OBDC - NYSE

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

Thank you, operator, and welcome to Blue Owl Capital Corporation's first quarter 2025 earnings conference call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the first quarter ended March 31, 2025, these should be reviewed in connection with the Company's 10-Q filed yesterday with the SEC. All materials referenced on today's call, including the earnings press release, earnings presentation and 10-Q are available on the Investors 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. 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 fed. The Company makes no such representations or warranties with respect to this information. With that, I'll turn the call over to Craig.

Thanks, Mike. Good morning, everyone, and thank you all for joining us today. We delivered solid first quarter results, driven by the ongoing strong performance of our portfolio. As a reminder, we completed the merger between OBDC and OBDE on January 13. So, our first quarter results now represent the combined company. In the first quarter, we generated an ROE of 10.2%, our 11th consecutive double-digit ROE based on $0.39 per share of adjusted NII. As discussed during our last earnings call, the decline from the prior quarter was anticipated. Our results last year significantly benefited from higher interest rates and elevated income from repayment activity, both of which have started to normalize. Jonathan will go into more detail later on, but in the first quarter, we experienced a lower level of onetime nonrecurring income as compared to the fourth quarter as well as the remaining impact of interest rate cuts from last year. As of quarter end, our net asset value per share was $15.14, down slightly from the prior quarter. That said, the fundamental performance of the portfolio remains strong, credit quality is solid, and our nonaccrual rate continues to be well below the industry average. While we're now operating in a more normalized earnings environment, we remain confident in the credit quality of the portfolio. In light of events over the past month, I thought it would be helpful to share our perspective on the current economic and market environment. With uncertainty around tariff policy, ensuing equity sell-off in April and the possibility of an economic slowdown, we took the opportunity to reevaluate the health of our entire portfolio by re-underwriting our investments through the lens of potential scenarios for the months ahead. Following this review, we are confident that OBDC is well positioned to navigate these uncertain times. As was the case during the COVID pandemic in 2020 and the regional banking crisis in 2023, our portfolio is built for resilience during economic disruptions. Our team has been through seismic events before, and we are actively monitoring the portfolio in real time, maintaining positive dialogue with our portfolio companies, sponsors and partners to proactively address any issues that may arise. While the economic outlook remains unclear, we believe we are entering this period from a position of strength. Performance across our portfolio companies remains healthy, which we believe is a result of our weighting towards defensive sectors. This stands in stark contrast to the public fixed income markets, which are more meaningfully skewed towards cyclical industries such as building products, retail, autos, energy and chemicals, sectors in which OBDC generally has not invested. As noted on our last earnings call, approximately 94% of our portfolio of companies are based in the United States and primarily serve domestic customers, limiting exposure to international trade disruptions. Our top sectors are primarily service oriented, such as health care, business services, financial services or software, which reduces reliance on manufactured goods or commodities and minimizes direct tariff impacts. We estimate that our exposure to companies with significant offshore manufacturing is limited to mid-single digits of the portfolio. Additionally, these businesses generally have diverse product sourcing capabilities and experienced management teams that have successfully navigated previous tariff or supply chain disruptions. This was by design. Since inception, we've built our portfolio to withstand turbulent economic environments and believe we will be a safe port in the storm. That said, we remain quite cautious about the impact of potential negative economic developments that our portfolio companies might face, including the possibility of broader recessionary pressures. This is why we've taken a proactive approach in response to the recent policy announcements by focusing on what we can control and quickly addressing any challenges that arise. OBDC's defensive position as a senior secured lender with low loan to values can mitigate risk experienced during uncertain markets, and our view positions us well to weather potential future volatility or a recession. The majority of our portfolio companies are backed by private equity sponsors where skilled operators with significant equity investments in these businesses. This is particularly important during more volatile times as these sponsors have substantial financial resources including ample dry powder to support their investments for extended periods of stress as we saw during COVID. Additionally, we are a lead or co-lead lender on roughly 90% of deals and administrative agent on approximately 65% of our investments across our platform, which gives us direct access to real-time information on borrower performance. To date, we have not seen any material signs of stress such as increased revolver borrowings, request for interest payment modifications or late interest payments. We also benefit from a strong balance sheet and significant liquidity supported by diversified and flexible funding sources to allow us to be resilient and invest across all market environments. In summary, we believe our experienced team defensively constructed portfolio, disciplined underwriting and highly durable funding model have positioned us to protect our shareholders regardless of what lies ahead. With that, I'll turn it over to Logan for additional color on portfolio performance.

