Blue Owl Capital Corp Q4 FY2025 Earnings Call

Good morning, everyone, and welcome to the Blue Owl Capital Corporation's Fourth Quarter and Full Year 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. Mike, please go ahead.

Thank you, operator, and welcome to Blue Owl Capital Corporation's Fourth Quarter and Full Year 2025 Earnings Conference Call. Yesterday, OBDC issued its earnings release and posted an earnings presentation for the fourth quarter and full year ended December 31, 2025. These should be reviewed in connection with the company's 10-K filed yesterday with the SEC. All materials referenced during today's call, including the press release, presentation and 10-K 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'd 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, and good morning, everyone. We appreciate you joining us today. There's been a lot of recent investor attention on OBDC and the other BDCs that we manage, as well as the private credit industry more broadly. Much of this focus has been on credit quality and whether fundamentals are holding up. At a certain level, we understand investor concerns as the industry has grown significantly in the last few years. So I'd like to start off by reassuring you that credit quality in OBDC remains strong, and we expect that to continue. Before we get into our results, I want to address our future plans for OBDC II, following the termination of the proposed merger with OBDC that we announced last quarter. OBDC II is a nine-year-old private fund, which was required to eventually consider a liquidity event to return capital to shareholders. We believe the merger into OBDC was the most logical path due to the high asset overlap and benefits of scale. However, in light of the market reaction and working with our Board, we concluded the proposed merger no longer made sense, so we terminated it. Since then, OBDC II has been working to determine the best path forward. Yesterday, we announced a sale of a portfolio of OBDC II assets at book value totaling $600 million, or approximately 35% of the fund's total assets, and plan to distribute most of those proceeds to OBDC II shareholders. We believe this outcome prioritizes shareholders by providing significant near-term liquidity for OBDC II investors at attractive valuations. This asset sale process initially focused on OBDC II. But given significant demand from several high-quality institutional investors, we expanded the process to opportunistically sell modest amounts of additional assets from two other funds, including OBDC. In total, $1.4 billion of assets are being sold, including $400 million from OBDC. These sales are being executed at exactly our book value and at an average price of 99.7%. Not only is this a strong endorsement of our valuation process and NAV, but it further underscores the high quality of our portfolios. I want to emphasize this. Most industry private secondary sales are almost always executed at a discount to book value, and we are pleased to execute this transaction at our marks across approximately 130 names to a very select group of high-quality leading institutional buyers. We believe this sale sends a clear signal as to the strength of our portfolio and the quality and integrity of our marks. To be clear, this is a partial strip sale across OBDC Holdings, where we are selling small pieces of over 70 individual loans at an average size of $5 million per position, or approximately 5% of each position size. This transaction modestly increases OBDC's portfolio diversity and reduces leverage by approximately 0.05x, positioning OBDC with greater flexibility to deploy capital into the most attractive risk-adjusted opportunities. Moving forward, we are not changing our philosophy. As a buy-and-hold lender, we are not in the regular business of selling our private assets. In this situation, we started out by focusing on returning capital to OBDC II shareholders, and we received so much additional demand that we decided to fine-tune the OBDC portfolio from a position of strength. Alongside these actions, we were also active in supporting OBDC through our share repurchase program. Against the backdrop of volatility post-merger and the broader industry selloff, we repurchased $148 million of stock at an average discount to net asset value of 14%. These purchases were accretive to NAV per share and reflect our conviction in OBDC's long-term value. Taken together, we believe that this highlights disciplined capital allocation. We monetized assets at book value and at an average price of 99.7%, repurchased shares at 86% of book value, reinforcing our view that the trading discount does not reflect the underlying strength of the portfolio. Now turning to our performance. In the fourth quarter, we delivered solid results, supported by the continued strength of our portfolio, which generated adjusted NII per share of $0.36, which represents an ROE of 9.7%. These results are consistent with last quarter as headwinds from lower base rates were offset by positive one-time items. NAV as of quarter end was $14.81, down modestly from the prior quarter, primarily reflecting write-downs on a small handful of watchlist names, partially offset by accretive share repurchases. As we look back at 2025, we believe OBDC executed well amid a shifting rate environment. We closed the OBD merger, increasing our scale and establishing OBDC as the second-largest publicly traded BDC in the market. Throughout the year, we prioritized optimizing our capital structure to reduce costs and enhance flexibility while improving our credit profile, highlighted by our very recent Moody's upgrade in January to BAA2. On the origination front, in 2025, we deployed more than $4 billion at OBDC and $45 billion across the Blue Owl direct lending platform while maintaining our disciplined approach to credit selection. Over the past year, we selectively broadened our deal funnel by leveraging Blue Owl's expanded capabilities in alternative and asset-based credit, as well as digital infrastructure to access attractive risk-adjusted opportunities adding accretive non-correlated returns. All the while, our portfolio companies maintained their solid credit quality with revenue and EBITDA growth accelerating in the second half of the year. We are very pleased with our performance over the past year, and we entered 2026 on solid footing with continued confidence in the quality and resilience of the portfolio. Now I will turn the call to Logan to provide more detail on our investment activity and credit performance.

