Blue Owl Capital Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Blue Owl Capital Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Dana Sclefone, Head of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to Blue Owl Capital Corporation's 3rd quarter earnings call. Joining me this morning are our Chief Executive Officer, Craig Hacker and our Chief Financial Officer and Chief Operating Officer, Jonathan Lam. We're also joined this quarter by senior members of our team, including Alexis Magan, our Chief Credit Officer and Logan Nicholson, who joined the firm in September and served as Portfolio Manager for several of our diversified direct lending funds, including OVDC. I'd like to remind our listeners that remarks Many 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.

Speaker 1

Actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described in OPGC's 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 The portfolio companies was derived from 3rd party sources and has not been independently verified. The company makes no such representations or warranties with respect to this information. OBC's earnings release 10 Q and supplemental earnings presentation are available on the Investor Relations section of our website at blueowlcapitalcorporationdot With that, I'll turn the call over to Craig.

Speaker 2

Thanks, Dana. Good morning, everyone, and thank you all for joining us today. In the Q3, we saw continued strong momentum, delivering excellent credit performance across the portfolio and another quarter of record earnings. Net investment income was $0.49 per share, reflecting our 3rd consecutive quarter record NII. This was driven by increased interest income due to higher rates, solid dividend income and our resilient portfolio performance.

Speaker 2

These increased earnings translated into an attractive return on equity of 12.7 percent in addition to growing distribution for our shareholders. Based on our earnings well in excess of the regular dividend, Our Board has declared a supplemental dividend for the Q3 of $0.08 per share. Coupled with our previously declared Regular dividend of $0.33 this equates to total dividends paid for the Q3 of $0.41 Reflecting our confidence in both the sustainability of NII and the continued credit performance of our portfolio, Our Board has also approved a $0.02 increase to our regular dividend, increasing the 4th quarter regular dividend to $0.35 per share. The business is generating record earnings and we continue to share those earnings with our shareholders. This is the 2nd increase in our base dividend since the Q2 of 2022 and our total dividend of $0.41 for the Q3 represents a more than 30% increase And our total quarterly dividend during this period.

Speaker 2

Net asset value per share increased to $15.40 up $0.14 from the Q2. This marks the highest NAV per share since our inception. Our non accrual rate remains low at 0.9% of the fair value of the debt portfolio with just 3 names on non accrual unchanged from last quarter. We continue to demonstrate our ability to resolve non accruals and protect our principal. Since inception, we have deployed over $25,000,000,000 of capital and experienced a net loss ratio of only 15 basis points.

Speaker 2

Our borrowers' operating performance remains solid, continuing to reflect the strength of the U. S. Economy. Consistent with last quarter, our borrowers reported modest quarterly growth in revenues and EBITDA with many borrowers delivering margin expansion as a result of price increases and moderating inflation levels. Borrowers performance has grown steadily over the last On a year over year basis, our borrowers reported revenue and EBITDA growth of roughly 10% to 12% for each of the last two quarters.

Speaker 2

Our largest sectors, software, insurance, food and beverage and healthcare Continue to deliver strong results, reflecting the durable nature of these industries and the less discretionary services they provide. We believe the portfolio will continue to be resilient and to perform in line with our underwriting expectations. Even still, we are closely monitoring the impact of the higher rate environment on our portfolio. Over the course of this year, We've seen interest coverage levels come down as rates have increased, with coverage moving from 2.3 times to 1.8 times today. While the rate outlook today is higher than it was 6 months ago, the impact on coverage ratios has been meaningfully mitigated by better than As a result, although rates are higher, we continue to believe interest coverage ratios We'll reach trough levels of mid one times in the first half twenty twenty four.

Speaker 2

We expect that the vast majority of our borrowers We'll maintain an adequate coverage cushion and strong operating performance through this period. The list of borrowers we believe could See more challenged liquidity needs remain small. Our underwriting and portfolio management teams remain very focused and engaged with these borrowers and we believe any challenges will be manageable across our portfolio as a whole. We continue to be very pleased with the performance of our companies despite the higher rates. With that, I'll turn it over to Jonathan to provide more detail on our financial results.

