OBDC - NYSE

Greetings. Welcome to Blue Owl Capital Corporation Second Quarter 2023 Earnings. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Dana Sclafani, Head of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation Second Quarter Earnings Call. Joining me this morning are our Chief Executive Officer, Craig Packer; our Chief Financial Officer and Chief Operating Officer, Jonathan Lam; and other members of our senior management team. You’ll hear us referring to the company by its new name and ticker, OBDC, throughout today’s call, which is part of a broader rebranding effort by Blue Owl that became effective in July. The Owl Rock business is now known as Blue Owl’s Credit Platform and all of our BDCs now reflect the new naming convention, including Blue Owl Capital Corporation. I’d like to remind our listeners that remarks made during today’s call may contain forward-looking statements, which are not a guarantee of future performance or results, and involve a number of risks and uncertainties that are outside the company’s control. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the OBDC filings with the SEC. The company assumes no obligation to update any forward-looking statements. Certain information discussed on this call and in our earnings materials, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. OBDC’s earnings release, 10-Q and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporation.com. With that, I’ll turn the call over to Craig.

Thanks, Dana. Good morning, everyone, and thank you all for joining us today. As Dana mentioned, Blue Owl recently completed a full rebrand as part of its effort to bring together complementary businesses as a market-leading provider of capital solutions. This included renaming the business platform as well as all funds and products, including Owl Rock BDCs. However, importantly, for OBDC’s investors, this change has no impact on the investment team, the day-to-day operations or strategy of the company for the broader Blue Owl direct lending business. Turning now to our second quarter results. We delivered another quarter of continued NII growth and strong credit performance. Our net investment income increased to $0.48 per share from $0.45 last quarter. This is our second consecutive quarter of record NII and is driven by the earnings power of the portfolio in today’s higher rate environment. In addition to higher rates, we also saw a benefit from an increase in onetime fees related to repayment and amendment activity, which, as you’ll recall, have been negligible for the last several quarters. The growth in NII continues to translate into additional cash distributions for our shareholders. Our Board has approved a supplemental dividend of $0.07 per share for the second quarter. In addition to our previously declared $0.33 regular dividend, resulting in total dividends of $0.40 for the quarter. When factoring in the base and supplemental components, this quarter’s total dividend payout represents an approximate 30% increase from our $0.31 quarterly dividend a year ago. Our annualized ROE on NII for the second quarter increased to 12.6%, up 50 basis points from last quarter. We continue to believe that we will be able to deliver an ROE in excess of 12% for the full year based on our current outlook for rates and credit performance. We view this ROE level as very attractive in today’s market, and it represents a significant increase from last year’s 9.5% ROE. Net asset value per share increased to $15.26, up $0.11 from the first quarter, marking the highest NAV per share since our IPO in 2019. This gain was primarily driven by overearning our dividend by $0.09. Net unrealized gains and losses were also modestly positive, partially reflecting an improving market environment and the accretion of our investments towards par. Our nonaccrual rate remains low at just 0.9% of the fair value of the portfolio. We have three names on nonaccrual as of quarter end, having added one small position this quarter. As we look at our borrowers’ operating performance for the quarter, we continue to see solid results with modest growth in both revenues and EBITDA. Companies have been able to maintain previously executed price increases while also benefiting from lower input costs from supply chain normalization and a continuation of increased consumer demand post COVID. This isn’t to say that we don’t expect to see some pockets of stress at some point, but our borrowers have been proactively preparing for more difficult economic conditions for a while now given the well-telegraphed rate increases, and we are well prepared to address concerns as they arise. Every quarter, our underwriting and portfolio management teams look at each of our borrowers and evaluate liquidity and coverage metrics in the context of both the higher rate environment and the company’s operating performance. While the higher-for-longer rate environment has been a negative factor, company credit performance has been a positive one. And net-net, the overall picture remains stable. Consistent with our view in prior quarters, we believe interest coverage ratios will trend toward trough levels of mid 1x, down from 1.9x today. We expect to see this trough in the first half of 2024 and believe that most borrowers will maintain an adequate coverage cushion and strong credit performance through this period. That said, as we have discussed before, we expect higher-for-longer rates to impact a small number of our borrowers. This universe remains limited, and we believe we have good visibility into these names. We continue to estimate that this group represents approximately 10% of the portfolio. Now that group, 5% are the most at-risk names. Our portfolio management team and workout professionals, in coordination with the underwriting field teams, are closely monitoring these situations and, as needed, we are in ongoing dialogue with select borrowers on potential solutions. In addition, we will continue to reassess our entire portfolio each quarter to identify any signs of stress as interest rate and economic conditions evolve. We believe any credit challenges will be manageable and will be more than offset by the continued strength of our earnings in this environment. Looking back, as we entered this year, there were concerns about how private credit would fare in a higher rate environment, with some speculating that we would see significant increases in credit stress or defaults. Now that we’re halfway through the year, this has not yet come to bear. Today, our portfolio is delivering record NII, and credit performance across our borrowers is strong. I want to take a moment to reflect on why the direct lending sector in general, and the Blue Owl Platform in particular, have outperformed some of these expectations so far. First, clearly, the U.S. economy has fared better than expected, led by robust consumer demand and the continued rebound of consumption following COVID. This has benefited companies across most industries. In addition to this economic durability, we believe the strong performance is the result of the unique attributes of direct lending as well as our approach to building a resilient OBDC portfolio. We have always believed that direct lending provides many structural advantages compared to the public markets. As private lenders interacting directly with borrowers, we are able to do more thorough due diligence, have ongoing access to management teams that have the ability to customize documentation and terms to provide optimal downside protection. Our capital structures are streamlined, typically with only one lender group and only a few lenders in each field. Unlike public market investors, we will often target matching an index. Direct lenders can concentrate on noncyclical sectors and completely avoid more volatile exposures. We don’t have to be in every deal. We have the benefit of selectivity, and we can stick to what we like. Further, within the broader direct lending opportunity set, we, at Blue Owl, have deliberately focused on high-quality, upper middle market, sponsor-backed companies, market-leading businesses that have staying power. This is why we haven’t had to pivot our strategy in response to changing economic conditions. We have always prioritized credit quality over the marginal return. So today, we see direct lending doing well as an asset class and the OBDC portfolio achieving new earnings records. And this is because we have structured our approach, designed our portfolio to do well even in times like these. With that, I’ll turn it over to Jonathan to provide more detail on our financial results.