Thanks, Craig. Starting with investment activity this quarter, we continue to see healthy deal flow across our core sectors. We had our third largest originations quarter ever at over $12 billion across the direct lending platform, while at OBDC we were more selective, with capital used to reduce leverage and fund share repurchases. This quarter, OBDC had fundings of $820 million against $1.4 billion of repayments, resulting in lower net leverage at 1.19x. Further, with the additional deleveraging from the previously mentioned opportunistic asset sales at book value, we have ample dry powder to lean into the best risk-adjusted opportunities as the pipeline builds in 2026. Our originations this quarter were once again anchored by our existing relationships, with approximately 50% coming from large incumbent borrowers. That incumbency remains a core advantage of the Blue Owl platform. We incrementally deployed capital into our joint ventures and specialty finance investments with $80 million of fundings across several vehicles as we continue to ramp these platforms. Turning to the portfolio. We want to take a step back and provide some perspective on the composition and performance of our borrowers. As a reminder, OBDC is a broadly diversified portfolio with companies spanning 30 industries, and average position sizes of approximately 40 basis points. We focus on lending to non-cyclical defensive sectors and all of our largest sector allocations are performing well, including software. While we appreciate there has been increasing attention on software over the past several weeks, it represents only 4 of the top 25 investments in OBDC. That said, software has been a sector we've always liked and our focus continues to be on mission-critical, scaled enterprise software providers. Borrowers in our software portfolio saw LTM revenue and EBITDA growth of 10% and 16%, respectively, in the fourth quarter, outpacing the average earnings growth rate of all other sectors in the portfolio. Our 40-person technology investment team reviewed our exposures again through an AI lens and confirmed the fundamental health of our assets. This, coupled with the fact that our software investments are primarily first lien, senior secured loans with LTVs of approximately 30%, gives us confidence that our portfolio remains well positioned. We see a similar pattern in health care, where we have 45 investments totaling $2.5 billion. The majority of these names are also performing well, with revenue and EBITDA growth of 11% and 10%, respectively. The strength is broad-based. Overall, in the fourth quarter, every subsector in our portfolio delivered positive year-over-year growth, with revenue and EBITDA increasing 8% and 11%, respectively, and both metrics accelerated as compared to the fourth quarter of 2024. Across our key credit KPIs, the story is similarly constructive. Interest coverage ratios remain healthy at approximately 2x, revolver draws declined over the year, and amendment activity was stable. Our 3 to 5 rated names currently represent 9% of the portfolio, which is consistent with a year ago. Additionally, we saw refinancings of several of our PIK investments in the quarter, which reduced PIK income to 10.3% of total investment income, down from 13.2% a year ago. As we've highlighted in previous earnings calls, approximately 90% of our PIK names were underwritten that way at inception, and we have never taken a principal loss on those intentionally structured positions. Our nonaccrual rate decreased to 1.1% at fair value this quarter, down from 1.3% in the prior quarter due to the addition of 3 small positions and the removal of another position. Our nonaccruals have been relatively stable over the past few years and are well below public market default rates. Finally, I'd like to share some perspective on our specialty finance and joint venture investments. We view these as differentiated complements to our core lending platform designed to help offset rate and spread volatility and support NAV growth. Today, OBDC has 7 joint venture and specialty finance partnerships spanning multiple verticals, including asset-based finance, equipment leasing, life sciences, and life settlements. These investments benefit from strong underlying diversification with exposure to more than 300 loans and approximately 10,000 individual asset line items. Each of these platforms generate predictable income streams that are less correlated with base rates than our traditional direct loans and have generated ROEs of over 14% over the last year. We also established 2 vehicles last year, that once fully ramped, we expect will generate attractive low double-digit yields accretive to fund level ROEs over time. These are great examples of how we leverage the breadth of the Blue Owl platform to create value for shareholders. Across all our specialty finance and joint ventures, OBDC's exposure is approximately 12%, providing us with ample opportunity to selectively increase our allocation as market conditions warrant. To close, the breadth and strength of our portfolio remains resilient in a shifting and more recently uncertain market backdrop. With 10 years of operating history, and an even longer tenure of experienced professionals, underwriting and managing the book, we are seeing durable fundamental performance of our borrowers, and we remain convicted in our diversified lending strategy. Now I'll turn it over to Jonathan to review our financial results.