Speaker 2

Thanks,

Speaker 3

Craig. We ended the quarter with total portfolio investments of $12,900,000,000 Outstanding debt of $7,100,000,000 and total net assets of $6,000,000,000 Our 3rd quarter NAV per share was $15.40 a $0.14 increase from our 2nd quarter NAV per share of $15.26 Largely attributed to the continued over earning of our dividends 3.7 percent in addition to paying up 10.2% in distributions, which equates to a total return of 13.9 In terms of deployment, we continue to largely match originations with repayments Maintain a fully invested portfolio. OBC had $500,000,000 of new investment commitments, of which $387,000,000 were funded, offset by the $390,000,000 of repayments for the quarter. The weighted average total yield of the portfolio was 11.8%, up from 10% in the Q3 of the prior year. Turning to the income statement.

Speaker 3

We earned a record $0.49 per share in the 3rd quarter, up from $0.48 per share in the prior quarter. Based on these results, our Board declared a supplemental dividend of $0.08 per share for the Q3 of 2023, which will be paid on December 15 to shareholders of record on November 30. For the Q4 of 2023, our Board has increased our regular dividend to $0.35 per share, which we believe is still a very comfortable level relative to our earnings power. And we expect to continue to declare and pay supplemental dividends Quarterly to provide further distributions to shareholders. The 4th quarter dividend will be paid on or before January 12 To shareholders of record as of December 29, since we instituted the supplemental dividend in the Q3 of 2022, We have paid out $0.28 of additional dividends per share.

Speaker 3

This dividend structure provides increased income to our shareholders, while also allowing us to build NAV through excess earnings. As a result, we have $0.26 of spillover income through the end of the third quarter. OVDC continues to benefit from its flexible balance sheet and well diversified financing Overall, we continue to maintain significant liquidity of $1,900,000,000 And we ended the quarter with net leverage of 1.13 times, in line with the prior quarter and within our target range. With that, I'll turn it back to Craig for closing comments.

Speaker 2

Thanks, Jonathan. I'd like to spend some time addressing one of the most frequent questions we're hearing today. How will borrowers fare in the higher for longer rate environment? Interest coverage is the metric that is most widely cited and it is certainly meaningful high level statistic to assess the health of the portfolio. However, in our ongoing portfolio monitoring, we evaluate borrowers on many different metrics to give us a more comprehensive perspective.

Speaker 2

In addition to interest coverage, free cash flow and liquidity expectations, we believe loan to value and potential equity owner support Are also key considerations in assessing the overall health of our borrowers. Over the course of the year, private equity owners Have been proactive in addressing the higher rate environment through cost cutting initiatives and liquidity management. These include reducing operating costs, improving working capital and reducing capital expenditures and acquisition spending. We believe these actions and the sponsors' willingness to support the business with additional equity when needed are critical components to the preservation of long term value for these businesses. While we have had a limited number of comprehensive credit amendments this year, sponsors have contributed additional capital in 70% of these cases.

Speaker 2

An important part of our underwriting assessment is loan to value. On average, we invest at Approximately 40% loan to value. Even in a lower valuation environment, the sponsors retain significant equity investments in their companies. While not contractually required, this means that the private equity firms have a strong economic motivation for a very high recovery. Of course, all this doesn't minimize the amount of time and effort that it takes to work through more challenging situations.

Speaker 2

We have both the resources and the time horizon associated with our permanent capital base to work with borrowers to provide the operating runway needed To optimize value, we continue to invest in our team with over 115 investment professionals today, reflecting our commitment to ensure we have the resources necessary to work on troubled situations and protect our portfolio. To close, I wanted to spend a minute on the current market opportunity and our outlook for the Q4 and into next year. New activity has picked up nicely since the first half of the year, driven by increased refinancings, add on acquisitions and new buyout activity. We have seen the reopening of the public markets, which has led to some tightening of spreads. However, we are still able to earn 11% to 12% returns And unit trust loans, which we believe is a very attractive absolute return on new opportunities.

Speaker 2

Direct lenders continue to provide a compelling financing solution for borrowers of scale. We've had notable success leading the financings Many of the largest deals announced in recent months, including the multi $1,000,000,000 refinancing facilities for Anastra and PetVet. In many of these larger deals and across our broader portfolio, we typically serve as the administrative agent, which is not just a technical title, but instead is an important role awarded to only 1 lender on each deal. As the administrative agent, we are in direct dialogue with the borrower And sponsor in shaping the transaction terms and the credit documentation. In addition, this role allows our team To maintain a frequent dialogue with the borrower over the life of the loan, which gives us the singular best insight into its operating performance and liquidity profile on a real time basis.