Thanks, Craig. As just mentioned, the recent policy shifts subsequent to quarter end only added to the uncertainty about when a pickup in M&A activity will materialize. Accordingly, originations were lighter this quarter. We recorded $1.2 billion of new investment commitments and $800 million of fundings, excluding joint venture and strategic equity activity. Over 90% of first quarter direct loan originations consisted of first lien investments as we continue to believe that first lien and unitranche loans provide the most attractive relative value in the current market. As a result, over the last year, OBDC's first lien investments have grown from 73% to 77% of the portfolio. While activity has slowed, we continue to find large high-quality opportunities during the quarter, including PCI Pharma, a $4.5 billion transaction led by Blue Owl to refinance a syndicated loan. Notably, with an average deal size of approximately $2 billion this quarter, we continue to see the market migrate towards larger, more diversified credits. With the addition of first quarter originations, the median EBITDA of our portfolio borrowers grew slightly to $120 million and weighted average EBITDA increased to $215 million. Portfolio company revenues and EBITDA once again increased in the mid- to high single digits year-over-year. We would highlight this is approximately double the U.S. GDP growth rate due to our durable noncyclical sector selection, which should provide our borrowers more cushion in a potential recession. The portfolio also remains highly diversified with an average investment size of approximately 40 basis points. And our top 10 investments represent approximately 22% of the portfolio, down from 24% in the prior quarter. Additionally, as Craig noted, our average LTV is just over 40%, which provides significant support underneath our capital. Now I'd like to touch on some credit metrics in our portfolio. The nonaccrual rate as of quarter end was 0.8% at fair value and 1.4% at cost compared to 0.4% and 1.9% in the prior quarter. The change reflects two additions, including National Dentex labs and the removal of three positions that were fully exited. Stepping back, our nonaccrual rate remains at the lower end of our broader sector averages. Next, our internal rating system, which ranges from one to five as an indicator of portfolio health remains steady, and the subset of names on our watch list was also stable quarter-over-quarter. Interest coverage remained steady at 1.8x based on current spot rates up from trough levels as lower rates have benefited our borrowers, which should provide them a bit more flexibility during this period of uncertainty. Finally, PIK income declined to 10.7% of total investment income, from 13.2% last quarter. Driven by several investments that we earned to all cash pay as well as the merger with OBDE, which had lower levels of PIK exposure. As we've highlighted in the past, the vast majority of this PIK was underwritten at inception rather than as a result of credit issues, and these investments continue to perform as expected. In closing, I want to echo the sentiment Craig share. Our first quarter results demonstrate the continued strength of our portfolio. We are closely monitoring our investments for potential tariff impacts, but we remain confident in our defensive positioning and proactive in our approach. And now, I'll turn over the call to Jonathan to provide more detail on our first quarter financial results.

