OBDC - NYSE

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

Thank you, operator, and welcome to Blue Owl Capital Corporation's Second Quarter 2025 Earnings Conference Call. Yesterday, Blue Owl Capital Corporation issued its earnings release and posted an earnings presentation for the second quarter ended June 30, 2025. These should be reviewed in connection with the company's 10-Q filed yesterday with the SEC. All materials referenced during today's call, including the earnings press release, earnings presentation and 10-Q are available on the Investors section of the company's website at bluelowlcapitalcorporation.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 verified. The company makes no such representations or warranties with respect to this information. With that, I'll turn the call over to Craig.

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

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

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

Thanks, Jonathan. To close, I want to reflect on where OBDC and the broader BDC market are today. Over the past year, we saw 2 trends that have impacted both OBDC and the broader leveraged finance markets. First, interest rates declined 100 basis points from their peak as market expectations evolve. As a predominantly floating rate asset class, this has had a direct impact on our portfolio's earning power. Second, while direct lending spreads have been tighter, spreads have narrowed in all markets. Direct lending still commands a healthy premium to the broadly syndicated loan market, yielding a 150 to 200 basis point premium, which is generally in line with historical averages. Despite these 2 headwinds, we believe our portfolio is positioned for strong, consistent performance. Absolute returns within direct lending continue to be compelling no BDC continues to deliver attractive relative returns, which we were once again able to demonstrate in the second quarter, generating a 10.6% ROE and a 10.4% dividend yield on net asset value. Looking ahead, spreads have generally stabilized. And while the rate outlook remains uncertain, the market is expecting modest additional rate cuts later this year. However, even with that assumption, we are confident that we will maintain our dividend level throughout the rest of the year. On the deal environment, we are cautiously optimistic about a potential rebound in activity in the second half of this year. We've seen conversations with private equity sponsors have been encouraging. And if these discussions translate into new transactions, they could significantly boost deal flow. Regardless of whether these deals materialize, we are confident that our sourcing capabilities enhanced by the scale of our platform will continue to drive attractive deal flow going forward. In closing, we feel very comfortable with our ability to deploy capital opportunistically and manage leverage appropriately. Our strong track record, combined with the scale of our platform, consistent investment philosophy positions OBDC to deliver attractive risk- adjusted returns to our shareholders across any economic environment. Thank you for your time today, and we will now open the line for questions.

[Operator Instructions] Our first question today is coming from Brian McKenna of Citizens.

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

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

Sure. So Brian, on the OpEx side, as we mentioned last quarter, the vast majority, really, all of that has came through immediately, and we've seen that -- we've seen those synergies take effect. On the financing side, it's a little bit of a slower burn just because we have certain financings in particular, on the secured side that have call dates or reinvestment periods that still need to come. And so that will that will occur really over the course of -- the vast majority of it over the course of the next year or so, but it's happening piecemeal. So I would say that the vast majority there has not occurred, and then I'll hand it back -- about 20%, 25%.

How much ROE firm benefit from additional financing synergies?

Another 50 basis points.

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

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

Sure. So look, I think that there's a couple of pieces to this, and I want to sort of separate them out. The first is Blue Owl as a platform has gotten into new lines of business that just we weren't in previously. As folks, I think know, but just to highlight, we acquired Atalaya Capital last year, which is in the business of what we call alternative credit, but some will call it asset-based lending. We also got into the business of managing data centers with our acquisition of IPI. Our real estate business has seen tremendous activity in the data center space. So the firm as a whole has a much broader opportunity set than ever before, and we are going to be selective, but many of those opportunities offer similar cash flow characteristics and return characteristics is what we've been doing in our direct lending business. And so we're going to be deliberate about what we would put in OBDC, but we have just a broader deal funnel, and we think that, that's valuable in and of itself, but especially in an environment where there's just less new sponsor deals. So that's very attractive to us, it's early. And so I wouldn't -- looking backwards for this quarter and the previous quarters, I would say it's very modest because we're just getting that deal flow in place and just now in a position where we can commit to new deals and put them in the portfolios. We've talked a couple of times in the script, we set up an equipment finance JV across our BDCs. So historically, it's had limited impact, but I will tell you the reason why we've mentioned it a couple of times today is we're seeing very consequential imbalance in this area. And so, I do think going forward, it's something that we will really benefit from. I kind of hesitate to quantify it on the fly, but if I would just sort of cuff it in the next couple of years, could you see 10% of the portfolio, 15% of the portfolio in some of these new strategies and don't hold me to that. But I want folks to know it can be meaningful, but I also want them to know it's not going to dominate our investing. But these are really, I think, attractive investments that will fit really well in our BDC and offer attractive risk-adjusted return. So just directionally meaningful but not change the overall complexion of the portfolio. We'll obviously keep everyone updated quarter-by-quarter as we start to make these types of investments.