Speaker 2

Our franchise continues to win this important role across some of the most attractive deals in the market. In recent months, we have committed to 7 deals with financing sizes over $1,000,000,000 and serve as the administrative agent on 5 of We believe this reflects the confidence that the private equity sponsors have in our firm. We are also seeing the benefit from incumbency With roughly 70% of our originations this quarter deployed into existing borrowers, reflecting both our confidence in our borrowers and the power of this growing incumbency with 187 borrowers in the portfolio today. Looking forward, we expect deal activity will continue to rebound as valuations and the rate environment stabilize, driving increased interest in M and A by both companies and sponsors. We believe this more robust market environment will lead to a increase in repayment activity, which could drive further income for OBDC and allow us to redeploy capital into the new opportunities.

Speaker 2

Finally, I just want to reflect on OVDC's continued success and what a strong quarter this was. This is our 3rd quarter, a record NII. We achieved the highest NAV since our inception and we delivered an attractive ROE of 12.7%. Credit performance remains strong and is driving consistent earnings and increased distributions to shareholders. We expect that our portfolio will continue to perform well and we will be able to deliver strong operating results and returns to our shareholders.

Speaker 2

With that, thank you for your time today and we'll now open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. The confirmation total indicates your line is in the question Our first questions come from the line of Brian McKenna with JMP Securities. Please proceed with your questions.

Speaker 4

Thanks. Good morning, everyone. So just a question on the dividend to start. Coverage of both the regular and supplemental dividends has been running around 120% year to date. So I guess is this a reasonable expectation for the next few quarters assuming no material shift in the rate backdrop and then also continued healthy underlying credit trends across the portfolio?

Speaker 2

Sure, Brian. Good morning. We felt really comfortable increasing the base dividend. Obviously, supplemental dividend has worked really well and delivered additional dividends to shareholders. We certainly feel extremely comfortable with this new base and I think folks should expect us to continue to Okay.

Speaker 2

This going forward with the conditions that you suggested, if the portfolio continues to perform well and rates continue to stay high, We currently have a little additional room as well. So we feel really comfortable where we are and if Conditions warrant, we will always evaluate whether we should increase it. But I think it's a good representation of where we sit right now.

Speaker 4

Got it. Helpful. And then switching gears a little bit. So if I look at the average investment size of your portfolio companies, it's been holding steady around $70,000,000 the last several quarters. That said, I know the broader Blue Owl platform is more focused on the large end of the market And deal sizes in this part of the industry continue to trend upwards.

Speaker 4

So how should we think about the size of new investments and then kind of the overall average size of the portfolio at OBDC over time.

Speaker 2

Sure. We've been really pleased with the number of large high quality new investment I talked a minute ago about $7,000,000,000 deals, 5 of which we're leading. We continue to see this Trend in this quarter and in our pipeline with large companies tapping direct lending more and more. So I think that's very exciting, particularly because the quality of the companies are very high. As for our position size, as a platform, When we sign up these new deals, our aggregate investment is quite large, could be $400,000,000 $500,000,000 $600,000,000 $700,000,000 In total investment across our platform, when it comes to sizing OPDC specifically, it's really a function of Our capital available at the fund at that moment in time, the fund is squarely in our target leverage level.

Speaker 2

And so we are sizing new investments, essentially, to replace repayments. And so in this quarter, we got it. I think it's perfectly accurate as you can get it, but it can be a little bit lumpy. So if we get more repayments And those repayments are of greater size, then we would love to put marginally larger investments in this And OBDC, having said all that, I really like the increased diversification we've been able to achieve over the last couple of years. And so that's also a goal.

Speaker 2

So any 1, 2 or 3 quarters is not going to change The average size of the portfolio given the number of names in it, at 187 names, it would take a lot of turnover. But I think the average size Probably won't drift much higher over time, which I think is a good thing, because the diversification is very attractive.