Thank you, Logan. In the fourth quarter, OBDC earned adjusted investment income of $0.36 per share, in line with the prior quarter. Our adjusted NII had a few moving pieces this quarter that I want to spend a moment discussing. Despite headwinds from lower base rates and a modest decrease in average spreads throughout 2025 that are making their way through our book, there were several nonrecurring events, including higher one-time income and lower operating expenses. These nonrecurring items had a positive impact of approximately $0.02 per share this quarter which is elevated relative to our historical average. The Board declared a first-quarter base dividend of $0.37, which will be paid on April 15, 2026, to shareholders of record as of March 31, 2026. Our spillover income continues to remain healthy at $0.36 per share, and supported our base dividend this quarter. Moving to the balance sheet. Our fourth quarter NAV per share was $14.81, down from $14.89 last quarter, following additional breakdowns of existing watchlist positions, partially offset by accretive share repurchases. As Craig mentioned earlier, we executed on our repurchase program in the fourth quarter, where we bought back $148 million of stock. In total, the company repurchased 11.6 million shares, which was accretive to net asset value per share by approximately $0.05. This was the largest share repurchase in the history of OBDC. OBDC's Board of Directors has also authorized a new share repurchase program of up to $300 million, replacing our current $200 million share repurchase plan. Despite this repurchase activity, we were able to manage our net leverage down to 1.19x from 1.22x, which is within our target range of 0.9 to 1.25x, as we intentionally reduced leverage. On liquidity, we manage the balance sheet closely and conservatively to be prepared for unforeseen situations or uncertain market environments. We remain well capitalized with approximately $4 billion in total cash and capacity on our facilities, which comfortably exceeds our unfunded commitments, and provides ample capacity to meet all of our funding needs. Also demonstrating the strength of our business and credit profile was the Moody's upgrade that we received in late January to BAA2 credited to only a few other BDCs. This ratings upgrade was a reflection of our strong portfolio and liability management capabilities, and our long-term track record of disciplined underwriting and solid credit performance. We are very focused on reducing borrowing costs, and we are optimistic that the ratings upgrade will help us achieve better execution on new unsecured issuance in the future. Overall, we remain pleased with the strength and durability of our portfolio and believe our balance sheet is well-positioned to support continued portfolio performance in 2026. Now I will turn it over to Craig for some closing remarks.

Thanks, Jonathan. To close, I want to underscore our confidence in the portfolio. Credit quality is solid, and losses overall remained low, consistent with our downside-focused approach of lending to large, highly diversified recession-resistant businesses. Looking ahead, we anticipate that our forward earnings will be impacted by two important dynamics. Lower base rates flowing through our majority floating rate book, and tighter spreads on new and repriced assets. We are focused on the impact of lower rates on the earnings power of our portfolio, and having managed this fund for 10 years across various interest rate environments, we view rate sensitivity as a natural driver of BDC results. Importantly, there is a delay from the time when rates are lowered to when we see the full impact on the portfolio. At the same time, industry spreads have tightened resulting in the weighted average spread on our portfolio compressing by approximately 30 basis points over the last year. For this quarter, given our strong results, we are maintaining the regular dividend of $0.37. However, we will continue to discuss this carefully with our board and evaluate the dividend each quarter, particularly as the full effect of these lower rates and spreads are now impacting the portfolio. While lower rates and tighter spreads will compress asset yields and NII returns across the industry, they generally improve borrower fundamentals and, in turn, credit quality. Against that backdrop and given the solid borrower performance we continue to see, we do not expect broad-based credit issues in our portfolio. This contrasts with what seems to be reflected in our stock price, where the dividend yield is approximately 10% on NAV, but over 12% based on current trading levels. You've heard me say this before, but this is a very high-quality portfolio built through disciplined underwriting, with the appropriate structures and protection to perform across cycles. The recently announced $1.4 billion Blue Owl BDC asset sale transaction reflects the full book value of the underlying investments, and provides clear third-party validation of the strength of our book, the rigor behind our marks, and the discipline in our underwriting. We have conviction in our strategy and are focused on acting in the best interest of our shareholders, supported by our share repurchase activity and prudent management of our balance sheet. As we close our call, I want to mention that over the past year, spreads have generally trended tighter, but renewed macro uncertainty could drive widening, which we are currently observing in the public markets. Should this environment persist, it could present an opportunity to selectively deploy capital at higher spreads on new deals. The market is asking questions of private credit managers. We believe we will continue to deliver and ultimately, that performance is what will matter. Thank you for your time today, and we will now open the line for questions.