Thanks, Craig. We ended the quarter with total portfolio investments of $12.9 billion, outstanding debt of $7 billion and total net assets of $5.9 billion. Our second quarter NAV per share was $15.26, an $0.11 increase from our first quarter NAV per share of $15.15, largely attributed to the continued overearning of our dividend. When considering the total dividends paid over the last year, along with the NAV growth of 5.4%, driven largely from portfolio appreciation and excess earnings, this represents a total return of 15.3% over the period. Funded activity for our portfolio increased slightly as we saw higher levels of deal activity across the market. OBDC had $183 million of new investment commitments for the quarter. We also received $566 million of repayments and sales in the quarter, reflecting the first signs of a return to more normalized repayment levels. Turning to the income statement. As Craig mentioned, we earned a record $0.48 per share in the second quarter, up from $0.45 per share in the first quarter. The increase was largely driven by higher repayment and onetime fee income. We were pleased to complete our previously announced repurchase target of $75 million through the combined buying power of the company’s share repurchase program and the Blue Owl employee investment vehicle. The company repurchased a total of 4.1 million shares at an average price of $12.22 per share, which was accretive to net asset value by approximately $0.03 per share. In the third quarter of 2023, our Board has declared a $0.33 per share regular dividend, which will be paid on or before October 13 to shareholders of record as of September 29. Our Board also declared a supplemental dividend of $0.07 per share for the second quarter of 2023, which will be paid on September 15 to shareholders of record on August 31. Since we instituted the supplemental dividend in the third quarter of 2022, we have paid out $0.20 of additional dividends per share. This dividend structure provides increased income to our shareholders while also allowing us to build NAV through overearning of our dividend. As a result, we have $0.19 of spillover income through the end of the second quarter. OBDC continues to benefit from its flexible balance sheet and well-diversified financing structure. We ended the quarter with net leverage of 1.14x, down slightly from where we ended in the prior quarter and within our target range. We also had liquidity of $1.8 billion, well in excess of our unfunded commitments of approximately $800 million. With that, I will turn it back to Craig for closing comments.