Speaker 4

Great. Thanks,

Speaker 2

Craig. Thank you.

Operator

Thank you. Our next questions come from the line of Robert Dodd with Raymond James. Please proceed with your questions.

Speaker 5

Hi, guys. Congrats on the quarter. I mean, two questions. I mean, one, your comments On liquidity and interest coverage expense, Craig, that was very helpful. I mean, have you seen Any change in revolver draws at the portfolio companies?

Speaker 5

I mean, you disclose all the young public commitments, but it's sometimes Hard to see when they move from 1 quarter to the next or whatever, whether those are getting drawn or The commitments are expiring or whatever. So have you seen any change in pattern there? Or is it just making across the business?

Speaker 2

Thanks, Robert. No change in behavior on revolvers, business as usual. Companies use revolvers To fund the short term liquidity needs of their business and no change in those regards. Our companies are performing really well. I highlighted some of the statistics, but we've been really pleased with the strong operating performance, revenue growth, EBITDA growth Quarter over quarter, year over year.

Speaker 2

And so nothing of note to comment on revolvers. I think it reflects just the overall strength of the portfolio

Speaker 5

Got it. Thank you. On the second one, I mean, on the outlook, I mean, as you said, I mean, you're winning some very large deals. And are you do you expect 2024 to kind of Obviously, it's very hard predicting the future, but do you expect that kind of to continue that theme, more deals, Bigger deals and a rebound in the market or you do you think the near term is maybe A spurt of activity by the industry and could it level up again? Any thoughts there?

Speaker 2

I'm pretty optimistic that 2024 will see a significant pickup in activity. We're seeing that Already as we look to the Q4 of this year, I noted all that in my comments. Our pipeline of deal activity For the Q4 looks good both in terms of repayments and new activity. There's a lot of pent up appetite From the private equity firms to exit portfolio companies. For those of you that follow the private equity industry, You'll be aware that private equity fundraising is more challenged because private equity firms have not had the opportunity to return capital to their LPs As much as they would like, given some of the volatility over the last 12 months.

Speaker 2

They would like to exit their companies and that is the single biggest driver of deal activity. And so we're seeing that beginning to happen. And I think if we get stability in the rate environment And in the markets and economy stays in a reasonable place, I think you'll see a meaningful pickup in M and A activity that will drive New deals for us. You will also see a pickup in finance refinancings in our portfolio. What we've been really pleased with is there have been some really sizable companies of very high quality that had been previously financed in the public markets That are increasingly choosing to refinance in the private markets.

Speaker 2

Finastra, PetVet would be 2 great examples, Hyland. This is, I think, an extremely strong trend for direct lenders, such as OBTC. These are Large companies, and they offer us really attractive risk adjusted returns, and we're seeing some. I think they're going to continue to see meaningfully more in 2024. So I'm optimistic about deal activity, both in terms of repayments, Income generation off of those repayments as well as deploying capital in high quality situations.

Operator

Thank you. Our next question comes from the line of Ryan Lynch with KBW. Please proceed with your questions.

Speaker 6

Hey, good morning and nice quarter, guys. One of the questions I had was, you've talked a lot about mode. Some large deals that you guys are leading as well as potentially the pickup in 2024. There's a lot of loans coming from the broadly syndicated loan market that are now going to the private credit route. I think you mentioned some loan market that are now going to the private credit route.

Speaker 6

I think you mentioned some from PetVet, Finastra, Highland, just an example of a few that you guys are either leading or Can you maybe just speak to the notion that some of these large borrowers that were maybe in the broadly syndicated loan market before are Choosing the private credit solution versus not being able to access the broadly syndicated loan market mode. That this is more of a choice versus them not being able to access that and that's why they're coming to private credit side?

Speaker 2

Sure. Look, it's obviously there's a multitude of factors. But I think that this phenomenon is extremely attractive for private credit. The public loan market By far, the dominant purchaser of those loans are CLOs. In Strong market environments when CLO creation is high, CLOs have lots of cash and can deploy and they do mode at reasonable spreads.

Speaker 2

But when those factors are not in place and the largest buyer base is missing, CLO creation has been spotty this year. There have been times when it's been light. There's been times when it's rebounding. There was not it's bumping around. CLOs need a certain ratings profile and the rating agencies have a certain rubric that they use to evaluate credits.