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

Okay. Great. So there are some headlines out there this morning that OBDC II is halting redemptions permanently. Is that how you view last night's announcement? And then can you just remind us how much of that portfolio is turning over on a quarterly basis? And then what you plan to do with those redemptions?

Thanks, Brian. I appreciate the question. First, I want to reiterate, we think this is a terrific transaction for the investors in the funds that are affected OBDC II, OBDC and other funds, and also extremely endorsing for our entire credit platform. I think it's a really strong statement for us to be able to complete the sale of $1.4 billion of private assets in a very short timeline at book value at 99.7%. I think that's strong for any asset class to clear that kind of size at that kind of price at book value, and an extremely strong statement. As you noted, there are a few headlines. I think most of the feedback has been quite positive, but there are a few headlines that we think are a complete mischaracterization of what's happening here. We aren't halting redemptions. We've been tendering shares of this fund for 8 years. We instead of resuming 5% a quarter, we are, in fact, accelerating redemptions, and we're going to return to this investor group, 30% of their capital at book value in the next 45 days. So investors that would have thought they were getting 5% are getting 6x the amount of capital in cash at book value immediately. So we're not halting redemptions. We're simply changing the method by which we're providing redemptions. A tender offer, as you know, is subject to the investor choosing to get their capital back, in a fund that can place different incentives for investors that are redeeming or waiting. It can treat investors differently. We thought it was more important to treat all investors the same. So we're doing a 30% pro-rata distribution. So investors don't have to elect into this, or worry if they don't elect into a tender that they'll get a weaker portfolio. They're all going to get the same 30% distribution at the same time. As you asked, what should investors expect going forward? I want to remind everyone this fund is a different structure than our non-traded perpetual BDCs. This fund was raised 8 years ago, and was raised more akin to a private institutional fund. It was always anticipated that at some point, this fund would have some type of strategic transaction, whether that be a merger, a listing, or an IPO. And the other alternative that was stated very clearly at the outset was at some point, we may just choose to return the investors' capital. That is the path that we are choosing here. We are going to accelerate the return of the investors' capital, and we're starting with a very significant down payment of 30% immediately. This fund has significant earnings. We're going to continue to pay our dividend. But as you know, we also get regular repayments. And so as we get those repayments, we're going to discuss with our Board, but our intention is to continue to return capital on an accelerated basis. So we assume for this purpose, we'll get redemptions of 5% a quarter. Every quarter investors should expect we will evaluate a return of capital of 5%. We've got some debts. We have to make sure we're properly handling the debt. But basically, if you assume 5% per quarter, we could be in a position by the end of this year that we've returned half of the investors' capital. So again, not only are we not halting redemptions, but I think it's going to be significant cash flow to these investors. And more to the point, I want the audience to appreciate, we've had extensive conversations with the investors and the financial advisers that work with them over the last couple of months discussing alternatives for what we would do with this fund. And as we discuss those alternatives, we are confident that the plan we're pursuing is going to be extremely well received by those investors for the reasons I've outlined.

That's helpful, Craig. And then just a follow-up on OBDC. Cash ended the year at $570 million, you have the additional $400 million coming in from the sale. So depending on where leverage shakes out you have about $1 billion of capital to deploy before assuming any additional prepayment. So what's the most accretive use of capital today? Where are you leaning in from a deployment perspective? And you mentioned maybe an opportunity with spreads widening here. We'll see exactly how that plays out. And then are buybacks still on the table at current prices?

We started this process focused on solutions for OBDC II. In conversations with a small group of buyers, we found significant additional demand for these assets, exceeding our original plans for OBDC II sales. It became important to take advantage of this strong demand at high prices and explore potential tactical goals. The OBDC portfolio is in excellent condition, but we used this opportunity to carefully trim some larger positions for effective portfolio management. We are noticing a tightening of capital, both in the public loan market and some private markets, which we hope will create a better environment for deploying capital and lead to wider spreads on attractive investments. By selling these assets, we are strengthening OBDC's ability to deploy capital. However, our stock price remains significantly below book value. We recently undertook the largest share repurchase in our history, yet the stock price remains depressed. Consequently, we have increased our stock buyback program to $300 million and will evaluate buying stock against deploying capital. I want to highlight that we can sell $1.4 billion of assets at nearly full book value, while a similar portfolio trades in the low 80s to high 70s percent of book value. We will continue to examine the stock and seek ways to create value for shareholders.

