quality of the portfolio. I think with a lot of the headlines now, investors are oftentimes taking just a knee-jerk reaction to a headline. And so I think part of our job is to make sure that people hear our confidence in the portfolio, and that remains the case today. But whether it be buybacks, I think certainly with the merger, that's something that we'll be attuned to. We have the buyback that's out there. Insiders, we don't direct insiders to buy the stock, but obviously, a lot of employees find it attractive from time to time. We did do a special program around at the time you mentioned for employees, and we'll certainly look at that tool as well. So it's all available. And we've been very focused and have been very focused on creating value for shareholders and getting the stock back to where we think it should be. And candidly, where the analyst community has it projected out as well.

Our next questions come from the line of Arren Cyganovich with Truist.

With respect to what you were discussing in your prepared remarks about base rates declining further as the market expects and earnings and dividends having to be adjusted, I guess, is there a certain level that you would have to be below the current NII? Or is it just once you kind of see the future there, you'll make that adjustment? And then I guess finally, what are your expectations for rate cuts over the next four or five quarters?

We don't consider ourselves experts in macroeconomics, but rather we rely on the forward curve to gauge market sentiment, focusing primarily on SOFR. By the end of next year, we expect it to be around 3%. This reflects our expectations, but ultimately we are just following the market trends. Regarding our dividend policy, it's strong and is reviewed every quarter in discussions with the Board. This practice isn't new; we had similar discussions when interest rates were rising. We aim to maintain a sustainable base dividend aligned with a stable rate environment, though rates can fluctuate. We've implemented a supplemental dividend due to rising rates, thinking it might not be long-term viable, and that worked well for us. We are committed to finding a careful balance regarding any changes to dividends. This quarter, our net interest income exceeded our dividend by $0.01, and we have substantial spillover income, which gives us confidence through the year's end. However, as we look towards 2026, with anticipated rate declines, it is reasonable for investors to consider potential adjustments to the dividend reflective of earnings capacity in a lower rate environment. We will assess this further with our strong-performing portfolio in mind. Historically, when rates were around 3%, our dividend was approximately $0.33, providing useful insights for investors to predict future dividends. While we benefit from high rates, our company is structured to offer premium returns across all rate environments. It's important to note that we will not review this for the fourth quarter, as we have sufficient income to support current levels, but as 2026 approaches, we will engage in discussions with our Board based on the rate expectations then. Overall, we believe base dividends should correlate with the portfolio’s earnings potential and anticipated future rates.

Our next questions come from the line of Robert Dodd with Raymond James.

Moving on to the outlook for originations activity, I believe you've addressed the dividend discussion well. You are currently near the higher end of your target leverage. When OBDC comes into play, it will adjust that situation. However, do you see any possibility of taking on assets if M&A activity increases, or do you think you might not be able to engage fully in that due to your current leverage? What are your thoughts on the opportunities that could arise if there is a significant M&A cycle, considering your leverage position?

I will make a few comments, and Logan, perhaps you can share insights on the current activity levels. We are currently at the higher end of our range. Blue Owl has a strong capability to originate assets, which is one of our key advantages. Even in moderate merger and acquisition environments, we originated $10 billion worth of deals last quarter. At OBDC, we are working to align originations with repayments to remain at the mid- to higher end of our range for good returns. This synchronization is challenging because deal closings and repayments don't always align perfectly. We are at the higher end now, and the merger will slightly reduce leverage, providing some cushion. The pro forma leverage will be around 1.15x, which will help lower our leverage a bit. We can adjust this efficiently in any quarter because we consistently receive repayments. If we encounter an attractive cycle, we can allow some repayments to come in and redeploy to reach a leverage of 1.2x or 1.25x. Logan, could you elaborate on the deal environment?

Yes. Sure. In the fall, we've seen a meaningful pickup in our activity levels. We've seen in the last couple of months, particularly in September, a pickup of our activity and pipeline by about one-third from prior quarter levels. And the mix is significantly weighted now towards sell-side M&A opportunities, which usually and typically result in greater upfront fees when doing a brand-new deal. And there's more new capital, obviously, in those new deals as well in the supply versus what you've seen over the last two years is dollar-for-dollar refinancings of deals that come with very little upfront fees. So the mix is better and the pipeline is higher. We're trying to be cautiously optimistic given we need to get the signings of those deals, but we would note that the teams are very busy, and the outlook, we're quite optimistic. I'd also point out something that we pointed out last quarter and after the OBDE merger that also rings true after OBDC II, we continue to have less pro forma JV and strategic equity investments as we would have had prior to the merger. And so it gives us an opportunity to deploy into those accretive and noncorrelated opportunities. And if you look at this quarter, as an example, the differences are modest, but that dividend income offset some of the base rate decline and was stable and noncorrelated to the rest of the portfolio. It was really more one-time income-related items that had the impact this quarter versus last quarter. So I think those JVs and strategic investments will be a place post the OBDC II merger where we're able to take advantage of it.