Speaker 2

And so if you get a certain rating, you can go to the public markets. You don't get it for whatever reason, you can't. The other factor is the private equity firms have become, sensitized that even when they have a deal That is issued in the public markets and they get a rating that over time they are vulnerable to that rating changing, beating them with I have access to the public markets and that risk is one that they have had to live with, but they no longer have to live with because the private credit markets, We can do our own independent work, our own credit analysis and make our own judgments about the credit worthiness. And we Don't have that short term time horizon if there's a downgrade. And so the private equity firms have become more and more comfortable just choosing a private credit solution with the certainty, the privacy, the customization and the private equity firms are willing to pay a premium for that.

Speaker 2

So I think this is a great trend for our investors to get access to these extremely high quality companies. And so It's part choice. In some cases, there may be companies that just don't have a ratings profile or they're trying to finance in a market where CLO creation Generally private credit, we can also offer customization that the public markets can offer. We can offer maybe a bit more leverage for a high quality company. Again, we're financing at 40% loan value.

Speaker 2

So I think it's a combination of these things. But I would very much look at it as an opportunity for our portfolio to invest in high quality businesses.

Operator

Mode.

Speaker 2

And we are that opportunity set is growing and we have more to choose from. And our capital base as an industry is allowing Much bigger financings to get done in private credit markets. So I think it's very much a sign of strength and something the sponsors tell us Regularly that they like and would like to see more ways to finance in the private markets.

Speaker 6

Okay. That's really helpful background and color on that. The other question I had was, your guys' credit quality has Faired really well, as shown by the low non accruals and really nice NAV performance. But you mentioned something on the call that I was curious on, and I want to make sure I Got the number correct, but I believe you said with some of the performance related amendments that you guys have made in your portfolio, Private equity sponsors have contributed 70% of capital and 70% of those cases, I should say. I'm I'm just curious on the remaining 30% that the private equity sponsor didn't contribute additional capital into, was that because That was not a request that you guys had made.

Speaker 6

Was that something that the private equity sponsor was unwilling to do? Or was that something that the private equity sponsor maybe just didn't have any capital And that fund to do so, just love to get a little color on that remaining 30% where private equity capital wasn't contributed.

Speaker 2

Sure. Every situation is unique. We and I think that's Again, one of the great attributes of private credit, if you have a broadly syndicated loan and there's a credit problem, There's nobody to talk to. There are loans sold by 200 CLOs that you don't know. You have no ability to have a negotiation.

Speaker 2

We have a bilateral loan. We are we typically own more than half of it and the sponsors like being able to call us and discuss what's going on with the company. One of the main things on our list to ask for is equity. If the company, in our opinion, needs some deleveraging, mode. That is always very high on our list.

Speaker 2

But there are situations where a company might be bumping into a covenant, where it can comfortably cover its interest And maybe we priced a high quality loan at a spread where leverage is mildly elevated and it doesn't require new equity, it requires some type of economic solution. And so in those cases, we will work out a different type of solution with a private equity firm. Maybe we'll ask for additional call protection For some repayments, there's a lot of ways for us to solve problems with the private equity firms. Equity is certainly one that we really like for obvious reasons, but It's not the solution in every case. The general answer to your question is in our material amendments, We have very amicably reached good solutions for us in the private equity firms.

Speaker 2

You shouldn't read it as a sign That we just had to amend the deal and couldn't get what we wanted and how to software through it. That's not representative of the other 30%.

Operator

Okay.

Speaker 2

That

Operator

Thank you. Our next questions come from the line of Mark Hughes with Truist Securities. Please proceed with your questions.

Speaker 7

Yes, thanks. Good morning. Following on that, the amendment activity, I don't know if you suggested whether you'd seen any trend there, whether it ticked up Steady, obviously you're getting a lot of private equity support, but how has the trend been lately?

Speaker 2

I would say it's been very light. It's really in a good way. I mean, we at At the beginning of the year, I was quite cautious given rates were higher. I had expected by now we would have More stress in the portfolio, we really haven't seen it. It's low single digit amount of amendment activity, garden variety On amendment activity, we haven't seen any pickup.