Thanks, Jonathan. To close, I’d like to spend a bit more time on our outlook for the second half of this year and how we expect to deliver for our shareholders. We are seeing an increase in deal activity across the market, and our pipeline of new opportunities has picked up. There has been increased private equity auction activity and refinancing discussions. In addition, we continue to see good demand for add-on financings for our existing borrowers. We like this type of deal flow as we’re able to invest in borrowers we already know well and want to continue to support. In addition to traditional repayments, we’ve also seen more refinancing-like amendment activity, where sponsors who have well-performing portfolio companies with upcoming maturities but prefer to delay exiting are engaging us in discussions. In these situations, sponsors are asking us to provide modest additional maturity runway in exchange for attractive commensurate economic increases. The public to private takeover activity has slowed from last year’s levels, but we still see new opportunities coming in. Often, these are, of course, smaller deal sizes than the mega deals we saw in 2022. Overall, we are pleased with the current opportunity set for new deals and recently committed to 2 very attractive financings that illustrate these favorable conditions. Just last week, Blue Owl committed to lead the financing for 2 market-leading businesses, New Relic and Worldwide Clinical Trials. Both of these companies are market leaders with consistent and growing revenue streams in their respective sectors of software and health care, two of our strongest sectors. We’re backing premier private equity firms with whom we have worked with multiple times before. We are serving as administrative agent and the largest lender on both of these facilities, which have a combined total of more than $3 billion of first-lien financing. Looking at our pipeline today, economics and terms remain attractive, and leverage and LTV levels remain conservative. With the reopening of public loan markets in recent months, we have seen some pressure on spreads, which were at unusually high levels. However, spreads still remain elevated relative to what we have seen over recent years, and we can still earn 12% all-in on new unitranche investments. We believe that there is pent-up demand from sponsors and borrowers to resume buying and selling assets and refinancing capital structures. As the outlook for the rate environment and economic conditions stabilize, we expect to see a meaningful increase in deal activity, resulting in new investment opportunities. To close, I’d like to thank all of you who joined us for our first Investor Day. We had a tremendous turnout, and we are pleased to have an engaging day that covered our business in significant detail. We hope everyone came away with a better appreciation of our people, our process and our portfolio. During the event, we shared a road map for the ways we believe we can continue to increase overall ROE. We continue to invest in our specialty financing portfolio companies, which deliver accretive returns across well-diversified underlying portfolios. We expect to see increased portfolio turnover once deal activity resumes, which will provide both an opportunity to reinvest that capital and to generate enhanced fee income. Lastly, credit performance is always our top priority and will continue to drive the strength and stability of our returns. For those who were not able to attend, I would encourage you to visit the Investor Day section of our website, which includes a full webcast of the event and presentation materials. We remain very confident in our portfolio and the resiliency of what we have built, and we believe we are well positioned for what’s to come. With that, thank you for your time today. We will now open the line for questions.

[Operator Instructions] Our first question is from Casey Alexander with Compass Point. Please proceed.

Hi, good morning, and thanks for taking my questions. I’ve got a few fairly simple ones here. If I read it right, you still have $100 million left on the share repurchase program. Would it be fair to characterize that, from this point forward, it’s less programmatic and more discretionary than it has been in the past?

Casey, yes, I think that’s fair. I think that we were pretty clear in previous discussions that we intended to execute on the $50 million company purchase and $25 million employee purchase in the near term, and we’ve done that. We’re very pleased with how the stock has performed. The program is still open, but I think it will be more opportunistic from here, particularly with the nice performance in the stock.

Okay. Secondly, there has been a bit of a year-over-year pickup in PIK income. Can you contour that relative to your comments about working with your portfolio companies?

Sure. The vast majority, more than 90% of our PIK income is from deals that were structured as PIK from the beginning, not for credit concerns, but for particular reasons specific to a borrower, a company that is growing quickly and would like some flexibility, a loan that we make that for structural reasons. It’s more arduous to be serviced in cash pay, and we’re asked to make it PIK. And that, plus 90% of the situations we feel we’re getting really nicely compensated for allowing that flexibility. There’s typically a limit to it of 2 or 3 years. And frankly, it’s just a good trade and good use of our capital to do so. And so that PIK percentage of the portfolio has grown over the course of the year, as you noted, not because of credit – growing credit concerns just because we’ve chosen to do those deals a bit more. You’ll note this quarter, our PIK income is down, and that’s because we got a repayment of our largest single PIK position, which was a great example of everything I just said. Really high-quality loan structured as PIK for particular reasons to the borrower, and they decided on their own to repay a significant amount of that and, therefore, our PIK income went down.

Excellent. Last question, and I’m going to ask you to put on sort of a prognosticator’s hat here because – and some of your comments made me think of this question. What is really the optimal level of benchmark rates that carries the combination of maximizing your income, allowing for the best distribution, but also keeping the least amount of stress on your borrowers? Where is that mix? Is it here? Is it 100 bps below here? Like where’s sort of the honey hole of benchmark rates where Owl Rock and their borrowers together operate in the most optimal and efficient manner?