And the follow-on is exactly that. I mean, you created a new vehicle, the cross-strategies opportunities or whatever it was called, I think, this quarter to take advantage of that. I mean, it's obviously very, very small right now. I think it's like a $5 million position. I mean how big could that vehicle be as a piece of the portfolio? And what kind of return on capital do you expect from those versus from that type of opportunity versus the on-balance sheet direct lending?

I believe this illustrates the advantages of our platform. In the last quarter, we established an equipment leasing joint venture with CalSTRS. This quarter, we've created another entity focused on asset-based and alternative credit across our platform. The goal is to create a diverse range of secured investments, drawing from a variety of strong opportunities within the Blue Owl platform. We will take a cautious approach to maintaining this diversification, but I anticipate there will be significant opportunities. Like our other strategic equity and joint venture investments, this will be a small component of the overall portfolio, perhaps around 1% or 2% over several years. Therefore, I don’t expect it to have a substantial impact in the upcoming quarters. However, we plan to grow it over the next few years. Similar to our existing joint ventures, we are aiming for a low double-digit return profile, which we hope will be backed by assets that are not correlated with corporate credit in other direct lending ventures. The return profiles should be comparable, and we will proceed thoughtfully with the rollout of this new entity.

Our next questions come from the line of Finian O'Shea with Wells Fargo.

Logan, I found one of your earlier comments about average hold sizes and facility sizes nearing $1.5 billion interesting. Please correct me if I'm mistaken. I believe you were referring to the total tranche size for an average name. Is that a signal of increasing refinancing risk as the leveraged finance market remains strong? How much higher do you think that will go over time? Or do you believe the focus will be more on broadening rather than just increasing the size of companies?

Thanks for the question, Fin. This is more about tranche size rather than the specific size of our Blue Owl holdings. We've noticed a significant increase. For instance, in the first quarter, we mentioned that in one of the quarters this year, the average deal size surpassed $2 billion in total tranche size. We're observing sizable businesses, some with enterprise values exceeding $10 billion, opting for direct deals. If the average deal size, or even half of that, were to occur, we would face similar competition dynamics with syndicated and public markets. This trend isn't new. Additionally, we're continually monitoring new M&A activities and borrower options. Third parties like S&P release quarterly market share statistics, and despite the public markets being open, over three-quarters of new M&A and LBO deals continue to favor direct lending. We do not see any significant loss of share; in fact, it's quite the opposite. Borrowers are having positive experiences with direct lending, which fosters ongoing adoption. The number of companies in private markets, along with their scale and ability to remain private longer, indicates a steady secular shift. We believe this shift toward direct lending will persist each quarter, and we are not worried that the current dynamics with public markets are changing in any significant way.

Our next questions come from the line of Casey Alexander with Compass Point.

I'm kind of curious in relation to the $200 million share repurchase program. And I noticed that the merger doesn't have any lockups or gates for the OBDC II shareholders. So is it kind of your plan or your strategy to hold that for after the merger and use that to absorb any potential selling pressure that might come from the merger?

I don't believe we've reached a conclusion on that. When considering the buyback, it's something that can be utilized at any time, and clearly, in the current share price environment, we need to analyze it closely. Just because we're increasing it, and some investors may not be aware of OBDC II, it's important to note that OBDC II has conducted quarterly tender offers consistently throughout its seven-year history. We have successfully fulfilled every tender offer each quarter. Unlike other BDC mergers where investors might have limited liquidity options, our investors have already had the chance to exit if they choose to, and all who wanted to exit have done so on schedule. As a result, we don't see our buyback as essential for the completion of that merger, since the situation does not indicate that the merger would lead to an increase in sellers. We view the buyback as something that can be utilized in any market conditions, and of course, the current stock price is at a level we will consider.

Our next questions come from the line of Mickey Schleien with Clear Street.

Craig, thanks and Logan, thank you for all the discussion of the market backdrop. But I wanted to follow up on that issue by noting that we've heard generally that activity has picked up in the third quarter, which is obviously a good thing and that could help balance the direct lending loan market. And with that in mind, I'm curious what your sense is of the market's current balance or disequilibrium and your outlook for spreads, particularly going into next year?