Our next question today is coming from Finian O'Shea from Wells Fargo.

Following up on the portfolio, I appreciate the increased interest from the LPs. Regarding OBDC, you've addressed part of this with Brian. You've reduced some positions, but it appears you don't have a significant need for liquidity and you're not heavily concentrated either, having sold around 70 names. If this is more about fine-tuning concentration, is that group of names primarily concentrated in your top 10 or top 20, or are there other advantages to the portfolio sale?

Sure. So look, this was a really thorough process involving four really high-quality institutional investors in a very tight time frame. They were very engaged with us. They did detailed due diligence on the names in the portfolio, even though several of them knew us well, they were buying a portfolio, and they did detailed due diligence. And we certainly wanted to make sure if they were to do that work, that they would have an opportunity to make an investment. And so as we worked this through with them and we're looking at our portfolio, we settled on these asset sales splits. I think for OBDC, at the end of the day, we sold 2% of the assets. It's really immaterial. This would be like we got one repayment in a quarter. It's not material. But as I said, we thought we have this interest at a very high price. The market is starting to loosen up. We just bought back some stock, if we can, on the margin, create a little bit of liquidity, it's worth doing. It also accomplishes the goal of having four large investors who each bought, by the way, the same exact amount, the same exact price all have transactions that they were excited about. So I think it accomplished that goal as well. But I guess I would also say, and I said this in the prepared remarks, but I think it's worth revisiting. We understand and we see the same things that you're reading. There's skepticism about marks, the skepticism about valuation. We've always been saying we feel really good about the quality of our portfolio and the quality of our marks. But just saying it in some conference doesn't seem to have done enough. So we're putting our money where our mouth is. We sold the assets to four different third parties at 99.7%. I should point out that while OBDC only sold $400 million worth of assets, this very sliver portion of 75 different line items, our exposure in OBDC to those line items is almost half the portfolio. So we view the sale at OBDC as validating almost half the portfolio. Not only at book value but at 99.7% PAR, sold these assets at par. That's not only for OBDC but it's true for the entire Blue Owl direct lending platform. The assets we're selling here represent our largest names, our biggest exposures, and we had resounding demand at a very strong price. I think that's a really strong statement and I think it was a statement worth making in an environment where people are asking questions and they're skeptical about marks.

I appreciate that. As a follow-up to this discussion on the mechanics, could you clarify something? We receive a lot of inquiries about this. Is there any delayed settlement accrual or additional compensation to the buyer? Also, regarding the transactions involving selling to another account managed by the same advisor, is there any aspect of this structure that could lead to a rapid decline?

If I could rephrase your question, are we missing something behind the scenes? I understand the concern. We are currently in an environment where there is a lot of skepticism about private credit, and this skepticism can be intensified by individuals who aren't directly involved in private credit and don't have a deep understanding of the industry. They often spread information that can make issues seem more significant than they really are. The transaction is straightforward. We are selling 128 positions at 99.7% to four different institutional investors, each of whom made independent investment decisions simultaneously. Not only did they purchase this portfolio, they likely would have bought much more. It is typical for secondary asset sales to occur at a discount to book value, but this is not the case here. Sometimes you might see different transaction structures, especially with continuation vehicles where the buyer benefits from extended interest payments, which can lower their investment cost. However, that situation does not apply here. The buyers are acquiring at 99.7%, and we are utilizing standard LSTA loan trade settlement procedures, similar to what every trading desk uses every day. The buyers, who operate at arm's length, already had accounts with us, which made the process easier. As we've pointed out, we will continue to own most of these loan positions and manage them. The buyers have taken on the economic risk, and they deliberately made their economic choice, with nothing hidden that would undermine that decision.

Our next question is from Arren Cyganovich from Truist Securities.

One of the questions we got from investors was why not sell all of OBDC II? Is there something just maybe just from a debt perspective, or we're just trying to understand why not just kind of get rid of that perceived issue or perceived problem from investors?