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

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

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

Sure. I'll start and you can chime in. Look, we -- I always debate how much to lean in on this comment because we've been hopeful before and been disappointed before. But -- and we don't want to be -- we're not trying to lean in too much here. But there's been a noticeable pickup in engagement with sponsors in the last 60 days or so. That feels a little bit different. And if it were to really result in transactions, I think, can move the needle. In terms of the flavors, it's a mix. We've seen inbounds on potential public to private activity, so public companies getting taken private, so that which would be brand new names to the market. Those are really exciting. There are still activity, where we're refinancing loans in the public market into the private markets. There's an ebb and flow there. There are certainly names going in the other direction from private to public, but there are syndicated loans that are getting refinanced in our market and then there's just good old-fashioned sponsors looking to potentially sell companies to other sponsors. We continue to see a steady drumbeat of add-on acquisition financing for our portfolio that's been carrying us throughout. But I would say those first 3 buckets or so, there's been enough in each area that gives us some hope that this will translate into increased deal activity in the second half of the year. I'm always a believer like to see it actually happen versus predicting it will happen. But these deals are moving along in a nice clip, and hopefully, things will unstick here a bit.

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

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

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

And if I can go back to your comment about these other strategies, Craig. I mean, I'll ask you a hypothetical and you can dodge it if you want. If the platform were to make a new acquisition of a new strategy tomorrow, what kind of time frame to onboard it, review it, maybe let it mature a little bit, then look, is it BDC appropriate and then build a structure? I mean, is it -- if you made an acquisition tomorrow, it's like you might be onboarding those assets 2 years from now, if they're BDC appropriate? Or what's the time frame to view of whether something -- review and structuring, et cetera, et cetera, whether something is appropriate to add in terms of a new type of strategy to the BDC portfolio?

Well, the acquisitions we've made are completely integrated and fully ramped deal flow is active and our teams are integrated with those opportunities. We've already done all the work necessary to make sure investments can be appropriate structured properly, on pass muster in terms of allocation policies set up appropriate coordination. So all the opportunities I mentioned earlier, that's all live now. And the delay is not from work internally, but just finding deals that work and it takes time for deals to come in and we commit and they close. So it's just the life cycle of the deals at this point, not any holdups. We're live on this now, and we look weekly at opportunities that can fit across the platform and again, that's why we're saying -- we're talking about this because you're going to see as the third quarter investments show up that are a benefit of what we're talking about here. In terms of your hypothetical, if you see us announce an acquisition at the Blue Owl level, once the deal closes, we're able to integrate and get things up and running really quickly measured in a month or 2. It doesn't -- we're a nimble organization. We're ultimately a fairly focused and focused organization. We're in 3 major credit lines, credit, real assets and GP stakes by the time we announced the deal, you should assume we've diligenced it extraordinarily well and understand exactly how it's going to fit and whether it's appropriate and we can be investing in those strategies measured in months, but deals just have a cycle to themselves. But I would just -- I would focus on the deals we've already announced rather than some hypothetical and just to say we're again, I think it's a huge positive for OBDC shareholders, why I'm highlighting it. These are really attractive risk-adjusted returns, originated and structured by teams with deep, deep, deep domain expertise and offer low double-digit plus ROEs. You know, Robert, you know well, like we've done this before, not at the acquisition level, but we've built joint ventures in aircraft and rail car finance and drug royalties and asset-based lending. I mean, these have been very accretive strategies. We're very deliberate about how we do them. But they offer additional diversification, additional consistent income on the benefits of scale. And I think it's a nice a nice way to allow us to continue to be very disciplined in our core sponsored lending business.

Got it. Got it. I got 1 more on kind of related to the -- when we talk about public private markets, I mean, there's always swings that we're mad about. I mean there's a big sponsor, who's talking publicly or at least talking to Bloomberg about shifting a fair number of their deals in private credit to the syndicated loan market, which happens to be open right now with pretty tight spreads. Are you seeing anything in terms of like overall shifts in terms of share or anything like that? Or is that just another artifact of the noise that we currently see of swinging backwards and forwards between the 2 depending on points in the cycle.