Sure, I'll begin, and Logan can add his thoughts. I'm glad you asked this because when examining earnings, particularly ours and possibly those of other BDCs, several factors are involved. It's worth taking a moment to discuss this. We are quite confident in the quality of our portfolio, which continues to perform well. We did experience one nonaccrual, but we anticipate that credit performance will remain strong. Over the past year, there has been a significant shift in rates, with a 100 basis point change being the main factor affecting earnings. This isn’t unexpected, given the floating rate nature of our assets, but it does lead to headlines about earnings declining either quarterly or annually. This is primarily due to rate changes. However, there's also the issue of spreads. In the direct lending market, spreads have narrowed. Looking at our OBDC, a year ago, we reported that spreads in our portfolio were 50 basis points wider than they are now. Therefore, we are facing two factors: a 100 basis point decrease in rates and a 50 basis point decrease in spreads. These represent different cycles. The tight spreads you mentioned are likely due to two reasons. First, we are competing with the syndicated market, where spreads are at historical lows. For example, single B credits are being priced at 275 to 300 over. Anyone familiar with the public loan markets would recognize this as exceptionally tight. Based on my extensive experience in leveraged finance, such markets tend to be cyclical. Eventually, we should expect to see wider spreads in the public loan market, which could be significant. The second element to consider is that M&A activity is currently modest, but we are noticing indications of a resurgence. Private equity firms are eager to start M&A operations again, and we’ve seen some encouraging signs in the past month or two. I’m not ready to say this marks the start of a new cycle, but it is a positive indication, recognized by other managers as well. If M&A activity continues to grow and we see a normalization of public loan market conditions, spreads in the direct lending market will likely adjust accordingly and widen. Thus, we can anticipate a typical spread widening cycle in the direct lending market. As for when that might occur, my forecasting abilities haven't been reliable. I thought it might happen this year, but it hasn’t. However, it will happen eventually, and when it does, it will help counterbalance some of the rate tightening we’ve seen and enhance returns. I’m not suggesting we should expect this next year since predicting such events is very challenging. Still, observing the loan market and the M&A cycle, it seems reasonable to believe that in the next 12 to 18 months, one or both of these scenarios could occur, and we would benefit from them.

One additional point to add on is Craig has mentioned of where syndicated market spreads are today; we've seen spread deployment stability over the last few quarters in private markets. And if you look at the average spread on our new deployments, excluding a couple of one-off second liens or refinancings, we've been deploying right around that 500 over spread level basically for the last year, plus or minus. And so our deployments have been consistent while public markets continue to tighten. So the relative spread environment still feels reasonably good.

I appreciate that. That's really helpful. And sort of in line with my thesis. Moving on, there were several portfolio companies which contributed to this quarter's unrealized portfolio depreciation, but Conair and Beauty Industry Group made up most of it on a net basis. Could you just help us understand what the issues are there? And do you see those sort of factors affecting other portfolio companies?

Sure, thank you. There are two distinct issues affecting the two companies. Regarding Conair, it holds a second lien position primarily behind a first lien that has been downgraded to CCC ratings, which creates some technical pressure. The market reflects this with its trading price. Moreover, Conair is facing challenges related to tariffs, as they import most of their products from China and are currently working on restructuring their supply chains to mitigate this issue. Fortunately, they have over a year’s worth of liquidity, so there is no immediate catalyst or concern; the company is stable and has time to address these tariff-related challenges. It’s important to note that the depressed trading price of Conair is influenced by its public market rating. On the other hand, the Beauty Industry Group has also been affected by tariffs, which have impacted its fundamentals. We’ve held this company in our portfolio for more than five years through different ownership periods, and it has been on our watch list for two years due to various challenges, with tariffs being the latest. They previously struggled with competition and operational issues, and like Conair, they import most of their beauty products from China. Currently, the sponsor's willingness to provide additional capital for support is uncertain, leading to further markdowns for this company, which has tighter liquidity compared to Conair, thus justifying its markdown this quarter. I hope this clarifies the situation.

Yes. I would just add, we have said when tariffs kicked in, there were a few names that we thought were sensitive to the tariffs. And so although disappointing, it's not surprising to us, but I want to reassure investors, this is not indicative of a long list of other names that could migrate.

Why don't we move to the next question.

Just one on the merger here. Wondering if you could just talk a little bit more about expected time frames for achieving the expected ROE accretion that you mentioned.