We canceled the merger in November because it was crucial to act quickly. The merger and its cancellation created confusion for OBDC II investors and those in our other funds. We aimed to quickly demonstrate the portfolio's strength and return capital. We explored several alternatives and wanted a significant transaction that returned 30% to our investors and showcased our marks while ensuring the remaining portfolio was in good condition. That portfolio has about 0.5 turns of leverage, ample liquidity, and is diversified, making it easier to manage and recover capital. Other options, like selling the entire portfolio, were feasible but would have taken longer and been more complicated due to shareholder protections. Instead, we chose a faster approach that allowed us to put cash in investors' hands by the end of March. We will keep managing this fund, which consists of loans with predictable repayments, giving us high visibility on capital recovery. We are not speculating on getting the capital back; we will continue to return it. By the end of the year, we might have returned half of the investors' capital. We will keep assessing the situation. There's nothing particularly unusual here, as funds in private markets typically return capital to clients regularly. This fund operates like any other, and we'll manage it to benefit investors.

Yes, it makes sense. You're returning it more quickly, and for OBDC shares, you're selling at NAV while being able to buy at a significant discount, which is beneficial for OBDC. I completely understand this. These are the questions we are receiving from investors. Additionally, regarding software, you have consistently been confident in this area. There are BDCs specifically focused on it. What is your appetite for new software loan purchases? Is this presenting a beneficial opportunity, especially since some of your peers might be hesitant to enter this area?

So we covered this a bit in the comments. Look, we've always liked software. We have a significant team. We think we're one of the largest investors and have the capacity to differentiate between a software business that's going to be well protected in an AI world, and one that's going to be more vulnerable. We also have funds that are dedicated to the technology sector that have capacity to do software. OBDC was designed as a diversified fund as Logan mentioned, software is the biggest sector, but it's a relatively small percentage of the overall fund. So we have capacity to do best-in-class deals that we have extreme high levels of confidence are going to continue to hold up well. That bar has always been high. It's even higher now. We're certainly not taking lightly the potential impact of AI. Having said that, we continue to see our best-in-class companies perform well. We think they'll endure. And if we see opportunities, we'll do it. But I would say we're going to be very discriminating. And I don't think our software percentage will go up. If anything, I would expect it to modestly decline over the next year or two, but it will depend upon the opportunity set.

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

I believe you've addressed OBDC II quite thoroughly. Regarding the sales book, there's some disclosure indicating that about 13% came from Internet and software. Can you provide information about the vintage of those assets? I assume these larger assets were likely lower spread as well. Can you share details about the weighted average spread of those assets compared to the overall portfolio? You mentioned Software and Internet, but was there more or less PIK in that segment? Any additional metrics you can provide on how this could modestly impact the portfolio?

Thank you, Robert. This is Logan. The portfolio sales comprised mainly first liens, and the weighted average spread was just above 500, which is in line with the overall portfolio. There weren't any significant outliers in the sales across the book. Regarding our PIK exposure, it remains consistent, as we noted that we have about 10% PIK exposure, and the sold portfolio reflected about 10% to 11% PIK exposure. Therefore, there is no meaningful change in how our portfolio looks. The first lien percentages and non-accrual percentages have remained the same before and after the sales. As Craig mentioned, we have seen a slight decrease in the percentages of three of our top five positions as a result of the transaction. This also provides us with some opportunistic capital that we can redeploy into a market that is becoming increasingly attractive.

Got it. As we look ahead, spreads have begun to widen slightly, and we hope they will remain that way. What is your outlook for the rest of the year? You've addressed the developments from this quarter and last year, but do you think spreads will remain wider and create additional opportunities? Conversely, you mentioned not expecting credit to decline, which I tend to agree with. Typically, if credit remains stable, spreads tighten over time, regardless of current public equity market perceptions. What do you foresee in this regard?

Yes, it's a good question. We have addressed this frequently over the past year. Spreads in all credit markets have been very tight over the last 12 to 18 months, including private credit, leveraged loans, investment-grade, and high-yield. We expect that at some point they will widen to reach a more normal baseline. We're beginning to see some signs of that, and I hope it continues, though not dramatically—just to a more typical range. When the public loan markets show signs of backing up, private credit spreads tend to react quickly. Regarding the economy and our portfolio, the sectors we're involved in and the companies we support are performing well, showing low to high single-digit revenue and EBITDA growth rates. We are confident in their performance. It's important to note that you can't predict a significant credit issue while also expecting tight spreads; those scenarios are not compatible. I believe credit performance will remain strong, not only for our firm but also for major players in the private credit market. I foresee modest spread widening and potentially a slight increase in M&A activity, which may favor larger platforms with capital over smaller firms with less. Private equity firms have had numerous discussions with various lenders over the past year, but when conditions tighten, they tend to rely on the largest funders they are familiar with, and we are among those. I think it will be a better environment, but I remain cautious about how long it will last.

Our next question today is coming from Kenneth Lee from RBC Capital Markets.

Just one more on the loan sales transaction there. To clarify the mark that you received, the 99.8%, how does it compare with the previous fair value marks in general?