Speaker 2

And I would say it's lighter than anybody would have expected. I'm quite pleased with it. The stats we gave on sponsor support, we're really that's over the course of the last 12 months really. The last quarter This quarter was a really light amendment quarter and sitting here into the Q4, it remains light and we'll Yeah, the rest of the quarter plays.

Speaker 7

Yeah, yeah. The 10% to 12% EBITDA growth, I think you suggested for the last couple of quarters Seems pretty impressive. Do you have a sense of whether there's an expectation for that to slow as the Fed does its work? Any nuance on the economy here?

Speaker 2

Sure. So just to be clear, the 10% to 12% that I referenced It was a year over year statistic for revenues to EBITDA. And I also referenced in my comments, quarter over quarter growth that growth mode. Is in the low single digits. So quarter over quarter continued growth, but at a lower level year over year More significant growth.

Speaker 2

I think what we've been most pleased with is just the breadth of the performance. It's really in all of our sectors And most of our companies. And so we're pleased with it. I just want to remind everyone, I don't think of our portfolio as a perfect representation of the U. S.

Speaker 2

Economy. We are very purposefully Focused on recession resistant businesses that we expect to be stable in most economic environments, sectors like software, healthcare, food and beverage, Insurance, etcetera. We are not trying to be an early warning sign for economic weakness. We have almost little to no exposure in Commodity sectors like energy and chemicals and homebuilding and retail and restaurants, these are the sectors that you would look to As early warning signs. As an example, we had a very significant strike in the auto industry, which is now unsettled.

Speaker 2

I mean, we have Literally almost zero exposure to the auto industry in our entire portfolio. So I'm pleased with the performance. If the economy stays the way it is, I We expect that performance to continue. We do have some businesses that are exposed to just general industrial conditions or general consumer demand. And so we'll watch that closely.

Speaker 2

If the economy stays strong, portfolio will do well. If the economy goes And has a downturn, which I think at this point most economic observers that I follow, think we will avoid a recession. But if we had a mild recession, we still think our Portfolio will do really well. So cautiously optimistic, but we'll feel better as the next 12 months unfold.

Speaker 7

Thank you. Appreciate it.

Speaker 2

Thank you.

Operator

Thank you. Our next questions come from the line of Eric Swick with Hovde Group. Please proceed with your questions.

Speaker 8

Good morning, everyone. First, just wanted to start with a question. 1, I appreciate all of the detail that you put in the slide deck and just looking through A bunch of that. And notice as I look at the new investments, both the average interest rate and average spread has come down over the past two quarters. But Given the increase in base rates, you've still been able to exhibit some increase in the weighted average yield in the portfolio.

Speaker 8

So just curious kind of given those mode. The two trends of the declining rates on and spreads on new opportunities, so far is obviously up a little bit From 630 to 930, so I would think there's maybe a little bit more opportunity to expand the overall yield. But would you think kind of given those trends, if Interest rates hold in a cycle, you kind of near the peak of the yield for the portfolio for this cycle, are there other opportunities to kind of hold the line there?

Speaker 2

Sure. So I'll make a couple of comments. The last couple of quarters have been No, this quarter was a little more active, but these are light quarters from a volume standpoint. So They're not going to have a meaningful impact in the overall return in the portfolio because they're a small sliver of the portfolio. If you look at the average spread That we have in the book, it has been a rock solid for 5 quarters in a row, pinned at 6.7%.

Speaker 2

And so I wouldn't read too much into any 1 or 2 quarters' worth of activity. I did note in my comments, this quarter as the public markets have Reopen, we have seen a bit of tightening of spread. And so Spreads have been really wide in the first half of this year, public markets shut, other private credit providers pulling back. That was a great opportunity for us to get lots of spread and that is waning a bit. We're seeing some tightening spread, Absolute returns still extremely high, 11% to 12%, I made the comment in the script.

Speaker 2

So I do think that These market conditions will move up and down on a given quarter based on what's happening in the broadly syndicated markets, based on what our peers are doing with their capital. The base rate environment is extremely attractive, overall returns for new deals extremely attractive. Are we at the I think that You're asking forward looking. Are we at the peak? It's hard to say.