I’m trying to wrap my head around a honey hole, but it’s a good question. I – we feel really comfortable with our portfolio even at today’s higher rates. You’ve heard on the call, and I’ll reiterate, we have a great degree of confidence that the vast majority of our companies will comfortably be able to support their debt. But clearly, many of these capital structures were put in place before the rate move, and it’s pressuring portfolio company cash flows. From our perspective as a borrower, it’s manageable for the companies, and they are managing it. But there’s no doubt that if you talk to the CFOs, liquidity is going to be tighter. And they’re going to have to work harder to make sure that they’re able to not only service their debt but run their business. So I suspect that we’re being thoughtful and honest, probably modestly lower rates would be better for the overall system in terms of both their comfort level and us earning suitable returns. I mean, we – we’re floating rate investors. I don’t – we benefit from higher rates. Our shareholders benefited from higher rates. You’re seeing this now. These higher rates are resulting us paying out more dividends. And so I don’t – I wouldn’t want rates to go down much more than we are here because it’s great for our clients. So you throw a 100 basis points. I don’t think it’s more than that. 50 basis – 50 to 100 would probably be optimal. And by the way, while rates are very elevated now and most observers expect rates to go down, with a debate to 12 months, it’s 18 months. So it’s really a limited window of time that is – where it’s at its worst. So that is – I guess that’s some thoughts.

All right. Great. Thank you very much for that. That’s all of my questions. I appreciate it.

Sure. Thanks, Casey.

Our next question is from Robert Dodd with Raymond James. Please proceed.

Hi, guys, and congratulations on the quarter. Question on credit quality. You probably guessed this was coming. On the tail, I appreciate everything you give us in terms of color on the average. But – and then 10% under stress, 5% deeper stress. What percentage of the portfolio currently is not covering its interest? But tied to that, what percentage of that were structured that way? To your point, if you structure a PIK loan, it’s underwritten on that basis. So what percentage of the portfolio is structured that way versus the percentage that’s not covering right now? And do you expect that to evolve over time?

There are 7 names with interest coverage less than 1 today. That number at sort of peak rates, we think, could be 12. So 7 today, 12 at peak rates. I don’t have a dollars number, but my guess is it’s probably slightly less on a percentage basis in the portfolio. That’s 5%, give or take. 5%, maybe a few basis points higher. So that’s the group. It’s the same group of companies that we’ve been referencing. Look, this interest coverage statistic is just one statistic. It’s – I think it’s a nice shorthand for us to have conversations at a very high level to give you a flavor for relative stress in the portfolio. But obviously, as a lender, we look at much more than just interest coverage statistics. How much liquidity does the company have, what’s the trajectory, working capital needs and the like. So those names that we’re talking about, those are names that will – we should acknowledge are under – they’re not – they weren’t structured that way. They were – these are names that are under some stress. That’s why they’re on our watch list. That’s why we’re referring to them names of notice. If it was a name that was around 1x coverage but structured that way for very particular reasons, we wouldn’t be highlighting it as a name of concern. So this is the universe. But the companies are really doing a nice job of working through this. We work with them. We’re in dialogue with them constantly and the sponsors constantly. It’s not a fast-moving object. Sometimes we can look out. We have projections. We look out 6 months, 9 months. And we proactively work with the companies and the sponsors to address problems well ahead of time. And our confidence on why the universe isn’t going to grow stems from the tremendous support from the financial sponsors. Even in situations where the coverage is tight, our average loan to value in our portfolio is less than 45%. And so if you’re a financial sponsor, you have a company that’s tight on liquidity, but you think – and they mark their portfolio as well. If you think you’re sitting on an equity investment with substantial value, it’s obviously in your own self-interest to put some additional capital in to buy some time to – particularly if you think rates are going to go down. And that’s the behavior we’re seeing. And that’s why you’re not seeing a real pickup in defaults. The sponsors are solving the problem. We work with them. We want them to solve it. But it’s a very – I think a pretty constructive working relationship even in the more stressed names.

All right. I appreciate all that color. And yes, I definitely lead in the direction of it’s not the only thing that matters, but the more fulsome discussion that you gave is very helpful as well. So on to the – yes, like I can get good color on that as well, but basically, it’s like new platforms, refis and add-ons. I mean everything seems to be ramping up right now. Is it – do you expect the mix, as we go forward, to shift more in that direction of – obviously, there’s a lot of refinancing that has to happen eventually. But is it going to be more new platforms that work with better terms or more add-ons, where the terms may carry some legacy relationship benefits and the terms might not be quite as good as that available on your platform? Any color you can give about how that – you think that’s going to shake out?