Thank you, Logan. Before discussing our financial results, I want to review the non-GAAP accounting adjustments we introduced this quarter due to the accounting treatment of our recent merger with OBDE. We did this to help make our close merger financials more comparable to premerger results. Under the asset acquisition method, we recognized an $83 million purchase discount on the assets acquired from OBDE, which resulted in a onetime unrealized gain to OBDC in the first quarter. This purchase discount will be reversed out of the realized gains into total investment income each quarter as the legacy OBDE loans mature or are realized. In the first quarter, this amortization income represented approximately $0.02 per share. Importantly, we have amended our investment advisory agreement to revise the calculation of incentive fees to ensure that any income or net realized gains arising solely from the merger accounting treatment will have no impact on the incentive fees payable to go out. This noncash amortization will be reflected in our results going forward, and we're happy to discuss this further with you in Q&A or offline to the extent you have any questions. Now turning to our results. We built upon the momentum established in 2024 and delivered another quarter of solid financial performance to begin the year. Following completion of the merger with OBDE ended the quarter with total portfolio investments of nearly $18 billion, total net assets of nearly $8 billion and total outstanding debt of approximately $10 billion. Our first quarter NAV per share was $15.14, down $0.12 from the last quarter. The decline was primarily driven by changes in credit spreads and write-downs on a small number of high focused investments. Turning to the income statement. We reported adjusted net investment income of $0.39 per share down $0.08 from the prior quarter, which was in line with our expectations. As discussed on our last earnings call, the decline primarily reflects a meaningful reduction in onetime income including early repayment activity and a dividend we received in the fourth quarter, which together contributed approximately $0.05 to last quarter's NII. In addition, the remaining 1/3 of the 100 basis point interest rate cuts that were implemented last year flowed through earnings as well as a small amount of spread compression of approximately 10 basis points. Similar to prior quarters, we over earned our base dividend, resulting in the Board declaring a $0.01 supplemental dividend based on our first quarter results, which will be paid on June 13 to shareholders of record as of May 30th. As a reminder, we implemented a programmatic supplemental dividend framework to allow shareholders to benefit from the higher returns associated with the increased rate environment, which has worked as designed. The Board also declared a second quarter base dividend of $0.37, which will be paid on July 15 to shareholders of record as of June 30. We believe OBDC is well positioned for the evolving rate environment and that the base dividend continues to be supported by our adjusted earnings with 106% dividend coverage. Further, our spillover income remains healthy at approximately $0.34 and equates to nearly a full quarter's worth of base dividends. We believe having a meaningful undistributed spillover supports our goal of maintaining a steady dividend through volatile and varying market conditions. Moving to the balance sheet. We are entering the year on a solid foot as our diversified capital structure positions us to expand the current environment. We finished the quarter with net leverage of 1.26x, up from 1.19x and just outside of our target range of 0.9x to 1.25x, which is partly attributable to the onetime leveraging event of the merger with OBDE. We also had visibility into a couple of large repayments that slipped into April. And as a result, we expect net leverage in Q2 will be within our target range. Since the merger closing in January, we have taken several steps to optimize our capital structure and reduce funding costs at OBDC. During the first quarter and post quarter end, we reset two CLOs and amended two of our bilateral SPVs, reducing interest expense for each and extending maturities for most of the facilities. In April, we repaid OBDE's $142 million July 2025 notes, which was modestly accretive to net investment income as the notes had a higher interest rate as compared to OBDC's cost of funding. Lastly, as a reminder, we prefunded the $425 million of unsecured notes that matured in March by opportunistically raising $400 million through a reopening of OBDC's March 2029 for the secured notes last quarter, which priced a swap spread of SOFR plus 192 basis points. near secured credit facility pricing levels. These changes represent our continuing efforts to actively improve our liability structure and optimize ROE post-merger. Turning to liquidity, we ended the quarter with over $3 billion of total cash and capacity on our facilities, which was over 2x in excess of our unfunded commitments that can be immediately drawn. Importantly, we have no material short-term maturities, and our robust liquidity position provides us with more than ample unfunded capacity to meet any near-term funding needs. Overall, we remain very pleased with our results and believe that our balance sheet is well positioned for a more uncertain environment ahead. And now, I'll hand it back to Craig to provide final thoughts for today's call.