I think it's a very healthy traditional market environment. I would say sponsors continue to shift more of their decisions and financing decisions to the private markets, especially for new deals. In terms of the trade balance in one direction or the other, it's pretty balanced, deals coming from public to private or from private to public. It's a healthy market where sponsors have 2 good choices and they're picking. I mean, we've talked about this many times on these calls. There are going to be periods of times the typical order of fares as both markets are open and sponsors pick and that's the environment we're in now. There are going to be other periods of time, where the public markets are challenged and deal flow will swing to the private markets, but this is the way it should be. Both markets, there's plenty of deal flow to feed both markets and we continue to find that the sector shift is towards direct lending. And then importantly, we continue to get a significant premium, better documentation, better diligence, and we continue to cherry pick, we think the best assets for the private markets. So I think it's a healthy functioning environment that suits us just fine.

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

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

So our companies continue to perform well. We talked about it in the script. They continue to grow modestly quarter-over-quarter, low single digits, more like double digits year-over-year. I would say, generally, we continue to see a modestly sort of expanding economy. But I -- look, I know at 1 level, we have 300-plus portfolio companies at OBDC. And so investors will look to us as a barometer, but I just quickly rush to remind everyone, we are not a microcosm of the U.S. economy. We are heavily concentrated in companies that we think are resistant to recession, particularly things like software and insurance brokerage and parts of health care, food and beverage and so we are not expecting to be an early warning sign of the U.S. economy and weakness. We have very few cyclicals, when you're reading about tariffs affecting auto. It's just not -- it's not something that impacts our portfolio. We have like no auto exposure. So I -- I read and consume economic information the same way I'm sure most investors do, and there's concern about the way the labor numbers and just general impact of tariffs and potential economic weakness. So I think the consensus is that growth is slowing in the U.S. But I'd say that's not what we're seeing. And I hope that if we got in a modest recession that, that would have even less impact on OBDC.

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

My sense is spreads have troughed. I think that they've troughed and I'm hopeful at some point, they'll move -- they'll widen off the trough. I just -- I think the reason the spreads have gotten as tight as they are is only partly related to capital inflows into the private markets. It's also a white hot syndicated loan market. And that market is at all-time tights and that we just talked about a minute ago, we compete with that market. And so that market, if that market widens, that will benefit private markets. And that market tends to be fickle and cyclical. And so, if you go through a period of time where the syndicated market has some volatility, spreads will widen -- aero spreads are wide in the private markets, and then the deal flow environment continues to be modest. So I would say I'm not predicting it in the micro short term, but I would be hopeful that the next move in spreads is wider, not tighter, as any 1 of those factors comes into play more deal flow cooling public market or just some capital consumption in the private markets, where there's not quite as much capital out there for new deals.

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

Craig, I'm just a little curious on the equipment leasing side. That market is often characterized by lower balance fixed rate, short duration type loans. Some which could be difficult to scale, particularly to the scale that OBDC is going to need for it to make a meaningful contribution to NII. So -- and it also often takes a large team of people in place to track collateral and things like that. So I'm curious how you guys plan to scale that business to something that's meaningful for OBDC?

Well, the reason we highlighted the equipment finance JV is not because we think it's going to be a massive investment. But to highlight the type of opportunities that we now have, particularly by our acquisition alternative credit space for equipment financing, joint ventures or other types of more asset-oriented joint ventures that can benefit OBDC. I think you're right, it will take time. It will take time for it to be meaningful. But as you know, we've done this before, Wingspire, which is 1 of the largest investments of OBDC has a very successful equipment financing business. Has a team, and it's a meaningful contributor, an important contributor to Wingspire results, which OBDC benefits from every quarter. I would say, in the Equipment Finance business, 1 thing, and we'll share more detail on this when it's really impactful. So I don't want to spend too much time speculating. But particularly what's going on in data centers is creating the need for massive amounts of capital, where you're building out scale data centers and they have lots of financing needs for the data center itself and GPUs and the like. And you have some of the -- literally the most valuable companies in the world that are building these facilities and don't want to have assets on their books and it's creating very chunky opportunities for attractive, relatively short duration returns from potentially investment-grade counterparties. So these are the kinds of things that could be a bit chunkier than the really micro ticket equipment leasing that you're referring to. So it will be a mix. But I don't want to overemphasized the equipment leasing as being a needle mover for OBDC, but I do want shareholders to understand is that we're taking active steps to leverage our product capability to come up with ever more ways to diversify our portfolio and create consistent returns, and this will just be one of many tools.