I think that there’s a lot of pent-up activity in every flavor that you could consider, add-ons, refinancings, just new buyouts, auctions. So I think all of it is pent up. We approach any new investment with the mind of getting market terms at that time. So I don’t think an add-on or any kind of refinancing had any relationship benefit to it. We want to get market terms, and the sponsors want to get market terms in both directions. And so there’s always discussion back and forth. So I wouldn’t look at the mix and think, well, 1 mix would result in better term – new deals will get better terms versus refis. I don’t think you could draw that conclusion. Maybe a snitch on the margin, but I wouldn’t – that is not how we think about it. When we spend capital, we really want to make sure we’re getting compensated for it. I mentioned it in the script, but I’ll just underscore it here. We’re quite excited about the deal flow environment. It may not show up in third quarter completed deals because it takes a while from when we sign a deal to a closing, but we’ve just signed up 2 very attractive financings, I mentioned in the script, for New Relic, Worldwide Clinical. These are brand-new deals, sizable, I mentioned a few minutes ago, $3 billion in financing. We’re leading both. We’ll take the largest piece in both. And they all have the same – all the attributes of deals that we like in terms of credit quality and economic terms and covenants and protections. And so I think we’re seeing it now, I guess, is what I’m saying. So we’re seeing the pickup now. It’s just going to take a little bit of time for that to result in new investments showing up on balance sheets. I also mentioned there’s a bit of spread compression. I mentioned it. I’ll re-mention it. Spreads were extremely wide for 9 months to a year because the syndicated markets were shut. Spreads have compressed. They’re still very attractive and elevated versus where spreads were 18 months ago. So I think it’s a pretty reasonable place for borrowers and for investors. But we are earning 12-plus percent on new unitranche for sub-40% loan-to-value first-lien term loans. I think it’s extremely attractive, and we’re fortunate to be in a position to lead and have the biggest piece of some of these really attractive deals.

Got it. Thank you.

Thanks, Robert.

Our next question is from Ryan Lynch with KBW. Please proceed.

Hey, good morning. Craig, I wanted to follow-up on kind of that last comment you just made on spreads. I think you kind of alluded to this, but you said spreads are still fairly wide but are tightening. I think you mentioned something about maybe the syndicated market maybe opening back up and maybe pressuring them. But I’d just love to hear, what is really the driver behind spreads tightening a little bit? Because you would think, to the extent that there’s more deal activity out there, you might kind of have the opposite thing happening. So I’d just love to hear, is it because of the syndicated market opening up or another reason? If it is because of the syndicated market opening up, what’s really the drivers behind that even?

Sure. It’s a mix. Look, it’s a market. There’s a lot of components that go into how we price our capital and how the sponsors make their choices. And so 1 component is the sponsors’ alternative financing in the public markets, that was shut for a long time. It’s open now. The markets are open. Banks are willing to commit to deals. And so the sponsors will consider what that pricing might look like. The syndicated markets are not well suited for unitranche financing. Syndicated markets offer generally first-lien financing. And if you want additional debt, you can get that in the form of second-lien or high-yield bonds. Generally doesn’t have unitranche as a solution, in part because the rating agencies would give it not a great rating and, therefore, the CLO buyers who buy all the syndicated deals wouldn’t buy it. So it’s really – they’re comparing a unitranche from a direct lender versus a combination financing from a bank, which has flex and uncertainty to it. But they’ll try to do that math. So when the banks are open, as they are now and they’re willing to underwrite, the sponsors will compare. Here’s the combination pricing of these 2 pieces, factor in the flex, compared to the certainty that we can provide, and they’ll pay us a premium for it. But that premium has to be somewhat related to what their options are. So that’s 1 variable. Another variable is just the general competitive environment for direct lenders. And do folks have capital? Are they willing to commit that capital and on what terms? And so I would say, a year ago, we were not in this camp, but there were some large direct lenders that weren’t as flushed with capital, for whatever reason, fundraising, repayments. And so we’ve seen an increased desire by some direct lenders. Again, we’ve been pretty consistent the whole time, but we’ve seen some that were kind of a bit more on their heels, have been coming in more aggressively and willing to push for tighter pricing. So those are some of the factors. And so you’re seeing some spread compression. Again, we’re still getting 600, 625 over on unitranche. That’s at least 50 basis points wider than the tights of 12, 18 months ago. So it’s just the market. It goes up and down, and I think it’s in a really healthy place now. So to your question, well, there’s more new deals, why is it going tighter? Well, it’s just supply and demand. Yes, there’s more new deals, but there’s also more capital coming to chase those deals. And over the last – I would say, over the last couple of months, that’s resulted in this spread tightening. But I think it’s kind of leveled out at this point. We’ll see. It could go wider. It could go tighter. We can get focused on these spread numbers. The base rates are extraordinarily high. And the credits, the deals, really attractive. So yes, of course, we’d all prefer to get an extra 25 or 50 basis points. Of course, we’d like that. But I just think, what’s exciting, and I mentioned these 2 deals, but they’re indicative of the quality of what we’re seeing is extremely high. And so I take a lot of comfort in that.