Thanks, Jonathan. The recent volatility across stocks in public fixed income markets has signaled a potential shift in the investment landscape. In periods like this, we believe private credit is poised to capitalize on market volatility, by providing support to borrowers and sponsors facing challenges in accessing financing. While leverage at OBDC is towards the high end of our target range, we remain agile and able to deploy capital strategically as repayments come in, which allows us to be patient and pick our spots as we find opportunities. Last year, we experienced a significant number of refinancings, which impacted the overall spread of our portfolio. However, at this point, we believe most of this refinancing activity has played out which means we have the ability to operate with a high-quality portfolio that benefits from stable spreads. This positions us well to be patient and selective knowing that as public markets continue to experience volatility, the value of the certainty we offer to borrowers only increases. While it was too early to say how long this environment will last, we're confident in our ability to take advantage of opportunities given our capital resources and long-term investing time horizon to navigate what lies ahead. Looking forward, while macroeconomic uncertainty persists, the market is anticipating a significant reduction in interest rates, which will impact our earnings. That said, we believe our stable earnings profile and compelling risk-adjusted returns will continue to make us an attractive option for investors. Even in a lower rate environment. As we've mentioned throughout today's call, our portfolio is performing well, reflecting the continued strength and resilience of our borrowers. The stability of our portfolio gives us confidence in maintaining our dividend level for the remainder of 2025. To close, we are very pleased with our first quarter results and the seamless execution of the merger. We're confident in our ability to navigate a more challenging environment ahead all while delivering attractive returns to our shareholders. Thank you for your time today, and we'll now open the line for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question is from the line of Brian McKenna with Citizens. Please proceed with your question.

Craig, it would be great to get your perspective on how the macro unfolded over the past several months. I know you gave a little bit of color, but for some time now, we've talked about just how tight spreads were as banks were really active and then there's just a lack of new M&A transactions. We finally got some volatility. Banks did pull back. So, I'm just curious from your seat, how spreads trended from February to March and then from March into April and May? And then at the OWL Investor Day back in February, you stated "I don't know, I haven't seen it yet" when speaking about the forthcoming recovery in M&A. So, here we are, there's been no change in the broader M&A backdrop. Do you have any updated thoughts on where we go from here. And then if activity remains muted on the M&A side, does that have any implications on OBDC?

Okay. Thanks, Brian. There are a few pieces in there. So, I don't get all of them, remind me. My quote "I don't know, I haven't seen it yet", I think that's held up well over time. So, I think I was probably spot on there. Look, to try to hit some of the themes that you're asking about, just to pull the lens back. Last year, it was a moderate M&A environment with a really strong broadly syndicated loan market and rates spreads tight. And so, there's a lot of refinancing last year. There are a lot of public and private market dollars chasing a moderate amount of deal flow, and that resulted in spread compression. The hope this year was that there would be a resumption in M&A. I think there was a lot of optimism with the new administration that would be a regulatory that would result in M&A with private equity firms needing to return capital. So, there was a hope that, that would result in more deal flow, more opportunities to deploy and potentially improve spread environment. What's happened so far this year is given there's just been after the initial, I think, optimism around new administration, there's been a lot of uncertainty created by tariffs in particular and that's had a showing effect on M&A both private equity, but just in general, the uncertainty around tariffs has created a muted M&A environment. And I think most people expect that to continue for a while. Until there's greater clarity is hard for companies to want to buy and sell and for there to be an active M&A environment. And so, I think that will continue to be the case. On the spread front, the public loan market really closed out, it's opened up a little bit now, but the extreme volatility of a month or so ago really impacted the public loan market. So that bid went away. And so, spreads, I think, have stabilized. Our hope would have been in an environment with a lot of public market volatility that spreads would widen. Typically, that's what you would see that -- we haven't seen that yet. Private credit spreads are stable. I think different market participants might call it 25 basis points wider 50 basis points wider. But I think there's also deals that are getting done and really the same spread they would have gotten done a couple of months ago. So, I think it's not going any tighter. Our hope is to have it go wider. We are certainly pushing for that in the instances where we think it's appropriate. But there remains pretty modest deal flow. And so, the deals we're seeing are good quality. You saw we had an active quarter. I think we'll continue to have an active year. our portfolio companies, we have a significant number of incumbencies and they are constantly doing that on acquisitions that are smaller but allow us to deploy capital. I think spreads, my hope is, at some point, there'll be a pickup in activity and spreads will go wider a bit, but we're not seeing that just yet. It's a fine environment we're investing. I'd like to see more deal flow, I'd like to see a little bit better economic terms, but the quality is very good and the portfolio companies are holding up very well. So hopefully, that captures, I think, the gist of what you're asking about, but if I missed any piece of it, just remind me.