We sold it at our expected price, with the fair value at 99.7%. This aligns with our consistent marks throughout the quarters. Over the past year, most of our portfolio has been valued close to par, and we sold this collection of loans at par, similar to the previous year. I want to clarify that we did not negotiate individual prices with investors. We asked them to pay our book value, and we followed our usual valuation process, insisting on book value. They agreed to this price, which not only confirms that we received par but also validates our valuation process. Independent parties conducting their own evaluations agreed to pay book value, and we updated that book value accordingly.

As of February 12, we provided an updated valuation for us on that day. So they're up to date, and the moves in the valuations were minor across the portfolio as a whole.

Got you. Very helpful there. And just one follow-up, if I may, just on the dividend. And could you talk about some of the inputs or considerations that the Board may take into account, or present the common dividend going forward?

Our process with the Board regarding the dividend remains consistent with what we've been doing for the past decade. We evaluate various metrics, including our current earnings, expected future earnings, credit performance, and dividend coverage. We generally prefer to maintain a stable base dividend. A couple of years ago, we established a supplemental dividend due to increased earnings from higher rates. However, as we mentioned earlier and as others in the industry have noted, while credit performance is solid, the rate environment has changed. Interest rates are lower now and are anticipated to decrease further. Spreads are tightening, particularly in response to these lower rates. When rates were higher, our earnings improved, but with the decline in rates, our earnings have diminished. In this quarter, we generated $0.36 in earnings while maintaining a $0.37 dividend, which we believe is reasonable to keep unchanged. That said, we are currently experiencing the full effects of the rate changes and tightening spreads. We will meet with the Board each quarter and definitely in the next quarter to review our earnings and outlook for the coming months and reassess the dividend. We aim to avoid frequent changes to the dividend, so we will engage in a detailed discussion about it, just as we have consistently since the beginning.

Your next question today is coming from Casey Alexander from Compass Point.

I can appreciate your frustration that in this environment right now, everything is being looked at through the most skeptical lens possible. And that's kind of what happens when the market paints things with a broad brush. But what I want to ask is now that the market knows that Blue Owl II is in runoff, and you did this transaction with just 4 investors, there's a tremendous amount of dry powder that is still out there in LPs and places like that. I would expect that your inboxes might be pretty busy from other folks that would like to take a look at that Blue Owl II portfolio and see if there are things that they might want to buy. Would you guys consider additional asset sales out of that portfolio to accelerate the process of winding it down?

We are open to anything that will provide significant value to our investors. Since November, we've received inquiries, and I mentioned before that the investors we sold assets to expressed further interest, which could have led to more transactions. These are important questions, and the answers can be complex. Deciding when to wind something down or whether it needs shareholder involvement is a process we take seriously. This isn’t like a public loan where we sell quickly; we operate as a company with a Board and established processes, which we will continue to follow. At the core of your question is our desire to speed up the return of capital. At this stage in the fund's lifecycle, we are aiming for strategic transactions that provide liquidity to our investors. We now have a clear plan that includes repayments, earnings, and possibly more asset sales to facilitate that capital return. It's worth reiterating that we are aware of the investors’ sentiments. Many are wondering and speculating, but overall, they feel well-treated. They value this transaction, and we believe they will remain satisfied as long as we manage it carefully and return capital at a fair price. Our investors are not pressuring us to sell quickly for less value; they expect us to act prudently, as we always have. We'll pursue transactions that offer great value and help hasten the return of capital, though the situation is more intricate than simply deciding to sell assets immediately.

I could certainly appreciate that, and thank you for that answer, Craig. Since this is an OBDC call, ask a question that is relevant to OBDC. Jonathan, can you give us a little more granularity on the one-time income and the lowering OpEx that produced the $0.02 tailwind? Just give us a feel for where some of that came from?

Sure. The majority of it was from a repayment where we got some call protection. And then on the OpEx side, call it $0.05 or so, is really just when we completed the merger at the beginning of the year, OBDC and OBDE. Although we promised synergies, we budgeted in the context of in a conservative manner in terms of not necessarily hitting all of those synergies. And so when you get a lot of your invoicing and your expenses coming through at the end of the year, we effectively saw a positive true-up, which is nonrecurring related to those synergies. And so that contributes to what I'll call a one-time OpEx adjustment.

Next question today is coming from John Hecht from Jefferies.

Just looking at the published material. If you examine the principal amount of investments sold or repaid, it's quite elevated. I’m curious if you can break that down in comparison to what you proactively sold last quarter, what was a scheduled paydown, and what might have been a prepayment. Additionally, what is your perspective on the recent announcements of additional sales this quarter, and on that type of activity beyond the planned or announced sales at this moment?