Yes. That’s really, really helpful, kind of fulsome commentary on all the moving pieces. So that’s great. The other question I had was just going back to the dividend policy. Obviously, you guys have the supplemental dividend policy. But the core is now – when the original core was set and then raised, your earnings have moved up substantially. I know the supplemental dividend policy captures some of that. But I’m just curious, in the most recent quarter, if you look at the earnings supplemental for next quarter that you guys have projected, you guys have about 120% dividend coverage on kind of total dividends. Is that where you want to be? Or is there any thought to get that total dividend payout a little bit closer to earnings?

I’ll comment and then Jonathan can add. Look, I’ve been really pleased with how the supplemental dividend has worked. When we introduced it, it was new. The recognition of higher rates, we knew we’d be earning more in the portfolio. And you’re trying to strike this balance with offering the clear certainty of the stated dividend, plus the predictability of the supplemental. Again, it’s a tricky – everybody wants certainty, but our underlying assets are floating rate, and they move around. So how do you offer certainty of something that’s fundamentally moving around? And we think the supplemental construction is a great way to do that. And we increased our base at the time, I know you recall, from $0.31 to $0.33. Again, what I think – it should be clear, but I just want to make sure it’s clear. It’s a formula that we’re committed to every quarter. So our investors, I think, should have a high degree of confidence at these earnings levels, exactly what the supplemental will be. We basically committed to pay out 50% in excess. And then we’re building a very nice amount of additional spillover income, which we never had before as a more relatively new public company. And so we’re – we think that offers additional comfort to investors. Thinking of the future in the next 2 or 3 years now, we are consistently able to stock away some additional earnings in that spillover income. So I feel like this has worked out really well. Shareholders are benefiting from more money in their pocket. They’re also benefiting from increased cushion. In terms of the guts of your question, given – every quarter, we’re going to look at it, right? But I’d say, it’s an uncertain time for the trajectory of rates. It just is. We all know that. And so I think that, in a very short term, we probably would want to see some greater clarity on where rates might go over the next 2 or 3 years before we would look to change. So I don’t think there’s any magic formula percentage, but I do think that the components of the formula are just going to move around a bit here. And so we will watch it. We’re very motivated to deliver capital back to our shareholders. We’re all shareholders. I’m a shareholder. I like getting dividends. We’re going to continue to look for ways for increasing them. But we also know that people value consistency. And so we don’t want to lean into something, and then 3 or 6 months later, it creates some unnecessary anxiety about whether it’s going to get reduced again. And I think this formula really does a nice job of balancing those two.

Yes. I understand. That’s all for me. I appreciate the time today.

Thank you.

Our next question is from Derek Hewett with Bank of America. Please proceed.

Good morning, everyone, and congrats on the good quarter. Craig, could you talk about your outlook for the Wingspire dividends? It looks like the dividend is down about a couple of million dollars to 8 on a quarter-over-quarter basis. But if you look at the scheduled investments, it looks like the BDC actually added to the investment and then there was a modest write-up of the investment during the second quarter.

Sure. Really, as we’ve talked about multiple times, we created the Wingspire business organically, working with an experienced management team, built out a substantial business there that we’re very happy with the performance. They did an acquisition in the equipment finance business. And so we are – we’ve continued to add capital to Wingspire. It’s a diversified pool of underlying asset-based loans and equipment finance loans. And so we’re pleased with the performance. We’re going to continue to add capital. We, at OBDC, through our role on the Wingspire Board, meet regularly with the Wingspire team to determine dividend levels coming out of Wingspire thoughtfully and carefully. And they may go up or down a bit in any given quarter based on what’s happening at Wingspire. So it had increased nicely to $10 million in the previous quarter, $8 million in this quarter. I think that’s the right neighborhood to think about the dividend levels based on performance. And so we’ll – it’s going to be a low double-digit, maybe one day a bit higher than that. Our returner for us. I think that’s terrific returns and want to continue to invest capital in it. So any one quarter could be $1 million or $2 in one direction or the other, but I think this is the right range to think about Wingspire dividends.