Speaker 2

It's just so market dependent. I think mode. Our expectation, investor expectation on rates right now, growing sentiment that maybe rates are out of peak and will come down certainly the forward curve would Yes, that as to where spreads will go, that is a function of, as I just said, market appetite And where additional capital will deploy, we're always trying to get the best of both worlds. We want to have great credits Great credit protections and get as much credit as we can. But we certainly have competitive environment that we live with.

Speaker 2

So I'd be very pleased at the state like this for a while. So if we can do a little bit better, we can. I do think deal flow activity will pick up And that will generate some prepayment income that we haven't had for a while. But we're these are really attractive returns and really attractive Brad, it's the likes of which 18 months ago, 12 months ago, we're on these calls. I don't think anyone expected.

Speaker 2

And so we're certainly Very pleased with what we're seeing. But it will move up and down. The spreads operate in a general band, It's 550 to 700 over depending and we've moved in and up in that band, down in that band over the last since our Since every quarter, we've operated somewhere on that band. Right now, it's on the tighter end. If we widen out, all it takes is some dislocation in the broadly syndicated markets for quarter or 2 and spreads will widen out again.

Speaker 8

That's very helpful. I appreciate the detailed comments there. And second one for me, Just on leverage, the leverage has come down over the past few quarters, closer to the lower end of your target range. Curious to wonder if that was purposeful or more Reflective of the fact that there's been more exit repayments relative to new commitments over the past couple of quarters.

Speaker 3

Yes, it was basically flat This quarter versus last quarter, but it has come down from earlier in the year. Again, it's mostly a timing issue. We're matching repayments And new investments and so we're sort of squarely in like, call it, that 115 area. We could take it up a little bit. But we're certainly happy where we are and certainly operating a little bit higher, which is where we were operating earlier in

Speaker 2

the year. I wouldn't read anything

Speaker 5

into it.

Speaker 2

I mean, what I'm really pleased at is even with a tick lower of leverage, our ROE is extremely high. So I think it's a great combination of Great returns with some dry powder. And so we can invest. We see great opportunities. We take leverage out of it.

Speaker 2

I really like where we sit in our target leverage range.

Speaker 8

Thanks for taking my questions

Operator

Thank you. Thank you. Our next questions come from the line of Mickey Schleien with Ladenburg. Please proceed with your questions.

Speaker 9

Yes, good afternoon. I just have one question at this point. I wanted to ask, when do the reinvestment periods in your CLO financings begin to end and how significant could that unwinding be on your interest expense Over the next couple of years when you consider the current terms available in the market.

Speaker 3

Thanks, Mickey. So, yes, our CLO Reinvestment periods are typically 2 to 4 years, generally more 4 years. And so they're on a regular basis vote. Coming close to when they're coming close to or within a year of effectively that Reset period, we will go out and do a reset. So that has already occurred in some of our CLOs And we'll continue to be the case.

Speaker 3

We're not that concerned in terms of what that will look like from a Financing cost perspective from a repricing of those transactions. On the unsecured side, mode. Obviously, we do have lower cost financing there. Again, nothing really material in 2024. In future years, we do have some refinancings there that will come up and we'll be doing those accordingly in those future

Speaker 9

Jonathan, if I can just follow-up. I mean AAA spreads in the CLO world are still pretty wide. That's the reason that the machine is not working very well. So are you indicating that those spreads available in the market Today are sort of similar to where you're already at or because of your platform?

Speaker 3

A little bit wider, but Not meaningfully wider from where we printed all of these CLOs. Again, we have a fair number of CLOs in this in OPDC and some of them were printed at wider levels. The later ones a little bit tighter, but the earlier ones a little bit wider and I think we're

Speaker 9

Okay. I understand. Those are all my questions. Appreciate your time. Thank

Speaker 7

you. Thank you.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Craig Becker for any closing comments.

Speaker 2

Great. Thanks all for joining. We're extremely pleased with the quarter. Hopefully, the results speak for themselves. But we're really excited to deliver the dividend increase in Particular, and the supplemental dividend continues to work well and just, very happy.

Speaker 2

So thanks all for joining. If you have any questions, As a follow-up, we're easily reachable and would be pleased to take them. And with that, hope you all have a great rest of your day.

Operator

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

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Earnings Conference Call
Blue Owl Capital Q3 2023
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