Sure. In terms of timing, we expect to close the merger hopefully in the first quarter, possibly later in that quarter. The operational expense synergies usually come in quickly since they relate mainly to duplicative expenses. The synergies related to the capital structure may take longer, but we believe we can achieve most of them by 2026. Additionally, leveraging the portfolio should happen fairly soon, considering the relatively small size of OBDC II compared to OBDC. Therefore, we do not anticipate it taking a long time.

Got it. That's very helpful. I have a follow-up regarding the new share repurchase program. How do you evaluate potential share repurchases considering OBDC's leverage, and how do you plan to balance repurchases with potential investment opportunities that may arise in the near term?

I believe you're doing well in identifying all the factors at play. We will take all of those factors into account. Our capital is permanent and very valuable, and we're constantly working to preserve it for new investment opportunities. However, given the current stock price and the tight spreads along with lower rates, the appeal of purchasing shares increases. Leverage is an important consideration as well; we can manage it as we receive repayments, which continues to happen. It's not a precise science, and I think that's understood. We operate within specific timeframes dictated by our public disclosure schedule. In certain quarters, there are times when we are unable to buy shares based on our reporting timelines and the information we receive from our portfolio companies. Thus, there are significant periods in a quarter where we are restricted from buying shares. During the times when we can buy, we assess the share price, other investment opportunities, and leverage, and we make decisions based on those evaluations as we have in the past. I wish I could provide a more detailed analytical response, but it's a matter of considering all of these aspects.

Our next questions come from the line of Sean Paul Adams with B. Riley Securities.

Given the impact of the uptick and the scale on earnings, are there any potential valuations for changes in the management fee cost structure on a go-forward basis?

I'm not completely clear on the question, but no, we are not considering changes to the management fee structure, if that's what you're asking. We have maintained the same structure for nearly 10 years, and OBDC II had the same fee setup. Similarly, our tech fund also follows this fee structure.

Our next questions come from the line of Christopher Nolan with Ladenburg Thalmann.

Just a follow-up on that previous question on the management fee structure. Given your comments in terms of narrower spreads, lower rates, you're in a different environment. And any consideration to improving expenses relative to revenues, improve the total return of OBDC?

I understand why you're asking this question. I encourage you to review the history of the fund. It has maintained the same fee structure even when rates were at zero for several years. This fee structure has been established and is transparent. We have been consistent in applying it and we aren't currently assessing it. I believe it has been designed thoughtfully, aligning with industry peers and reflecting the quality and resources we invest in it. The purpose of the fee structure is not to change based on fluctuations in rates over short periods, so that should not be an expectation.

Okay. The only reason I ask is your investment yields on debt is roughly 10.5%, and your stock dividend yield is roughly 12% or a little less. I'm just considering that total returns may be part of the reason why the stock is trading below book value. I'm trying to follow up on your earlier comment that all levers are available.

I have many thoughts on why our stock is performing as it is, but I would note that there are comparable peer stocks with significantly lower yields. I hope this situation is just a short-term technical issue. Investors have been skittish about recent headlines related to private credit. In the short term, they appear to be reacting to one or two news items in the market. I appreciate you highlighting that our stock is yielding 12% from a high-quality performing portfolio. We hope investors will find that attractive, and the buyback is certainly a consideration. There have been times in the last decade when the stock has been mispriced. We haven’t altered the fee structure, which I don't see as a meaningful factor in this context. I want to emphasize that the overall quality of the portfolio and the opportunity for that yield should stand out. Even if dividends decrease slightly, we are still looking at a 10% to 11% yield that I hope will appeal to investors, helping the stock move in a more positive direction.

Our next question has come from the line of Brian McKenna with Citizens.

So just a quick follow-up on repayment activity. Clearly, a little bit lighter in the quarter, and they can bounce around from quarter-to-quarter, but any visibility into 4Q repayments? I'm just trying to think through is that $0.02 per share of nonrecurring income, a good starting point for the fourth quarter?

I think so far, it's consistent with the prior quarter. No change.

$0.02 seems about right.

Our next questions come from the line of Mickey Schleien with Clear Street.

Apologies, the phone cut out. A couple of questions. In terms of the merger closing, are you assuming the government is going to reopen quickly and get the SEC fully up and running in your assessment?

That would be part of the assessment that they would be able to review that. But ultimately, we think the projection that we've got in place accounts for that.

Okay. And I don't want to beat a dead horse here, but I just want to confirm, there were no repurchases made under the 2024 stock repurchase program. Is that correct?

That's correct.

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to management for closing remarks.

Okay. Look, we appreciate the engagement. We're available. If folks have questions, please reach out. Thanks for your time, and we will speak with everyone soon.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.