Okay, great. Thank you.

Thank you.

Our next question is from Mark Hughes with Truist Securities. Please proceed.

Yes, thank you. Good morning. With – it sounds like the third quarter off to a good start on origination activity. Any sense on the net investment in kind of coming periods if you’ve got more repayments? How do you think that will balance out?

Yes. I just want to make sure I’m not giving the wrong impression. I mentioned our deal flow today and these couple of deals that we signed up without speaking to any one specific deal. You shouldn’t read that into translating into origination in the third quarter. We’re already in the third quarter now. I’m commenting on the deal flow we’re seeing now that’s getting signed up that might close in the next 6 months, 9 months. It doesn’t – it just doesn’t get closed overnight. So in the third quarter, sitting here right now, we had a moderate origination quarter, we had a nice pickup in repayments. I’d say, net-net, just sitting here right now, the third quarter, probably the repayments, we’re running a bit behind right now in the third quarter, where we landed in the second quarter. Now a lot can happen over the next 6 weeks. But I’d say, right now, we’re running a bit behind it. In terms of origination, we’re probably running on pace, which is a modest quarter. So not going to be a significant pickup in origination, maybe a bit of a decline in repayments, and net-net, a modest growth in the portfolio or slightly up or slightly down.

Yes, yes. Would you venture to say when did the lines cross?

Well, Mark, the lines are never going to cross because we’re really targeting a leverage target, right? So we’ve got our 0.9 and 1.25x leverage target. And so we are – in essence, the repayments are what drive our originations. I mean as a platform, we’re quite active. We originated more than $3 billion of deals in the second quarter, more than 2x our first quarter. So as a platform, we’re seeing everything, and are ramping funds or investing. But for OBDC, specifically, given that we’re living within the leverage targets that we’ve been very clear on, in any one quarter, we’re kind of matching up origination to match repayments. So if we get modest repayments, you should expect to see modest origination. Now at some point – I mean, it’s not going to be in the third quarter. At some point, I think you’re going to see a, dare I say, dramatic pickup in repayments because there’s just a lot of pent-up desire for sponsors to exit companies and return capital to their LPs to refinance. There’s just – there’s a lot of deals that I think are sort of hovering out there. So at some point, it will pick up quite dramatically. So we will be in an environment where there’s lots of repayments and lots of origination, but the net-net will probably still be as close to 0 as possible to live within that leverage target. So does that make sense?

It sure does. I’ll rephrase. When do the lines meet would be a better way to...

They’re kind of me. I mean we’re – if you stare at every quarter, you’re going to see us – again, you can’t match it up perfectly because repayments happen when they happen. The new deal closes when it happens. You can’t match it up perfectly. But we’re basically at that point. We’ve been at that point for the last several quarters, where we are hovering right in that 1.1 to 1.25x leverage. We think that’s the optimal level for us. There’s some that run a bit higher than that, which you can have a view of. It will help you with returns. But we care about our bondholders, too, and so we prefer not to be a bit higher than that. I think if you run a bit lower than that, it’s going to hurt your returns. And so we prefer – I think it’s just kind of the sweet spot.

Understood. And then one other question, the increase in fees in the quarter. I think you alluded to amendments and repayments. The balance of those 2 and the impact, which was more significant?

Mostly related to repayments or refinancing. Some of it gets characterized on an – from an accounting perspective as an amendment. But it’s not an amendment due to anything happening at the portfolio company, but more – they’re doing a refinancing that qualify as a brand-new financing for GAAP, so it gets treated as amendment base.

Yes. I will add in that, although our repayments were higher this quarter, the economics that we earn from amendments and fees was even a bit higher than we would have guessed for the mix. It wound up being a sort of a lucrative amount of fees. So as you think about our third quarter, there’s probably a penny or two of extra fees in there that, sitting here right now, we’re not seeing it for the third quarter. I mean, again, it’s early, but I just – you shouldn’t just sort of straight line it across even if the repayments stay at the same level. Again, we’ll see, but there are some exit fees that won’t necessarily repeat in there that are helping that number.

Thank you.

Our next question is from Bryce Rowe with B. Riley Securities. Please proceed.

Thanks. Good morning. Maybe wanted to – just to follow up on the discussion around repayments. Just curious if the quarterly repayments were more kind of normal course or kind of proactivity on your part to get in front of what might be higher origination as we continue to look forward?