Yes. No, I think you got most of it, if not all of it. So that's super helpful. Appreciate that. There were clearly a few questions in that. So, I just have one quick follow-up. Is there any updated time line around the public listing of OTF now that, that merger is complete?

There's no -- there's nothing for us to disclose here. As we have with -- we've obviously completed a number of strategic transactions, merger of OBDC and OBDE, merger of our two private tech funds, we take a very front-footed approach with trying to find ways to deliver value for our shareholders, talk to our board regularly about all those activities. And so, our tech fund dominating report on it, but the -- our tech fund now combines private tech loans would be one of the largest, most consequential OBDCs that we're a public company. So, if we found a window where we think that makes sense that we would explore that as we have some of the other strategic transactions. So, we're we actively look at each of our funds regularly to see what makes sense, but nothing more specific to report.

The next question from the line of Mickey Schleien with Ladenburg Thalmann. Please proceed with your question.

I wanted to ask the spread question as well, but you explained it very thoroughly. So, my other question is related to share repurchases. I realize there are windows, which open close for share repurchases. But why not rotate some of the repayments you received into buying shares during the recent periods of volatility, which would seem to be a great use of capital.

So, we have a share repurchase program. We've also instituted an ATM program. We look at both tools regularly, weekly, daily. As you know, there are windows for share repurchases. And they're meaningful windows, which I won't get into precisely here, but they're measured in weeks, not in days. And so, if there are environments that line up with our windows to buy shares, that's a conversation that we'll have with our Board meeting. It was not that long ago that we've been above total. So, these things move quickly and they have to line up. We see the share repurchase in the past, and we can look at using it again. I mean, I agree with your instinct, which is we think that our stock trading where it is, is not reflective of the fundamentals of the portfolio performance, which continues to be excellent. The yield on our stock today on our base dividend is close to 11%. And we haven't had any credit issues. And our peers that have comparable credit quality or trading book value. We traded $0.90 of book value. So, we agree with the sentiment that our stock is attractively priced. Obviously, the capital is very valuable to deploy. So, we always weigh that, but it's something that we will continue to look at.

So, if I understand correctly, that recent period of volatility, where we saw a sharp selloff over a few days, it just -- it didn't coincide with one of the windows being open. Is that correct?

That is correct.

Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question.

This is for Jonathan. Jonathan, not being as familiar with the liability structure that you inherited from Blue Owl III. I'm curious if there's anything in Blue Owl III’s liabilities that you inherited that are going to offer some opportunities to rationalize some of those liabilities at lower cost?

Yes, it's a great question. It's something that we definitely talked about at the time of the merger that we felt that there were going to be opportunities. We've already started to take advantage of some of those on the secured side by repricing certain drop-down facilities that we have in place as well as repricing the CLO. And we've -- subsequent to quarter end, we took out notes that we had issued at OBDC III that were a high coupon as well at the first possible chance to take those notes out. So, there's more there to do. And as the call dates and sort of come up, we'll certainly be able to take advantage of that.

The next question is from the line of Robert Dodd with Raymond James. Please proceed with your question.

You've added the spread in M&A on really clearly in case you got the liability one. So, the board going back to kind of your opening remarks, I mean this point in your underwriting case when you're looking at new deals, what are you ranking maybe qualitatively, not quantitatively, necessarily, as the probability of a near-term recession. I mean you always put one into kind of your underwriting case and a lot of your businesses, they're not that economically sensitive because of the services side. But is that kind of near-term view like the second half of '25, has that view changed on the probability of a meaningful or moderate economic slowdown?