Sure. Great question. We reported the number of just over $1 billion of repayments; that's entirely repayments in normal course. The asset sales of $400 million or not in those numbers yet. They will be forthcoming and closing over the next few weeks, and we'll be in the first quarter numbers. So everything was normal course in the last quarter.

Do you expect that pattern to continue, or was it just a coincidence of many maturities occurring last quarter?

I'd say it's in a normal course that we saw repayments in the fund at around $1 billion. It's been consistent with our last few quarters. And we have the opportunity in any given quarter to decide how much we reinvest or not. And as mentioned, we prioritized other things during the quarter like paying down debt as well as share repurchases in particular. And so it's our opportunity to take a look at that normal accordance repayment cycle that happens every quarter, and then choose to reinvest a portion or not depending on our priorities. And that's really on the reinvesting side was where we made the decisions; the repayment side was all normal course.

Okay. That's helpful. And then where are we at with respect to rate floors and ongoing sensitivity to potential Fed rate declines?

Sure. Rate floors are not yet in effect. Where we have rate floors on a portion of the portfolio, they're typically around 1% and they were really a legacy of the zero interest rate environment of years ago. And so at this point, as with most lenders in the space, our loans would still be floating rate and true to that level of SOFR as we go down, it would be effectively one-to-one.

Our final question today is coming from Paul Johnson from KBW.

In terms of the mix of the transaction, I noticed you mentioned both funded and seems like funded and unfunded commitments. What is, I guess, the composition mix for OBDC in terms of what was funded on the balance sheet and what's leading in terms of a commitment?

On the asset sales, it's about 10% unfunded. It's consistent with our existing. So if you look across the portfolio, it's really a slice of the existing and consistent with our unfunded revolver and DDTL mix. And so when we say $400, that's the full commitment size about 90% of that is funded and 10% of that unfunded. Again, broadly across the 3 different portfolios involved, that's consistent.

Got you. Okay. That makes sense. Can you provide a bit more detail on the transaction process? Was this a solicited transaction? You mentioned excess demand. Also, where do the assets actually go? I know they have an account with you, so do they remain on the platform in some way, or are they transferred to structures that are off the platform?

The process we went through after canceling the merger involved reaching out to a select few investors who we believed could make a substantial investment in high-quality private credit assets at book value. Due to our limited time and resources, we received positive feedback and worked with the four investors we're finalizing arrangements with. It was a streamlined process where they did their due diligence while we made our teams available, resulting in an efficient collaboration. Regarding the platform, we established investment vehicles, some of which were already in place, for these assets. Typically, large pension plans and insurance companies partner with external managers to handle their private credit investments since these are not public securities they can monitor themselves. They rely on managers like us to oversee the credits, provide necessary information, and track the assets and payments. While they could choose different managers, we not only manage these assets effectively but also hold 90% of the positions, which makes us ideally positioned to continue managing them. This is standard practice for any institutional investor's transaction.

Got it. I appreciate that, Craig. That's helpful. Last question I'd ask just bigger picture broadly on bank competition. Just love to get your thoughts there. It feels like the banks are positioning fairly competitively here. Just be curious to get your thoughts just kind of with the recent volatility, if that's changed at all and what the outlook may be for the year?

I don't think there's anything new. The public loan market is a competitor of ours and always has been since the firm was established. There are times when both markets perform well, as was the case last year. The public loan market is generally more volatile, which influences how banks engage in the leveraged loan market. Recently, we’ve observed some increased volatility, impacting banks' perception of underwriting risk, leading them to be more cautious. This shift can result in deals that might have gone to public markets now leaning towards private markets. While I don't want to make broad predictions based on just a few weeks, we have indeed seen such movement recently, and I expect this trend to continue. We maintain strong relationships with major banks, doing substantial business with them, and they remain a significant source of financing. Overall, there hasn't been a major shift in the competitive landscape; it's primarily about market demand. I anticipate that private credit may gain a bit more traction, but time will tell.

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

Look, we obviously covered a lot of ground. I would just urge everyone, please read the release that we put out on the asset sales. Don't just read the headline, don't just read the tweet. Read the announcement. We put a lot of information in there. I'm confident if you read the details of what we did, it will be very clear. And you have clarifying questions, we welcome them. We think this is a really strong outcome for the investors in our funds and I think a really strong endorsement of the quality of our assets, and want to make sure that you see it that way as well. Thank you, and have a great day.

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