Well, I’m not sure if this is going to answer your question or not. I – look, we’re – we – fundamentally, the decision on when we get repaid in a performing credit is a function of what the company is up to and what the sponsor is up to. They’re certainly probably a name or two we wouldn’t be disappointed if they repaid us, but those tend to be the more challenged situations that have less the ability to do so. So I think it’s just the healthy activity of a well-performing portfolio and sponsors and companies on their own timetable deciding when to refinance or when to grow through acquisition. I mentioned it in the script, but I think one of the interesting things is we’ve gotten approached a handful of times in this quarter, where the sponsor, in their hope, would have exited the company this past year. They wanted to sell the company. But the environment was one where they didn’t think it was a wise time to sell the company, but they might have had a maturity in 2 or 3 years. So being prudent, they don’t want to wait too long to address the maturity, but they’re not quite ready to sell. And so they’ll engage us in a discussion where they say, "Look, we’d like another year of runway so that there’s no gun to our head, and we’re willing to pay for it." And if it’s a well-performing business, we’re happy to engage in those discussions. It’s very constructive. Again, we’ve been in the credit. We know it well. We’re not changing our exposure, and we’ll have a fulsome review of the terms and the covenants and basically price in what we think is attractive to us to give them another year or 2, which is typically can include giving us a fee, increasing the spread, adding call protection, tightening of covenant basket. Those are the menu of things that we look at. And the private equity firms really like that because this is one of the great attributes of direct lending. They can call us up, have one conversation. We can turn that around in a couple of weeks, and they can be done in the syndicated markets. It’s just not possible. It’s not possible to get it done. And even if you could get it done, it could take months and months. And so this is something that we do well, and I think it builds a lot of connectivity and loyalty with the private equity firms when they see that user friendliness of the private credit solution. And we like it because we get to keep a loan to a company we already have, that we like and with better economics and which is likely to exit in the next year or 2. And so that type of activity happened in the second quarter, and I think you’ll see more of that. At some point, you’re just going to see deal activity resume and they’ll exit. But in the meantime, this is one of the ways that we’re working with private equity firms to have a win-win.

And Craig, is that a process? Or is that more a dialogue or part of the ongoing dialogue? Or is it, again, using that word proactivity, are you being proactive to get in front of those maturities? Or is it the private equity firm that’s trying to be proactive to get in front of it? Just kind of curious how the conversation...

Yes. We saw – we – our team talks to the sponsors all the time. All the time, I mean weekly. And we’re talking about – we’re certainly covering every company quarterly, and we’re talking to the CFOs. We’re their bank. We’re the revolving credit provider. They give us reporting. Nothing is sneaking up on us. Nothing is sneaking up on them. It’s a fluid ongoing dialogue. We – part of our job is to make sure they know what options they have available and what we can support. Part of their job is to talk to their lenders and ask what the art of possible is. There are times we have these discussions. We could spend 6 weeks going back and forth, and they decide to wait. This is a constant level of dialogue that – it’s not one or the other. It’s just constant back and forth in a tight partnerships that we have with our companies. Not to digress too much, but we had our second annual CFO conference just a couple of months ago. We did our Investor Day, which was terrific. We did a whole separate event just for the CFOs of our companies and brought them to New York. We had 50 CFOs, who spent the day with us. We had some really good content. We are close to our companies. We don’t wait for problems. They don’t want to have problems. We’re in constant dialogue with them.

Got it. Maybe one more for me. You’ve got plenty of availability on the revolving line of debt. Capital markets have kind of opened back up to a higher extent here recently. Just curious how you’re thinking about the April 24 unsecured note maturity at this point?

Yes. I mean, look, we’ve got – as I think I mentioned in the script, we’ve got a significant amount of liquidity in excess of our unfunded commitments. And so the way that we’re looking at that maturity is we want to be opportunistic about it. We think we have options elsewhere on our platform. We’ve been successful in issuing unsecured. We can go do that here, or we can take it out with the revolver because we’ve got plenty of capacity. So we have that optionality. And so we’re not in any rush to make any decisions with respect to it. We’ll see what makes most sense from an economic perspective in the market as we get closer.

Awesome. Thanks, Jonathan. I appreciate y’all’s time today.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Craig Packer for closing comments.

Well, thank you all. Some great questions today. We’re really pleased with the results and encouraged by the stock movement and excited to keep delivering strong results for the back half of the year. So hope everyone enjoys their day, and thanks for spending some time with us.