Sure. So, look, I'll try to answer your question, but I'm going to just try to have a broader lens to it. We're -- the economy can be gangbusters, and we're running downside cases. We're -- every deal, every investment we've made in our history has a recession case in it. Every deal in our history has a liquidation case in it. So, we're extremely downside focused and is a hallmark of our underwriting process. In addition to that, as you know, for buying businesses, we're investing businesses, excuse me, that are not that simple. That is also a hallmark of our investment process, software assurance brokers, health care, food and beverage, mostly U.S. businesses, mostly stable, mostly annuity-like revenue streams. That's what we like to invest in. I'll also repeat what we said in our prepared remarks, we're not seeing any economic weakness of our portfolio of companies. Now, we are not a forward indicator of the U.S. economy because we're selecting into the most stable parts of U.S. economy. So, we wouldn't see it, but we're not. If what you're asking me is, are we especially concerned about an economic slowdown in our underwriting process. I think the answer is, yes, we are. I mean we follow economic developments as closely as I think most investors would and there have been seismic changes to U.S. trade regulations that many feel are going to potentially impact the economy later this year. And so of course, we're taking a serious look at that and factoring that into our base case rather than a downside case. So, I think that's just sort of responsible lending in this kind of environment, and we are a downside in orientation. So, we're taking that into account and it's probably our expectation. It's not going to change the kinds of investments we're making because we were already selected out of the type of investments that will be most impacted by that type of a downturn. But it's certainly on the margin makes you that much more cautious about how much leverage you put on a business that even though it's not cyclical, like every business is impacted if there's a recession and even a very stable one. So, we are certainly factoring that in, and it's we insisted that introduces a level of caution as we look to deploy additional capital.

Got it. Got it. Now one more, if I can. I mean on -- now the business has been combined. The asset base is bigger. You've got a little bit more room arguably now under your nonqualified bucket or any of these other diversified lending strategies that you follow between Wingspire, et cetera. I mean any incremental -- and I think I asked you about this last quarter, but any incremental thoughts on like now that they're combined bigger balance sheet, how much of that non-pure traditional first lien, I'm not saying it's high risk or anything, right? But those differentiated strategies you want within this vehicle.

As you're alluding to at OBDC, previously, we had fairly meaningful investments in a number of sensitive portfolios of assets on an asset-based lending business. We have a syndicated loan joint venture, our aircraft and railcar equipment finance, give or take, those are measured in the low double digits of the asset pool. OBDE had much less. And so, we would certainly look to true up the combined portfolio and essentially get a portion of incremental exposure by just getting the combined asset base to where OBDC was previously. These have been really good investments. Again, there are the underlying pools of assets within each of these investments are diversified pools, diversified pools of loans. Typically, we have a life insurance settlements business with our royalty business or diversified underlying pools that have delivered depending upon the structure of low to middle -- low to mid-teens ROEs. So, they're accretive to OBDC. We think they're risk appropriate. And over time, we'd like to continue to grow our exposure to the existing ones. And if we could find one or two additional strategies to invest in, we would do that as well. Again, today, it's combined low double digits, we're going to be patient as we grow this, but over the next couple of years, if we could take that number up to 15% versus 12%. I think that would be very valuable for shareholders. And we're working with experienced teams that have good deal flow, chunky opportunities, and we'll look to support them and find good investments through that venue.

Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question. Mr. Alexander, please go ahead with your questions.

Yes. I just wanted to follow up real quick. I just want to make sure that the variable dividend structure is going to be toggling off of adjusted earnings and not the GAAP number.

Casey, that is correct. It's off of adjusted.

The next question comes from the line of Sean Paul Adams with B. Riley Securities. Please proceed with your question.

I think you already touched on part of this question earlier in the call. But now that the OBDE merger has closed, what kind of specific operational efficiencies besides just the refi are you guys tracking? I believe earlier in the quarter, you had mentioned expecting maybe 50 to 75 bps of ROE uplift from portfolio optimization. How far along are you in realizing those gains? And would we see the full benefit to OBDC?