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

Just a sort of a market level question on the non-tradeds, we wanted to ask given your position in that domain and of course, it's importance to direct lending. Seeing if you had thoughts on just the sort of tail off of gross inflows. And to be clear, industry-wide, post-April Liberation Day, they've continued to sort of tail in May and June. And then as it relates to direct lending and DSL, if this continues, do you think things can really cool down and spreads can [Technical Difficulty].

What allows us to continue to sign up large transactions. So I think that picture is a very good one. And look, I think it really is showing the resilience of that channel despite what some might have predicted would be more negative. In terms of your question on spreads and the like, I covered this a minute ago, I think that there's 3 factors that are driving spreads to where they are now. Really strong public market, capital formation on the private side, modest M&A. I think if any one of those 3 were to reverse core spreads widen of 2 of the 3 reverse course spreads will widen meaningfully I'd say of the 3, I'd bet on M&A and the public markets being towards the higher end of the list, not the lack of capital in the private space because of which continue to see a lot of interest from clients. Spreads, I'd like spreads to be tighter. I mean why [Technical Difficulty]. Our alternative credit team has been in the leasing business for years and has been active in the space and if you look at regional bank pullback, things like health care equipment would be another great example, firms that have large capital spend equipment, don't have the benefit of regional bank balance sheets anymore. And so -- we think some of these environments for equipment leasing on the higher-end capital equipment side, are in a similar place that maybe direct lending was 10, 15 years ago as banks pull back, institutional capital has to step in. So I would anticipate it to be a diversified pool and there are some areas like data centers or health care equipment that we see that could be chunkier, but it should be a diversified pool, similar to how OBDC's portfolio is diversified.

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

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

Our next question is coming from Paul Johnson of KBW.

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

Look, I think the vast majority of it has worked its way through. The sponsors are very -- the very efficient at identifying opportunities to refinance and reduce spread. Look, just to remind everyone, our loans, when we put a new loan in the book, typically have 1, maybe 2 years of call protection where we get a premium after that, our loans are typically repayable at par. So 1 of the value propositions of direct lending is it's efficient for a sponsor in a loan that we're providing that is performing well and through its call protection for us to be able to have a conversation about a cost-effective refinancing. And so that happens. It's a lot easier, frankly, than the public markets. It's 1 of the reasons why the spot is like working with us. I think the vast majority of that has worked its way through. There's probably some modest amount that sponsors are holding off, either for call protection or they think they're going to exit a company, but I think a lot of it's worked its way through at this point. And you've seen that reflected, as you said, in the last 18 months. There's probably a few names, but most of them, I think, are pretty stable at this point.

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

Look, I think it is an opportunity. I would characterize the opportunity though as closer to the one-off end of the spectrum, given where junior capital is pricing in the public markets as well. If you look at high yield spreads and the second lien spread environment for syndicated deals, they are very tight levels. And so -- when a deal goes BSL more often than not, it fully transitions that way. And so I think our relationship and incumbency and long-standing history with Truecordia was a differentiator for us. And so I think that mattered quite a bit in this instance. If you look at the amount of discussion around names going back and forth, as Craig mentioned, it's actually pretty balanced though. And so I don't want to overplay names going to BSL not leaving us with a substantial junior capital opportunity. We're seeing an equal number of names come out of the BSL market and choose the direct markets, and we saw substantial volume in the last quarter from names transitioning out of the BSL market. So there is a balance between the 2. And then new names, whether it be a new LBO or take private, new names continue to have that secular shift to choosing direct, which -- we continue to see and there hasn't been any shift there. So I think the opportunity set remains a very good one. And I think the junior capital side, if the public markets stay where they are, I think it will be more sporadic.

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

Right. Well, we appreciate everyone's interest. We were really pleased with our quarter. I think it was 1 of the strongest in the industry and continued particularly terrific performance on the NII front and the dividend coverage front and the ROE front. So I appreciate everyone's interest and look forward to speaking with you again soon.