Sure. Maybe I'll start and pass to Jonathan because there's two fronts that we highlighted at the time of the merger. First was, call it, market dependent and investment-related ROE optimization efforts. Some of those are exactly what Craig was just talking about is continuing to deploy to accretive JVs and strategic equity opportunities, like our platforms, Wingspire as one example. And OBDE was underweight some of those opportunities. And so, getting that back up as part of the combined portfolio would be top of that list, and that certainly takes time to deploy into the assets at that level, but it's something that we're already working on. Additionally, there are others where OBDE was a slightly different portfolio mix and part of that's market opportunity set dependent. Today, we see the best relative value, as mentioned during the call in first liens and unitranche, but we are open if the return opportunity and the relative value opportunity improves, to looking at second lien or junior capital where OBDE was also underweight. So, some more market-dependent. JVs is more time dependent, and we're working on those now. And then there are our cost structure side, which I'll let Jonathan touch on.

Yes. So, look, on the operating expenses, you get to see those sort of pull through rather quickly. And so, in Q1, we were able to already see approximately 10 basis points of what I'll call synergies on a relative basis to where OpEx was across a number of categories in 2024.

Yes. I mean, look, we view spillover income as good for helping to sustain the dividend during periods of volatility. Those -- that was what I had indicated on in my prepared remarks. We’re not I’m not at all saying that we would use the spillover and run it down, if we were permanently impaired in terms of our income relative to the relative to the dividend. We’re just not at that point now. And so, what we say is and what we’re saying is that having the cushion of spillover income to sustain a dividend for a quarter or so during a period of volatility is what you use it for. But we like that cushion, and in no way are we indicating that we would run it down and utilize it in order to sustain a dividend that’s not earnable for the long term. So, in a much, much lower rate environment, we’re having a different conversation.

Our next question is from the line of Maxwell Fritscher with Truist Securities. Please proceed with your question.

I am on for Mark Hughes. Can you provide any color on what you're seeing in the pipeline in terms of mix of new versus incumbent borrowers and then maybe even types of deals you're seeing, terms, covenants, anything in particular to call out?

Sure. It's been remarkably consistent with prior quarters. And so, to Craig's point, we didn't necessarily see the tick up in M&A in the late fourth or early first quarter. And so, it's been a consistent first quarter. More than half of our deal flow in the first quarter came from existing borrowers, add-ons and refinancings. And the majority of the cases when there was a refinancing, we were able to do additional size. And so, incumbencies have been a majority source of our deal flow. Looking forward, our pipeline for the second quarter is trending in the same direction. Quite a bit of existing borrower transactions more than half and sporadic M&A. There's been quite a few attractive deals already announced, one deal north of $4 billion that was publicly announced just a few weeks ago. And there are a few more that we're looking at in the pipeline that are quite attractive and sizable. So, no change to the landscape relative to Q1 from a pipeline perspective and still fairly attractive and up in scale.

Understood. And then you'd mentioned the decrease in PIK from borrowers transitioning to cash pay. Do you have any visibility in the near, maybe medium term for other borrowers to do the same?

Sure. Exactly right. So, in the first quarter, we had five names that went from partial PIK to fully cash pay. And so, we do have visibility to others likely going off their PIK options. Again, some of these windows, it is at the borrower's option. And so sometimes it's voluntary and sometimes it's time-based. But we do have visibility, and we expect our PIK to be consistent. We, at this point, have had a number of quarters in a row back to the full year 2024, where we've been range-bound on PIK we've had now a couple of quarters of decline. So, we would expect our PIK to be consistent based on our visibility so far. And also last year, we had the benefit of a number of refinancing. So opportunistic refinancings of junior capital into de-levered capital structures into first liens or simply take out with cash flow. And to the extent that the markets are open and active in terms of refinancings, we will continue to see that.

At this time, I will turn the floor back to management for further remarks.

Right. Thanks, everyone, for joining. We're always available. If you have any follow-up questions, just reach out. We feel really good about the quarter and I appreciate everyone joining the call. Have a great day.